YELLEN’S ‘GIFT’ TO POWELL
Trump’s nominee to inherit healthy growth but will also face inflation conundrum
WASHINGTON
UNITED States Federal Reserve (Fed) governor Jerome Powell will inherit healthy economic growth and a consensus on monetary policy at least for the next few months, if he is confirmed by the Senate as the next Fed chair when Janet Yellen’s term expires in February.
But he will also inherit Yellen’s unfinished business: unresolved questions in economics about why inflation is so low, the role of financial market conditions in setting monetary policy and the way to fight recessions if interest rates stay low.
The debates will leave Powell, a 64-year-old lawyer mediating among the economists on the Fed’s research staff, 12 regional reserve bank presidents, and colleagues like Lael Brainard, who would be the only other professional economist on the board currently, if Yellen were to leave the Fed’s board once she relinquishes the chair.
While Yellen’s term as Fed chair ends in February next year, her term as a governor on the Fed board runs until 2024.
And unless the US’ near recordsetting 101-month economic expansion lasts another four years, Powell may have to confront a recession for which many feel the central bank is unprepared for.
Powell will “have regulatory issues at heart”, said Axel Merk, president and portfolio manager of the Merk Hard Currency Fund, in Palo Alto, California.
“The question is, what is he going to do in a crisis? Who will he rely on? I have no doubt about his intellect or integrity or anything like that but he might think it’s easier than it is.”
Powell, a Fed board member since 2012, will be the first Fed chair without an advanced economics degree since William Miller, whose short-lived chairmanship in the 1970s saw inflation spiral out of control.
Though confident about the short-term economic outlook and monetary stance, policymakers are concerned that persistently low inflation in recent years may mean the economy could slide back into a recession more easily than in past years.
In the meantime, steady growth in payrolls and low unemployment, as evidenced by last Friday’s US jobs report, indicated an expansion that was still on track.
But some analysts note that the continued narrow gap between short- and long-term interest rates, or the flat “yield curve”, suggests doubt in markets about the economic future.
If interest rates stay low, the Fed will have limited room to combat a downturn with rate cuts before they hit zero, which could force the use of bond buying again or more controversial tools like negative interest rates.
Though Powell has arguably become more of a policy “dove”, favouring easy money, since he joined the consensus that Yellen
developed, the next crisis could put him in an unenviable position. As a Republican, serving alongside a Republican president and what is currently a Republican congress, he would be forced to mull policies that conservatives in the parties have often opposed.
“One area of concern is whether a Powell-led FOMC (Federal Open Market Committee) would be as aggressive or proactive as a Yellen-led FOMC would be ... in terms of confronting recessionary shocks,” said former Minneapolis Fed president Narayana Kocherlakota.
He added that Powell, early in his term as Fed governor, “displayed uneasiness with unconventional monetary policy”.
That “uneasiness” gave way over time to support for Fed policies, which recognised that the scars from the 2008 financial crisis and recession needed time to heal, a process Powell has said he is committed to seeing continue.
But the outcome may depend on who is around him, and who he finds convincing.
Powell will now have to prove he can draw similar insights from the Fed’s network of talent, and mould that into a policy.
Trump can name three more Fed board governors, and a fourth if Yellen, when her term as chair expires, also gives up her seat on the board. One of them will serve as Powell’s vice-chair.
Top Trump economic adviser Gary Cohn said on Friday consultations with Powell would begin soon on the vacancies with a choice made by year-end.
“He might seek candidates with expertise in the theoretical underpinnings of monetary policy” to complement his expertise in markets developing during a career in investment banking, said Barclays analysts.
“The most important question is the conduct of monetary policy during the next downturn.” Bloomberg
Powell, early in his term as Fed governor, displayed uneasiness with unconventional monetary policy.
NARAYANA KOCHERLAKOTA
Ex-Minneapolis Fed president