Jerome Powell: The man with the world economy in his hands
With more influence than heads of state, the chair of the US Federal Reserve has received both praise and criticism since taking over. If job growth stays strong and inflation hits 2%, he won’t care.
AFP
Jerome Powell during a press conference in Washington on May 1, 2024.
Jerome Powell: The man with the world economy in his hands
US Federal Reserve Chairman Jerome Powell has one of the world’s most important jobs, making some of the world’s biggest economic decisions. Thankfully, in doing so, he has a lot of experience on which to draw. He began his career as a lawyer, later becoming an investment banker, then serving as a Treasury Department official overseeing debt market management, and finally becoming a partner at the Carlyle Group, a leading private equity firm on Wall Street.
He was born on 4 February 1953 in Washington, DC, to a family who specialise in law. His father was a lawyer, while his maternal grandfather was Dean of the Columbus School of Law at the Catholic University of America and a lecturer at Georgetown University Law School. He graduated from Georgetown Preparatory School in 1972 and studied politics at Princeton University in 1975. He then earned a law degree from Georgetown University and spent a year as a legislative assistant to Republican Senator Richard Schweiker.
After graduating, he moved to New York, where he worked as a clerk for Judge Ellsworth Van Graafeiland at the US Court of Appeals, then worked as a lawyer at law Davis Polk and Werbel & McMillen. From 1984 to 1990, he worked at Dillon, Read & Co., an investment bank specialising in mergers and acquisitions, where he was promoted to Vice President. He then joined President George H.W. Bush's administration as Under Secretary of the Treasury for Domestic Finance, responsible for policy related to financial institutions, the Treasury debt market, and related areas.
Into the world of banking
During his tenure, he investigated Salomon Brothers for submitting false bids under competing names to repeatedly acquire Treasury bonds over a two-year period. He also persuaded famed investor Warren Buffett to temporarily step in to lead the investment bank and restructure it to save it from bankruptcy. A major shareholder in Salomon Brothers, he briefly did so, putting his reputation on the line, before appointing a Yorkshireman whose reforms helped the bank prosper.
In 1993, Powell joined Bankers Trust as a managing director, specialising in lending operations and financial services, but left in 1995 after it emerged that managers had been involved in transactions and derivative instruments that caused huge losses to major clients. He returned briefly to Dillon, Read & Co. before becoming a partner at Carlyle Group, a multinational private equity, asset management, and financial services firm, where he founded and led the Industrial Group.
Powell makes some of the world's biggest economic decisions. Thankfully, he has a lot of experience to draw on.
After leaving Carlyle, he founded Severn Capital Partners, a private investment firm focused on investment and speciality finance in the industrial sector. In 2008, he became a managing partner of the Global Environment Fund, specialising in sustainable energy.
Outside business, he has served on the boards of a public charter school in Washington, a finance centre at Princeton University, an environmental organisation, and a consortium of 16 schools in the poorer areas of Washington, D.C.
The Obama era
From 2010 to 2012, Powell worked as a visiting scholar at the Bipartisan Policy Centre, a cross-party think tank that seeks a common approach to national challenges in fields such as energy, climate, and national debt. In 2011, he played a pivotal role in getting members of Congress to agree on raising the debt ceiling and not defaulting on the country's sovereign debt.
At the time, he explained that "if investors avoid the Treasury bond market, there may be no ability to pay maturing financial bonds, meaning an immediate default", adding that "even a brief default could pose catastrophic risks to the financial system, as Treasury securities are a critical source of collateral within that system".
On the other hand, Powell insisted that "raising the national debt ceiling must be accompanied by substantive policy reforms, significant budget savings, and a strict enforcement mechanism to constrain Congress". His arguments and analysis caught the attention of President Barack Obama, who nominated him and Jeremy Stein for two vacant positions on the Federal Reserve Board of Governors, despite Powell being a Republican and Obama a Democrat.
Powell took office in May 2012, and two years later, he was re-nominated for a full 14-year term. The Senate approved his appointment for a tenure ending on 31 January 2028. He took a centrist approach to the financial regulations established by the Dodd-Frank Act, navigating between Republicans who sought more flexible regulatory rules and Democrats who advocated for stricter regulations. He felt that "more regulation is not always the best solution for every problem".
US President Donald Trump announces his nominee for Chairman of the Federal Reserve, Jerome Powell (L), in the Rose Garden of the White House in Washington, DC, November 2, 2017.
The Trump era
Before US Treasury Secretary Janet Yellen's tenure as Federal Reserve chairman came to an end, President Donald Trump said he wanted her replacement to come "from the world of business and government," similar to William McChesney Martin, who served for nearly two decades.
In November 2017, Trump said he had found his man: Jerome Powell. He had been a lawyer, an investment banker, a Treasury Department official, and a partner at a leading private equity firm on Wall Street. Moreover, he had experience in the Federal Reserve's management and operations and the added benefit of a good relationship with the Republican Party.
The Senate Banking Committee approved the nomination, which was confirmed by the Senate in January 2018, with 84 votes in favour and 13 against. Powell took office in February 2018, becoming the 16th chairman of the Fed.
He has been described as "neither a hawk nor a dove" because he has no fixed ideology and shifts his views as the economy evolves. Although he advocated raising the federal debt ceiling in 2011, earlier this year, he warned about the unsustainability of that debt in the long run.
In an interview with CBS, he said it needed to be addressed urgently because the debt was growing faster than the economy, and Americans were living at the expense of future generations.
Relying on the data
Powell is known to be pragmatic. He studies—and relies on—the data and their indications. He emphasises patience, moderation, and rational analysis without overreaction, encouraging colleagues to look at the facts. "Light bulbs go off in their heads when they finish listening to him," said someone who knows him.
Powell has been described as 'neither a hawk nor a dove because he has no fixed ideology and shifts his views as the economy evolves
Powell clearly believes in the virtues of debate, having once said that "the best outcomes are reached when opposing viewpoints are clearly and strongly presented before decisions are made". He is the first Fed chair in three decades not to have a degree in economics. His three predecessors all had doctorates in the field from the most prestigious universities: Janet Yellen at Yale University, Ben Bernanke at the Massachusetts Institute of Technology, and Alan Greenspan at New York University. Powell is also one of the richest Federal Reserve chairmen, yet he continues to commute to and from the bank by bicycle.
Trump's opprobrium
Powell has overseen the formulation and implementation of US monetary policy, which aims to maintain price stability, promote maximum employment, and ensure the stability of the financial system. However, it has been a bumpy ride and has involved disputes with President Trump.
Since March 2022, Powell has presided over 11 consecutive increases in interest rates over two years in response to the growing strength of the US economy and to combat the effects of inflation. He refused to set a timeline for reversing that, setting a 2% inflation rate as a benchmark for rate cuts. He also announced that the Fed would reduce its asset portfolio from $4.5tn to a range of $2.5-3tn over four years. Trump disagreed, saying it would be unwise to continue raising interest rates due to economic uncertainty and financial market volatility.
He also warned that it would be a mistake to make such a move in the middle of an escalating trade war with China, cautioning against "making decisions based on meaningless numbers."
In a tweet, Trump said: "It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris burning, and China way down, the Fed is even considering yet another interest rate hike." Trump argued that higher interest rates make borrowing more expensive, slowing investment by households and businesses. In an August 2019 tweet, he asked, "Who is our bigger enemy, Jay Powell or Chairman Xi?"
....My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?
Monetary tightening policy has long been a source of tension and conflict in the US between the country's president and the chairman of the Federal Reserve. In the 1980s, President Ronald Reagan and Paul Volcker were similarly at odds. Powell gently reminded Trump that "the long experience in the United States and other advanced economies has demonstrated that monetary policy is most successful when decisions are rendered independent of the influence of elected officials".
On another occasion, he said the Fed's structure "reflects a long-standing desire in America to ensure that power over our nation's monetary policy and financial system is not concentrated in a few hands".
Powell's policy initially led to a fall in financial asset prices, which negatively impacted sectors like real estate. This led him to return to expanding the Fed's balance sheet, beginning with monetary easing in the fourth quarter of 2019. Powell described this as an overnight repurchase agreement (repo), where the seller could reverse the transaction and did not constitute quantitative easing.
In early 2020, he launched an unprecedented series of actions to counter the pandemic's impact on the financial market, including a dramatic expansion of the Fed's balance sheet and new tools like direct purchase of corporate bonds and direct lending.
Both Republicans and Democrats praised his decisions, as did Trump, despite the fact that quantitative easing has led to a rise in inflation and the Consumer Price Index (reaching 7% in 2021) as well as asset price inflation reaching record highs.
The Fed's structure reflects a long-standing desire in America to ensure that power over our nation's monetary policy and financial system is not concentrated in a few hands
Federal Reserve chairman Jerome Powell
Market anaesthesia
Wall Street had one of its best years ever in 2020, with Great Gatsby-esque extravagance and prosperity for asset owners while those without assets suffered. The direct and indirect quantitative easing operations approached previous bubble levels and deepened wealth inequality by boosting the profits of the wealthiest, especially investment bankers.
Mohamed El-Erian, chief economic advisor at Allianz, accused Powell of being "a follower, not a leader of financial markets." In contrast, Bloomberg dubbed him "Wall Street's Head of State" in reference to his control over asset prices and profitability.
James Grant of the Austrian Mises Institute, writing in the Wall Street Journal, likened Powell to a doctor treating Wall Street's ailing markets with anaesthetics and pain relief, while the Washington Post said the Fed was "addicted to propping up markets, even when there is no need".
Steven Pearlstein, the paper's economics writer, accused Powell of having "adopted a strategy that works like a one-way ratchet, providing a floor for stock and bond prices but never a ceiling" and that if Powell ditched that strategy, it would "trigger a sharp sell-off by investors who have become addicted to monetary stimulus".
Billionaire Seth Klarman, head of the Baupost Group, said the Fed under Powell has "disrupted market rules, and its role in price discovery has effectively been suspended". Time magazine said Powell's actions had "changed the Federal Reserve forever" and expressed concern that he had made Wall Street markets dependent on unsustainable levels of monetary stimulus to support artificially high asset prices.
A television station broadcasts US Federal Reserve Chair Chair Jerome Powell speaking in Jackson Hole, Wyoming, on the floor of the New York Stock Exchange (NYSE) in New York on August 23, 2024.
Among the asset bubbles caused by Powell's policies were those in cryptocurrencies, which saw price spikes in 2020. The Fed chair was later named Forbes Person of the Year in the cryptocurrency sector.
Responding to accusations
Economists expressed concern about the dangers of what could be the largest financial bubble in US history, which would affect not just stocks but almost every other financial asset.
Powell's view is that there is no risk-free path for monetary policy. Modern monetary developments allow for the exceptional use of quantitative easing tools to overcome recessions, high unemployment, trade wars, and political unrest and to generate economic growth through asset price inflation.
Rising asset prices lead to increased wealth, which, over time, results in increased spending, which supports job growth and reduces inequality. The correlation between low interest rates and asset values is not as strong as some believe, as many factors determine asset prices. There is no fear of a potential housing bubble, like the one that preceded the Great Recession, as there are no bad loans or unsustainable prices.
The Biden era
Ahead of the end of Powell's term in February 2022, some warned against extending his term, arguing that he had failed to mitigate the risks posed by climate change to the financial system and that he had taken a lax approach to regulating large banks. He was accused of not sufficiently adhering to ethics rules when the American Prospect website revealed that he had sold some of his assets in the stock market for up to $5m.
This coincided with the resignation of two Federal Reserve officials in Dallas and Boston following the disclosure of large stock market transactions during the pandemic. A Fed spokesman told AFP that the sale covered personal family expenses.
Federal Reserve Board Chairman Jerome Powell testifies during a hearing before the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill on November 30, 2021, in Washington, DC.
Nevertheless, Biden renominated him, and he was approved by the Senate Banking Committee, with only one dissenting vote (from Senator Elizabeth Warren, a law professor). He later secured the approval of a majority of the Senate, and his second term began in May 2022.
Biden has consistently praised Powell's performance, saying he was "the right person" to lead the Federal Reserve as the United States faced its highest inflation rates in 40 years. Biden has also noted "the need for stability and independence" at the Fed and that "having Fed leadership with a broad bipartisan support is important," which was achieved by appointing a Republican (Powell) as chairman and a Democrat as vice chairman.
Interest rate reduction
In August of this year, Powell told assembled delegates at the annual Jackson Hole meeting for central bankers that it was time to adjust monetary policy in the US because inflation was now on a sustainable path back to 2%.
Three weeks later, during the Federal Reserve meeting, he announced a half-point rate cut, making it easier for individuals and businesses to borrow, giving them more money to spend. This will be reflected in everything from 30-year fixed mortgages to credit cards and car loans.
This should boost the US economy at a time when Vice President and Democratic presidential candidate Kamala Harris—who opposed Powell's first nomination to head the Federal Reserve in 2018 when she was in the Senate—desperately needs good economic news just a month before the election.
Whatever the political outcome of the vote on 5 November, it is a safe bet that Powell will continue to be guided by the data as his second term draws to a close.
