Tuesday <strong>07</strong> <strong>Nov</strong>ember <strong>2017</strong> C002D5556 BUSINESS DAY A3
Tuesday <strong>07</strong> <strong>Nov</strong>ember <strong>2017</strong> FT FINANCIAL TIMES C002D5556 BUSINESS DAY A3 World Business Newspaper Eight important days for world trade Federal Reserve gains a plumber-in-chief with Jay Powell Central bank chair nominee’s knowledge on structure of markets will probably be tested JOE RENNISON AND ROBIN WIGGLESWORTH On the eve of his official nomination as the next chair of the Federal Reserve, Jay Powell was addressing an industry roundtable on the efforts to move the financial system away from Libor, the disgraced global interest rate benchmark. Although the 64-year-old’s remarks to the New York Fed were prerecorded, his willingness to dive into the minutiae of interest rates illustrates how the policymaker has embraced the nitty-gritty of financial market structure more than most since he joined the Fed board in 2012. At some point during his stint at the helm of the Fed, Mr Powell will probably find the experience and knowledge he has accumulated in the plumbing of financial markets tested. Under the former private equity executive, the Fed will face the task of managing a turning point in policy as officials shrink a $4.5tn balance the US central bank amassed fighting the financial crisis and shielding the economy from its fallout. While Janet Yellen has gingerly begun this task, Mr Powell will continue the retreat with US corporate bond markets trading near record highs and stocks reaching new peaks. The big concern for investors is that as the Fed — and other central banks — retreat from QE, changes in how securities are traded, namely how capital-constrained banks are reluctant to act as market makers in bonds and credit, raise the risk of a major shock in financial markets. “In the environment that we are in now, having someone who understands the plumbing of financial markets is very positive,” says Nathan Sheets, now chief economist at PGIM Fixed Income after a stint at the Treasury, where he worked closely with the central bank official. “Governor Powell certainly fits that bill.” Mr Powell, who will also have a slew The outlook for US monetary policy in 2018 has been thrown into further uncertainty with the early retirement of Bill Dudley, the influential president of the Federal Reserve Bank of New York. Mr Dudley was expected to leave at the start of 2019, but he will now retire in the middle of 2018, the bank said on Monday. of fresh governors, including a new head of the New York Fed after Bill Dudley said on Monday that he would be leaving next year, has voiced optimism that a gradual reduction in the Fed’s holdings of Treasuries and mortgage-backed securities will be orderly. However, he has also warned that the fragility of an outdated market structure — yet to fully adjust to a new breed of tech-savvy traders that have become more prominent in the $14tn US government bond market — may spell problems. “Most of the time in most markets liquidity is OK. But it may be more fragile, and more prone to disappearing in stress situations,” he told the FT last year. “There hasn’t been a liquidity-related incident that has had a significant effect on the real economy. That doesn’t mean it won’t happen.” As a Fed governor, his interest derives from the central bank’s responsibility to ensure stability of the financial system, where Treasuries are the chief source of collateral for many institutions and clearing houses which back vast amounts of derivatives trading. US government debt also plays a key role in portfolios for domestic and foreign investors. He has voiced support for central clearing of “repo” trades that are integral to the functioning of the broader Treasury market. “He has shown a strong interest in this part of the market and so we are optimistic and confident that will continue,” says Paul Hamill, global head of fixed income trading at Citadel Securities. “We feel strongly that there are some sensible things that should be implemented.” But it is an interest that is also rooted in his experiences as an undersecretary in the US Treasury in the early 1990s, when he sat on a committee probing Salomon Brothers after the investment bank sought to rig Treasury auctions and was fined for infractions of the rules. The episode “still gives me nightmares”, Mr Powell said last month. Bill Dudley’s early retirement adds to Fed uncertainty Change in NY Fed departure follows Fischer exit and Powell nomination at central bank SAM FLEMING Page A4 His move follows the announcement last week that Jay Powell will replace Janet Yellen as the chair of the US Federal Reserve’s board of governors from February. In October Stanley Fischer, the Fed’s vice-chair of the board of governors, retired early for personal reasons. That move means that by the second half of next year the three most influential positions in US monetary policy are likely to be occupied by Continues on page A4 May and Corbyn woo business in face of Brexit warnings Page A5 Jay Powell, the incoming Fed chair, is known for embracing the nitty-gritty of financial markets © FT montage / Dreamstime / AFP / Bloomberg Centre-right fends off Five Star to win Sicily presidency Win for Berlusconi-led coalition rings alarm bell for Renzi ahead of general election confidence, whereas it was once JAMES POLITI to 2016. problematic for him to do so. The Although Mr Renzi, who Italy’s centre-right led by former centre-right can now say they are stepped down as prime minister prime minister Silvio Berlusconi has fended off a strong challeft which has governed us for endum, was re-elected PD leader the real alternative to the centre- after losing last December’s referlenge from the populist Five Star the past five years,” said Daniele in May, he faces sceptics in the Movement to win the presidency Albertazzi, a senior lecturer in party who believe he has become of Sicily, ringing alarm bells for European politics at the University too divisive and that his policies Matteo Renzi and his centre-left of Birmingham in the UK. are too centrist to win the next Democratic party (PD) in a poll Mr Berlusconi said in a tweet election. seen as the final test ahead of Italy’s on Monday evening: “Sicily has “We are back to asking the same next general election. chosen the path of true, serious, question: ‘Will Renzi change now?’ With more than half the ballots counted on Monday, Nello honesty, competence and experi- solution, but Renzi keeps going his constructive change, based on Everything points to that being the Musumeci, the candidate from ence.” own way,” Massimo Giannini, a the octogenarian former prime Five Star has always considered columnist at La Repubblica, said minister’s coalition, was leading Sicily one of its main centres of on Monday. Giancarlo Cancelleri, the Five Star support, because of widespread Mr Renzi had been due to debate with Luigi Di Maio, Five Star’s candidate, by 39.2 per cent to 35 disappointment there with traditional politics and backing for its candidate to be prime minister in per cent. Fabrizio Micari, representing promise to root out corruption and 2018, on television on Tuesday Italy’s ruling PD, was a distant third introduce a guaranteed income for night. with just 18.8 per cent. the poor. But Mr Di Maio pulled out The poll on the economically But the poll’s outcome for the abruptly on Monday, citing uncertainty over his opponent’s leader- distressed Mediterranean island party was mixed. It emerged as of more than 5m people adds to the strongest single party on the ship. “The PD is politically defunct: signs that with the general election island but failed to gain control of we don’t even know if Renzi will be due as early as March 2018, Italy’s the regional government, one of its a candidate to be prime minister political mood is shifting towards longstanding goals. any more for the centre-left,” Mr Di the Eurosceptic right. However, the biggest soulsearching was likely to unfold Mr Renzi, who did not oth- Maio wrote in a blog post. It also suggests that Five Star remains a powerful force but is no within the PD, with Sicily the latest erwise comment on the Sicilian longer in the ascendant and that example — after Mr Renzi’s failure result, attacked Mr Di Maio for Mr Renzi and the PD could be in last December to win a flagship “running away”. trouble. constitutional referendum — of “I’m sorry for my kids when I Turnout was low, at just under its difficulty in connecting with think that Italians risk being led 47 per cent, suggesting that many Italian voters. by someone who has no courage. voters were not enthused by the In June, the centre-right also Who is scared of a challenge. Who political offering. performed strongly in municipal races, including winning the wrote on Facebook. invents ridiculous excuses,” he The centre-right victory came after Mr Berlusconi, Matteo Salvini of the Northern League and leftwing stronghold. Renzi may be that Mr Berlusconi’s mayoralty in Genoa, a traditional The deeper problem for Mr Giorgia Meloni of the hard-right The PD’s problems come despite some favourable trends PD to find votes among centrist return will make it harder for the Brothers of Italy, set aside their differences and campaigned aggressively on behalf of Mr Musumeci accelerating and stronger-thantant to reaching a coalition deal in recent months, including an Italians, while the left is still resis- in the final weeks. expected economic recovery and a that would put it in a stronger position in the 2018 “Berlusconi can now show drop in migrant arrivals compared election.