SUMMARY
  • Meet The New Boss
  • Happiness And Nervousness Over Asset Prices
  • Economic Fortune Is Evening Out
The White House has settled on Jerome Powell as its choice to lead the U.S. Federal Reserve. The nomination should earn support from the U.S. Senate, which confirmed Mr. Powell as a governor of the Federal Reserve System in 2012.

During his five years at the Fed, Powell hasn’t expressed any strong views on monetary policy. He has never dissented from an interest rate decision, and his public remarks on the economy and inflation have not staked out fresh ground. On this basis, we are not expecting any changes to the trajectory of U.S. interest rates upon the transition next February.

The Fed’s balance sheet reduction program, which commenced last month, is designed to proceed without much intervention. Barring something unforeseen, it is unlikely that this carefully laid plan will be modified.

Powell will become the first Fed chair without a PhD in economics in three decades. We do not see this as a liability; there are plenty of classically trained economists on the Fed staff, and throughout the Federal Reserve System. Further, financial conditions have become an increasingly prominent consideration for central banks since the 2008 financial crisis, and Powell’s experience with markets will continue to be of value to the Fed’s discussions.

Powell is close with Randal Quarles, who was recently confirmed as the Fed’s vice chairman for supervision. Together, the two will likely seek to right-size supervision of the financial system. Our view is that some post-crisis regulation is in need of re-evaluation. Portions of the Dodd-Frank Act (such as the Volcker Rule, which limits the proprietary trading done by banks) have been difficult to implement and have had little impact on financial stability. Other strictures, like higher capital standards for banks, have been more effective and should be sustained.

Should Janet Yellen opt to leave the Fed Board when her term as chair concludes, there will be four openings to fill. The new appointments will certainly contribute to the institution’s monetary philosophy. But it is worth noting that the Fed’s constitution is filled with checks and balances that limit the potential for radical change. The staff is influential, as are the district presidents. And if the Fed loses control of inflation, the bond markets will certainly express their displeasure.

Powell will take the helm amid an odd combination of circumstances: strong growth, low employment and quiet inflation. He may be called on to react to significant fiscal stimulus, if tax reductions pass the Congress. And he may have to confront risks to financial stability as asset prices continue upwards (see following article).

We’ll publish more on the leadership transition as the handoff approaches.