Mr. Ordinary and the Wizards of Constitution Avenue

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The wait is finally over! After months of speculation and DC cocktail bar chatter, President Trump has named his pick for Fed head: Jerome Powell, currently a member of the Fed’s Board of Governors. The Wall Street Journal calls him “Mr. Ordinary,” which is a refreshing change from nicknames implying magic videogame powers, like “Super Mario” Draghi at the ECB or former Fed head “Helicopter Ben” Bernanke. Wall Street-types are already cheering him as more pro-market than his soon-to-be predecessor, economist Janet Yellen, thanks to his private equity background. Those hoping for deregulation like that he served in George H.W. Bush’s Treasury. Republicans like him because he is a Republican. Yet many also view him as being a lot like Yellen, implying he’ll love low rates and extend the status quo. Those are all opinions. Maybe they are valid! But it’s impossible to know today. What central bankers say before taking the helm and do afterward are often quite different, and you can’t know in advance whether it will be “good different” or “bad different.” All we can do is weigh their decisions as they make them.

Fed-watchers will argue you can find clues on Powell’s monetary policy preferences from his public speeches, past writings, interest rate votes and occasional mentions in Fed minutes. We guess the last two, at least, measure actions (to an extent). But they’re incomplete. People thought they had a good read on Yellen when she took office since she had been at the Fed for years, but in reality, we knew next to nothing. This is the Fed’s fault: They keep full transcripts of every meeting and conference call, which would give investors (and senators) a treasure trove of insight—not just into their actions and opinions, but also into the logic, evidence, biases and mindset behind them. Unfortunately, the Fed releases these at a five-year lag.

Powell joined the Fed in 2012, so we have no Powell transcripts to scrutinize, which makes your friendly MarketMinder editors sad. We faced similar when Yellen was nominated in 2013 and confirmed weeks before the Fed released transcripts of all 2008’s meetings. When those came out, we all learned the truth: The good lady was perhaps not quite as “dovish”^[i] or astute as people presumed based on her testimony and academic writing. Last we checked, true monetary policy doves don’t argue against rate cuts right after Lehman Brothers fails. Nor do policymakers who truly have their finger on the pulse of the economy make out-of-touch jokes about rich Californians delaying plastic surgery and luxury restaurants losing customers at that same Fed meeting. She wasn’t the only out-of-touch bird at the Fed, as our read of the transcripts shows basically everyone except Bill Dudley missed how mark-to-market accounting’s ill-advised application to illiquid assets was eating bank capital and threatening a massive credit crunch. But the question remains: If the Senate had that full record of everything she did and argued for at the Fed in 2008, would they have confirmed her? Or would the badly timed Halloween puns have killed her chances?^[ii]

That said, even having full transcripts probably won’t tell you what Powell will do once he’s in office. Fed heads’ tendency to do wackadoodle, inexplicable things is legendary. The popular tale starts with William McChesney Martin, who headed the Fed from 1951 to 1970. Most considered him a bright guy who understood how markets worked, so they were perplexed when he kept rates low despite burgeoning inflation. Arthur Burns, his eventual successor, loved dishing out criticism, complaining Martin should know better. (Burns also took shots at everything from Martin’s management style to the choice of cars he selected for the Fed’s fleet.) And Martin agreed! But, as he quipped, when you become Fed head, they^[iii] make you take a little memory-wiping pill. You forget everything you ever knew about the economy and money markets, and it lasts as long as you’re Fed head. It wasn’t him! It was the pill! So naturally, when Burns had his turn and made all the same mistakes as Martin, he shrugged and explained: he’d taken “Martin’s little pill.” We’ve long suspected Bernanke took it, too: How else do you explain one of America’s foremost scholars of the Great Depression totally botching the response to 2008’s financial crisis? This was a guy who knew all about the importance of the Fed’s serving as lender of last resort before becoming Fed head. But the Bernanke Fed seemingly saw no point in lender-of-last-resorting. Instead, he forced Lehman Brothers to fail and then outsourced crisis management to the Treasury.

Now, all this might give you the impression the Fed head is some all-powerful entity, a single hand guiding the country’s economic fortunes. And when it comes to crisis management, we guess that is sort of true sometimes. At least, in Bernanke’s case, it was. Judgment errors in the heat of the moment can snowball a pre-existing problem. But those cases are rare. Very rare.

Most of the time, the Fed head’s job is boring. They chair meetings, which amounts to banging a gavel, giving the floor to the next speaker, moderating debates over adverbs in the policy statement, and tabling a few monetary policy options for the entire Federal Open Market Committee to vote on. The Fed head says which option they prefer, and they state their case, but they can’t strong-arm the others into going their way. Nor have they mastered Jedi mind tricks. The Fed still operates by consensus. Whatever the committee votes for is what happens, whether or not it is the Fed head’s favorite choice.

So when it comes to monetary policy, the Fed head is far from all-powerful. For all the attention heaped on Powell, we daresay the three open seats at the Fed are more meaningful, as three new votes could sway the consensus in a different direction than it might otherwise go.

Then again, it is important not to overrate monetary policy’s economic impact—particularly when we’re talking about tweaking short-term rates, which is largely all the Fed does these days. BoE chief Mark Carney said it best a few weeks ago: Central banks are not “omnipotent.” Unless the yield curve is in danger of inverting (short rates rising above long), short-term interest rate wiggles just don’t matter all that much. There is no set relationship between the level or direction of short-term rates and future stock market movement. If the Fed overshoots when trying to pre-empt or battle inflation, jacks short-term rates above long rates and inverts the yield curve, then it’s a problem. But it isn’t a timing tool. Monetary policy hits the economy at a lag. Yield curves can invert months—even a year or more—before recession begins. So predicting whether and when the Fed will invert the yield curve isn’t necessary. You have time to survey everything.

Which is good, because let’s face it, Powell stands a good chance of chairing a meeting at which the Fed inverts the yield curve. No, we aren’t making a forecast—just taking a clear-eyed look at history. After all, every recent Fed head bar Yellen made that dubious mistake. Bernanke did it in 2006. Alan Greenspan did it in early 2000 and 1988-1989. Paul Volcker did it, albeit on purpose, when battling inflation in 1980. The amnesiac Burns did it in 1973. Martin did it in 1969. Every time, recession eventually followed. Yellen’s avoiding an unforced error is rare.^[iv] Given all the adoration finance-types are heaping on Powell, it would be a fairly typical twist of fate for his Fed to mess up.

Again, though, that isn’t actionable today—just a half-joking observation. We’re sure Powell and the rest of the Fed will give investors plenty to think over in the months and years ahead. But there isn’t anything you can do about it today. Just wait, watch, hope they don’t screw up, and hope the press conferences are entertaining.

[i] Which is central bank jargon for “person who likes low rates.” The opposite is a hawk. Why are they all birds?

[ii] DISCLOSURE: We love puns. Love them. There is no such thing as a bad pun. But, time and place.

[iii] We guess you’d say it’s the “deep state”?

[iv] Although one-term Fed heads are rare too, so maybe she didn’t have enough time to get to inverting the curve?