President Donald Trump nominated Federal Reserve Governor Jerome Powell to be the U.S. central bank's next chairman in a widely anticipated move likely to preserve the policies of current chair Janet Yellen.
Market reaction to the nomination Nov. 2 was muted. The S&P 500 was down 0.16% at 3:15 p.m., just after the White House announcement. The yield on the benchmark 10-year Treasury slipped to 2.345%. Bond yields fall as prices rise.
If confirmed by the Senate, Powell will replace Yellen when her term expires in February 2018.
Powell would be the first Fed chairman in decades not trained as an economist. He began his career as a corporate attorney, went on to work for investment banks and became a partner at private equity firm Carlyle Group. He also served in the U.S. Treasury under President George H.W. Bush.
Compromise choice
Powell was viewed as a compromise candidate between keeping Yellen in role as chairman — her term on the Fed Board doesn't expire until 2024 — and the other leading candidate, Stanford University economist John Taylor. Taylor, the author of an eponymous rule tracing the relationship between employment and inflation, would be expected to raise rates faster.
Powell also reportedly had the backing of Treasury Secretary Steven Mnuchin.
As a Fed bank president, governor and vice chair, Yellen was involved in many of the financial crisis-era decisions by the Federal Open Market Committee. After becoming chair in 2014, she led the FOMC's efforts to raise rates gradually during a period of prolonged economic recovery that included the Fed's decision to wind down its $4.5 trillion securities portfolio, which began in October.
Though Trump criticized Yellen's handling of monetary policy during the 2016 presidential campaign, he has since moderated his tone. As recently as Nov. 1 he said at a press conference that she was "excellent."
Appointed by President Barack Obama to the Fed Board in 2011, Powell was a key voice in urging his fellow Republicans to accept the Fed's program of low interest rates and asset purchases as the economy struggled to recover from the Great Recession.
"He's pragmatic, he understands how to build a consensus," said Ken Matheny, executive director at Macroeconomic Advisers.
In selecting Powell, Trump is seizing the opportunity to continue Yellen's policy of keeping rates low, while at the same time keeping the door open for regulatory reform.
The trajectory of monetary policy would be "pulled forward only modestly," Compass Point analyst Isaac Boltansky wrote in a recent note.
Further, Trump may have been concerned that a more hawkish approach to monetary policy could dampen the economic stimulus expected from his tax reform agenda.
Relaxing regulations
On regulation, Powell has talked about the need to roll back Dodd-Frank Act regulations, especially as the law applies to smaller banks. He recently discussed easing the Volcker rule, which prohibits proprietary trading at banks, and defended a Fed rule on board oversight that has been criticized by Democrats as being too lenient.
If Powell is confirmed, the White House could shift its focus to filling the three vacancies left on the seven-member board. Trump's first nominee to the board, Randal Quarles, recently began his term and has assumed the Fed's lead regulatory role as vice chairman of supervision.
Brian Rehling, co-head of global fixed income at Wells Fargo Investment Advisors, pointed out that Trump could have four Fed vacancies to fill since Yellen might decide to leave the Board after being replaced as its chairman.
"There's a lot of potential for the president to shape some of those ultimate Fed votes if he's intent on pursuing particular policy," Rehling said.