President Trump has nominated Jay Powell as the next Chair of the US Federal Reserve. This was largely expected, despite Trump’s hosting of a somewhat convoluted selection process (involving a promotional video), which saw numerous candidates briefly take the role of favourite. The official changing of the guard occurs at the start of February next year, when Janet Yellen’s term expires.
Few expected Ms Yellen to be reappointed. One black mark against her name was that she was an Obama appointee. On top of that, she used her Jackson Hole speech this year to argue forcefully in favour of much of the post-crisis financial regulation – a stance that put her at odds with the views of President Trump. This was probably the biggest factor counting against her reappointment.
More of the same?
Nevertheless, the appointment of Powell would largely represent a continuation of current Fed policy. He too was appointed to the Fed’s board by President Obama, albeit as a sop to Senate Republicans to facilitate the appointment of Jeremy Stein, Obama’s preferred candidate. As a Fed governor, Powell has cultivated a reputation as a “centrist”, and he has voted alongside Yellen in every policy meeting under her leadership.
Hence, it’s fairly safe to say he largely shares her view that the economy is close to full employment, and that this will eventually cause inflation to pick-up. He is, therefore, unlikely to deviate from the very gradual tightening path the Fed has guided the market to expect.
But Powell has never expressed strong support for the recent financial regulation, and there is some suggestion he is slightly more concerned about the impact of certain aspects of monetary policy on financial stability. He describes himself as a fiscal conservative by “any fair reckoning”, although he has tended to be more pragmatic than ideological in his previous roles.
Powell’s lack of formal training may make him more liable to be led by the staff economists.
Another important point to note is that Powell is not a trained economist. He is a lawyer with a background in private equity. Given the recent dominance of academics at the Fed, this is quite striking. Powell’s lack of formal training may make him more liable to be led by the staff economists.
Changing of the guard
The whole leadership group of the Fed will change next year; vice-chairman Stanley Fischer, another Obama appointee, announced his resignation back in September, citing “personal reasons”. Bill Dudley, president of the Federal Reserve Bank of New York, is also taking early retirement. He was due to leave at the beginning of 2019, but said at the beginning of this week that he will now retire in mid-2018.
Nevertheless, markets have not interpreted Powell’s nomination and the top-level departures to mean that policy will change significantly. This is partly because Powell largely agrees with Yellen’s views, but also partly because the path of monetary policy is ultimately determined not by the whim of officials but by the fundamentals of the economy. And current policy is consistent with those fundamentals. The only thing that might change this is fiscal policy. So what happens on the tax side may turn out to be more important to the path of monetary policy than the individual in charge of the Fed.
And finally, lost in the noise of Powell’s nomination was the Fed’s decision to keep rates on hold at its November meeting. The path is now clear for a December hike, which will probably be Yellen’s last substantive decision as Fed chair.
The article above was previously published on Aberdeen Asset Management’s ‘Thinking Aloud’ blog on 9th November 2017