Mr. Powell Goes To Washington

Tuesday, November 28, 2017

President Trump’s nominee for new Chair of the Federal Reserve, Jerome “Jay” Powell, appears on Capitol Hill today to take questions from senators about U.S. monetary policy in 2018 and beyond. Mr. Powell would succeed Janet Yellen, who will be retiring from the Fed as of the end of her term.

Usually, it is the Fed Chair’s prerogative to serve or not; presidents generally re-appoint those who’ve proved to be worthy custodians of the economy. Ms. Yellen, while officially retiring, would likely have kept on the post had it not become “in play” politically. Recall that Candidate Trump often cited (unproven) illegal and dishonest measures on behalf of the Fed taken to make the domestic economy appear to be performing better than it actually was. When Candidate Trump became President Trump, the rhetoric softened but the desire at the White House for regime change at the Fed remained.

Between Yellen and her predecessor Ben Bernanke, the Chair was able to fairly nimbly save the U.S. banking system from the brink of oblivion following the mortgage crash, which led to the Great Recession. Whether they took every step exactly perfectly is perhaps beside the point from an historic perspective; that we’re still not digging out from economic ruin as we had following the crash of 1929 — the Great Depression lasted, in some accounts, all the way until the U.S. entered World War II — is a testament to both Fed Chairs’ good work over the past decade.

So what will Jay Powell change once he takes the reins? That’s what senators aim to find out today. While he is widely expected to be confirmed on a bipartisan basis, he does appear on this crucial stage at what looks like an important fork in the road: will incremental interest rate hikes continue into next year and beyond, or is Powell’s objective to keep money cheaper longer so as to mitigate risk of bringing on a new economic recession? How does Powell expect a $1.4 trillion gap in the budget on behalf of corporate tax reform will sit with the U.S. economy over time?

If history is any gauge, and it should be, expect Powell to dodge and weave any pointed questions that might restrict his ability to move in any particular direction. We do not expect a fully articulated response from Powell on specific tax reform measures. He has already been quoted as saying the Fed “must retain flexibility” to adjust policy. Importantly, he also has said he expects interest rates to rise “somewhat further.”

Right now, analysts are pricing in two interest rate hikes for 2018, following another quarter-point hike when the Fed meets again in a couple weeks. Slowly, we’re seeing a cushion to the downside should economic realities require further cuts to interest rates in the future, but these days — with a strong jobs market, healthy corporate profits and stock market indexes at or near all-time highs — focus has rightly been on making sure the economy doesn’t heat up too quickly, thus causing interest rates to rise higher, faster. Those old enough to recall a time where Americans were paying 18% in interest on their home mortgage know exactly how painful something like this could become.

Powell also said the U.S. financial system is in better shape than it was a decade ago. Meaning, one may think, that Dodd-Frank regulatory measures have actually strengthened the financial sector, which we already know is the lifeblood of the domestic economy (and the global economy to a notable extent, as well). Which would point to Powell being in favor of keeping such measures on the books and not jettisoning them in favor of corporate profit potential. Perhaps the senators inquiring of Powell today can get some clarity on this? Stay tuned…

Mark Vickery
Senior Editor

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