Trump’s Fed Choice: Continuity - Context

Governor Powell has been a member of the FOMC since 2012. He helped to design the programs that the Fed has put in place to reduce the size of the balance sheet;, he’s been a vocal proponent of the plan to raise interest rates gradually;, and so there is no reason to expect a dramatic change in policy with his appointment. Certainly the market has taken comfort from that, given that the current policy mix seems to be working quite well.

One area where he does seem to be a little bit more focused than perhaps she has been has been on the impact of financial markets on the economy and financial conditions in general. He seems a little bit more interested in making sure, or a little bit more concerned about the idea that bubbles could emerge that would be disruptive for the economy. He may be a little bit quicker to respond to signs that financial markets are getting over their skis than Chair Yellen would have been.

Governor Powell’s background is different than that of recent Fed chairs, most notably in that he is not an academic PhD economist. He is a lawyer by training and his professional experience is largely in private equity, although he also did work in the Treasury Department. That makes his appointment a little bit unusual. That said, he has been on the board for the last five years, and so he’s certainly well- versed in monetary economics and experienced in it. And so I don’t think that the markets should be overly concerned that he doesn’t have that sort of academic background.

One aspect of this transition that I think the market may be overlooking to a degree is that it isn’t just the chairman’s seat that is going to change here. There are currently several vacancies on the Board of Governors, and indeed there are likely to be more. The President will have to appoint people to fill those seats to keep the board functioning.

Under normal circumstances, or at least under recent circumstances, the members of the Board of Governors have not been that prominent publicly, because the chair of the committee has had such a dominant voice. But because Governor Powell, and presumably future Chair Powell, doesn’t have the same sort of academic grounding that they had, he may find himself more reliant on other members of the committee. And so the appointment of a new Vice Chair, for example, or the appointment of other members of the Board of Governors, will take on increased importance. And the clock is ticking, because, if we assume that Chair Yellen leaves the Fed when her term expires in early February, at least one other new member of the Board will need to be appointed by that time in order to keep the Committee functioning.

The appointment of Governor Powell as Chair doesn’t change our outlook for the near- term. He is likely to pursue policy continuity, which for us means one more rate -hike this year, and two additional rate- hikes in the first half of next year. We aren’t altering our forecasts in any way;, we expect Fed policy to remain as it would have under Chair Yellen for the reasonable investment horizon, if you will.

The thing for investors to remember here is that Fed chairs don’t prove their worth in normal circumstances. In normal circumstances, whether you’re a PhD economist, whether you’re an experienced market professional, it doesn’t matter that much. The job of a Fed Chair is to be a faithful steward and allow the economy to play itself out, to move policy gradually, and that’s well and good. Fed Chairs prove their mettle and prove their worth in times of crisis and at turning points in the cycle, and it isn’t until we get to one of those points that we’ll really know whether today’s appointment was a good one or not.