Trump’s Fed Choice: Continuity

Governor Powell has been a member of the FOMC since 2012. He helped to design the programs that the Fed has put in place to reduce the size of the balance sheet;, he’s been a vocal proponent of the plan to raise interest rates gradually;, and so there is no reason to expect a dramatic change in policy with his appointment. Certainly the market has taken comfort from that, given that the current policy mix seems to be working quite well.

One area where he does seem to be a little bit more focused than perhaps she has been has been on the impact of financial markets on the economy and financial conditions in general. He seems a little bit more interested in making sure, or a little bit more concerned about the idea that bubbles could emerge that would be disruptive for the economy. He may be a little bit quicker to respond to signs that financial markets are getting over their skis than Chair Yellen would have been.

Governor Powell’s background is different than that of recent Fed chairs, most notably in that he is not an academic PhD economist. He is a lawyer by training and his professional experience is largely in private equity, although he also did work in the Treasury Department. That makes his appointment a little bit unusual. That said, he has been on the board for the last five years, and so he’s certainly well- versed in monetary economics and experienced in it. And so I don’t think that the markets should be overly concerned that he doesn’t have that sort of academic background.

One aspect of this transition that I think the market may be overlooking to a degree is that it isn’t just the chairman’s seat that is going to change here. There are currently several vacancies on the Board of Governors, and indeed there are likely to be more. The President will have to appoint people to fill those seats to keep the board functioning.