Jerome Powell, US President Donald Trump’s nominee to lead the Federal Reserve, should have little trouble bonding with Christine Lagarde, the managing director of the International Monetary Fund. Both served in right-of-centre governments and both are said to be good at bringing people together. Both also have endured criticism that they are unqualified to run their institutions because they are lawyers, not economists.
“Powell doesn’t even own an undergrad degree in economics,” Avery Shenfeld, chief economist at CIBC Capital Markets, the investment banking arm at the Canadian Imperial Bank of Commerce, wrote in a note to his clients on November 3. “Forgive us for defending our own profession, but when would a non-lawyer be named Attorney General?”
Lagarde, who got by as France’s finance minister without an undergrad degree in economics, faced similar criticism when she was thrust into her current position in 2011. She still does, to some extent. Yet she has also excelled at her job. There is reason to think Powell will do the same, assuming he is confirmed by the Senate. (That’s pretty much assured. Trump’s Republican Party holds a majority, and Powell previously was endorsed by the Senate when Barack Obama nominated him for a governorship on the Federal Reserve Board in 2012.)
The post-nomination biographies of Powell, a former executive at Carlyle Group, the Washington-based private equity firm, describe someone who is curious, experienced, humble and intelligent. The Washington Post reported that he has “an odd ability to repeat people's sentences backward to them, a quirk former colleagues say is a reminder of his smarts — and how closely he listens.”
Shenfeld, who has a Ph.D. in economics from Harvard University, warned that Powell could be at the mercy of Fed staff, unable to probe for weaknesses in their choice of economic models. That’s a risk, perhaps — although one would hope the other members of the Federal Open Market Committee, the Fed’s policy-setting body, could help hold staff to account. The closest observers of the US central bank expect Powell will stick to the path set by the current chair, Janet Yellen, and carry on raising interest rates slowly and carefully.
There is one reason to feel uneasy about Powell’s nomination, however. The manner in which he was chosen was demeaning to both the individual and the institution. As George Mason University economics professor and Bloomberg columnist Tyler Cowen observed, Trump treated the nomination like a season of The Apprentice, his former reality television show. “It is a new and novel way of politicizing monetary policy,” Cowen wrote on October 30, ahead of the announcement.
Gossip about who might get the job churned for months. At least five candidates emerged as contenders. Among them was Yellen, the first woman to lead the Fed, and now the first chair in almost four decades who was denied a chance to serve a second term. It’s a remarkable snub. The US unemployment rate is hovering near four percent and inflation is tame. The Fed is mandated to orchestrate “maximum employment” and price stability. Yellen achieved both. She earned the right to keep going.
Trump stated publicly that he liked Yellen and that he thought she was doing good work. He also admitted that he was inclined to brand the Fed with a chair of his choosing. “You like to make your own mark which is maybe one of the things she’s got a little bit against her,” the president said during an interview with the Fox Business Network.
Consciously or not, Trump punched a hole in the central bank’s wall of independence with that remark. He showed everyone that he was putting his selfish desire to choose his own Fed chair ahead of a selection based purely on merit. Maybe it’s always been thus — except Democratic President Barack Obama reappointed Ben Bernanke, a Republican; Bill Clinton reupped Alan Greenspan, also a Republican; and Ronald Reagan extended Paul Volcker, the last Democratic chair before Yellen’s appointment in 2014. There was a tradition in the United States of presidents making their own marks at the Fed by sticking with the chair they inherited, helping the central bank stay above the fray. Trump has dragged the Fed “down in the mud” with him, as Cowen argued, by trivializing the selection process and reminding everyone who is in charge.
There are echoes here of the hiring of Stephen Poloz to run the Bank of Canada.
Virtually every keen observer of Canada’s central bank expected Tiff Macklem, the senior deputy governor and a former official at the Department of Finance, to inherit the post vacated by Mark Carney in 2013. The choice of Poloz raised questions about whether the prime minister’s office was attempting to send a message about who was in charge in Ottawa. Then Prime Minister Stephen Harper summoned Poloz for a photo op, turning the appointment of an official who is supposed to serve at arm’s length from the government into a political event. The image diminished the Bank of Canada’s mystique in the same way the game-show approach that led to Powell’s nomination has reduced the standing of the Fed.
None of this may matter when it comes to the day-to-day business of setting interest rates. Poloz’s work to date shows that an unseemly hiring process doesn’t automatically result in poor policy. He cut interest rates twice in 2015 to offset the collapse of oil prices, moves that were controversial at the time but now look prescient. Powell’s intelligence and inquisitiveness suggest that he will muster similar good judgment. “He has developed the analytical capabilities that a Fed governor needs,” Jeffrey Frankel, a Harvard economics professor, wrote in a commentary for Project Syndicate. “Almost as important, he won’t have a chip on his shoulder when dealing with more credentialed staff. From my perspective, Powell would stand out as one of the best appointments Trump has made.”
It’s just too bad Trump tarnished that appointment by turning the selection process into a form of entertainment. “Whether we are consciously aware of the shift in our perspective or not, we are likely to think of the future Fed with less of that mysterious aura surrounding it,” Cowen wrote in his Bloomberg piece. “It will instead seem like the result of an undignified competition for victory and status.”
The financial crisis and its aftermath are testaments to the necessity of independent central banks. They were able to make difficult decisions and take risks precisely because they were unattached to the political process. I have written that central bankers should be appointed with the same rigour that goes into selecting Supreme Court justices. But I am under no illusion political leaders will go there. What fun would there be in that?