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A Dangerous Man

On September 28th, 2021, the US Federal Reserve Chairman, Jerome Powell, faced his most hostile hearing to date, in front of Congress, since his appointment in February 2018. The Chairman’s term expires on February 5th, 2022, and he is widely expected to be renominated for a second four-year term. However, his prospects, while still strong, seem to have diminished lately as more opposition from the Senate comes forward. (See Chart below)

A democratic Senator, Elizabeth Warren, went on the record to say, “Over and over, you have acted to make our banking system less safe and that makes you a dangerous man to head up the Fed, and that’s why I will oppose your renomination”. She was referring to the fact that Powell has modified the rules that were enacted to make the Banking system more robust after the 2008 financial crisis. It is noteworthy that former congressmen Barney Frank and Chris Dodd, who drafted the Dodd-Frank act to tighten the bank rules in response to the 2008 crisis have endorsed renomination of Jerome Powell as a Fed chair for another term.

Market bets on the next US Federal Reserve Chairman 2021

Note: Methodology - market quote of the candidate as a % of sum of total candidate quotes.

Stock markets have come to love Jerome Powell as he was the architect of a massive stimulatory response to help the economy rise out of challenges posed by the pandemic. Furthermore, markets have realised that with him at the helm as a Fed chair, they can expect pacifying messages to soothe market nerves even as the economic data begins to point to challenges ahead.

While we can agree that inflation is the single most important risk facing the markets at present, given a reading consistently more than 5% since May 2021, we think wiring the policy response to inflation is even more important from a stock market perspective and Mr. Powell has learned to do this job extremely well.

As a case in point, the median Fed dot plot in June 2021 indicated no interest rate hikes in 2022 and two interest rate hikes in 2023. The data during last 3 months was strong enough to sway median dot plot in September 2021 to indicate one interest rate hike in 2022 and three in 2023. The Fed also indicated it could start tapering of its bond buying program soon. While bond markets reacted to the hawkish shift by pushing the US 10yr bond yields up by ~20 bps between 22nd September and 30th September, the stock markets’ immediate reaction was positive as Powell insisted that the tapering timeline should not be seen as linked to the timeline of an increase in interest rates.

Markets hate uncertainty and with any uncertainty of continuation of Jerome Powell’s as a Fed chair, the risk of policy uncertainty is increased. It was no surprise that the day he was termed “a dangerous man”, stock markets fell by ~2%.

September in Review

  1. The stock markets gave back some of their year-to-date returns with S&P 500 falling by ~4.9% and S&P TSX falling by ~2.6% during the month.

  2. As per Bloomberg’s September economic survey, economists expect Canada’s GDP to grow at ~4% in 2022 and one interest rate hike by Bank of Canada in 2022.

  3. Canada concluded its snap election with the new house of commons looking pretty much same as the old.

  4. The cryptocurrency market suffered a setback as China’s central bank said that all cryptocurrency related transactions are illegal.

  5. Global stock markets witnessed sharp sell off in the middle of the month after concerns arose that Evergrande Group, a China based property developer, might default on its interest payments and lead to a contagion in global credit markets.

  6. The diplomatic crisis between US, China and Canada culminated in a sudden resolution after Meng Wanzhou, the Huawei executive, struck a deferred prosecution agreement with the US authorities paving way for her release from house arrest. Shortly after, the two Michaels also boarded plane to return to Canada

  7. Treasury Secretary Janet Yellen and Fed Chair Jerome Powell both emphasized that the consequences of not raising the debt ceiling would be catastrophic and treasury will run out of cash around 18 October.

  8. In a survey of Bloomberg Economists, the third-quarter US GDP growth was lowered to a 5.0% annualized rate, down from a previous estimate of 7.0% driven by resurgence of Covid-19.

How does this affect my investments?

The stock markets are inherently volatile and short-term market movements are impossible to predict. Historically, market declines have been followed by recoveries and new highs. By staying invested in a diversified portfolio, your portfolio will be well positioned to benefit from a recovery while mitigating the volatility experienced during the period.

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