On November 2, President Trump announced Jay Powell as his choice to succeed Janet Yellen as Fed chair. He’ll take over next February. Powell didn’t emerge as a candidate until late August. He showed up late to the party but still succeeded in winning the top job.
Many analysts are surprised by the Powell pick. For starters, he’s a compromise choice with more in common with Yellen than with more hawkish candidates like Kevin Warsh and Gary Cohn. Usually one to make a splash, Trump did the opposite of that by selecting the most moderate candidate.
In contrast to Yellen and her predecessor Ben Bernanke, Fed Chair Jay Powell is not an academic economist. Currently a Fed governor, Powell is a former investment banker and treasury official under President George H.W. Bush. Here are Powell’s views on the issues that matter most to investors:
Monetary Policy
Powell prefers to raise interest rates gradually, like the Fed is doing under Yellen’s leadership. He agrees with the Fed’s current inflation target of 2%. The consumer price index sits at 1.4%, so the Fed can continue to have a lax policy without harmful inflationary effects.
Tellingly, Powell gave a speech on October 12 where he said the global economy is stabilizing and the Fed should stay the present course:
“You’ve got for the first time in quite a while synchronized growth around the world, you’ve got a dollar that is flat to down, you’ve got commodity prices up, and you have really significant reduction in downward pressure on the Chinese currency. So, all of this I think is taking place against a backdrop where as long as this backdrop sustains, it’s likely that the process of normalization will proceed without significant disruptions.”
What it means for investors: Interest rates will edge up gradually. Borrowing will remain cheap, giving stocks an extra boost.
Financial Regulation
Incoming Fed Chair Jay Powell tends to agree with the POTUS on financial regulation. He thinks some sectors of the financial system are over-regulated. The government needs to ease back some regulations before the economy can reach its full potential.
Earlier this year, Powell published a paper on the Fed website where he called for simpler rules and fewer regulations on community banks. In a June 1 interview, Powell called for an audit of all current financial regulations:
“The post crisis reform program has been mostly completed and has mostly been successful. I think it’s our obligation now, as we reach completion of it, to look back over it and ask what aspects of it may be redundant or inefficient or utterly essential and should be protected down to every letter. But there are going to be some adjustments and I think that’s only appropriate.”
What it means for investors: Fed Chair Jay Powell will work with White House officials and GOP lawmakers to reduce the regulatory burden. This should be good for the stock market, especially for small cap stocks that are more sensitive to regulatory changes.
Bitcoin
Powell is open to Bitcoin and other virtual currencies. While he acknowledges the risks and potential problems posed by virtual currencies, he claims to have a neutral attitude. Here’s what he said about Bitcoin during that same June 1 interview:
“Nothing against Bitcoin, nothing against you know, private currencies. … We generally look at some of the risk of cryptocurrencies associated with money laundering and those sorts of issues but we’re not broadly opposed or supportive of alternative currencies.
I think from a Fed standpoint, I would say I am very cautious on the idea of a Fed digital currency. That’s something central banks are generally looking at, but I would say my approach to that would be very, very cautious.”
What it means for investors: As Fed chair, Powell will likely accommodate the rise of virtual currencies. That doesn’t mean the government won’t try to regulate them. Investors should take this as good news, however.