President Trump’s nomination of Jerome Powell as the next chairman of the Federal Reserve System is a bet that he will continue Janet Yellen’s policies and not rock financial markets. The expectation is that Powell will follow the Fed’s already-announced normalization schedule, which calls for slowly reducing the Fed’s $4.2 trillion balance sheet, by rolling off maturing mortgage-backed securities (MBS) and longer-term Treasuries, and gradually increasing the target range for the fed funds rate.[1]
The presidential vote of confidence for Powell reflects the White House and Treasury’s desire for low interest rates to fund the public debt and support high asset prices, as well as the probability that the Senate will quickly confirm the nominee.
Mr. Powell also appears open to revisiting financial regulations, such as the Volcker rule and regulations that discriminate against smaller banks. In testimony, before the Senate Committee on Banking, Housing, and Urban Affairs, on June 22, 2017, Governor Powell set forth “Guiding Principles to Simplify and Reduce Regulatory Burden.” One of the key principles is that Fed policymakers “should assess whether we can adjust regulation in common-sense ways that will simplify rules and reduce unnecessary regulatory burden without compromising safety and soundness.” He emphasized that the Fed’s goal should be “to establish a regulatory framework that helps ensure the resiliency of our financial system, the availability of credit, economic growth, and financial market efficiency.” However, during his tenure on the Fed’s Board of Governors since May 2012, he has consistently voted in favor of tightening the Fed’s grip on financial regulation.[2] Thus, one must remain skeptical about whether he would embrace market-friendly deregulation.