Wednesday, 21 February, 2018

Jerome Powell takes oath as sixteenth president of the Fed

Profile: Who is the new Fed chair Jerome Powell? Jerome Powell takes the reins at the Fed amid market sell-off, jump in yields
Nellie Chapman | 09 February, 2018, 02:55

Both Janet Yellen and Ben Bernanke were struggling with an economy with low inflation and low interest rates, which strongly supported the stock market. But market pullbacks are necessary to keep stocks from overinflating, and they provide investors stuck on the sidelines a chance to buy in. He is the 16th President of the US Central Bank.

It's an interesting complexity for investors to assess.

Outgoing Federal Reserve Chair Janet Yellen said USA stocks and commercial real estate prices are elevated but stopped short of saying those markets are in a bubble. "The market got spooked by a jobs report suggesting wage growth had accelerated".

However, continuing exactly down the same path could prove to be a challenge.

New leadership at the Fed is adding a degree of uncertainty.

Monday's plunge comes the same day Jerome Powell succeeded Janet Yellen has Federal Reserve Chair.

The new Fed head faces an immediate challenge from the wobbly market, as US stocks opened sharply lower Monday after a heavy sell-off Friday. The recent tax cut will boost corporate earnings and put more money in people's pockets - employers, employees and investors alike.

The heart of the stock market sell-off is about inflation.

Until recently, however, investors were enjoying a seemingly optimal combination of faster US economic growth, an improving global economy and low inflation.

Trump's habit of regularly boasting about stock market surges is a practice other presidents avoided. Now there is concern that precisely because the economy is so strong, they will flood the market by offloading the assets, a perception that is further fueling the market selloff.

The broader Standard & Poor's 500 index was up 36 points, or 1.3 percent, at 2,685.

"Following Friday's wage data markets are coming to the conclusion that the USA economy is close to overheating and therefore that the risks of inflation are bigger than the risks of a recession", noted Torsten Sløk, chief global economist at Deutsche Bank Securities.

Although the market opened lower Monday, it actually had climbed into positive territory in the morning.

The Tokyo benchmark bounced throughout the day, closing 4.7 percent lower at 21,610.24. Despite the growing number of reasons to be concerned that the Fed's inflation target will soon be breached, the Fed shows little sign of fearing a new bout of inflation through its inaction.

Despite the robust economic growth and the positive news on nearly all economic fronts, or more precisely because of the positive news, the market is tanking. Even 2.9 percent is well below historic norms.

In essence, the $1.5 trillion tax cut may be stimulus that the economy doesn't need. If the BSP raises rates to taper down inflation, that is also fine.

"There would be few places to hide from the risk-off atmosphere that is expected to extend its stay in Asian markets today in a significant manner", Jingyi Pan of IG said in a commentary.

Global investors are also trying to navigate a changing economic backdrop.

While the economy has hummed along, wage growth has stubbornly lagged behind.

U.S. and German 10-year bond yields hit fresh multi-year highs in early European trade on Monday.

Against the strength, investors are wondering whether those central banks will tamp down on their efforts to help growth, which could send interest rates higher.

Investors should step back and take a deep breath.

It is worth remembering that Americans are in a much better financial position than we were a decade ago, and that while nominal household debt levels are higher, household debt-to-income levels are nowhere near their pre-recession peak.

Industrial stocks tumbled 4.5 percent. Exxon Mobil fell 5.7 percent, making it the second-biggest loser in the Dow Jones on Monday, after Boeing. Goldman Sachs analysts recently noted that corporations themselves represent the single largest source of demand for stocks in the United States.