Jerome Powell´s inheritance

First let´s look at Yellen´s tenure. This was the first time since 1951 that a Fed Chairperson that completed his first term was not appointed for a second stint.

It was also the first time during the same period that a Fed Chair did not preside over a recession in his first term.

For the first time, also, unemployment only decreased.

Inflation remained low as it had for the past 25 years.

One could conclude that Janet Yellen had the most successful first term as Fed Chair in the post war period…but didn´t get reappointed!

Note, however, that Yellen´s tenure was a continuation of Bernanke´s second term, from 2010 to 2014, marked by falling unemployment, low and stable inflation and low real growth. In other words, she didn´t “rock the boat”.

Unfortunately, the boat had to be rocked. In his first term, Bernanke squandered Greenspan´s nominal stability legacy, allowing the “Great Recession” to take hold.

In his second term, Bernanke never tried to get a recovery going, being content to let the economy just slide along a lower path.

Will Powell rock the boat? Highly unlikely given his 5-year history as a Board Member. Like Yellen, he´ll strive to satisfy the Fed´s mandate of “low and stable inflation and maximum employment”.

His views match Yellen´s closely:

On inflation:

“Inflation is a little bit below target, and it’s kind of a mystery,” he told CNBC in August. “You would have expected, given that we’re getting tighter labor markets, that we’d have a little higher inflation. I think that what that gives us is the ability to be patient.”

On the Phillips Curve and inflation expectations:

“The relationship between slack and inflation has weakened substantially over the years,” Powell said in June 2016. “In addition, inflation depends importantly on the inflation expectations of workers and firms. A widely shared view among economists today is that, unlike during the 1970s, expectations are no longer heavily influenced by fluctuations in inflation, but are fairly constant, or anchored. For both these reasons, inflation has become less responsive to cyclical changes in the economy.”

“While inflation expectations seem to me to remain reasonably well anchored, it is essential that they remain so,” he said. “The only way to assure that anchoring is to achieve actual inflation of 2 percent, and I am strongly committed to that objective.

On reducing the balance sheet:

“The shrinkage of the Fed’s balance sheet is also expected to proceed quite gradually, with slowly phased-in increases in caps on the monthly reductions in the Federal Reserve’s security holdings,” he said in the October speech.

In the best of world´s, therefore, the economy will behave much like it has for the past eight years, with unemployment remaining low instead of continuously falling.

If that happens, the US economy in 2019 will have experienced its longest period of expansion but also its longest depression!

Any shock, including a mistake by the Fed, however, could easily drive the economy into recession.


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