Fed Chair Jerome Powell has been nominated for a second term. Here's what that means for investors

Published Mon, Nov 22 202110:34 AM ESTUpdated Mon, Nov 22 20214:20 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Stocks initially rose as bank shares rallied and bonds sold off after Jerome Powell was renominated as chairman of the Federal Reserve. The announcement from the White House triggered a relief rally that began ahead of the market open. It also removed uncertainty about who would be the next Fed chairman when Powell's first term expires in February. A contender for chair, Fed governor Lael Brainard was named vice chair of the board of governors. She was seen by the market as more dovish than Powell, and traders had increasingly been making bets in the bond market that inflation would run hotter and interest rates would rise slower. Those trades reversed somewhat Monday morning, as bond yields rose. Yields move opposite price, and there were some large moves. The 5-year yield jumped more than 9 basis points and was at 1.31%, while the 2-year, the most indicative of Fed rate hikes, rose to 0.58% from 0.52%. By the end of the day, the stock market rally was over. The Dow was flattish after gaining more than 300 points, and the S & P 500 was down 0.3%. The Nasdaq initially hit a record high on the Powell news, then reversed and closed 1.3% lower as investors worried rising rates would hurt tech and growth stocks. James Paulsen, chief investment strategist at The Leuthold Group, said President Joe Biden's choice calmed the markets, and that may not have been the case if he had named Brainard. "It just introduces a risk that you don't need on top of all the other things that are out there right now. It would have been more uncertainty," said Paulsen. "You know what Powell is doing, whether you like it or not. The devil you know is better than the devil you don't know." Inflation expectations going forward Paulsen said there was some concern that Brainard's policies would have meant the Fed would be slower to respond to the threat of rising inflation. "President Biden might have gone for [Brainard] ... but I just think — does he need to create more turmoil right now given his poll numbers? Does he need to make the market worry about something else?" he said. The bond market moved to price in more rate hikes, and inflation expectations fell Monday. For instance, a Treasury market inflation metric, the 5-year breakeven, was at 3%, after hitting 3.25% last week. That indicates that traders expect inflation to average 3% over the next five years. Bank shares rose on the higher move in interest rates and also on the idea that Brainard would have been harder on the banks were she named chair or even to the vacated post of vice chair for supervision. The latter post was held by Randal Quarles, who is resigning effective at the end of December . JPMorgan , Citigroup and Bank of America all ended the day higher. "The market reaction to rate hikes for next year was a little aggressive," said Wells Fargo's Mike Schumacher. He said the fed funds futures moved sharply. The July contract rose to 0.32% and is pricing in a full rate hike, while the December contract, at 0.68%, is pricing in more than two hikes, he said. Stocks rising despite the prospect of higher rates Rising rates normally would not be a positive for stocks, but equities ignored that fact early in the day. "I don't understand the stock market reaction. I don't know why the stock market is celebrating higher rates and a quicker taper. Not that it's going to happen soon, because Brainard is going to be a dovish voice," said Peter Boockvar, chief investment officer at Bleakley Global Advisory. Fed governor Christopher Waller said Friday that the Fed should speed up the tapering of its bond-buying program. The Fed at its last meeting announced it would start slowing its $120 billion a month purchases of Treasury and mortgage securities. The program is expected to end by the middle of next year, at which point the market expects the central bank to begin to look toward rate hikes. Economists have said higher inflation readings and a strong job market could push the Fed to slow the purchases more quickly. Waller said the Fed should finish tapering by April. Powell has been Fed chairman since 2018. A Republican and former private equity executive, he was appointed to the Federal Reserve Board by President Barack Obama in 2012. Brainard has been a Federal Reserve Board governor since 2014. She was the under secretary of the Treasury for international affairs from 2010 to 2013. Brainard had been backed for the chairmanship by progressives in the Democratic Party who want to see tougher banking regulation. Richard Clarida is the current vice chair of the board of governors, and his term will expire Jan. 31.

U.S. Federal Reserve Chairman Jerome Powell speaks to reporters.

Kevin Lamarque | Reuters

Stocks initially rose as bank shares rallied and bonds sold off after Jerome Powell was renominated as chairman of the Federal Reserve.