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Three Questions

Three Questions: Prof. William B. English on the Debut of the New Fed Chair

The March meeting of the Federal Reserve’s Open Market Committee (FOMC) was also the debut of a new Fed chair, former investment banker Jerome Powell, who succeeded Janet Yellen. After the meeting, the Fed released a statement expressing confidence in the economy and announced an interest-rate hike. We asked Prof. William B. English, who spent more than two decades as an economist at the Fed, to interpret the March statement and reflect on the role of the Fed chair.

What do you make of the statement from the most recent FOMC meeting? Is there anything unexpected?

There were no real surprises. The March FOMC statement was fairly similar to the January statement, showing continued confidence in the economic outlook. The committee noted that “the economic outlook had strengthened in recent months,” which was new, but the decision to raise short-term interest rates by a quarter percentage point had been anticipated by most outside observers. Overall, I think the intention was to show continuity as Jerome Powell took over from Janet Yellen as Fed chair.

What did the statement and other recent monetary policy communications say about Jerome Powell’s approach and the committee’s view of the state of the economy and the future?

Chair Powell’s approach to policy appears to be similar to that of Janet Yellen—very careful and sensible, with an attention to the nuances in the incoming data. He was in the middle of the committee in his views as a Fed governor, and I expect that that will continue. He has made it clear that the underlying strength of the economy has picked up somewhat, even indicating that some of the headwinds that had held the economy back at times in recent years—such as fiscal policy and foreign economic developments—have become tailwinds of late. In their forecasts, the FOMC participants now see a more protracted period with output above trend and also a small overshoot of their 2% inflation target. Nonetheless, they are still projecting only gradual increases in interest rates, as they appear to want to be sure to get inflation back to their 2% objective following a long period of below-target inflation.

How much does it really matter who sits in the Fed chair? How much does the person ultimately affect policy and economic outcomes?

It matters a great deal. The FOMC operates mostly by consensus, but the chair sets the agenda and shapes the policy proposals that are brought to the committee’s deliberations. So the chair has a lot of influence over the policies that are ultimately adopted. Over the past decade, for example, Chairs Bernanke and Yellen had immense influence over the monetary policies pursued by the Fed, pushing the committee to provide substantial monetary policy accommodation and then withdraw it only gradually in order to bring unemployment down and inflation back toward their 2% target. I think other chairs might not have been willing to press for such an accommodative path, and the economy would have performed less well as a result. Chair Powell will face challenges of his own, and his role will be critical to the outcomes for the American people and for the global economy.

Department: Three Questions