If reports in recent days are right, President Trump is about to take a risk that is the opposite of the type that he is known for. If, as expected, he selects Jerome H. Powell to be the next Federal Reserve chair, he will be settling on a modest, measured, unflamboyant steward — someone totally unlike himself, intellectually and stylistically. But the risk in a Powell appointment is that Powell could prove too risk-averse. The first responsibility of a Fed chair is to do no harm. But the second is to make difficult and sometimes rapid decisions: to lead, even when leading involves danger.
A Powell selection would come as a relief to the central-banking establishment. Overwhelmingly, Fed staffers, ex-staffers and credentialed observers would prefer to see the incumbent, Janet L. Yellen, nominated for a second term, a result that would keep a seasoned PhD economist in the chair and uphold a valuable tradition of nonpartisan Fed choices. But Powell, who has served five years as a Fed governor under Ben S. Bernanke and Yellen, is the insiders’ second choice. Though a Republican, he was first nominated by President Barack Obama. Though a lawyer, he is generally well liked by the economists who dominate the Fed’s culture.
The question is how Powell would handle challenges that required him to rise above that culture. In normal times, a Fed chair can accept the staff’s formidably expert assessment of the economy and its view of the appropriate level for interest rates. But three sorts of challenge demand a more activist chair: political threats to the Fed from the administration or Congress; a financial crisis, requiring rapid decisions on bailouts; and strange twists in the economy that render the staff’s economic model unreliable.
Consider the political challenges. Fed independence is not enshrined in law; it is a norm, and a flimsy one. In the late 1960s and the 1970s, politicians pressured the Fed to keep interest rates low, temporarily boosting growth while stoking damaging inflation. This changed in 1979 with the appointment of the towering Paul Volcker, but not in a deep way: By the mid 1980s the administration was back to bullying the Fed, and Volcker was reduced to tendering his resignation. It was only under Volcker’s successor, Alan Greenspan, that the Fed won solid independence in setting interest rates. That autonomy has continued, but both Trump and congressional leaders have threatened to subvert it.
If Powell is chosen to be chairman of the Fed, he will have to respond to these threats skillfully. There is a persistent myth that Fed leaders uphold the institution’s freedom by posing as scrupulous technocrats and refusing to touch politics, but Greenspan established the Fed’s independence by out-politicking his political antagonists. Greenspan cultivated allies in Congress, maneuvered to block legislation that harmed the Fed’s prerogatives and played the media like a piano. If Powell is to protect the Fed, he will have to develop a Machiavellian mastery of Washington.
Next, consider financial crises. Since the collapse of Penn Central railroad in 1970, most Fed chairmen have faced a moment when business-as-usual gives way to frantic ad-libbing. The exception has been the post-2008 years — the years of Powell’s Fed service. The Fed leaders who perform best during crises tend to be those who have experienced them before and who are confident enough to knock heads and break crockery. In 2008, the nation was fortunate that then-Chairman Bernanke was a preeminent academic authority on the 1930s Depression; it was also lucky that Timothy Geithner, the New York Fed president, had spent much of the 1990s handling emerging-market crises. Powell served at the Treasury during the savings-and-loan bust, but that was a quarter of a century ago.
Finally, consider those strange twists in the economy. Today’s oddly low inflation defies the Fed’s model, which would have predicted a higher rate given more or less full employment. Likewise, the Fed’s standard framework has no clear prescription for today’s mix of low inflation and exuberant finance: Should the Fed keep interest rates low to stabilize inflation around the 2 percent target, or raise rates higher to discourage a bubble? Given these dilemmas, it will be hard for any new Fed chairman to unite his disputatious colleagues around a common policy, and harder still to convince critics in the markets, media or Congress of the soundness of the Fed’s position. If the next Fed chairman has neither the intellectual stature of Bernanke nor the political skills of Greenspan, it will be especially difficult.
Powell is thoughtful, likable and, if appointed, will inevitably grow in the job. Still, to contemplate his candidacy is to be reminded that, in politics as in life, the apparently safe course may bring its own peculiar perils.