Calm Powell reassures asset managers

Editor's note: This story appeared in the Nov. 17 print edition of InvestmentNews.

Federal Reserve chair Jerome Powell was blunt about the agency’s independence from politicians, telling reporters that he has no plans to step aside if asked.

“Not permitted under the law,” Powell said in a brief comment responding to a question about incoming president Donald Trump’s powers to fire him or other governors on the Federal Reserve Board.

Trump, who appointed Powell as chair of the Fed in 2017, has been critical of him and has asserted that the president should have some input into monetary policy.

The press conference happened just after the Fed announced its benchmark interest rate cut of 25 basis points – the second cut this year – bringing the target rate for federal funds to 4.5 to 4.75 percent. In September, the Fed lowered its rate by 50 bps, and there are projections that it may do another 25-bps reduction in December.

This month’s rate decision, and Powell’s comments afterward, seemed to reassure asset managers.

“It was one of Powell’s better press conferences,” said Damian McIntyre, head of multi-asset solutions at Federated Hermes, citing the Fed leader’s comments on uncertainty about policy issues in the near future.

“He has already worked with the [Trump] administration once,” McIntyre said. “He’s shown countless times that he tries to stay apolitical and do what’s right for the economy and for the country. We would expect him to work in that manner” going forward.

Early expectations are that policies Trump has championed, including a massive increase in tariffs and an extension of 2017’s Tax Cuts and Jobs Act, could put upward pressure on inflation, analysts noted.

“I was glad to see there was no immediate, knee-jerk change,” said Matt Peron, global head of solutions at Janus Henderson. “He did a good job by not elevating policy uncertainty.”

What the Fed’s “terminal rate” ends up being remains to be seen, particularly with inflation possibly fluctuating next year.

“Our posture around the election and the Fed has been that we’re following the fundamentals. That [political] stuff gets a lot of attention, but at the end of the day, the economy has shown to be quite resilient in the face of rates hikes,” Peron said. “The big story for us as investors and asset allocators is where earnings are going to go. On that front, we’ve seen earnings go up for the past few months … and we think that is going to continue.”

Despite tail risks including the threat of political interference, the “base case remains that the Fed will remain independent, and Powell will be able to do what he needs to do to maintain inflation.” Another 25-bps cut in December is indeed likely, he said.

“When it comes to asset allocation, we’ve always had the view that fixed income should be four percent to 4.5 percent on the 10-year [Treasury],” he said. “We’re not changing that range now, but that is under review.… People are a little too optimistic on inflation going in the right direction, and it’s probably going to be a little bit noisier.”

For his part, Powell said the Fed is on “a more neutral path” but declined to say what would happen in December.

“We have gained confidence that we are on a sustainable path down to two percent [inflation],” he said. “We don’t think it’s a good time to do a lot of forward guidance. There is a lot of uncertainty.”

However, he did comment on the effects that years of inflation have had on Americans – a factor that seemed to weigh heavily in Trump’s favor leading into the election. Even as inflation has come down to more historically normal levels, prices remain high relative to wages.

“We went through a global inflation shock.… It stays with you, because the price level doesn’t go back down. It takes years of real wage gains for people to feel better – and we’re on the way to that,” he said. “What needs to happen is happening, and for the most part has happened. But it will be some time before people regain their confidence and feel better.”

The Fed’s decision for November was uncontroversial, and another cut in December is reasonable – but after that is a big question because of the policy impact of “Trump 2.0,” said Neil Sun, BlueBay portfolio manager at RBC Global Asset Management.

Powell’s comments turned out to be more neutral and less hawkish than some expected, and that resulted in a rally in rates that brought yields down to low points for the day of the announcement, Sun said.

“We actually have been reducing risk and positioning ourselves in a more defensive stance. We’re more concerned about a Trump 2.0 period, where the tariffs and the policies will create some upward pressure for inflation,” he said.

A 10-percent tariff on trading partners, for example, could introduce a percentage point to the rate of inflation, he said. He also believes that, generally, investors should be mindful of their exuberance.

“We’re fully aware that the market is rallying hard and that everyone is having their moment, celebrating the new highs in equities,” he said.

Powell’s response to the question of whether he would resign if asked, or could be removed, was “a very firm response and gives some comfort to the markets,” Sun said.

“Trump tends to evaluate himself based on equity performance,” and if negative sentiment and equities show signs of weakness in his term, that could steer him away from aggressive commentary on the Fed, Sun said.

“We could possibly see Trump cooperating more with the Federal Reserve … and not causing any chaos in the market.”