Jerome Powell and the Future of the U.S. Economy
Will the Real Fed Chairman Please Stand Up?
For nearly four decades, economists have had a monopoly on what some would call the most powerful office in the free world.
Back in 1978, G. William Miller was appointed chair of the Federal Reserve. His background was as a lawyer and then in the corporate world as an executive officer at Textron, Inc.
His appointment interrupted a longstanding tradition of putting economists in charge of the Fed. And it's been even longer since someone with a background in finance held the position.
That was William Martin, who was chair until 1970. Before getting drafted to serve in WWII, Martin had been dubbed the “boy wonder of Wall Street” after becoming president of the NYSE at the ripe old age of 31.
Martin was appointed head of the Federal Reserve in 1951 by Harry Truman and became its longest-serving chair.
So, it’s been over six decades since someone who made his name in finance has served as head of the most powerful bank in the world.
Between Martin and Miller, Arthur Burns, an economist, held the role. After Miller, whose term ended in 1979, every single person to fill the seat has been an economist.
Paul Volcker — economist. Alan Greenspan — economist. Ben Bernanke — economist. Janet Yellen — economist.
But that tradition just came to an end with President Trump’s latest appointment.
Will the Real Jerome Powell Please Stand Up?
Yesterday, Donald Trump announced his pick for the new chair of the Fed. And in a completely Trump-like move, he picked an investment banker and not an economist.
Jerome Powell earned a law degree from Georgetown in 1979 and started his career as a clerk for the U.S. Court of Appeals. Then, from 1981 to 1984, he practiced law in New York City.
But in 1984, he made his transition to the world of investment banking and private equity. And he never looked back.
Powell worked at the investment bank Dillon, Read & Co. for a few years. Then he became a managing director for Bankers Trust.
After quitting that job when the bank got in trouble for losing a lot of customer funds on derivatives trades, he went back to Dillon, Read for a short stint. Two years later, he became a partner at The Carlyle Group and led the Carlyle U.S. Buyout Fund.
Then, in 2005, he left Carlyle to found his own private investment group called Severn Capital Partners. He later became a managing partner of private equity and venture capital firm Global Environment Fund and also served a two-year stint as a visiting scholar at the Bipartisan Policy Center think tank.
It wasn’t until 2011 that he left the world of finance behind. That was when President Obama tapped him to sit on the Federal Reserve Board of Governors. He took office on May 25, 2012, to fill out the term of Frederic Mishkin, who had recently resigned. And then, in 2014, he was nominated and confirmed for a full 14-year term.
A Continuation of Continuity
So, what does this new Fed chair mean for the U.S. economy? Honestly, only time will tell. He could lead to major changes. Or he could just stick with the same old song and dance.
He’s been called the “Republican Yellen” because his views so far have been pretty much in line with the former chair.
He’s supported her gradual interest rate increases. He’s a proponent of unwinding the bank’s $4.4 trillion worth of Treasuries. And, like Yellen, he’s not so certain that lighter regulation for banks is a good thing.
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He appears to support the Dodd-Frank Wall Street Reform and Consumer Protection Act. And he’s been an advocate of ending “too big to fail” banks. In fact, he’s led oversight of those banks since April of this year.
But one place he deviates from his predecessor is on easing the Volcker Rule. That’s the mandate that bars lenders from making certain investments with their own money. He thinks it’s overly costly for the banks and that they should be able to resume proprietary trading of whatever assets they want. Especially smaller banks.
So, this decision should make everyone pretty happy. Rates will continue to rise — very slowly. QE will continue to be unwound — also slowly. And banks may get a little more leeway as to what they can do with their own money.
All in all, Powell is one of the best choices Trump could have made. Others on his list were much more hawkish — meaning they want to jack rates up much faster. And those nominees would have been much tougher to get confirmed by Congress.
Powell’s nomination keeps the status quo going and shouldn’t ruffle any feathers on either side of the aisle. He’s a Republican. But he’s also a dove. He’s from Wall Street. But he also supports higher capital requirements for big banks.
And once he’s confirmed, we shouldn’t see much reaction from a stock market that’s already priced in the gradual rate hikes started under Janet Yellen. Unless the past five years have all been an act to convince liberals he’s the candidate they want to replace Yellen, that is. We’ll have to wait and see about that.
But one thing we can look forward to for sure is bigger bank profits.
Those are certain with higher interest rates. When the Fed raises the rates for banks, they raise the rate for us even more. And that leads to more money flowing into their top line.
But if Powell gets his way and parts of the Volcker Rule get rewritten — or dropped entirely — then banks can start up prop trading arms again and use them to bolster earnings.
According to some estimates, reduced regulation on the securities banks can hold and how much interest they can make on them could lead $27 billion in profit back to some of the country’s largest banks.
And as an investor, more profit is always a good thing.
To your wealth,
Follow me on Twitter @AllBeingsEqual
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