There are many similarities between Federal Reserve Governor Jerome  Jay Powell, nominated Thursday to become the central bank’s Chairman, and outgoing Chair Janet Yellen. But there are also important differences, even if nuanced. Kevin Logan, HSBC’s chief US economist, expects a “continuity in US monetary policy” with perhaps a “lighter touch on bank regulation.” Much like Trump’s appointment of derivatives industry leader J. Christopher Giancarlo to head the CFTC, Powell has a strong background in investment management, not academia.

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Jay Powell

Jay Powell not expected to be much different from Yellen on gradual, "boring" rate hike policy

Jay Powell, a Republican, was appointed to the Fed’s Board of Governors in 2011 by former US President Barack Obama. His appointment was widely viewed as Obama’s reaching across the aisle to hand and olive branch to Republicans.

Since joining the central bank’s inner circle, Powell mostly fell in line with Chair Yellen, another Obama appointment viewed as an olive branch to the progressive wing of the Democratic party. Yellen was in a tight race with establishment candidate and former US Treasury Secretary Larry Summers for the spot.

With a record $4.5 trillion balance sheet, Yellen began on what was initially considered among the more difficult tasks in Fed history: withdrawing quantitative stimulus that the markets had become dependent on. Success in the matter would not be benchmarked with fanfare, but rather a silence. The less the public was aware of the withdrawal process – meaning no noisy market price readjustments – the better.

Despite their divergent political viewpoints, Powell is expected to gently steer the central bank on the same monetary path that Yellen had outlined. HSBC, for their part, see the Federal Open Market Committee raising the federal funds rate by 25 basis points in December and only one more time in 2018, not the three times as the FOMC’s median projection suggests.

“We also anticipate that Jay Powell would ask the FOMC to continue the gradual reduction of the Fed’s balance sheet, neither speeding up nor slowing down the gradual redemption of principal payments on the Fed’s holdings of Treasury and agency mortgage-backed securities,” the November 1 analysis predicted.

While the immediate path of rate hikes and reducing the girth of the massive balance sheet are headlines upon which most observers focus, HSBC notes the longer term nuance and how Powell might leave a lasting mark:

Although he may continue the policies already put in place by current Chair Yellen, Mr. Powell would not simply be a caretaker for Yellen’s policies. He would have the responsibility of guiding the Fed to a new long-run policy framework during his tenure. After the Fed expanded its balance sheet through quantitative easing, bank reserves were no longer scarce and, by necessity, the FOMC adopted a new policy framework that uses administered interest rates to influence financial conditions. Whether the Fed continues with this system or goes back to the “reserve scarcity” system in place prior to the crisis is a decision that will have to be made within the next few years.

Jerome Powell
By Federalreserve (powell_jerome_060512_8x10) [Public domain], via Wikimedia Commons

Jay Powell is a hands-on practitioner familiar with the inner workings of Washington DC

While Yellen and Powell represent stability and continuity amid a Goldilocks market environment that continues to generate impressive economic statistics without inflation, there are meaningful differences. The first is in Powell’s background.

Powell is a hands-on market practitioner.

While the previous three Fed chairs had Ph.D.’s in economics – and the Fed employees more than 300 economists with doctorate degrees – Powell has a bachelor of arts from Princeton University and a law degree from Georgetown University, where he was editor of the law review. In addition to serving in various government positions, from 1997 to 2005 he was a partner at the Carlyle Group, a Washington DC-based private equity firm with $170 billion under management.

David Rubenstein, the founder of the Carlyle Group, had predicted Powell would be nominated Fed Chair in at a Wednesday CFA Society Chicago dinner event and said he didn’t expect much to change related to the current rate hike path.

Lauding the notion of a practitioner with hands-on investment banking experience running the US central bank, Steve Ricchiuto, Mizuho Chief US Economist, told Bloomberg TV that “the academic community has completely screwed up monetary policy."

While Jay Powell has been a vocal critic of bank regulation, he is expected to keep the core framework of the post-crisis regulatory structure intact.

“Mr. Powell has made clear that he believes there may be aspects of post-financial crisis regulation that have imposed an ‘unnecessary burden’ on US banks and could be eased, and developments there are important for credit markets,” HSBC opined.

Powell, who has been previously confirmed by the US Senate, is expected to be confirmed without much if any debate.