Key takeaways: What happened?
- President Donald Trump nominated Jerome Powell to replace Janet Yellen as the chair of the Federal Reserve
- Powell is a choice for policy continuity: he will favor the same gradual approach to monetary tightening pursued by Yellen
- There is no change to our forecasts as a result of Powell’s nomination
- We still expect a 25bps rate hike at the December Federal Open Markets Committee (FOMC) meeting, with a gradual series of rate hikes across 2018. Accordingly, there should be no impact on USD exchange rates
- Powell’s ability to achieve his monetary policy preferences may change if Trump appoints hawkish governors to fill the open seats on the Fed’s monetary policy committee
The Powell nomination signals policy continuity
Trump does not want a fundamental change in monetary policy. He has praised Yellen for her “excellent” work as Fed Chair, and seems to have seriously considered appointing Yellen for a second term. However, in Trump’s own words, he preferred to appoint a new Fed Chair to leave his own mark on the institution. His choice of Jerome Powell is a choice for policy continuity.
Powell has been a Fed governor and member of the Federal Open Markets Committee (FOMC), the Fed’s monetary policy decision-making body, since May 2012. His voting record shows that he has favored the monetary policy approach of his predecessors:
- Powell has served under both Yellen and her predecessor, Ben Bernanke, and never voted against either of them
- Powell supported the controversial third quantitative easing program launched by Bernanke in September 2012. This program generated serious internal dissent in the FOMC
- Powell supported the gradual path of policy normalization pursued by Yellen, noting in a June speech that the gradual path had increased growth and employment without “high inflation or excessive credit growth”
There is no reason to expect Powell will deviate substantially from Yellen on monetary policy matters, and therefore our forecasts are unchanged.
Powell’s success could depend on further FOMC appointments
There are several open seats on the FOMC. It is unclear whether Yellen will remain on the FOMC after she is no longer the chair. If she wants to, she can remain until 2024. Assuming she stays on at the Fed, she would continue to be a strong and credible ally for Powell as he attempts to keep the Fed on a gradual monetary policy trajectory.
If Yellen chooses to leave the Fed, the picture becomes cloudier. Powell, for all his merits as a trained lawyer with a long career as an investment banker and a specialization in bank regulation, is not an economist. Because he lacks the economic credentials of his predecessors, it will be difficult for him to assert his authority on monetary policy matters. If Trump appoints his second choice for Fed Chair, the hawkish macroeconomist John B. Taylor, to fill one of the FOMC vacancies, Powell could find himself unable to steer the FOMC toward his more dovish policy preferences.
Signals to watch
The choice of Powell represents policy continuity, and there is no change to our US outlook. The US economy is forecast to continue to grow over the coming years. The Powell Fed will continue with a gradual path of interest rate hikes, and the divergence in global interest rates will continue to provide support to the US Dollar against its major trading partners. More information on our US forecast can be found in the 2018 Global Outlook. The appointment of Powell does not change our forecast view, but it does increase the fragility of the FOMC to any future appointments. Pay close attention to any future FOMC appointments, and to their potential to upset the balance of power on the FOMC.
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