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Walking in Their Footsteps: Powell Will Maintain Status Quo at Fed

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It looks like Trump’s pick to chair the Federal Reserve plans to walk in the footsteps of his predecessors.

In other words, we can expect the legacy of Ben Bernanke and Janet Yellen to continue unbroken. That means a continuation of interventionist monetary policy, artificially low interest rates into the foreseeable future, and plenty of quantitative easing when the time comes.

Yes. The new boss looks a lot like the old boss.

Jerome Powell testified before the Senate Banking Committee on Tuesday. The New York Times described it as a “relatively placid affair.”

Maintaining the status quo doesn’t set off too many fireworks.

Democrats seem OK with the pick. Interestingly, the people who were against Powell when he was an Obama appointee are OK with him now that he’s a Trump appointee.

Some Democrats have indicated they might oppose the nomination. But, importantly, Mr. Powell drew little opposition from conservative Republicans who opposed both his nomination as a Fed governor in 2012 and his reappointment in 2014. Senator Dean Heller, a Nevada Republican who voted against Mr. Powell both times, said he was trying to get to yes.”

Conservatives are down with the status quo.

So, what can we expect from a Powell-led Fed? From what he has said, pretty much the same thing we got under Yellen.

And Bernanke.

As we said when Trump announced the appointment, Powell is the quintessential “swamp creature.”

In remarks he made before his confirmation hearing, Powell defended the Fed’s broad uses of “crisis-fighting powers” As Reuters put it, Powell positioned himself “as an extension of the central bank policies of current Chair Janet Yellen and her predecessor Ben Bernanke.”

In a brief opening statement released by the Fed on Monday, Powell, who is currently a member of the Fed’s Board of Governors, endorsed the core ideas that have defined U.S. central banking since the financial crisis of 2007 to 2009 – a willingness to move aggressively against a downturn, and an insistence on flexibility and independence from political influence in setting policy.”

In other words, we can expect Powell to blow up bubbles and drive malinvestment.

Powell is a typical central planner. He believes a small cadre of people is smart enough to micromanage the world economy. Investment guru Jim Grant once called the central bank-driven financial system “the Ph.D. standard,” as opposed to the gold standard.

That system features monetary oversight by former university economics faculty — the Ph.D. standard, let’s call it. The ex-professors buy bonds with money they whistle into existence (‘quantitative easing’), tinker with interest rates, and give speeches about their intentions to buy bonds and tinker with interest rates (‘forward guidance’).”

Powell’s statement before the hearing proves him to be a dedicated disciple of the Ph.D. standard.

We must retain the flexibility to adjust our policies in response to economic developments. We must be prepared to respond decisively and with appropriate force to new and unexpected threats to our nation’s financial stability and economic prosperity. I will do everything in my power to achieve those goals while preserving the Federal Reserve’s independent and nonpartisan status that is so vital to their pursuit.”

So, what does the status quo mean for us?

Greenspan gave us the dot-com bubble. Bernanke gave us the housing bubble. Yellen has blown up all kinds of bubbles, most significantly the bloated stock market bubble.

The question is what kind of bubble will Powell blow up when he slashes interest rates to zero (or below) and launches the next rounds of quantitative easing in response to the next economic downturn?

And we’re way overdue for that.

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