According to the folks who bet on such things, Jerome (Jay) Powell is a heavy favorite to become the next Fed chair. I have no special insights into the likely pick, but I do have a pretty good sense of Powell. I was working as a special advisor to the Fed governors when Powell arrived in May of 2012, and I worked fairly closely with him for more than 2 years thereafter. I think Powell would be an outstanding choice, particularly given the complex political backdrop at present.
Since much of this post may read like I’m sucking up to a potential chair, let me begin with a negative. I believe in training and expertise, and Powell—like Warsh, Cohn, and a number of others who have ostensibly been on the short list—has no strong training or background in macroeconomics or monetary policy. For this reason, I think none of these folks is the ideal candidate. On the other hand, absent major economic disruptions, the job probably doesn’t demand the career long focus that Bernanke and Yellen brought into the job.
Background and training are great, but they certainly don’t guarantee good macroeconomic judgment or instincts. In these regards, Powell scores well. All of the Fed’s governors face a blizzard of material coming from the Fed staff, from policymaker colleagues, and from many helpful outside voices. It is not easy to sort through this information, remaining skeptical but open to insights as to how the often conflicting information should affect ones evolving view. Powell is quite adept at digesting the inputs and distilling them into a reasonable and coherent position that he can articulately defend. I didn’t always agree with where he ended up, but could always see a persuasive case supporting his view. Perhaps as important, I saw his views, say, on financial excesses, change in a natural way with changing conditions. As many others have noted, Powell’s views typically run on the cautious/hawkish side of center.
After monetary policy formulation, the second most important challenge for the Chair at present may be dealing with the very contentious environment both on Capitol Hill and within the FOMC. For good or for ill—more on this topic in a subsequent post—Chairs Bernanke and Yellen greatly democratized the Committee. Reserve bank presidents, governors, and even the Fed’s vice chair now take strong public positions, positions that regularly differ from the documented consensus policy of the FOMC. Further, the political atmosphere in which the Committee operates is highly caustic. The next Chair is likely to face real challenges holding the Committee together and, perhaps, keeping an unruly Congress at bay. In this arena, Powell has great strengths.
Powell came to the Board with the reputation as a skilled consensus-builder. His low-drama, profoundly reasonable approach to contentious topics, I believe, could be the best approach for the Fed at present, especially in light of the decidedly high drama atmosphere prevailing elsewhere in the government.
Finally, the next Chair will preside over a turbulent time on the regulatory front. It remains unclear just what new direction Congress may give the Fed, but Powell has a strong background in these topics, given his training as a lawyer and having worked financial regulation both at the Treasury and at the Fed. His speeches give a good picture of centrist views on regulation: Banks are safer now because they are holding more and better capital, but there is considerable room to improve the balance between the costs and benefits of regulation.
Bottom line, a Powell regime would probably yield a low-drama, high-competence approach at the Fed. That’s exactly what central banks should aspire to.
1. There is no guarantee of quiet times, of course. I must admit that at present I find myself wishing we had a gifted and experienced diplomat to handle the current nuclear brinksmanship with North Korea, and by the same token, I suspect we might all wish for a gifted thinker on monetary policy if interest rates return to zero in a future recession. Powell (or Warsh) might prove to be that person, but they are not ideally suited to the task. [back]
2. Caution and hawkishness obviously do not always call for the same policies. Regarding financial stability risks at present, they do. Regarding the risk of returning to zero interest rates, they don’t. [back]