Stocks rallied and bond yields rose last week on optimism for the Republicans to successfully pass tax reform and on strength in third quarter corporate earnings. These two factors will probably continue to move markets in the coming week.
The next Federal Reserve (Fed) chair will likely be selected this week or next. This choice will significantly influence future Fed policy and has the ability to disrupt markets. At this point, it looks like John Taylor, Jerome Powell and Janet Yellen are the front-runners. All three are highly qualified choices for the top job. I do think the President will make a change in the Fed’s top position and not reappoint Janet Yellen.
This leaves the race between Taylor and Powell. Of the two, Powell is probably the most moderate and will likely keep rates lower for longer. His policy stances are most in line with Yellen’s current policy. Taylor brings more uncertainty as interest rates are currently lower than his famous “Taylor rule” suggests. The basic principal is that for every 1% increase in inflation, the short term interest rates should be raised by more than 1%. With the funds rate at 1% to 1.25% and inflation near 2%, the funds rate could rise under Powell.
My expectation is for Powell to be named as the next Fed chair and for the current slow pace of removing monetary accommodation to continue.
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