The Federal Reserve chair is the world’s biggest job in financial policy setting. It demands good judgement, ice-cool nerve and some luck. Outgoing boss Janet Yellen needed – and had – all three.
Yellen presided over an economy that put on speed and saw unemployment fall: at the start of her role US unemployment stood at 6.7%. By the end of her tenure this had dropped to 4.1%. She took a lead on crushing the Fed’s massive quantitative easing program – the printing of dirt cheap money – and managed to keep a tight grip on inflation, close to the Fed’s 2% target.
Oh, and under her economic stewardship the stock market is up +70% (since 2014).
New boss, new direction?
Step forward, then, Jerome Powell. He not only needs a generous measure of Yellen’s technical grip – Powell is a lawyer by discipline, not an economist – but has to signal future change (and do it clearly without ambivalence), well in advance. Forward guidance was something Yellen did particularly well. Markets and investors abhor surprises.
"He's boring, but he's to the point," Ward McCarthy, chief financial economist at Jefferies, told CNBC in early November. "You don't listen to him and scratch your head and wonder what he just said.”
Despite the lack of formal economic credentials Powell hauls a raft of financial and regulatory experience behind him. That ‘regulatory’ bit is especially relevant. Powell’s boss, Donald Trump, wants to unravel many of the Dodd-Frank safeguards ushered in after the 2008 financial crisis; so does Powell.
"We will continue to consider appropriate ways to ease regulatory burdens while preserving core reforms,” Powell said in his confirmation statement. Critically, Powell, when pressed by Democrats last year, said he did not think US banks had become too large – many consider mega American banks and their many opaque tentacles under-capitalised. The potential for moral hazard risk still lurks, many worry.
More clarity needed
In other words, there’s a slight smell of institutional complacency around Powell. Plus some haziness about his own gut instincts. Powell has never strayed far from Fed consensus in his speeches says US economist Michael Pearce from Capital Economics. That means the financial community doesn’t yet have a clear idea of what Powell actually thinks, even if they know he’s not an eccentric.
“Far from generating stability, we fear this will leave the Fed looking directionless when events inevitably turn,” said Pearce in a briefing note, “and the Fed needs to think about ending or perhaps even reversing its tightening cycle. Unless Powell finds a strong voice, miscommunication from the Fed could easily wrong-foot the markets.”
The consensus suggests Powell will want to raise rates four times this year. US wage pressure, finally, is beginning to build. Interest rate expectations have risen steadily over the last quarter; a March rate hike is more or less priced in.
“We anticipate a larger rebound in inflation this year which will force the Fed to raise rates four times in 2018, more than markets currently expect,” says Pearce.
Dollar – what exactly is going on?
The other monster issue is the direction of the dollar, currently close to a three-year low. Treasury Secretary Steven Mnuchin recently said a more anaemic US currency is what the White House wants, helping the country trade competitively but making some imports prohibitively expensive.
Donald Trump said the same thing repeatedly before taking public office. Then he changed his mind in Davos last week. “The dollar is going to get stronger and stronger and ultimately I want to see a strong dollar,” the President said in an interview with CNBC.
Getting a clear steer, then, on what’s going on isn’t easy. The monetary murk also transmits a lack of grip to the wider financial community and poses other questions: how can you create real, sustainable wealth when you boil-shrink the buying power of your currency? What is the point of cutting taxes for blue-collar workers if their Asian washing machine or German car costs more?
A German-engineered BMW in NYC: Shutterstock
Reserve status – but for how long?
On the edges, the Chinese are getting more confident about their own currency, even applying pressure for the Saudis to price oil in yuan rather than dollars.
For the moment the US dollar maintains its reserve currency status. But that’s more about the frailty of other currencies, some argue, than innate dollar robustness. Powell, a safe-ish bet, has his work cut out, then. His overriding dullness and caution may see rates climb at a slower pace than some predict.