Who’s running things?
Source: Lucidchart. CC0
Investment news often focusses on monetary policy and the future direction of interest rates. And with good reason. Interest rates are fundamentally, financially, and economically critical to understanding how much our investments are worth. Fundamentally, because the more companies pay to service their debt, the less they have in earnings. Financially, because the value of any financial asset is the present value of all the future cash flows. And economically, because interest rates affect the economy – with long and variable lags. Capital investment, consumer spending, government budgets: all are impacted by interest rates.
As a result, the level and direction of interest rates has a huge impact on our investment portfolios. Since short-term interest rates are determined by central bankers around the world, investors are right to try and understand what – and who — manages interest rates.
By far the most important central bank, for US investors, is the Federal Reserve. The US economy is about 22% of the world economy, and liquid US assets – stocks, bonds, and money markets – are more than half of all the capital market assets in the world. When the stock market falls by 10%, over $2 trillion in wealth is wiped out. So it’s no wonder that everyone wonders and worries about the Fed – what they’re thinking, what they’re writing, what they have in their coffee. And the Fed is led by one person – the Chair – who is the “first among equals” at their Board meetings. What he (or she) thinks is what the Fed will do.
Jay Powell is one of the most distinctive Chairmen the Fed has ever had. His background is as a lawyer, investment banker, and private equity manager. For over 20 years he invested in companies, helped them formulate and execute strategies, and either sold them to other investors or brought them to the public markets. His training and experience has taught him to respect the markets, but not be ruled by them. It’s likely that as the Fed’s Chairman he will take a similar approach.
Our central bankers have come from very different backgrounds: Yellen and Bernanke were academic economists; Alan Greenspan was an economic analyst and consultant; Paul Volker was a banker. Jay Powell, as a lawyer and private equity manager, will see the world through lawyer-colored glasses.
We can’t escape our perspective. We can never see the world as it is, only our perception of the world. That’s why it’s so important to be part of a team and learn from other perspectives. But if we want to understand an institution, it’s good to know who is setting the pace and establishing priorities.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”