Was it really only Thursday that President Trump stopped teasing the markets and officially revealed that Jerome "Jay" Powell is to be the next Chairman of the Federal Reserve ? Given the miles of column inches in the financial media devoted to the subject, both before and after the event, it seems like the whole thing's been going on a lot longer than that. Well, it has of course ..... the extent of the fevered speculation reflects the fact that being boss of the Fed makes you the most important central banker in the world and the decisions that you oversee affect each and every one of us, not just those involved in markets, and on a global scale. All things considered, it's not surprising that commentators are continuing to make a big deal about Mr Powell and what lies ahead of him.
You could of course make a good case for saying that President Trump is having a more profound influence on markets than any monetary policymaker, an argument that he would presumably fully endorse as he claims the credit for record stock market levels. He was at it again at the weekend when lecturing the assembled media, a captive audience on this occasion as the encounter took place on Air Force One. To be fair, the President's declarations are never less than fascinating ..... and if any of those present find both his influence and his proximity in a confined space a little scary, that won't bother him one bit.
Since we're on President Trump, you might not be surprised to hear that he plays a role in that conspiracy theory surrounding Mr Powell's appointment. In truth, the suggestion that the appointment might have been made as part of a hidden political agenda is neither new nor particularly radical -- for some time, commentators have been flagging up concerns that the President might seek to fill the unprecedented number of empty positions on the Fed's board of governors with officials of broadly the same instincts as his own. In the modern world maintaining the independence of the Fed, of any central bank for that matter, able to conduct monetary policy free from political interference (as long as it adheres to its fundamental remits) is considered vital -- by most judges, anyway.
We need to make it clear that there is absolutely NO suggestion that Mr Powell is anything other than a good man, well-suited to the job and whose integrity is beyond reproach. He is also on record as stressing the importance of full independence for the Fed. That said, the thinking behind the whispers goes like this :
Jay Powell has been on the Fed board since 2012 ..... in over five years, he has never dissented from even one of outgoing Chair Janet Yellen's decisions on monetary policy and is likely to be the epitome of a consensus-building leader. Every indication is that he will fulfil his reputation as the "continuation candidate", and conduct monetary policy in very much the same way as Ms Yellen would have done had she been reappointed. That being the case, and since Ms Yellen was willing to serve another term, why then didn't the President just reappoint her ?
Since it assumed its current form in 1935, the Fed has only once seen a chairman NOT reappointed for a second term when they were prepared to serve one. William Miller (1978-79) left after little more than a year, but that was to become Jimmy Carter's Secretary of the Treasury. In all honesty Mr Miller was not particularly highly regarded in either role, whereas Ms Yellen is generally considered to have done a difficult job pretty well -- notwithstanding the protestations from the hawks about quantitative easing and inflated asset values. So if she's done a decent job and there is likely to be little difference in policy between her and her successor, the obvious conclusion being drawn is that Mr Powell got the post because he's a Republican, and Ms Yellen is a Democrat. As such, the administration believes that he will be more receptive to their desires than Ms Yellen would be.
Too Machiavellian for you ? Maybe ..... it could just be down to something as simple as the fact that President Trump likes to put his own mark on things, and would naturally be keen to replace a figure in such an important position who was chosen by President Obama. Or perhaps it's all to do with the difficulties in the Trump / Yellen relationship that are the result of the abuse he threw at her on the campaign trail about her handling of Fed policy that was far too accommodating for the President-to-be.
That would be ironic really, since he's now apparently a "low rates kinda guy" who -- since he's started claiming that he's responsible for the performance of Wall St. -- just loves what Ms Yellen's gradual approach has done for share prices. That may be a reason why, when push comes to shove, the more hawkish John Taylor failed to get the nod.
Actually, there is one difference between Janet Yellen and Mr Powell and it pertains to regulation. Ms Yellen opposes any relaxation of the strictures put on those in the investment industry after the financial crash -- as you might imagine an academic economist who's witnessed the destructive irresponsibility of that time at first hand might. Mr Powell on the other hand, not an economist and with a background incorporating the markets, is open to the idea of relaxing certain areas of regulation. In particular Mr Powell, as something of an expert in the field, worries that the incredibly onerous requirements that have made market-making in bond markets in particular impossible for banks. The resulting lack of liquidity is not an issue (or even noticeable) when the markets push gently higher or tread water, but if there's a sudden reversal, as there will be sometime for sure, there could be real trouble. Sellers will be looking for buyers who are just not there anymore.
It's just as well Mr Powell is well-versed in the subject. He's becoming Fed Chairman just at the time the Fed effectively begins to drain liquidity, or access to it, by starting on the reduction of the Fed's balance sheet accumulated through QE. It's got to be done to avoid global overheating, but managed in such a way that doesn't provoke any nasty shocks that could quickly develop into something really painful. That seems like Mr Powell's biggest task, and is also the reason why those following economies are looking a lot happier than those who follow markets, according to Mr Authers. The first group look at robust growth in the US, the Eurozone and China, low inflation, rising markets and low or falling unemployment -- the archetypal "Goldilocks Scenario" . The second have to keep reminding themselves about the dangers of a lack of market liquidity ..... and they look increasingly queasy every time they do it.