Daily Management Review

Does Powell's nomination mean the Fed supervised by Donald Trump?


Jerome Powell will become the new head of the Federal Reserve System (FRS) of the US. President of the United States Donald Trump promised to surprise everyone with his choice, but apparently he decided not to risk on such an important issue.

Federalreserve via flickr
Federalreserve via flickr
The US President announced his decision in the Rose Garden of the White House. "Powell has earned the respect of his colleagues in the Fed ... he will be able to find consensus and guide the economy, solving complex problems," he said.

The presidential nominee has yet to be approved by the Senate of the US Congress. Trump expressed confidence that the senators would not delay this process.

Analysts also do not expect problems with this. Powell is still a good politician, who skillfully finds compromises, so his candidacy has good chances for approval in the Senate.

67-year-old Powell is considered a pragmatist and a centrist in matters of monetary policy and. A Republican by party affiliation and a lawyer by education, Powell worked in the Ministry of Finance, becoming in 1992 the Deputy Minister of Finance. He supervised financial institutions and was responsible for treasury bills in the market. Later he worked as a lawyer in the Investment Bank of New York, and in 1997-2005 he was a partner in The Carlyle Group. In 2012, he was appointed to the board of directors of the Fed.

His nomination is not expected to bring drastic changes in the policy of the American financial regulator. Powell is one of the main adherents of the "soft" monetary policy and, in all likelihood, he will continue to operate within the current plan.

His predecessor, Janet Yellen, headed one of the world's most influential financial departments. She will go down in history as the first woman to chair the US Federal Reserve and the first for few decades the Fed’s head, who was not invited to remain in office for another four years.

The differences between Yellen and Trump about the US monetary policy arose at the stage of the election campaign. Trump openly attacked Yellen, calling her "an adherent of low interest rates," and in July officially announced that he was considering several candidates who could replace her in that position. Yellen's term expires in February 2018.

On the other hand, Powell supports an accurate approach to market regulation. Some critics believe that it is possible to mitigate a number of measures that were introduced after the financial crisis. "If the Senate approves Trump's choice, investors will get a new head that has a positive view on the current economic situation and believes that inflation will grow to 2%, and the unemployment rate will continue to fall.

As noted by Deutsche Welle, Donald Trump turned election of the new chairman of the Fed into a real show. For several months, the president and his entourage called one name after another. Trump's predecessors tried to avoid such a public search, sending clear signals to investors. 

Jerome Powell entered the shortlist of candidates for the post of head of the Federal Reserve this summer. However, at that time analysts and Western media still relied heavily on the director of the National Economic Council of the United States and the former top manager of the investment bank Goldman Sachs Gary Cohn. Among the leaders of the candidate race was the 47-year-old Kevin Warsh, who is known as the youngest member in history (the FRS member in 2006-2011).

Having received humanitarian and legal education, Powell is not a professional economist, like his predecessors Yellen and Ben Bernanke, and does not have deep knowledge in the field of macroeconomics and monetary regulation. Lack of a firm position on macroeconomic issues and his political practicality may expose Powell to political influence, the more so Trump has repeatedly expressed the view that the rate of the Fed is too low.

Under Yellen, the FRS made several decisions over the course of 2017 to further raise the key rate to stop the "lasting decade of emergency support for the economy". The Fed also began to develop plans to reduce the huge portfolio of treasury bills and mortgage-backed securities that are on the balance sheet of the central bank after the financial crisis.

In fact, the market has long been raising the interest rate of the Fed, and given the low levels this indicator has been for many years, a further rate increase within reasonable limits will positively affect most sectors of the American economy and the market as a whole, I am sure Pchelintsev.

The conflict between raising inflation to the target and curbing the asset price bubble is the biggest problem, says Paul Mortimer-Lee, North America's chief economist at BNP Paribas in New York. "Some say that monetary policy is too rigid, others say that it is too weak. This is a terrible dilemma, "he told Bloomberg.

After the collapse of Lehman Brothers and the global financial crisis in 2008, the US Federal Reserve took radical measures: the interest rate was radically reduced, about $ 4 trillion was spent on buying government bonds. It's time to end the era of soft monetary policy for the US central bank, however

if the Fed is wrong and will raise rates and reduce the balance too quickly, it can push the economy to recession, which will negatively affect the positions of Republicans and Trump personally. If movements are too slow, there is a risk of uncontrolled acceleration of inflation, which will lead to the need for a series of sharp increases in the key rate to deal with rising prices.

"The global economy has never been in better shape, but nowadays becoming a central banker is a very ungrateful task," notes Torsten Slock, chief international economist at Deutsche Bank in New York.

Monetary policy can lead to conflicts between Powell and Congress. A number of officials believe in the application of the Taylor rule, which describes interaction of raising rates, inflation and GDP growth. Theoretically, it makes the policy of the Federal Reserve more transparent. Powell fully disagrees with this, since from his point of view, the strategic planning of the Fed's actions is much more complicated and confusing than a mathematical formula can describe.

In the third quarter, US GDP grew by 3%, the index of business activity in industry in October was 58.7 points, the unemployment rate - 4.2%, inflation fell to 1.6%.

Everything suggests that the US Federal Reserve, having fully achieved its targets, is likely to continue the old policy. The rate will be raised not only in December, but will also continue to grow in 2018 as well. Gradually, it will approach 2% per annum, experts believe. The FRS program, designed to reduce the balance of the system, will also be consistently implemented, and if the inflation statistics exceed the expected, additional adjustments may be made to this program.

source: dw.de, bloomberg.com