The next Federal Reserve chair has a far more difficult job than Yellen did

  • President Donald Trump is going to name a Federal Reserve chair to replace Janet Yellen on Thursday afternoon.
  • The likely nominee is a current Fed board governor, Jerome Powell, and is seen as driving continuity on interest rate policy.
  • Powell is likely to face more market turbulence and economic uncertainty than Janet Yellen has over the last four years. 
  • Yellen's predecessor Ben Bernanke has warned that 'the current monetary toolbox' might not be sufficient to navigate what's ahead.

Maybe not being reappointed Federal Reserve Chair will prove a blessing for Janet Yellen.

President Donald Trump is going to name the new head of the US central bank later Thursday. Yellen's term ends in February and Trump's not expected to nominate her for a second one. Instead, his pick is probably going to be current Fed Governor Jerome Powell, multiple media outlets have reported this week.

A look at Jerome Powell through the years:
 

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Jerome Powell through the years
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Jerome Powell through the years
FILE: Jerome Powell, governor of the U.S. Federal Reserve, stands for a photograph at the board's headquarters in Washington, D.C., U.S., on Thursday, April 13, 2017. With the White House scheduling an announcement for 3 p.m. in Washington on Thursday, U.S. President Donald Trump will announce Powell, 64, as his nominee to be Federal Reserve chairman, said several people familiar with the decision, replacing Chair Janet Yellen when her term expires in February. Our editors select the best archive images of Jerome Powell. Photographer: T.J. Kirkpatrick/Bloomberg via Getty Images
FILE: Jerome Powell, governor of the U.S. Federal Reserve, stands for a photograph at the board's headquarters in Washington, D.C., U.S., on Thursday, April 13, 2017. With the White House scheduling an announcement for 3 p.m. in Washington on Thursday, U.S. President Donald Trump will announce Powell, 64, as his nominee to be Federal Reserve chairman, said several people familiar with the decision, replacing Chair Janet Yellen when her term expires in February. Our editors select the best archive images of Jerome Powell. Photographer: T.J. Kirkpatrick/Bloomberg via Getty Images
Jerome H. Powell, a governor on the board of the Federal Reserve System, prepares to testify to the Senate Banking Committee on Capitol Hill in Washington, U.S., June 22, 2017. REUTERS/Joshua Roberts
Federal Reserve Board Governor Jerome Powell discusses financial regulation in Washington, U.S., October 3, 2017. REUTERS/Joshua Roberts
Jerome H. Powell, a governor on the board of the Federal Reserve System, prepares to testify to the Senate Banking Committee on Capitol Hill in Washington, U.S., June 22, 2017. REUTERS/Joshua Roberts
Jerome H. Powell, a governor on the board of the Federal Reserve System, prepares to testify to the Senate Banking Committee on Capitol Hill in Washington, U.S., June 22, 2017. REUTERS/Joshua Roberts
Commodity Futures Trading Commission (CFTC) Chairman Christopher Giancarlo, Federal Reserve Board Governor Jerome Powell and moderator Reuters columnist Gina Chon discuss financial regulation in Washington, U.S., October 3, 2017. REUTERS/Joshua Roberts
Federal Reserve Governor Jerome Powell attends the Federal Reserve Bank of Kansas City's annual Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming August 28, 2015. REUTERS/Jonathan Crosby
Federal Reserve Governor Jerome Powell delivers remarks during a conference at the Brookings Institution in Washington August 3, 2015. REUTERS/Carlos Barria
Federal Reserve Governor Jerome Powell attends a conference at the Brookings Institution in Washington August 3, 2015. REUTERS/Carlos Barria
U.S. Federal Reserve Chair Janet Yellen (L) congratulates Fed Governor Jerome Powell at his swearing-in ceremony for a new term on the Fed's board, in Washington in this handout photo taken and released June 16, 2014. REUTERS/U.S. Federal Reserve/Handout via Reuters (UNITED STATES - Tags: POLITICS BUSINESS) ATTENTION EDITORS - FOR EDITORIAL USE ONLY. NOT FOR SALE FOR MARKETING OR ADVERTISING CAMPAIGNS. THIS PICTURE WAS PROVIDED BY A THIRD PARTY. REUTERS IS UNABLE TO INDEPENDENTLY VERIFY THE AUTHENTICITY, CONTENT, LOCATION OR DATE OF THIS IMAGE. THIS PICTURE IS DISTRIBUTED EXACTLY AS RECEIVED BY REUTERS, AS A SERVICE TO CLIENTS
Federal Reserve Board Governors Jeremy Stein (L) and Jerome Powell attend the swearing in of new Federal Reserve Board Chairwoman Janet Yellen at the Federal Reserve Board in Washington, February 3, 2014. REUTERS/Jim Bourg (UNITED STATES - Tags: BUSINESS POLITICS)
Federal Reserve Board of Governors member Jerome Powell listens during an open board meeting at the Federal Reserve in Washington December 14, 2012. REUTERS/Kevin Lamarque (UNITED STATES - Tags: POLITICS BUSINESS)
Federal Reserve Board of Governors member Jerome Powell listens during an open board meeting at the Federal Reserve in Washington December 14, 2012. REUTERS/Kevin Lamarque (UNITED STATES - Tags: POLITICS BUSINESS)
Elissa Leonard looks on as her husband Jerome Powell is sworn in as a member of the Federal Reserve's Board of Governors by Chairman Ben Bernanke in Washington in this Federal Reserve System handout photo dated May 25, 2012. The former investment banker and U.S. Treasury official is due to fill a term expiring Jan. 31, 2014. REUTERS/Federal Reserve System/Handout (UNITED STATES - Tags: BUSINESS POLITICS) FOR EDITORIAL USE ONLY. NOT FOR SALE FOR MARKETING OR ADVERTISING CAMPAIGNS. THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY. IT IS DISTRIBUTED, EXACTLY AS RECEIVED BY REUTERS, AS A SERVICE TO CLIENTS
Jerome Powell, governor of the U.S. Federal Reserve, left, shakes hands with Terry Lundgren, chairman of The Economic Club of New York and executive chairman of Macy's Inc., after speaking at an Economic Club of New York event in New York, U.S., on Thursday, June 1, 2017. Powell�is calling for gradual interest rate increases and a start to balance-sheet reductions later this year if the economy stays on track, though hes watching a recent slowdown in inflation. Photographer: Michael Nagle/Bloomberg via Getty Images
Jerome Powell, governor of the U.S. Federal Reserve, speaks during an Economic Club of New York event in New York, U.S., on Thursday, June 1, 2017. Powell�is calling for gradual interest rate increases and a start to balance-sheet reductions later this year if the economy stays on track, though hes watching a recent slowdown in inflation. Photographer: Michael Nagle/Bloomberg via Getty Images
Daniel Tarullo, left, and Jerome Powell, governors of the U.S. Federal Reserve, talk before the start of a meeting of the Board of Governors of the Federal Reserve in Washington, D.C., U.S., on Monday, Nov. 30, 2015. The Federal Reserve took the final step to ensure it can't repeat the extraordinary steps taken to rescue American International Group Inc. and Bear Stearns Cos. in 2008, adopting formal restrictions on its ability to help failing financial firms. Photographer: Andrew Harrer/Bloomberg via Getty Images
Jeremy Stein, nominee to be a member of the board of governors with the U.S. Federal Reserve, right, listens to fellow nominee Jerome Powell speak during a Senate Banking Committee hearing in Washington, D.C., U.S., on Tuesday, March 20, 2012. Federal Reserve Chairman Ben S. Bernanke stands to gain two lieutenants with expertise on financial markets if the Senate confirms President Barack Obama's nominees to the Board of Governors. Photographer: Andrew Harrer/Bloomberg via Getty Images
Jerome Powell, nominee to be a member of the board of governors with the U.S. Federal Reserve, left, speaks during a Senate Banking Committee hearing with fellow nominee Jeremy Stein in Washington, D.C., U.S., on Tuesday, March 20, 2012. Federal Reserve Chairman Ben S. Bernanke stands to gain two lieutenants with expertise on financial markets if the Senate confirms President Barack Obama's nominees to the Board of Governors. Photographer: Andrew Harrer/Bloomberg via Getty Images
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That would be a safe pick — signaling continuity with the current low-interest rate environment and take it slow approach that Yellen has overseen. 

Still, whether it's Powell or not, the next four years could be a lot tougher for the central bank than the last four.

Over the past few years, the economy and stock market have been marked by stable growth and a distinct absence of financial distress. But stocks won't carry on like this for long, there's already signs of financial instability in corners of credit markets, and the central bank is only just starting its process of unwinding its massive quantitative easing plan — both of which will be the responsibility of the next Fed Chair.

"The markets have been remarkably ebullient for the past year," Benn Steil, senior fellow at the Council on Foreign Relations, told Business Insider. "Not just stocks. Everything that’s liquid is hot.  Meanwhile, corporate long-term fixed asset investment is still subdued. This suggests that there’s a lot of cash out there searching desperately for yield without commitment."

That's great for markets in the short run but will eventually become a problem.

Trump's potential selections for next Fed chair:

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Trump's potential selections for next Fed chair
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Trump's potential selections for next Fed chair

Janet Yellen, current chair of the U.S. Federal Reserve

(Andrew Harrer/Bloomberg via Getty Images)

Kevin Warsh, former governor of the U.S. Federal Reserve board

(Chris Ratcliffe/Bloomberg via Getty Images)

Stanford University economist and former US Treasury official John B. Taylor.

(Photo by Susana Gonzalez/Bloomberg via Getty Images)

White House chief economic adviser Gary Cohn

(REUTERS/Yuri Gripas)

Jerome H. Powell, a governor on the board of the Federal Reserve System

(REUTERS/Joshua Roberts)

A combination photo of the five U.S. Federal Reserve Chair contenders: Kevin Warsh (L to R), John Taylor, Gary Cohn, Jerome Powell and present chair Janet Yellen in Washington, D.C. REUTERS/Staff/Stringer/File Photos
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"Whenever everyone thinks 'well, it’s liquid – I’ll get out before the trouble hits,' problems occur," said Steil. "So there is, to my mind, a good chance Powell will have to deal with far more turbulence than Yellen has."

One of the biggest concerns for Fed officials about fighting the next recession is a potential lack of tools to combat an economic downturn following a deep recession that forces the central bank to not only slash official interest rates to zero for several years but also to sharply expand its balance sheet to $4.5 trillion.

On Wednesday, the Fed kept interest rates on hold in a 1% to 1.25% range, having raised official borrowing costs four times starting in December 2015. The central bank is also gradually winding down its balance sheet starting this month.

"Powell may at some point need to take balance-sheet reduction off auto-pilot.  I don’t expect him to initiate actual selling, but I can imagine him pausing roll-off and resuming reinvestment if the economy turns sour,” Steil said. “That will present a communications challenge." 

Bernanke weighs in

Ex-Fed Chairman Ben Bernanke, Yellen's predecessor, who now works in the finance industry, doesn’t think the Fed is sufficiently well equipped to handle the next recession. 

In a Brookings Institution blog on Oct. 12, Bernanke proposed what he calls "an alternative framework for monetary policy." He calls it "temporary price-level targeting" which is effectively an effort to temporarily overshoot the Fed’s inflation target following a chronic period of missing it to the downside, such as has been experienced recently.

The Fed has fallen short of its 2% inflation target for five years, and the central bank admitted in its policy statement Wednesday that "inflation for items other than food and energy remained soft. On a 12-month basis, both inflation measures have declined this year and are running below 2%." 

The solution, to Bernanke, while somewhat technical, involves essentially a stronger commitment to meeting that target on asymmetric basis — that is, to tolerate too-low inflation just as little as too-high inflation.

"Low nominal interest rates, low inflation, and slow economic growth pose challenges to central bankers," Bernanke wrote. "In particular, with estimatesof the long-run equilibrium level of the real interest rate quite low, the next recession may occur at a time when the Fed has little room to cut short-term rates. Problems associated with the zero-lower bound on interest rates could be severe and enduring."

Low inflation sounds great but chronically low price rises often reflect a weak economic and stagnant wages. 

Bernanke adds, rather ominously: "I am not confident that the current monetary toolbox would prove sufficient to address a sharp downturn. We should be thinking now about adjusting the framework in which monetary policy is conducted, to provide more policy 'space' in the future."

That thinking is going to be the job of whoever gets handed the keys tomorrow. 

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