Jerome Powell's Candidacy Offers Continuity in Fed Policy

By David Harrison Features Dow Jones Newswires

President Donald Trump repeatedly praised Federal Reserve Chairwoman Janet Yellen this year, but last week signaled he was likely to offer her job to someone else.

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"You'd like to make your own mark," he told an interviewer.

In Jerome Powell, Mr. Trump picked a Republican who has consistently supported Ms. Yellen on policy and as Fed chief would likely keep the central bank on its current path.

Mr. Powell would "largely represent continuity," said Jonathan Wright, a former Fed economist now at Johns Hopkins University. His views "are all very consistent with the current consensus."

In his five years on the central bank's board of governors, Mr. Powell has never dissented on a monetary or regulatory policy decision.

He has supported the Fed's current course of slowly reversing its postcrisis stimulus efforts amid a strengthening economy. But he would be willing to use such measures again in a severe downturn, according to a review of his public remarks and interviews with people who have followed his career.

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He also has largely endorsed the Fed's efforts since the financial crisis to strengthen regulations to make the banking system safer, while making clear in public remarks that he wants to adjust them.

And although Mr. Powell previously served in a Republican administration and donated money to GOP candidates before joining the Fed, he has argued against some GOP lawmakers' efforts to subject the central bank to greater congressional scrutiny.

Conservative critics of the Fed had urged Mr. Trump to nominate a chairman more likely to break with the recent past. Instead, he opted for more of the same.

If confirmed by the Senate, Mr. Powell, a lawyer, would be the first Fed chairman in three decades without a Ph.D. in economics. But several Fed officials have said that being an academic economist is less important than being willing to learn.

Former Minneapolis Fed President Narayana Kocherlakota, who served alongside Mr. Powell, said his pragmatic approach would serve him well as chairman.

"As an academic, we like the argumentation a little bit. That was not Jay Powell," said Mr. Kocherlakota, who now teaches at the University of Rochester. "He's about figuring out how can we take what's being said and moving it in a positive direction. He's very good at staying on that at all times."

Other former colleagues said Mr. Powell threw himself into his job at the Fed, studying up on economic theory and research ahead of speeches and policy meetings.

On monetary policy, he has supported gradually raising short-term interest rates and shrinking the portfolio of bonds the Fed purchased to boost the economy during and after the recession.

Despite some early misgivings, Mr. Powell has come to embrace the view -- forcefully articulated by Ms. Yellen and her predecessor, Ben Bernanke -- that the central bank should be prepared to take aggressive action to fight a recession.

The Fed in 2008 launched the first of three rounds of bond purchases aimed at stabilizing markets and lowering long-term interest rates. The move was untested and drew criticism from some economists and lawmakers that the Fed was risking a surge in inflation.

Barely a few months after joining the Fed in May 2012, Mr. Powell privately told his colleagues that he was worried the bond-buying would be ineffective and could roil markets. In his memoir, "The Courage to Act," Mr. Bernanke recounts how Mr. Powell had quietly urged him to find an "off ramp" allowing the Fed to wind down the programs.

In the end, the economy and the labor market continued to strengthen while inflation remained under control. Mr. Powell conceded he had been wrong.

"Let's let the data speak: The evidence so far is clear that the benefits of these policies have been substantial and that the risks have not materialized," he said in a speech in February 2015.

The Fed should be prepared to employ bond purchases again to support the economy if it is in dire shape and doesn't respond to interest-rate cuts, Mr. Powell said in February this year.

They "should be used only in extraordinary circumstances," he said. "I would want to be in a position where the [Fed] is in a place to respond to any downturn that might happen in a significant way."

Former Fed governor Laurence Meyer said Mr. Powell's experience with unconventional policy tools could reassure markets and households. The eight-year-old economic expansion won't last forever, he said. At some point, the central bank will have to decide how to react when interest rates have fallen near zero again and can't go any lower.

"He's been there during the implementation of the nonconventional policies and involved in discussions of alternative options and strategy when confronted with the zero-bound," Mr. Meyer said. "This is important because we will be there again."

On regulation, Mr. Powell has largely endorsed the Fed's efforts to strengthen bank supervision following the financial crisis. He backs requiring banks to hold more capital and liquid assets to protect them from shocks. He also supports the Fed's efforts to force large banks to come up with a resolution plan should they collapse.

In testimony before the Senate Banking Committee this summer, he said the rules adopted after the financial crisis helped make the financial system "substantially stronger and more stable." Mr. Trump, by contrast, has vowed to scrap many postcrisis rules, calling the 2010 Dodd-Frank law "a disaster."

But Mr. Powell also has highlighted areas where postcrisis rules could be eased. He has suggested softening the Volcker rule, which prevents banks from making overly risky bets with their own money. He has recommended making annual bank stress tests less burdensome. And he has proposed paring back requirements on bank boards of directors and managers, saying the Fed wanted to avoid imposing "an ever-increasing checklist" on bankers.

"I don't think what we're talking about here amounts to broad deregulation," he told the Senate Banking Committee this summer. "I think it amounts to making regulation more efficient, protecting the important gains we've made" since the financial crisis.

Mr. Powell spent three years in George H.W. Bush's Treasury Department, first as assistant secretary and then as undersecretary for financial institutions, and he saw firsthand how regulators can protect consumers from crumbling financial institutions. Shortly after he joined the administration in 1990, the department had to deal with a wave of more than 1,000 bank failures, most prominently the Bank of New England, at the time one of the region's largest banks, he recounted in a speech.

One Sunday morning in January 1991, Mr. Powell joined other regulators in a conference room to hash out how to deal with the bank's collapse. To prevent a bank run, which could destabilize the entire financial system, the group decided to guarantee all deposits, no matter how large they were.

Later that year, Mr. Powell helped handle the government's response to Salomon Brothers, an investment bank found to have rigged bids in Treasury auctions. The firm eventually settled, top executives resigned, and regulators allowed it to stay open.

"He learned a great deal about the classic problem of financial institutions. On the one hand trying to protect the market from systemic uncertainty and at the same time trying not to encourage more behavior problems," said Robert Glauber, a former Treasury undersecretary who was Mr. Powell's boss when he first came to the agency. "You develop the sense of where to strike that balance from experience, and Jay's had a great deal of it."

In a 2013 speech, Mr. Powell said he had come to understand the importance of making banks more resilient. If they do fail, however, there should be a process in place to limit the risk of a banking crisis or of a government bailout, he said.

"The market needs to believe -- and it needs to be the case -- that every private financial institution can fail and be resolved under our laws without imposing undue costs on society," he said.

Mr. Powell could clash with Republicans in the White House and on Capitol Hill over the question of the central bank's discretion.

He has criticized GOP-sponsored House bills that would require the Government Accountability Office to evaluate the Fed's monetary policy and would direct Fed officials to adopt a mathematical rule to guide their policy.

The legislation assumes the Fed acted inappropriately and with too much secrecy in its response to the financial crisis, Mr. Powell said in a February 2015 speech.

"The Fed's actions were effective, necessary, appropriate, and very much in keeping with the traditional role of the Fed and other central banks, " he said. "Most importantly, I believe these proposals fail to anticipate the significant costs and risks of subjecting monetary policy to political pressure and constraining the Fed's ability to carry out its traditional role of providing liquidity in a crisis."

If Mr. Powell, as chairman, resists political efforts to bring the Fed under closer congressional supervision, he would be following in the footsteps of his predecessors, regardless of their party affiliation, Mr. Meyer said.

Mr. Powell might be able to develop bonds with Mr. Trump and with Republican lawmakers to ease that task, said Mr. Meyer, .

"This is a core value of every chairman: that the chairman is responsible for guarding the independence of the Fed," Mr. Meyer said. "You want somebody who is skillful at building personal relationships and reducing the vulnerability of the Fed to political interference. I think Powell would be very effective here."

Write to David Harrison at david.harrison@wsj.com

(END) Dow Jones Newswires

November 01, 2017 18:02 ET (22:02 GMT)