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USD jumped on the surprised renomination of Powell (as Fed Chair) and growing policy divergence between Fed and ECB

calendar 23/11/2021 - 20:32 UTC

The US dollar index (DXY) made a 16-month high (since July 20) around 96.61 Tuesday on the surprised renomination of Powell (as Fed Chair) and growing policy divergence between Fed and ECB/BOJ. The U.S. dollar is getting broader strength on weakness in EURUSD amid dovish jawboning by ECB/Lagarde. ECB is not even thinking about policy tightening, while on the other side of the Atlantic, Fed is actively considering tightening from tapering. Also, the ongoing Turkish currency turmoil is negative for many EU banks due to their exposure, which is affecting EUR sentiment to some extent. EUR was also under stress on renewed Brexit deal uncertainty over NI protocols with the U.K.

Moreover, USDJPY jumped on the prospect of faster tightening after Biden renominated Powell as Fed Chair and Brainard as VC (vice-chair). The probable reappointment of Powell as Fed Chair will not only ensure present policy continuity but may also prompt for faster tightening (QE tapering, QT, and Liftoff). Powell and Brainard as well as Biden vowed to tackle surging inflation as the number one priority.

Brainard was seen as less hawkish than Powell and for the last few weeks, a high probability Brainard was being appointed as Fed Chair instead of Powell because of Powell’s insider trading and deregulation issues. But Biden kept a fine balancing act by renominating Powell as Fed Chair and nominating Brainard as Fed VC in place of Clarida, whose term will expire in Jan’22; Clarida was also accused of insider trading and is seen as a ‘serious’ trader.

Biden didn’t take any undue risk in such tough times of tapering to tightening and fighting inflation by nominating someone new and relatively less experience like Brainard. In any way, Biden’s decision to renominate Powell as Fed Chair is subjected to Congressional approval. Although Democrat Senator Warren may oppose ‘dangerous man’ Powell on bank deregulation issues, being an erstwhile Republican (Trump) appointed Central Banker (Fed Chair), Powell may also get Republican support this time; i.e. it may be bipartisan as in 2017.

On Monday, U.S. President Biden announced Powell's renomination. Narrating the ‘spectacular’ economic recovery from the COVID recession, Biden said:

https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/11/22/remarks-by-president-biden-announcing-his-nominees-for-chair-and-vice-chair-of-the-board-of-governors-of-the-federal-reserve-system/

·         Surging inflation is now a problem for every American as well as every other country because of supply bottlenecks post COVID

·         Fed has the dual mandate of maximum employment and price stability

·         Fed needs patience, proper skill, and political independence to achieve these dual goals

·         Powell is renominated because of his decisive leadership at the time of COVID lockdown last year

·         Renomination of experienced Powell will ensure policy continuity and stability at Fed

·         Powell’s stress on inclusive and broad-based maximum employment is ideal

·         Now as the U.S. economy is progressing solidly towards maximum employment; thus Fed should attack the inflation problem from a position of strength, not weakness

·         Powell is the ideal person at this moment, who can steer the U.S. economy for maximum employment, ensuring price stability

·         As Fed Chair, Powell will also ensure climate risk mitigation, prohibition of any risky deregulation move, and orderly regulation including that on Cryptos

·         Powell and Brainard will ensure no regulatory risk like before the 2008 GFC

·         Despite Republican stump, Powell is renominated because of his bipartisan approval and political independence effort despite Trump tantrum

·         Fed’s independence vital for its credibility

·         Both Powell and Brainard has broad bipartisan support, which is vital for the politically divided nation and public trust in Fed’s independence and credibility

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Powell said in his nomination speech:

https://www.federalreserve.gov/newsevents/pressreleases/other20211122a.htm

 

·         Higher inflation is primarily caused by the rapid pace of reopening, elevated catch/pent-up demand, and supply bottlenecks

·         Higher inflation is bad for the economy, especially for those who live by paycheck to paycheck

·         Fed will use appropriate tools to manage both maximum employment (economic recovery) and inflation (price stability)

Statement by Governor Brainard on her nomination by President Biden:

https://www.federalreserve.gov/newsevents/pressreleases/other20211122b.htm

 

·         Fed will ensure lower inflation and maximum employment with a tight labor market (higher wage growth)

·         Fed will ensure inclusive and broad-based economic development/recovery

Bottom line:

By nominating Powell and Brainard as Fed Chair and Vice-Chair, President Biden ensured policy continuity, stability, and a vigorous fight against inflation. Biden also satisfied Democrat’s progressive/socialistic agenda. In any way, the ‘unexpected’ renomination of Powell was seen as hawkish for USD in hopes of accelerated tightening to control uncontrolled Bidenflation, which is helping Biden’s approval rate sinking before the 2022 mid-term election. Biden will not risk an election or trifecta by allowing inflation hotter and hotter and losing Congress in the 2022 mid-term election.

USD was already upbeat last weekend even before Powell renomination amid hawkish talks from Fed’s Governor Waller, who advocated faster tightening. And USD jumped soon after the White House announced Powell's renomination as Fed Chair instead of Brainard. But even if Brainard was chosen as Fed Chair, Fed’s present policy of faster tightening by ensuring goldilocks economic/employment recovery would be the same.

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