Powell Is Already Yesterday’s Man

Fed Chair Powell has, by and large, done an exemplary job since assuming office in February 2018.

Barring a brief market tantrum over the ‘autopilot’ episode at the end of that year, Powell has been a steady hand – preventing money market turmoil in late-2019; providing incredible and powerful to the economy when required during the pandemic; removing that accommodation rapidly once inflation soared amid fiscal largesse post-covid; engineering a ‘soft landing’ late last year; and, now, perhaps most importantly, preserving the policy independence of the Fed as an institution.

I appreciate that I may be the sole member of the ‘Jay Powell Fan Club’, or at least the only one willing to go on record about it, but I strongly believe that an objective assessment of Powell’s performance as Chair would conclude that he’s done a very good job, in very trying circumstances.

However, as much as it pains me to write this, Powell is now ‘yesterday’s man’.

Allow me to explain.

There are just five FOMC meetings left before Powell’s term as Chair expires next May.

For the next two of those meetings, in October and December, the resulting policy action is a foregone conclusion – namely, a 25bp cut each time, as the FOMC pursue a ‘risk management’ approach of gradually easing policy to support the stalling US labour market.

Moving into 2026, there are just three meetings early next year for Powell to chair before he must vacate his seat at the head of the table. However, by that stage, not only will we know the identity of Powell’s replacement (my money is still on Jefferies’ David Zervos, for what it’s worth), but there is every chance that said replacement could well be sat around the table, having ‘swapped in’ to replace Governor Miran upon the expiry of his term at the end of January.

In any case, whether the new Chair is sat on the FOMC or not, market participants will undoubtedly be paying much greater attention to anything they have to say in terms of forward guidance, as opposed to any remarks that the departing Powell may make.

As a result, barring an incredibly surprising, and equally unlikely, hawkish U-turn from policymakers between now and the end of the year, there’s quite a strong case to be made that any guidance Powell issues, or any comments Powell makes, shouldn’t really matter too much between now, and the end of term. Of course, that could well change if Powell remains as a Governor, upon which his influence on markets would be restored to some degree, though such a move isn’t the base case for now.

Consequently, it becomes relatively straightforward to determine the outlook for Fed policy from here on in. In short, the policy stance will continue to loosen, not only as a result of the ‘insurance’ cuts that the FOMC are in the midst of delivering now, but also amid the likely appointment of a dovish supply-sider to take the helm next spring, ensuring that rates should remain on a gradual glide back to neutral by the end of next summer, if not before.

For markets, the implications of this are also relatively straightforward. Expectations of an easier monetary backdrop should ensure that the path of least resistance continues to lead to the upside for equities, particularly considering the potential re-emergence of the ‘Fed put’ to support things further. For the greenback, meanwhile, this ‘run it hot’ policy approach decisively tilts risks to the economic outlook to the upside, arguably for the first time this year, while also tilting risks to the greenback in the same direction. A steeper curve, stemming from the FOMC’s view that 2% inflation is now a floor, as opposed to a ceiling, should also help things along on this front.