Jerome Powell, said to be President Donald Trump's pick to be the next Federal Reserve chairman, is set to take the reins of the world's most important central bank when the U.S. economy is rolling along at a pace he'll be under pressure to sustain.
Growth is accelerating, inflation is tame and unemployment is the lowest in 16 years. Such a backdrop should initially enable a new Fed chairman to keep gradually raising interest rates from historic lows with the aim of stretching out what is already the third-longest U.S. upswing.
But expansions don't die of old age. Rather, they typically are brought down by the bursting of asset bubbles, shocks like natural disasters or political upheaval, or errors by central banks.
Faster rate hikes could cool the stock market but risk holding inflation below the central bank's target, possibly tipping the economy into a recession. Tightening too slowly could stoke asset values even further, creating trouble down the road. Powell, and Trump by association, will own the outcome.
Powell has the added dilemma that his Fed would confront any slump in growth with little in its policy arsenal. There is barely room to cut rates deeply, and the backup plan -- quantitative easing -- is now the subject of Republican lawmaker ire.
(Watch: Why inflation and interest rates could remain low for a very long time)
"Powell has been dealt some cards in this poker game that aren't helpful for carrying out monetary policy," said Torsten Slok, chief international economist at Deutsche Bank AG in New York. "The world economy has never been in better shape, but it is a very unthankful job to be a central banker these days."
With the White House scheduling an announcement for 3 p.m. in Washington on Thursday, Trump will announce Powell, 64, as his nominee to be Fed chief, said several people familiar with the decision, replacing Chair Janet Yellen when her term expires in February. Powell is currently one of four Fed governors on a seven-seat board that Trump will have a chance to reshape. All his nominees will be subject to Senate approval.
Only the ninth leadership change at the Fed since the end of World War II, the changeover comes at a critical moment. Monetary policy is already set on a tightening course, and it is precisely at this moment when mistakes are made or avoided.
ECONOMIC DIVIDE
Complicating matters even further for the former private-equity executive is that growth since the Great Recession ended in 2009 is only slowly closing an economic divide that's fueled the political populism that elected the man who picked him. The gap between rich and poor could widen further if stocks keep climbing and wage growth stays moderate.
"The conflict between getting inflation up to target and restraining the asset price bubble is the biggest challenge," said Paul Mortimer-Lee, chief economist for North America at BNP Paribas SA in New York. "One says monetary policy is too tight, and the other says it is too slack," he added. "That is a terrible dilemma."
An ex-Treasury undersecretary and former Carlyle Group LP managing director, Powell would be taking charge in the midst of a political battle over how much stimulus the economy needs.
"The era of a bipartisan, or technocratic Federal Reserve is gone," said Mark Spindel, a co-author of a book on the central bank's relationship with Congress. Powell "will be caught in a very difficult position between a blame-avoiding Congress, an outspoken president and potentially unruly committee."
Republicans are debating tax cuts, a move that could add even more demand to the economy, and officials only have blunt tools to tamper down frothy markets.
(More: The history of bonds — at least since yields hit record lows last year)
Meanwhile, for those with savings to invest, stock indexes are touching record highs. Trump has touted soaring equities as a sign of his success. No stock rally lasts forever, and Fed officials will only worry more if savings rates decline, and consumption and investment boom on the back of asset wealth. Enthusiasm can contract suddenly when asset markets turn lower.
One of Powell's virtues for the job is that he understands markets. He spent much of his career working in the financial industry, first at investment bank Dillon Read & Co. and later at Carlyle. That career path also made him a multi-millionaire.
To sustain the expansion, Yellen has gradually tightened monetary policy to allow a strong labor market to lift wages and pricing power. But wages are responding slowly, in part because worker output per hour, or productivity, is low.
RECESSION ARSENAL
It's a complicated problem and one that has left Powell with yet another risk. The Fed's benchmark lending rate is now in a range of 1 percent to 1.25 percent, and current Fed forecasts suggest it will only be around 2 percent by the end of next year.
Nobody is forecasting a recession soon. But economists expect the Fed to cut rates to zero again when the next one hits because the policy rate probably won't be much above three percent going in.
"It is not hard to believe that sometime in the next four years we will have a recession starting from a point of relatively low nominal interest rates," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.
(El-Erian: Powell Brings Continuity and Experience)
Powell is likely to rely on a competent Fed staff, and his associates on a policy committee packed with the nation's top economists are long on policy experience, such as San Francisco Fed President John Williams and Fed Governor Lael Brainard. Will that be enough to keep the economy chugging along?
"The Fed Chairman needs to lead the committee, not listen to the committee and decide what to do based on the consensus of views around the table," said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. "Powell has a steep learning curve ahead of him. It's not going to be easy."
