www.worldcommercereview.com chairman, Presidentchairman, Trump break atradition ofbipartisan With theappointment ofJerome Powell Fed’s asthenext economy by formation. reviews SilviaMerler economist’s re-nomination and choosessomeonewhoisnotan re-nomination opinions onthischoice andthechallengesahead Powell’s Federal Reserve www.worldcommercereview.com K sence politicization, ofdirect theFed always faces aproblem of ‘cognitive capture’ by Wall Street. That’s what hap policy. importantly,to depoliticize (and global)effort Most monetary Even there intheab hasbeenabipartisan even thebest-trained economist. huge balance sheet–andthepossiblymassive increase indebt, should Trump gethistaxcuts–would challenge five years. While the Fed’skit hasbeen greatly tool expanded inthelastdecade, the Fed’s low interest rates and ket turmoil, asassetprices undergo asignificant ‘correction’, andmany amajordownturn are inthenext expecting the Fed willface great challenges, to asitreverts more policies. interest normal Higher rates could give to rise mar Joseph Stiglitz wonders whether Trump hascaptured theFed. President Trump atimewhen choseanon-economist posed by a president seeminglyintent onchallenging allinstitutionalnorms. with Dodd-Frank financial-reform topic. legislation willbeanimportant Third, thethreat to the Fed’s independence develop abetter approach. Second, oftheFed’s bankregulation isalsopart mandate, andthecosts ofcompliance isthefirstandbestlineofdefence policy against a recession, anurgentthat monetary task for thenewchairis to which itinevitablywill. identifies Rogoff three fortheareas that willbeimportant Fedgoing forward. First, given difficult forthe interest Fed tonormalize policy rates sothat ithas room tocutthemwhenthe recessionnext hits, At thesametime, despite astrongly growing USandglobaleconomy, inflation remains low, whichhasmade it rates, investors seemever more willingto assumegreater insearch risk ofreturn. ures, stock lookeven markets frothier today thantheydidinthe1920sandwithtoday’s extraordinarily low interest tory policy.tory PowellBy somemeas- challenges at theoutsetofhisfive-year term. willface someextraordinary continuity inFedalds short-term interest-rate policy, asimplerandcleanerapproach andperhaps to regula- singledecisionofhispresidency. isasaneand soberchoice themostimportant thatmade perhaps her It arguesenneth Rogoff that withtheappointment ofJerome Powell Fed asthenext Chair, Donald Trump has - - - - www.worldcommercereview.com there’s thanadjustinginterest policy rates, muchmore to monetary whichiswhy we shouldwant ahighlyqualified in charge oftheFed isroughly analogousto naminganeconomist to bechiefjustice oftheSupremeFirst, Court. The pastfour Fed chairshave policy. allbeeneconomists, Putting withadeepunderstandingofmonetary alawyer Scott Summerwrites on theWashington Post that there are afew reasons to beconcerned aboutthisappointment. financial ofwell-designed regulations.nizes theimportance 2010 Dodd-Frank reforms, regulatory designed to prevent arecurrence. Fortunately, itappearsthat Powell recog- to have forgotten what happenedlessthanadecadeago, oritwould bedifficult to to explainits rescindthe efforts ofacentury,three quarters mitigated onlyby massive government intervention. The Trump administration seems pened whenAlan were Greenspan Bernanke andBen incharge andtheconsequences were thegreatest in crisis Republicans in the House and Senate proceed Senate and House the in Republicans Going forward, it will be interesting to see how how see to interesting be will it forward, Going www.worldcommercereview.com tant that theFed isableto switch from tightening to easingshouldtheneedarise. could leave theeconomy more vulnerable to negative itallthemore recession, impor shocksandactual making could bemisinterpreteddle andthisshift signal. asarecessionary At thesametime, thetransition to slower growth data isusuallyoneofstronger growth. As theexpansion matures andslows, however, thedata become more mud- gauging thepace ofany slowdown. stagesofanexpansion, told thepicture theearly by During mosteconomic FedThe next handlethe transition chairwillneedto to deftly aslower-growth economy. Onebigchallengewillbe on theorder of100basispoints year. between now andtheendofnext generate excessive pressures. inflationary To counter these forces, the Fed anticipates continue tightening ofpolicy, operating at orsomewhat beyond fullemployment, asustained3percent pace would stretch too farand capacity of growth exceeds theFed’s estimated longer-run pace of1.8percent. Given that theFed believes theeconomy is Tim Fed writes onBloomberg Duy that thenext Chairwillcontend withaslow-growth economy. The recent pace dressed through policy. regulation, nottheblunt instrument ofmonetary ble macroeconomic environment ismostconducive to astablefinancialsystem. Financial excesses are better ad- to stop astock bubble market to try policy excesses.financial market Many economists are sceptical ofthisview— for goodIn1929,theFedreason. tightened cern isthat Powell believes theFed shouldfocus notjustonmacroeconomic stability, to prevent butshouldalsotry flation ofthetimeitwas enoughto keep interest rates high,butrates were highbecauseofinflation. Another con - whatMiller thought experienced thefinancialcrisis, that during butintheopposite to fight direction. thehighin- asFed toThe serve Miller lastnon-economist chairwas GWilliam policy,rates buttheproblem andmonetary iseven more severe amongnon-economists. specialist to lead thecentral Even bank. many economists cangetconfused bybetween interest theconnection , tippingtheeconomy into theGreat thelongrun,asta- Depression. In . Interestingly, hisproblems were quite similarto - www.worldcommercereview.com what hewanted, a ‘low interest rate person’ who alsohappensto bea ‘Republican Tho inahostilepoliticalclimate.how itcansafeguard policy theindependence ofmonetary looks likeintoday’s economic environment, what thescope oftheFed’s role infinancial regulation shouldbe, and board shapedby Reserve Trump andPowell now faces three bigquestionsaboutwhat a ‘normal’ policy monetary rate consistent withmany estimates ofpotential gross growth domesticproduct andfullemployment. The Federal Under Janet Yellen, theFed astheeconomy policy expands stillstruggleswithhow at a to exit ultra-loose monetary bility. niting inflation. The central exploredBernanke bankled Ben by how to stem theeconomic effectsoffinancial insta- the flation.During tenure ofhis successor, Alan Greenspan, itaskedhow fasttheeconomy could grow withoutig- questions aboutthecentral bank’s mission.UnderPaul Volcker, theFed grappled withhow to in- tamedestructive to makeanumberofkeyFed —andtheresponsibility —to askfar-reaching appointments anopportunity brings Glenn Hubbard writes ontheFTthat theappointment ofPowell isjustthestart. The Trump administration’s ability growth to pushtheneutral rate higher. term, itmight argue for aslow pace ofrate increases, butover thelongerrunwe wouldfaster productivity expect Fed’s estimate ofthelonger-run growth positionbecause, rate inthenear makersinatricky andcould place policy hikes. And thenthere ofanacceleration isthepossibility growth, ofproductivity would which,inturn, boostthe pressures exist thancurrentlytionary evident. These circumstances might require amore aggressive pace ofrate consumer spending.cut, Or, supporting withtheeconomy already operating above fullemployment, more infla- and expand theiroperations, boostinggrowth. Alternatively, Congress may manageto agree onasubstantial tax Moreover, theFed may face adifferentIt may challenge. bethat companies operatingtaketheplunge nearcapacity Bishop atMises Wire arguesthatwiththenomination ofPowellthe ‘swamp wins again’. Donald .’ Bishop believes that Powell Trump gets ’s www.worldcommercereview.com This article was originallypublishedonBruegel This article isAffiliateSilvia Merler Fellow atBruegel drama may giveround ofarbitrary the Fed enoughofanexcuse to follow theirleadandholdoffuntil 2018. ■ of theyear. While we canbeensured that outcome willbemore spending(andmore debt),theboutofyet another legislature’s candown theroad asledto yet thebudgetary another for kicking knack ‘fiscal cliff’ scenario attheend Whether theFed continues withitsprojected interest rate hikeinDecember may itselfdependonCongress. The ward, we to seetheFed shouldexpect continue slow normalization ofitsbalance sheet. John Taylor orKevin Warsh, Powell hasmadeitclearthat heopposessuchlimitsbeingplaced ontheFed. for Going policy.requiring theFed monetary to adoptrule-based While thiswould have complemented thenomination of Financial Committee hasbeenpushingFed JebHensarling Chairman Services reform whichwould have included forward,Going itwillbeinteresting to seehow intheHouseandSenate Republicans proceed. For years now, House es –asopposedto openingFOMCmeetingsinto sometrulyspirited debate. ministration. The administration hassignaled that consensus itsplansto withitsremaining form Fed apolicy choic usefulillustration ofhow littlehaschangedin asaparticularly nomination serves Washington since theBushAd- - -