Matthew Benjamin on the Next Fed Chairman
Samuel Taube: Joining us again today is Matthew Benjamin, the Editorial Director of The Oxford Club and a former consultant for the World Bank. Matthew, thanks for joining us again.
Matthew Benjamin: Glad to be back, Sam.
ST: So a couple of weeks back, I understand that you attended a dinner hosted by the National Economists Club along with the current chair of the Federal Reserve, Janet Yellen.
And that ties very nicely into what we're discussing today, because Dr. Yellen's term expires in February, as you well know. And President Trump is expected to appoint Jerome Powell, a current Federal Reserve Board of Governors member, to succeed her.
So let me start with a very simple question: Why is the next Fed chair important for investors, and what are some big decisions that Powell is likely to face?
MB: It's a great question, Sam. First, a little bit about Jerome Powell: He goes by Jay. They call him Jay Powell. He was nominated in 2011 by former President Obama. He's a Republican, but the deal that Obama struck with Senate Republicans was that he could get his Democratic nominee, Jerry Stein, through if he appointed him at the same time as a Republican.
So Stein and Powell were both confirmed by the Senate and started terms in 2012. Stein has since gone; Powell is still there. And if, as expected, he is nominated to succeed Yellen, his job will be a big one.
The last two Fed chairs basically focused on stimulating the economy after the Great Recession and the financial crisis. The next Fed chair's job will be to unwind some of that stimulus.
So as you know, part of the Fed's stimulus program was something called quantitative easing. This was a very unique and unprecedented program to stimulate the economy by buying trillions of dollars of government bonds, mortgage-backed bonds.
And the idea was to bring down long-term rates and flood the economy with liquidity. Some people would say it had a lot of success. The economy's done very well in recent years. Unemployment has fallen to about 4.2%, right?
ST: Pretty near full employment, yeah.
MB: Exactly right. And the recovery is pretty much fully done. Powell's job will be to unwind this: sell off or allow most of those securities to roll off the Fed's $4.2 trillion balance sheet.
Also, his job will be to gradually raise the fed funds rate, which is now 1.25% or around that.
MB: It's in a small range - gradually raise that to a level that the Fed would consider neutral. That's a level that is neither stimulating nor slowing the economy.
It's not exactly clear where that is, but somewhere around 3% is the current thinking - lower than it used to be. So he's got to do all these things and not upset the economy and the bond market.
ST: A lot of responsibilities to handle, to be sure.
MB: Exactly right.
ST: So when you met with Janet Yellen earlier this month, did she have any insights about what's coming for Powell in the next few years?
MB: Well, I think Yellen - I don't know what she actually thought, but I would imagine that she was hoping to be renominated by President Trump. There was a good chance that she would be.
Trump has, even though he criticized her on the campaign trail, warmed up to her considerably since he took office. And according to everything he's said, she was one of the final candidates.
ST: Right, and it's unusual for a Fed chair to not be reappointed, right?
MB: That’s exactly right.
She would be the first in quite a while to not get a second term. That said, presidents like to nominate their own candidates. Reagan and Obama did it, and the idea is you put your own person in the Fed.
So I think she thought she'd be reappointed. I think that's unlikely now. She did say, interestingly, in her speech at that dinner I attended, that if the economy were to fall into crisis again, she would again utilize this quantitative easing policy, which is somewhat controversial.
MB: A lot of people did not like it and thought it was bad for the economy, for potential inflation, etc. And I think Powell might agree with her on that one.
ST: I see, yeah. And that transitions nicely into my next question. Let's talk a bit about Powell's record. I've read in a couple of places that he's considered to be more or less in line with Yellen's beliefs about monetary policy. Would you say that's accurate?
MB: That's exactly right, Sam. So he joined the board in 2012. His voting record shows that he has more or less supported the Bernanke-Yellen project to do quantitative easing and keep rates very, very low for a long time - and only very gradually raise them.
So on monetary policy, he is the status quo candidate. He is a vote by Trump for continuity at the Fed. He would be expected - and markets already expect him - to more or less continue policies that Yellen has been pursuing during her term.
ST: I see.
MB: So, you know, it's possible. He's a Republican, and perhaps his ideology on monetary policy is slightly more hawkish than Yellen's, but not by much.
So he may seek to raise rates a bit more rapidly than she would have, were she to get a second term, but that's not a certainty. And as with most of these Fed chairmen, a lot of this decision-making is completely reliant on the economic data that comes in.
MB: And then one other thing is, of course, that the other side of the Fed's job is banking regulation. This is where we would expect Powell to depart from Yellen a little bit more dramatically.
He's spoken out in favor of more streamlined or even reduced banking regulation to help the economy. So that might be something he would pursue and a place where he would differ from Janet Yellen.
ST: Okay, so do you think he is in favor of streamlining things and reducing regulations to the point where Dodd-Frank would be in his crosshairs?
MB: As you know, the Fed cannot change Dodd-Frank. It's the biggest banking regulator, and it's supposed to implement and enforce Dodd-Frank. So the most that he could do would be to enforce it a little bit less stringently, I guess.
If Congress does get close to repealing or altering Dodd-Frank, which some Republicans in Congress definitely want to do - it's not clear whether it's possible, but if they do - he could lend his voice to these efforts and say he supports it. That's a big deal if they can get the Fed chair on record saying he supports a measure to change legislation.
ST: I see. So how does Powell compare to some of the other finalists that Trump was looking at? In particular, I wanted to talk about John Taylor, who was seen by certain media outlets as the runner-up here.
MB: That's right. So John Taylor has been around a long time. He served in the Treasury Department quite a while ago. He's famous for something called the Taylor Rule, and I won't go into the details here - it's somewhat complex - but this is a rule that he advocated for the Fed to use.
It's a simple kind of equation or algorithm, if you will, that uses several inputs to determine where the Fed should set the fed funds rate. So he's kind of a rules-based guy, and on monetary policy he is much more conservative and hawkish, if you will, than people like Powell or Yellen.
He's somewhat opposed to what we call discretionary monetary policymaking. This kind of discretionary policy means the Fed looks at the numbers and decides what to do.
MB: Conservatives have long advocated that the Fed follow a rules-based policymaking program where they put inputs into an equation - just like the Taylor Rule - and out comes a level for the fed funds rate and other things.
So the thinking is that Taylor would be much more hawkish. His own rule would have set the fed funds rate somewhat higher and, some say, would have also brought the unemployment rate higher.
So he's quite a different kind of guy. He would have the Fed do less in terms of boosting the economy and lowering unemployment, and be more vigilant on things like inflation.
ST: I see. And this won't be Trump's only pick for the Fed board during his presidency, right?
MB: No. That's right and that's significant, too, Sam. It's a good point. There are currently three vacancies on the seven-member board. Trump filled one vacancy just last month. Randal Quarles is a new governor on the board, but there are three remaining vacancies after several recent resignations on the board.
So he'll have additional chances to sway or influence what the Fed does. My thinking is that if he does appoint Powell as chairman, he will look to mollify some conservatives in Congress who didn't like Powell as much by appointing more conservative, hawkish candidates to these other spots.
ST: Interesting, yeah. If you are an income investor and you're concerned about the effects new Fed policy, higher interest rates and whatnot could have on your portfolio, check out The Oxford Income Letter.
Chief Income Strategist Marc Lichtenfeld is always on top of these kinds of trends, and we'll put a link to his latest research at the bottom of this transcript.
Matt, you've been very insightful. Thanks for joining us again.
MB: Anytime, Sam.
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