Status quo likely

 05 Nov 2017 - 14:23

The Peninsula

United States President Donald Trump last week nominated Jerome Powell as the next chairman of the Federal Reserve. Any announcement regarding the Federal Reserve, which is the central bank of the United States, assumes significance not just for the US economy but for the entire world. The chairman of the Federal Reserve is considered to be the among the most powerful position in the world as the Fed chairman has the responsibility of steering America’s economy, the largest economy which has become a key driver of global growth. Now when the suspense about the new name is clear, experts are trying to figure out what this means for Federal Reserve policy in particular for potential rate hikes and balance sheet unwinding.

Experts believe that Powell’s selection would be a status quo move for the president. The economy has performed well under current chair Janet Yellen, and Powell’s statements during his five years as governor has singnalled that he has, for the most part, agreed with Yellen’s decisions. Powell has worked alongside Yellen for the past five years, backing her direction on monetary policy and, in recent years, sharing her concerns that weak inflation justified a continued cautious approach to raising interest rates.

Yellen’s four-year term as Fed chief ends in early February 2018. She will be the first US central bank chief not to be renominated to a second term since 1979. The main challenger to Powell was Stanford University economist John Taylor, a favourite of conservative Republicans who believed monetary policy had been too loose under Yellen and wanted the central bank to rely more on rules when setting rates.

By setting benchmark short-term interest rates, the Fed broadly influences borrowing and lending conditions in the economy. Since the crisis, the central bank has gained more power over the financial sector, while becoming more concerned about issues like income inequality. Powel will take over an economy that has been expanding for more than eight years and one that boasts an unemployment rate at more than a 16-1/2-year low. In nominating the 64-year-old Powell, Trump deviated from the decades of presidential tradition by not retaining the current Fed chair: Barack Obama kept Ben Bernanke, Bill Clinton stayed the course with Alan Greenspan, and Ronald Reagan renominated Paul Volcker.

Powel’s nomination will go through the Senate for confirmation and, if confirmed, Powell will take the reins of the central bank when Yellen’s term expires in early February. Powell is expected to easily clear the Senate, which confirmed him 74 to 21 in 2012 and 67 to 24 in 2014. Experts and analysts hope the new chair will further boost the recovery in US economy which will boost global growth.