The chair of the Federal Reserve exerts a large influence on monetary policy, and thus on the economy. President Trump has just nominated a new chair, Jerome Powell. What is the effect on U.S. business likely to be?
A Broad Agreement with Current Fed Policies Expected
Overall, professors at the University of Pennsylvania’s Wharton School believe that Trump’s choice for chair indicates that there will be few overall policy changes at the Fed and thus, little impact on current business strategy plans. The effect on business is likely to be positive, for two reasons. First, stability and predictability are positive for business as it lends stability and predictability to corporate endeavors. Second, the current interest rate policy has brought the economy from the brink of collapse in 2008 to a vibrant state.
Powell might be slightly less dovish on interest rates, depending on the economy, but his Fed leadership would not represent a sea change.
Powell, who is 64 years old, has served as one of the Federal Reserve’s governors since 2012 and has been in broad agreement with current Fed chair Janet Yellen throughout his tenure. As a result, many observers expect his leadership as Fed chair to be broadly in line with hers.
Gradually rising interest rates are likely to continue next year.
Yellen and the Fed slashed interest rates to spur economic recovery during the Great Recession of 2008-2009 and only started to cautiously raise them this past December. They have gradually inched up since then, and many market watchers expect gradual tightening to continue next year. Currently, the unemployment rate is at the lowest it’s been in over 15 years and the economy is strong. Both Powell and Trump have, of course, every reason to want the robust economy to continue.
Thus, while Powell may hike rates slightly more quickly than the dovish Yellen, he will be highly unlikely to crank them substantially higher, which could put brakes on the economy.
As Wharton commentators also noted, President Trump, as a real estate investor, is likely very pro low interest rates.
Business Strategy Impacts? Easing of Regulation, Streamlined Payments, and Settlements Possible
Powell may, though, be different from Yellen in a more liberal approach to banking regulation. While he is unlikely to support the repeal of Dodd-Frank, a goal of many congressional Republicans, he may support the easing of regulations set by the global Basel Committee on Banking Supervision. It promulgates regulations on banks worldwide on liquidity, stress testing, and adequacy of capital.
Wharton professors believe he may be more in favor of letting debt and liquidity parameters, for example, be more in the hands of banks themselves.
Powell is a former banker and a lawyer, in marked contrast to past Fed chairs, who have almost universally been economists.
Powell may also support revisions to the payments and settlement system in the United States. The system is widely considered behind the times and slow by global standards. These systems are something of an area of expertise for Powell. Any efforts in this regard would not affect Fed interest rate policy, of course, but it could streamline and upgrade banking systems to a more digitized system.
If Powell is confirmed by the Senate, he will take office in early February 2018.