Traders are likely to breathe a sigh of relief if Jerome Powell, the Fed governor under consideration by President Donald Trump to become chairman of the central bank, gets nominated.
Powell is now the favorite in betting markets amid published reports he’s in the lead to get Trump to nominate him. Trump himself called Powell and John Taylor “very talented people,” though in an interview with Fox Business Network, he added that he also liked the current chair, Janet Yellen.
Wall Street likes Powell for his reputation of being dovish on monetary policy, at least for a Republican.
There’s good reason for that. Powell has never dissented from any decision since becoming governor in May 2012. Put another way — he’s agreed to lift interest rates four times in five years.
“Powell and Yellen would be competent continuity,” said Paul Donovan, global chief economist of UBS’s chief investment office.
“We suspect that a Powell-led Fed would not be a large step away from a Yellen-led Fed and would thus represent policy continuity for markets,” echoed Peter Hooper, chief economist at Deutsche Bank.
In a speech about how emerging markets would react to the Fed normalization, Powell certainly didn’t sound like aggressive rate hikes were in store.
“One factor that favors easier adjustment in [emerging-market economies] is that U.S. monetary policy normalization has been and should continue to be gradual, as long as the U.S. economy evolves roughly as expected,” Powell told a banking conference this month.
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That said, there’s reason for traders not to be too ebullient. Former Fed Chairman Ben Bernanke, in his memoir, said Powell’s reticence contributed to the events now called the “taper tantrum,” when bond yields surged in the wake of a suggestion (from Bernanke) that bond purchases would slow.
Powell was one of the “three amigos” Bernanke feared might end support for bond purchases. “As Jay told me, we needed an ‘off ramp,’” Bernanke recounted in “The Courage to Act.”
Powell himself has made clear he’s a proponent of the “off ramp” the Fed has chosen as it’s begun to reduce the size of its $4.5 trillion balance sheet. In a speech in June, Powell also imagined the Fed balance sheet probably wouldn’t get below $2.4 trillion, and possibly not even $2.9 trillion.
Stylistically, Bernanke called Powell a “moderate and a consensus builder,” and few seem to disagree.
That was on display at his time at the Bipartisan Policy Center in 2011, when Powell worked to get Congress to lift the debt ceiling.
“Jay’s detailed analysis and highly effective presentation of the day-by-day cash flows of the federal government was instrumental in last year’s efforts to resolve the debt ceiling crisis,” said Jason Grumet, the president of the BPC, after Powell’s confirmation.
Beyond monetary policy, Powell takes a far more laissez-faire stance on regulation than, say, Sen. Elizabeth Warren. That should leave him in a good position to work with the new vice chairman for supervision, Randal Quarles, who like Powell once worked at The Carlyle Group.
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Consider the response to the Salomon Brothers Treasury bond scandal, when a trader was found submitting false bids. Powell was under secretary of the Treasury for finance under the elder President Bush of the time.
“After the dust settled, we had to grapple with the wider implications of the scandal for the market itself and particularly the role of regulatory oversight,” Powell recounted in a speech this year.
The federal government did throw the book at Salomon — levying what at the time was the largest-ever fine, barring the firm from dealing in government securities, and then only reducing the sanction when Warren Buffett stepped in to become chairman.
In fact, Powell was involved in the negotiations that brought Buffett into the firm. An article in Fortune recounts a conversation between Powell and Buffett, in which Powell spelled out that the ban on Salomon’s bidding for its own account would be lifted in exchange for Buffett’s involvement, while the ban for bidding on customers’ accounts remained.
“Will that do?” asked Powell. “I think it will,” answered Buffett.
The government also limited the amount of new regulation after the scandal. “We also knew that, despite the misconduct by Salomon Brothers, Treasury markets generally worked quite well,” Powell recounted.