Trump plays it safe with Fed chair pick choosing Jerome Powell to replace Janet Yellen

Thomson Reuters

Janet Yellen and Jerome Powell.

• Jerome Powell, the current Fed board governor and former private-equity executive, is US President Donald Trump's pick to replace Janet Yellen as the central bank's chair.
• Powell will face key decisions, including honing consensus around whether to continue raising interest rates in a steady-growth but low-inflation environment.
• He is seen as the safe bet, having already served on the Fed for 5 years.
• Janet Yellen's term ends in February.

US President Donald Trump has named Jerome Powell, a current Federal Reserve governor and former finance executive, as his choice to replace Janet Yellen as chair of the world's most powerful central bank - ending months of speculation about who would take charge.

Powell, who is expected to be confirmed to the role, will face key decisions on whether to continue raising interest rates as the economy sends mixed signals about the growth outlook and US inflation remains well below the Fed's official 2% target.

Powell is seen as a relatively safe, Wall Street-friendly choice at a crucial time for the central bank. The Fed has begun the process of raising interest rates from post-recession lows and is unwinding its massive asset-buying program - a response to the financial crisis a decade ago.

Trump's decision not to grant Yellen a second term as chair is a break with the recent tradition of presidents nominating sitting chairs to a second term, even when they have different political affiliations. Yellen is a Democrat and served in the administration of former US President Bill Clinton. Her term ends in February.

Still, Powell does offer continuity of sorts, and in that sense is the best alternative to Yellen among those who were on Trump's shortlist of candidates. Other candidates reportedly considered included White House adviser and ex-Goldman Sachs executive Gary Cohn and Kevin Warsh, a former Fed governor and Morgan Stanley banker.

The selection was a drawn-out affair conducted in Trump's very public style. The president tweeted as he met candidates, and last week posted and an Instagram video previewing the decision.

Predictable is good

Powell, a 64-year-old Republican was appointed to the Fed's powerful Washington-based board of governors in 2012 by US President Barack Obama. The appointment of Powell, who is among the wealthiest members of the Fed, is likely to be well received on Wall Street, which will see him as a friendly face on possible deregulation but also, importantly, as somewhat predictable on interest-rate policy at a key time for the central bank.

He is likely to maintain the Fed's course of gradual but cautious rate increases, with an eye to an inflation rate that continues to undershoot the central bank's 2% goal. This points to economic activity and a labor market still running below their potential, a point highlighted by weak wage growth for most Americans.

The Fed has raised interest rates four times since December 2015, and it recently began gradually winding down its $4.5 trillion balance sheet. Fed officials are predicting several additional rate increases this year and next, but financial markets are more skeptical.

Powell worked in private industry much of his life and was a partner at Carlyle Group from 1997 to 2005. Lacking a formal education in economics and having graduated with law degree from Yale University, Powell had to learn on the job when it came to monetary theory and interest-rate policy. Still, his financial background made him well equipped.

He has focused on more tangential issues for the Fed like the regulation of scandal-ridden Libor interest rates, financial innovation, and housing policy. His most recent speech on monetary policy was in June for the Economic Club of New York. At that point he said:

"The healthy state of our economy and favorable outlook suggest that the FOMC should continue the process of normalizing monetary policy. The Committee has been patient in raising rates, and that patience has paid dividends."