The cat is out of the bag: last Thursday, president Donald Trump announced that he will nominate Fed-board member Jay Powell as Chair of the world’s most important central bank. After Trump kept the press and financial markets in suspense for weeks, just as if it were an episode of his hit series The Apprentice, he finally announced that he will nominate Jay Powell to replace current Fed Chair Janet Yellen as of February next year. What can we expect from Jay Powell in the coming years while the Fed attempts to normalize its monetary policy?
Of all candidates for Fed chair who were eyed by Trump, Jay Powell seems to be the easiest way out. Powell has always agreed with the ones holding the reigns. “Pragmatism,” the Financial Times calls it. I would call it a lack of principles.
It should therefore not be a surprise that markets barely moved upon this long-awaited news. Jay Powell is the candidate par excellence that simply continues the same-old monetary policy of the retiring (and snubbed by Trump) Janet Yellen.
And how could we summarize Yellen’s monetary policy in a few words? Akin to papering over the cracks. To prefer not raising interest rates, but if one must, then to raise rates as little and as gradual as possible. A constant fear for a strong, adverse reaction from financial markets (especially stock markets). Politically correct. Rather too much inflation than a financial crisis. To prefer postponing until tomorrow what you could have done (or should have done) today.
It is clear what the incentive of a president is: to nominate someone for Fed Chair who will make it as easy as possible to execute your plans. The “pragmatist”, for convenience sake. Someone who keeps interest rates a bit too low for too long. Because that will only make it easier to realize your plans as a president, as is the case with Trump who plans on financing a tax cut with higher deficits.
In this respect, the hope of Trump reforming the Fed has turned out to be completely false.
After all, Trump went on saying the following at the time of his presidential campaign during one of his debates with his opponent, Hillary Clinton:
“And believe me, we are in a bubble right now. And the other leaving that looks good is the stock market. But if you raise interest rates even a little bit that is going to come crashing down.
We are in a big fat ugly bubble. And we better be awfully careful. And we had a Fed that is doing political things. This Janet Yellen of the Fed, the Fed is doing political by keeping interest rates at this level. And believe me the day Obama goes off and he leaves and he goes out to the golf course for the rest of his life to play golf, when they raise interest rates, you are going to see some very bad things happen because the Fed is not doing their job. The Fed is being more political than Secretary Clinton.”
Trump was merciless during his campaign with regard to the Fed. Until he was elected president.
Suddenly no more “ugly bubbles.” New record highs of stock markets were, on the contrary, a clear prove of Trump’s “superior” qualities. What he first deemed a bubble, was now evidence of Trump’s outstanding management, according to Trump himself.
The Fed was no longer being more political than Secretary Clinton, but suddenly Yellen and her successor Jay Powell are simply divine, benevolent philanthropists who want to do good upon the world.
It should be clear that Trump does not care for what he said a year earlier. The path of least resistance is a Fed Chair who will kneel before the almighty Trump and swears to keep interest rates low enough to help realize the political plans of the administration. Someone who is as flexible as the wind with regard to fiscal reform and who will never be overly critical out of fear of losing his job.
It was Powell, after all, who more or less opposed the third quantitative easing (QE) program, but still ended up voting, as a true politician, in favor of QE3. It seems Powell is more in it for power than anything else. He bends like bamboo.
In this respect, it is rather curious that Jay Powell is a multimillionaire, which turns him into the richest among Fed board members and, in fact, the richest Fed leader in history. So clearly, he is not in it for the money. It seems as if Powell is rather in it for the power.
Just as curious is the fact that a large share of Jay Powell’s wealth is invested in private equity and the US stock market. Two sectors that experienced a couple of great years, precisely because of the Fed´s low interest rates! Does Powell wish to maintain his millions of net worth? In that case, not only the president, but the Fed Chair stands to benefit very much from continuing a low interest rate policy as well.
On the opposite side of the spectrum stands, for instance, the retiring (and since recently former) Vice Chair of the Fed, the former IMF director Stanley Fischer. In contrast to Powell, Fischer held an enormous position in physical gold, something which is undoubtedly a result of his previous experience at the IMF during the Asian contagion (currency) crisis of the late 90s.
Trump just made his most important Fed appointments of all: he picked a nominee who is a virtual guarantee for low interest rates and who prefers inflation over rate hikes. But Trump still has four more nominations to go. These four nominations involve important positions in the Fed board that is responsible for monetary policy decisions (the so-called FOMC).
What will Donald Trump decide with regard to these four vacancies? These appointments might turn out to be just as predictable as Trump´s decision to nominate Jay Powell. Trump will, most probably, choose an easy way out (the path of least resistance) and fill the other four positions next year with other puppets who will fulfill Trump’s strong desire to lower taxes without cutting public spending.