Stocks rallied and bond yields rose last week on optimism for the Republicans to successfully pass tax reform and on strength in third quarter corporate earnings. These two factors will probably continue to move markets in the coming week.
The next Federal Reserve (Fed) chair will likely be selected this week or next. This choice will significantly influence future Fed policy and has the ability to disrupt markets. At this point, it looks like John Taylor, Jerome Powell and Janet Yellen are the front-runners. All three are highly qualified choices for the top job. I do think the President will make a change in the Fed’s top position and not reappoint Janet Yellen.
This leaves the race between Taylor and Powell. Of the two, Powell is probably the most moderate and will likely keep rates lower for longer. His policy stances are most in line with Yellen’s current policy. Taylor brings more uncertainty as interest rates are currently lower than his famous “Taylor rule” suggests. The basic principal is that for every 1% increase in inflation, the short term interest rates should be raised by more than 1%. With the funds rate at 1% to 1.25% and inflation near 2%, the funds rate could rise under Powell.
My expectation is for Powell to be named as the next Fed chair and for the current slow pace of removing monetary accommodation to continue.
This blog post is for informational use only. The views expressed are those of the author(s), and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client. Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.