For better or worse, Powell will probably be one of the most consequential central bankers in US history, as he deploys trillions of dollars in unprecedented ways. The question for the economy is whether his long and winding career path will enable him to get it right
When Jerome Powell was nominated to lead the Federal Reserve in late 2017, there was some tut-tutting about his seemingly unusual background for the job.
Some articles noted that he would be the first Fed chair without formal economic training since a notoriously inept Carter-era Fed chair, G William Miller. Powell had a distinguished resume but also a winding career path that took him from corporate law to Wall Street deal-making to public service. His predecessors, by contrast, were world-calibre experts in labour markets (Janet Yellen), monetary policy (Ben Bernanke) or economic forecasting (Alan Greenspan).
But now, as the world’s most powerful central bank faces perhaps the gravest economic crisis of modern times, Powell’s varied experiences appear to be a strength, not a weakness, with his areas of knowledge uncannily well-suited to the woes confronting the world economy.
The challenge isn’t really about diagnosing the problem. There is little disagreement on what is happening: A pandemic is necessitating the shutdowns of large swaths of economic activity.
The Fed is not trying to project exactly how high the unemployment rate will rise or how low the GDP numbers will fall. It’s trying to act swiftly and creatively to devise programmes that can pump trillions of dollars into the economy.
Powell and his Fed colleagues, along with their counterparts at the Treasury Department, are essentially trying to ensure that however bad things get, American business is in position to return to functioning rapidly once the public health crisis subsides. The idea is that millions of unemployed Americans will have jobs to go back to when that day comes.
To do that, you need someone who understands the minutiae of how the Fed works and the legal details of its authorities. You want someone who understands the problems facing business and what might solve them and who has the deft political touch to collaborate with the Treasury Department and Congress to carry out that mission.
Powell spent six years as a governor at the Fed focused on the not-very-sexy details and is a lawyer by training. He worked in financial markets and in overseeing corporate buyouts in the private equity industry. And he worked at the Treasury Department in the early 1990s and has carefully cultivated relationships on Capitol Hill.
The situation has unfolded so rapidly that you also need someone who can push an often cautious Fed bureaucracy to act on a speed and scale commensurate with the crisis. Former colleagues describe Powell as a crisp decision-maker.
“It’s a unique situation, and Jay has the right attributes for dealing with it,” said Nellie Liang, who worked closely with Powell on financial stability issues as a Fed staff member and now is a senior fellow at the Brookings Institution. “He’s a person who can size up a situation very quickly and be decisive. I think he’s really well-suited for this situation.”
In the space of just three weeks starting in late February, the Fed cut interest rates to zero, relaunched its programme of bond buying on a mass scale, and initiated programmes to support lending to all sorts of entities — sometimes more than one a day. It was as if actions that were spread out over 18 months during the 2008 financial crisis were squeezed into a single month.
“It’s clear that he saw that this was a serious risk early, and scrambled the staff to start doing some serious work, because they’ve been able to roll out a lot of stuff very quickly,” said William English, a former senior Fed staff member now at the Yale School of Management. “I credit that to Jay. I think his understanding of markets helped him to realise that this needed very serious attention early.”
The Fed’s era of mass-scale support for lending across all corners of the economy is only beginning. Powell essentially promised Congress and the Treasury Department that they could count on the Fed to help finance a gigantic lending programme. The $2 trillion rescue legislation Congress passed last week includes $454 billion that can be paired with 10 times as much money from the Fed to support trillions in lending.
“He told me, ‘Think big,’ because the interest rates are low,’” House Speaker Nancy Pelosi said of Powell in an interview with PBS NewsHour last week.
None of this assures success. The economic crisis the United States faces has no modern precedent. The central bank is already facing tough questions about why it hasn’t done more to support lending to state and local governments, which are facing a fiscal crisis. And while it announced a “Main Street Business Lending Programme” on March 23, aimed at small and mid-size businesses, it is not yet up and running, and there are big open questions about how it might work.
All of those types of decisions are hard and require judgment from someone who understands the intersection of the legalities, the politics, the financial markets and the corporate world.
Bernanke, the Fed chair when the global financial crisis erupted in 2008, was a scholar of economic history who had studied how financial panics could create economic catastrophe.
That background wasn’t the reason he was appointed to the job. But it allowed him to understand the peril that faced the world economy more quickly than most and to persuade his colleagues to take extraordinary actions that prevented a slide to an even worse global depression.
Now, the biggest decisions are not so much about assessing the economic problem but about executing potential solutions. And for the second time in a dozen years, the US central bank has a leader whose background, by sheer luck, seems a match for the moment.
For better or worse, Powell will probably be one of the most consequential central bankers in US history, as he deploys trillions of dollars in unprecedented ways. The question for the economy is whether his long and winding career path will enable him to get it right.
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