Why You Should Know About Jerome Powell, Tapped as the Next Fed Chair

After much speculation, President Trump this month nominated Jerome H. Powell, 64, to be the next chairman of the Federal Reserve. Powell, nominated on Nov. 2,  is now next in line for what many consider the second-most-powerful position in the United States government, after the president himself.

If confirmed by the Senate, Powell will replace Janet L. Yellen, 71, who has been chairing the Fed for the last four years. Her term expires Feb 3. The appointment would make Yellen, who was the first female chairman of the federal bank, also the first serving Fed chair in nearly 40 years who was not reappointed by a new president for another term. The last time a first-term president removed the serving Federal Reserve chair was in 1978.

What does the chair do, anyway?

The Federal Reserve chair is the head of the Federal Reserve System, aka the central bank of the United States. The bank is in charge of things like conducting monetary policy in order to promote employment, keep inflation under control and moderate long-term interest rates — all of this in an effort to keep our financial system functional and stable.

Fed chairs serve four-year terms and are nominated by the president. If approved as chair, Powell will be in charge of carrying out the Fed mandate. The chair reports twice a year to Congress to testify on the Fed’s monetary policy and objectives. The chair also meets regularly with the Secretary of the Treasury Department, a member of the President’s cabinet. The chair’s actions influence employment, prices and interest rates.

Here’s another responsibility: The Fed chair is also the chair of the Federal Open Market Committee, which sets the federal funds rate. The funds rate is the benchmark interest rate for the nation, and when the funds rate rises, interest rates on short-term borrowing options like credit cards and personal loans tend to rise, too. For a complete primer on the fed funds rate and how it impacts your wallet, check out this explainer from our parent company, LendingTree.

For seven years following the 2008 financial crisis, the Fed held the funds rate  near zero to help curb inflation and encourage lending during the nation’s recovery. Then, in December 2015 the Fed raised the rate to between 0.25 and 0.50 percent. Since, the Fed has voted to raise interest rates four times as the economy has picked back up. The federal funds rate is now 1.25 percent, as Fed officials voted in June 2017 to again raise rates.

Who is Jerome H. Powell?

Jerome H. Powell is a current member of the Federal Reserve System’s Board of Governors. Powell, a Republican, was appointed to the position by former President Barack Obama, himself a Democrat, in 2012, and his current term was set to end in 2028.

Powell, though not an economist, has a rich background in financial markets. Prior to his appointment, Powell was a visiting scholar at the Bipartisan Policy Center in Washington, D.C. He also served in the George H.W. Bush administration as an assistant secretary and as under secretary of the Treasury.

Between his stints in Washington,  Powell led a career as a lawyer and investment banker in New York City. Powell served as a partner at The Carlyle Group from 1997 to 2005. He will be among the richest people to ever lead the central bank, according to The Washington Post.

According to The Wall Street Journal, White House officials say Trump chose Powell because he liked his combination of monetary policy acumen and business savvy. The president cited Powell’s “real-world perspective” as a positive trait, saying “he understands what it takes for our economy to grow.”

What we can expect from Powell as Fed chair

Powell is reported to be a centrist when it comes to monetary policy. Which is to say that as the next chair of the Federal Reserve System, hel is expected to stick to Yellen’s methodical approach to unwinding financial stimulus policies aimed at continuing recovery from the Great Recession.

Powell voted in favor of every policy decision made by the Board of Governors since he joined the Fed in May 2012. That includes all four federal funds rate increases. He also supported the Fed’s decision in June to begin reducing a $4.2 trillion balance sheet mainly consisting of U.S. Treasury and mortgage-backed securities purchased to lower long-term rates in recovery. Selling the securities takes money out of the market, driving down interest rates and inflation.

Investors expect Powell to keep the FOMC making quarter-percent raises through 2020. According to The New York Times, a survey of 144 investors conducted by Evercore ISI found investors expected that Powell would push rates modestly higher over time than Yellen. He is expected to conduct monetary policy so similarly, some are even referring to Powell as the ‘Republican Yellen.’

The one area where Powell may diverge from a Yellen-like monetary policy is in financial regulation.

The Fed is one of several federal agencies charged with regulating and supervising financial institutions. The Fed-enforced reforms in the wake of the Great Recession , often defended by Yellen, including new financial rules under the 2010 Dodd-Frank law.

“There is certainly a role for regulation, but regulation should always take into account the impact that it has on markets — a balance that must be constantly weighed. More regulation is not the best answer to every problem,” Powell said at an October meeting of the Fed-sponsored private-sector Treasury Market Practices Group.

Trump has stated several times that he he’s in favor of looser financial industry regulation, and the Trump administration further expressed the sentiment when it released plans calling for significant reductions in regulation in June. Just after the plans were released, Powell made clear he didn’t fully agree with the Trump administration’s plans at an appearance before the Senate Banking Committee, according to The Times.

Although Powell acknowledged there were some ideas he would not support, he said there were some ideas that would “enable us to reduce the cost of regulation without affecting safety and soundness.”

The post Why You Should Know About Jerome Powell, Tapped as the Next Fed Chair appeared first on MagnifyMoney.

How the Fed’s Interest Rate Hike Could Impact Your Finances

16165619661_26f0a28bd3_b

It’s widely expected that the Fed will raise interest rates this month, but we won’t know for sure until they meet December 13 and 14. The last time the Federal Reserve raised its benchmark interest rate was a year ago, when it voted to raise the rate from .25% to .5%.

Why should we care?

Consumers should be aware of the rate hike for a simple reason: Lenders and banks base their interest rates on the federal funds rate, so when the benchmark increases or decreases, it can impact rates on products like credit cards, auto loans, mortgage rates, and more.

So, what could change for you?

Mortgage Rates

Cheryl Young, a chief economist at Trulia, says homebuyers don’t need to be terribly worried about an increase in the federal funds rate.

“Don’t rush into a home purchase decision because you think that rates are going to go up,” said Young. “Make sure to take your time and don’t get driven into a hasty decision based on what may or may not happen with rates.”

A Trulia report released Wednesday shows homebuyers are more concerned about saving for a downpayment than rising mortgage rates. Young  says if you are renting and thinking about buying, for the majority of market, buying still makes more financial sense. In fact, mortgage rates would have to double in order to make renting more affordable on the whole.

Existing homeowners and people who are preparing to buy a home soon should take the opportunity to lock in today’s low rates before they rise, says David Demming, CEO of Demming Financial Services in Aurora, Ohio.

Buy when things are cheap,” said DemmingIf you are getting your first house, don’t drag your heels, so that you can lock in the low rate right now. Some lenders will give you a 10-year fixed rate and you should take advantage of those.”

Those who have a balance on a home equity line of credit, or HELOC loan, may want to make some aggressive payments now, warns Margarita Cheng, the CEO of Blue Ocean Global Wealth in Rockville, Md.

“When the prime rate goes up, the interest rate on a home equity line of credit will float up,” says Cheng.

Credit and Savings

“The costs for the credit card lender increases when the benchmark rates go up, so they are then tempted to raise rates on short term loans like credit cards,” says Chris Chen, Wealth Strategist at Insight Financial Strategists in Waltham, Mass.

There is some good news, although it may not be what you wanted to hear. The interest rates on credit cards are already high — currently 15% on average. Even if the Fed raises rates by another .25%, credit card users likely won’t notice.

For savers, however, a rate hike could be good news. You might start to earn more on the cash you have stashed in savings accounts, Money Market funds and CDs. Rates on these products are much lower than prior to the recession but a fed rate hike might make them “just a teeny bit less unattractive,” says Chen.

Car Loans

Car loans are one of those short-term loans you can expect to be influenced by a rise in the funds rate, but borrowers likely won’t feel much of a sting.

To get the best rate on a car loan, you should shop around for a low rate first, then make sure to negotiate the price of the vehicle. Interest rates on car loans are fixed, so if you do that, you’ll be set for a while. Heads up: the current average rate on a 60-month auto loan for a new car is 4.27%.

Investments

Bonds react inversely to the federal funds rate. When interest rates go up, the price of a bond goes down.

“To what degree, we don’t know,” Cheng says. “But that’s why it’s important to be prepared and have diversified investments.”

Don’t panic just because some of your bonds could lose value, adds Kristi Sullivan, the CEO of Sullivan Financial Planning. It’s all part of the cycle.

The Bottom Line

Whether or not the Fed’s December meeting results in an increased funds rate, you should think about your entire financial picture. The general expectation is that rates will continue to increase as the economy strengthens. Keep an eye on your interest rates and maintain a diverse portfolio and you should be prepared for whatever happens.

 

The post How the Fed’s Interest Rate Hike Could Impact Your Finances appeared first on MagnifyMoney.