Stock Market Loves the 'Don't Rock the Boat' Powell Renomination

(Bloomberg) — In a market that has soared past a pandemic and delivered stock returns pushing 20% a year, continuity is everything to the equity set.

Most Read from Bloomberg

Traders, strategists and money managers were virtually unanimous in welcoming four more years for Jerome Powell, selected Monday for another term as chair of the Federal Reserve.

“Investors will likely breathe a sigh of relief this morning with Biden’s vote of confidence in Powell,” said Mike Bailey, director of research at FBB Capital Partners. “With stocks at all-time highs, investors want as little change as possible, and the second Powell term delivers just that.”

President Joe Biden selected Powell for a second four-year term while elevating Governor Lael Brainard to vice chair, keeping consistency at the U.S. central bank as the nation grapples with the fastest inflation in decades and the lingering effects of Covid-19.

The move, announced by the White House on Monday, rewards Powell for helping rescue the U.S. economy from the pandemic and tasks him with protecting that recovery from a surge in consumer prices.

When the coronavirus hit in 2020, Powell employed an array of tools to steer the economy through the pandemic, cutting interest rates to near zero in one month and choosing a forceful course of action he was later praised for. This year, Powell is facing a difficult task of weaning the economy off of stimulus and making sure prices don’t jump too fast.

And while Wall Street didn’t always like Powell’s actions — stocks nosedived after Powell called interest rates “a long way from neutral” in the fall of 2018 — it kept its frustration brief. Since Powell took office in 2018, the S&P 500 has rallied 70% in the best performance for any Fed chief since Alan Greenspan.

Yields on two- and five-year Treasuries, the most sensitive tenors to the path of expected Fed policy, jumped after the announcement. A full 25-basis point interest rate hike is priced in for the June 2022 meeting, according to the U.S. swaps market.

That reaction makes sense, according to Dennis DeBusschere, founder of research shop 22V Research, because Powell was viewed as less dovish than Brainard.

Here are some other views from market-watchers:

David Donabedian, chief investment officer of CIBC Private Wealth Management:

“It represents continuity in terms of leadership at the Fed and that means more of a feeling of certainty. And I think that President Biden has a number of political challenges now and he doesn’t need volatility at financial markets to add to that, and so this is a safe choice, a known commodity. I think that’s the priority here,” he said. “For the market, the same guy who has been setting the course for years now will continue to set the course. He’s held in relatively high esteem by market participants. And so from a monetary policy standpoint, it’s business as usual. The same questions we were thinking about last week, we’re thinking about this week, which is will Powell and the Fed figure out the best course on how to address inflation? Are they right that it’s transitory, and how over time will they normalize monetary policy? Those are all still big questions with no easy answers but there’s some comfort that you’ve got a steady hand in leadership.”

Kathy Jones of Charles Schwab:

“I think this is a ‘don’t rock the boat’ move. It’s consistent with a long history at the Fed — usually Fed chairs are renominated. It looks like probably there was a thought at the WH that fighting a battle perhaps over Brainard was not a fight worth having at this stage of the game.”

Richard Bernstein Advisors LLC deputy chief investment officer Dan Suzuki:

“It seems in line with what the tea leaves were indicating. The democrats gave up the option of a future inflation scapegoat in favor of a well-respected known entity that was supported by Yellen. While on paper, Powell leans slightly more hawkish than Brainard, their policies are very similar and Powell provides more consistency and less uncertainty. Biden still has more appointments that will shape the overall make-up of the Fed.”

Chris Ahrens, strategist at Stifel Nicolaus & Co.:

“The president opted for a known quantity who should be able to navigate the confirmation process with a minimal amount of friction. The choice of Brainard as Vice Chairman also elevates her visibility and leaves her in a strong position for future. The markets can focus more specifically on the tone and comments of FOMC members regarding the progress of the economy toward mandate attainment, rather than wait until March 16th, which would have been a new chair’s first meeting, to see how things might start to sort themselves out.”

Wells Fargo Investment Institute senior global market strategist Sameer Samana:

“Since they were both in the running, it doesn’t surprise us at all. And since we’re at such a key moment for the economy and markets — inflation looking less transitory, balance sheet purchases being tapered, virus still in the background — sticking with continuity (in Powell) makes a lot of sense. As a whole, we would expect this Fed to continue down the path of reducing extraordinary measures and consider rate hikes in the second half of 2022 unless they find their hands forced by inflation. But at least right now, we don’t see major market implications, based on where expectations were,” he said. “It probably is worth noting that the Brainard nomination may mean a bit more regulatory focus on large financial institutions.”

Bob Michele, chief investment officer at J.P. Morgan Investment Management:

“I wouldn’t be surprised if there was some sort of commitment from Powell to the [Biden] administration to be very cautious about the normalizing process and be sure that there are sufficient growth and inflationary pressures. We’re seeing them now — will that continue for an entire year as they GET through the tapering process and then start to raise rates? We think so, but let’s wait and see.”

Matt Maley, chief market strategist for Miller Tabak + Co.:

“For the markets, any reaction will be short-lived. The markets will be focused on inflation once again within a New York minute. It will be the issue of inflation that will determine the timing of rate hikes, not the person sitting at the top of the Fed.”

(Updates with comments from Chris Ahrens and Bob Michele)

Most Read from Bloomberg Businessweek

©2021 Bloomberg L.P.