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Investors have learned to watch (and sometimes watch out) when the Federal Reserve Chair testifies to Congress. After new chair Jerome Powell testified on February 27 for the first time, markets appeared calm. This calm is in keeping with one of our key 2018 market themes—Fed gradualism—and offered a respite from a turbulent month. Powell presides over the board of Fed Governors, but is one of only three currently serving in seven slots after the resignation of previous Chair Janet Yellen. There has been unusually high turnover of Governors, with only one Obama appointee left. Does this turnover signal a policy shift, or will the gradualism theme persist?

With the 14-year terms of Fed governors, it is indeed odd to have this degree of turnover. A vacancy that will likely be filled soon (and needs confirmation by the Senate) is the role of Fed Vice Chair. Recent reports suggest Richard Clarida, of PIMCO and Columbia University, will be nominated. The US central bank is charged with not only setting monetary policy, but also regulating the banking industry, and is in the midst of reducing an unprecedented hefty balance sheet of bond holdings. The Powell-led Fed is expected to follow the existing path of well telegraphed and gradual rate hikes. At the same time, he appears to be in favor of the central bank playing a more deregulatory role for the banks it oversees. We also anticipate a Fed board that is probably more investment-focused than in the past.

The real challenge for the Fed will arise when there is the inevitable market disruption. Powell has been fairly critical of the Fed’s extraordinary quantitative easing programs, so it remains to be seen if the central bank will be hawkish when the economy is in the eye of an actual economic storm.

Some additional food for thought: while there can be turnover associated with a change in the presidency, past Fed boards seem to also see increased attrition late in economic cycles. While NEPC believes the current environment of synchronized global growth—another one of our key market themes—can continue, the new Fed board will preside over a downturn at some point, given their long terms.