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The Fed is about to see a lot of new faces.  What this means for banks, the economy and markets

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The Fed is about to see a lot of new faces. What this means for banks, the economy and markets

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Sarah Bloom Raskin

Andre Harrer | Bloomberg | Getty Images

In what will probably only be a few months, the Federal Reserve will be very different: three new governors, a new vice president, a new banking director and probably a few new regional presidents.

But while the upper echelon parts of the institution might change a bit, the whole thing might look pretty much the same.

That’s because Fed watchers ideologically believe there will likely be little change, even if Sarah Bloom Raskin, Lisa Cook and Philip Jefferson are confirmed as new members of the Board of Governors. White House sources say President Joe Biden will name the trio in the coming days.

Of the three, Raskin is considered the greatest agent of change. She is expected to take on a heavier hand in her future role as vice president of banking supervision, a position until December that had been held by Randal Quarles, who has taken on a lighter touch.

Bankers will be surprised that the rhetoric is perhaps a bit more extreme. But the bottom? What are they doing to these guys?

Christopher Whalen

Founder, Whalen Global Advisors

But while Raskin might step up the rhetoric about the financial system, one wonders how much of that will actually translate into policy terms.

“She’s a former regulator. She knows this stuff. It’s not something she’s going to mess up,” said Christopher Whalen, founder of Whalen Global Advisors and former Fed researcher. “Bankers will be surprised that the rhetoric is maybe a bit more extreme. But the substance? What are they doing to these guys? It’s not like they’re taking a lot of risks.”

Indeed, the level of quality capital held by US banks relative to risky assets has steadily increased since the 2008 financial crisis, rising from 11.4% at the end of 2009 to 15.7% in the third quarter of 2011. , according to the Fed. The data.

Still, the banking sector remained a favorite target of congressional Democrats, led by Massachusetts Sen. Elizabeth Warren, who reportedly favored Raskin for the oversight role.

Still, the candidate’s greatest impact could come from some of the ancillary places where the Fed has dipped its toes recently, such as the push to get banks to plan for the financial impact of climate-related events.

“The main point of contention in her confirmation will relate to climate policy, where she has in the past expressed support for implementing the Fed’s monetary and regulatory policy in a way that promotes the green transition,” said Krishna Guha, Head of Global Policy and Central Banking. strategic for Evercore ISI.

While Guha sees Raskin “taking a noticeably tougher line of regulation” than Quarles, he also sees her as “pragmatic” on issues such as Treasury market reform, particularly pandemic-era changes to the ratio. additional leverage. The SLR dictates the weighting of assets held by banks, and industry leaders have called for changes to differentiate between things like Treasuries and other much riskier assets.

The financial system also continued to experience unusual pandemic-era trends, such as significantly higher demand for liquidity from the Fed’s overnight reverse repo agreements, where banks can exchange high quality assets for cash. Trading set a single-day record on New Year’s Eve in 2021 with nearly $2 trillion changing hands, and Thursday’s activity saw more than $1.6 trillion in transactions.

Monetary policy challenges await

These issues will demand Raskin’s attention, as will broader monetary policy issues.

Cook and Jefferson are expected to bring dovish views to the board, meaning they favor looser policy on interest rates and other similar issues. If confirmed, however, they would come to the board at a time when the Fed is pushing for a more hawkish approach, triggering rate hikes and other tightening measures in an effort to control inflation.

“We believe it would be a mistake to view them as likely to form a hardline dovish bloc upon their arrival and oppose the hawkish change in Fed policy underway,” Guha wrote. “We rather think that they – like [Governor Lael] Brainard and other doves of old [Mary] Daly and [Charles] Evans – will view politics as a two-part game and explain what that means and how it can play out.”

Daly is the president of the San Francisco Fed while Evans runs the central bank’s operations in Chicago.

In recent days, among many other policy makers, they have been talking about the need to raise rates. So even if the new trio of officials wanted to put the brakes on policy tightening, they would likely be drowned out by the desire to rein in price increases at their fastest pace in nearly 40 years. The Fed is also expected to suspend monthly asset purchases in March.

Where the board seems less decisive is on cutting some of the more than $8.8 trillion in assets held by the Fed. Some officials at the December meeting said the balance sheet reduction could begin soon after rate hikes begin, but others in recent days have expressed uncertainty about the process.

“People want the Fed to do something about inflation. But as growth starts to slow around the spring, people aren’t going to be able to afford higher borrowing costs,” said Joseph LaVorgna, an economics economist. chief for the Americas at Natixis and chief economist for the National Economic Council under former President Donald Trump.

“They are going to be quite accommodating on the rate side and may indeed postpone the balance sheet reduction,” he added.

Other changes for the Fed will likely see Brainard take over as vice chairman of the Federal Open Market Committee, which sets interest rate policy. The position makes her President Jerome Powell’s top lieutenant; statements made during her Senate confirmation hearing on Thursday indicate that she will likely pass.

Two regional chairman positions are also open, following the resignation of Eric Rosengren of Boston and Robert Kaplan of Dallas last year amid a controversy over market transactions by Fed officials at the start of the pandemic.

Whalen, the former Fed official, said the new policymakers will have plenty to deal with, even if they aren’t likely to push for massive changes.

“I think Fed governors may actually be spending more time this year talking about the finer points of financial markets than they have in the past two years,” he said. “It’s very clear that they made mistakes. Yet they’re not very good at saying that.”

The Fed is about to see a lot of new faces. What this means for banks, the economy and markets

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