President Trump's choice for chair of the Federal Reserve, Jerome H. Powell, will face an immediate test as stronger economic growth exerts greater pressure on the central bank to step up the pace of interest-rate hikes.
Trump has said he wants interest rates to stay low. That presumably was an important consideration in the president's decision, announced Thursday, to replace current Fed Chair Janet Yellen with Powell, 64, a Fed governor since 2012 who has closely aligned himself with the cautious policy moves and positions forged by Yellen.
Like Yellen, whom he would succeed in early February if confirmed by the Senate, Powell has shown he is in no hurry to raise rates. But with the U.S. economy gathering steam and stocks surging to levels that have some worried, Powell soon could find himself in the uncomfortable position of having to build consensus around making more rapid rate increases, seldom an easy thing to do.
Some analysts think the job will be harder because Powell, unlike Fed chairs over the last four decades, is a not an economist. He is a lawyer and former investment banker.
Already, debate is sharpening inside the Fed as policymakers at one end press to hold off on lifting interest rates while those on the other are keen to take more aggressive action to keep inflation in check. What's more, the tax overhaul unveiled Thursday by Trump and congressional Republicans is likely to further push up interest rates if the cuts result in bigger federal deficits and debt, as expected.
"He's got a very large challenge in that, within the Fed, there's a growing divide about the trajectory of rate hikes," Diane Swonk, a Chicago economist, said of Powell. "He's been straddling the middle. The question is, can you straddle the middle and corral the cat?"
Trump had narrowed his list of Fed candidates to five people, including Yellen, whom he praised as "excellent" this week.
In not choosing her, Trump broke a pattern of several decades in which Fed chairs were renominated by presidents of opposing parties.
Powell, a Republican, was appointed by Obama in 2012 to fill a vacant seat on the Fed board and was easily confirmed.
Ryan Sweet, who follows the Fed for Moody's Analytics in West Chester, said one near-term challenge for Powell is addressing the disconnect in rate expectations between the Fed and financial markets.
Most Fed officials see their benchmark interest rate, currently at 1 percent to 1.25 percent, rising over the next two to three years until it stabilizes at about 3 percent. Markets, however, think the longer-run rate will end up closer to 2 percent.
"He's going to have to close that gap - and do it gracefully," Sweet said, noting that otherwise, it could jar financial markets.