The most important decision that President Donald Trump has made after becoming the President of the US is nominating Jerome Powell, a known monetary policy centrist and the current Fed governor, as the next Chairman of the Federal Reserve Board of the US.
By and large, it has met with the approval of all those who are concerned about the global economy. For, his nomination means no disruptive change—as indeed demanded by some of the conservative Republicans—in the monetary policies of the Fed. The appointment of 64-year-old Powell, who is not a PhD in economics like the current Fed Chair, Janet Yellen and her predecessor Ben Bernanke, which is subject to Senate confirmation, is however certain to be welcomed by Wall Street where the incremental approach of Fed to reduce its stimulus program has helped asset prices to surge.
Powell, a lawyer by qualification and an insider of finance sector by virtue of his association with Carlyle during 1997-2005 as well as the US Treasury during the Presidency of George HW Bush, is the first Chairman without an extensive grounding in economics since the last appointment of G William Miller in 1978 by President Jimmy Carter, which of course, proved to be a disaster. Of course, Powell will not be a Miller, for as ‘ordinary’ Governor sitting in the Fed since 2012 he, being “curious” and “incredibly collegial” by nature, must have certainly gained deep knowledge of the key issues that he is likely to face as Fed Chair. Nevertheless, he being a lawyer, there is a probability of his judgments on economics being questioned, at least in the beginning days of his tenure.
Intriguingly, who knows if this weakness may well turn out to be his strength: displaying a “healthy scepticism” about the models that the Fed economists present, and yet factoring them into his decision making, Powell with his known pragmatic and consensual approach can as well win over the challenges. Nonetheless, with a lawyer in the chair, the composition of the rest of the Fed Board assumes greater significance. It is, of course, a different matter that even if Trump encircles him with governors of hawkish disposition by nominating the likes of John Taylor, a known monetary policy hawk, Powell, with his roots in Republican Party, could still win the day by making political arguments in favour of what Fed thinks as right policies—indeed better than Janet Yellen. So, what really matters here is the competency of the board to give right advice to Fed Chair.
This is what indeed would be watched even by the Central Banks from across the globe, for the US Fed rules the global financial system: if Fed gets it right, prices remain stable, unemployment remains low and obviously output sails along alright. But if it gets wrong, everything becomes pell-mell not only for the US but also for the whole of the globe, for the US dollar still lies at the centre of the global trade and as a result many countries still imitate Fed policies to stabilize their own exchange rate. That is precisely the reason why it is pretty essential for the Fed to get its act right and “getting it right” always is not easy.
So, Powell is thus all set to face tough challenges in the initial years. The stock market is currently looking frothier. At the same time, as interest rates are still extremely low, investors appear to be more willing to take greater risks in search of a return—a repetition of 2008? Intriguingly, despite the growing US and global economy, inflation continues to be low. So, if the Fed cannot normalize interest rates well before the onset of next recession, Powell will end up staring at a big question mark.
Incidentally, in his presentation to the Senate committee, he hinted that he, as expected, would stick to the same monetary policy course, which his predecessor charted if he is confirmed as the Fed Chairman. Which means, he is likely to raise short-term interest rates in December, lifting them gradually higher in the next two years. He also expected the balance sheet of the Fed to shrink gradually. Admitting the uncertainty about the current relatively weak inflation and its underlying forces, he said, “We must be prepared to respond decisively and with appropriate force to new and unexpected threats to our nation’s financial stability and economic prosperity.” All this portrays Powell’s readiness with a monetary policy of his own that ensures the prospect of post-Yellen stability from the Fed, which is sure to please the markets.
Reacting to his nomination earlier, a section of analysts feared that he may pursue financial deregulation that Trump called for—rolling back of the regulations that were clamped down on the risky behavior of banks post the global crisis. But before the Senate confirmation committee, he said: “Our financial system is without doubt far stronger and more resilient than it was a decade ago. We will continue to consider appropriate ways to ease regulatory burdens while preserving core reforms” such as minimum levels of capital and liquidity, stress testing and living wills for large banks in case they collapse.
In the same vein, knowing President Trump’s penchant for challenging the institutional norms, some economists wondered about the independence of Fed, but Powell categorically stated: “I will do everything in my power to achieve these goals (maintaining price stability and fostering maximum employment) while preserving the Federal Reserve’s independent and non-partisan status that is so vital to their pursuit.”
And yet, one is not certain where this “strong, committed and smart” lawyer would lead the Fed should the economy falter—should China’s ballooning debt unravel leading to financial chaos around the globe; should the mounting volumes of the derivatives trading concentrated among a few of the US banks spill causing anxious moments; should a recession set in much before the normalization of interest rates—except to keep faith in his much-acclaimed “regulation-cautious” approach to the policy pursuits.