Jerome Powell: the new Fed chairman

Jerome Powell is the new Fed chairman. Who is he and what does his appointment mean for the markets?

Who is Jerome Powell?

Jerome ‘Jay’ Powell is the current chairman of the board of governors of the Federal Reserve. 

He took office on 5 February 2018 for a four-year term, succeeding Janet Yellen in the role.

Before he took office as chair, he served as a member of the Federal Reserve’s board of governors under presidents Barack Obama and Donald Trump. 

What can we expect from Jerome Powell’s tenure as chair of the Fed?

There are three key things to watch out for from Powell’s first few months in charge: how closely he sticks to his predecessor’s roadmap, his plans for regulation, and whether he reveals an economic agenda of his own or sticks to the objectives assigned by congress.

Continuity

Powell is expected to provide a degree of continuity as Fed chair, having voted with Yellen in every vote of her tenure. He has said that his Fed will:

  • Continue to raise rates as the economy recovers, sticking with the target inflation rate of 2%
  • Continue to reduce the Fed’s balance sheet, aiming to take it from $4.5 trillion to $2.5-3 trillion over the next three to four years by letting bonds expire

On top of that, Powell has stated that he intends to maintain the independence of the Fed from government and other parties, and will ensure that the Fed remains transparent and accountable.

Regulatory reform

Powell is expected to take a softer approach to financial regulation than his predecessor. While he supports many of the regulations outlined in the Obama-era Dodd-Frank Act – for example stress testing of banks – he has said that he wants to conduct a thorough review of the policies, particularly those that place a regulatory burden on smaller banks.

This puts him in middle ground between some Republicans (including Trump) who want significantly looser regulations, and Democrats who are calling for tighter rules. 

Economic agenda

Powell is the first Fed chair in more than 40 years to take office without a PhD in economics. Some Democrats have raised concerns that he could act in the interests of Wall Street (and the 1%) or bow to political pressure, given his lack of experience, significant personal wealth and Republican leanings. 

However, in his first ‘Semiannual monetary policy report’ in February 2018, Powell promised his Fed would aim to achieve the objectives assigned by congress – namely maximum employment and price stability – by pursuing an inflation rate of 2%. If his actions in office reflect his words, it would likely confirm his economic agenda and go some way towards easing his critics’ fears.  

How could Jerome Powell’s term as Fed chair affect the markets?

If Powell delivers the rate rises, regulatory reforms and balance sheet reductions he has hinted at, the markets could react as follows:

Forex

The dollar would likely strengthen in response to any rate rises. Regulatory reforms would likely have the same effect as these could stimulate the economy by making credit cheaper and banking more profitable (potentially leading to further rate rises). Watch how pairs including EUR/USD and GBP/USD respond to news from the Fed.

Shares and indices

US shares and indices could be strengthened by any hint that Powell is deregulating financial services, as this could increase the availability of credit for businesses. However, any rate rises could offset this effect, as these tend to reduce consumer spending and make credit more expensive. Watch the US 500 and Wall Street.

Bonds

Bond prices are likely to fall if Powell pursues higher interest rates and continues Yellen’s plan to reduce the Fed’s balance sheet, as this could increase the supply of bonds on the market. Watch US bonds including Treasury bond decimalised and 10-year T-note decimalised.

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Prices above are subject to our  website terms and conditions. Prices are indicative only.

Commodities

Commodity prices in general would likely fall in response to any rate rises – in part because of the stronger dollar.

On the other hand, banking reforms could drive prices higher by making cheap credit available to businesses and consumers, who may respond by spending and investing more. Watch commodities like gold and high grade copper

Jerome Powell: hawk or dove?

There is no consensus on whether Jerome Powell is a  hawk or dove as his public statements have tended to stick closely to the official line. For this reason, many analysts have suggested that he does not have a fixed ideology, preferring instead to act pragmatically to pursue a low-risk course for the economy.

It therefore seems likely that his views will change as the economy evolves, making Powell more of an ‘owl’ than a hawk or dove. This view seems to have been confirmed by his first semi-annual report to congress, where he hinted that he would pursue rate rises in response to improved economic data, and stated that he finds the FOMC’s guidance on monetary policy very useful.

Jerome Powell: biography

Jerome Hayden Powell (born 4 February 1953) is a registered Republican and member of the Fed’s board of governors. He has a bachelor’s degree in politics from Princeton University and a law degree from Georgetown University. After working briefly as a lawyer from 1981 to 1984, he switched to investment banking, working his way up to vice president at Dillon, Read & Co.

He was invited to work at the US treasury under George H. W. Bush in 1990, becoming the undersecretary of the United States department of the treasury in 1992. He is said to have made his fortune as a partner at private equity firm the Carlyle Group from 1997 to 2005: current estimates put his net worth between $20-112 million.

From 2010 to 2012, Powell was as a visiting scholar at the Bipartisan Policy Centre in Washington, where he helped gain bipartisan support in Congress to raise the debt ceiling. He took up his current position on the board of governors in 2012, and was confirmed for a second 14-year term in 2014. He was nominated for Fed chair by President Trump in late 2017 and took office in February 2018.

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