Trump Fed nominee Jerome Powell faces 2 big questions at his Senate confirmation hearing

Reuters/Carlos Barria

• President Donald Trump's nominee to replace Janet Yellen as Fed chair, Jerome Powell, faces his confirmation hearing before the Senate Banking Committee on Tuesday.
• Powell is likely to face questions on how he will approach the Federal Reserve's plan to gradually continue raising interest rates and on financial regulation.
• Powell's confirmation is widely expected to sail through despite his lack of formal training in economics.

The position of Federal Reserve chair is one of the most powerful in the world, so let's hope the Senate Banking Committee brings its A-game when it comes to questioning Jerome Powell, President Donald Trump's nominee to replace current Fed Chair Janet Yellen, during his confirmation hearing on Tuesday.

A current Fed governor and former private equity executive, Powell has commented fairly sparsely on monetary policy and regulatory matters, so there are lots of unanswered questions about how he views the world.

While his confirmation is seen as all but certain, given that he was previously confirmed twice as Fed governor, the importance of the position of Fed chair deserves even deeper scrutiny.

The Fed is in charge of not only setting interest rates but also regulating the nation's largest banks, particularly those that were at the center of the 2008 financial crisis.

So Powell faces two principal tasks, both of which should be the focus of the hearing - even if some of the questioning is likely devolve into partisan bickering and political point-scoring before the cameras.

Should the Fed keep raising rates?

The first big task for the next Fed chair is the decision about whether to continue raising interest rates against a mixed economic backdrop. The data point to solid, if unspectacular, growth and a historically low unemployment rate, but also a low inflation rate that continues to undershoot the Fed's 2% target and is a sign of subpar economic activity and soft wage growth.

This is how lawmakers might get at that issue at Tuesday's hearing:

1. Do you intend to continue raising interest rates in December and next year despite below-target inflation, and what factors are you considering in making that decision?

Part of Powell's early mission on this front will be establishing himself as a leader and developing his own way of communicating on major policy issues, many of which he has touched upon only sparsely as a Fed governor. Powell should be pressed on his lack of economics training - he's the first Fed chair in decades to lack a doctorate in the field - and how he will use his staff and the expertise of his colleagues to help guide decision making.

Powell is expected to maintain the more committee-centered approach that began under Ben Bernanke, who wanted to move away from Alan Greenspan's cult of personality, and continued under Yellen.

The Fed has raised interest rates four times since December 2015, to the current 1% to 1.25% range. The central bank has also started to gradually shrink a $4.5 trillion balance sheet that expanded sharply in response to the Great Recession of 2007-2009.

How should big banks be regulated?

The next Fed chair's second major challenge is managing the regulation of banks and other key financial sector entities. This is especially difficult because the Fed is caught in a difficult spot: It must implement an agenda of deregulation mandated by Trump, even though the central bank was deeply involved in developing and creating the post-financial crisis regulatory structure.

So in this case, regulators might ask Powell:

2. What is your view of the post-crisis financial rules and how willing would you be to roll them back, in particular capital requirements for big banks and consumer protections now under challenge?

Many investors and public advocates worry that weaker rules could lead banks to again take wild risks and put consumers and workers at undue risk. Powell, a former Carlyle Group executive, has plenty of financial market experience, but some might worry he is ideologically too close to the sector to supervise it closely.

Both Yellen and the recently-retired vice chair, Stanley Fischer, have spoken in unusually blunt terms about the dangers of rolling back financial rules.

Powell has been friendly to the idea of letting financial institutions roam more freely, albeit within limits, according to The New York Times. Indeed, Powell's industry-friendly stance probably didn't hurt his chances of landing the job.

A political squabble that started last week over the leadership of the Consumer Financial Protection Bureau is just a small taste of all the political blowback that is likely to ensue from Republican efforts to undo post-crisis financial regulations. These include much higher capital requirements for the largest Wall Street institutions, because these are the ones that brought the financial system to the brink of failure in 2008.

Another big regulatory issue facing the Fed is how to regulate so-called "shadow banks," which range from hedge funds to private equity to the money market industry - essentially firms without a banking charter that perform banking-like functions.

Before the financial crisis, investment banks were part of the shadow banking world, and the lack of regulatory scrutiny on their activities was a major culprit of the crisis.

Given the massive and lingering costs of that debacle in the form of lost jobs, wealth and productivity, Americans should hope Powell places the burden of proof on the need for any rule rollbacks on the industry, and even then, assesses their assertions with a giant grain of salt.