J

ust before leaving for his trip to Asia, United States President Donald Trump made an announcement nominating governor Jerome Powell as his candidate to replace Professor Janet Yellen as chair of the Federal Reserve Bank of the United States (Fed), whose term ends in February 2018.

At the start of the Trump administration it was almost certain that Yellen would not be reappointed to serve a second term, as Trump kept criticizing Yellen’s policy of raising the prime rates.

But, his criticism disappeared months into the presidency, when he recognized that the Fed had raised prime rates to his liking, i.e. at a slow pace.

Regarding who will replace her as the new chair, most would previously have mentioned Gary Cohn, who joined the Trump administration as an economic advisor and director of the National Economic Council.

In President Trump’s plan to change the Washington establishment, Cohn, a former investment banker and CEO of Goldman Sachs, was considered to be the perfect candidate to run the Fed.

However, after the Charlottesville incident it was rumored that Cohn had started to fall out of favor with the President, due to his complaint against Trump’s antisemitic statements.

His name as forerunner was replaced by Kevin Warsh who, aside from being a former Fed governor, has a strong connection to Trump through his wife, who is the daughter of Trump’s business friend Ronald Lauder and heir to Estée Lauder.

Be that as it may, now it is official, Fed governor Powell is the nominee to replace Yellen. And everyone seems to say there is no reason why the Senate would not confirm the nomination.

What do we know about Governor Jerome Powell? He is a Republican, but was installed by President Barack Obama. He is not a macroeconomist, nor does he hold a doctoral degree, which is a bit unusual for the chief of a modern-day central bank.

However, he is a former investment banker. He has also been working with Chair Yellen and has the same dovish stance on interest rates and quantitative easing, believing in a measured and slow pace in normalizing monetary policy, including the reduction of the ballooning Fed balance sheet.

The market welcomes the choice as it signals a continuation of the current policy, or at least not the kind of drastic change creating uncertainty that the market despises.

In terms of the program for increasing interest rates at a measured and slow pace, he has even been considered as more considerate than Yellen as to its adverse impacts on emerging economies.

As everyone could recall, the emerging economies suffered from sudden outflows of capital caused simply by an announcement by former Fed chair Ben Bernanke in 2013 about the possible normalization of Fed quantitative easing, later known as the “taper tantrum.”

Thus, the change to Powell as the new Fed chair is good news for emerging economies, including Indonesia.

In terms of banking and financial regulation, Governor Powell is known for listening more to Wall Street financiers’ complaints that the rules and regulations after the global financial crisis have been too stringent and stifling for the financial industry.

Rules and regulations since the global financial crisis have generally been brought in by the Dodd-Frank Wall Street Reform and Consumers Protection Act of 2010. The most well-known regulation arising from the act has been the Volcker Rule.

It is a rule that prohibits banks from conducting certain investment activities with their own accounts, and limits their ownership of and relationship with hedge funds and private equity funds.

This regulation and others, including the office of consumer protection in the Fed, have in particular been considered by investment bankers as stifling the banking industry and constraining their growth.

President Trump has already appointed Randal Quarles as the vice chair of the Fed in charge of bank supervision. Just like his appointees in several ministries, it seems that one of their tasks is to discard the old (Obama’s) policies.

So, as in the case of the Environmental Agency, Health Education and Welfare, the US Trade Representative, here the Fed would have the job of repealing rules and regulations that are considered too rigid and stifling for the financial industry.

History has demonstrated that the loose monetary and supervision regimes of the Alan Greenspan era of the 1980s and 1990s, well-known for self-regulation or loose regulations on banking, despite producing growth and stability for a long time — the Great Moderation — had also led the US economy into bubbles — dot-com in 2000 and housing in 2007 — that had followed financial crises.

This is the kind of potential future problem that the monetary and supervision authorities of emerging economies will have to keep watch and be prepared for. This is not something to be taken lightly for emerging economies, including Indonesia.

Regarding current developments, the new Nobel laureate in economics, the professor Richard Thaler, was quoted as saying the bullishness of the stock markets made him nervous. So I think in Thaler’s assessment, the development of economies does not justify the bullishness of the capital markets.

Even assessing China’s economy, Zhou Xiaochuan, the Governor of China’s central bank the People’s Bank of China, warned about a “Minsky Moment”, the possibility of the economic bubble to burst.

This must be because China’s economy is showing signs of a bubble due to aggressive leveraging, which has caused China’s debt to gross domestic product ratio to skyrocket.

The current concern of emerging economies regarding money and finance, is how the monetary authorities of advanced economies implement monetary policy normalization programs after years of practicing unconventional monetary policies.

Both programs to raise interest rates and those to taper off purchases of securities would cause capital outflows from emerging economies. No effort could be spared to avoid the recurrence of the 2013 taper tantrum, which was so devastating for emerging economies.

Different developments of macro indicators during the economic recovery in the US, Europe and Japan that lead a measured and slow pace of monetary normalization would be welcome indeed.

However, there is concern over the possibility that less regulated finance could appear in the future. It is hoped that the pendulum will not swing back to the era of overly loose regulation of the 80s and 90s that ended with financial crises.

One final note: I am aware of the popular argument that we should not be overly concerned with the role of the US dollar and the Fed, since it is on the decline already, and the world is switching to Renminbi.

However, even if the shift has already started, it would be a long process. In the meantime we still have to deal with the current system such that we cannot ignore all these developments, at least in the short and medium term.
____________________________

The writer was governor of Bank Indonesia from 1993-1998. He is now professor emeritus of economics at the University of Indonesia and professor of International Economics at the S. Rajaratnam School of International Studies, Nanyang Technological University, Singapore.