Original title: What is the impact of the Fed’s dovish power on commodities and the U.S. dollar?
US President Biden announced on November 22 that Jerome Powell was nominated for re-election as Chairman of the Federal Reserve Board, and at the same time he nominated current Federal Reserve Director Lyle Brainard as the next Fed Vice Chairman. U.S. experts and media generally believe that as the American public is worried about inflation, the Biden administration wants to ensure the continuity and stability of the Fed’s policy, while ensuring that the Fed chairman receives broad cross-party support to avoid unnecessary market changes caused by high-level Fed personnel changes. Fluctuations increase economic uncertainty.
Reasons for Powell’s re-election nomination
Powell has assumed the chairmanship of the Federal Reserve since February 2018 and will end his four-year term in February next year. The term of current Fed Vice Chairman Richard Clarida will also end at the end of January next year. At the critical moment when inflationary pressures in the United States are high and the Fed begins to withdraw from the ultra-loose monetary policy introduced since the outbreak of the new crown epidemic, the successor candidates of the Fed’s top management have attracted much attention. Based on Powell’s outstanding performance in leading the Fed’s response to the epidemic, most economists and market participants support Republican Powell’s re-election; some Democrats hope that Biden will nominate Democrat Brainard as the next chairman of the Federal Reserve to strengthen financial supervision and respond to the climate. Variety.
After extensive consultations with White House officials and members of Congress, Biden finally decided to nominate Powell as chairman of the Federal Reserve for two main reasons:
First, the U.S. economic recovery still faces many uncertainties, such as whether there will be a new wave of epidemics in the U.S. this winter, when the bottleneck of the supply chain will be relieved, and when the persistently high inflationary pressure will fall, etc., in this context, ensure that the Fed’s policy Continuity and stability are very important.
To curb inflation, Powell has led the Fed to formulate a plan to reduce the scale of asset purchases month by month starting later this month. In fact, the difficulty of actual operation is far greater than the difficulty of policy formulation. It is important to know the timing and pace. Too early may damage the economic recovery, and too late may lead to inflation risks and asset bubbles.
Since he started serving as a member of the Federal Reserve Board in 2012, Powell has participated in the entire decision-making process of the Fed’s last round of monetary easing policy withdrawal and has extensive experience. In 2020, Powell led the Fed to reform the monetary policy framework and set a goal of focusing more on achieving full employment and achieving an average inflation rate of 2%. Powell continues to lead the Fed to gradually normalize monetary policy, which can ensure the continuity and stability of the Fed’s policy to the greatest extent.
Second, the nomination of the Fed chairman needs to be approved by a vote in the Senate. In the context of current US political division and increasing public inflation concerns, it is particularly important to ensure that the candidate for the chairman of the Fed receives broad cross-party support, which will help increase public’s understanding of the Fed’s policies. Trust and support to stabilize inflation expectations.
When announcing the nominee for the chairman of the Federal Reserve, Biden said that the world is currently facing supply chain bottlenecks and rising prices caused by the new crown epidemic. The Fed plays a key role in responding to these challenges, balancing the two factors of stabilizing inflation and achieving full employment. The key goal requires patience, skill and independence.
Biden praised Powell for maintaining the independence of the Fed, and Powell’s management style has also been widely supported by the American business community, labor organizations, and congressmen from both parties.
Neal Dutta, head of the US economy at the Renaissance Institute for Macroeconomics, said that Powell and Brainard have little difference in their views on monetary policy, but given the political environment in the Senate, Powell is a more secure choice.
How to view Powell’s re-election nomination
The inflation level in the United States hit a record high in nearly 31 years in October. The Biden administration’s most important economic task at the moment is to fight inflation. To this end, it has resorted to “three strikes.” One is the Fed’s announcement of Taper to curb liquidity from the source; the second is to solve the pain points of the supply chain, reduce freight costs, increase the supply of goods, and stabilize prices; the third is to lower or abolish import taxes on some Chinese and European goods, thereby reducing traders’ Tax costs and lower the selling price.
Chen Zhen, a researcher of Founder’s mid-term futures shipping and global macroeconomics, said that high inflation is the most difficult problem in American society. It directly affects the quality of life of the American people. If it is not handled properly, it will directly affect Biden’s approval rate. Against this background, it is not difficult to understand Biden’s nomination.
“Although Powell has been criticized for his dovish remarks and policies, Brainard is more dovish and has long been regarded as the most dovish member of the Federal Open Market Committee. If Brainard takes office, the Fed will stay longer. The relatively loose environment in China is clearly contrary to the Biden administration’s urgent demands to fight inflation.” Chen Zhen told a reporter from the Futures Daily.
“Powell’s re-election as the chairman of the Federal Reserve is a good thing for the market.” Joe Perry, a senior analyst at Jiasheng Group, said that everything will remain the same after Powell’s re-election. He is a dovish, but he will not be too dovish, because he has made a reduction plan for the next six months. He also said that if inflation is too high, he will readjust the policy. Therefore, the market welcomed the result of this re-election, and the uncertainty disappeared.
In Joe Perry’s view, Brainard’s nomination as the vice chairman of the Federal Reserve is also a good result, because she has a very tough attitude towards financial supervision. Not only that, Powell’s attitude towards climate change is not tough, and the same is true for income inequality, but Brainard is very concerned about these. In addition, Powell can focus on monetary policy, while Brainard can control other aspects of monetary policy. That is, Powell can focus on broader issues with the assistance of Brainard.
What is the impact on commodities and the U.S. dollar?
On Monday evening, US President Biden nominated Powell for re-election as the chairman of the Federal Reserve and Brainard as the vice chairman of the Federal Reserve. Expectations for a rate hike in the overnight market moved forward again. The U.S. dollar index and U.S. bond interest rates rose sharply, gold and silver fell sharply, and gold fell by more than 2%.
Guosen Futures Precious Metals Research and Consulting Team stated that there are two points worth noting after Powell’s re-election as the chairman of the Federal Reserve: one is that Powell is relatively less dovish than the other candidate, Brainard. Brainard has a higher tolerance for inflation and pays more attention to employment issues. The market is worried that Powell will withdraw from the loose monetary policy sooner under the policy continuity of re-election and the relatively hawkish policy stance. Recently, many Fed officials, including the current Fed Vice Chairman Clarida, have suggested speeding up Taper. If the current monthly debt reduction of 15 billion U.S. dollars to 30 billion U.S. dollars at the December meeting will be detrimental to precious metals, it is recommended to pay attention to this week. The minutes of the Federal Reserve meeting announced the situation. Second, the importance of controlling inflation in policies has risen sharply. In this nomination, Biden mentioned that the two Fed chairmen and deputy Fed chairmen will focus on controlling inflation at a low level, price stability, and achieving full employment to improve the economy, with inflation control being the first priority. In the early days, Biden had mentioned that reversing inflation was his top priority, and he also expressed his importance on rising oil prices. Biden’s recent investigations into US energy companies and the release of strategic oil reserves from multiple countries all show Biden’s actual suppression of current energy price increases and high inflation. 10-year inflation expectations have fallen from a high of 2.76% to 2.61%. The rapid cooling of inflation expectations in the short term will put pressure on precious metals.
In terms of interest rates, the market expects the probability of the first interest rate hike to rise to 80% when the taper ends in June next year. “Biden’s support rate has dropped significantly. There will be pressures for next year’s mid-term elections. The subsequent monetary policy may be difficult to tighten more than expected. There may be overreactions in the negative.” Retail sales data rose more-than-expected, and employee salaries still maintained a high growth rate, reflecting that inflation still has a strong continuity. Follow-up concerns are whether inflation continues to remain high, and there is still support under precious metals. “For precious metals, after gold fell below the $1840/oz mark, we are concerned about whether it can provide support near $1810/oz.”
Cheng Zhaohong, manager of the futures investment consulting department of Guohai Liangshi, believes that the Fed is likely to reduce QE according to the current rhythm. The Fed will not consider raising interest rates until the bond purchases are gradually over. The short-term market reaction may be a bit too aggressive.
The U.S. dollar is the “anchor” of commodity prices. The world’s major international commodities and assets are priced in U.S. dollars, and the value of the U.S. dollar itself will directly affect the prices of bulk commodities. Chen Zhen believes that choosing a relatively more hawkish Fed chairman means the possibility of ending Taper or even raising interest rates early, and commodity prices are generally bearish. “However, in addition to the value of the U.S. dollar, another key factor affecting the commodity itself is the supply and demand relationship. In the second half of the year, the European Union, Japan, and the United States all announced huge fiscal stimulus plans, involving infrastructure and other fields. Countries’ demand for iron ore (594, 11.00, 1.89%), coal, natural gas, and oil is still high. Commodity prices will fall due to the Fed’s appointment in the short term, but there is still a strong momentum for a rebound in the medium and long term.”
“The U.S. dollar index can also rise in the short term, and the medium to long term depends on the relationship between the euro, yen, pound and other major currencies.” Chen Zhen said that the European Central Bank and the Bank of England may gradually withdraw from Taper at the beginning of next year. Definitely lags behind the United States. Inflation in Japan has just started, and the economy has been affected by the declaration of a state of emergency for a long time. The Bank of Japan will not withdraw from Taper in the first half of next year. “The U.S. dollar index will remain strong in the medium to long term.”
As far as the US dollar index is concerned, Joe Perry believes that 97.75-98 is a very important point range because it is a 68% Fibonacci retracement between the high of March 20, 2020 and the low of January 20, 2021. Gear, this is a very important technical point. “This is the focus of the market. If the U.S. dollar index breaks through this key point, it will continue to rise higher and may return to the high point last March.”
Joe Perry believes that the market will show a parabolic trend (parabolic). Everyone knows that the valuation of US stocks is too high, but they are still chasing higher. “I think the market will usher in a’Santa rally’ (Santa rally) and then a retracement. The specifics still depend on the interest rate meeting in December.”
Looking ahead, Wang Yanqing, a senior analyst at China Securities Futures Nonferrous Metals, believes that although the Fed chairperson will eliminate a major uncertainty, fundamentally speaking, the Fed’s future monetary policy will still mainly depend on economic conditions. The recent epidemic in Europe has repeatedly suppressed the economic recovery, while the US economic recovery is gaining momentum. This is the biggest driving force for the recent strength of the US dollar.In addition, the United States is uniting multiple countries to suppresscrudePrices, if oil prices continue to decline, will suppress inflation expectations, and may also make the “temporary inflation theory” accepted by the market again, thereby reducing the market’s interest rate hike expectations.
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Editor in charge: Tang Jing