Analysis Powell’s Federal Reserve: moderation and continuity


Manuel Balmaseda is Chief Economist at Cemex

Next February, Jerome H. Powell will become the sixteenth President of the United States Federal Reserve (Fed) replacing Janet Yellen. Once decided not to renew Yellen’s mandate, and to stamp its own signature to the Central Bank, President Trump has opted for a small change in the head of the institution, dismissing the candidates taken into consideration before and which could mean more radical changes. Powell, member of the Federal Reserve Board of Governors since 2012, was the less risky option and also a bet on the moderation, predictability and continuity of the monetary policy implemented by the Federal Reserve since the Great Recession. But, at the same time, Powell is a moderate republican, with a wide experience in the private sector, and unlike Janet Yellen, defender of easing the regulation in the financial sector, one of President Trump electoral promises.

In the last decades there have been two types of presidents of the Federal Reserve: dominant personalities, such as Paul Volcker and Alan Greenspan, whose opinions about inflation and the interest rates dominated the vision of the Central Banks since the decade of 1980 until the mid-2000s, and leaders who have based their strength in their capacity to combine consensus, as Ben Bernanke and Janet Yellen, who have “democratized” the process of decision making of the FED, reducing the specific weight of the President.

President Powell Federal Reserve, if it serves as a sample of its almost 40 years of career in the government, the legal sector and the investment bank, will be very similar to the one of its immediately predecessors. If there is something that characterizes Jerome Powell is its capacity to generate consensus, as president Bernake recognized Jerome Powell “is a team player”, who knows how to assume as his own decisions taken by a majority. Despite of being one of the driving forces of the reduction of monetary stimulus, in the 44 reunions of the Federal Reserve Council in which he has participated he has never voted against the major opinion.

Regarding the monetary policy, President Powell will maintain the approach consisting on a gradualist rise of interest rates initiated by the FED and slowly reduction of its balance, but he would be happy to keep a final balance a little bit higher. The continuity in the monetary policy is being welcomed by the market, which disliked the uncertainty that a more radical change in leadership and, therefore, in the direction of the Federal Reserve would mean. Likewise, gradualism in the rise of interests’ rates, which will make they stay low for a long period of time, is also seen with good eyes by Trump Administration as long as it fosters economic activity, keeping unemployment very low, and supports the record levels of the stock markets.

The sustained economic growth and the low unemployment rate in an environment of low inflationist pressures advocate for the defense of gradualism in the rise of taxes. Nevertheless, the risk that the excessive levels of liquidity and the low levels of interests are encouraging the creation of bubbles of assets to which the Federal Reserve will have to react in a given moment are arguments in favor of the gradually normalization of taxes, and specially, of the necessity of preserving the independence of the institution. In these circumstances, Powell, as Bernanke and Yellen previously did, will continue defending the independence of the Federal Reserve to answer in an objective and decisive way before a new economic crisis and before unexpected threats to financial stability.

Having said that, as opposed to his predecessors, Powell will be the first president of the FED since the late 70s who does not hold a Bachelor in Economics. That does not need to be an impediment to successfully direct the institution. He has been governor during the last five years, and thus, he has participated in the difficult and controversial decisions taken by the FED during this period. Moreover, the understanding of the economic situation and the impact of the economic policy on the activity have been decisive during his professional past, as much as supervisor and regulator of the financial sector in the Treasury of the United States as in the investment bank. In any case, it is probable he relatively relies more on the economists of the FED than his predecessors, even giving them more relevance than the one they already have. Additionally, Powell could be less dogmatic and have a more flexible attitude than Bernanke or Yellen, both PhD’s in Economics, regarding some important topics now and which produce an intense economic debate with very opposite opinions between the “economists”, as, for example, to what extent the current low unemployment rate would inexorably lead to a rise of inflation.

In short, the appointment of Jerome H. Powell as president of the Federal Reserve will be favorably perceived both by the institution and the market. Powell was the most continuist candidate, defender of maintaining the gradual approach of the monetary policy. Moreover, he not only knows perfectly the functioning of the FED and the plan to return to normality, but he also has great experience both in the private sector, especially in the investment bank, as in the public one, as regulator and supervisor of the financial sector. Finally, Powell is favorable to reducefinancial regulation, which makes him a very important ally for the republic administration in a key position.

Translation by María Maseda

#Economy #USA #política monetaria #Reserva Federal