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E*TRADE Securities2

11/09/17

Market observers spend countless hours analyzing Fed-speak. Statements, meeting minutes, public comments from officials, whatever. The words delivered by Fed officials get dissected every which way for clues about future monetary policy. Needless to say, when a new Fed chair is nominated, pundits tend to double down on their scrutiny.

Consensus seems to be that President Trump’s nomination of Fed Governor Jerome (Jay) Powell was a safe choice, and a natural extension of Janet Yellen’s chairmanship, albeit from the other side of the political aisle.

So what can we expect from Powell in the years to come?  To help shed some light, below is a quick Who What Where When Why on our new Fed chair.

Who is Powell?

A lawyer by trade, Powell does not have an advanced economics degree. But that doesn’t mean he isn’t well versed in the economy, from several different angles. On Wall Street he logged time in investment banking and private equity. Prior to taking office as one of the seven members of the Board of Governors of the Federal Reserve System in May 2012, Powell’s public service also included tenures as Assistant Secretary and Undersecretary of the Treasury for Domestic Finance under President George H.W. Bush. 

What's his likely approach?

Continuity seems to be a good way to look at a Powell-led Fed. “The economy is as close to our assigned goals as it has been for many years,” he said in June. If it continues on this track, “I would view it as appropriate to continue to gradually raise rates.”1

That likely means continuing to raise the benchmark fed funds rate in 0.25% steps through 2020. Officials have penciled in one more rate increase for 2017, which would fulfill their goal of three hikes for 2017. Three hikes have been signaled for 2018, but in September officials suggested slowing the pace to two in 2019 and one in 2020.2

Fed "dot plot"

Source: Federal Reserve*

Where could he differ?

Some believe Powell has the potential to stray from Yellen’s doctrine on banking regulations. Both appear to be in favor of loosening some of the restrictions enacted since the financial crisis, though pundits view Powell as having been a bit more vocal on the issue than Yellen in the past.

Powell has said he’s in favor of easing the regulatory burdens on small banks. He’s also indicated an interest in modifying the Volcker rule, which restricts big banks’ ability to make higher-risk trades with their own money.3

When will he be confirmed?

The Senate Banking Committee will get a crack at Powell before confirmation. The chairman of that committee indicated his goal was to have Powell confirmed by year-end. As he is already on the Fed Board of Governors, nominated to that post by a Democratic President Obama, support from both parties seems likely. 

Why is the Fed chair important?

It’s a pretty big deal. The Fed chair heads a seven-member board, 12 regional banks, and roughly 2,700 employees that help guide the country’s interest rates, bank regulations, and currency. The Fed also helps manage the nation’s debt.

Of immediate concern in the current economy is how best to continue to normalize monetary policy following the financial crisis. In particular, Powell et al. need to determine how far—and how fast—to raise interest rates in an economy without much slack in the labor market and inflation that remains below the Fed’s 2% target.

How did the market respond?

It wasn’t surprised. And stocks barely moved on the news. There’s some risk to replacing Yellen, who has been at the helm amid a growing economy, low unemployment, and a record-breaking stock market. But as far as successors go, Powell seems to be a natural fit, in that he’s been firmly on board with the Fed’s current path and he seems to champion lighter-touch regulations. He’s something of a known quantity that gives the market some certainty about what to expect.

Bottom line: While the Trump Administration has been nothing if not…surprising, most pundits will tell you this appointment is anything but. It is a middle-of-the-road and expected change, and one that is unlikely to change one’s goals or investment outlook.  

 

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* Note: Shaded circles indicate the value (rounded to the nearest 1/8 percentage point) of an individual Federal Open Market Committee participant’s judgment of the midpoint of the appropriate target range for the fed funds rate or the appropriate target level for the fed funds rate at the end of the specified calendar year or over the longer run.

 

1. Davidson, Kate; Nicholas, Peter; and Harrison, David. “Trump to Tap Jerome Powell as Next Fed Chairman,” The Wall Street Journal, 1 Nov. 2017. https://www.wsj.com/articles/trump-to-tap-feds-jerome-powell-for-fed-chairman-1509568166

2. Minutes of the Federal Open Market Committee, September 19–20, 2017. https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20170920.pdf

3. Hamilton, Jesse and Schmidt, Robert. “Under Powell, Wall Street Expects Steady Wins on Regulation,” Bloomberg, 3 Nov. 2017. https://www.bloomberg.com/news/articles/2017-11-03/under-powell-wall-street-can-expect-steady-wins-on-regulation