New Fed Chair, why you should care.
StartFragmentToday, as expected, Donald Trump nominated Jerome Powell as the next Chairman of the Federal Reserve, who will success Janet Yellen. For those who don't know the Federal Reserve controls the interest rates in the United States and although he will not control the rate decisions on his own, he will ultimately become one of the most economically powerful people in the world at this time. He is not an economist by education but is expected to continue the gradual rate increase path of Janet Yellen, in contrast to the more hawkish John Taylor, who would have been expected to take a more rapid rate increase trajectory.
Three rate hikes next year versus four, waiting longer between increases, or requiring higher inflation before raising may all seem like things the average individual couldn't care less about. However, Federal Reserve interest rates have enormous power in the economy. All other rates from savings rates to borrowing rates, including mortgages are all linked to this rate.
Again, you may be wondering why a trader and an investor such as myself really cares. Well I am an economist first and I know the many repercussions of higher rates. First of all, higher borrowing costs leads to less borrowing, which can hurt the housing market as well as demand for all goods and services in the economy. Secondly, higher rates relative to other countries boost the US dollar as investors worldwide will shift more dollars into the US, where they can get higher rates on their savings. Finally, a big consideration for investors combines both of these as investors trading with borrowed money or margin will have to pay more interest, obviously discouraging this, and yield stocks become less attractive when compared to higher yields in the fixed income market.
In the end higher rates will encourage some money to move out of the stock markets and towards safer fixed income assets. The quicker and steeper the increases the greater the magnitude of this shift, and raises rates too quickly would likely hit the housing market demand cause many individuals to run into problems with debt payments, and result in a shift from risk assets to fixed income causing declines in the stock market. There are arguments to be made on both sides as to when and how often rates should be increased with the results only measurable in hindsight, but as an investor knowing that the most influential Central Bank in the world will likely be more market friendly than some of the alternatives is a relief.
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