New Fed chairman shows he’s not Yellen’s policy clone

Jay Powell’s congressional testimony this week on Tuesday and again on Thursday offered a chance for market participants and the general public to get their first extended look at the new Fed chairman.

Though Powell has been a governor at the Federal Reserve for several years, he kept a relatively low profile, especially with regard to monetary policy. As a result, for financial market participants and the broader public, he was a bit of a blank slate.

{mosads}There was a consensus view that Powell would be largely a clone of his predecessor Janet Yellen because he never formally dissented and largely seemed to pose views consistent with hers in his public speeches as governor.

I was always suspicious of the notion that Powell would be just like Yellen. After all, if President Trump was entirely happy with Chair Yellen and he viewed the two of them as identical, he would have simply renominated her for another term as chair. In any case, this week’s hearings provided an opportunity for Chairman Powell to make a first impression.

Market participants came away with two major takeaways from Powell’s appearance. First, the markets saw firsthand that Chairman Powell is not as dovish as Chair Yellen was.

Casual observers were probably fooled that Powell had followed the “company line” as a governor, a practice that has become increasingly common (Fed governors rarely dissent or even publicly disagree with the chair, especially since the financial crisis, in an effort to present a united front).

Now, as chairman, he is free to offer his own views and he did so readily on Tuesday, volunteering that he had upgraded his economic outlook since December and was more confident that inflation will accelerate to the Fed’s target, underpinning the case for continued “gradual” rate hikes.

Indeed, the main monetary policy news from Tuesday’s question-and-answer session was that Powell’s upbeat assessment of the economy was seen as opening the door to the prospect of four rate hikes this year, one more than the Federal Open Market Committee currently projects and markets are pricing in.

The other impression that Powell left was a more general sense of his leadership. Powell demonstrated his knowledge as he addressed all pertinent questions. As a non-economist, there was some fear in certain circles that he may not be up to the task of leading the central bank, but he laid those to rest rather swiftly.

He proved that he knows his stuff. Yet, because he has ample real world experience, he spoke in plain English. He avoided the cryptic, long-winded filibusters that have become typical at these hearings since Chairman Greenspan.

In fact, he was usually to the point and easy to understand, two things that have not been hallmarks over the years of Fed speakers. He also showed a strong temperament. He was confident and seemed in command of the room. He was respectful without seeming to kowtow to the legislators. Perhaps most impressively, he stuck to his knitting.

Representatives and senators have a habit of using these hearings to go off on long haranguing tangents, regardless of whether the topic is within the power of the Fed chief to address. For example, several this week offered long diatribes on racial discrimination in the workplace.

In the past, Fed chairs have indulged legislators, offering sympathy and promising to do all that they could to help. In fact, it could be argued that Chair Yellen’s instant agreement with all of the sundry economic concerns offered up by congressmen and congresswomen contributed to her ultra-dovish reputation.

In contrast, Chairman Powell took a courteous but refreshingly firm tone. He refused to be drawn into any topics that were primarily political or fiscal in nature, other than to offer a few broad generalities that virtually no one at the Fed could possibly object to.

He was clear about what the Fed can and cannot do and avoided saying much about the latter. Market participants typically look at new Fed chairs skeptically, always wondering whether they are capable of filling the sizable shoes of their predecessor.

The audience seemed to walk away from Powell’s first test with a newfound respect for him and confidence that he will be able to chair the Fed with poise for the next four years.

Stephen Stanley is the chief economist for Amherst Pierpont Securities, a broker-dealer providing institutional and middle-market clients with access to fixed-income products.