By Craig Torres and Rich Miller
(Bloomberg) — Jerome Powell, said to be President Donald Trump’s pick to be the next Federal Reserve chairman, is set to take the reins of the world’s most important central bank at a time when the U.S. economy is on a roll.
Growth is accelerating, inflation is tame and unemployment is the lowest in 16 years. Such a backdrop should initially enable a new Fed chairman to keep gradually raising interest rates from historic lows with the aim of stretching out what is already the third-longest U.S. upswing.
Expansions don’t die of old age. Rather, they typically are brought down by the bursting of asset bubbles, shocks like natural disasters or political upheaval, or errors by central banks. Faster rate hikes could cool the stock market but risk holding inflation below the central bank’s target, possibly tipping the economy into a recession. Tightening too slowly could stoke asset values even further. Powell, and Trump by association, will own the outcome.
Powell has the added dilemma that his Fed would confront any slump in growth with little in its policy arsenal. There is barely room to cut rates deeply, and the backup plan — quantitative easing — is now the subject of Republican lawmaker ire.
“Powell has been dealt some cards in this poker game that aren’t helpful for carrying out monetary policy,” said Torsten Slok, chief international economist at Deutsche Bank AG in New York. “The world economy has never been in better shape, but it is a very unthankful job to be a central banker these days.”
Trump on Thursday will announce Powell, 64, as his nominee to be Fed chief, said several people familiar with the decision, replacing Chair Janet Yellen when her term expires in February. Powell is currently one of four Fed governors on a seven-seat board that Trump will have a chance to reshape. All his nominees will be subject to Senate approval.
Only the ninth leadership change at the Fed since the end of World War II, the changeover comes at a critical moment. Monetary policy is already set on a tightening course, and it is precisely at this moment when mistakes are made or avoided.
Complicating matters even further for the former private-equity executive is that growth since the Great Recession ended in 2009 is only slowly closing an economic divide that’s fueled the political populism that elected the man who picked him. The gap between rich and poor could widen further if stocks keep climbing and wage growth stays moderate.
“The conflict between getting inflation up to target and restraining the asset price bubble is the biggest challenge,” said Paul Mortimer-Lee, chief economist for North America at BNP Paribas SA in New York. “One says monetary policy is too tight, and the other says it is too slack,” he added. “That is a terrible dilemma.”
An ex-Treasury undersecretary and former Carlyle Group LP managing director, Powell would be taking charge in the midst of a political battle over how much stimulus the economy needs.
“The era of a bipartisan, or technocratic Federal Reserve is gone,” said Mark Spindel, a co-author of a book on the central bank’s relationship with Congress. Powell “will be caught in a very difficult position between a blame-avoiding Congress, an outspoken president and potentially unruly committee.”
Republicans are debating tax cuts, a move that could add even more demand to the economy, and officials only have blunt tools to tamper down frothy markets.
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