The president just announced his pick to chair the Federal Reserve System. Subject to Senate confirmation, current Fed governor Jerome “Jay” Powell will succeed Janet Yellen as Fed chair in February 2018. Market reaction to this announcement has been sanguine, with commentators describing Powell as the “continuity candidate.”
It is perhaps strange that Powell should be so-described, when Janet Yellen was still in the running for a second term until very recently. The point, though, is that Powell’s views are much closer to Yellen’s than the other candidates interviewed by the president — former Fed governor Kevin Warsh and Stanford economist John B. Taylor — either of whom might have heralded a departure from the status quo.
Powell is often characterized as a moderate dove or neutral on the path of interest rates. He is seen to mirror Chair Yellen in many respects, having supported every move made by the Fed since his appointment to the Fed Board in 2012. What’s more, Powell has already been confirmed by the Senate twice: once to complete Frederic Mishkin’s term as Fed governor, and again in 2014 for his own 14-year term. This fact surely wasn’t lost on an administration desperate for policy wins: a twice-confirmed Fed governor, who is a Republican, is likely to face the easiest confirmation process.
As chair, it is unlikely that Powell will make significant changes to the Fed’s normalization plan. The Fed has been painstakingly deliberate in communicating its intentions about interest rates and the balance sheet; Powell, who supports “forward guidance” as a policy tool, will not want to disrupt that. And with historically low volatility in financial markets right now, Powell won’t want to risk another “Taper Tantrum” that would mar the beginning of his tenure as Fed chair.
None of this means there won’t be any changes at the Fed once Powell is in charge. For one thing, Powell is skeptical about some post-crisis financial regulations. He testified recently that there is room for relaxing or even eliminating elements of newly-imposed regulations stemming from Dodd-Frank. Powell has been particularly outspoken on the need to exempt small banks from regulations designed to apply to large financial institutions. In private, Powell has also voiced concerns that even the most well-intentioned regulations can have unseen, adverse effects.
One worry about Powell is how he would handle a recession, or — even worse — another financial crisis. He is a lawyer by training and was a partner at private equity firm The Carlyle Group before coming to the Fed. Nevertheless, his former colleagues note that he devoted himself to learning macroeconomics and was quick to come to grips with the intricacies of monetary policy. Powell is also known to lean on the Fed’s staff for guidance — a detail that suggests he will lead by consensus.
That said, Powell has gone further than many of his colleagues on the subject of monetary policy rules. In a speech last February, Powell closed by discussing the usefulness of such rules. He highlighted the Cleveland Fed’s rules-based dashboard, and suggested it was the type of analytical tool the FOMC ought to use to guide monetary policy. In short, Powell sees value in using rules as benchmarks that can improve the analysis performed by the central bank. John Taylor, the father of the most famous monetary rule, has expressed support for such a strategy.
Powell ended that February speech by saying, “Policy should be systematic, but not automatic.” If the Fed delivers on that promise under his leadership, it will be taking a step in the right direction.
