Can Jerome Powell Run the Fed for the People?
Ever since Donald Trump officially nominated Jerome Powell on Nov. 2 to be chairman of the Federal Reserve Board, Wall Streeters and others have been scouring his bio for clues on what type of U.S. central banker he’ll be. Here’s what we know: Powell has a personality that veers toward consensus building. The Wall Street Journal has dubbed him “Mr. Ordinary.” He’s not an economist, though he’s been involved in financial markets as a banker, investor, and policymaker for a while. And he’s very, very rich.
Powell’s understated persona has led some to say there are few clues to how he’ll act as Fed chief. But there’s more to go on than people have suggested.
The first thing is being Mr. Ordinary. Personality matters, says Laurence Ball, an economist at Johns Hopkins University who’s written papers on the character traits—and effectiveness—of Ben Bernanke and other policymakers. Ball says Bernanke’s shyness, for instance, prevented him from seeing the financial crisis coming and acting more quickly when it did. Similarly, Powell’s centrist tendency is a concern. Ball says the Fed is an institution that by its nature pulls people to the center. “Forcefulness matters,” he says. “The Fed could use more mavericks.”
Powell might also not be as much of a dove on interest rates as Trump and others think. In June he spoke about the continued need to increase them. Shortly after he joined the Fed, he pressed Bernanke to limit and set an end date to quantitative easing—the bond-buying program meant to help stimulate the economy. He’s since been a supporter of the program.
What’s more, historically, Fed chairs who were bankers or chief executive officers have tended to keep rates higher than those who were economists. William McChesney Martin Jr., a banker who headed the Fed from 1951 to 1970 and who’s seen as one of the more successful modern chairs, was famously hawkish. He likened the Fed to a host who pulls away the punch bowl just as the party’s getting started.
Others see Powell’s lack of an economics background as a good thing—if it means he will communicate in plain language. Fed statements have gotten longer and more complicated over the past two decades. A 2014 study from the St. Louis Fed found that earlier U.S. central bank monthly statements required the equivalent of only a ninth-grade reading level. Now you might need as much as three years of post-college education to understand them. “The Fed definitely has a communication problem,” says Vincent Reinhart, chief economist at Standish Mellon Asset Management Co. and a former top economist at the Fed. “A non-economist who can explain the bank’s policy to Washington and the rest of the world would be a positive.”
Still, Reinhart says, there’s probably a reason we haven’t had a Fed chair who wasn’t an economist in a while. The job these days is to signal the future path of interest rates. That’s something Janet Yellen did very well. Predicting rates is hard to do, and models that economists use are increasingly technical. “The risk is that a non-economist becomes only a user of the recommendations the Fed’s staff economists provide,” Reinhart says. “A Greenspan or Bernanke or Yellen had the ability to push back.”
Lastly, Powell, who spent time as a top banker on Wall Street and a dealmaker at private equity firm Carlyle Group LP, is probably far richer than many realize. Most reports have pegged his wealth at as much as $55 million. But Powell’s most recent disclosure says he received as much as $1 million in income from the Vanguard Total Stock Market index fund in the past year. Its dividend yield has been 1.7 percent over the past 12 months. Based on the dividend, his stake in the fund alone could be worth $58.5 million, pushing his total potential wealth to more than $112 million. (Powell also sold a portion of his stake in 2017, but his disclosure doesn’t say how much income was generated by that sale.) He declined to comment for this article.
Fed policy arguably could be shaded because one of the most important people in the economy is also among the top 0.1 percent—almost 800 times richer, even after adjusting for inflation, than Paul Volcker was when he headed the central bank. Perspective matters. For example, when the Fed under Bernanke lowered interest rates to near zero and kept them there during the financial crisis, critics contended he was hurting savers. But the only savers hurt were those who were relatively rich and had most of their money invested in relatively short-term bonds or certificates of deposit. Any savers with a portion of their wealth in the stock market ended up doing fine in the Bernanke era. Bernanke shrugged off the criticism. Would someone worth 40 times as much do the same if a similar crisis occurred?
The wealth gap is one of the biggest issues facing the U.S. The Fed can play a role in trying to narrow that difference, or at least limiting its growth. One way is by regulating Wall Street, from limiting compensation to vetting products offered to Main Street investors. But Powell is expected to loosen regulations. “When the leadership of the Fed can’t relate to what it’s like to lose your job and then not be able to pay your rent, that’s a problem,” says Dean Baker, co-director of the liberal Center for Economic and Policy Research.
Stephen Gandel writes for Bloomberg Gadfly.