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The Fed is Now in Jay Powell’s Hands

by Feb 8, 2018

Princeton graduate and Georgetown alumnus Jerome “Jay” Powell was sworn in as the 16th Chairman of the United States Federal Reserve on February 5. Powell was originally nominated to the Fed’s Board of Governors by President Obama back in 2011, and brings a wealth of experience to the new role.

He’ll need it, because Powell’s job will be to ensure the US economy stays in that happy place between overheating and recession.

Powell is getting tested early—within a few hours of being sworn in, the Dow Jones Industrial Average suffered its largest one-day point drop in history, plunging 1,175 points and shedding all of its 2018 gains in a single disastrous day. The mini-crash follows last week’s market turbulence when a sell-off caused the Dow to drop 666 points.

According to USA Today, the bearish behavior at the Dow owes to fears of spiking inflation and borrowing costs, which prompted investors to re-think the bullish views on stocks that have driven massive growth since President Trump’s election in 2016.

Though not an academic economist like his predecessors Janet Yellen and Ben Bernanke, Powell has a very deep practical understanding of the stock market. By all accounts, his colleagues at the Fed have absolute confidence in his abilities.

“I worry not at all,” said Seth Carpenter, who worked with Powell at the Fed before becoming chief US economist at UBS, noting that Mr. Powell, in his early days at the Fed, would pull staff members aside after meetings with long lists of questions.

As time went on, Powell’s lists of questions got shorter.

“It got increasingly deep and increasingly technical and increasingly sophisticated to the point where I think that this idea that he’s not a real economist is just bunk,” Mr. Carpenter said.

But what will the Jay Powell Fed look like? Will he keep interest rates steady or move more quickly to wind up the Fed’s post-recession policy of easy money? What are his views on financial regulation?

According to a February 4 article published in the New York Times, Powell intends to continue the Fed’s gradual withdrawal from the monetary stimulus program it launched after the 2008 financial crisis.

What’s more, the new Fed chair’s skeptical views on financial regulation are well known and fall in line nicely with the Trump administration’s goal of loosening the constraints imposed on the financial industry following the 2008 crisis.

“Regulation should always take into account the impact that it has on markets — a balance that must be constantly weighed. More regulation is not the best answer to every problem,” Powell told an audience of bond traders this past October.

Investors should rest easy knowing Powell has taken the reins—the mild-mannered Republican businessman has built a good reputation across the aisle for his ability to build bi-partisan consensus.

Powell is also known as someone who doesn’t seek the limelight and who likes to work behind the scenes.

“I never saw him lose his temper,” says Richard Fisher, the former president of the Federal Reserve Bank of Dallas, who sat next to Powell at many Fed meetings and had dinner with him from time to time. “Jay doesn't promote himself like so many do in Washington. He likes to do the unglamorous jobs,” Fisher is quotes as saying in a November 2 article published in the Washington Post.

Interest rates will rise under the Jay Powell Fed, but he’s likely to follow the slow-but-steady pace of his predecessor, Janet Yellen. Plus, his approach to regulation should give markets an extra boost.

Powell’s bi-partisan tendencies are underscored by the fact that President Obama nominated him to the Fed board in 2011 and then re-nominated him in 2014. As such, Powell’s nomination to the Fed chair bodes well for investors, especially in light of the dense cloud of political polarization that has hung over Washington over the past year.