National Post (National Edition)
TRUMP MAKES HIS MARK WITH FED CHIEF PICK
TRUMP MAKES THE BEST OF A BAD DECISION WITH PICK OF POWELL FOR FED CHIEF
Let’s get this out of the way: U.S. President Donald Trump’s decision to replace Federal Reserve chair Janet Yellen with Jerome Powell was, prima facie, a bad one — simply because he decided to replace Yellen in the first place.
When it comes to choosing someone to lead the most important monetary policymaking body in the world, the risks are so high and the effects of failure so potentially devastating that the safest course of action is the best one. Continuity matters, which is why every president back to and including Ronald Reagan (until this one) decided to re-install a first-time Fed chair for at least a second term, whatever their political stripe.
It matters perhaps more than ever now, when the Fed is embarking on the huge and uncertain project of weening the U.S. economy off the extraordinary stimulus it’s maintained for nearly a decade. In that project, Yellen has so far proven herself to be the right person for the job. Her approach seems both reasoned and fair. She has built consensus among Fed governors. And through it all, the U.S. economy has been doing well: unemployment and inflation are contained; growth is solid.
Yet Trump, as he said, wanted to make his own mark. So he ditched the best candidate for the job. And the woman largely responsible for America’s economic stability — which, let’s face it, means she’s had a big hand in Canada’s, as well — goes down in history as the shortest-serving Fed chair since G. William Miller, a Jimmy Carter appointee and disaster, who served all of 17 months.
Anyway, Trump came to bury Yellen, as much as he praised her. (After accusing her during his campaign of playing pro-Obama politics, he called her a “fantastic person” in letting her go.) His appointment of Powell, a Fed governor since 2012 and a longtime Republican, is political. To Trump’s credit, however, Powell is the least offensive, and most true to the spirit of continuity, of any of the candidates the president was considering.
It’s true that unlike his predecessor, or Ben Bernanke or Alan Greenspan, he doesn’t have an economics degree, which has already drawn some skepticism around his appointment. But he’s had a long career in finance and policy, and the staff of the U.S. Federal Reserve has no shortage of economists to consult. He also brings “real world” experience to the job, which should give him some added credibility on Wall Street.
On monetary policy, the accepted storyline is that he is largely in the Yellen camp — in favour of interest-rate normalization and reduction of the Fed balance sheet. He is in no rush: low inflation, in his view, leaves room for patience in raising rates. Under Powell, we can expect continuing “data dependency” from the Fed as it moves toward normalization. And Canadians shouldn’t expect a Powell Fed to have any significantly different impact on our own monetary policy than Yellen would have had.
On financial industry regulation — the other big part of the Fed’s function — analysts seem to agree that he is more open than Yellen to revising post-recession rules like Dodd-Frank. But he’s unlikely to be any laissez-faire type; his previous statements suggest he supports tweaking the rules rather than abandoning them.
Powell is considered a pragmatist and a moderate, and he is reported to be a very effective behindthe-scenes deal-maker. He’ll need those skills, because as much as he might be a “Republican Yellen,” the Fed he inherits might be very different from Yellen’s. Her vicechair, Stanley Fischer, resigned as of last month, and Trump has at least two more governor appointments to make. Depending on whom the president picks — and they might well have a more ideological bent than Powell does — the new Fed chair could find building consensus on the FOMC much more difficult than Yellen did.
The other big question is how far the politicization of the Fed chairmanship will go. The Trump administration, which backs the big taxcut plan released this week by the House of Representatives, has promised that the U.S. economy is going to boom; Trump has mused about five-per-cent GDP growth. If the Republican fiscal stimulus goes through, how much pressure will the Fed face to let the economy run hotter than it otherwise would? How much flak might Powell get if he raises rates enough to perceivably dampen growth? And how will he handle it? Might he bow to political pressure?
The same questions would apply to Y ellen, of course, but she wasn’t Trump’s “guy.” For now, all we can say is that the president, in replacing Yellen with Powell, made the best bad decision he could.