Welcome to the Powell Fed
WASHIINGTON -- It will be Powell's Fed.
Assuming he's confirmed by the Senate, Jerome ("Jay") Powell will become the 16th chairman of the Federal Reserve Board in early 2018. Almost by definition, he instantly becomes the most important economic policy-maker in the world. But who is he? Outside economic circles, hardly anyone knows.
So let's catch up.
Powell would be the first non-economist to head the Fed since the disastrous appointment of G. William Miller by President Carter in 1978. But parallels are strained. Even many economists don't believe academic credentials are essential.
"Setting monetary policy [interest rates and credit conditions] in most economic environments is pretty straightforward, and I don't think a Ph.D. from an Ivy League school is needed," says economist Mark Zandi of Moody's Analytics, who has a Ph.D. from the University of Pennsylvania.
More to the point, Powell, a lawyer by training, has spent most of his life steeped in financial markets. A Republican, he served as a top Treasury Department official in the administration of George H.W. Bush. After that, he joined the Carlyle Group, a major private equity firm, from 1997 to 2005. President Obama nominated him for a spot on the Fed Board of Governors, which he filled in 2012.
The Fed's immediate focus is how to sustain the economic recovery without having low interest rates fuel inflation or financial speculation. To defeat this problem, the Fed has been gradually raising overnight interest rates since late 2015. Rates have gone from about zero to their current range of 1 percent to 1.25 percent. In addition, the Fed is reducing its massive holdings of bonds. This, too, would nudge rates higher.
So far, the transition to higher interest rates -- presided over by Janet Yellen, the Fed's present chair -- has gone smoothly. Powell has consistently backed Yellen, suggesting much continuity.
Still, there are no guarantees. Interest-rate increases could backfire. Again, here's Zandi.
"Unemployment seems destined to fall below 4 percent, creating inflationary wage and price pressures," he says. "Investors expect interest rates to rise -- but not nearly as much as Fed members do, and I suspect the Fed will be right. Guiding investors' interest-rate expectations higher without triggering a major sell-off in global stock, bond, and commercial real estate markets will be tricky."