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Jerome Powell:

  • Republican, studied at Princeton (AB in Politics) and Georgetown (JD)

  • Spent five years as a clerk and lawyer, then six years as an investment banker

  • Served as Under Secretary of the Treasury for Domestic Finance from 1992-1993, nominated by George H.W. Bush

  • Founded/worked as managing director for a few financial institutions

  • In 2008, he became a managing partner of the Global Environment Fund, a private equity and venture capital firm that invests in sustainable energy

  • Nominated to Fed Reserve Board of Governors in 2012 by Barack Obama

  • Nominated by Donald Trump to serve as Chair of the Fed Reserve in 2018

  • In 2013, he made a speech regarding financial regulation and ending “too big to fail” banks; in 2017, he took oversight of the “too big to fail” banks

  • He is described as more of a monetary dove than other Fed Board of Governors members, meaning he does not prioritize keeping inflation low and instead emphasizes other issues, such as low employment

  • Last year, he expressed concerns that the government is responsible for mortgage defaults and that lending standards are too rigid, noting that these can be solved by ample amounts of private capital to support housing finance activities


Janet Yellen:

  • Democratic, studied at Brown (BA in Economics) and Yale (MA, PhD)

  • Over 45 years of experience as Professor at prestigious universities

  • Appointed as member of the Board of Governors of the Fed Reserve in 1994

  • Served as Chair of Council of Economic Advisors to Bill Clinton from 1997-1999

  • Served as President of the Fed Reserve Bank of San Francisco from 2004-2009

  • Nominated by Barack Obama as vice-chair of the Fed Reserve from 2010-2014, along with becoming a member of Fed Reserve Board of Governors

  • Nominated again by Obama to serve as Chair of the Fed Reserve from 2014-2018

  • She is described as more of a monetary dove; however, capable of acting more like a monetary hawk if economic circumstances dictate

  • She is a Keynesian economist and believes in the modern version of the Phillips Curve, which states that unemployment decreases will correlate with higher rates of wage rises and increasing inflation

  • In 2005, Yellen argued against deflating the housing bubble and predicted that the economy could absorb the shock; in 2010, she conceded her previous misjudgment saying she assumed it was a similar situation to the tech bubble

  • She defended the $3T in stimulus funds the Fed was injecting into the economy

  • In December 2015, she increased the increase rate for the first time since 2006



     Jerome Powell was the safest nominee for Chair of the Federal Reserve to replace Janet Yellen, considered by many as the Republican version of her. Many economists expect him to continue her path of gradual rate hikes and little policy change. However, there are some differences between them that could have a large impact on the decisions the Fed implements over the next few years.

     While some consider Powell to be more of a monetary dove, it seems that he is actually more hawkish than Yellen, in terms of prioritizing inflation. An example is his view on QE3 (third round of quantitative easing), for which he has been a skeptic since it commenced in 2012. In 2008, the Fed began large-scale purchases of assets to stimulate the lagging economy and save the financial system from collapsing. This program, known as quantitative easing, lasted for eight years, resulting in a Fed balance sheet consisting of $2.5T in treasuries and $1.8T in mortgage-backed securities. QE3 was implemented in 2012 and involved the Fed buying an additional $40 billion in mortgage-backed securities each month until it sees improvement in the labor market. While the labor market has become very strong over the years, since the Fed bought securities with money that essentially created out of thin air, this leaves the economy vulnerable to extremely high inflation once the economy fully recovers. I think Powell understand this and it was his reasoning for not supporting it.

     Another difference is Powell’s propensity of a softer approach towards financial regulations, aligning with President Trump. While Yellen has stressed the importance for strict regulation, Powell has stated that “more regulation is not the best answer to every problem” and believes that looser guidelines may be needed for financial institutions to prosper. For example, he generally supports the Dodd-Frank reform, but cites parts of it as “unnecessarily burdensome” and believes that the Volcker Rule should be re-written to ease the regulatory burden on smaller banks. Yellen’s main focus was on stabilizing the economy, while Powell wants to deregulate community banks, relax liquidity constraints on larger firms, and relax lending standards in the housing market. These measures are in line with the Trump administration’s focus on regulatory reform, and would likely spur growth.

     Powell is the first chairman without a PhD in Economics since Paul Volcker (Chairman from 1979-1987), so people need to comprehend that he may make decisions differently than previous chairs since he lacks deep understanding of monetary policy. On the other hand, his corporate finance background may be beneficial and exactly the change that the economy needs, since Greenspan and Bernanke’s PhD’s did not prevent the Great Recession from occurring. His methodology of analyzing economic trends may be different than previous economists who served as chairs, but since the Fed is a body of people, I think we may not notice the difference.

     While Yellen achieved many impressive feats, such as accelerating economic growth, a solid employment picture, and a stable financial system, she failed to bring the inflation rate up to the 2% target the central bank holds. According to the Phillips curve, when unemployment decreases substantially inflation should begin to rise. This inverse relationship can be seen through history, yet the unemployment rate is down to 4.1% (the lowest ever recorded in history) and inflation remains under target at 1.7%. With the country currently experiencing a strong labor market with signs of it becoming stronger, the unemployment rate could drop below 4%, which I think will result in inflation rising. When looking at data from the 1960s, inflation hardly increased when the unemployment rate dropped from ~6.8% to ~4.2%. However, when unemployment dipped to ~3.8% in the later part of the decade, inflation skyrocketed to ~5% in three years.



     I expect Powell to follow Yellen’s footsteps and raise interest rates in 2018, watching market indicators and data all the while. Trump’s tax cuts and planned $1.5T in infrastructure spending, are expected to boost the economy while simultaneously escalating the budget deficit. This will create a problem for Powell, as he will need to normalize the Fed’s $4.5T balance sheets. In 2014, Yellen announced the Fed would cut back on their bond-buying program, but now Powell is looking to further decrease the size of the balance sheet and stabilize it over the next four years, possibly by selling off the securities.

     Powell agrees with the concept that since the economy and labor market are both very strong currently, waiting too long would cause the economy to overheat. The only response to this would be to suddenly raise interest rates, which would almost certainly result in a recession. That means the best way to sustain recovery from the financial crisis is to continue the current path of gradual rate increases. I estimate that Powell will hike the interest rate twice or three times this year, moving to 2% or above by the end of 2018, with almost certainly a hike from 1.5% to 1.75% at the next meeting on March 21st.

     Given Yellen publically commenting on her failure to increase inflation, I think that Powell will take a more hawkish approach and prioritize higher inflation. As the labor market begins to bottom out and dip towards 4.0% unemployment, he will raise the interest rates to combat any chance of high inflation. However, raising interest rates result in deflation, so the Fed will attempt to balance this. Overall, Powell has spoken about trying to increase inflation and I think that reaching the 2% target will almost certainty be a goal achieved during his term over the next few years. The only question remaining is will it exceed that a lot?

     Overall, Powell is similar to Yellen in many ways. Since being appointed to the Fed Board of Governors in 2012, Powell has consistently voted with both Bernanke and Yellen questions of policy. Her monetary policy has been characterized by patiently and gradually raising the federal-funds rate, while reducing its massive balance sheet. Therefore, he will most likely continue in a similar monetary policy path with the possibility of slightly higher rates, while also differing in his financial regulation.


“Underlying the rosiness of current markets is the age of the bull market. The current rally is seven months away from being the longest ever, raising questions about when the champagne will stop flowing.” – Fortune


Interest Rates
Janet Yellen
Jerome Powell
Donald Trump