An unkown quantity at the Fed
The new Federal Reserve chair doesn’t stand for business as usual
Donald Trump has a cautious side after all. In naming Jerome Powell as next chairman of the Federal Reserve, the president has chosen a loyal ally of the outgoing chair, Janet Yellen. At first sight, the appointment signals business as usual in monetary policy, rather than the unconventionality that some of the other candidates stood for.
On the whole, this was wise. The Fed is gradually getting monetary policy back to normal, and a surge of uncertainty over its intentions on interest rates and balance-sheet operations wouldn’t help. Even so, it would be an exaggeration to say that the appointment won’t have an impact.
For a start, attachment to a particular theory of “normal” monetary policy is not the only thing, or even the main thing, that a Fed chair must bring to the job. Leading the Fed’s policy-making committee, especially when it’s divided or confronted with unforeseen events, is the greater challenge.
In this regard, Mr. Powell is untested. Note as well that vacancies mean further appointments to the committee are coming — choices that could make his job easier or harder. Mr. Powell is certainly well qualified, but he lacks the academic weight of his predecessors. This could make it more difficult for him to shape a consensus.
On financial regulation, as opposed to monetary policy, the Powell Fed can be expected to adjust the emphasis, at least. Ms. Yellen has generally favored strict and proactive rule-making. Mr. Powell has appeared to be less convinced of the Fed’s ability to usefully interfere with the financial markets’ role in allocating capital. That skepticism could lead in one of two directions — one promising, the other quite dangerous.
A reluctant financial regulator, aware of how hard it is to do that job well, might favor the lighter touch of simpler rules — combined with a renewed focus on the capital that banks and other financial firms use to support their lending. That particular change of emphasis would be good: Making financial firms stronger is the best way to avoid future crises, and stronger firms require less intrusive oversight.
But the other possibility — lighter regulation combined with a more relaxed approach to capital adequacy — would risk the kind of regulatory failure that helped bring on the crash. Everything depends on what kind of lightertouch regulator Mr. Powell intends the Fed to be.
It would have been customary for Mr. Trump to have reappointed Ms. Yellen, who has acquitted herself well. But he has never been one to do what is customary. In Mr. Powell, Mr. Trump has selected the least unsettling alternative — which is fine, so long as both remember the most important advice for any Fed chief: Expect the unexpected.