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By Jean Yung
WASHINGTON (MNI) - Over the coming year, the three most influential seats
at the Federal Reserve will be vacated and ready for a new Trump
appointment--and perhaps the opportunity for an unexpected alteration of course.
First among them, Trump nominee for chairman, Jay Powell, is seen as a
policy centrist who's expected to stick to the pace of gradual tightening set
out by Janet Yellen. As Fed governor, he never strayed far from the mainstream
of the official Federal Open Market Committee.
That is, as long as the economy keeps evolving broadly as expected. The
true test for the new leadership will be the unexpected: inflation rising well
above 2%, an economy headed for recession, or a shock from overseas.
Trump and the GOP are rushing to deliver a tax overhaul that could spur
faster growth and an acceleration in inflation. With the unemployment rate
already at 4.1%, half a percentage point below the Fed's estimate of maximum
employment, current Fed officials are worried that wages and prices could rise
quicker than expected, necessitating a faster pace of interest rates increases.
On the other hand, some market observers wonder if the markets could face
renewed turbulence as Fed rate hikes begin to bite and global central banks dial
back on liquidity provision. An unexpected economic shock could send rates back
How will the new Fed approach unconventional policy in the next recession?
What role will it see for balance sheet policy? Will it be constrained by the
zero lower bound, or will it embrace negative rates already deployed in Europe?
Although some Republicans pushed for President Donald Trump to nominate a
Fed critic to lead the organization, he chose Powell, a pragmatic moderate
aligned with the consensus view on the FOMC. But less is known about how Powell
might steer the committee in a different economic environment.
Critics have said Powell lacks experience in a crisis. A lawyer by training
and a banker and investor by trade, he had no previous monetary policy
experience before coming to the Fed Board in 2012. He will be the first
non-economist to lead the institution in more than 30 years.
But San Francisco Fed's Williams expressed few qualms about Powell's
qualifications. He told MNI in a recent interview that Powell an
intellectually-driven, action-oriented consensus builder in the mold of his
He's also seen his share of ups and downs, Williams said. Difficulties in
the euro zone, the halting pace of economic recovery in the United States, the
Fed's rollout of QE3 and forward guidance and the balance sheet unwind have been
thorny challenges over the past six years, Williams said. "So he does have that
experience of being in the trenches."
Trump has still other opportunities to put his stamp on the Fed.
Assuming Yellen follows precedent and leaves her position as governor after
stepping down as chair, the president will need to name a vice chair and three
others to the Fed Board to join Powell, Randy Quarles and Lael Brainard.
The powerful Federal Reserve Bank of New York is also searching for a new
president following Bill Dudley's announcement last week that he would retire by
mid-2018. Trump won't have a hand in picking his successor, who is selected by
the non-bank-affiliated directors of the bank's board, but the nomination is
subject to approval by the Fed Board in Washington.
Dudley worked tirelessly alongside Yellen to support the economic recovery
and later to unwind the Fed's unconventional crisis-fighting tools. The New York
Fed president votes at every meeting and is responsible for implementing Fed
policy through open market operations. It's an important role that could help
reshape the Powell Fed.
Among the other regional bank presidents, next year's FOMC voters skew more
Centrists Robert Kaplan and Patrick Harker and doves Charles Evans and Neel
Kashkari will be replaced by centrist John Williams, hawk Loretta Mester,
newcomer Raphael Bostic and the as-yet unannounced new chief of the Richmond
Fed. Jeffrey Lacker's successor in Richmond will likely favor higher rates as
the bank has traditionally supported hawkish monetary policy.
Investors are expecting little change in monetary policy under a Powell
Fed. Should the economic winds of change blow, that assessment may prove less
enduring than they expect.
--MNI Washington Bureau; +1 202-371-2121; email: firstname.lastname@example.org