By Robert Eisenbeis, Ph.D.
President Trump announced on Thursday the elevation of Governor Jerome Powell to succeed Chair Janet Yellen when her four-year term as chair of the Board of Governors expires. For those who may not know, the chair of the Board of Governors is appointed for a four-year term, which is different from the 14-year terms served by the governor.1 Thus, Chair Yellen could continue on the Board until her term is up in 2024. Whether that will happen isn't clear, since we don't know yet what her plans are.
The position of chair of the Board is distinct from the position of chair of the FOMC. The chair of the FOMC is elected as the first order of business at the beginning of each year.2 There is no requirement that the position be filled by the chair of the Board of Governors, although there has yet to be an exception. The only permanent position on the FOMC is that of vice-chair, which is filled by the president of the New York Fed.
In selecting Governor Powell, the president achieved a two-for-one. Powell is a Republican, and he's a moderate when it comes to policy. Perhaps the best clue as to what we will get on the policy side is reflected in comments Powell made in June in New York:
"The healthy state of our economy and favorable outlook suggest that the FOMC should continue the process of normalizing monetary policy. The Committee has been patient in raising rates, and that patience has paid dividends."
This stance is a clear endorsement of the current policy approach, and Powell used all the right words, including patient. We should expect no surprises from Governor Powell. But the fact remains that he isn't an economist, as his most recent predecessors were. Those who think it is important to have someone in the chair position who is sensitive to Wall Street financial markets will be pleased. It is also important to realize, however, that the background and credentials of the chair are less important than his or her sensitivity to the Fed's culture and willingness to separate the Fed from politics. Arthur Burns was an economist but was a disaster as a policymaker. He played to Nixon's politics and oversaw one of the worst periods of inflation the country has seen. It was the courage of Paul Volcker, who was not a Ph.D. economist, that brought the country back to a long period of stable prices. G. William Miller, who was appointed by President Carter in 1979, was a businessman totally inexperienced with the Fed's culture who didn't realize that in that environment he was but one of many equals and not the supreme leader. He lasted only a year and a half.3
While attention is now on Governor Powell, there are other issues that will become important. First, there are presently two economists on the four-person Board of Governors, which has three vacancies. Assuming Chair Yellen leaves in January, Governor Brainard will remain as the lone economist. If others are not appointed, then the sitting governors will be totally dependent upon the Board staff, whose command of economic models and forecasts encompasses a depth of expertise and experience that would create a dependency and give the staff an increased role in policymaking. At the same time, with at most four governors in place, the reserve bank presidents have the ability to outvote the sitting governors, should a conflict over policy arise. This situation creates an important role for Chairman Powell to manage the policy process and achieve consensus. It appears that this skill is in his tool bag, but this issue gets more interesting as we move into 2018. The voting reserve bank presidents include Presidents Bostic, Mester, and Williams, all of whom are economists. There has yet to be a new president appointed at the Federal Reserve Bank of Richmond. The point is that the economists on the FOMC are predominantly reserve bank presidents, and all have significant economic credentials that the Board governors will not have next year.
One final point. The October jobs numbers show a rebound to 261K jobs created, despite the hurricanes. Additionally, although the Atlanta Fed's GDPNow forecast fell back from 4.5% to 3.3% in the first week of November, any number starting with a 3 is a very good indication of the overall health of the economy. These job and growth numbers clearly provide sufficient support for the FOMC to continue on its gradual pace of policy tightening. If this is the last policy move in Chair Yellen's term, then it will provides additional breathing room for Chairman Powell to sit back and reassess where things are in 2018. The biggest risk he faces going forward is placing too much emphasis on achieving the Fed's 2% inflation objective in the face of possible evidence of developing imbalances in the real economy.
1 If a governor leaves before his or her term is up, a successor first fills the remaining years and then can be appointed to a new 14-year term.
2 See, for example, the transcript of the January 2011 meeting, the most recent transcript presently available.
3 I personally observed all three of these chairmen while on the staff of the Board of Governors during their tenure.