The real significance of Afghanistan to markets may be how it’s shaped Fed succession battle

August 23, 2021

Trying to connect the events in Afghanistan to world financial markets hasn’t been easy.

The Afghan economy, whether under the rule of the Taliban or not, is too small to matter globally, and in fact is even more sidelined with the U.S. freezing over $9 billion in Afghanistan central-bank assets. There is one view that the episode, reflecting poorly on the U.S. ability to project military might, therefore jeopardizes the reserve status of the U.S. dollar, but inconveniently the U.S. dollar DXY, -0.43% has since been hitting multimonth highs.

There’s also the view that, because the chaotic scenes have cost President Joe Biden in the polls, it will erode his ability to pass his economic agenda through Congress, though, again, there’s no evidence for this so far, and the House is back in session this week to work on that economic agenda. There’s also the notion that China, which is friendly with the Taliban, will be successful in mining for key minerals in Afghanistan, though the cost of building the necessary infrastructure as well as importing or training labor into the landlocked and war-torn country may be prohibitive.

But what does matter to financial markets is the decision on who will be the next Federal Reserve chair, as Jerome Powell’s term ends next year. Leave it to Tim Duy, the provocative University of Oregon professor and chief U.S. economist at SGH Macro Advisors, to make the connection.

Duy said the White House at this point is distracted and politically weakened by the events in Afghanistan. “I think that favors Powell in that he represents continuity and the path of least resistance,” he said. Powell, a Republican, would gain support from the GOP side of the aisle, and a key swing Democrat, West Virginia Sen. Joe Manchin, has said he prefers tapering sooner rather than later — which presumably means he doesn’t want a more dovish choice than Powell.

That would make it difficult to get the realistic alternative to Powell, Fed. Gov. Lael Brainard, through Senate confirmation. “With Powell, Biden likely has an easier path to a bipartisan win, and I think his administration will be looking to rack up those wins, although the progressive wing’s calls for tighter regulation will also play then to the compromise of Brainard as vice chair for supervision (assuming, of course, that she would be interested in taking the job),” said Duy.

According to a Bloomberg News article, Powell’s reappointment is supported by Treasury Secretary Janet Yellen, and Biden will make his decision around Labor Day.

Duy said the Fed will wait till November to formally announce a slowdown in bond purchases. “I think a consensus will be easier to reach with two more employment reports, that the Fed would not want to announce a taper heading into another debt ceiling debate in October, and that the Fed will want to use September to telegraph that the taper is coming,” he said. As for the Jackson Hole Fed gathering — being held virtually beginning Thursday — “watch also for signs that Powell has lost some of his conviction that the delta variant will have only limited economic impacts; any increase of concerns on this front would be a clear signal against September.”

Back to list