Meet New Fed Chair Jerome Powell

President Trump has chosen Fed board member Jerome Powell as the next Fed chief. Though we wrote briefly about him last month1, we thought that it would be worthwhile expounding more deeply on his views and history now that he is the official nominee. 

First, more on Powell’s background: Jerome Powell served as undersecretary of the US Treasury Department under President George H.W. Bush, and subsequently became a partner at private equity firm The Carlyle Group, where he became a multimillionaire. He then worked at the Bipartisan Policy Center, and in 2012 was nominated by President Barack Obama to serve on the Federal Reserve Board, where he has remained ever since. He is a Republican but is not considered to be an ideologue2
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If confirmed, Powell would be the first Federal Reserve Chief in decades to lack a PhD in economics. However, he has had five years to acquire fluency in monetary theory and interest rate policy, for which his financial experience provided a sturdy foundation. Though his background is somewhat nontraditional, he is certainly well qualified for the job.

It should be noted that current Fed chair Janet Yellen would be the first chair to not be renominated to a second term as Fed chief in decades, despite her track record of declining unemployment and steady (albeit unspectacular) growth. Trump has referred to wanting to appoint his own man, as is his right, but letting Yellen go is yet another blow to the already reeling concept of bipartisan tradition.

Still, if you like Janet Yellen, you will probably also like Jerome Powell, who appears to be cut very much from the same cloth. He has never dissented from any Fed decision since becoming governor, which means that he has supported Yellen’s gradual rate increases over the past two years. In a banking conference last month Powell commented that “monetary policy normalization has been and should continue to be gradual, as long as the U.S. economy evolves roughly as expected”3.

Markets certainly have reason to be pleased with Yellen’s tenure; accordingly, they have greeted the news of Powell’s appointment with alacrity. Bond markets rose when rumors solidified that Powell was the choice over John Taylor4. Moreover, Powell has indicated that he favors steps to loosen some of the regulations imposed by the Dodd-Frank Act, particularly the Volcker Rule, which limits the types of investments big banks can make5. Still, in keeping with his moderate personality6, we would expect the financial regulatory environment to undergo adjustments, and not an overhaul. We would also expect Powell to continue Yellen’s gradual normalization of the Fed’s balance sheet.

As for the future of interest rates, the Fed chose this past week to leave rates unchanged, but markets expect the Fed to raise rates again in December, with Bloomberg’s World Interest Rate Probability function indicating a rate hike probability of over 90%7. We believe Powell will seek to continue gradual normalization of interest rates, with pace dictated by the ebb and flow of economic data. Given the steady growth in GDP and markets over the past several years, Powell’s inclination to follow a Yellen-style approach appears to be a fine choice at this time.

— JMS Team


Sources:
1. The good: we correctly predicted the final two candidates would be Jerome Powell and John Taylor. The bad: we guessed Taylor.
2. Washington Post, “Trump expected to nominate Powell for Fed chair,” by Heather Long and Damian Paletta, 10/30/2017.
3. MarketWatch, “What a Jerome Powell-led Fed may look like,” by Steve Goldstein, 10/20/2017.
4. Business Insider, “Here’s everything you need to know about Jerome Powell, Trump’s likely pick to lead the Federal Reserve,” by Pedro
Nicolaci Da Costa, 10/31/2017.
5. New York Times, “In Choice of Fed Chairman, Trump Downgrades Deregulation, by Binyamin Applebaum, 10/29/2017.
6. Apparently peer pressure can’t cajole Powell into even drinking a third glass of wine with dinner, according to the New York Times,
“Trump Is Expected to Name Jerome Powell as Next Fed Chairman,” by Maggie Haberman and Binyamin Applebaum, 10/30/2017.
7. Charles Schwab, “Fed Stands Pat in November; Gets Ready to Go in December,” by Liz Ann Sonders, 11/1/2017.

Disclosure:
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting and legal or tax advice. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.