Jerome Powell tended to side with Janet Yellen when he was a Fed Governor. When he takes her place in February, another aspect of a Fed Chair’s leadership abilities is likely to emerge.
The Federal Reserve chair, despite being appointed by the president and overseen by Congress, leads a politically independent decision-making committee composed of the seven members of the Board of Governors (including the chair) and five rotating Federal Reserve Bank presidents. Although only custom restrains the Federal Open Market Committee from overriding its leader, effective chairs have been sufficiently persuasive to forge consensus among the committee’s independent-minded members. At pivotal moments in the past, for example, strong-willed chairs such as Paul Volcker, who set out to break inflation, and Ben Bernanke, who faced a once-in-70-years financial crisis, turned the heads of resistant committee members. That will be no small feat for incoming Fed Chair Jerome Powell, considering that the committee is stacked with ideologically committed economists holding PhDs and Powell will be the first-ever chair from outside the economics profession. As such, we expect Powell to seek consensus to a greater extent than his predecessors. And during the upcoming four-year term, when post-crisis monetary policy must be surgically and carefully withdrawn without surprising or spooking the markets, consensus-based decision-making may be just what’s needed.
During her reign, Chair Yellen often was supported by dovish governors with occasional pushback from the more hawkish Federal Reserve presidents. With four governor seats yet to be filled, the committee’s increasingly important ideological composition is hard to handicap. During the run up to Powell’s nomination, four candidates were floated to test the market’s reaction. Only the trial balloon of John Taylor’s name invoked a bump up in interest rates with a strengthening of the US dollar. If a bubble buster lurked among the candidates, it was most likely Taylor, said the markets. Muted reactions to the other candidates presaged what eventually transpired, which was no discernible market impact upon the formal announcement of Jerome Powell as Fed chair. His term begins March 1.
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