President Trump nominated Federal Reserve Board Member Jerome Powell to be the next Federal Reserve Chairman. Assuming he is confirmed, Powell will replace the current Chairwoman, Janet Yellen whose term as chair expires in the first quarter of 2018. What does this mean for the markets and monetary policy moving forward? For the markets, Powell’s nomination has been telegraphed for a while and the immediate effect of his nomination should be minimal. The nomination is believed to represent a continuation of Federal Reserve policy with a few caveats and unknowns.
There are some key background differences between Powell, and the past two Federal Reserve chairs. While Yellen and Chairman Bernanke were both trained economists with published research that informed viewers of their economic philosophies, Powell is a lawyer and private equity executive without published research to inform onlookers of his thought process. Bernanke was a student of the Great Depression who spent much of his academic career learning how to prevent another one. It should not have been surprising that he and Secretary Paulson resorted to extreme and immediate measures to try and stop the financial crisis from spiraling into a global economic collapse. Yellen is perceived to lean “dovish,” but her focus on the importance of labor market tightness should not make it surprising that she began hiking rates once unemployment declined significantly. Nor should it be surprising that she has continued to raise rates despite still tepid economic growth and negative rates in much of the developed world.
Chairman-elect Powell does not have an academic record that one can reference to predict his future actions. This is not necessarily a negative. This may make him more flexible when the monetary environment diverges from the current trend. He is not a trained academic, but maybe coming from a business background can be a positive going forward. In some ways, he is similar to Chairman Greenspan who was a trained economist, but also had extensive private sector experience. It is believed that Powell will continue the course set by Yellen’s Fed, but there may be a couple changes as there always is with transitions. It is believed that Powell thinks that the current regulatory environment should be rolled back slightly. His immediate predecessors have been able to answer almost every economic question thrown at them by Congress or reporters. Without a classical economic background, Powell’s explanations may not be as adept. A stumble could potentially unsettle markets which have a history of testing Fed Chairs shortly after their appointments.
Finally, it should be remembered that the Federal Reserve is usually comprised of seven members on its Board of Governors. There are currently three vacant positions and it is likely that Yellen will step down once Powell becomes Fed Chair. Given that Powell is an unknown as an economic quantity, the other people nominated to fill the empty positions may tell onlookers more about the future direction of the Federal Reserve than Powell’s nomination. In summary, NPP does not think much has changed at this point and believe that Powell represents for the most part a continuation of past Federal Reserve policies. We could change our opinion depending on the other nomination to the Board of Governors, but for now, we believe the status quo remains intact.