Governor Jerome Powell is now taking over as chairman of US Federal Reserve. He’s now arguably the world’s most powerful central banker, holding in his hands the management of the world’s most traded currency. 

He’s taking over from Janet Yellen who maintained ultra-low interest rate policies during much of her tenure. Now President Donald Trump is taking much of the credit for low unemployment levels and a stock market rally that can be partially attributed to the era of "easy money".  In her final two years at the Fed, Yellen gradually began the process of easing rates higher from their historic lows. Now the equity market rally is being underpinned by massive corporate and personal tax cuts passed under Donald Trump. 

During his confirmation hearing in the US Senate, Jerome Powell said he would stick to the Federal Reserve’s dual mandate of maximizing employment while controlling inflation saying he would do “everything within my power to achieve those goals while preserving the Federal Reserve’s independent and non-partisan status that is so vital to their pursuit.” 

Adding that, “Our aim is to sustain a strong jobs market with inflation moving gradually up toward our target.” That target of two percent looks much closer now to being reached or even overshot, given that the engine of the American economy is beginning to chug much harder.

Jerome Powell is taking over with three of the seven Board of Governors’ seats empty. Those seats will need to be filled with nominations made by Donald Trump. 

Desmond Lachman, an economist at the American Enterprise Institute, is concerned that “if we are now going to have a Fed that has many political appointees who are more inclined to low-interest rates, I’m not holding my breath that the Fed is going to be too quick to respond to stirring inflation problems.” The US Federal Reserve is meant to anticipate and react to rising inflation by raising rates.

The US Federal Reserve is meant to anticipate and react to rising inflation by raising rates.

A decision to hasten the pace of rate rises by Powell would pour some cold water on a sizzling economy and may also dampen some of the fervor on Wall Street. 

So Lachman believes that Powell may have to find a way to “deflate this bubble in a way that’s not disruptive” while being cognizant that raising rates too quickly “risks bringing down the whole ‘house of cards’ on his watch.” 

To be clear, no-one knows when markets will turn toward a ‘correction.’ But as we’ve learned from history, that moment always comes at some point. And those will be the moments that test the mettle of the Fed chair and the team that surrounds him.