How will Trump pick for Fed chair affect China?

Source:Global Times Published: 2017/11/5 22:08:39

Illustration: Luo Xuan/GT





Editor's Note:

Speculation over the new Federal Reserve chair can now end as Jerome H. Powell, a current member of the Fed's board of governors, was revealed on Thursday to be President Donald Trump's pick for the US central bank's top job. The Fed insider will replace Janet L. Yellen, who would have been re-nominated for a second term if Trump had followed tradition. To provide a glimpse into China's attitude toward Powell's nomination, the Global Times gathered the views of several Chinese observers.

Liu Zhiqin, a senior fellow with the Chongyang Institute for Financial Studies at Renmin University of China

The nomination highlights Trump's characteristics. He does not follow past conventions in appointing officials. To name Powell, a non-economist seen by some observers as an amateur, to run the Fed shows that Trump values competence rather than academic background.  

Powell has long worked in the financial field and coordinated with Yellen in drafting monetary policy. He is a veteran in terms of work procedure and policy-making. He also served as a consultant for Wall Street and has engaged in think tank research. He has solid knowledge and expertise in both theory and practice. He is a "dove" among US monetary policymakers and tends to adopt moderate and progressive policy. He will closely watch the dollar's movement in the market and its interaction with other currencies. Furthermore, he is moderate in dealing with China-related issues and has never gone to extremes.              

His nomination is favorable for China. As long as Chinese policymakers communicate well and exchange views properly with him, China could win support from Powell in terms of monetary policy, exchange rate reform and opening-up of the capital market.  

Powell has also been critical of Treasury bonds, which is why the news of his nomination sent the price of Treasury bonds higher and lowered their yield. Powell tends to support tax and public expenditure policies but may slightly deviate from Trump's reform guideline and add his personal touch.

Generally speaking, Powell is a generous and easy-going candidate who can get on well with China. If his nomination can be passed by the Senate and House, it can help stabilize and boost the US economy and developing economies might also benefit from it.      

Xiong Yuan, a research fellow at the International Monetary Institute of Renmin University of China

Trump's nomination of Powell as the new Fed chair will have no substantial impact on the Fed's monetary policy in the short term. Powell's previous stance and speeches indicate that his policy orientation will be close to that of Yellen, which will help in maintaining Fed monetary policy continuity. Another more important factor is that the Fed has returned to a normalized rate-hike path. The Fed has raised interest rates twice this year, following the single rate hikes in 2015 and 2016. It also began shrinking its huge balance in October. Beyond all this, the market odds of a Fed rate increase in December are almost 100 percent, and two to three rate hikes are projected for 2018.

Over the medium to long term, compared with Yellen, Powell is more inclined to roll back financial regulations, which fits in with Trump's policy proposals. This, added to Trump's stimulus policies including tax cuts and infrastructure plans, will support further economic growth in the US and continued increases in US asset prices. The Fed will therefore be in a better position to raise interest rates.

Given that the global economy is on course for a broad-based recovery, the international spillover effects of Fed monetary policy have become increasingly apparent, with monetary easing seen fading away across the globe. In a fresh sign, the Bank of England hiked rates for the first time in a decade on Thursday.

China, however, has not been much affected by the Fed's policy. Since the third quarter of 2016, China has tightened its grip over the financial space. As a consequence, the country's asset prices, represented by monetary market rates and government debt yields, have conspicuously been on an upward trend while the M2 money supply has fallen to historic lows, an indication that the country's monetary policy has become tighter. With the Fed steering global trends in monetary policy into a tightening cycle, the possibility of China loosening its monetary policy will be limited.

Bian Yongzu, a research fellow at the Chongyang Institute for Financial Studies at Renmin University of China

The similar personal experiences of Powell and Trump might have been a factor in Powell's nomination. First, Powell would be the first person to reach this position without a PhD in economics, while Trump also had little political experience before his presidential campaign. Second, Powell has plenty of experience in various areas, which is also similar to Trump, and this makes them more flexible in problem solving. Third, Powell, like Trump, is a wealthy businessman, which gives him a more common understanding of the market and making profits. Powell may be more active in supporting Trump's policy, as both of them are inclined to relax supervision of the financial sector, and this may be welcomed by those in the financial community.

Powell is generally regarded as a moderate centrist, and he is expected to maintain the continuity of Yellen's policy by implementing interest rate rises and cutting the balance sheet to ensure the recovery of the US economy without resorting to stimulus. The primary demand in the current world economy is stability.

China should be aware of the potential risks. The possible strengthening of the dollar caused by rate hikes and balance sheet reduction could lead to dollars flowing back to the US, triggering liquidity crises in other economies. But with China's economy strengthening, this effect will be reduced. The fluctuations could even provide an opportunity for further yuan internationalization.

Posted in: INSIDER'S EYE

blog comments powered by Disqus