US President Donald Trump has nominated the lawyer and former investment banker Jerome Powell to succeed Janet Yellen as the Chairman of the Federal Reserve. The candidate thus nominated by Trump now needs to be approved by the US Senate. Janet Yellen’s four-year term as Fed Chair expires on 3 February 2018.
What probably tilted the nomination in Powell’s favour was the fact that he is said to have closer links to the governing Republicans. With his choice, Trump will no doubt satisfy far more Republicans than if he had proposed that Yellen should be re-appointed. Another advantage over candidates that have hitherto mainly been active in the groves of academia was presumably that Powell has, since May 2012, been a member of the Fed’s Board of Governors and therefore has much experience in the procedures and decision-making processes at the world’s most important central bank. What may also have spoken in his favour is that he has been more open towards easing regulatory conditions for banks than Janet Yellen. He has, for instance, stated that the countless regulations should not be defined in detail from the “top down” right through to the lowest levels of management, but that a bank’s board should be flexible in how it implements regulations. Moreover, in April 2017 Powell went on record saying that some of the rules imposed in the wake of the financial crisis are too complex and possibly pose a strain and should therefore not necessarily be retained.
As a member of the Board of Governors, Powell is considered to be neutral in terms of monetary policy. Since joining the Board he has supported the cautious approach Janet Yellen has taken on the tack for increasing interest rates and on gradually reducing the Fed’s balance sheet. Thus, in the past he has never opposed a decision on interest rates. In this context, the markets have great confidence that Jerome Powell will largely continue Yellen’s monetary-policy thrust. In various speeches he has also indicated that he would continue the policy of gradually raising key lending rates as long as economic conditions permit. The markets believe his nomination will ensure continuity in monetary policy. There is at present no compelling reason to make any changes to monetary policy. Uncertainty might arise if there were a sudden surge in inflation and/or a sharp burst of economic growth, for example in the wake of a comprehensive tax reform.
President Trump no doubt wants a candidate who will go along with easing the regulatory regime while also keeping interest rates low. In the form of Jerome Powell he has now chosen a candidate who best fits that bill. To what extent Powell actually fulfils Trump’s hopes is unclear in the medium term. The consensus among many central bankers and financial market players is that an extremely expansionary monetary policy is only feasible against the backdrop of stricter financial market regulation, as the regulations counteract exaggerations. Should the regulatory regime now be eased, the ongoing accommodative monetary policy could threaten the stability of the financial markets. In a less stringently regulated scenario, the central banks might possibly have to return far quicker to a less expansionary or even restrictive monetary policy. In the final instance, many central bankers advocate using sector-specific regulations to counteract financial market risks and not to resort to changes to key lending rates with the related broad negative impact on the economy.
While Powell can exert strong influence as chairman of the FOMC, at the end of the day decisions are taken after intense economic discussions by the committee. Moreover, the further course of monetary policy also depends on whom the US President installs as Powell’s Vice Chairman.