By Joseph Lawler
Jerome Powell won’t run the Federal Reserve too differently than Janet Yellen would have. But, because he is not her and was not President Barack Obama’s nominee, he will start a four-year term as Fed chairman Monday while she begins as a think tanker at the Brookings Institution.
Because he’s not Yellen, Powell not only has the endorsement of President Trump, but also the support of most Republican senators. That support could help him through difficult economic scenarios in the years ahead.
Otherwise, though, he’s mostly expected to carry out policy as Yellen would have.
In fact, Yellen is leaving Powell a Fed that is largely on autopilot for the next year or so, having charted its course away from the emergency crisis-era measures that former Chairman Ben Bernanke put in place.
Over this year and next, the Fed is expected to continue gradually raising interest rates back toward more “normal” levels. Meanwhile, it will allow its swollen balance sheet to shrink month by month, by not rolling over some of the proceeds from its massive bond holdings. Those plans were put into place without major disruptions by Yellen.
“All of that gives new Chair Powell some breathing room to focus on intermediate and long-term monetary policy strategy,” said Peter Ireland, an economics professor at Boston College.
Not that Powell and Yellen are exactly the same. On balance, Powell might be a little bit closer to Hill Republicans on monetary policy, leaning slightly more “hawkish” than Yellen — that is, being slightly more willing to tighten the money supply to avoid rising inflation. Recently released transcripts from monetary policy meetings in 2012, Powell’s first year, suggest that he was more skeptical of a new round of stimulus.
But for the next few months, the biggest issue won’t be management of interest rate decisions, Ireland said. Instead, the bigger task facing Powell likely will be managing a budding debate over whether to change the Fed’s 2 percent inflation target to allow for more flexibility in the case of another crisis.
The second question regarding Powell’s chairmanship likely will be how he would respond to another recession, especially one that again forced the Fed to lower its interest rate target all the way to zero, Ireland said.
“There’s about a 20 percent chance of a recession hitting any year now,” said Joseph Gagnon, a fellow at the Peterson Institute for International Economics and former Fed staffer, meaning that there’s better-than-even odds that Powell is confronted with a recession during his term.
Powell’s biggest challenge, then, is planning now to avoid any serious policy mistakes that could lead to a recession or leave the Fed badly positioned to control the money supply if one hit.
Monetary policy is only one half of the Fed’s responsibilities. The other half, which many congressional Republicans are likely more interested in, is management of the Fed’s regulation and supervision of banks.
Powell voted with Yellen on regulatory and supervision matters during their time together. And his public statements, including during his confirmation hearing, made it clear that he supports the basic framework for regulation put in place by the 2010 Dodd-Frank financial reform law and other post-crisis rules.
He has given no signs that he will substantially repeal Dodd-Frank through regulation, as conservatives in Congress and President Trump have called for.
Instead, he has called for tweaks to lower regulatory burdens on small and mid-sized banks that aren’t thought to improve the safety of the financial system, and for revising other rules that might not be working as planned — all initiatives that Yellen also supported, noted Phillip Swagel, a professor at the Maryland School of Public Policy and former George W. Bush Treasury official.
“I would expect Chair Powell to continue to test this balance, the balancing act between improved safety and cost,” Swagel said.
The Powell era, however, will include another key Trump appointee, Randal Quarles, serving as the vice chairman for supervision, a position with oversight of regulatory affairs that was never filled under Obama.
Quarles, a former private equity investor and George W. Bush Treasury official, is likely to push for changes to several key features of the post-crisis rules, said Paul Atkins, chief executive of the financial services consultancy Patomak Global Partners, including new capital requirements for banks, internationally coordinated rules, and the Volcker Rule.
“You’ll see a lot of things come about that will be markedly different from the previous regime,” Atkins said.
The Volcker Rule limits banks’ ability to speculate for profit with insured deposits. Banks have criticized the rule on the grounds that it could limit their ability to provide liquidity during a crisis and provides few benefits in terms of safety.
Quarles took office in October. He will be one of just three members of the Fed’s board of governors to start Powell’s term, with the third being Obama appointee Lael Brainard, a PhD economist who worked in the Obama and Clinton administrations.