Fed Chair Nominee Powell Is No Ph.D., But No Pushover EitherBy and
Staff has history of keeping debate behind closed doors
Insiders say Powell has shown he’ll challenge Fed economists
Years before he was tapped to lead the Federal Reserve, Jerome Powell brought to the world’s most powerful central bank a lesson he learned in the business world: manage or be managed.
On everything from the payments system to monetary policy, he noticed the Fed’s brainy staff of economists would hash out their differences among themselves and then present governors with a unified policy recommendation, expecting them mostly to follow their advice.
That didn’t sit well with a lawyer who cut his teeth in private-equity investing. In that line of work, proposed deals must survive a gauntlet of scrutiny in front of top decision makers, with some firm members assigned specifically to argue against a would-be investment.
So Powell the Fed governor pushed back. He insisted on some occasions that staff members debate policy ideas in front of him, according to one former Fed official who served with Powell. He also pored over mountains of academic studies and asked questions. In his five-plus years at the Fed, he’s managed to gain the staff’s respect even as he challenged their ready-made recommendations.
That will come in handy when Powell takes the reins in February and the Fed, with its army of more than 300 Ph.D. economists, gets its first chair without an economics doctorate since Paul Volcker served from 1979 to 1987. Already there are worries from outside the bank that he’ll be captured by the Fed staff. Former Governor Kevin Warsh, who made President Trump’s short-list of Fed chair candidates, practically campaigned for the job on the idea that an outsider was needed to challenge the groupthink inside the building.
“It is really important for the Fed chair to challenge the staff on why they think their analysis is right,” said Karen Dynan, a Harvard University economist who worked at the Fed board for 17 years. “The danger is when the analysis is consistent with views that are widely held and accepted too quickly.”
Fed staff represent one of the best collections of economic specialists in the world. By many accounts their forecasts and recommendations are highly valued by policy makers. But they’ve also been accused of being insular and, as Powell learned, resistant to airing unresolved debates in front of governors. Moreover, turnover among the most senior staff is infrequent. When it does occur, successors are usually promoted from within.
Of the organization’s eight directors and deputy directors in the divisions of monetary affairs and research-and-statistics who are economists, six started their careers in the Fed system. Only one has experience in the private sector, and that coming on Wall Street, according to biographies compiled by the central bank and Bloomberg. That means the Fed benefits from experience within the system, but may miss out on fresh thinking.
Janet Yellen, the current chair, showed leadership when she stuck to a view that as the economy recovered more Americans outside the official labor force might yet be drawn back in. The staff was more skeptical. Following their thinking might have led to a faster pace of interest-rate increases. In the end, Yellen seems to have been vindicated. She’s raised rates with extreme caution, provoked no inflation to speak of and drawn hundreds of thousands of workers off the sidelines.
Some doubt Powell will have the knowledge and confidence needed to do anything similar.
“Powell doesn’t have the same depth of knowledge on which to rely,” compared with his predecessors, said Eric Winograd, senior U.S. economist at Alliance Bernstein. “That won’t matter for now, when the waters are relatively calm and the course of policy well-set, but we’ll see what happens when the cycle turns and the FOMC has to change course.”
There have been other non-Ph.D.’s who’ve found their voice and spoken forcefully in economic debates, such as former Governor Daniel Tarullo, a lawyer and bank regulator who left the Fed in April.
In August 2011, the Federal Open Market Committee met just as stock markets were plunging and pessimism was mounting around the European and U.S. economies.
Then-Chairman Ben Bernanke started with Tarullo in what’s called the “economic go-round” where all FOMC participants share their views. It’s usually a polite recitation of macroeconomic trends and observations. Tarullo broke with that tradition and bombed the room, shaping the rest of the meeting.
“That debate is over,” he said. “The side arguing steady but unspectacular growth has lost.”
Powell is known as collegial, even genteel. He’s unlikely to be quite the bulldog that Tarullo was, but he’s also shown he won’t always just follow the house view.
Powell “is well aware that there are lots of views on monetary policy questions, that if someone presents a policy view as definitively so, then he’s getting bad advice,” said Jon Faust, an economic adviser to the FOMC from 2012 to 2014 who is now an economist at Johns Hopkins University in Baltimore. “He was quite adept at asking the right questions, including of me.”