Changing of the Guard

new group

The US was the first. Powell has replaced Yellen at the top of the Federal Reserve. His testimony tomorrow and Thursday will be his first and next month’s FOMC meeting will be the first he chairs.  There is little doubt in the market that he will sanction a rate hike at the meeting.    Although there is speculation the Fed can underscore a more hawkish by showing forecasts anticipating three hikes this year, we suspect that it is premature, and that tactically it is risky.  

Japan was second.  BOJ Governor Kuroda will serve a rare second term.  As Yellen was the first Fed Chair in more than 30 years not to serve a second term, Kuroda is the first BOJ Governor in 50 years to have a second term.   Kuroda’s (meaning black) reappointment, and the new deputies, solidifies the change in Japan’s central bank from the Shirokawa (meaning white) tradition to a more activist stance.  As Powell appears to offer great continuity with Bernanke and Yellen, Kuroda’s reappointment speaks to the continuity at the BOJ.

China may be third.  PBOC Governor Zhou Xiaochuan is expected to step down around China’s formal legislative session next month.  Harvard-trained, English speaking Liu He, a close friend of President Xi (both families were purged during the Cultural Revolution 1966-1976).  The coming weeks will clarify the situation but Liu appears to be a rising star.  He may be named both vice premier and governor of the central bank.  He would be the first to hold both posts since Zhu Rongji, who later (1998-2003) became Premier.

Liu’s views are not clear, but he does appear to favor economic liberalization within the context of China.  Zhou and many other senior PBOC officials often seemed to want to liberalize and modernize faster than others, like the Commerce Ministry, for example.  However, in recent years, Zhou seemed to lose his policy clout.  If Liu indeed gets the appointment then power and gravitas would be restored.   Liu has suggested that China could roll out more market opening measures than the international unity expects.

Next year, Bank of England Governor Carney is expected to step down in June, while ECB’s Draghi term ends in October.  In the UK, Broadbent is a likely successor to Carney.   The changes at the ECB are part a larger transition in Europe that will culminates with a new European Commission and a European parliament election next year.  That transition is already underway.  Portugal’s Centeno is the head of the Eurogroup of eurozone finance ministers.  Portugal, though is losing the vice presidency of the ECB.  Spain’s de Guindos will likely be formally named at ECB Vice President at the European Council toward the end of next month.

Five of the top seven posts at the ECB will be changed by the end of next year.  In addition, the heads of the European Stabilization Mechanism (Regling), the Single Resolution Board (Konig) and the European Investment Bank (Hoyer) will be replaced.  This number of positions allows for greater horse trading and may help facilitate the kind of balances that European often seeks.

Many observers see De Guindos at the vice presidency boosting the chances the Bundesbank’s Weidmann succeeds Draghi.  On one hand, Germany has not held that office before, and on the other hand, if the ECB is going to be exiting from its extraordinary policies, it may be desirable to have a hawk lead the way.  Nevertheless, in his role at the ECB, Weidmann has not demonstrated the kind of consensus-building that the top position seems to require.

One of the balances that Europe seems more sensitive to in addition to big/small and creditor/debtor, is gender.  If Weidmann gets the nod, that the only woman on the executive board, Germany’s Lautenschlaeger would have to step down.  There is an unwritten rule that no county should have two members on the executive board.   Bini Smaghi stepped down, for example, when Draghi was named as ECB President.  However, there are at least three women deputy governors of national central banks (Germany, France and Ireland), that could be promoted if their Governors get new jobs (Weidmann and Lane), or terms end (Coeure end of next year).  It looks reasonable to expect that going forward the ECB will also have more women on the board.