Jerome Powell, said to be President Donald Trump’s pick to be the next Federal Reserve chairman, is set to take the reins of the world’s most important central bank when the U.S. economy is rolling along at a pace he’ll be under pressure to sustain.
Growth is accelerating, inflation is tame and unemployment is the lowest in 16 years. Such a backdrop should initially enable a new Fed chairman to keep gradually raising interest rates from historic lows with the aim of stretching out what is already the third-longest U.S. upswing.
But expansions don’t die of old age. Rather, they typically are brought down by the bursting of asset bubbles, shocks like natural disasters or political upheaval, or errors by central banks.
Faster rate hikes could cool the stock market but risk holding inflation below the central bank’s target, possibly tipping the economy into a recession. Tightening too slowly could stoke asset values even further, creating trouble down the road. Powell, and Trump by association, will own the outcome.
Powell has the added dilemma that his Fed would confront any slump in growth with little in its policy arsenal. There is barely room to cut rates deeply, and the backup plan -- quantitative easing -- is now the subject of Republican lawmaker ire.
“Powell has been dealt some cards in this poker game that aren’t helpful for carrying out monetary policy,” said Torsten Slok, chief international economist at Deutsche Bank AG in New York. “The world economy has never been in better shape, but it is a very unthankful job to be a central banker these days.”
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With the White House scheduling an announcement for 3 p.m. in Washington on Thursday, Trump will announce Powell, 64, as his nominee to be Fed chief, said several people familiar with the decision, replacing Chair Janet Yellen when her term expires in February. Powell is currently one of four Fed governors on a seven-seat board that Trump will have a chance to reshape. All his nominees will be subject to Senate approval.
Only the ninth leadership change at the Fed since the end of World War II, the changeover comes at a critical moment. Monetary policy is already set on a tightening course, and it is precisely at this moment when mistakes are made or avoided.
Economic Divide