Fiscal sustainability: Hassett outside the White House in Washington. The increasing chances of him getting the job as chairman has fuelled questions about the independence of the Fed, which remains a major concern for investors. — Bloomberg
NEW YORK: The Federal Reserve (Fed) may have to turn to quantitative easing (QE) to lower long-term borrowing costs if bond markets start to question the independence of the next chairman, according to Man Group.
Investors only have to look at what happened in the United Kingdom when traders sold off gilts in 2022 due to a lack of confidence in the economic policies of then-Prime Minister Liz Truss, said Kristina Hooper, chief market strategist at the world’s largest publicly traded hedge fund group.
UK borrowing costs have been higher than many other Group-of-Seven economies since then, which is a reminder that “credibility of public officials matters”, Hooper wrote in a LinkedIn post.
“If anyone perceived to be less than independent is chosen as Fed chair and is focused on lowering rates at the long end, I suspect that person will have to resort to QE to offer the best chance to achieve that objective,” she said.
Treasury 10-year yields have already climbed more than 20 basis points from their October lows, an unusual phenomenon given the Fed is likely to make another quarter-point interest rate cut this week.
President Donald Trump has said he’s close to naming his choice to replace chair Jerome Powell, whose term ends in May.
White House National Economic Council director Kevin Hassett has emerged as the front-runner.
Hassett is widely considered a supporter of Trump’s preference for lower rates.
Trump said earlier this month that the race for the central bank chief job is “down to one” while referring to Hassett as a “potential Fed chair”.
Hassett said on Monday it would be irresponsible for the Fed to lay out a plan for where it aims to take interest rates over the next six months.
While equity investors typically have “simple motivations” such as loose monetary policy, bond investors are more focused on fiscal sustainability and Fed independence, according to Hooper.
“Cutting the Fed funds rate does not ensure that rates on the long end move lower, in fact, it could have the opposite effect,” she said.
PGIM Fixed Income’s co-chief investment officer Gregory Peters last week pointed to the rise in treasury yields since it was first reported that Hassett had emerged as the leading contender to take over from Powell.
The increasing chance of Hassett getting the job has fuelled questions about the independence of the Fed, which remains a major concern for investors, said Peters, who is also a member of the Treasury Borrowing Advisory Committee. — Bloomberg
