Jerome Powell – President of the Federal Reserve

Jerome Powell nomination as President of the Federal Reserve has not created a disruption*. He was in Janet Yellen’s line on macroeconomics and on monetary policy. Nevertheless he is perceived as more market friendly on regulation than Yellen.

He is perceived as someone who will maintain low interest rates and that will modify financial and banking regulation. For this he cannot be wrong in the eyes of financial investors in Wall Street. It’s also an agenda that is consistent with the White House wishes on monetary policy.

But we cannot stop here the analysis. He is not a specialist of monetary policy at a moment where the Fed is normalizing its monetary policy. The Fed is beginning an extraordinary process that consist of increasing interest rates, shrinking the size of its balance sheet and maintaining the low unemployment rate and an inflation rate close to 2%. Being able to satisfy all these objectives is and will be the most difficult task for a central banker.
It can be a terrible task for someone who is not a specialist of the monetary policy theory as Bernanke and Yellen were. Why? Because the economy has shocks positive or/and negative and that there is a need for a rapid adjustment of the monetary policy.
Until now Powell has followed the trajectory decided by Yellen. What will happen when he will have to create the trajectory? The success of the Fed depends a lot on what its president does. We know that the personality of the president of a central bank is key in the credibility of the monetary policy and in the way it is conducted. We’ve seen that in the Euro Area with the nomination of Draghi that has completely changed the picture and probably saved the Eurozone.

This type of situation will be interesting to follow. So we cannot infer that Powell’s monetary policy will follow that of Yellen because the economy will be different. He will think differently at the monetary strategy but we don’t have a precise knowledge of his personal reaction function in case of a shock.

The second point is what he wants to do on regulation. On this point he doesn’t follow Yellen who favors a strong regulation. The question is on what he really wants to do.

No, the new monetary policy will not be the continuation of Yellen’s policy. I’m persuaded that it will be more than marginally different, it will be larger than that. What will be key is Yellen’s behavior. Her mandate as member of the board will finish in January 2024. Will she stay at the board after being ousted as president? Her press release after Powell’s nomination seems to say that she will stay for a moment to ease the transition. That would be the best situation.

What will be interesting in coming months will be the way Powell will keep the Fed’s independence? His relationships with the White House will be fascinating as the White House wants to manage everything. We know that Trump is very critic on the current regulation that depends on the Fed and on the level of interest rates. Will Powell follow the WH recommendations on these points? That will be important for the Fed’s credibility to keep its independence from the White House. The other point will be his reaction if the Republicans of the Congress ask the Fed to adopt a monetary policy rule (Taylor rule type). Bernanke and Yellen have refused this straightjacket. What will be Powell’s view? If the Fed follows a Taylor type rule it will no longer have independency.

Powell’s nomination as Fed’s President was not a surprise. Since his nomination as board member in 2012 he is not a source of disruption. But during all this time he was not the one who at the end of the day has to decide on what to do. In the future it can be more complicated: it will be easy if nothing happen (a kind of great moderation episode), it can be more complicated in case of shocks as he will have to decide rapidly on very difficult issues. His lack of knowledge on macroeconomics could be problematic at this stage even if he has a very smart team with him. The other point to follow is the way he wants to conduct the deregulation process. Will it be at the margin or more?

We have more questions than we have answers but his task will be monumental to normalize the monetary strategy and to limit the probability of a new crisis. The last point to mention is that the Fed still has three empty seats on seven at the board after Stan Fischer departure. Donald Trump has already nominated two members: Randal Quarles who has been confirmed by the Congress and Powell as future president. With three new nominations (and may be four if Yellen quits prematurely) the board will act very differently from what we used to see under the last two presidencies. The role Powell will then be more important; interesting time.

* His mandate will start at the end of Janet Yellen’s mandate on February the 3rd, 2018. After his nomination by Donald Trump, Jerome Powell must be confirmed by the Congress.

Philippe Waechter – Chief economist – Natixis Asset Management