As trials by fire go, there probably couldn't have been a better script for Jerome Powell's first week on the job as the chairman of the Federal Reserve.
His Monday swearing-in coincided with a record 1,175-point drop by the Dow Jones industrial average, and the market volatility in the days that followed sent every major equity index into correction territory by week's end.
For financial advisers, the sudden market volatility places added significance on Mr. Powell's replacement of Janet Yellen after four years as Fed Chair.
Communications and clarity top the wish list of what most advisers would want from Mr. Powell and the Fed Board he now leads.
"As far as what we'd like to see from the new Fed chair, the two words that come to mind are measured and predictable," said Megan Gorman, managing partner at Chequers Financial Management, which manages $250 million.
"As a member of the Fed board, there were comments he made about being uncomfortable with quantitative easing and low rates," Ms. Gorman added. "Jerome Powell occasionally speaks his mind. He is selective. But on occasion, he has taken a moment or two to say when he is uncomfortable."
But advisers are also taking some solace from the fact that Mr. Powell's appointment marks a break from the string of academics who have steered the nation's monetary policy.
"Jerome Powell is an attorney and a former private-equity executive, and it will be interesting to see him leading this committee of academics," said Sam Miller, senior investment strategist at SEIA, which has $7.8 billion under management.
Even though the Fed is widely expected to hike rates three or four times this year from the current level of 1.25%, at least the rate hike expected in March could be in jeopardy, according to Michael Hans, chief investment officer at Clarfeld Financial Advisors, which manages $6 billion.
"I don't know that the Fed would hike rates into a highly volatile market, but [Mr. Powell] has a background in finance and he might look right through that volatility," Mr. Hans said.
While the stated dual mandate of the Fed is to manage inflation and employment, there is no denying the connection between monetary policy and the broader financial markets.
For instance, in the immediate wake of the 2008 financial crisis, the Fed drove its overnight rate down to zero, then followed with a series of quantitative easing programs that ballooned the central bank's balance sheet toward a record $5 trillion, all to prevent a more severe economic collapse.
But now, with the economy growing at a more normal pace, unemployment at just 3.5%, and inflation picking up, financial advisers are hoping Mr. Powell can lead the fed funds rate back toward a more normalized range of 2%.
"We think one of the most important things the Fed can do is to be clear in its intentions and try to avoid surprising the markets," said David Aaron, chief investment officer and co-chief executive at EMM Wealth, which manages $2.3 billion.
"Everyone is hoping the new Fed Chair will follow on Janet Yellen's glide path," he added. "We were long overdue to start ending quantitative easing and she set that glide path, and the hope is that he doesn't deviate dramatically or quickly from that."
In many respects, the immediate challenges facing Mr. Powell and the Federal Reserve Board of Governors are byproducts of a much stronger economic outlook that in part has resulted from policies put in place by President Donald J. Trump.
While analysts have pointed to the prospect of higher interest rates as a reason for the recent stock market volatility, it is more likely the market is reacting to the factors likely to drive rates higher.
"The latest employment data was good, but the data on wage acceleration underneath it is what has the market worried," Mr. Aaron said. "This is the fullest employment we've seen in 40 or 50 years, and the economy will have to slow because it will cost more to bring in new workers. On top of that, the Fed is removing monetary stimulus from the economy."
Mr. Aaron also pointed to Mr. Trump's December tax-reform package, which helped boost investor confidence ahead of the recent market pullback.
"The story for the U.S. in 2017 was a shift from monetary to fiscal stimulus," he said. "Without tax reform, we wouldn't have had any significant acceleration or chance of seeing the economy grow toward 3%, but with it, investor confidence in the markets and the economy went higher."
Daniel Kern, chief investment officer at TFC Financial Management, which manages $950 million, is also hoping Mr. Powell is big on communication.
During Mr. Powell's scheduled Feb. 28 semiannual monetary policy report to the House Financial Services Committee, Mr. Kern would like to see the new Fed chairman address the stock market volatility.
"I always wonder during a sell-off like this if there is systemic risk related to low volatility; have too many people piled into low-volatility strategies?" Mr. Kern pondered. "I think the answer is no, but it would be comforting to hear insights from Powell because he really has a unique perspective."
Feb 9, 2018 @ 4:17 pm
By Jeff Benjamin