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Federal Reserve

Powell the right choice to steer Fed course

Trump choice is set to continue kid gloves approach that is supportive of the global economy and is likely to be welcomed by policymakers elsewhere

PUBLISHED : Wednesday, 08 November, 2017, 12:52am
UPDATED : Wednesday, 08 November, 2017, 12:52am

By picking Jerome Powell as the next head of the US Federal Reserve, President Donald Trump has made a choice that is reassuring to the markets. As a member of the Fed board, Powell is well-known as a supporter of outgoing chairwoman Janet Yellen’s dovish policy of gradually raising interest rates as long as inflation remains muted and wage increases stay moderate. Since joining the Fed in 2012, he has not dissented from any Fed decision, including the four interest rate increases during his tenure.

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Both Yellen and Powell agree on the need to exit the massive quantitative easing experiment that has radically expanded the Fed’s balance sheet with assets worth US$4.5 trillion, and that it must be done gradually without disturbing the markets and the broader economy too much.

Powell is set to continue this kid gloves approach, which will also be supportive of the global economy and is likely to be welcomed by policymakers elsewhere.

The new Fed chair candidate is the proverbial safe pair of hands. As a result, his confirmation, required in the US Senate, is not expected to run into difficulties.

His choice would not have been out of the ordinary in most other times but, with the highly volatile Trump as president, many people have heaved a sigh of relief.

Trump has appealed neither to his radical rightwing base nor to the Republican hawks, who have long been critical of the Fed’s policy of quantitative easing.

The Fed’s current view is that there is no hurry to raise rates as part of a sustained campaign as long as there continues to be long-term economic growth and low inflation. Maintaining a fairly large Fed balance sheet is acceptable under this scenario. Powell looks set to take this view going forward.

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He will have his work cut out. The US economy is in its best shape since the outbreak of the subprime property market a decade ago. It’s cruising with respectable 3 per cent annualised growth in the last quarter, a low jobless rate of 4.2 per cent, along with moderate wage increases, and stronger business and consumer confidence.

Some critics worry the next crisis or downturn may not be far off, and that the same Fed firefighting toolkit may not be available given the intense hostility of congressional Republicans to any stimulus policy. And, given the low rates, the Fed may not have much room to cut them in the next downturn.

There will always be another downturn. But for now, if confirmed, Powell’s priority is to hold the current line.