Impact of Powell’s Nomination as New U.S Fed Chairman on Asian Financial Markets

President Donald Trump and The Federal Reserves Governor Jerome Powell - Photo by Getty Images

JAKARTA (TheInsiderStories) – United States President Donald Trump has appointed Jerome Powell to chair the Federal Reserve (Fed), bypassing Janet Yellen for a second term. Powell took office as a member of the Board of Governors of the Fed on May 25, 2012, to fill an unexpired term.

He was reappointed and sworn in on June 16, 2014, for a term ending Jan. 31, 2028. Prior to his appointment to the Board, Powell was a visiting scholar at the Bipartisan Policy Center in Washington, D.C., where he focused on federal and state fiscal issues.

From 1997 through 2005, Mr. Powell was a partner at The Carlyle Group. He served as an Assistant Secretary and as Undersecretary of the Treasury under President George H.W. Bush, with responsibility for policy on financial institutions, the Treasury debt market, and related areas. Prior to joining the Administration, he worked as a lawyer and investment banker in New York City.

In addition to service on corporate boards, Powell has served on the boards of charitable and educational institutions, including the Bendheim Center for Finance at Princeton University and The Nature Conservancy of Washington, D.C., and Maryland.

The new chairman was born in Feb. 1953 in Washington, D.C. He received an A.B. in politics from Princeton University in 1975 and earned a law degree from Georgetown University in 1979. While at Georgetown, he was editor-in-chief of the Georgetown Law Journal. Powell is married with three children.

Trump confident that “Jay” – Powell’s nickname – will be a wise steward of the Federal Reserve, imbuing it with the leadership it needs in years to come. Powell said in a statement on Oct. 2, in the years since the global financial crisis ended, U.S economy has made substantial progress toward full recovery.

By many measures, he added, the U.S.A. is close to full employment, and inflation has gradually moved up toward its stated target.

“Our financial system is without doubt far stronger and more resilient than it was before the crisis. Our banks have much higher capital and liquidity, are more aware of the risks they run, and are better able to manage those risks,” he confirmed.

According to Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit, the decision by President Trump to nominate Powell as the new Fed board chairman is expected to bring continuity to the central bank monetary policy at a crucial time when the central bank is gradually tightening policy interest rates as well as unwinding the massive bond holdings of US$4.5 trillion on its balance sheet.

The nomination is subject to U.S Senate confirmation with the expectation that this will be supported by both Republican and Democratic senators. Powell is regarded as having a dovish approach to U.S monetary policy normalization and he is expected to continue with a similar gradualist strategy as Yellen had taken for tightening US monetary policy while slowly unwinding the massive bond holdings on the Fed’s balance sheet.

He said that with his experience as a Fed Reserve board governor since 2012, he can assure continuity and stability as the new US Fed chairman, as well as having strong political skills in consensus-building and deep knowledge of financial markets.

This, Bhiwas continued, will help to reassure Asian financial markets that the Fed will continue to take a gradual and measured approach to tightening US monetary policy. During 2017, there have been renewed concerns about the potential impact of rising U.S interest rates at both the short-end and long-end of the yield curve on Asian capital markets, as a decade of ultra-loose monetary policy in the U.S comes to an end.

Having Powell as Fed chairman would help to reassure Asian financial markets that the US Fed is not likely to significantly alter its current approach to gradual tightening of monetary policy. This should help to prevent disruptive movements in Asian equities and currency markets by allaying global investor fears that the US Fed could adopt a more hawkish monetary policy.

Continuity of U.S Fed monetary policy should help the stability of the Chinese Yuan, which has benefited from renewed investor confidence in recent months, as China’s economy has strengthened and Chinese foreign exchange reserves have again been increasing.

The Malaysian Ringgit has also benefited from resurgent Malaysian GDP growth and booming exports during 2017, and expectations that the new Fed chairman will take a gradualist approach to further U.S monetary policy tightening should help to keep the ringgit relatively stable against the US dollar in the near term.

Nevertheless, he stated, Asian financial markets still face medium-term challenges as the U.S Fed continues to gradually tighten monetary policy over 2018-19, with the fed-funds rate expected by IHS Markit to reach 3 per cent by the end of 2019 and 10-year US treasury yields also expected to rise.

Consequently, Asian capital markets, which have become intoxicated by very low interest rates and waves of liquidity for the past decade, will face a changing landscape due to the rising U.S fed-fund rate. Strong growth momentum in Europe during 2017 also signals that the European Central Bank will also likely start raising policy rates in 2018, with the Bank of England already having started its own tightening process on Nov. 2, with its first rate hike in over a decade.

Some Asian corporate borrowers that have become too leveraged to US dollar debt could face challenges from higher refinancing costs, particularly those with a high share of short-term U.S dollar debt.

Some Asian property markets could also be vulnerable, notably the Hong Kong property market, due to the Hong Kong dollar peg to the U.S dollar, forcing the Hong Kong Monetary Authority to follow U.S policy rate hikes. This will push up Hong Kong mortgage rates, creating potential risks for highly-leveraged Hong Kong borrowers with U.S dollar or Hong Kong dollar loans.

Written by Linda Silaen, Email: