Trump breaks one trend, keeps another, with Fed choice

On Thursday, the White House announced its nomination of Federal Reserve Governor Jerome Powell as the next chairman of the Federal Reserve. If confirmed by the Senate, Powell will begin serving as chairman in February, replacing current Fed Chair Janet Yellen.

Traditionally, the incoming administration chooses to reappoint the existing Fed chairman to serve another four-year term. Across history, both Democrat and Republican presidents have opted to renominate the leader of the Federal Reserve in an attempt to solidify the autonomy of the central bank from a pointed political agenda.

{mosads}After all, the Federal Reserve operates independently of the White House. Thus, while the president can choose a nominee he believes has a particular thought process on stimulating or slowing economic growth if activity heats up too quickly, the president will have no direct sway or additional control over the nominee once confirmed to the seat. 

Reappointing existing Fed leadership, particularly in times of uneven or unstable economic conditions, also serves to calm the market; anticipation of a significant deviation from the current pathway of rates could cause undue volatility or unrest in market metrics and/or consumer confidence.

With changing leadership on Capitol Hill often causing enough uncertainty as it is, in the past, politicians have proven cautious to further disrupt market expectations with a shift in management at the Federal Reserve.

In fact, the last time an incoming administration did not reappoint the existing Fed chairman was more than three decades ago: President Jimmy Carter did not reappoint Arthur Burns in 1977 and instead nominated G. William Miller to the post. 

While precedent dictates the incoming administration to keep the current Fed chair, the Trump White House has defined itself as unconventional, choosing to break with this long-standing tradition. While Powell does represent a change in leadership, he was widely scored as a “safe” bet — the safest bet next to Yellen herself.

After all, Powell has been openly supportive of the post-financial crisis policies enacted under Former Fed Chairman Ben Bernanke and more recently under Chair Yellen, offering comfort to the market that he would be unlikely to make any significant changes to monetary policy or the anticipated pathway for rates, at least over the near-term. 

Others on the short list being considered for the post, such as National Economic Council Director Gary Cohn or former Fed Governor Kevin Warsh, were seen as Fed outsiders, while Stanford professor John Taylor, who has been openly critical of the Fed’s policies as well as the economic models used to create policy, was seen as a potential “disruptor.”

Conversely, Powell is viewed as a supporter of the current direction of policy and a team player, less likely than other contenders to be more aggressive with rate hikes or preoccupied with putting his own stamp on the future of monetary policy.

As a current member of the FOMC’s Board of Governors, Powell is considered a dove with a clear track record of voting along with leadership and in favor of the Fed’s current low-rate policy. Furthermore, his cautious stance on growth and inflation, as well as his preference for reduced regulation, are well known and have been well established by his public comments over the years.

With a background in private equity, Powell has voiced openness to paring back Dodd-Frank and other financial restraints that were put in place after the global financial crisis. A law-school graduate, Powell would, however, be the first Fed chair since Volcker in the 1980s to lead the Fed without a Ph.D. in economics. 

While Powell’s pro-growth, deregulation platform bodes well for the president’s agenda, change in and of itself can create uncertainty, particularly as the configuration of the Fed is at a pivotal inflection point.

Recall, aside from the chairman, the Trump administration has three vacancies left to fill — two longstanding openings left by Sarah Raskin and Jeremy Stein in March 2014 and May 2014, respectively, and one with the retirement of Stan Fisher just last month — which could further morph the composition and thinking of the committee, tilting support for the president’s policy initiatives.

Lindsey Piegza, Ph.D., is the chief economist for Stifel Fixed Income. She specializes in research and analysis of economic trends and activity, world economies, financial markets and fiscal policies. She’s a regular guest on CNBC, Bloomberg, Fox News and CNN.