Choosing Powell as Fed Chairman Is a Safe Gamble

By Greg Ip Features Dow Jones Newswires

President Donald Trump's selection of Federal Reserve governor Jerome Powell to succeed Janet Yellen as chairman of the central bank is something of a gamble. Unemployment is at a 16-year low, economic growth is picking up, the stock market is setting records, and yet he's changing leaders at the institution most responsible for all of that.

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As gambles go, it looks like a safe one. Of all the candidates Mr. Trump considered, Mr. Powell's temperament and views come closest to Ms. Yellen's. He believes the Fed should use all available tools -- bond buying, interest rates and verbal guidance -- to get unemployment down and keep inflation at its target of 2%. He backs the regulatory framework put in place under President Barack Obama, albeit with less strict implementation.

Mr. Powell's job will turning those beliefs into effective policy. Heading the Fed's policy committee is harder than being a member: It means not just voting but deciding what will be voted on, gathering support for it, then explaining it to the markets and the public.

If confirmed by the Senate, as is likely, he will at some point face second guessing from colleagues, Congress, and perhaps the mercurial man who picked him.

Mr. Powell, a lawyer and banker, would be the first Fed chair in three decades without a Ph.D. in economics. He served at the Treasury under George H.W. Bush in the early 1990s, pursued a career in investment banking and private equity, then landed at the Bipartisan Policy Center, a think tank.

Mr. Obama, whose staff appreciated Mr. Powell's work explaining to Republicans in Congress the dangers of not raising the debt ceiling, made him a Fed governor in 2012.

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Former colleagues describe Mr. Powell as open minded and meticulous, immersing himself in an issue until he understands it from all sides.

When he arrived in 2012, a former colleague recalls, he seemed to think the Fed's staff took him less seriously than governors who had economics Ph.D.s. He responded by studying twice as hard until he could comfortably probe and debate key economic questions with the doctoral-degree holders.

Having served with two accomplished professors of macroeconomics -- Ms. Yellen and her predecessor, Ben Bernanke -- he has ended up seeing the world as they do.

In a 2015 interview, he was asked if the Fed's unconventional monetary stimulus was actually holding back growth. He answered, "I don't understand what model of the economy would require substantially higher interest rates right now, which would mean a vastly higher dollar, higher mortgage costs and higher costs for consumers, and probably lower asset prices."

Asked in the interview if the Fed's low interest rates had encouraged Congress to run up more debt, he noted the central bank's mandate is full employment and price stability. "We're not supposed to sacrifice those two goals [to] punish Congress for not doing the right fiscal policy," he said.

To a modern central banker those views are utterly mainstream and unremarkable, yet they aren't shared by two competing candidates to succeed Ms. Yellen, former Fed governor Kevin Warsh and Stanford University economist John Taylor.

Nonetheless, the 64-year-old Mr. Powell will face challenges that vex even trained economists. The first is the same one Ms. Yellen is now struggling with: deciding how far to raise interest rates when the economy has no slack but inflation is falling further below the central bank's 2% target.

Evaluating whether current models of inflation still work demands a thorough knowledge of economic theory and evidence, for which Mr. Powell would have to rely more on others than have his predecessors.

Another front is the upward march of stock and property prices. More than Ms. Yellen, Mr. Powell worries that a monetary policy that succeeds at getting inflation back up may also stoke an asset bubble whose ultimate demise brings on a recession, though unlike some Fed officials he hasn't argued this is a reason to further tighten policy.

Faced with such situations, Mr. Powell by temperament and training will likely do as his predecessors have: weigh the potential consequences of alternative policies and choose the one less likely to end in disaster. For now, that means sticking to a gradual course of raising interest rates.

Another challenge is to establish his own leadership. From 1979 to 2006 Paul Volcker and Alan Greenspan enjoyed the reflexive deference of most of their colleagues through sheer force of personality. That deference ended with the financial crisis.

Mr. Bernanke and Ms. Yellen have been much more consensus driven; Mr. Powell will likely be even more so. But at times, especially during crises, the right policy will be so contentious that the chairman must fight for every vote while sidelining dissidents.

Finally, he faces a treacherous political landscape. Monetary policy is no longer nonpartisan. Republicans regularly disparaged Mr. Bernanke and Ms. Yellen and many think Mr. Powell isn't much better.

Central banks embody the technocratic expertise that many of Mr. Trump's populist supporters despise. Having discarded the tradition that presidents reappoint the incumbent Fed chairman regardless of party, Mr. Trump may also discard the practice of keeping criticism of the Fed to himself.

Past Fed chiefs have needed political skills to head off threats to their leadership and the central bank. On that, Mr. Powell is untested. Already, Mr. Trump faces pressure to nominate conservative skeptics of the Fed's easy money policies to fill its board vacancies, in particular as vice chairman, which would narrow Mr. Powell's room to maneuver from the start.

Ms. Yellen could be an ally of Mr. Powell's on that front. Though her term as chairwoman ends next February, she could stay on as a governor until that term ends in 2024. She hasn't commented on the possibility.

"This is asking a lot of Janet Yellen," wrote Josh Bivens of the left-leaning Economic Policy Institute in a commentary. "She is likely to lose a job she has done extraordinarily well for no good reason at all....But her continued presence as a key decision maker at the Fed would be a huge win for smart economic policy-making."

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

November 02, 2017 16:21 ET (20:21 GMT)