Who is Jerome Powell?

  1. Who is Jerome Powell?

    That was a late inning surprise. Yesterday, President Trump announced that Jerome Powell would be his choice to lead the Federal Reserve starting next February. Powell has been a Fed Governor since his nomination in 2012 by President Obama, so he is expected to garner bipartisan support in the Senate. Prior to the leaks that started last week, Powell did not seem to be the front-runner for the job – the highest odds we assigned to his becoming Fed Chair never exceeded 35%. Therefore, comparatively little was written about his past views and actions. As a Governor, he didn’t give a lot of speeches, his wasn’t the loudest voice in the room and he never dissented over 44 meetings. He appeared to be a loyal soldier. Powell would be the first Fed Chair without a PhD in Economics since Paul Volcker in the 1980’s, thus we lack a body of published research from which we can glean his likely outlooks and views. He does bring a respected body of public service and private business experience that should serve him well. Notably, markets will like the appointment for the continuity. What evidence does exist suggests he will maintain the path set by Janet Yellen in raising rates, diminishing the level of assets on the Federal Reserve balance sheet, supporting some level of regulatory rollback and otherwise doing little to upset monetary policy. He is not expected to rock the boat. Click here to see a Bloomberg article that we think does the best job of describing…

  2. Going up?

      Interest rates are going up. In fact, they have begun rising already. Since December 2015, the Federal Reserve has raised the overnight interest rate from 0% to 1.25% through five quarter point increases. They are also signaling one more in December and up to three of four more next year. And if you take into account a coming leadership change at the Federal Reserve, these plans could become more aggressive in removing accommodation. So what does this mean for portfolios? The effect on equity securities will be muted, for a while. Equities typically like a little inflation; we are in a sweet spot between 1.0 and 2.0%. Equities also like interest rates to keep themselves in a range too. The boundaries of this range can change based on market conditions, but we are in another sweet spot there too. Rates are still low enough to encourage businesses to borrow so they can do their own investing. And they are too low to act as competition for investor capital. As rates rise these factors will change, but we think that is rather far away. Equities can exist quite happily with rates staying below four or five percent and nobody is talking about those levels yet. The effect on fixed income is more immediate and surprising, based on what you own. Fixed income prices are based on interest rates and the math that calculates your cash flows back to today. When rates go down, fixed income securities’ value goes up because your fixed cash flows are now…

  3. Finally.

    The Fed continues to un-amaze. If predictability is the key to a strong economy and strong markets, there is nothing to worry about. On the other hand, if gridlocked politicians, North Korea, miscellaneous hurricanes and a wild-card president are relevant to the economy, well, perhaps attention should be paid. Janet Yellen indicated that a rate hike, probably .25%, will come to pass in December with more to follow next year. She also said that the Fed will begin unwinding its balance sheet now, initially by not purchasing new securities as old ones mature. This will remove $10 billion a month from the balance sheet in the near term, gradually increasing to $50 billion a month within 12 months. Depending on how closely this plan is followed, returning to pre-2008 levels would take something over ten years, although we don’t know what the final level will be. A lot can happen in ten years. We are almost ten years removed from the problems that led to low interest rates and quantitative easing in the first place. The beginning of World War II to the beginning of the Cold War took less time. The smart phone is just ten years old. Within ten years of President John F. Kennedy telling the country we had the resources and talents necessary to land an astronaut on the moon, we did just that. Perhaps all will go smoothly for the Fed and the economy, but it probably will not. An asset reduction plan has never been tried by any Central…

  4. Time to drop the inflation target

    Low inflation is becoming a problem for Janet Yellen and the Federal Reserve. We could be forgiven for thinking low and steady inflation in a growing economy was a good thing. But it wasn’t supposed to be this way. Forecast models used at the Fed rely in part on something called the Phillips curve. Created by A.W.H. Phillips through his study of wage inflation and unemployment in the United Kingdom from 1861 to 1957, the curve was said to reflect a consistent inverse relationship. When unemployment was high, wages only increased slowly; when unemployment was low, wages rose rapidly. Fed forecasts have consistently predicted that, as our unemployment rates moved downward over the last several years, wage growth would accelerate, allowing them to reverse the significant easing implemented after 2008. Once we crossed the level they felt represented full employment, currently 4.6%, wage growth would accelerate. Problem is, wage growth has only grown slowly the entire way. Even with a 4.4% unemployment rate (it crossed 4.6% in March), wage growth is unchanged and inflation has actually declined. This isn’t what the models predicted. Furthermore, since that target was created in 2012, inflation has resisted 2% for most of the past five years. There are some economists claiming that the Phillips curve is all but dead. Some critics believe the 2% target was too high in the first place, that various global factors have had the effect of permanently lowering the long term trend of inflation. In any case, the Fed is approaching a fork in…

  5. Is 2% a hard inflation target?

    In 2012, following their January 25 meeting, the Federal Reserve issued a press release that included their first stated commitment to an inflation target. “The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures (PCE), is most consistent over the longer run with the Federal Reserve’s statutory mandate”. Pioneered in New Zealand in 1990, the Federal Reserve became the 24th central bank to adopt an inflation target, following in the footsteps of such monetary policy luminaries as Brazil, Armenia and Guatemala. Prior to this adoption, the Federal Open Market Committee (FOMC) regularly announced a desired target range for inflation, usually between 1.0% and 2.0%. Moving from a range to a specific target went hand in hand with the broader push for increased transparency on the part of the FOMC. The belief was that increased transparency would enhance the effectiveness of monetary policy and ease the way for its acceptance and implementation and eventual success. We have always found it curious that investors and consumers need to be told what level of inflation is good or bad in the first place. Nevertheless, in the five years that have passed since adopting an inflation target in the United States, we have yet to reach that bogey. In a speech at an economic conference on October 14, 2016, FOMC Chair Janet Yellen asked a series of questions regarding research around the 2008 crisis and its aftermath. In one instance she invoked the term…

  6. What about the FOMC in 2017

    According to the Washington Post as of today, of the 689 key positions requiring Senate confirmation, 23 nominees have been announced. Of the 666 remaining, we are particularly interested in two. The Federal Reserve Board of Governors is comprised of seven seats. Two of these seats have been vacant since 2014 when Jeremy Stein and Sarah Bloom Raskin both left. President Obama nominated two governors, but amid the partisan standoff the Senate refused to hold hearings for either one. Since the election several names have been raised, some of whom have former Fed experience, some from academia and some from private industry. Based on our reading of publicly available information, we think the following names have the greatest likelihood of being nominated. John Taylor, 70, is a Professor of Economics at Stanford University and has spent several periods in various governmental roles during the Carter, Ford and both Bush administrations. In the world of monetary policy, Taylor is probably best known for a concise formula for monetary policy rule he developed in the early 1990’s that came to be known as the Taylor Rule. An outspoken critic of the policies adopted by the current Fed, Taylor seems eager and willing to be nominated. In Taylor, the Fed would see an authoritative voice in favor of monetary policy setting that is more rules-based rather than the seat-of-the-pants approach that prevails currently. Taylor also advocates a more limited role for government, a political view at odds with other governors. With an economy that grew at 3.5% in…