Spark Global Limited reports
Wall Street breathed a sigh of relief when US President Joe Biden picked Jerome Powell for a second term as chairman of the Federal Reserve. The Fed’s decision to cut interest rates and its efforts to support the economy during the previous two turbulent years helped the US avoid a prolonged recession, earning Mr Powell plaudits from professional and amateur investors alike.
Now Powell, along with Fed Vice Chairmandesignate Lael Brainard, faces new challenges: accelerating inflation, increasing supply chain disruptions, and ultimately scaling back some of the help given during the worst of the pandemic.
The fed chairman’s main job is to keep prices stable, guide decisions on when to raise or lower interest rates, and help as many people as possible get jobs. So the Fed’s actions, and Mr Powell’s reappointment, will affect almost every aspect of Americans’ financial lives, from home ownership goals to retirement savings to the price of groceries.
Keith Lerner, chief market strategist at Truist Advisory Services in New York, said Powell’s reappointment suggests loose monetary policy will continue. He said:
“This is a good thing for people investing in retirement and 401 (k) plans. But the Fed chair is just one of many factors that affect markets and investment, along with the direction of COVID-19, the direction of the economy, supply chain factors.”
Here are some of the areas experts think Powell’s re-election will affect — for better and worse.
Crypto and risky assets
Prices for risky investments like cryptocurrencies and unprofitable tech companies have soared in the past two years. What’s the reason? This is the result of a combination of low interest rates, rising consumer savings and stimulus measures from the US government.
For example, there are now two dog-themed cryptocurrency theories each worth more than $24 billion. In addition, the price of Bitcoin has almost doubled since the start of the year; Unprofitable electric car company Rivian Automotive Inc. It recently raised nearly $12 billion in the biggest initial public offering of the year.
If Mr Powell is slow to raise rates, investors are likely to remain enthusiastic about such risky bets.
There is also the idea that cryptocurrencies can serve as a hedge against inflation, though the link between the two is far from clear. Supporters say digital currencies cannot depreciate like the dollar or other traditional currencies because of their limited supply. Mike Bailey, director of research at FBB Capital Partners, said:
“Another Powell term could provide some justification for crypto diehard bulls, as these investors often view cryptocurrencies as a hedge against fed easing.”
But overall, there is uncertainty about how markets will behave without additional Fed support, which will test retail investors’ portfolios. Douglas Boneparth, president of Bone Fide Wealth, a Wealth management company, said:
“This [additional easing of monetary policy] is one of the main tools to sustain equity prices. When you take one of those crutches away and try to see if the economy can walk on its own, that’s when investors find out how durable their portfolios can be.”
Looming over American consumers right now is inflation, with a consumer price index rising at its fastest pace in more than two decades. That affects the price of everything from soap to ice cream.
To address this, the Fed may need to accelerate its timetable for raising interest rates from near zero. The Fed is already planning to reduce its bond purchases, which helped boost fixed-income markets this month; Traders expect the Fed to start raising rates in June, according to interest rate futures.
A pullback in monetary support could cause stocks to fall, but experts say Mr Powell’s clear communication with Wall Street professionals and his cautious approach will help mitigate the damage. Truist’s Lerner says:
“If the economy continues to improve, interest rates will go up regardless of who the Fed chair is. One thing that stands out about Powell is that he is much more focused on maximizing employment and we think he will take a cautious approach and make sure he doesn’t raise rates too quickly.”
However, some fear Mr Powell is underestimating the threat of inflation and putting it down to some current supply chain problems rather than seeing it as a lasting phenomenon. Kim Forrest, chief investment officer at Bokeh Capital Partners, said:
“There are a lot of people who think Powell has indulged in inflation and that he’s going to be a dove on inflation, but I think he’s a market participant, unlike economists, and he’s been through these cycles and I think that’s important. As an investor who invests for others, I’m glad they reappointed Colin Powell.”
Bankrate’s McBride expects the Fed’s anti-inflation efforts to make stocks more bumpy in 2022. He said:
“From an investor’s point of view, it’s just hang in there. We are bound to see more volatility over the next 12 months or so, and returns will not be as easy to come by as they have been over the past year or so.”
He recommends “focusing on your long-term goals, just investing regularly and making sure you invest appropriately based on your goals and risk tolerance.”
The real estate
Low interest rates during Mr. Powell’s tenure helped encourage consumers to take out mortgages and buy homes, which, combined with a lack of supply, helped drive the housing market higher, and his reappointment could help keep the sector hot.
FBB’s Bailey said:
“I expect the prospect of lower interest rates for longer to be positive for house prices as mortgage rates will be well below historical levels.”
That’s good news for home sellers and those in the real estate business, but harder for buyers, especially first-time buyers. In September, the number of people who thought it was a good time to buy a home fell to 29 percent. The last time Americans were this pessimistic about the housing market was in 1982, when the average rate on a 30-year fixed-rate mortgage was more than 15 per cent. It is now about 3 per cent.
But Bankrate chief financial analyst Greg McBride expects interest rates on credit cards, home equity lines of credit and other consumer and small-business loans to rise as the Fed inevitably raises rates. He advises homeowners to refinance their mortgages now, while interest rates remain low. He said:
“As we move into 2022, please pay down the high-cost debt, because when we get to the second half of the year, once the Fed starts raising rates, the cost of debt could rise further.”
Retirement and 401 (k) plans
In the short term, confirmation of Mr Powell’s reappointment helps stocks avoid any collapse that might result from a change of fed chair, which could immediately change direction or introduce strange and unexpected policies.
While stocks rose only modestly on Monday after news of Powell’s reappointment, market analysts said the announcement could support stocks moving forward, given that traders are familiar with Powell and know his economic plans and goals from past press conferences and announcements.
Bailey of FBB said:
“If Powell means more continuity and less uncertainty, then everyday investors may become less risk averse and consider taking more money out of stocks for retirement savings.”
For Bone Parth of Bone Fide Wealth, Powell’s re-election is good for financial planners and the accounts they manage.
Reprint indicated source：Spark Global Limited information