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The Fed is about to see many new faces.What it means for banks, economies and markets

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Perhaps in just a few months, the Federal Reserve will look very different: three new governors, a new vice-chairman, a new banker, and perhaps two new regional presidents.

However, the upper parts of the institution may vary considerably, but the whole may look almost the same.

This is because Fed watchers believe that even if Sarah Bloom Ruskin, Lisa Cook, and Philip Jefferson are identified as new members of the board, there will be little ideological change. President Joe Biden will nominate a trio in the coming days, according to White House sources.

Of the three, Ruskin is considered to be the largest change agent. She is expected to play a heavier role in her future role as Vice-Chairman of Banking Supervision. This is the position held by Randal Quarles with a light touch until December.

Bankers will be surprised that rhetoric may be a little more extreme. But what is the substance? What are they doing to these people?

Christopher Hollen

Founder of Whalen Global Advisors

However, while Ruskin can strengthen the rhetoric of the financial system, there are doubts about how it will actually be transformed in policy.

“She is a former regulatory agency. She knows this. This is not what she spoils,” said Christopher Whalen, founder and former Fed researcher at Whalen Global Advisors. “Bankers will be surprised that rhetoric may be a bit more extreme, but in reality? What are they doing to these people? Why are they taking a lot of risk? is not it.”

In fact, according to the Fed, the level of quality capital held by U.S. banks compared to risk assets has risen from 11.4% at the end of 2009 to 15.7% in the third quarter of 2011 since the 2008 financial crisis. And is rising continuously. data.

Still, the banking industry remains a favorite target of the Democratic Party of Parliament, led by Massachusetts Senator Elizabeth Warren, who is believed to have endorsed Ruskin in her supervisory role.

However, the candidate’s biggest impact can occur in some of the Fed’s recent footsteps, such as having banks plan on the economic impact of climate-related events.

“The main point of controversy in her confirmation is about climate policy, which has previously expressed support for implementing both federal monetary and regulatory policies in a way that facilitates a green transition,” said Global Policy and Krishna Guha, head of the central bank, said. Evercore ISI strategy.

While Ruskin sees Ruskin as “substantially more robust in terms of regulation” than Quares, Guha also addresses issues such as Treasury market reforms, especially changes in supplemental leverage ratios during the pandemic era. I see it as “practical”. The SLR has determined the weighting of assets held by banks, and industry leaders are calling for changes to distinguish between the Treasury and other much more risky holdings.

The financial system also continues to see unusual trends in the pandemic era, including dramatically higher liquidity demand from the Fed’s overnight reverse repo transactions, where banks can exchange high-quality assets for cash. Operations set a daily record on New Year’s Eve 2021 with nearly $ 2 trillion in trading and more than $ 1.6 trillion in activity on Thursday.

Monetary policy challenges await

These issues, like the broader issues of monetary policy, require attention from Ruskin.

Cook and Jefferson are expected to bring dovish views to the board. That is, we support looser policies when it comes to interest rates and other issues. But if confirmed, they will join the board as the Fed curbs rate hikes and other tightening moves to curb inflation and promotes a more hawkish approach.

“I think it’s a mistake to see them as likely to form a tough dovish block on arrival and oppose the ongoing hawkish shift in Fed policy,” Guha wrote. “Rather, we say they [Governor Lael] Brainard and other former pigeons [Mary] With daily [Charles] Evans – Consider policy as a half-game and explain what this means and how it works. “

Daily is the president of the Federal Reserve Bank of San Francisco, and Evans directs the central bank’s Chicago operations.

They talked about the need to raise interest rates, among several other policy makers these days. Therefore, even if the new trio officials want to put a brake on policy tightening, they may be drowned in the desire to curb the fastest price increases in nearly 40 years. The Fed also plans to suspend monthly asset purchases in March.

What the board does not seem decisive is to reduce some of the Fed’s $ 8.8 trillion assets. Some officials at the December meeting said balance sheet cuts could begin shortly after rate hikes began, but other recent officials have expressed uncertainty about the process.

The National Economic Council under former President Donald Trump, Chief Economist of the Americas in Natixis.

“They are pretty dovish in terms of interest rates and may actually help reduce balance sheets,” he added.

Other changes to the Federal Reserve could allow Brainard to take over as Vice-Chairman of the Federal Open Market Committee, which sets interest rate policies. This position is effectively the Supreme Lieutenant of President Jerome Powell. A statement at the Senate confirmation hearing on Thursday shows that she is likely to vote.

Two regional presidents have also been opened after Eric Rosengren of Boston and Robert Kaplan of Dallas resigned last year in a controversy over market transactions by early Fed authorities in the pandemic.

Hollen, a former Fed official, said new policymakers are unlikely to drive major changes, but have plenty of room to keep them busy.

“I think the Fed’s governor could spend more time this year on financial market gist than in the last few years,” he said. “It’s very clear that they made a mistake, but they’re not very good at saying it.”

The Fed is about to see many new faces.What it means for banks, economies and markets

Source link The Fed is about to see many new faces.What it means for banks, economies and markets

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