With Jerome Powell's second term, markets are betting the Fed will be more aggressive on inflation

• Jerome Powell has been nominated for a second term as Fed chair, and markets are betting the central bank will become more "hawkish" on inflation.
• He was up against Lael Brainard for the job, and investors think Powell is the most likely of the two to tackle price rises.

President Joe Biden has nominated Jerome Powell to serve a second term as Federal Reserve chair and the markets have reacted strongly, reflecting a belief among investors that the central bank will become more aggressive in tackling inflation.

Powell was up against Fed governor Lael Brainard for the job. She's now going to become the vice chair of the US central bank.

Investors raced to adjust their positioning on Monday as the news came through, betting that Powell will be more "hawkish" than Brainard would have been. (That is, that the Fed under his watch will be more willing to cut back on bond purchases and raise interest rates to stamp down on inflation, which is at a 31-year high.)

Bond yields, which move inversely to prices, have risen sharply in anticipation of less support from the Fed.

The yield on the interest-rate sensitive 2-year US Treasury note has jumped to 0.639%, its highest level since the start of March 2020.

Meanwhile the yield on the 10-year Treasury note – a benchmark for other borrowing rates throughout the economy – has risen sharply from around 1.55% on Friday to 1.655% on Tuesday. Higher bond yields are weighing on stocks.

Investors now think the Fed will hike interest rates three times within the next year, according to the Bloomberg interest rate probability tool, up from an expectation of two hikes just two weeks ago.

Read more: Legendary investor Howard Marks breaks down where he is finding opportunities to 'make the big money' amid the Fed's monetary easing, fiscal stimulus, and rising inflation

"The market is reading it a certain way," Peter van Dooijeweert, a managing director at the investment company Man Group, told Insider. "They are expecting him to be more hawkish and that rate rises will come earlier."

Van Dooijeweert said markets might be thinking that Powell will become more aggressive on price rises now he doesn't have to win renomination.

"What does that do to his somewhat dovish bias, does it make him slightly more hawkish because he's free for four years to do what [he sees as] right?" he said.

However, many analysts were left confused by the market's reaction, given that Powell has overseen the loosest monetary policy in Fed history.

"The hawkish reaction to the news seemed odd," said Neil Wilson, chief market analyst at trading platform Markets.com said in emailed comments. "Powell has hardly been a hawk and the appointment means continuity," he added.

"Nevertheless, the market seems to have taken the Powell nomination as something of a signal. Broadly speaking, we might say that the Fed, and more importantly maybe the White House, are starting to recognise the danger of inflation the longer it stays high."

Tech stocks, which tend to do better when interest rates are low, suffered on Monday, with the Nasdaq 100 falling 1.16%. Nasdaq futures were down again on Tuesday, suggesting the index may be in for another rocky day.