The Federal Reserve, Mr. Powell and the Sound of Crickets

Jay Powell was named last week by President Trump as his nominee to be the next Fed Chairman once Janet Yellen finishes her term in February. The market’s reaction is exactly what we hoped for – quiet and peaceful like the sound of crickets on a summer evening!

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So why the sound of crickets?  First, Jay is likely to continue along the Fed’s current path of slowly and cautiously raising interest rates and reducing the size of the Federal Reserve’s balance sheet. And like Ms. Yellen, he is anticipated to act only as the economic data allows. Second, he is expected to work with the Fed’s new regulation tsar Randal Quarles (the Fed’s first vice-chair for financial supervision) to improve Dodd-Frank and Volcker Rule regulation. It is widely agreed we should keep the important safeguards that were put in place after the financial crisis, yet we should also modify some small bits that only add to costs or reduce profits without enhancing soundness or stability. 

We can also be comfortable with Mr. Powell’s nomination as he is a well know commodity. Jay has been on the Federal Reserve board since 2012 and has proven himself to be a centrist. He has worked in the Treasury under George H W Bush in the 1990s, has business experience as an executive in the Carlyle Group (the well know D.C. based investment firm) and even has the recommendation of Janet Yellen who noted his “seriousness of purpose” and said she was confident in her successor’s “deep commitment to carrying out the vital public mission of the Federal Reserve. I am committed to working with him to ensure a smooth transition”.

A good resume, extensive experience and a strong recommendation are a good start. Still, Mr. Powell will face some challenges that no other Chairman has faced. Under Mr. Powell’s watch the Federal Reserve will need to thread the needle by raising rates at just the right speed to avoid choking off our slow economic expansion, and will need to shrink the Fed’s balance sheet which is a lot like trying to turn an aircraft carrier in a small harbor – doable but very tricky (see our note here). 

We think Mr. Powell is up to the task and he can help prolong accommodative monetary policy and the slow and steady economic recovery. And we like the sound of crickets!

Source: The Financial Times, Bloomberg, The New York Times