With Washington largely focussed on other issues—major tax legislation; Donald Trump versus “Chuck and Nancy”; sexual-harassment charges—Jerome Powell, the White House’s nominee to replace Janet Yellen as chair of the Federal Reserve, testified for more than two hours before the Senate Banking Committee on Tuesday morning. The hearing didn’t create many headlines. But the role that Powell is about to take on is a vitally important one, and he’s largely unknown outside the Fed, where he has served as a member of the board of governors since 2012. So, what did we learn about him from the hearing? Nine points stood out:
1. He’s a cool customer. A former lawyer, investment banker, and Treasury official, Powell looks like Central Casting’s idea of a banker—sixty-four years old, with a lined forehead and carefully combed gray hair. (Some observers suspect that Trump picked him because he looked the part.) “You are about to become the most important economic policymaker in the world,” Senator Dean Heller, the Republican from Nevada, said to him. “How do you feel about that?” Powell paused for just a second before responding, “I feel fine about it, Senator.”
2. He’s keen to avoid being seen as a Trump stooge. In his opening statement, Powell said he would do everything he could to preserve the Fed’s “independent and nonpartisan status.” He also said that nothing in his conversations with “anyone in the Administration”—which presumably included Trump—had given him reason to be concerned about pressure from the White House. And when Senator John Neely Kennedy, a Louisiana Republican, asked him what role Steven Mnuchin, Trump’s Treasury Secretary, would play in his decision-making, Powell replied, “He would have no role.”
3. Powell is also staying carefully away from partisan land mines. Throughout the hearing, senators from both parties pressed Powell for his views on the Republican tax bill. Smoothly evasive, he repeatedly said that fiscal policy wasn’t in the Fed’s “lane.” At one point he told Senator Bob Menendez, a New Jersey Democrat, that the Fed doesn’t even have “a model of the effects of these cuts,” which wasn’t strictly accurate. (The Fed’s macroeconomic model of the U.S. economy can be used to gauge the impact of tax cuts.) Heller asked him if he had a personal position on the tax bill. “No, Senator, I don’t,” Powell said.
4. He seems like a fiscal moderate. Although Powell wouldn’t be drawn into judging the Republican tax plan, he did express some concerns about rising public debts. “Like all of us, I’m concerned about the sustainability of our fiscal path in the long run,” he told Menendez. “I’m very concerned about that.” Senator Chris Van Hollen, a Maryland Democrat, even managed to lead Powell to comment on some specific numbers from the Republican tax plan. “If there was another $1.5 trillion debt, it would make a bad situation worse, would it not?” Van Hollen said. To which Powell replied, “It would, all else equal.”
5. He seems certain to follow Yellen’s lead, which means that the Fed’s current policy of slowly raising interest rates will continue. In his opening statement, Powell said that he would “strive, along with my colleagues, to support the economy’s continued progress toward full recovery. Our aim is to sustain a strong jobs market with inflation moving gradually up toward our target.” The citing of jobs before inflation echoed Yellen’s emphasis, although it was also consistent with the Fed’s dual legal mandate of insuring price stability and maximum employment. Powell never suggested that he considered rising inflation to be an immediate threat, and he defended the policy approach that has kept the federal funds rate, which the Fed controls, at or below 1.25 per cent since the end of 2008. “We’ve been patient in removing accommodation, and I think that patience has served us well,” he said.
6. The biggest difference between Yellen and Powell’s approaches might be their respective attitudes toward financial regulation. In his testimony, Powell defended the over-all approach that was adopted after the great financial crisis of 2008–09, which involved forcing banks to hold more capital and liquidity, to take regular stress tests, and to construct “living wills” that would supposedly enable them to be wound down, rather than bailed out, in the next crisis. But Powell also said that the Fed should take a “fresh look” at some of the rules and see if any of them were too costly or burdensome. It doesn’t help anyone for banks to spend more money than they need to on safety and soundness, he told Senator Brian Schatz, a Hawaii Democrat. “Too much paper, too much compliance?” Schatz asked. “Yes, you hear that a lot,” Powell replied. “There’s certainly a lot of regulatory burden.”
7. He could well approve a weakening of the Volcker Rule, which was designed to prevent the trading departments of big banks from speculating on their own accounts—an activity known as proprietary trading. During a slightly testy exchange with Senator Elizabeth Warren, the Democrat from Massachusetts, Powell said, straight out, “I do support a rewrite of the Volcker Rule.” Warren asked whether that meant he approved of more proprietary trading. Powell didn’t answer directly. Instead, he said he was in favor of “tailoring the application” of the rule. This was the sort of language that Wall Street wanted to hear. Ever since Paul Volcker, a former Fed chairman, issued his proposal, at the start of 2010, the big banks have vigorously opposed it. Although Powell also said that he wanted to stick to the spirit of the rule, the bankers will be delighted to have someone at the Fed who is sensitive to their concerns.
8. He thinks “Too Big to Fail” is a thing of the past. While most financial experts believe that big banks are safer than they used to be, and that the introduction of “living wills” and other measures has made the prospect of closing one down if it got into trouble less daunting, rarely do you hear anyone of Powell’s standing say that a potential bank failure could no longer threaten the system and require a taxpayer bailout. When asked by Kennedy, the Republican senator from Louisiana, if “we still have banks that are too big to fail in America,” Powell said, “I would say no to that.”
9. He doesn’t fully understand rising inequality. In response to a question from Senator Sherrod Brown, the Ohio Democrat, Powell said that inequality and wage stagnation are pressing problems, and he said that, to him, the “most compelling” factor in explaining them was a shortfall in educational attainment that had left American workers without the skills they need to compete in a high-tech world. Broadly speaking, this is the thesis that Claudia Goldin and Larry Katz, two Harvard economists, presented in their 2010 book, “The Race Between Education and Technology.” It is a widely cited theory, and it may well help explain the gap between the wages of skilled and unskilled workers. But it doesn’t really address the explosion in inequality at the top of the income distribution, much of which emanates from rising compensation in the financial sector—where Powell spent much of his career—or the slow growth in wages earned by recent college graduates. When Powell said that the Fed doesn’t have many tools for dealing with the issue of income distribution, he was stating received wisdom. But the Fed does play an important role in determining the level of employment, the regulatory environment, and the level of asset prices, all of which affect inequality. The Fed isn’t entirely an innocent bystander.