(Bloomberg) -- Treasuries maintained their advance, while the dollar budged little after the Wall Street Journal reported that U.S. President Donald Trump has selected Federal Reserve Governor Jerome Powell to lead the U.S. central bank, signaling continuity for monetary policy in the world's biggest economy.
The benchmark 10-year U.S. yield slid a basis point to 2.37 percent Wednesday, although it held above its lows from earlier in the session, while the dollar index held 0.2 percent stronger. The reported choice, which Trump is due to announce officially on Thursday, doesn't come as much of a surprise to markets: Powell, a Republican, was the overwhelming favorite on betting websites after reports from a week ago said he was in line to succeed current Fed Chair Janet Yellen.
Traders have been increasingly pricing in his selection since then, bidding up Treasuries and reversing an advance in yields that took the 10-year rate to its highest level since March. It's down 9 basis points over the past week.
While the response of markets has been muted, a Powell nomination would remove unease across the $14.2 trillion Treasuries market that Trump might name a candidate seen as more hawkish, most notably economist John Taylor. Such a move could have pushed yields higher in short order. Powell, by contrast, is viewed as likely to maintain Yellen's gradual approach to lifting rates and shrinking the Fed's $4.5 trillion balance sheet. Policy makers' latest projections point to a hike in December and three more by the end of 2018.
“A Powell nomination would be a very status quo move by the president and a vote for policy continuity,” Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said in a phone interview. “While a Taylor Fed chairmanship would have brought the market closer to the implied path of rate hikes seen in the dot plot, a Powell leadership will leave in place the market's willingness to discount the projected path of rate hikes.”
Matt Toms, who oversees $133 billion as chief investment officer of fixed income at Voya Investment Management, said before the report that the Fed's approach wouldn't alter much under Powell and that the key message for markets from such a pick is the absence of change.
Flattening Curve
The choice should extend the trend this year of a narrowing gap between two- and 10-year yields, Subadra Rajappa, head of U.S. rates strategy at Societe Generale, said before the WSJ report. That gap was little changed in the immediate aftermath of the report, although it did flatten 2 basis points to 75 following the U.S. Treasury's refunding announcement earlier Wednesday.
A Powell nomination, which requires Senate confirmation, would end months of uncertainty that left traders adjusting their views according to who appeared to be gaining favor with the president. In addition to Taylor and Yellen, Trump's shortlist also included former Fed Governor Kevin Warsh and National Economic Council Director Gary Cohn.
Under Yellen, who took over from Ben Bernanke in 2014, unemployment fell to a 16-year low of 4.2 percent in September with the economic expansion in its ninth year. Yet inflation has remained stubbornly low, holding mostly below the Fed's 2 percent target since 2012, giving investors confidence to buy longer maturities.
The Fed raised rates in March and June, as officials stuck to the conviction that job gains would eventually spur higher wages and inflation. Traders have been pricing in a more than 80 percent likelihood that the central bank tightens again in December, based on the current effective fed funds rate and the forward overnight index swap rate.
Upgraded Assessment
While the central bank opted on Wednesday to leave its benchmark unchanged, as expected, the accompanying statement reinforced expectations for a hike next month as policy makers subtly upgraded their assessment of the U.S. economy.
As for the dollar, the choice of Powell is seen as being less supportive for the currency than a candidate such as Taylor, whose rule for setting interest rates was viewed as leading to tighter policy.
Powell, a former investment banker and partner at private equity firm Carlyle Group, took office as a Fed governor in May 2012. He was reappointed in June 2014 for a term ending in 2028. He also served as a senior official at the U.S. Treasury under President George H. W. Bush.
--With assistance from Vivien Lou Chen
To contact the reporters on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net, Liz Capo McCormick in New York at emccormick7@bloomberg.net.
To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Boris Korby
©2017 Bloomberg L.P.
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