It seems that the message of President Donald Trump to Janet Yellen, when choosing a new FED chairman, is “You’re Fired!”. Jerome Powell is the most speculated name to be appointed, who is not even an economist. Currently, the market estimates its chances at 80%.
Assuming you understood who would elect the president, the most obvious ways to make money would be bets on the direction of government bonds, the US dollar and gold.
History shows that it is difficult to make money from trading the news for a new chairman, even though it is clear who he is. For example, the election of Paul Volker in 1979 has created an expectation on the market to tackle inflation through an increase in interest rates, which in turn should have led to a strong dollar, lower yields on long-term bonds and a lower price for gold. These sentiment have been held for only 2 weeks after the bond and gold prices have risen sharply and the dollar has plunged.
An example of not responding to short-term expectations is also Alan Greenspan, elected in 1987, who was expected to tighten monetary policy and tackle inflation. However, two months after his election, the market suffered the Black Monday.
We can tentatively say two things about Mr. Powell, assuming he is appointed: he will be friendlier to Wall Street than Ms. Yellen, and he will take a similarly dovish approach to monetary policy.
In the short run, less red tape will support bank stocks a bit, but banks surely won’t return to their wild precrisis leverage any time soon. Equally, a continuation of Ms. Yellen’s cautious approach to rate increases will avoid shocking the market, while leaving unchecked the danger that a bubble develops in the already-expensive stock market.
Given the appalling history of investors that they will predict how the Fed’s presidents will use their power, the wisest approach is to wait and remain subject to the infallible technical analysis and money management.
Trader Nikolay Georgiev