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Why the Federal Reserve Could Look Totally Different Next Year

President Donald Trump's nomination of Jerome "Jay" Powell as the next Federal Reserve chair is predicted to bring little change to the central bank’s incremental rate increases and unwinding of recession-era quantitative easing, although the multimillionaire and former investment banker brings a Wall Street-friendly skepticism of regulation.

Powell, 64, has served on the Fed’s Board of Governors since 2012, after a career spanning law, private equity and the Treasury Department under George H.W. Bush. Although a Republican, he has a history of dovish monetary policy-making decisions in the vein of current Fed chair Janet Yellen.

“He’s a consensus builder. I would not expect the Fed to get more aggressive,” said Brian Rehling, co-head of global fixed income strategy at the Wells Fargo Investment Institute. “There’s a pretty significant body of evidence on his views and how he’s likely to proceed.”

With a long-running bull market and steady — if slower than ideal — economic growth, Powell is unlikely to change the Fed’s interest-raising trajectory, with most experts anticipating two or three increases in 2018.

“From a continuity standpoint, it’s definitely a positive for the market,” Myles Clouston, senior director of Nasdaq Advisory Services, told NBC News. “The market hates surprises."

A shake-up might not come from the top

If most experts agree that Powell is unlikely to shake up monetary policy, though, his impact on financial regulation could be more significant.

“There’s the potential for a shift from the regulatory standpoint,” said Greg McBride, chief financial analyst for Bankrate.com. “Jerome Powell has been more vocal about the need for a lighter regulatory touch and that the current level of regulation has hindered economic growth. Those comments foreshadow a change in stance.”

Related: Trump Nominates Jerome Powell as New Chair of the Federal Reserve

Last month, the Senate confirmed Randal Quarles — a lawyer and private equity firm founder who served in George W. Bush’s Treasury Department and favors less regulation in financial markets — to fill one of the vacant seats on the Fed board and oversee bank supervision.

Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting firm that specializes in financial regulation, predicted that the one-two punch of Powell and Quarles could lead to a relaxation of regulations like bank liquidity requirements.

“It’s important to note, in general, that the monetary policy under a Powell Fed will still be made by the same Federal Open Market Committee that he sat on, and that’s much more of a consensus-driven process, but regulatory policy is really made by the board,” she said. “I think you’re going to see, in time, a significant restructuring of some of the post-crisis rules,” she said, adding that she didn’t expect a wide-ranging repeal of the landmark 2010 legislation.

Dan North, chief economist at Euler Hermes North America, voiced a similar sentiment. “I doubt you’ll see a wholesale change or wholesale dismantling of Dodd-Frank. I just don’t think you’ll see a ramp-up,” he said.

What's next for Yellen?

Although Yellen has vociferously made the case for a strong regulatory framework to prevent another financial meltdown, most observers think she is unlikely to remain on the board after stepping down as chair and will leave before her term ends in 2024.

“She probably has many opportunities outside of the Fed that would probably be more appealing than taking a step back,” Rehling said — even though this would hand Trump the opportunity to fill another vacant seat.

Even if Yellen were to remain, Trump still has three seats to fill on the seven-member board, giving him broad latitude to reshape the central bank in his image. Two names reportedly under consideration for the chair position were Stanford University economist John Taylor and former Fed Governor Kevin Warsh, both of whom take markedly more hawkish positions on monetary policy.

“With this many open seats at the table, you could see a diametrical shift in the Fed’s stance on both monetary policy and regulation going forward. The Fed 12 months from now could look a whole lot different,” McBride said.

This could leave Powell in the unenviable position of trying to build consensus among a sharply divided board, making it more difficult to stay the course on monetary policy.

“Overall, he’s got a big job in front of him,” Clouston said. “We live in a global economy now, and his main job to make sure the markets and the economy are firing on all cylinders.”

Staying ahead of the curve on inflation will be Powell’s greatest imperative, he said. “That will be a big challenge.”

McBride said Powell’s lack of a doctorate in economics could be an impediment if rapidly rising inflation, a geopolitical crisis or other shock strikes the economy. “Having a lawyer rather than an economist at the controls of the world’s largest economy could lead to some interesting times, particularly because the Fed is at a critical phase both raising short-term interest rates and the unprecedented move of downsizing the balance sheet,” he said. “If things go wrong, who do you want at the controls?”