Jerome Powell’s Views on U.S. Monetary Policy in His Own Words

EghtesadOnline: President Donald Trump is expected to nominate Federal Reserve Governor Jerome Powell to seize the reins of the central bank when Chair Janet Yellen’s term ends in February 2018, in a move that could alter monetary policy and the direction of America’s economy.

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04 November 2017

Trump plans to nominate Powell for the top banking job on Thursday, three people familiar with the decision said on Wednesday. Neither the White House, the Fed nor the candidate himself have confirmed the news, which was first reported by the Wall Street Journal.

If approved by the Senate, Powell would take over the world’s most powerful monetary institution in the midst of a gradual process of interest-rate increases and the start of an unprecedented operation to shrink its balance sheet.

While Powell undoubtedly will elaborate on his policy views and economic outlook during confirmation hearings, it’s worth looking back at some of his previous comments to see where he stands on key issues facing the rate-setting Federal Open Market Committee.

On interest-rate increases

“U.S. monetary policy normalization has been and should continue to be gradual, as long as the U.S. economy evolves roughly as expected,” Powell said in an Oct. 12 speech. “The expectation of gradual policy normalization should reduce the likelihood of outsized movements in interest rates.”

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.

“It’s hard for me to see the balance sheet getting lower than $2.5 trillion, let’s say, $2.5 to $3 trillion,” he told CNBC in June. “That assumes we normalize the balance sheet over the course of the next five years and go back to a fairly small number of reserves.”

On consumer prices

“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 economic growth, unemployment and wages

“My baseline expectation is that the economy will continue on a path of growth of about 2 percent, strong job creation and tightening labor markets, and inflation moving up toward our 2 percent target,” he said in a June 2017 speech.

“I expect that unemployment will decline a bit further and remain at low levels for some time, which could draw more workers into the workforce, put upward pressure on wages, or cause businesses to invest more as labor costs rise, all of which I would view as desirable outcomes,” he said.

On using rules to set monetary policy

“There is general agreement that these simple policy rules do provide interesting and useful insights into policy,” he said in a February speech. “To gain the benefit of those insights, it is helpful to look at a range of rules. But there is no consensus that any one rule is best, let alone that it would be desirable to require the FOMC to pick and mechanically follow one rule to the exclusion of others.”