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Powell has a hole in his resume — how he handles it will be the story of his Fed chairmanship

MarketWatch logo MarketWatch 11/3/2017 Greg Robb

a man wearing a suit and tie: Fed Gov. Jerome H. “Jay” Powell is a lawyer by training. © Provided by Dow Jones & Company, Inc. Fed Gov. Jerome H. “Jay” Powell is a lawyer by training.

Jerome Powell, the president’s presumed pick to be the next chairman of the Federal Reserve, is not a trained economist. That makes him the first leader of the Fed without an economics degree since the late 1970s.

“It is a hole in his resume,” said Ward McCarthy, chief financial economist at Jefferies.

But how much of a hole?

The last Fed chairman also missing this pedigree was G. William Miller, who ran a tech company before President Jimmy Carter tapped him for the Fed. His one-year tenure has been labeled an unmitigated disaster, with the devilish combination of rising unemployment and double-digit inflation under his watch.

In contrast to Miller, Powell isn’t starting from scratch. He’s spent the last five years on the Fed’s interest rate-setting board of governors learning the ropes.

Read: What a Jerome Powell Fed means for investors and the economy

Victor Li, a professor of economics at Villanova University and a former Fed staffer, said Powell must be a collaborative chairman to succeed.

“He is going to have to be a leader as well as a follower,” Li said.

“Powell will need to rely more on the expertise of the other [Federal Open Market Committee] members and regional bank presidents” to navigate the economy through the risks of inflation and recession, Li said.

In a crisis, there may not be much time for deliberation, he said. “You have to move fast in a crisis and so it is a bit of a concern,” Li said.

Don’t miss: Here’s how a new Fed chief typically spooks on the Dow

Without economics training, Powell “may not be able think outside the box on monetary policy,” he said.

Overall, Powell is expected to continue to follow the gradual rate hike approach of Fed Chairwoman Janet Yellen and have a lighter touch on regulation.

Andrew Levin, a former top Fed staffer, and now an economics professor at Dartmouth, said that it will be important for Powell to collect a wide variety of economic viewpoints from inside and outside the central bank.

“The risk always to the Fed is that it is too insulated, that the walls are too high and too thick,” Levin said.

“Powell’s resume is not up to the standards we would expect of a nominee for Fed chair,” said Paul Ashworth, chief U.S. economist at Capital Economics.

Ashworth said the Fed is facing fundamental questions of what drives inflation in a modern U.S. economy. It is not clear why the Fed is even targeting 2% inflation, he said. “We would be more comfortable if it was the academically outstanding Janet Yellen who was leading that research,” he said.

“The risk of a serious policy mistake—in either direction—will arguably be higher under Powell’s leadership than under Yellen’s. And policy communications may become more muddled, if Powell doesn’t provide strong intellectual leadership and the policy debate descends into a free-for-all among regional Fed Presidents,” Ashworth added.

Other experts don’t see any problem for Powell with his lack of economic training.

Jon Faust, a professor of economics at Johns Hopkins University, who worked with Powell at the Fed, said his former colleague has strong skills needed to lead the central bank: marshalling arguments and building consensus.

“If you have someone with good skills as chairman who happened to have spent his life studying monetary policy that would be better. But most of the time, I don’t think it is essential,” he said.

The time it is essential is during an economic crisis, Faust said.

Mark Gertler, an economics professor at NYU, who collaborated closely with former Fed chairman Ben Bernanke, said Powell has earned the respect of his peers. “So I don’t see any problem with the economics community,” he said.

Robert Barbera, co-director of the Center for Financial Economics, said Powell’s experience at the Carlyle Group hedge fund may give him a leg up over his predecessors.

“He’s spent much of his career in finance. We preach at our center that conventional macroeconomics wildly under appreciates the importance of finance,” Barbera said.

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