Why Does The Fed Chair Matter for SMB?

why-does-the-fed-chair-matter-for-smb

President Trump is expected to choose the next Federal Reserve chair soon. Speculation is that he’ll choose one of four candidates – current Chair Janet Yellen, Stanford University economist John Taylor, former Fed governor Kevin Warsh or current Fed governor Jerome Powell. Some odds makers are betting on Powell while placing all others a distant second.

The choice of each of the four candidates may have specific implications for small and midsize businesses (SMB). Here’s a look at how each could influence the economic landscape for SMB going forward:

Janet Yellen – As current Fed chair, Yellen is perhaps the most predictable when it comes to the policies and rates the Fed will set. If Yellen is selected for a second term, some strategists expect that interest rates would grow more slowly throughout next year. They say the expected rate outlook could fall by as much as 0.15 percentage point from its current level of 1.70%.

For SMB, this may mean a continuation of cheaper short-term loans for business startup and growth. It could also mean that returns on investments for cash on hand may remain lower. Though the Fed has begun raising short-term interest rates over the past year, the bond market – a reliable predictor of growth and inflation – continues to stagnate. It may continue to do so under Yellen.

John Taylor – Taylor is generally seen as the choice who would have the biggest influence on the markets. He’s an advocate of interest-rate modeling tools, such as the Taylor Rule, which was named after him. The Taylor Rule suggests that interest rates should already be much higher than they are – as high as 3.5% compared to the current level of between 1% and 1.25%.

With Taylor at the helm, the difference between short-term and long-term borrowing costs could narrow more sharply in what’s known as a flattening yield curve. Short-term interest rates could continue to rise, while long-term interest rates might fall, closing the gap between the two. If short-term rates surpass long-term rates, the yield curve is said to have inverted – a real red flag that would indicate deep worries about the health of the economy and Fed policy.

Kevin Warsh – The prognosis on a Warsh leadership of the Fed is mixed. Since Warsh would be expected to loosen bank regulation to spur lending activity, some believe his choice would result in a steepening of the yield curve. Others, though, say his selection would actually flatten the curve because he would likely espouse the view that the Fed’s massive balance sheet should be shrunk.

Jerome Powell – Interestingly enough, Powell, the odds-on favorite, is expected to have the least impact on current markets. Experts predict little movement at all in the markets should he be selected as Fed chair.

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