Employment Report Takes Backseat to New Fed Driver
The October jobs data came in with a strong reading as compared to September, as most forecasters expected. The U.S. economy added 261,000 jobs in October, a sharp rebound in payrolls, as storm ravaged communities in the Southeast U.S. rebuild and return to normal economic activity. As I pointed out last month, there were large losses in the restaurant and bar industry in the month of September as many eating and drinking establishments temporarily closed as a result of evacuations in the month. Strong job gains were witnessed in the food services sector in October, as 88,500 jobs were added in this sector in October, reversing September’s losses. Despite the anticipated noise in this report, growth in the labor market appears to be relatively strong and the unemployment rate declined to 4.1%. This strong employment report garnered well-deserved attention on Friday, but was overshadowed by President Trump’s nomination of Jerome Powell as the next Federal Reserve Chair, one of the most closely watched job openings in the country over the past several months.
The selection was a more conventional pick than some of the rumored candidates that have circulated in the past several months. Powell has served as a Federal Reserve governor since 2012 and has a strong reputation among colleagues. Additionally, Powell has an impressive resume within the private sector and served a brief stint with the Treasury department during George H.W. Bush’s administration. However, many economists have pointed out that Powell only has a few years of experience in setting monetary policy and no academic credentials in monetary economics. While this lack of experience does not disqualify Powell from providing a steady hand to U.S. monetary policy, it does raise questions about what to expect from his prospective chairmanship. And there is historical precedence that begs for these questions to be addressed.
If confirmed, Powell will become the first Fed Chair without a Ph.D. in Economics since G. William Miller held the position during the Carter administration. Miller’s tenure at the Fed was infamously short-lived. He presided over one of the worst bouts of inflation and economic stagnation in U.S. history and is politely regarded as an ineffective central banker. Miller did not believe that the Federal Reserve could effectively control inflation, due to the complex forces that drive prices, and therefore supported an expansionary monetary policy agenda. This growth-at-any-cost policy helped create conditions for runaway inflation during his term. This surge in inflation required a brutally tight monetary policy under his successor, Paul Volcker that pushed 30-year Treasury bond yields above 15%. It is not likely that history will repeat itself during Powell’s chairmanship simply because he does not hold an advanced degree in economics, but if he fails to ensure independence in monetary policy by the Federal Reserve at the hands of pressure from the executive or legislative branch, that could spell bad news for the U.S. economy.
While Miller and Powell may have similar professional backgrounds, it is important to note that they are not the same men and the current state of the economy is quite different from the economy of 40 years ago. So perhaps it is worth focusing on what is known about Powell before speculating about his views on the Federal Reserve and its role in creating conditions to allow for stable prices and full employment. Powell has not voted outside of the consensus on monetary policy action during his term as a governor. This has led many economic commentators to suggest that Powell will look to the monetary policy experts to build a consensus on monetary policy action and keep the data-dependent approach of the Fed. By allowing the trained technocrats to focus on setting monetary policy, Powell may have more time to focus on the increasingly large scope of the Federal Reserve’s regulatory mandate, which has expanded significantly following the financial crisis.
In his public statements, Jerome Powell has frequently alluded to problems with the implementation of Dodd-Frank and other financial legislation. The rationalization of a burdensome and often times contradictory regulatory regime is worth considering. In the years following the crisis a string of legislation has certainly created a safer financial system. Capital ratios at banks have increased, but it is clear that many of the other rules and stress tests have been poorly conceived and nearly impossible to implement. This has created confusion and frustration at financial firms, large and small. Reviewing the multitude of laws and rules at the Federal Reserve’s charge is a commendable task for a new Federal Reserve Chair. While the monetary bona fides of Trump’s nominee are uncertain, one can hope that if confirmed, Powell sticks to his circle of competence in financial regulation and management and presides over a data dependent FOMC where the economists continue to present, debate, and drive the direction of monetary policy.
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