Trump nominates Jerome Powell as the Next Fed Chair - Nomura

Analysts at Nomura noted the Rose-Garden announcement in the US session from Trump who has selected Jerome Powell, ("Jay", as Trump called him today), to replace Yellen in early 2018 and offered their analyses of what this means under a number of issues.

Key Quotes:

"Continuity with new leadership style is expected

Today President Trump nominated Jerome Powell, a current Fed governor, as the next Fed Chair. He will succeed Chair Yellen once the Senate confirms the nomination. Powell is likely to avoid commenting on monetary policy until his confirmation hearings are over. Those hearings could come as early as December, but they may be delayed until January depending on other debates on the policy agenda. We expect the Senate to confirm Powell, but given that many Republican senators have previously expressed criticism of accommodative monetary policy, the confirmation hearings could become contentious.

Policy continuity with accelerated “depersonalization”

In our view, the President’s nomination of Governor Powell represents continuity of monetary policy. Not only his voting record but also his remarks suggest that, at least in the near term, Powell is likely to follow the course of monetary policy set by the current core group of Chair Yellen, former Vice Chair Fischer and New York Fed President Dudley.

That said, one issue Powell will likely have to confront is how monetary policy should respond if tax cuts, currently being discussed in Congress, actually boost economic growth. If Powell thinks that policy efforts by the federal government will act as a factor to increase the potential rate of growth permanently, he may be unwilling to accelerate the pace of monetary tightening. On the other hand, if he judges that most of the economic boost from tax reform or tax cuts is only cyclical and pushes the economy further above potential, the policy rate could go up faster in response.

In the long run, the leadership style of the Chair may change, which in turn could have implications to monetary policy. As a lawyer by training with less of a background in macroeconomics and monetary policy, Powell may rely more on staff work and input from other FOMC participants relative to Chair Yellen. Indeed, if confirmed, Powell would be the first Chair without a Ph.D. in economics since Paul Volker in the 1980s. Further, he has so far focused on financial regulation and oversight at the Board of Governors. Since the 1980s, monetary policy discussions have become more complex and subtle. Thus, the combination of Powell’s background and monetary policy’s increasing reliance on economic models and theory could shift the policy-making process more towards collective decision-making as opposed to being dominated by the Chair. Roughly speaking, this trend started when former Chair Bernanke took office as he noted at the post-FOMC meeting press conference in March 2013. He stated, “one of the things that I hope to accomplish … was to try to depersonalize, to some extent, monetary policy.” 1 Under Powell, the depersonalization of monetary policy could accelerate further. One potential drawback of the shift would be that the Fed might not be able to organize an aggressive response when needed.

Will the Vice Chair carry more weight?

Against what we discuss above, under the new leadership, the Vice Chair (not on financial regulation), which is currently vacant, might carry more weight. Stanley Fischer, a former Vice Chair, had an outstanding academic career and helped provide theoretical rationale for policy actions while he was at the Board of Governors. The White House could fill the position with someone having an academic background. While Treasury Secretary Mnuchin, who led the Fed Chair candidate selection process, reportedly favored Powell, other senior officials such as Vice President Pence and some congressional Republicans supported John Taylor, a professor at Stanford, known for the Taylor rule. At the moment, we do not have much clarity as to who might be nominated to be as Vice Chair. During the announcement today, President Trump thanked current Chair Yellen and, in our opinion, did not indicate any inclination for a major change to the current course of monetary policy. However, we cannot rule out the possibility of the President choosing a person who seeks significant changes to monetary policy (like Taylor), while the Chair traditionally has a significant influence in choosing the Vice Chair. Powell’s remarks earlier this year suggest that he is critical of rule-based monetary policy. 2 He stated, “I am unable to think of any critical, complex human activity that could be safely reduced to a simple summary equation.”

Regulation

With respect to regulation, Governor Powell would likely be slightly more accommodative to loosening some post-crisis financial regulations than Yellen. However, he would most likely be open to only small adjustments. In our view, Powell would likely favor reducing regulatory burdens associated with complexity of the Volker Rule, stress testing, and leverage ratios but resist any material changes to the essential elements of the DoddFrank Act which could undermine the effectiveness of the current financial regulation framework. As for Congressional efforts to reform the Fed, we believe he would try to keep the current degree of independence of monetary policy, as his statement on the nomination includes the following sentence, “I strongly share that sense of mission and am committed to making decisions with objectivity and based on the best available evidence, in the long-standing tradition of monetary policy independence.”