Powell Steps Becomes Fed Chief as Economy Starts to Show Strain
Posted February 4, 2018 6:57 p.m. EST
WASHINGTON — Jerome H. Powell, who will be sworn in Monday as the Federal Reserve’s 16th chairman, is stepping into his new role as a half-decade of economic tranquility is beginning to show some signs of strain.
The Fed has gradually been increasing interest rates to maintain control of inflation, and markets are starting to notice. Stock prices fell Friday as investors contemplated higher rates with a tightening labor market.
Powell, charged with keeping the economy in the safe space between overheating and recession, arrives on that high wire as a relative unknown. He is a lawyer by training and an investor by trade in a role reserved almost exclusively for economists in recent decades.
He has said that he plans to continue the Fed’s gradual retreat from the economic stimulus campaign it mounted after the 2008 financial crisis, and markets have taken him at his word.
It is harder to predict how he would respond to faster growth — or to a financial crisis.
But Powell, who turned 65 Sunday, arrives in the job with a deeper knowledge of financial markets than his recent predecessors, and what friends describe as strong political instincts.
“I worry not at all,” said Seth Carpenter, who worked with Powell at the Fed and is now the chief U.S. economist at UBS. He said that Powell, in his early days at the Fed, would pull staff members aside after meetings with long lists of questions. In time, the lists got shorter.
“It got increasingly deep and increasingly technical and increasingly sophisticated to the point where I think that this idea that he’s not a real economist is just bunk,” Carpenter said.
Louis Crandall, a longtime Fed watcher at Wrightson ICAP, said every Fed chief faced unexpected challenges. In 1987, the stock market crashed two months after the installation of Alan Greenspan as Fed chairman. Greenspan was one of the nation’s most prominent economists, and his views were well known, but Crandall said no one had asked what he would do about a market crash.
Powell also has well-established views on financial regulation, a crucial issue as the Trump administration seeks to loosen the strictures imposed on the industry after the 2008 crisis.
In the fall of 1991, Powell, then an assistant Treasury secretary, was summoned before Congress to explain how the government had failed to prevent an elaborate scheme by a bond trader at Salomon Bros. to corner the market in some Treasury securities.
Under sharp questioning, Powell resisted demands for a regulatory crackdown. He pressed for Salomon executives to lose their jobs, and he favored changes to prevent any recurrences. But he cautioned Congress against meddling with a market that mostly worked.
In October, shortly before Powell was nominated as chairman of the Federal Reserve, he told an audience of bond traders that he remained proud that the government had shown restraint.
“Regulation should always take into account the impact that it has on markets — a balance that must be constantly weighed,” he said. “More regulation is not the best answer to every problem.”
In his remarks, Powell also highlighted the importance of financial market participants holding each other to a high standard. That approach was reflected in Friday’s announcement that the Fed was slapping sanctions on Wells Fargo for failures of corporate governance. The action was taken during the final hours of Janet L. Yellen’s tenure as Fed chairwoman, but with Powell’s full support.
Powell has emphasized the importance of oversight by bank boards of directors, and the Wells action criticized the company’s board for failing to do its job. The Fed also published harshly critical letters to the last two chairmen of the Wells board, holding them accountable for the problems.
Powell is a lifelong Washingtonian. He went away to college at Princeton but came back to law school at Georgetown. He went away to work on Wall Street but came back in the early 1990s to take a job under Treasury Secretary Nicholas Brady, who had also been his boss at the white-shoe investment bank Dillon Read.
Powell has the calm and unassuming manner of a person confident in his abilities. Carpenter said the only time that he had seen Powell show irritation was when he persisted in addressing Powell as “Gov. Powell” rather than “Jay.”
John Dugan, a longtime friend who worked for Powell at Treasury, said Powell’s success owed much to playing well with others. “He has a tremendous sense of humor, but not an unkind one,” said Dugan, a former comptroller of the currency. The Salomon scandal began with a routine phone call. At the time, Wall Street firms wrote bids on scraps of paper stuffed into a wooden box. The New York Fed policed the process by calling a small selection of buyers to verify bids. In the spring of 1991, a staff member reached a surprised supposed bidder. A quiet investigation found that Salomon was bidding in other peoples’ names. No firm was allowed to buy more than 35 percent of a given debt issue; at one auction in May 1991, Salomon bought 94 percent, allowing the firm to resell at a premium.
Powell oversaw the government’s borrowing program, so he led the repairs, including the negotiations over a long weekend in August that resulted in the departure of Salomon’s top management and the installation of Warren E. Buffett as chairman. The bond trader went to prison.
Powell “was impressive to me because he thought clearly and he didn’t jump to conclusions,” said Deborah A. Perelmuter, then the head of the domestic trading desk at the New York Fed, who watched Powell hammer together a consensus on the necessary changes — including the replacement of paper slips with electronic bidding. “He seemed to have his head on straight.”
His views about regulation remain substantially unchanged. He supports the stronger rules imposed on financial companies after the 2008 crisis, but he has said he sees room for streamlining and he favors measures that encourage the industry to take responsibility for its conduct, where possible.
After leaving Treasury, Powell remained in Washington and made a fortune as a private-equity investor at the Carlyle Group. By 2010, he was looking for a new challenge, and he joined the Bipartisan Policy Center for an eight-week project simulating a state’s insolvency. He was not paid.
Searching for an encore, Powell recognized, earlier than most, that the Tea Party Republicans who arrived in Congress in January 2011 were genuinely opposed to raising the nation’s borrowing limit, known as the debt ceiling. Since he had been in charge of government borrowing, he also understood, better than most, that default would cause a crisis.
Working by hand, he modeled the government’s cash flows, calculating when Treasury would run out of money. He called it the “X date,” coining a term that remains in common use. He published his analysis online and, for several weeks, no one paid any attention. Then, quite suddenly, he found himself in the spotlight. Treasury had published its own calculations but the media — and congressional Republicans — wanted an independent source of information. All the better that Powell was himself a Republican.
“Jay was somebody who they could trust, who could help get facts into the discussion.” said Shai Akabas, the director of economic policy at the Bipartisan Policy Center, who worked for Powell as an analyst at the time. “He likes to earn your respect by working hard. It’s not about saying, ‘I’m here to help.’ It’s showing them that you’re really there constructively.”
Powell started briefing individual members of Congress about the need to raise the debt ceiling and in mid-June briefed the entire House Republican caucus, explaining that failing to act would cause a lot of pain for a lot of people.
When Republican leaders met with Timothy F. Geithner, the Treasury secretary, to negotiate a deal, they mentioned that Powell’s presentation was a crucial reason they would be able to rally the necessary votes to raise the ceiling.
Geithner asked Powell if he would be interested in returning to public service. In December 2011, President Barack Obama nominated Powell for a seat on the Fed’s board of governors.
Powell, who lives in Chevy Chase, Maryland, with his wife, Elissa Leonard, a filmmaker, is now preparing for a new challenge. One looming test: He has often commuted to the Fed on his bike, an 8-mile ride. He is trying to persuade his new security detail to let him stay in the saddle.