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By : Dr. Mohamed Ramady

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:: The appointment of Jerome Powell as Fed Chairman by President Trump is now superseded by what happens next with Fed monetary policy after Janet Yellen .

The appointment of a new Federal Reserve Chair is something that is of importance not only to the USA but to countries like those in the Gulf whose currencies are pegged to the dollar.

Federal Reserve Chair Janet Yellen’s relatively brief 30-minute meeting with President Trump marked the last of the President’s Apprentice-style parade of the final five candidates to head the Federal Reserve for a four-year term beginning next February in a high stake non -Apprentice game with ramifications as to potential style and leadership .

Until Powell’s appointment, the betting was a John Taylor-Jerome Powell, Chair and Vice Chair twin nomination, and many did not rule out a surprise reappointment of Chair Yellen, in defiance of Republicans on Capitol Hill and indeed, most of his advisors. With Powell’s appointment, one doubts there is likely to be a significantly different rate path in 2018 than the already hawkish projections mapped out by the Yellen-led Federal Open Market Committee. But what will be different next year is a new Chair needing to establish credibility with the markets, which will invariably be testing him on the first data or policy surprise amid uncertain inflation dynamics and a potentially significant fiscal policy boost.

Higher market volatility

A Chair other than Yellen, in other words, could translate into higher market volatility. This has implications for Gulf interest rate policies.

At minimum, it could be said the announcement of a presumably more hawkish Chair would jolt the market pricing up to the Fed’s current projections rather than as the rates policy, and data, unfold through next year.

The highly likely rate hike at the mid-December meeting is set to be followed by at least two rate hikes, probably by summer, in order to lift the policy rate up to a presumed 2 percent neutral rate; a third rate hike in 2018 is more likely than not, especially if the Republican tax cuts ambitions are realized that would be boosting aggregate demand in an economy already operating near full employment.

Credibility is everything to an incoming Chair, the one essential, defining mark of the Chair’s power and influence and in this Yellen takes full mark and credit. That perhaps best underscores the main difference next year if there should be a nomination and confirmation of a new Chair: namely that he would be arriving and inevitably be facing a market testing of a new Chair who will lack the track record and policy credibility. The appointment of Powell has diminished this.

Dr. Mohamed Ramady

Perhaps more importantly, Fed rate policy is a Committee decision, and it takes time for an untested Chair to build the critical credibility needed to work with the senior policy staff and to shape a policy consensus among a solid majority of the Federal Open Market Committee ( FOMC) voters comprising both the politically appointed Governors and the five District Presidents.

Too many dissents early on would undermine the sense of the new Chair’s leadership skills and sway over policy, both internally and in the perceptions of the market that is always hypersensitive for the slightest whiff of change or faltering in the Fed’s reaction function. That could introduce an element of uncertainty and market volatility that could prove very difficult to contain, and central banks are loathe to signal to the markets that they are uncertain and indecisive.

Credibility is everything to an incoming Chair, the one essential, defining mark of the Chair’s power and influence and in this Yellen takes full mark and credit. That perhaps best underscores the main difference next year if there should be a nomination and confirmation of a new Chair: namely that he would be arriving and inevitably be facing a market testing of a new Chair who will lack the track record and policy credibility. The appointment of Powell has diminished this.

Governor Powell was said to be a clear front-runner, and was often described as just about everyone’s “favored second choice,” neatly meeting the checklist of the White House criteria on both monetary policy and especially regulatory policy.

Powell has ably served under Yellen since his appointment in 2012, as a Republican paired at the time with Democrat Jeremy Stein of Harvard University.

Powell has been closely aligned with Yellen throughout the years of the policy normalization strategy and has shown a knack for consensus building in both his Board functions and with staff, as well as outreach to the districts.

With the appointment of the new Chairman out of the way, the implication for the Gulf is to expect more interest rate hikes starting from December.

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:: Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran , Saudi Arabia. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges.’

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:: Disclaimer: Views expressed by writers in the Column section are their own and do not reflect RiyadhVision’s point-of-view.

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