Trump Policy Shock: He Does Something Vaguely Sensible

There was no reason to change the chairman of the US Federal Reserve, the central bank of the world’s largest economy. Janet Yellen has successfully communicated the need to start raising interest rates to the financial markets while continuing to withdraw its extraordinary monetary stimulus.

She has also been a safe pair of hands, maintaining stability and investors’ confidence even as rumours about her dismissal have run through the media since Donald Trump’s election in November 2016.

But none of this matters to Trump who made a big deal during his election campaign of the need for a new head of the central bank. Trump hammered Yellen in the final months of the campaign, accusing her of keeping the benchmark rate “artificially low” to help fellow Democrats.

His final campaign video included images of the Fed and Yellen, casting her as part of the “political establishment” that has “bled our country dry”.

Powell has a reputation as an effective consensus builder

Judging by some of his other federal appointments and signals given by the man himself, many observers were braced for the appointment of someone who would represent a break with the Bernanke/Yellen era and seek to style himself more on the model of Alan Greenspan model, with tighter monetary policy and less intervention.

Former Fed governor Kevin Warsh filled that job description as did respected Stanford economist John Taylor who has a rule that draws on the unemployment rate named after him, and who has argued that interest rates should be considerably less accommodative than they had been since the financial crisis.

With Jay Powell the president has picked someone who is likely to continue on the path set by Yellen and her processor Ben Bernanke and pursue a policy of gentle gradual tightening of interest rates.

Rather than an economist — a first for the Fed since the 1970s — Powell is a lawyer and former partner at private equity firm Carlyle. US financial markets were broadly unmoved by the decision indicating that they are lukewarm about hopes of a radical loosening of financial regulation imposed since the global financial crisis.

As economists at one investment bank put it, Powell has a reputation as an effective consensus builder — an important characteristic for the Fed chair.

 

the financial markets know that Powell is Trump’s man

Trump emphasised the importance of a strong chair, but also one who is able to build consensus and work well with other branches of government. Indeed, it can be seen as a rebuttal to those in Congress who call for more oversight of the Fed.

But it is not over yet. There are still three openings on the Fed’s Board, presumably to be filled in 2018, plus four regional president rotations that could result in a somewhat more hawkish Committee.

And there is still the question of replacing Stanley Fischer, who stood down unexpectedly as the vice-chair. By the time the economic cycle turns through its next boom and bust, we may be looking at a different central bank.

And the journey so far has not been without its Trump-esque ripples. National Economic Council head Gary Cohn was considered a favourite for the post, but his chances diminished sharply after he distanced himself from Trump's equivocal remarks about white supremacist violence in Virginia.

But perhaps the major casualty is Powell himself. The appointment of the central bank is a political decision but by drawing up one of his Apprentice-style shortlists and face-offs, he ensured that the financial markets know that Powell is Trump’s man. That will not make his job easier when it comes to making difficult decisions. Or it may cost him his job.

But for now, the apparent common-sense of the decision has left everyone confused.

More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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