November 5, 2017
Janet Yellen Was a Master of Thinking in Public. What About Jay Powell?
by Adam Davidson
Jay Powell, Trump’s nominee for Federal Reserve chair, is praised as a safe, consensus choice, but no one can be entirely sure what he is thinking. Photograph by T.J. Kirkpatrick / Bloomberg via Getty
Much of the time, the Federal Reserve operates a bit like a commercial pilot on a long, routine flight over the Pacific. The plane’s navigational system is taking care of nearly all the decisions, and the pilot is just there in case things go haywire. The central role of the Fed’s chair, governors, and regional presidents is to meet roughly every six weeks to decide on the Fed funds rate. Technically, that rate is the amount banks charge one another for overnight loans; metaphorically, however, it’s the central drumbeat of the economy. (Or should it be “the thrust of the airplane’s engines”? Too many metaphors.) The Fed funds rate ripples throughout our financial system and, in ways that are still not fully understood, helps determine inflation, unemployment, and, from time to time, the very structural soundness of the global economy.
On Thursday, President Trump nominated Jerome (Jay) Powell as the next chair of the Federal Reserve. By near-universal agreement, he’s a safe choice. For five years, he has been one of the little-known gray men at those regular meetings, always voting with the usually unanimous majority, never expressing dissent or an independent view. Journalists and Fed watchers have scoured his background and found virtually nothing to suggest a monetary Powell doctrine—some take on the world that would tell us how he might handle, say, a financial crisis or a sudden recession with a President screaming for the Fed to act. Bloomberg carefully studies each member of the Fed’s Open Market Committee (the body that determines that crucial rate), and has rated Powell as precisely “neutral,” meaning he is neither a “dove” (someone generally supportive of lower rates to increase employment) or a “hawk” (someone who is more worried about inflation and wants to use faster-rising rates to slow the economy down). The assumption is that he will continue the policies of the recent past, which is to say that he will encourage the Fed to very slowly, very carefully increase the Fed funds rate.
Our ignorance about Powell is partly because he is not an economist, so there is no trail of academic papers in which he has carefully laid out his views. Powell, who is sixty-four, is a lawyer. Early in his legal career, he represented banks; in the mid-eighties, he was hired by one, eventually becoming a vice-president of the investment bank Dillon, Read. Aside from a short stint in George H. W. Bush’s Treasury Department, he spent most of his career at huge global investment firms, including the Carlyle Group and a firm that he founded, Severn Capital Partners. He has made few public statements; those he has made are obscure even by Fed standards. This summer, for example, he said that he would have expected more inflation right now, given that the economy has been growing healthily and unemployment has fallen. He said that the lack of inflation is “kind of a mystery,” and offered no additional insight. The interplay between Federal Reserve policy and inflation is a central question of macroeconomics, and so it is crucial to understand how a Fed chair thinks through this question. By comparison, Janet Yellen, the outgoing chair, has recently also expressed surprise at the unusually low level of inflation, but she hardly left it there. She walked through several possible reasons for it, including global technological change (she pointed to online shopping, which encourages price cuts, as one potential cause), and lower-than-expected increases in medical prices. She additionally explained how continued surprises might influence her decisions about Fed policy. Yellen was candid and clear, so that anyone—or at least anyone who understands central bankers—could grasp what she is thinking, and how her thinking might change if the facts change.
Dr. Janet Yellen is a master at thinking in public—continually sharing what she is doing, why she is doing it, and what she might do in the future. This was essential to the Fed’s role in stabilizing the global economy during its greatest modern crisis.–Adam Davidson
Like her predecessor, Ben Bernanke, Yellen is a master at thinking in public—continually sharing what she is doing, why she is doing it, and what she might do in the future. This was essential to the Fed’s role in stabilizing the global economy during its greatest modern crisis. It’s an odd feature of our modern economy that it requires the entire financial world to trust in a handful of monetary-policy wizards who meet in secret every six weeks or so. But it is true. The Fed funds rate is the platform upon which the global economy is built, and was tested so profoundly that Bernanke and Yellen (who served as vice-chair before her promotion) had to invent new suites of macroeconomic tools. If they hadn’t built such trust through decades of rigorous academic work and open communication while at the Fed, their experiments would surely not have been so successful.
If the economy continues as it has for the past three years or so—slowly, steadily growing, with minimal inflation or turmoil—there should be little reason to worry about Powell. A middle-of-the-road man of consensus will be able to guide the Fed well. Powell is a relief for those worried that Trump—who has made it quite clear how little he knows or cares about monetary policy—might put in place a fringe ideologue or a man like Arthur Burns, who, as the Fed chair, succumbed to President Nixon’s desire to goose the economy through lower rates right before the 1972 election, even if it increased the likelihood of long-term inflation.
If, however, there is severe economic turbulence—a rougher-than-usual recession or a financial crisis that erupts, suddenly, somewhere else on the globe—the fact that few people know how Powell thinks will be a real problem. Hopefully, he will take after his predecessors and begin to tell us about himself. We need to know who you are, Mr. Powell—it’s possible our economy will depend on it.