Trump's change at Fed's helm is also a vote for continuity

If confirmed by the Senate, Federal Reserve chair nominee Jerome Powell is expected to continue the current policy of gradually raising interest rates. But in a break with tradition, he's not an economist. 

At a time of turmoil in US politics and with uncertainty over the economy's future, President Trump tilted toward calm and continuity in one important arena this week by nominating Jerome Powell to head the Federal Reserve.

Mr. Powell is already a Fed governor and largely supportive of its current policy stance.

So the announcement is in effect a vote not to rock the boat at the institution charged with keeping the economy on a strong course, safeguarding it from financial crisis, and helping to set norms for central banks worldwide.

That wasn’t a foregone conclusion. Some of the other finalists Mr. Trump considered would have represented major breaks with current policy, such as toward an “inflation hawk” approach, which would raise interest rates more quickly, or a more formula-based approach to setting interest rates.

With delicate tasks ahead – trying to preserve economic growth while backing away from extraordinary post-recession stimulus – Mr. Powell is someone who's already sat with current Fed Chair Janet Yellen at the Fed's oversize meeting table and taken her side on the most prominent policy decisions.

“We’re very fortunate that we have a lot of very talented public servants at the Federal Reserve who really are nonpartisan and trying to do the best they can for the economy," says Michael Klein, a professor of international economics at Tufts’ University’s Fletcher School of Law and Diplomacy. "It seems [that Powell] understands that culture and wouldn't want to upset the apple cart.”

“There’s no rampant inflation. In fact the Fed has not even met its 2 percent ... target” for annual change in consumer prices, he adds.

Economists generally say a moderate level of inflation is healthier for an economy than very much or none.

Guiding a solid economy

If Powell is confirmed by the Senate, he’d take the reins at a time of solid but fairly tepid economic growth and low unemployment. The official jobless rate dipped in October to 4.1 percent, a 17-year low.

Mr. Trump could have opted for even more continuity. He declined to nominate Ms. Yellen for a second four-year term. Past presidents have typically done that, regardless of party affiliations.

Powell and Yellen are hardly clones of one another. Yellen is known as a Democrat, Powell as a Republican (though appointed to the Fed Board of Governors by President Barack Obama). 

Perhaps most significant, his background is in law, investing, and government – so if confirmed Powell would break with the recent tradition of economists at the helm. That, some analysts say, could be a liability should the Fed find itself facing another crisis akin to the 2008 crash for banks and the economy.

“Having a PhD is not by itself any kind of indicator of competence,” says Mr. Klein, who is also founder of the EconoFact website. “But having that kind of background might be especially valuable” in a crisis.

“Yellen and [her predecessor Ben] Bernanke were very much responsible for bringing the economy out of what could have been a catastrophic event,” he adds.

Some Democrats in the Senate, which must confirm the nomination, urge that Powell get careful vetting ahead of a vote.

“I hope that he assures us he is committed to following Chair Yellen’s example of prioritizing job growth, safety and soundness in our financial system, keeping unemployment low, and fostering an economy that leads to higher middle-class Americans wages,” Senate minority leader Chuck Schumer (D) of New York said in a statement released Thursday.

Although Powell isn’t an economist, he is steeped in the Fed’s purview: financial markets.

Before joining the Fed’s Board of Governors in 2012, Powell was a visiting scholar at the Bipartisan Policy Center in Washington and for almost a decade was a partner at the Carlyle Group, an investment firm. He was a Treasury Department official under President George H.W. Bush, with responsibility for policy on financial institutions and the Treasury debt market.

He and his wife have three children.

A lighter touch on regulation

In Senate confirmation hearings, the big question is likely to be: Where would he steer things, both on interest rates and the regulation of banks?

Fed-watchers see Powell as supportive of the overall framework by which the Fed and other agencies supervise banks, with a watch out for risky behavior such as building up too much debt (or “leverage” in Wall Street parlance) relative to assets.

But an analysis this week by Oxford Economics says he’s also “expressed some willingness to ease some of the structures put in place by Dodd-Frank,” the bank reforms enacted in 2010 after the Great Recession.

On interest rates and money supply, the Fed under Yellen has continued policies aimed at stimulating more growth, well into a steady recovery in the economy.

Yet the current policy, which Powell has supported, is balanced by a careful watch on inflation and on the goal of normalizing the Fed's policy stance after a long stretch of near-zero short-term interest rates and an unusual program of bond-buying
designed to bring long-term interest rates down.

Yellen's last big move, initiating a gradual reduction in the Fed's massive $4.5 trillion portfolio of bonds, appears set to be a major ongoing task for her successor.

In an August survey of economists, a majority said they support the Fed’s current monetary policy, in its efforts (mandated by Congress) to seek both full employment and low inflation.

Some 61 percent of respondents said the current policy stance is “about right.” The survey by the National Association for Business Economics found a significant minority, 34 percent, calling for a policy that includes a faster rise in interest rates.