Jerome Powell - Who Is He? What Can We Expect?

President Trump nominated Jerome Powell as the next Chairman of the Federal Reserve on November 2nd. On Tuesday he testified before the Senate Banking Commission. It is very likely he will be confirmed by the Senate and replace Janet Yellen in February. Who is Mr. Powell? Why did President Trump choose him? Will his leadership change recent monetary policy? What challenges will he face?

Five things to know about Mr. Powell

1. Mr. Powell would be the first Federal Reserve Chairman since William Miller in the late ‘70s to not have an economics degree. He is an attorney. However, he has a great deal of experience in the private and public sector financial markets. President H.W. Bush nominated him to the Treasury where he became the Undersecretary of Domestic Finance. Mr. Powell has served on the Federal Reserve’s Board of Governors since May 2012 after being nominated by President Obama.
   
   
2. He will be the first investment banker to hold the top spot at the Federal Reserve. He worked at Dillon, Read as an investment banker. In 1997 he became a partner at the Carlyle Group, a very prestigious investment banking firm.
   
   
3. Mr. Powell has no experience leading a large organization, but he has taken the lead in overseeing banking operations and regulations. While at the Treasury, he became undersecretary of domestic finance and gained experience in managing the investigation and prosecution of Salomon Brothers when a trader submitted false bids for US Treasuries. At the Federal Reserve he has the administrative role of overseeing the Dodd-Frank Act, a massive group of regulations passed after the 2008 financial crisis.
   
   
4. Mr. Powell is the first Board Governor nominated by a president of the other party. Mr. Powell is a Republican. President Obama nominated Jerome Powell to the Board of Governors following his willingness and ability to reach across party lines. Prior to serving at the Federal Reserve, Mr. Powell worked for the Bipartisan Policy Center. (He was essentially a volunteer because his salary was $1.) There he was alarmed at Congress’s unwillingness to raise the debt ceiling in 2011 when Republicans held President Obama hostage and wanted to force Obama to accept their policies. He visited the Capital where he convinced many Republicans to increase the debt ceiling to avoid horrific repercussions in the financial markets and avoid victimizing Social Security recipients, veterans, and others into the political standoff.
   
   
5. Mr. Powell has voted with the majority of the board on every vote since joining it. He has voiced support for the general policies of a slow increase in interest rates and a reduction in the assets. He has expressed some reservations on the stringency of the regulations. On Tuesday, when pressed by Senator Warren on the toughness of banking regulations, he responded by saying, “Honestly, Senator, I believe they are tough enough.” Most expect him to continue with the current policies of slowly increasing interest rates and quantitative easing.

Why did President Trump choose Jerome Powell?

During Janet Yellen’s term, the current Federal Reserve Board Chairwoman, economic growth has increased from 1.7% in 2013 to its current level of 3.1%, and unemployment has dipped from 6.6% to 4.1%. Inflation has remained below the two percent target for most of Ms. Yellen’s term, and the stock market has increased 50%. Why didn’t the President choose to renew Yellen? I believe President Trump wants to have his own person in the position, but at the same time he wants the Federal Reserve to continue its steady course. President Trump also likes Powell’s business experience and his belief in reducing regulation. John Taylor and Kevin Warsh were on the short list, but each has criticized the Fed’s low interest rate policy and would probably have been more inclined to increase interest rates – a policy which would discourage economic growth and probably hurt stock investors.

What challenges are in store for Chairman Powell?

Maintaining 3% economic growth, while limiting inflation, will probably be Chairman Powell’s largest challenge. The US economy is in one if its longest growth periods. Our current expansion started in June 2009. Only the 1961 - 1969 and 1991 - 2001 expansions have been longer. The expansion period of a business cycle has averaged 58.4 months since 1945. Since 1990 the term is closer to 95 months. In either case, a correction is overdue since this expansion has already lasted 100 months. Furthermore, most economists believe the current expansion rate in excess of 3.0% is not sustainable. Most Federal Reserve economists believe 1.8% is the highest sustainable growth rate without fueling inflation or causing another financial bubble. In recognition of this, the Federal Reserve has been slowly raising interest rates and reducing the Fed’s balance sheet through quantitative easing. Both these measures are contractionary and slow economic growth – which conflicts with President Trump’s desire to keep interest rates low and maintain 3% growth. Mr. Trump’s proposed tax cut would further compound the Federal Reserve’s course by adding a stimulus to an economy the Fed wants to maintain at a sustainable growth rate. Restraining an economy that is growing too fast is not a politically popular policy and is difficult to explain to the public. In a speech to the Economics Club of New York on June 1, 2017, Powell summarized his views that a tightening labor market is a precursor to inflation and rates should be increased.

While the recent performance of the labor market might warrant a faster pace of tightening, inflation has been below target for five years and has moved up only slowly toward 2 percent, which argues for continued patience, especially if that progress slows or stalls. If the economy performs about as expected, I would view it as appropriate to continue to gradually raise rates. I would also see it as appropriate to begin the process of reducing the size of the balance sheet later this year. (Federal Reserve Newsevents)

Perhaps Mr. Powell’s greatest challenge will be to maintain the Federal Reserve’s independence. Frequently the FOMC has a balancing act that conflicts with Congress’s election cycle. When the Federal Reserve was established, Congress recognized the need to insulate it from political pressures and created an independent central bank. A lack of independence could result in monetary policies that may not be in the long-run interest of the economy. President Trump demands loyalty and has shown a willingness to fire those who disagree with him. He also has been very clear in wanting to maintain a 3% growth rate. The Federal Reserve has several mandates – maintain low prices with stable employment and sustainable growth. This means that if a robust economy triggers inflation, the Federal Reserve must slow the economy to reduce inflationary pressures or violate its mandate.

Powell is inheriting an economy that is growing, with low unemployment, and low inflation. Investors have prospered. Maintaining the current trends for several years would establish new records in expansions. The nation has financed its prosperity with borrowed funds resulting in a large national deficit and continued deficit spending. Economic growth is essential to pay down the debt. My prayers are that Jerome Powell can maintain a monetary policy that fosters continued economic growth while maintaining the Fed’s independence.