If Congress approves President Trump’s choice of Jerome H. Powell as chair of the Federal Reserve Board, it could mean more of the same. But maybe not.
As The Wall Street Journal reported, “Mr. Powell has never dissented on a Fed monetary or regulatory policy vote and in speeches hasn’t deviated far from the board’s consensus.”
Conversely, Powell is a former investment banker who does not have a Ph.D. in economics, which could result in the Fed making decisions based on the real world, not on factors of interest only to academics. As we’ve previously noted, the Fed has been described as “a tribe of slow-moving … economists who dismiss those without high-level academic credentials.”
While some Fed members believe in decision-making based on mathematical models, Powell has said, “Simple policy rules are widely thought to be both interesting and useful, but to represent only a small part of the analysis needed to assess the appropriate path for policy. I am unable to think of any critical, complex human activity that could be safely reduced to a simple summary equation.”
Powell would be the first Fed leader in three decades without a Ph.D. in economics. Powell is an attorney who, before joining the Fed board five years ago, was a U.S. Treasury undersecretary for financial institutions in the George H.W. Bush administration, a partner at the Carlyle Group and as a scholar at the Bipartisan Policy Center.
Less Regulation
While his voting may reflect agreement with current Chair Janet Yellen, Powell is likely to be more of a deregulator than a regulator. As he said in a speech in early October, “More regulation is not the best answer to every problem.”
Addressing members of Congress in June, he talked about loosening some requirements of the Dodd–Frank Wall Street Reform and Consumer Protection Act. He said he was looking into softening the Volcker rule, which prevents banks from making overly risky bets with their own money, and indicated that it may be appropriate to ease some of the annual stress tests big banks are required to perform.
He also suggested a review of supervisory requirements imposed on bank boards of directors after the financial crisis, because a board’s role “is one of oversight, not management.”
Best of Both Worlds?
Speaking about Powell, Krishna Guha, vice chairman at Evercore ISI and a former New York Fed official, told The Wall Street Journal, “To some extent he offers Trump the best of both worlds. You get broadly speaking continuity of Yellen’s careful and relatively dovish approach to monetary policy but with somebody who is a card-carrying Republican and who is significantly more inclined to revisit some of the post-crisis regulations.”
Powell’s appointment is not expected to create much opposition, although some Republican senators have criticized him for supporting the Fed’s easy-money and post-crisis regulatory policies. Before selecting Powell, President Trump asked lawmakers, businesspeople and media personalities for their input and he polled Republican senators on their preferred choices.
In his speeches, he has echoed Ms. Yellen, suggesting that the improving economy calls for gradually raising interest rates. He’s also supported the Fed’s goal of a 2% inflation rate, suggesting that, “This objective is symmetric, so the Committee would be concerned if inflation were to run persistently above or below this target.”
He believes the economy is strengthening to the point where the Fed’s inflation target will soon be reached. Given that the economy has achieved 3% growth for two consecutive quarters (3.1% in Q2 and 3.0% in Q3), even with the drag of a devastating hurricane season, it will be interesting to see how the Fed reacts if and when the rate of inflation shoots past the 2% goal.
Fannie and Freddie
In addition to normalizing interest rates without spooking the markets or weakening the economy, Powell will be challenged to shrink the Fed’s $4.5 trillion portfolio. While it will take years to wind down, based on the Fed’s decision to simply let existing bonds mature, Powell has said that the Fed should consider resuming bond buying again “only in extraordinary circumstances.”
He has also directed Congress to overhaul the housing finance system, moving Fannie Mae and Freddie Mac out of government conservatorship, which he believes would reduce the risk of a taxpayer-funded bailout in case of another downturn in the housing market.
Second Fed Appointment
Assuming his appointment is confirmed by the U.S. Senate, Powell would be the second Fed appointment for President Trump. His appointment of Randal Quarles was confirmed in October.
Like Powell, and unlike Yellen, Quarles favors changes to current regulations.
“Regulatory policies enacted since the financial crisis have improved the safety and soundness of the financial system,” Quarles said. “But as with any complex undertaking, after the first wave of reform, and with the benefit of experience and reflection, some refinements will undoubtedly be in order.”
Also like Powell, Quarles is a lawyer who served as a partner at Carlyle Group, leaving to help found Cynosure Group, a private equity firm based in Utah. He worked in the financial industry before joining the Treasury Department in 2002 as assistant secretary for international affairs under President George W. Bush, later serving as undersecretary for domestic finance.
Even with the two new appointments, three more seats on the seven-member Fed board remain open. And New York Fed President William Dudley has just announced that he will be leaving about six months before his term ends.