Paul McCartney brought the house down last week at Steven Colbert’s final Late Night show on CBS with his performance of the Beatles’ “Hello, Goodbye.” The lyrics to the classic rock song — “you say ‘goodbye’, and I say ‘hello'” — could easily apply to Jerome Powell.
Powell served for eight years as the Chair of the Federal Reserve. But while his critics (notably including President Trump) were eager to be rid of him, he opted to break tradition by continuing to serve on the Federal Reserve Board of Governors. The stock market may have dodged a bullet with Powell staying at the Fed, in my opinion.
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Familiarity breeds… contentment?
You have probably heard the saying, “Familiarity breeds contempt.” However, it’s a much different story with markets. Investors prefer predictability. That’s something Powell brought to the table during his term as Fed Chair.
On the other hand, Powell’s successor, Kevin Warsh, wants “regime change” at the Fed. Warsh has spoken in favor of slashing the central bank’s balance sheet and limiting its market interventions. Potentially even more worrisome, some are concerned that he could cause the Fed to lose its political independence.
Had Powell resigned from the Fed’s Board of Governors, the stock market could have been rattled by the prospects of Warsh having his way. The bond market may have been affected even more significantly. However, Powell should be a stabilizing force by remaining at the Fed.
Importantly, Powell will retain his vote on the Federal Open Markets Committee (FOMC), which sets U.S. monetary policy. He will be in a position to serve as an influential opponent of any policy changes that could negatively impact the economy and markets.
Powell was known for his clear communication during his term as Fed Chair. If Warsh tries to curtail the amount of information the central bank reveals about its decision-making process, Powell could go directly to the press. Should the Fed’s independence appear to be in danger of being compromised, it’s probably a safe bet that Powell will sound an alarm.
Overall, the former Fed Chair’s continued service could boost investors’ perception of stability at the Fed. The credibility that Powell built during his eight years at the central bank’s helm will likely go a long way toward reassuring markets that radical changes won’t occur over the near term.
