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Chairman Powell is taking monetary policy towards normalization in the second quarter; markets hope it’s not towards premature tightening.

March 28, 2018

The second quarter of 2018 begins with a new head of the Federal Reserve and a more volatile market. Quincy Krosby, Prudential’s chief market strategist, shares a history of regime changes at the Fed and how we may expect monetary policy to impact the market in the second quarter and beyond in her Q2 2018 market commentary: Regime Change.

 

Highlights:

  • Federal Reserve chairman Jerome Powell takes the helm
  • A brief history of recent regime changes at the Federal Reserve
  • The market enters a period of crosscurrents

 

Q2 OPENING BELL

The term “regime change” is currently trending in the headlines, from “More expect Venezuela will collapse and have regime change within 12 months” to “Pushing back against Iran: Is it time for regime change?” As we enter the second quarter of 2018, however, the term is increasingly used to describe a subtle but equally important shift in economic policy. Monetary policy stands out as a significant economic catalyst, and with the departure of Federal Reserve Chair Janet Yellen, we’ve seen headlines blare: “How to survive the regime change in markets.”

Referring to February’s market correction, triggered by fears that inflation was beginning to assert itself, the Financial Times succinctly stated: “Whether correction turns into regime change is down to the Fed.” But do members of the Federal Open Market Committee (FOMC) of the Federal Reserve view their job as protectors of stock market performance, the way they seemingly did coming out of the financial crisis?

Newly installed Fed Chairman Jerome Powell, greeted on his first official day with a 4 percent market sell-off, appeared upbeat about prospects for the economy. “We don’t manage the stock market, but it enters into our thinking,” he testified on Capitol Hill at the end of February. “The stock market is not the economy, but it is very much a factor in the economy’s overall performance.”

As a Federal Reserve governor, Powell spoke at a 2017 meeting of the American Finance Association and observed that low interest rates can lead to “excessive leverage and broadly unsustainable asset prices.” He added that if risk taking doesn’t result in financial instability, it is not the “Fed’s job to stop people from losing, or making, money.”

Now that Fed Governor Powell is Chairman Powell, he is taking monetary policy towards normalization, while markets hope it’s not towards premature tightening.

 

Read Quincy Krosby’s Q2 2018 Market Commentary: Regime Change

 

To talk to Quincy Krosby about her views of the market, contact Lisa M. Bennett or Dara Scerbo.

The views and opinions are those of the author at the time of publication and are subject to change at any time due to market or economic conditions. This is solely for informational purposes. This is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

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Contact(s)

Lisa M. Bennett
phone 973-802-2894

Dara Scerbo
phone 973-367-9318