BTIG Director of Policy Research Isaac Boltansky discusses what he expects the Fed chair nomination process to look like for re-nominated Chairman Jerome Powell and Lael Brainard as the Vice Chair.
Video Transcript
- Of course, all eyes are on that nomination for the next Fed chief. Jerome Powell looking like he will be keeping his job here. Let's bring in Isaac Boltansky BTIG director of Policy Research who is on the phone. Isaac, your takeaway on this.
ISAAC BOLTANSKY: Good morning. So I think that ultimately after what was an abnormally lengthy deliberation phase that took a lot longer than anyone expected or any one hoped, the White House ultimately went with the safest choice. The Powell pick provides both leadership continuity, which the market will applaud and is already applauding as we can say, as well as a victory for the White House's. My sense is that this is going to be a relatively painless confirmation process that should be wrapped up before the end of the year.
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- Isaac, it's Julie here. I'm seeing some, perhaps, conspiracy theorists, depending on your perspective on Twitter, say that, well, if the inflation situation goes even more pear shaped, and the Fed cannot handle it or does not handle it in a way that the public perceives to be effective, then Powell could be sort of a sacrificial Lamb here. And then, Brainard could step into that role. Do you think that's overthinking it, or do you think that that has some credence?
ISAAC BOLTANSKY: I think that that is perhaps two degrees too much towards the over thinking end of the spectrum. Ultimately, a lot has been made about perceived differences between Powell and Brainerd in terms of their monetary policy, but when you really go through what they've said so far, they're actually quite similar in their monetary policy ideology.
Thus far, both of them have repeatedly said that they believe that inflation is transitory but not necessarily short lived. And I think that their commentary to date on monetary policy has been largely similar. Furthermore, it's bizarre to me that anyone would argue that Brainard is more hawkish than Powell. I think that if anything, she has been portrayed by some of her opponents and proponents as more dovish.
So I'm not a buyer of that conspiracy theory. I think that Powell and Brainard make the right choice for the White House, first and foremost, because we will see leadership continuity. And secondly, because they will cruise through the confirmation process.
- Isaac, do you think this removes any chance of a rate hike next year?
ISAAC BOLTANSKY: I don't think that we can say that yet. I think that what we need to keep in mind is that these are important voices on the board, but they are just voices in the room at the end of the day. I'm going to wait to see what the White House does with the remaining seats on the Federal Reserve Board, which supposedly, we should hear who those nominees are in early December. I think that that will provide some insight, especially if it ends up being that we see a few more doves added to the board.
So to me, I think it's still too early to tell simply because these are important voices, but they're not the only voices that the White House is going to add to the Federal Reserve Board.
- And on that point, Isaac, who would be now your pick or your likely pick for the vise chair of supervision role, which some expected Brainard to fill, and she is not apparently?
ISAAC BOLTANSKY: Yeah, so I think that there are a few names that have been mentioned. I repeatedly hear Sarah Bloom Raskin name. I also hear Lisa Cook mentioned, given that she has some support from Chairman of the Senate Banking Committee Sherrod Brown.
My point to clients though, has been the same. No matter who is in that seat, I think we can safely assume what their agenda will be. I think that it's going to be a harder stress test for the big banks, meaning that capital returns will be incrementally more difficult. I think that there will be a very strong focus on climate change, which means that financing for fossil fuel projects will directionally become more difficult.
And I think ultimately, we've got to keep in mind whomever is in these seats, has to deal with whatever the headlines of the day will be, whether that's crypto or Treasury market functioning. I think that those things will pop up on the agenda as well. So I'm not focused as much on who exactly will be on the scene at this moment, as I think that the agenda is pretty clear no matter who ultimately gets the pick.
- Isaac, why do you think returns for the banks would be incrementally tougher?
ISAAC BOLTANSKY: Yeah, so the stress test is an annual exercise that the big banks go through, and the stress test was softened slightly under the Trump administration with vise chair corals in the seat. They weren't seismic shifts. I would say that they were directional shifts that made the stress test easier. My expectation is that by the time that we get to 2023's stress test cycle, because everything in D.C. takes time, But once we get to that cycle, I think that you will have more of a focus on bank exposure to different types of climate change scenarios.
And my sense is that you could see very technical changes around how many quarters worth of dividends the banks have to hold on their balance sheet. Right now, that's at four. I could see that going higher to six or possibly even eight. So nothing seismic but directionally, I think that it's going to become a bit tougher once we have a new vise chair for supervision confirmed and through the administrative changes that are required for the stress test annually
- Isaac Boltansky, BTIG director of Policy Research, thanks for hopping on for us. Appreciate it.