- President Trump is expected to appoint Jerome Powell, current board governor and a former private equity executive, as Federal Reserve chair, replacing Janet Yellen.
- Picking Powell signals the administration was fearful of jolting markets with some of the picks on its list, who had signalled they might be more aggressive in raising interest rates.
- Powell lacks formal monetary policy training but has gotten quite a bit of practice since joining the board in 2012.
Donald Trump looks set to appoint Jerome Powell, a former private equity executive at Carlyle Group and current member of the Federal Reserve, as the next Federal Reserve chair.
While the official announcement is not expected until Thursday, several news outlets starting with Politico have reported he is the likely nominee, citing White House sources.
The choice of Powell is a departure in a long tradition of reappointing Fed chairs to a second term, regardless of party affiliation. Janet Yellen, a Democrat, actively interviewed for the job but appears to have been turned down despite Trump’s recent praise of her work.
The 64-year old Powell, a Republican, was appointed to the Fed’s powerful Washington-based board of governors in 2012, by ex-President Barack Obama. Powell worked in private industry much of his life and was a partner at The Carlyle Group from 1997 to 2005. And he had to learn on the job a bit when it came to monetary theory and interest rate policy, but his financial background made him well-equipped to be a fast learner.
Danielle DiMartino Booth, former advisor to ex-Dallas Fed President Richard Fisher, told Business Insider she doesn’t see Powell’s lack of formal monetary economic training as a liability.
“His experience in private equity affords him a unique vista on shadow banking and his background in politics is critical background for dealing with the craziness that it DC these days,” said DiMartino Booth, founder of research firm Money Strong. “He’s not a PhD in economics which too few are highlighting in my view.”
Well received on Wall Street
The appointment of Powell, who is among the wealthiest members of the Fed, is likely to be well received on Wall Street, which will see him as a friendly face on possible deregulation but also, importantly a voice of continuity in interest rate policy at a key time for the central bank.
The Fed has raised interest rates four times since December. 2015 and recently began gradually winding down its $US4.5 trillion balance sheet. Fed officials are predicting several additional rate increases this year and next, but financial markets are more sceptical.
Powell is likely for now to maintain a steady course of gradual but cautious rate increases with an eye to an inflation rate that continues to undershoot the central bank’s 2% goal. (This points to economic activity and a labour market that are still running below their potential, a point highlighted by weak wage growth for most Americans.)
He has not been a major voice on interest rates until now, focusing on more tangential issues for the Fed like the regulation of scandal-ridden Libor interest rates, financial innovation and housing policy. His last speech on monetary policy was in June. At that point he said:
“The healthy state of our economy and favourable outlook suggest that the FOMC should continue the process of normalizing monetary policy,” Powell told the Economic Club of New York. “The Committee has been patient in raising rates, and that patience has paid dividends.”
Back in May 2016, he sounded more dovish on policy — that is, less likely to tighten rates — than many members on the Fed’s policy-setting Federal Open Market Committee.
“The risks of waiting [to raise rates] are frankly not so great,” said. “This doesn’t feel like an economy that’s bubbling over or threatening to break into high inflation.”
“He has been in line with the leadership on monetary policy in recent years,” Julia Coronado, a former Fed board economist who worked on Wall Street before founding research firm MacroPolicy Perspectives, told Business Insider. “His comfort zone and leadership has been in getting his hands dirty on regulatory and financial sector plumbing issues. He is smart and collegial and knows how to lean on the staff’s expertise.”
Forging a consensus
She added he will probably be a different kind of Fed chair than Yellen “in that he will be forging a consensus more than driving it on monetary policy. His depth on financial infrastructure could come in handy if and when the FOMC needs to confront decisions on balance sheet policy again.”
Because Powell is seen as less likely than other contenders like John Taylor and Kevin Warsh to be more aggressive about interest rate hikes, bond markets reacted positively to the news.
Powell was previously Assistant Secretary and Undersecretary of the Treasury under George W. Bush, overseeing banking and Treasury markets. His current status as a board member makes him an easy nominee to confirm as well.
“Given his voting record and public comments to date, we would expect the Fed’s [rate hike path] to be pulled forward only modestly if Gov. Powell is tapped,” wrote Isaac Boltansky and Lukas Davaz of DC-based policy financial research firm Compass Point in a client note.
“[He] has been confirmed twice by the Senate for his current post on the Federal Reserve, which underscores our view that he would win confirmation if nominated as Chair.”
Likely a plus for Trump, who ran on a platform of Wall Street deregulation, Powell has signalled an openness to watering down Dodd-Frank financial rules.
This puts him in the company of another Trump appointee to the Fed, Vice Chair for Supervision Randall Quarles, who’s also in favour of unwinding some of the post-crisis rules mean to prevent a repeat of 2008.
Janet Yellen recently warned of the risks of going too far in the other direction. “Any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years,” she said in August.