The good news about the almost-certain nomination of Jerome Powell as the new Federal Reserve chair to replace Janet Yellen in February is that there will be a seamless transition of leadership and continuity in monetary policy, at least in the short term. Powell has had a voice in determining policy for the past five years as a member of the Washington-based board of governors and has never dissented from the consensus statement. His imminent appointment has been widely reported and is based on authoritative briefings, though a formal announcement is not likely to be made until Thursday, after the two-day meeting of the Federal Open Market Committee.
The less good news is that, in every respect except that he is a Republican, Powell is less qualified to be Fed chair under President Donald Trump than the woman he is replacing. His background is in law and investment banking, with some policy experience at the US Treasury, but he lacks the foundation in economics which has distinguished Fed chiefs. No amount of assistance from the staff can make up for that. He is more likely to be swayed by the staff than was Yellen, a distinguished academic economist who had nearly two decades of hands-on experience with monetary policy as a top Fed official.
Trump made it clear that part of his motivation in making a change at the Fed was wanting to leave his own mark. It may be, too, that he wants to keep on making his own mark and feels Powell will be more pliable than a fiercely independent Yellen. But it may be that Powell, who unpredictably held on in the race to become chair, will continue to surprise Fed watchers. In any case, picking a Republican was a concession of sorts to law-makers keen on exerting the party’s control on all the levers of government.
Powell was appointed to the board of governors in 2012 by Barack Obama in a pairing with Democrat Jeremy Stein to keep Republicans from blocking the Fed nominations. The entire Senate confirmation process has famously broken down. Republicans blocked the nomination of Nobel Prize-winning economist Peter Diamond in 2010 because he was a Democrat and too progressive in his thinking. The board has not had its full complement of seven members since 2013 and was consistently incomplete before that. Currently, only four of the seven positions are filled.
Trump broke with tradition by not reappointing a successful Fed chair on a nonpartisan basis. President Bill Clinton twice reappointed Republican Alan Greenspan and Obama reappointed Republican Ben Bernanke. But some traditions, to paraphrase, are made to be broken. The Fed might have been better off if Greenspan had not been reappointed so often; it is clear, in retrospect, that 18 years is too long for any one person to hold the top job.
Financial markets will be happy that two of the other leading and potentially disruptive candidates did not win the position. John Taylor, a distinguished academic economist, would be as dogmatic as something called the ‘Taylor rule’ might suggest. Kevin Warsh, who was the youngest ever Fed governor when appointed in 2006 at age 35, is a non-economist, having parlayed his law degree into a career on Wall Street. He was known as a ‘hard money hawk’, and is not especially interested in either flexibility or consensus.
Things could have turned out worse for financial markets where stability and continuity count for a lot, especially when things are going well. It remains to be seen who Trump will appoint to what is likely to be four empty seats, presuming Yellen leaves the board after her term as chair expires. Her term as governor runs until 2024 and some have urged her to stay, but no chair has ever stayed on as a simple governor. That is one tradition which is unlikely to be broken. Just how adept Powell, who has a reputation as a consensus-builder, will be in establishing his leadership over the board and the policy-making FOMC is an open question.
Darrell Delamaide is a writer and editor based in Washington.