News outlets are reporting that President Trump will nominate Jerome Powell to chair the Federal Reserve’s Board of Governors. That’s a big deal. Every president since Harry Truman has reappointed the incumbent Fed chair from the other party for a second term. Obama-appointed Fed chair Janet L. Yellen has gotten high marks from Trump and many others for how she’s managed the economy. Nevertheless, Trump breaks with decades of bipartisan practice to replace her with Powell, a Republican who’s been a Fed governor since 2012.
It’s true that Powell has been one of Yellen’s most reliable supporters in setting monetary policy, making this a steady-as-she-goes selection. In choosing Powell, Trump also ignores Senate Republicans who urged the president to select a “hawk,” a central banker more prone to steeper and speedier rate hikes.
Even so, this is a markedly partisan move. Powell will confront at least four speed bumps.
1. This could be the most polarizing vote ever to confirm a Fed chair.
Congress first required that Fed chair nominations be confirmed in 1977. Until recently, most nominations have been confirmed in bipartisan votes. But the parties have favored different monetary and regulatory policies since the 2007 financial crisis, and so President Barack Obama’s two appointees to the Fed faced much rougher sledding. When Obama renominated Ben Bernanke — originally appointed by George W. Bush — for a second term in 2010, he got just over half of Republican senators’ votes. Yellen got only a third of GOP votes in 2014.
Could Powell face a similarly partisan confirmation vote? When Obama nominated Powell for a Fed Board seat in 2014, fewer than half of GOP senators — then in the minority — supported him. Of those, 22 Republican “no” voters are still serving in the Senate. Will they support Powell now that he’s a Trump nominee? More than three dozen Democrats supported Powell in 2014. How many will vote to reconfirm him now that he’s Trump’s pick?
Powell will surely be confirmed. But if he faces a close and partisan confirmation vote, it would signal that partisan polarization has increasingly spread to the Fed.
2. How will Powell forge consensus at the Fed?
Some Fed watchers argue that putting Powell at the top will make little difference in monetary policy. Powell is expected to continue on Yellen’s gradual path of higher interest rates and a shrinking Fed balance sheet. Had Trump picked a candidate who brought a more confrontational approach to leading the Fed, it might shake the roaring stock market for which Trump often claims credit. But because Powell offers continuity, his nomination should calm market fears of any sudden monetary policy shifts.
But the chair is just one person. Trump has three more seats to fill. And if Yellen leaves the Board when her term as chair ends, Trump can fill a fourth. The Senate has already confirmed his nominee Randal Quarles for the key supervisory seat. Trump’s other nominees will help shape the economy’s outlook — and either limit or strengthen Powell’s power.
Capitol Hill Republicans are likely to continue to urge the president to appoint more disruptive members. If that happens, Powell could well have trouble building policy consensus both within the board and across the Fed’s broader monetary policy committee.
3. Will the new Fed unravel Dodd-Frank’s regulatory policies?
Trump and his economic advisers are no fans of Dodd-Frank, the Obama-era law that significantly tightened supervision and regulation of the banking industry after the financial crisis. Yellen may have taken herself out of the running for renomination when she gave a full-throated defense of Dodd-Frank’s regulatory architecture at the Fed’s summer retreat in Jackson Hole. Treasury Secretary Steven Mnuchin reportedly favored Powell in part because he thinks he could “exert some measure of influence over him.”
But Powell has largely defended Dodd-Frank. He even called the Trump Treasury’s plan for financial deregulation a “mixed bag,” noting some ideas he wouldn’t support. Meanwhile, Quarles at his confirmation hearing expressed support for paring back Dodd-Frank, endorsing “virtually all” of the June 2017 Treasury report that aims to roll back regulatory costs and burdens on the banking industry.
Quarles is the first person to serve as vice chair for supervision since Congress created the seat in Dodd-Frank. The law makes clear that the vice chair makes recommendations “for the Board.” How would Powell respond if Quarles — along with a Republican Congress, the White House and the Treasury Department — all urge the Fed to rewrite rules imposed by Dodd-Frank, rules that were intended to shore up the safety of the financial sector?
4. Will a Republican Congress ease up on a Republican-led Fed?
Republicans in Congress pushed back hard against the monetary policy of a Fed led by Obama appointees. Predicting inflation that never appeared, Republicans argued that rates were kept too low for too long. They also threatened to curtail the Fed’s policy discretion by requiring the Fed to follow formulaic rules to set interest rates.
And when the Fed bought massive quantities of bonds to stimulate the economy in the wake of the crisis, GOP lawmakers accused the central bank of a multitrillion-dollar intrusion into the credit market. As the chair of the House financial services panel warned, “If we are not careful we may wake up one day to find our central bankers have instead become our central planners.”
Notably, Powell never dissented from any of the Fed’s decisions under Bernanke and Yellen. If he is Fed chair, will congressional Republicans still lean on the Fed? If there’s a financial crisis, will the Fed give in to pressure to abandon the Bernanke and Yellen approach?
Lawmakers of all stripes focus more intently on the Fed when the economy sours. Should another financial crisis or even a more run-of-the-mill recession appear on Powell’s watch, he will find himself caught between his blame-avoiding congressional bosses, an outspoken, critical president and potentially unruly colleagues at the Fed. Powell’s pragmatic, consensus-building reputation will surely be stress-tested.
Mark Spindel is founder and chief investment officer at Potomac River Capital, a Washington-based investment firm.
Binder and Spindel are co-authors of the newly published “The Myth of Independence: How Congress Governs the Federal Reserve,” Princeton University Press.