Wall Street best hope that a Bernie Sanders win in the Iowa caucus is a mere flash in the pan. Because if Sanders becomes the Democratic nominee and were to beat Trump — which is not out of the realm of possibilities (see the 2016 election outcome) — a combo of a President Sanders and Treasury Secretary Elizabeth Warren could do a number on the Federal Reserve.
Speculation is picking up in some political circles that seeking to consolidate the Democratic vote early, Sanders would offer banking hawk Warren the coveted Treasury Secretary spot. That would place two Wall Street hawks in charge of — among other things — selecting the next Federal Reserve chief and possibly re-shaping how the monetary policy body governs. And to be sure, their choice for Fed head would very likely be the opposite of current Fed Chair Jerome Powell.
Think not so stock market friendly.
“Perhaps Warren could win, perhaps Warren could be Treasury Secretary. The question is the Fed is more relevant. As long as you have someone in there as more of a moderate — certainly Powell is there for now —investors will feel some comfort there,” pointed out FBB Capital Partners director of research Mike Bailey on Yahoo Finance’s The First Trade.
The market’s comfort in Powell — after a rocky start to his tenure — stems from a repeated stance on being data dependent on interest rate policy. That led to three rate cuts in 2019 as the Fed sought to prop up growth amid the U.S.-China trade war. Markets are pricing in at least one more rate cut later this year.
The Powell Fed has also injected liquidity into repo markets to relieve funding pressures. Wall Street pros believe the quantitative easing like effort coupled with the three rate cuts have lit the fuse of stocks for the better part of the past year.