Senators to quiz nominee for Fed

Questions likely on interest rates

WASHINGTON — Jerome Powell’s confirmation to be chairman of the Federal Reserve is considered all but certain. Yet when a Senate committee holds a hearing today on Powell’s nomination, one question will hover above the discussions:

Will Powell be Janet Yellen by another name — or a different kind of Fed leader?

Y ellen will leave the Fed in February after four years as chairman, a period characterized by a cautious stance toward interest rate hikes, relative transparency about the Fed’s expectations and projections, and support for stricter bank rules that were enacted after the 2008 financial crisis.

There are three areas where senators are likely to explore how a Powell Fed might differ from the Yellen Fed: interest rate policies, communications and banking regulations.

In his five years as a member of the Fed’s seven-member board of governors, Powell has built a reputation as a centrist. He never dissented from the policies advocated by Yellen or her predecessor, Ben Bernanke.

What investors don’t know is whether Powell, once he becomes chairman, would push to accelerate the central bank’s rate increases — a step favored by some of the Fed’s regional bank presidents. Those officials say they fear that the Fed’s still-low rates, at a time when the economy appears close to full health, risk sowing the seeds of high inflation or dangerous bubbles in such assets as stocks or home prices.

For seven years after the financial

crisis began, the Fed left its key policy rate unchanged to help the economy emerge from a devastating recession. The Yellen Fed raised rates once each in 2015 and 2016. This year, the Fed has raised rates twice and is signaling that it will do so again in December.

In his own remarks on rate policies, Powell has so far stuck close to the Yellen line. In a speech in June, he said that while low unemployment argued for raising rates, weak inflation suggested that the Fed should move cautiously in doing so. That wary approach reflected Yellen’s own warnings about the need to raise rates only incrementally, depending on the latest economic data.

The key to any change may be whether inflation continues to lag chronically below the Fed’s 2 percent target, something that has perplexed both

Yellen and Powell. Powell, in an interview in August, called low inflation “kind of a mystery.”

Likewise, the minutes of the Fed’s recent meetings indicate that Fed officials are frustrated and puzzled about why inflation has failed to accelerate this year. Powell’s take on that question will likely play a significant role in determining how fast the Fed raises rates in 2018.

In her four years, Yellen has extended the efforts begun by Bernanke to make the historically secretive Fed more open in communicating to the public. Yellen continued the quarterly news conferences begun by Bernanke. And she opened up avenues for the Fed to signal future rate decisions. One way was to emphasize what has come to be known as the “dot plot” — the anonymous

forecasts of individual Fed officials on where they foresee the Fed’s policy rate headed.

But these moves have generated some criticism that the Fed is confusing investors by sending sometimes conflicting signals. This is especially so in the comments made by regional Fed presidents, who have generally sought to push the central bank to move faster to raise rates. Another point of dispute is whether the Fed should adopt a policy rule to guide its rate decisions, a step advocated by conservative Republicans in Congress.

Powell has expressed opposition to adopting a single rule to govern Fed rate decisions, saying it would prevent the Fed from being fully flexible in its actions. But in a 2016 speech, Powell reviewed the Fed’s communications efforts

since 1999 and suggested where mistakes had been made in the past.

Still, most analysts say they don’t think Powell would want to limit the ability of other Fed officials to voice dissenting views.

“While at times there are too many conflicting signals and too many voices coming out of the Fed, I doubt that Powell will advocate muzzling his colleagues,” said Sung Won Sohn, an economics professor at California State University, Channel Islands. “He is going to need their support to set policy.”

Powell’s actions on the Dodd-Frank Act, the law enacted to tighten banking regulations after the 2008 crisis, may turn out to be the area where he will differ the most from his predecessor. Yellen rejected arguments that the tighter

regulation had hurt economic growth by making banks less likely to lend. Somewhat differently, Powell has generally supported the broad thrust of Dodd-Frank while suggesting that in some areas it had gone too far.

In a congressional appearance in June, Powell said that the “core reforms” should be retained but that in some respects there was a need to “go back and clean up our work.” He indicated that two areas where loosening the rules might be considered were in easing regulations on smaller banks and revising the law’s curbs on investment trades by big banks.

But Powell has so far been lukewarm about proposals put forward by President Donald Trump’s administration for a more far-reaching pullback in regulations.