Earlier this week, Jerome Powell, a current member of the Federal Reserve Board of Governors was nominated by President Trump to become the new Chairman of the Federal Reserve. His nomination still has to be confirmed by the US Senate.
However, the interesting aspect of his choice is that Powell does not have an economics degree, which is not mandatory per law but it is one of those things people tend to expect, and his past job experience working as a lawyer and an investment banker. Thus, he may be the most down to earth Fed Chairman in a long time, as most of them tend to be academics living in the ivory towers of American Ivy League.
For example, former Fed Chairman Paul Volcker has his own rule, Volcker Rule, which is part of the Dodd-Frank Act and prohibits banks to do proprietary trading for a profit, in other words, to speculate with their own money. However, it never took real effect as Wall Street always finds loopholes but that is not the problem. The real problem was Volcker’s naivety who actually thought that he could stop banks from speculating. Powell does not outright calls him naive but rather suggest two things, we can do this more efficiently and small banks must be excluded.
Moreover, when I was in school, I studied Taylor’s Rule, which was created by one of the candidates for Trump’s nomination, John Taylor, and can be summarized in the following words: when inflation is high, interest rates must be raised to cool it down. Sounds simple enough for even a kid to understand it, but the problem is that the assumptions used for the making of this rule are too unrealistic. First, we cannot observe the real interest rate (real i = nominal i – inflation), so we are basically guessing whether is high or low. Second, we assume that the US is a closed economy, but the US dollar is the de-facto global currency to the point in which foreign countries from El Salvador to Zimbabwe use it as their own local currency. Thus, the Fed should stop assuming that only Americans handle the greenbacks as their currency for the purpose of making better choices.
Moving on to other events that also happened this week is the quarter-percentage-point increase in interest rates by the Bank of England from 0.25% to 0.5% signaling a stronger British economy regardless of the infamous Brexit. Furthermore, there has been a new leak in the same manner as the Panama Papers, Paradise Papers, that show the offshore investments of several people of interest. Even Queen Elizabeth II is shown to have investments relating to a predatory lending company, not good for public relations.
Thus, we end up the week with a possible change in the Fed perspective of how the world is, an thriving British economy, and a lot of drama for tomorrow’s news. Anyone want to bet that the Trump-Russia story is going to benefit from Paradise Papers?