In early February, the Senate approved Jerome Powell as Federal Reserve Chair Janet Yellen’s successor with an 84-13 vote. Powell, however, is not a run-of-the-mill economist — nor a trained economist at all, for that matter. In fact, Powell will be the first Federal Reserve Chair in 40 years to lack a doctorate in economics.
Powell received a bachelor’s degree in politics from Princeton, was trained as a lawyer, has experience with investment banking, and holds ties to Capitol Hill. “Other things equal, I think I’d prefer someone who is more trained as an economist rather than trained as a lawyer,” American macroeconomist and Harvard economics professor Gregory Mankiw told the HPR.
In contrast with Powell, Yellen and the chairs who preceded her predominantly held formal degrees in economics. In nominating Powell, rather than reappointing Yellen, President Trump broke with lengthy precedent. While this brings into question what Trump’s primary motivations were for nominating Powell and what can be expected for the economy moving forward under new leadership, many are hopeful that Powell’s strong leadership capabilities and commitment to financial stability suggest an ordinary upcoming term.
A Seasoned Predecessor
Yellen holds a bachelor’s degree in economics from Brown and a doctorate from Yale. She alternated between working in academia and as an economist for the Federal Reserve from the 1970s to the early 2000s.
American economist and former senior staff economist for the Council of Economic Advisers Richard Cooper taught Yellen during her time at Yale. In an interview with the HPR, he confirmed that Yellen had served on the Federal Open Market Committee for over 20 years. Her combined experience is significant: She served as a governor of the board in the 90’s, as President of the Federal Reserve Bank of San Francisco, and as Vice Chair and Chair of the Federal Reserve itself. According to Cooper, all of these positions contributed to Yellen’s “seasoned experience making monetary policy.”
Yellen was first appointed to the Board of Governors in 2010 by President Barack Obama, and she served as Vice Chair to Ben Bernanke beginning that same year. She took on her first four-year term as Federal Reserve Chair on February 3, 2014.
Historically, it has been standard practice to re-elect a chair to serve more than one term. More interestingly, however, this tradition of re-election has held even in light of party turnovers in the White House. “There’s been a tradition for some decades now of reappointing the [Federal Reserve Chair] even when — most notably when — the person reappointing is of the opposite party of the president who first appointed the Chair,” international macroeconomist and research associate at the U.S. National Bureau of Economic Research Jeffrey Frankel told the HPR. “That has been going on since Paul Volcker was reappointed by both Democrats and Republicans.”
It should be noted that the Federal Reserve is regarded as a nonpartisan body. A president’s decision to keep a chair selected by the opposing party shows respect for the position.
American political economist and Council on Foreign Relations member Benjamin Friedman agreed with Frankel’s observation, noting that this is a “tradition going back for nearly 40 years”, and one that several former presidents have followed. Friedman explained how Ronald Reagan reappointed Volcker, Bill Clinton reappointed Alan Greenspan, and Obama reappointed Bernanke: “Indeed, the practice goes back further than that when President Eisenhower reappointed Bill Martin.”
President Trump’s Motivation
Former President and CEO of the Atlanta Federal Reserve Bank Dennis Lockhart told the HPR that the Federal Reserve Bank “truly is a non-partisan, apolitical public matter.” The goal of the institution is to regulate and maintain the U.S. economy with efficiency, stability, and clarity, and this goal can only be upheld in the absence of political influence. Accordingly, Friedman stated that “the central bank and U.S. economy benefit from the perception that monetary policy is not a partisan activity.”
“In my experience over 10 years, the individuals as well as the institution overall was scrupulously non-partisan,” Lockhart said. “Political considerations almost never entered into deliberations about policy.”
But the concern of partisanship may not rest in monetary policy decisions, but rather the process by which the individuals who make such decisions are selected. Policies exist to address this matter and curb any potential uncertainties. For example, once the president nominates and Congress approves the chair, neither of these bodies may fire him or her. A new chair may only be selected once the term expires, or under special circumstances.
“I think President Trump understands and respects the notion of the independence of the central bank,” Lockhart claimed. Traditionally, presidents have nominated a member of their respective political party when a chairmanship vacancy opens up. These political affiliation patterns, however, are of minimal importance once a nominee assumes the role as chair. Trump may have broken with tradition by not reappointing Yellen, but his selection of a more right-leaning chair bears no surprise.
“I wasn’t shocked that he didn’t appoint Janet,” Mankiw noted. This, however, is where his certainty regarding the matter ends: “I don’t find Mr. Trump’s motivations easy to decipher, to put it as politely as I can,” he remarked.
Frenkel offers a potential explanation of Trump’s motives. He stated that Trump was likely “tempted to reappoint [Yellen],” but that choice fell short of the desire to put his own stamp on his administration and the central bank. Leaving his mark would require undoing or reversing what Obama set in place.
Karen Dynan, who served as the Assistant Secretary for Economic Policy and Chief Economist at the U.S. Department of the Treasury from 2014 to 2017, explained that this type of motive falls into a greater pattern and is not particularly unique to the current president. “This tends to be true with any sort of appointee of the administration,” Dynan said to the HPR, “that the administration will generally put some weight on making their own choice and not sticking with the person that their predecessor appointed, even if they are doing a fantastic job.”
Even though economists may disagree with Trump’s decision to not reappoint the incumbent, they found consensus among themselves regarding Powell’s nomination as a likely legacy of Yellen. Many believed that his term as Chair will show continuity with the last four years. This nomination will be a “vote for continuity rather than change, but of course you could have even more continuity by reappointing Yellen,” Cooper said.
Why Pick Powell?
Given Powell’s questionable credentials and experience, what do we know about Powell? His character. A highly positive reputation precedes him, which plays a big role for both his approval to take the chairmanship and his ability to fulfill the position once he’s in it. Lockhart expressed that he has personal ties to Powell after having worked together for five years on the Council of Economic Advisors, and for two years in the Federal Reserve. “I am extremely positive on this nomination,” Lockhart said. “I have a great deal of respect for Jay Powell.”
Both Lockhart and Powell are non-economists, yet Lockhart expresses “full confidence in his ability to lead in monetary economics and monetary policy.” The two attended Federal Open Market Committee meetings together, giving Lockhart what he calls a “sense of how [Powell] thinks along with the quality and balance of thinking after observing him in action.”
Good character and calm temperament repeatedly came up as traits the Federal Reserve Chair should exhibit. Dynan clearly laid out what she interpreted as fundamental traits for success in the position; “you need to understand the economics behind monetary policy, to have an appreciation for independence of the [Federal Reserve], to know what you don’t know.” She continued, “[You must] be willing to recognize the limitations of your own knowledge and be willing to listen to experts when you don’t know the answer to a question, and you need to be a good leader.”
Ultimately, the Chairman serves as the leading spokesman both before Congress and in public statements, and holds responsibilities such as presiding over FOMC’s meetings, setting the agenda, and guiding discussion. It is important to note, however, that the Chair does not act alone; Powell will have constant access to policy-oriented economists at the Federal Reserve who will be able to provide insight and guidance on all monetary matters. According to Lockhart, Yellen was “very effective as a consensus builder, and I think Jay Powell will be equally effective based on his style and temperament.” He referred to Powell as “collegial and well-respected within the Federal Reserve both by colleagues and staff.”
Friedman confirmed that “Jay Powell is an excellent choice,” and that his “reasons for being sorry about the president’s decision [not to reappoint Yellen have] nothing to do with the identity of the individual who he nominated instead.”
Mankiw also acknowledged that, despite the few reservations related to Powell’s expertise in economics, “People who know him better than I do say he’s a really nice guy, and that’s always a really good thing to hear because you have to corral a very big staff at the Fed.”
Despite Powell’s seemingly glowing reputation, however, it is difficult to believe that character alone can make up for his lack of experience in economics. Historically, there have been conspicuous issues with appointing individuals untrained in economics as chair, which brings into question the reliability of this most recent nomination.
The last non-economist chair was William Miller under the Carter Administration; his glory days were brief and not so glorious. Miller’s term was cut short, and he left the U.S. economy suffering from high rates of inflation and unemployment — a phenomenon known as stagflation, an economist’s worst nightmare.
But unlike Miller, Powell does not show signs of following along this destructive path. While he may not have background in formal economics, Powell is far from inexperienced in a more practical sense. He has a respectable background working with the Federal Reserve. Powell served as a Governor under Yellen’s leadership since 2012, when he was appointed to the Board by Obama. “Based on what he’s done before, there’s no indication that he’s basing his decisions on anything but good, sound economics,” Dynan confirmed.
Looking Forward
With Powell newly in charge, an analysis of the economy’s current state may indicate what we can expect to see from the Federal Reserve and its new leader. At the moment, the U.S. economy remains in a state of stable and lower-than-targeted inflation and is continuing to generate jobs, according to Lockhart’s analysis.
Frankel remarked that “during the campaign, [Trump] was all about ‘monetary policy is too easy, interest rates are too low,’” in contrast to the current state of affairs but that “since he’s been in office, he’s switched sides on that.” While Trump himself has particular desires as to how he hopes to see the economy change, it is crucial to remember that the administration has little influence over the proceedings of monetary policy.
Lockhart said that Powell “may be receptive to some deregulation, but he’s very attentive to financial stability.” In response to the administration’s goals, Powell may “look for opportunities to reduce regulatory burden but not sacrifice the structure in place.” This matter aside, Lockhart stressed the importance of looking forward and being monetarily proactive. “The forecast for the median term is for continued expansion, and even some further improvement in employment and the FOMC’s forecast is that inflation will firm in the direction of the two-percent target,” he said.
Dynan commented that the economy is nearing full employment, which “generally means that the Fed needs to withdraw some of the support monetary policy is providing for the economy.” The Federal Reserve’s response will likely be to raise the interest rates in order to address both inflation and the unemployment rate.
Mankiw explained that the FOMC is responsible for maintaining this target goal while striking a balance that accounts for any potential and unexpected short-term changes. “In the long run, their primary goal is to keep inflation low,” he said, but that it is important to recognize that “this long run commitment gives them a lot of short-run flexibility to try to stabilize employment in the short-term median run.”
Under Powell, we should expect to see “some increase in rates if the U.S. economy continues to do well, but that would have happened under Yellen anyways,” Cooper said. While Powell’s lack of a formal background in economics distinguishes him from his well-established predecessor, his considerable experience suggests a promising term as Chair. Powell’s course of action moving forward will likely follow what Yellen would have done had she been reappointed. While it is impossible to confidently predict future downfalls in the economy, this vote for continuity provides assurance that it will be unlikely to see any direct negative impacts with Powell as Chair.
Image Credit: Flickr/The White House (Andrea Hanks)