Robert Samuelson: Welcome to the Powell Fed
WASHIINGTON — It will be Powell’s Fed.
Assuming he’s confirmed by the Senate, Jerome (“Jay”) Powell will become the 16th chairman of the Federal Reserve Board in early 2018. Almost by definition, he instantly becomes the most important economic policymaker in the world. But who is he? Outside economic circles, hardly anyone knows.
So, let’s catch up.
Powell would be the first noneconomist to head the Fed since the disastrous appointment of G. William Miller by President Jimmy Carter in 1978. But parallels are strained. Even many economists don’t believe academic credentials are essential.
“Setting monetary policy (interest rates and credit conditions) in most economic environments is pretty straightforward, and I don’t think a Ph.D. from an Ivy League school is needed,” says economist Mark Zandi, of Moody’s Analytics, who has a Ph.D. from the University of Pennsylvania.
More to the point, Powell, a lawyer by training, has spent most of his life steeped in financial markets. A Republican, he served as a top Treasury Department official in the administration of George H.W. Bush. After that, he joined the Carlyle Group, a major private equity firm, from 1997 to 2005. President Barack Obama nominated him for a spot on the Fed Board of Governors, which he filled in 2012.
The Fed’s immediate focus is how to sustain the economic recovery without having low interest rates fuel inflation or financial speculation. To defeat this problem, the Fed has been gradually raising overnight interest rates since late 2015. Rates have gone from about zero to their current range of 1 percent to 1.25 percent. In addition, the Fed is reducing its massive holdings of bonds. This, too, would nudge rates higher.
So far, the transition to higher interest rates — presided over by Janet Yellen, the Fed’s present chair — has gone smoothly. Powell has consistently backed Yellen, suggesting much continuity.
Still, there are no guarantees. Interest-rate increases could backfire. Again, here’s Zandi.
“Unemployment seems destined to fall below 4 percent, creating inflationary wage and price pressures,” he says. “Investors expect interest rates to rise — but not nearly as much as Fed members do, and I suspect the Fed will be right. Guiding investors’ interest-rate expectations higher without triggering a major sell-off in global stock, bond and commercial real estate markets will be tricky.”
There are bound to be surprises. Some economists worry that passage of the Republican tax cut will overstimulate the economy. To combat the resulting inflationary pressures, the Fed would raise interest rates faster than it intended. This might cause an economic slowdown or recession.
Among those who have worked with Powell, there’s much good will. One Democratic economist (who would have preferred that Yellen be nominated for a second term and wishes to remain anonymous) put it this way: “He’s a wonderful guy and gets along well with people. He’s played a conciliatory role. He’s intelligent and not an ideologue.”
William Hoagland, a Republican and senior vice president at the Bipartisan Policy Center, where Powell worked for several years, uses similar words: “He’s a standup guy, a solid individual. He’s easy to talk with.” (While at the BPC, part of Powell’s job was to persuade Republicans not to default on the national debt.)
There are questions, of course. Will Powell be stigmatized as a creature of Wall Street? He’s not poor. Citing a recent financial disclosure form, the Washington Post put his net worth between $20 million and $55 million.
Will he protect the Fed’s vaunted independence? In an important new book, political scientist Sarah Binder and hedge-fund manager Mark Spindel argue that the Fed’s independence is overstated (the book’s title: “The Myth of Independence”).
Binder and Spindel suggest a political cycle: When the economy is doing well, Congress ignores the Fed; when the economy stumbles, it tends to blame the Fed — and restrict its powers or require more accountability. Powell has pronounced himself against many recent proposed restrictions (for example, a requirement that the Fed set interest rates according to a formula).
The biggest question mark involves Trump. In a presidency that has been full of surprises and vitriol, relations between the White House and the Fed have been remarkably calm and monotonous. There have been no personal attacks or vicious tweets.
But is Trump planning to remake the Fed according to his own priorities? Does he think that, of all the plausible candidates for the Fed chair, Powell would be the easiest to influence or intimidate?
Or are we just watching the Binder-Spindel cycle in action? Why criticize the Fed when the unemployment rate is declining and the Dow Jones is rising? But what happens when the day comes, as it will, when the unemployment rate rises and the Dow Jones falls? The Powell Fed might be less boring than we now imagine.