The change in leadership at the central bank is taking place at a time of strength for the U.S. and global economies, which should help ensure a smooth transition. In a statement following its two-day policy meeting, the Fed praised the “solid” gains in hiring, household spending and business investment.
Unemployment is at a 17-year low, growth has picked up in recent months, and inflation has remained low. Perhaps the only concern is a stock market that keeps hitting record highs, but the Fed has said its main focus is the health of the wider economy, not daily market moves.
“I think this initial handoff from Yellen to Powell is going to go pretty well. He’ll take the baton and run smoothly with it in his first lap,” said Stuart Hoffman, senior economic adviser for PNC Financial Services Group.
The Fed is strongly hinting that it is likely to hike interest rates at its next meeting in March. The committee that sets interest rates went out of its way to say that it expects inflation to hit — or at least come very close to — the Fed's 2 percent target this year. Persistently low inflation has been the main stumbling block holding the Fed back from faster rate hikes.
“Inflation on a 12-month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term,” the Fed wrote in its statement, adding that "further graduate increases" in interest rates are likely. There was no news conference after the policymaking meeting for the Fed to further explain its thinking.
The Fed projects three rate hikes this year.
In recent years, the central bank has overestimated how many times it will raise rates, but economists say this time might be different. The recently enacted Republican tax cuts are likely to pump up growth, forcing the Fed to pump the brakes so inflation doesn’t get out of hand.
“Powell tends to err on the side of caution,” said Lindsey Piegza, chief economist at Stifel. “It will be difficult in his mind to justify additional rate increases.”
Powell, a lawyer and former private equity executive, has been a member of the Fed board since 2012. He has served under Yellen and is expected to keep many of her “slow and steady” policies in place.
Yellen is widely praised for her tenure as chair, and many on Wall Street hoped she would be reappointed, as is typical under a new administration. She has presided over one of the largest drops in unemployment and greatest rises in stocks of any Fed chair.
Trump criticized Yellen on the campaign trail, saying she should be "ashamed" of herself for keeping interest rates low, but he ended up lauding her after he took office and said he seriously considered reappointing her. But in the end, Trump went with Powell, a Republican who was initially appointed to the Fed by President Barack Obama and is known for working across the aisle.
In addition to having to figure out how to react to rising markets and a potentially hot economy, Powell will also have to deal with a short-staffed Fed. There are supposed to be seven Fed governors, but as of Monday, Yellen is expected to resign from the board, meaning Powell will take over with just three of seven Fed governor slots filled.
Fed governors are appointed by the president and confirmed by the Senate, a similar process to Supreme Court judges. But both Obama and Trump have been slow to appoint people to open seats, and Congress has been slow to confirm them. Trump has nominated economist Marvin Goodfriend for one of the other openings, but the Senate has yet to vote on him.
“I’m looking for Jerome Powell to encourage the president to continue to fill out the board so he has more support,” said Ellen Zentner, chief economist at Morgan Stanley.
Having a full board at the Fed could be even more important if the stock market starts to slide. Alan Greenspan had to face the October 1987 “Black Monday” stock market crash just two months into his tenure as Fed chair. It was an early test of his leadership.
“Alan, you’re it,” the president of the New York Federal Reserve – E. Gerald Corrigan – told Greenspan at the time. “...It’s up to you. This whole thing is on your shoulders.”
Fed historian Gary Richardson said the markets will have to get used to how Powell, a lawyer, speaks and reacts. That could be tricky if there’s a crisis in his early days. (Powell is the first non-economist Fed chief since the late 1970s.)
“Economists want more communication; lawyers tend to want less,” said Richardson, a professor at the University of California Irvine and the former official Fed historian. “Powell has only been at the Fed when the economy is expanding. He has no experience running the Fed when the economy is contracting.”