Jay Powell – A Quiet Leader

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The sheer breadth of Powell’s experience is refreshing compared to what we’ve had for the past 30 years. Powell has a deep understanding of the law and politics. He worked in the Treasury Department under Nicholas Brady and was confirmed as Undersecretary of the Treasury under George H.W. Bush. His background in politics and the experience he has had at the Fed thus far have prepared him well for his role as liaison to Congress and the White House.

Powell’s experience as an investment banker was critical in his carrying out the investigation and sanctioning of Salomon Brothers. Understanding the entirely different type of politics that exists in big banks will bode well for his capacity to regulate the banks. This attribute especially will dilute the power traditionally exerted by the NY Fed in recent years, a District that has a long history of conflicts of interest vis-à-vis the banks it regulates. A stronger regulator as Fed chair in the years leading up to the financial crisis would have been able to recognize many of the markers the economists missed.

At the Carlyle Group, Powell founded and ran the Industrial Group within the Buyout Fund. A separate missing characteristic among Fed leaders for the past 30 years has been a woeful lack of understanding as to how Fed policy effects corporations and the decisions CEOs and CFOs make driven by Fed policy, the most obvious of which has been debt-financed share buybacks at the expense of capital expenditures.

Some in the media have questioned Powell’s being the wealthiest individual at the Fed. That is actually a strong suit. In his work between 2010 and 2012 at a bipartisan think tank, Powell worked for a salary of $1 per year to carry out his mission to raise the debt ceiling. His wealth affords him the luxury of having no preset agenda. His history of working for his country exemplifies that he is at the Fed because he truly believes he is doing a greater good in servicing his country.

Powell’s work on Too Big to Fail banks also speaks to his ability to be independent and objective in his approach to regulating big banks with deep-pocketed lobbyists who hold huge sway over politicians. If he is willing to go up against the biggest banks, he will hopefully prove to be a leader cast in the mold of William McChesney Martin, the longest serving Fed Chairman famous for testifying to Congress that it was the Fed’s job to take away the punch bowl just as the party gets going.

His being a member of the Republican party is a sign he will be less apt to encourage further mission creep at the Fed in its fulfillment of its second mandate to maximize employment. Dovish leaning Fed chairs have induced financial instability time and again in their efforts to bring marginal workers off the sidelines. The busts that have followed though have done greater damage to the labor market. His experience in the financial markets suggests he will be less apt to keep rates too low for too long as has been the case with his three predecessors.

Powell was not in favor of the third round of QE, but voted for its nevertheless. This is his biggest black eye and why market participants perceive him to be as dovish as they do. One can only hope that the quiet leader will have the strength to not only act more independently, being faithful to his convictions, but also to encourage dissent on the Board of Governors which has been absent since 1996 save two dissents.

I lean towards the Bloomberg Intelligence Fed Spectrometer which rates Powell as neutral rather than a hawk or a dove. Or as the man I used to call boss, Richard Fisher, would say, Powell is a (wise) owl. The notion that an intelligent man who has studied economics assiduously since joining the Fed is unfit to lead because he is not a PhD in economics is naïve and utterly preposterous. His not being an academic is possibly his best attribute given he will be battling the next recession and the financial markets disruption that is sure to accompany it.

 

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