The president of the United States has chosen Janet Yellen’s successor as U.S. Federal Reserve chair. It is Jerome Powell, who has served on the Fed board since December 2011 and, prior to that appointment, worked as a civil servant, a business lawyer and an administrator in the world of investment banking. As the media have pointed out, Mr. Powell is a man who does not swim against the tide. While serving at the Fed he always supported Ms. Yellen’s position on monetary policy. True, on several occasions, he also spoke in favor of deregulation (which is what President Donald Trump likes to hear). However, his record as an active, determined opponent of regulation is poor.
In predecessor’s wake
Most probably, Mr. Powell will bring about no major change in monetary policy. All observers believe that he will continue the soft-landing approach introduced by his predecessor. He will keep a mild expansionary approach for a few more quarters, and then start draining liquidity if the economy remains healthy. Can we, then, summarize this nomination as a choice for continuity? The answer is mixed.
Of course, things would have been different if President Trump had chosen the other runner-up for the job – professor John Taylor. He opposes discretionary policymaking and advocates a fully predictable, countercyclical monetary rule, in which the money supply varies with inflation and growth. This approach contrasts with the view currently prevailing at the Fed (where the notion of “countercyclical” is much more nuanced), according to which monetary policy should also guarantee the stability of financial markets – Wall Street and large banks.
If the president’s goal were to please the markets, perhaps the best course of action would have been to keep Ms. Yellen in office. However, by choosing Mr. Powell, President Trump has managed to reassure financial markets and score some political points with the same stroke. His choice is an outspoken Republican who enjoys plenty of support among Democrats: former President Obama appointed him to the board of the Fed. Thus, Mr. Powell’s nomination has made the Republican party happy without angering the Democrats. Many legislators will certainly appreciate that the president has now paid attention to the world of traditional politics, and Mr. Trump may have opportunities to exploit his beau geste when he proposes controversial policy measures in the future.
What about the man himself? Does it matter that the next Fed head studied politics as an undergraduate and then law at grad school? It is indeed surprising that the top economics job in the U.S. is going to a candidate who has never had formal training in economic theory and quantitative disciplines, and whose knowledge of the real economy derives from his past jobs in the world of investment banking and the past six years as a Fed board member.
Is this lack of technical expertise important? Will it make a difference? It depends. Mr. Powell’s background will be of little importance if things go smoothly: if inflation remains below 3 percent, the growth rate reaches 2.5 percent and if the stock exchange does not crash. After all, under such circumstances, the best thing the new chairman could do is stick to Ms. Yellen’s roadmap and take part of the credit for the good performance. This is the most likely picture for the remainder of 2017 and the first half of the next year.
However, the situation may become complicated if something goes awry. If tensions come to the surface, Mr. Powell’s lack of economic training might take its toll. The main structural problem of the American economy is low productivity growth. If productivity does not accelerate in the near future, high growth will vanish and profits will stall. Under such circumstances, the stock exchange might take a hard beating and Americans’ excess liquid assets might ignite relatively high rates of inflation. At that point, Ms. Yellen’s agenda would no longer fit the picture and her successor would come under heavy pressure to do something – despite the rather limited weaponry at his disposal.
Markets generally like opinionated leaders. Ideology, strong theoretical beliefs and the stamina to fight for those convictions is what makes an opinion credible and persuades wide audiences, including investors and legislators, to adjust and anticipate the leaders’ decisions. Put differently, you don’t need opinionated commanders when business as usual suits just fine, but you require somebody with a clear roadmap of his or her own when important decisions are unavoidable and consistency plays a key role. Mr. Powell’s ability to manage critical situations is how Americans will test his quality. As mentioned earlier, the man’s past provides no clues. Will he be a leader and take the board of the Fed with him? Or will he be a notary and go with the majority? Or will he follow his experts’ advice? If so, who are the experts? The professional economists at the Fed, or a team of outsiders?
The question mark
More importantly, his lack of technical skills could make him vulnerable, or too willing to please, when pressures start coming from Wall Street and the legislators. Mr. Powell enjoys politics, even if from a distance. He is obviously ambitious and eager to please, which is what an enterprising political candidate always wants to do. Who could rule out his run for the Oval Office in three or sever years from now? And how would a prospective presidential candidate behave as leader of the Fed? The obvious answer is kicking the can down the road, which is not what the economy will need when tensions arise.
The fact that Jerome Powell consistently kept a low profile in the past might be a sign of prudence and restraint, both highly welcome qualities. However, it might also indicate traces of opportunism. If applicable – and it is a big if – the strategy that served him well during his rise to the top would be a source of serious problems once he becomes a leader with huge policymaking power.
Enrico Colombatto is Professor of Economics at the University of Turin and Director of Research at the Institut de Recherches Economiques et Fiscales (IREF).