Mark Sherlock, Hermes’ US Small and Midcap manager agrees that the Fed will stay its current course regardless of who becomes chair.
“I don’t think the direction will change. There will be a change in interest rates and a decrease in the balance sheet, and they will be trying not to derail the economy.
“The Fed clearly wants to increase interest rates and to have some flexibility in the case of another downturn.”
As for front-runner Powell, Kumar regards him as “a pretty conventional Fed pick, more conventional in many ways than when the Bank of England picked Mark Carney”.
“He’s not picking his son. He’s choosing from a pretty respectable pool of candidates that had Hillary Clinton got in, she would have been choosing from.”
It’s also not inconceivable that Trump could choose to keep current Fed chair Janet Yellen at the head of the table.
After soliciting advice from Lou Dobbs, host of Fox Business Network, about whom he should select to head the Fed, Dobbs answered Yellen “would be worth keeping”. To which Trump replied that he had met with Yellen three days prior and found her “very impressive”. “I like her a lot,” said Trump. “I would certainly think about it.”
The president could ask Yellen to stay, agrees Kumar, “if only for the Donald Trump shock factor”, which is something he wouldn’t rule out.
And “if Yellen stays on she’ll crack on doing the same thing she’s done for the past five years”.
Allocation calls
Depending on who is chosen by Trump, Coombs says his US exposure will require some retooling.
A Taylor victory “won’t affect my equity position at all. Because the companies I own have very low debt to equity ratios, the interest rate impact on my portfolios is relatively small. In fact, higher interest rates would help me because I’ve been buying the banks and they would see benefit from net interest margins.”
However, Coombs says his fixed income position would be “absolutely affected” by a Taylor win.
“I own US treasuries and US index-linked. Were Taylor to be in charge, my fixed income portfolio would almost definitely change. By the time I could do something, I suspect yields would have risen already but it would certainly have an impact on whether I add to those positions or not.”
