INTERNATIONAL - A few months ago, Jerome Powell was reckoned to be too tough on banks to get US President Donald Trump’s nod for a key supervisory post at the Federal Reserve.
Now, as the Fed chairperson, he is expected to make life easier for the financial industry. In the running to be chief banking overseer, Powell was passed over by administration insiders who associated him with the rush to regulate after the 2008 crash. As a Fed governor since 2012, he did sign off on a lot of new rules - but only after privately raising some red flags first. The former private-equity executive was at times a lone voice at Janet Yellen’s Fed, warning that well-intentioned regulation could end up holding back the economy.
That is a temperate version of Trump's charge that red tape is choking the flow of credit to business. Trump, a former real-estate developer, has also made it clear that he’s fine with the cheap money that has characterised the Yellen era. Those preferences add up to a Fed chair who will stick with the programme on monetary policy and loosen some restrictions on banks - an equation that has led Trump to Powell.
Except for the fact that he's rich, Powell is unlike Trump in almost every way. He’s a low-profile pragmatist, a team player who avoids making waves. In tapping him, Trump ignored pressure from his own party to put a disrupter like himself in charge of the Fed.
Powell was chosen over rivals including Kevin Warsh and John Taylor - a favourite of Vice-President Mike Pence - who were associated with calls for much higher interest rates and a fundamental shake-up at the world’s most powerful central bank.
By picking Powell, a known quantity, Trump could be hoping that the economy and stock market can maintain the winning streaks they’ve enjoyed under Yellen. Her term expires on February 3.
What’s not known is how the 64-year-old Powell will react should disaster strike, in the form of a crisis or recession. While he had a taste of the former, as a mid-level Treasury official more than a quarter-century ago, Powell has never held a leadership position during a financial emergency.
A lawyer by training, he has also not spent his career monitoring the ups and downs of the economy - as Yellen has done.
“He does not have the extent of background and experience as Yellen, which does raise concerns about how he will respond when conditions in the economy change,” said Dean Baker, co-director of the progressive Center for Economic and Policy Research.
The Washington native takes over the Fed at a tricky time. Inflation is well below the central bank's 2percent target, while asset prices are at levels considered lofty by policy makers. Trump's push for a massive tax cut to supercharge growth, in an economy that already has historically low unemployment, won't make the task easier.
Powell hasn't played a prominent public role in the formulation or explanation of policy, but has been supportive of Yellen’s strategy of gradually increasing interest rates - an approach he’s likely to maintain as Fed chair.
He did voice private scepticism about the third round of quantitative easing launched by then-chairman Ben S Bernanke in 2012, but ended up voting in favour, according to Bernanke’s memoir.
Powell won’t be deploying a battery of economic theory to these questions. He’d be the first holder of the job since Paul Volcker in the 1980s not to have a PhD in economics. Some see his lack of an economics degree as a hole in his resume. “The chair should be an economist by training,” said former Philadelphia Fed president Charles Plosser, himself a PhD economist. “The nuance of monetary policy and the science of monetary policy have become much more complex and subtle and difficult.”
Powell faced similar scepticism from staffers when he joined the Fed in 2012. He won them over by displaying a willingness to dig deep into complexities, an ex-Fed official said.
He was known for showing up at meetings carrying a huge binder full of materials. While Powell has never dissented from a monetary-policy decision, a former colleague disputed suggestions that he was a yes-man.
“There has been a recent tradition of governors not dissenting,” said ex-Dallas Fed president Richard Fisher. “That doesn't mean he didn't add an important dimension to the discussion.”
A former Treasury undersecretary, Powell spearheaded the Fed’s response to the 2014 “flash crash” in US government debt, and the overhaul of the flawed London Interbank Offered Rate benchmark. Until recently, he presided over four of the Fed Board’s seven committees, handling such unglamorous duties as overseeing the financial payments system.
“He has taken on tasks that the other governors didn’t want,” said Fisher. “He now really understands what makes the place tick.” Powell also oversaw the Fed’s 12 regional banks, an experience that would serve him well as he works with their presidents to fashion a consensus on monetary policy.
Powell, who goes by "Jay", spent much of his career outside government in finance - first at investment bank Dillon Read & Co and then at private-equity firm Carlyle Group, where he set up an industrial unit and was seen as a prudent and picky investor. Powell’s experience in official Washington dates back to President George HW Bush’s Treasury Department, where he served alongside Randal Quarles, who beat Powell to get the nod for the Fed supervisory post in July. It was in those years that he saw a financial emergency first-hand.
Salomon Brothers had tried to corner a Treasury debt auction using phony bids in 1991, and faced a potential bank run that summer. On vacation in Cape Cod, Powell spent a weekend conferring by phone with officials including Fed chairman Alan Greenspan and Treasury Secretary Nicholas Brady. He then acted as a go-between with Salomon investor Warren Buffett.
Powell “did a fantastic job”, Brady said. “I relied on him heavily.” Salomon survived the Monday market opening.
Powell, who has an undergraduate degree in politics from Princeton University and a law degree from Georgetown, caught the attention of President Barack Obama, who tapped Powell for the Fed board. The Obama link has raised suspicions among some Republicans.
That said, Powell would be all-but-certain to win Senate confirmation, as Republicans are unlikely to oppose the pick of their own party's president. - Bloomberg