For the first time in four years, the Federal Reserve has a new chairman. Who is Jerome Powell and how might his leadership impact interest rates, the dollar, and equity markets?
JANET YELLEN’S TENURE
Nominated by President Obama, Janet Yellen served as Fed chairwoman from February 2014 through February 2018. During her tenure, the unemployment rate fell from 6.7% to 4.1%1, GDP increased from $15.8 trillion to $17.3 trillion2, and core inflation remained near or below the 2.0% target rate3. Importantly for investors, the Dow Jones Industrial Average surged over 50%4.
Yellen was known for her softer, “dovish” approach to interest rate management, keeping the federal-funds rate below 1.0% for the majority of her time as chairwoman5. While her performance record was strong, detractors felt she may have been too slow to increase interest rates even as GDP ticked higher and unemployment dropped below 5.0%. Historically, the Fed has raised interest rates as economic growth accelerated to curb inflation, and lowered rates as economic growth slowed to help increase economic activity, providing a smoothing effect to the nation’s economic expansion and contraction.
Considering the three key objectives of the Fed – maximizing employment, stabilizing prices, and moderating long-term interest rates – I would say that she did a great job at the helm of the U.S. central banking system during her tenure and leaves big shoes to fill.
JEROME POWELL’S RESUMÉ
On February 5th, 2018, Jerome Powell began a four-year term as America’s 10th Federal Reserve chairman6. In addition to serving as Fed chairman, Mr. Powell also serves as chairman of the Federal Open Market Committee (FOMC), the Fed’s principal monetary policymaking body. Not new to the U.S. central bank, Mr. Powell was nominated by President Obama to the Fed’s Board of Governors in 2012 and was the Undersecretary of the Treasury during George H.W. Bush’s presidency.
Unlike past Fed chairmen, Powell is not an economist by trade. He is a lawyer who spent years working within the investment banking and private equity space, most notably with the $195 billion asset manager The Carlyle Group from 1997 to 20057. While clearly experienced, his educational background and investment banking resumé lead some to wonder how he would respond to a financial crisis. Only time will tell, but we don’t view this as a major concern from an economic perspective.
WHY POWELL AND WHY NOW?
The Federal Reserve is expected to operate outside of the political spectrum, but it is important to note that Powell comes from a more conservative, Republican pedigree than Janet Yellen or her predecessor, Ben Bernanke. In many ways, the end of Janet Yellen’s four-year term was an opportunity for President Trump to nominate a Fed chairman who more closely aligned with his political ideology. Following the 2017 Presidential election, many insiders viewed a departure of Yellen at the end of her term as a near-certain bet. The chairperson to replace Yellen remained the question.
Front runners were John Taylor, Kevin Warsh, and Jerome Powell. When compared with Taylor and Warsh, Powell is viewed as more of a centrist, someone who has historically been dovish on interest rate policy and is likely to keep interest rates low for an extended period even as the economy continues to build steam. For President Trump, this dovish outlook is desirable, as rapidly rising interest rates would likely have negative short-term consequences on U.S. equity markets. With the 2018 midterm elections ramping up and the 2020 Presidential election just around the corner, Powell was the best candidate to continue along the path set out by Yellen and Bernanke before her.
WHAT DO WE EXPECT MOVING FORWARD?
We don’t expect Powell to shake up the U.S. central bank or monetary policy for the foreseeable future. He has generally been viewed as a pragmatist and largely supported Yellen’s views on interest rate policy. Importantly, he has indicated that he will continue the Fed’s path of gradually lifting short-term interest rates and trimming the $4.5 trillion securities portfolio amassed in the wake of the 2008 financial crisis.
“He’s been part of the consensus,” Yellen said of Powell in December8.
While Powell’s tenure signals little change in interest rate policy, we will keep an eye on whether he moves to scale back regulations on the banking sector. If this move does occur, it should be modest. His record does not point to wholesale deregulation and he voiced this sentiment during Senate confirmation hearings by showing strong support for the 2010 Dodd-Frank financial reforms.
All things considered, we expect this change in leadership to represent small changes in U.S. central banking policy, not a large shift with the capacity to change the trajectory of U.S. stock and bond markets.
Here at Atlas Private Wealth Management, we will continue to monitor the situation closely moving forward. If you have questions about the new Fed chair, interest rate policy, or how new developments may impact your portfolio, please reach out directly to your Atlas Private Wealth Management Advisor.