Janet Yellen has served as Chair of the Federal Reserve since 2013, but her time leading the central bank is coming to an end. President Trump nominated current Fed governor Jerome Powell to take over as chair, and Yellen has said that she will leave the Fed entirely once Powell gets confirmed by the Senate. Few expect more than token resistance to Powell's nomination, although opposition could end up coming from either side of the aisle, based on past Congressional hearings when the Fed governor initially joined the board.
Many people don't know all that much about Powell. With that in mind, we've found several comments that Powell has made recently that shed some light on his perspective as the next leader of the Fed.
1. On the basic function of the Fed
The best thing the Federal Reserve can do -- not just for the United States but for the global economy at large -- is to keep our house in order through the continued pursuit of our dual mandate.
Powell's statements about the Fed's function show basic alignment with the philosophies that the Trump administration has espoused more generally. The U.S. plays a major role in the health of the global economy, and Powell believes that the Fed's best course is to concentrate first on meeting its domestic mandate.
It's unlikely that the Fed will stop playing its traditional role in international commerce, working with other central banks during times of crisis to shore up weak spots and coordinating policy moves to prevent inadvertently causing major disruptions. Yet it's possible that Fed decisions based, in part, on what's happening abroad could become less common in the years to come.
2. On financial innovation
New technologies have enabled banks and other firms to find different ways of meeting consumers' demand for speed and convenience. On the other hand, these same technologies raise new considerations about data security and safety, as well as consumer privacy and protection.
Powell has a background in investment banking and private equity, and so he knows quite well the role that financial innovation is playing in the industry. Electronic and mobile payment systems, financial data aggregation, and broader-based business analytics are giving banks and other financial institutions the ability to offer customers new services. Banks are also using the data they collect to make better strategic decisions.
Yet data breaches have made clear the threats involved in concentrating all this information. Powell recognizes the struggle, but he knows that the technological genie can't get put back in the bottle, so his approach advocates responsible measures to secure the public trust while still allowing innovation to continue.
3. On emerging market economic strength
The most likely outcome is that the challenges posed to [emerging market economies] by the normalization of global financial conditions will be manageable. ... Although EME vulnerabilities have been rising, they are still well below the levels of the crisis-prone years of the 1980s and 1990s.
Outside the U.S., emerging market economies have played an increasingly important role in fostering growth across the globe. Some economists have been concerned about the impact of Fed monetary policy tightening on emerging markets, many of which rely on free flows of capital from U.S. and other developed financial markets.
Powell recognizes the danger from tightening, especially given the fact that low rates have made it easy for corporations across the world to borrow money. However, Powell believes that the pace of interest-rate increases and the reversal of quantitative-easing programs should be sufficiently slow to give emerging markets time to adjust.
4. On boards of directors at major financial institutions
We have identified five common attributes that effective boards should exhibit and for which we will have high expectations. ... We also want to give directors the flexibility to meet [our expectations] in a manner that works for their particular boards.
The Fed recently came out with expectations of board members in order to prevent the abuses that led to the financial crisis. They include developing a strategy that sets risks appropriately, getting necessary information to make smart decisions, holding senior management accountable, ensuring independence of audit and risk-management functions, and having an appropriate governance structure and set of practices. Powell acknowledges that financial institutions need to be strong enough to support economic growth, and he believes boards of directors play a vital role for those institutions.
5. On the aftermath of the LIBOR controversy
As people now consider the risks around LIBOR for other types of contracts, they will need to go through their documentation to understand what the fallback language is and how it can be improved. ... This is important work, both for the parties to these contracts and for our financial stability.
Five years ago, a scandal involving manipulation of the London Interbank Offered Rate (LIBOR) rocked the financial markets. This short-term rate was among the most popular benchmarks used in the industry, affecting the interest rates on credit cards, business loans, municipal borrowing, and a host of other applications. LIBOR's crisis also threatened the huge derivatives market. Powell's comments show his awareness of needing to follow up on past events with lasting reforms, but they also indicate just how long it can take for widespread reform to take place.
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The appointment of Jerome Powell has been disappointing to many who had hoped that Janet Yellen would have the opportunity to continue in her current role. Going forward, Powell will have the unenviable task of continuing the work of his predecessors, while dealing with the political tensions in Washington in the years to come.
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