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Editorial: New Fed chief will face test of securing stable growth

  • February 3, 2018
  • , Nikkei , p. 2
  • JMH Translation

On Feb. 3, Jerome Powell will become the chair of the Board of the Governors of the Federal Reserve System to succeed Janet Yellen, who dedicated her four-year term to winding down unprecedented monetary easing. For the time being, the new Fed chair will be tasked with smoothly returning monetary policy to normal and bringing about stable growth.


Yellen took over from Ben Bernanke in February 2014. While her predecessor introduced quantitative easing and implemented other loose policies to cope with the financial crisis in 2008, she tapered the Fed’s purchases of government bonds and other assets and raised the federal funds rate. From October last year, she set out a path toward cutting back on the Fed’s assets and winding down monetary easing.


The pace was slower than initially forecast owing to stagnant price increases, but she probably deserves credit for guiding monetary easing to an exit without creating much confusion in the market.


Powell will follow her course for the time being and continue to shrink the Fed’s assets and raise the federal funds rate.  


Power is not an economist like Bernanke and Yellen, but he is perceived as well-balanced thanks to his in-depth experience in administration and business. But change is afoot in the U.S. economy and financial market. He may be required not only to maintain the status quo but also to flexibly adjust policies in accordance with the changing environment.


Now U.S. long-term interest rates are on the rise. Speculation that the European Central Bank (ECB) may follow the U.S. and rush to end monetary easing appears to be behind this move.


The Fed must manage policies by taking into account the impact that it will have not only on the United States, but across the globe, including Europe, Japan, and emerging economies. Investors heed what the Fed chair says at press conferences and on other occasions. Powell’s ability to communicate with markets will soon be put to the test.


His relationship with the U.S. administration led by President Donald Trump will be worthy of attention. At this moment, most market players expect the federal funds rate to be raised three times a year, as was the case last year. But the pace of raising the rate might need to pick up if the economy as well as the stock and real estate markets overheats and inflation accelerates.


Following the introduction of a taxation reform program, which calls for reductions in the corporate and income taxes, the Trump administration is proposing investing 1.5 trillion dollars into infrastructure projects. If the economy overheats beyond what Fed anticipates, President Trump may press the central bank not to rush to raise the federal funds rate. If that happens, attention will be paid to whether Chairman Powell will be able to take a resolute step as the head of the central bank.

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