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Which Next Fed Chair Is Best For Gold?

Kitco News

(Kitco News) - A five-way race for the new Federal Reserve Chair has recently narrowed to two, with reports circulating that Fed governor Jerome Powell and Stanford University economist John Taylor are vying for the top economic position in the country.

According to reports from the White House, President Donald Trump could announce his nominee early next week. He said that he would release his pick before he goes on a tour in Asia in early November.

There has been a wide range of speculation on who will lead the central bank for the next four years. The contenders included current chairwoman Janet Yellen; the president’s chief economic adviser, Gary Cohn; and, Kevin Warsh, a former Fed governor and Morgan Stanley banker.

The question is who would be the best for gold and according to some analysts, it could be Powell, who is seen as a moderate central banker and would likely continue the central bank’s gradual pace of interest rate hikes.

To some analysts, Taylor is seen as a monetary policy hawk and would be the worst for gold investors as he could support a faster pace of rate hikes.

Higher interest rates would be bullish for the U.S. dollar and push bond yields higher, which would be negative for gold, which is a non-yielding asset.

“In view of the upcoming debate on the tax reform in the U.S. parliament, many observers appear to be pinning their hopes at present on Taylor, who is seen as a ‘hawk,’” said analysts at Commerzbank. “He stands for a rule-based proactive Fed monetary policy that would currently justify a higher Fed Fund rate. His candidature would therefore shore up the U.S. dollar and put pressure on the gold price.”

More on Taylor…

Axel Merk, president and chief investment officer of Merk Investments, said that while at first glance Talyor’s perceived hawkishness would be bad for gold, his leadership could create volatility in the marketplace, which would be good for the metal.

Merk noted that while Taylor is one of the frontrunners for the role, he still sees Warsh as a strong contender. He added that he knows both Taylor and Warsh, and sees similarities between the two.

“Taylor and Warsh have very strong personalities and I think you could see the market get a bit of a hiccup and it will take much longer for them to react to market conditions,” he said. “Because of their views, it is going to take them a longer to give into the markets.”

But Merk also questioned whether a correction in equity markets would be bad for the economy. He added that strong leadership in the Fed could create short-term pain for investors for long-term stability.

“I think Taylor and Warsh believe that the best short-term policy is to have a long-term policy,” he said.

Ultimately, Merk said that anyone who replaces Yellen is going to have to deal with an increase in risk premia. Equity valuations and bond prices are overextended because the central bank, with its loose monetary policy, has compressed risk, he explained.

Not only is the Federal Reserve raising interest rates but it is currently reducing its balance sheet, removing liquidity from the marketplace.

Looking at Powell, Merk said that he appears to be a competent financial regulator, but questioned his authority on monetary policy. The risk with Powell, he said, is that he ends up letting the market dictate monetary policy instead of the central bank being the leader.

“He has talked about monetary policy but there is nothing original in his comments,” he said. “What happens to the central bank when you have someone leading it who doesn’t have a strong opinion on monetary policy?”

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.