USD Rates: Powell re-nominated for second term as Fed Chair

Three hikes factored into 2022.
Eugene Leow23 Nov 2021
    Photo credit: Unsplash Photo

    President Biden re-nominated Jerome Powell for a second term as Fed Chair, resolving one of the lingering uncertainties for the year. Market participants were dealing with uncertainties amid speculation that Lael Brainard could take the position. Brainard has instead been selected for the Vice Chair. The market reaction to this news was along expected lines. US Treasury yields rose as uncertainties got lifted. More Fed hikes also got priced into the belly of the curve as the market removed the possibility of an even more dovish Fed. Close to three hikes are now being factored into 2022. However, the equities space was mixed as the sharp spike in yields caused a tumble in the Nasdaq.

    The key theme over the coming quarters would be policy normalisation and there is arguably greater clarity under Powell. He turned incrementally hawkish since June’s FOMC meeting and kicked off taper in November. Upcoming minutes would likely show that policy flexibility has been kept, providing leeway for accelerated taper if needed. Moreover, we think that there is a reasonable chance that the Fed would allow the balance sheet to shrink shortly after taper ends. As a gauge, the Fed funds rate upper bound was at 1.75% pre-crisis. While growth and inflation have surged, the employment mandate has not quite been met. Accordingly, the market is only factoring in partial normalisation out to 2023 (Fed funds rate upper bound of 1.5%). We expect 10Y yields to climb towards 2% in 2022. Our overall rates outlook for 2022 can be found here.

    Eugene Leow

    Senior Rates Strategist - G3 & Asia
    [email protected]

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