A boring choice for Fed chair, even though these are very interesting times
Jerome Powell’s main qualification for leading the world’s most powerful central bank seems to be his lack of strong views
Donald Trump with his choice for Fed chairman, Jerome Powell.
Sunday 5 November 2017
Jerome Powell was Wall Street’s choice to run the Federal Reserve. Given Donald Trump’s record on doing the unexpected, there was always the chance the president would pick another candidate, but for once he did not make waves.
Powell was the business-as-usual candidate. Nothing he has said or done since he first joined the Fed’s board five years ago suggests he intends to make life difficult for Trump or rattle the financial markets. Well, not deliberately at least, for while Powell is the boring choice, he may not necessarily prove to be the safe choice.
Clearly, the safest choice would have been for Trump to appoint Janet Yellen for a second term as chair of the world’s most powerful central bank. After all, she has presided over a period in which the US economy has grown, unemployment has fallen steadily and inflation has remained below its target. What’s more, without any real tremors, she took the first steps towards the normalisation of monetary policy by edging up interest rates and starting to unwind the Fed’s quantitative easing programme.
This is quite a task, because all central banks are to an extent flying blind. Their models tell them that falling unemployment should by now have led to a significant pick-up in wage inflation, but that’s not happening. The chances of policy error are high.
Washington politics explains why Powell has a seat on the board. Barack Obama wanted Jeremy Stein to fill one of two vacancies, but thought his nominee might be blocked by a Republican-dominated Senate. Needing a Republican makeweight to ease Stein’s passage, Obama chose Powell.
Nothing that has happened since suggested that Powell was destined for greater things. His boilerplate speeches have tended to focus on regulation, and when straying into the realm of monetary policy he has been careful not to deviate from whatever the current Fed orthodoxy might be. Had Trump lost the presidential race, there would not have been the slightest chance of Powell getting the top job. Churchill’s put-down of Attlee – a modest man with much to be modest about – summed him up.
Churchill was, of course, wrong about Attlee, and it is possible that Powell will go on to be one of the all-time great Fed chairmen. But it seems unlikely. Trump did not want Yellen because she was a Democrat. He didn’t want John Taylor or Kevin Warsh because they think the Fed needs to get ahead of the curve on inflation by raising interest rates more quickly.
What the president wanted was a Republican without particularly strong views on monetary policy, someone who would continue with Yellen’s softly, softly approach to raising rates but would be ready to roll back some of the post-crisis regulations imposed on the financial sector. By those criteria, Powell was the perfect choice.
And, in the right circumstances, he may do just fine. If monetary policy is all about the occasional tweak to interest rates – as it was in the Great Moderation of the 1990s – there will be little to fear. Things will get trickier if it proves harder than the Fed thinks to steer the US economy between recession and inflation, or if a crisis arrives from an unexpected quarter.
Unlike Yellen or her predecessor Ben Bernanke, Powell is not an economist. He is a lawyer by training, and has worked in investment banking and private equity. Being a trained economist is not everything. There have been trained economists – Arthur Burns in the 1970s, for example – who have made a right pig’s ear of running the Fed.
But equally there are times – such as when Mario Draghi rescued the euro from its existential crisis in 2012 – when being a journeyman is not sufficient. And there is nothing in Powell’s CV or his time at the Fed to suggest he is anything more than that.
Oil is up: but what would really help renewables is costlier carbon
High oil prices are a boon for the renewables industry. The higher the price of consuming black gold, the more consumers will be prepared to try alternatives, from solar to wind. So the industry might have been expected to cheer the surge last week in Brent crude prices to near a two-year high of $60 a barrel.
Yet the steep cuts in the cost of offshore wind and especially solar electricity generation mean that the economics are already running in their favour. In some countries, wind and solar power are now cost-competitive with oil, coal and natural gas-fired power plants, even when carbon emissions are not priced in.
That leaves the momentum with renewables, even when the oil price falls – as it did in 2014, when the price of a barrel tumbled from around $115 over 18 months to less than $40 in January 2016. And that’s just as well, since oil prices are unlikely to rise much more, despite the public statements from Opec and Russia that they will hold back about 1.8m barrels per day until next spring in an attempt to push prices higher.
There is more to come from the Americans, who mothballed many of their derricks before hurricane Harvey hit the Gulf. So US production, despite hitting its highest level for at least three decades, is likely to rise further, which will act to depress prices.
That’s not to say governments can relax and watch renewables win the day. Putting a price on carbon emissions remains important when global temperatures are rising fast.
Unfortunately, the European system of carbon credits, which is supposed to tax heavy carbon users, is mired in controversy after several years of handing out credits that make it cheaper to belch out CO2 than invest in environmentally friendly alternatives. The market price for credits is €6 a tonne when it needs to be nearer €50.
The remedy is for governments to sidestep the failed market in carbon credits and impose a steeper cost on users. That would help much more than a rise in oil prices.
Ryanair is flying as high as ever – even without its pilots
Ryanair bosses chose not to face the press last week when announcing half-yearly results – an absence surely unrelated to a decision in September to cancel thousands of flights due to lack of pilots.
Yet what the airline had to report was bulging profits, followed by news of its busiest October, cancellations or not. Plenty of pilots remain disgruntled, despite the airline’s deep delve into its pockets to prevent an exodus to competitors.
The rotas fiasco was never likely to be a “Ratners moment” for chief executive Michael O’Leary, a man who had long made an art of upsetting his customers. But Ryanair looks to have been barely jolted by the turbulence – and now, as competitors fall by the wayside, it forecasts higher revenues for the winter.
Not that much higher, though: this autumn’s lesson will reaffirm O’Leary’s conviction that the only way Ryanair could lose its passengers would be by raising fares.
