The Fed's Interest Rate Committee met on Nov. It was a historic meeting. Not because an important monetary decision was taken, but because there were 1 chairmen at the conference table.
Janet Yellen is the current head of the Fed and chaired the meeting. Sitting a few feet away from her was committee member Jerome Powell. The renowned American newspaper The New York Times reported a few days earlier that it had been informed that President Trump will nominate him as the new chairman this week. That reportedly also happened on Wednesday. What is Powell's monetary DNA and what would his promotion mean for the dollar and interest rate policy in the eurozone?
Jerome Powell, who turns 75 early next year, has worked at the US Treasury Department as a lawyer and investment banker. He has been a member of the interest rate committee since 2012. His appointment is valid until June 2028. He has an image as a bridge builder and someone who always looks for consensus. In other words, Powell is not someone who will make unexpected decisions that could cause panic in the markets.
Male Janet Yellen
We can say that Powell is (in monetary terms) the male version of Janet Yellen. He has never voted against a Fed decision, which means he wholeheartedly supported its very loose policy. In fact, we cannot even catch him making any statements that could be interpreted as critical. This means that the Fed's course is more or less known and that interest rates are only raised when there is absolutely no other option. And even then in mini steps with a long pause between 2 increases. Just like now.
The choice of Powell means that Trump opts for monetary continuity. On the one hand, because he does not want to saddle the financial markets with even more uncertainty. Had Trump chosen one of the other candidates, that would have happened. On the other hand, low interest rates suit Trump much better than high interest rates. Powell virtually guarantees long-term low interest rates.
More of the same
But there's more. It can hardly be a coincidence that Trump has tweeted remarkably often in recent days about how good it is that stock prices continue to rise. An important, if not the most important, reason for this increase is the very low interest rates and the expectation that this will remain the case for the time being. We can therefore interpret Trump's tweets as an implicit message that he is very satisfied with what the Fed is doing.
His choice for Powell is therefore not remarkable: of the 4 candidates, Powell is the only one who passionately wants to continue the Fed's current policy. Other candidates have made statements in the past indicating that they want to raise interest rates more quickly.
What is also not surprising is that he does not reappoint Yellen. While it is true that it does not matter for Fed policy whether Yellen or Powell heads the bank, the fact is that Yellen is an Obama appointee and Powell is a Republican. Since Trump is eager to get rid of Obama people, his decision is explainable. It also makes sense that he had her on the short list. Had he not done so, the markets could have panicked. With Powell, Trump gets Yellen's policy out of the hands of a fellow Republican, a win-win for the president.
ECB interest rate was, is and remains 0%
For the policy of the European Central Bank (ECB), this means that nothing actually changes in the monetary landscape surrounding the eurozone. There is therefore no need for the ECB to deviate from its own monetary path. In other words: there is no reason to increase interest rates before the end of 2019 or even 2020 and to phase out the policy of quantitative easing (large-scale purchases of government and corporate bonds) more quickly.
What remains valid is what I have often argued in the past: in everything the ECB does, the bank must ensure that it does not overtake the Fed on the right. With Powell behind the Fed steering wheel and foot on the accelerator or cruise control button, the Fed will move forward very slowly. The ECB will therefore remain at an appropriate distance (interest rates) will remain very low for a long time to come, especially the EURIBOR rates.