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Federal Reserve

Trump names Jerome Powell as new chair of US Federal Reserve, and Asian markets approve

’Dovish’ successor to Janet Yellen is expected to remain cautious on interest rate hikes and may relax financial regulations

PUBLISHED : Friday, 03 November, 2017, 8:54pm
UPDATED : Friday, 03 November, 2017, 11:29pm

Asian financial markets responded well on Friday to the news from the United States that Jerome Powell had been officially nominated by President Donald Trump to take over the running of the Federal Reserve next year.

In Hong Kong, the Hang Seng Index closed up 0.26 per cent, while the KOSPI ended 0.46 per cent higher in Seoul and the Nikkei 225 climbed 0.53 per cent in Tokyo.

In contrast, the Shanghai Composite Index ended the day down 0.34 per cent, though mainland Chinese stocks often buck wider Asian trends, and the appointment of a new chair of the US Fed would not be seen as a major market mover.

Widely viewed as a dovish figure, Powell, 64, is expected to remain cautious on interest rate hikes and might even consider relaxing financial regulations. A member of the Fed’s board of governors since 2012, the former managing director of Carlyle Group will, subject to approval from the Senate, take over from Janet Yellen in February 2018.

“He’s known for being soft on financial deregulation, which I suspect is why the market quite likes him, particularly banks,” Julian Evans-Pritchard, a China economist with Capital Economics, said.

Any easing of the regulations on banks would likely provide a boost to the US economy and could stimulate consumer spending. That would be good news for exporting countries across Asia, including China, as demand for goods increased.

The upbeat market sentiment seen on Friday was in sharp contrast to the panic that spread across emerging markets three years ago when the Fed announced plans to temper its quantitative easing programme, followed by its first interest rise in almost a decade at the end of 2015.

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It was a painful time for Beijing, as the quarter-percentage point increase, coupled with the People’s Bank of China’s ill-timed forex reforms triggered a massive capital outflow, plunged the value of the yuan as low as seven to the US dollar, reduced forex reserves by nearly a tenth and forced the introduction of strict capital control measures.

However, Evans-Pritchard said he did not expect the US dollar to strengthen as much this time around, as the currency had already made significant gains over the past year and the market had factored in Trump’s tax reforms.

Also, “unlike a few years ago when the prospect of policy divergence was expected … the US [economy] looked pretty healthy and the rest of the developing world didn’t … Now you have a globally synchronised recovery”, he said.

In its September minutes, the Fed said it expected three rate hikes next year, two in 2019 and one in 2020 until it reached 2.75 per cent and it could start downsizing its balance sheets.

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Iris Pang, chief Greater China economist at ING in Hong Kong, said that while Powell might avoid sending any explicit signals of a policy turnaround to the market he might be more cautious in implementing the rate hikes than Yellen’s Fed had suggested.

ING expected two rate increases next year, Pang said, adding that the slower pace would keep the US dollar index at a low level, which would be good for the yuan’s exchange rate.

While China’s central bank has been closely watching the Fed’s moves, it has chosen this year not to match all of them.

Pang said Beijing was likely to continue to raise market interest rates next year after its policy rate guidance and liquidity management policies led to increases of about 50 basis points in 2017.

Such a move would be in line with the global trend of central banks either tightening liquidity or raising interest rates, she said, adding that it would also support the government’s efforts to reduce debt levels.

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Zhong Yue, an analyst at ForexTime said that as Powell was largely seen as a supporter of Yellen’s policies, there were no expectations of a dramatic monetary policy change on his watch.

Likewise, the personnel change would have little impact on China’s or other Asian economies, both of which have seen stable growth, although Beijing might be forced to play the rate hike game if the US stuck to its promise of steady increases, he said.

Lu Zhengwei, chief economist at Shanghai-based Industrial Bank, said that although Powell appeared dovish, he should be given time to show his cards.

“Powell’s earlier statements represented the stance of his organisation, and not necessarily his personal views,” he said.

On matters such as exchange rates, therefore, until the new Fed chairman’s policy can be properly assessed, “China should keep its destiny in its own hands”, he said.