A former US Federal Reserve board member has predicted that Jerome Powell, President Donald Trump’s nominee to replace Janet Yellen as the central bank’s chair, won’t make any waves to the current trajectory of monetary policy.

Speaking at the CFA Australia Investment Conference in Melbourne on November 1, former US Federal Reserve board member Randall Kroszne told the audience that while he usually prefers talking economic and monetary policy rather than personnel,  that in the same week Trump was tipped to name his nominee to replace Yellen a bit of people-related prognostication was in order.

Kroszner said he believed Yellen had done a “solid” job, but the fact that she was appointed by Democratic president Barack Obama made it unlikely Trump would nominate her for a second term. He stopped short of disclosing who he believed was most likely to win the nomination, but noted Powell was the favourite according to media reports. Kroszner also added that if Powell was confirmed he was unlikely to shift the current course of current monetary policy as outlined by Yellen.

Two days later, on November 3 Trump named Powell as his nominee. He is expected to be confirmed.

Staying the course

Powell has been a Fed governor since 2012 and was a Treasury official under former president George HW Bush. If he is confirmed, Kroszner anticipates a continuation of current monetary policy.

“I think it will be very similar – a gradualist interest-rate approach,” he said. “The challenge that the US faces now – along with most banks around the world with the exception of in the UK – is primarily that inflation is under target. Raising rates [under those circumstances] is a bit of a challenge. With unemployment so low in the US, it is reasonable to think it would be possible [to] get some inflation pressure down the line, but we could have said that over the last year to year-and-a-half and we haven’t got that.”

Kroszner noted that while Trump criticised the Fed for not raising interest rates during the 2016 presidential election campaign, he has not criticised it for raising the interest rate twice since his election.

“[Trump’s] actually said very little about monetary policy and his preferences on monetary policy,” he said. “I think he’s very much taken by the gradualist approach that Janet Yellen has undertaken. Also, he’s aware that the exuberance in the stock markets is due not only to his policy, but also Federal Reserve policy…so I think he’s drawn to that, and I think not unreasonably.”

Kroszner, a professor at the University of Chicago Booth School of Business, served as a member of the Board of Governors of the US Federal Reserve from March 2006 to January 2009 and was chair of the central bank’s Committee on Supervisory and Regulatory Affairs during the global financial crisis.

He lightly noted that he enjoys greater freedom to speak off the cuff now that he was back in academia, as compared with his time at the Fed, when his words – or lack thereof – carried immediate impact on financial markets.

He also addressed the recent buoyancy of US stock markets, drawing comparisons between Trump and president Reagan.

“If you look at president Trump so far, there is a lot of anti-trade rhetoric, a lot of sabre rattling, but so far no substantive actions,” he said. “There is a set of reasons why the markets are positive, because they see a directional change and one that is broadly consistent with where Reagan brought the US in the 1980s and, obviously, that has had a positive effect on the markets.

“Of course there can be disappointment if there isn’t execution. Clearly, the president and Congress are quite focused on tax reform…If they can’t get something through on this, it will be very, very painful for them in the midterms.”

Rachel Alembakis has more than a decade of experience writing about institutional investments, asset owners, custody and administration for a variety of publications.
Leave a Reply