Fed nominee Powell, once hawkish, now champions Yellen's
focus on jobs
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[November 28, 2017]
By Howard Schneider and Ann Saphir
WASHINGTON/SAN FRANCISCO (Reuters) - As a
nominee to lead the Fed, veteran governor Jerome Powell sides with the
outgoing chair Janet Yellen in arguing that the Fed's easy money policy
has paid off by bringing millions back to work without any clear sign it
has thrown markets off kilter.
In remarks released ahead of his hearing by the Senate Banking Committee
which is due on Tuesday, Powell said the Fed needed the capacity "to
respond decisively and with appropriate force" to new threats to the
In the past, however, Powell has been more cautious about the risks
posed by such an expansive approach. In his first months at the Fed,
Powell was among those who pressured then chair Ben Bernanke for more
clarity on when the central bank would start scaling back its bond
buying. When Bernanke made those plans public it triggered a "taper
tantrum" spike in market interest rates in the summer of 2013, forcing
Bernanke, Powell and others to do damage control.
As Powell, 64, now prepares to lead the Fed himself, former colleagues,
associates and former Fed staff say the key unanswered question is
whether his evolution - from a former investment banker wary of an
expanding Fed to a supporter of Yellen's jobs-first approach -
represents a change of heart, or rather the outgoing chair's imprint on
the current debate.
Powell will inherit a strong economy, low inflation and a clear
near-term policy path set by Yellen.
What is not clear is how he would respond to another recessionary shock,
Minneapolis Fed President Narayana Kocherlakota, who himself
transitioned from a policy hawk to dove while in office, told Reuters.
"Would Powell be willing to be as aggressive as Yellen?" Kocherlakota
Powell will come under particular scrutiny as the first non-economist to
run the Fed since William Miller in the 1970s, who was at odds with
markets and his colleagues over his reluctance to raise rates to fight
Globally, it is the norm that top central bankers hold advanced
economics degrees or rise through the ranks of the central bank or
national finance ministry. Powell, a lawyer by training, served three
years at the Treasury in the early 1990s, but spent most of his career
in investment banking and private equity.
Still, even well-known economists have surprised once in the top job. A
review of tenures of Arthur Burns, Alan Greenspan and Ben Bernanke by
economists Alexander Salter and Daniel Smith showed all three
implemented policies they opposed before taking office.
"Prior to serving as Fed chairman, each favored a degree of monetary
restraint, acknowledging the past errors of the Fed," Salter and Smith
"But during their tenure at the Fed, these economistsí views switch to
promoting monetary activism," they said. They said they focused on the
three because their extensive writings allowed such comparisons.
[to top of second column]
Jerome Powell, U.S.
President Donald Trump's nominee to become chairman of the U.S.
Federal Reserve at the announcement event in the Rose Garden of the
White House in Washington, U.S. on November 2, 2017. REUTERS/Carlos
ONE EYE ON TRUMP
While there is no immediate policy challenge for Powell to tackle, the Fed is
trying to get a handle on the U.S. economy's ability to grow without stoking
inflation, and whether low long-term bond yields signal investors are losing
faith in the recovery.
President Donald Trump's tax and spending plans could also present a risk if
they spurred higher inflation. Any Fed policy tightening in response could mean
a clash with Trump, who picked Powell, initially considered a long-shot for the
job, out of a group of five finalists that included Yellen.
There is also a risk that one of the longest U.S. recoveries could fizzle during
Powell's four-year term.
David Stockton, the former head of research at the Fed, said that Powell will do
well by continuing Yellen's policies if the economy stays on its current course.
Too little is known, though, about Powell's capacity to diagnose and respond to
crises, he said.
Powell became a Fed governor in 2012 when the recovery was taking hold and the
debate centered on how to end the Fed's crisis response programs and raise
interest rates for the first time in nearly a decade.
"He has expressed in the past greater concern about the side effects of low
interest rates and quantitative easing," Stockton said. "Does that mean he will
be more reluctant to move quickly, and what will the consequences be?"
After the "taper tantrum," Powell appeared to side with the hawks again in the
summer of 2015, when he argued two rate rises might be needed that year. That
initial view overlooked how a meltdown in the Chinese stock market would dim the
global economic outlook.
He later backtracked and the Fed eventually moved only once that year, raising
rates in December.
Over time, Powell's speeches have come to emphasize how the long spell of loose
U.S. policy has given workers time to recover - the argument that has defined
Yellen's term as chair.
Those who have worked with Powell say it reveals a key skill needed to lead the
"You need to know what you donít know. And you need to be willing to listen when
you don't know something," said Karen Dynan, who as an assistant Treasury
Secretary in Barack Obama's second administration would regularly meet Fed
(Reporting by Howard Schneider and Ann Saphir; Editing by David Chance and
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