The next head of Federal Reserve

US President Donald Trump has nominated Jerome Powell to be the next Chair of the Federal Reserve.

If nominated, he will be replacing Janet Yellen in February 2018.

Background

The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913. The main goal behind establishing the body was to create a central control of the monetary system that will prevent financial crises. In the event of a financial downturn, the Federal Reserve steps in to provide key aid.

Over the years, the Federal Reserve a played a key role in saving the American economy (and in turn the global economy) from imploding. It’s roles and responsibilities were expanded after the Great Depression, that caused a global meltdown. The timing of the Great Depression varied across nations; in most countries it started in 1929 and lasted until 1941. It resulted in international trade being reduced by 50% and unemployment rose.

The Chair of the Board of Governors of the Federal Reserve System is the head of the central banking system of the United States. People appointed to this position are generally referred to as the Fed Chair. The tenure of the Federal Chair is four years and the person is appointed by the President of the United States. A person can be appointed the Chair multiple times by the President. Marriner Eccles was the first Chair of the Federal Reserve and William Martin was the longest serving. The current chair is Janet Yellen. She is also the first woman to ever hold the position. She was appointed by US President Barack Obama. Her tenure began in 2014 and would end in February 1^st, 2018.

Up until now there has been a tradition of a Federal chair being re-appointed for a second term. However, US President Donald Trump has stated that he would likely buck that tradition to make his own “mark.” 

Analysis

US President Donald Trump has hinted that he will be replacing Janet Yellen and nominate his own pick for the Federal Chair. “People are anxiously awaiting my decision about who the next head of the Fed will be,” Trump said on an Instagram video last week. “I have somebody very specific in mind. I think everybody will be very impressed.”

Reports began emerging that Trump was interested in either Jerome Powell or John Taylor. Taylor is an economist based in Stanford University who has been critical of low Federal interest rates in the past. Trump also made it seem like he might re-appoint Yellen stating, “I think she’s terrific. We had a great talk. In one way I have to say, you like to make your own mark, which is maybe one of things that she’s got a little bit against her.”

On Thursday, Trump made the announcement that he had chosen Jerome Powell for the next Chair. If he is confirmed by the Congress, then he will take over from Yellen in February 2018. “He’s strong, he’s committed, he’s smart. I am confident that Jay has the wisdom and leadership to guide our economy through any challenges,” Trump said, introducing his appointment in a short address outside the White House.

Powell for his part, praised his predecessors, Janet Yellen and Ben Bernanke. He said that he was “committed to making the best decisions based on the best available evidence in the longstanding tradition of monetary independence”. He added, "In the years since the global financial crisis ended, our economy has made substantial progress towards full recovery. By many measures, we are close to full employment, inflation has gradually moved up toward our target.

Powell is a trained lawyer who has in the past worked for top investment companies like Carlyle Group, where he was the partner. Media reports have revealed that he estimated to be worth between $20 million and $55 million.

Economically, both Yellen and Powell are similar. Powell, who has served as a member of the Federal Reserve Board of Governors since 2012, has voted in favor of keeping federal interest rates low – like Yellen. A fiscal conservative, Powell has intimated he would like to loosen the government’s grip on the financial sector.

“I don’t think what we’re talking about here amounts to broad deregulation,” Powell said. “I think it amounts to making regulation more efficient, protecting the important gains we’ve made [since the financial crisis]. We’re not really talking about some massive program here.”

The Dow Jones closed at a record high after the announcement. The Dow added 81.25 points to 23,516.26, while the S&P 500 rose 0.49 points to 2,579.85. Powell is viewed by investors as a market-friendly head.

Assessment

As we had earlier predicted, John Powell has been named the next Chair for the Federal Reserve.

Our assessment is that under his lead, the Federal Reserve is likely to keep the interest rates low in the next quarter as well. One of his main priorities would be to bring inflation up to 2%.