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Impending Fed Changes Likely Mean More Upside Ahead For Financials

From Brad Hoppmann: Tuesday morning, Fed Chair Janet Yellen delivered day one of the annual Humphrey-Hawkins testimony to Congress.

Yellen told the Senate Banking Committee (tomorrow it will be the House’s turn) that the central bank could consider raising short-term interest rates at its next policy meeting in March.

What would cause the Fed to bump the cost of capital again in just a few weeks’ time?

Here’s what Yellen told the committee:

“My colleagues on the [FOMC] and I expect the economy to continue to expand at a moderate pace, with the job market strengthening somewhat further and inflation gradually rising to 2%.”

This, according to Yellen, would warrant further gradual increases in the Federal Funds rate.

The conventional wisdom doesn’t think there will be a rate hike until May. (There’s just a 13% chance of a March hike, according the Fed Funds futures.) Of course, the Fed does have a way of making the conventional wisdom seem anything but wise.

Yet there is perhaps more-important news going on at the Fed that the markets are interested in.

That is, a key Fed official’s resignation last week … a resignation that gives President Trump the opportunity to reshape the Fed in his image.

On Friday, Federal Reserve board member Daniel Tarullo, a key official guiding bank regulation efforts, announced he will resign this spring.

This is important because it gives President Trump the opportunity to appoint Tarullo’s successor.

Here’s how AP Economic Writer Martin Crutsinger described it:

Trump is likely to choose someone more in line with his desires to roll back the regulations put in place by the Dodd-Frank Act, which overhauled bank supervision in the wake of the 2008 financial crisis.

That is the reason why this issue matters.

Already, the president has signed an executive order to begin the process of reforming the Dodd-Frank Act.

That issue caused a rollicking debate about financial industry regulatory rollbacks among Afternoon Edition readers. It’s also caused similar debates throughout the land.

With the Tarullo resignation, which will take effect on or about April 5, President Trump will have three vacancies on the Fed board to fill.

Currently, there are two vacant seats at our central bank. The reason why is because Congress basically refused to confirm two of President Obama’s nominees.

With Tarullo’s announced departure, Mr. Trump will have the chance to put his stamp on the Fed’s makeup in just his first few months in office.

Now, you may be asking yourself why the Tarullo resignation is so important here. Good question … and there is a good answer.

You see, part of the Dodd-Frank Act created a position of vice chairman for bank supervision.

That position was never filled by the Obama administration, and the reason was the rift between Democrats and Republicans in Congress over how to implement financial regulations.

Since no one officially had that job, Tarullo was acting as the de facto holder of the post. So basically, he served as the Fed’s point man on bank regulation since the Great Recession. Moreover, he did so firmly, and was a leading advocate of forcing banks to hold more capital.

U.S. bank stocks are up 5% this year, and stand to soar further as Dodd-Frank regulations unwind.

But with Tarullo leaving, President Trump is likely to tap a more deregulation-friendly Fed member. That likely means one step closer to Dodd-Frank reform of the sort Mr. Trump wants … and, frankly, that Wall Street wants.

In fact, Friday’s jump to all-time highs in the major averages was in part due to Tarullo’s resignation announcement.

And when the market speaks like that, we all need to listen.

The Financial Select Sector SPDR Fund (NYSE:XLF) was trading at $24.54 per share on Wednesday afternoon, up $0.21 (+0.86%). Year-to-date, XLF has gained 5.55%, versus a 4.99% rise in the benchmark S&P 500 index during the same period.

XLF currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 38 ETFs in the Financial Equities ETFs category.

This article is brought to you courtesy of Uncommon Wisdom Daily.

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