Finally, it was Jerome Powell who was picked ahead of John Taylor (reputed to be a monetary hardliner) to succeed Janet Yellen, whose term ends next February. Yellen, who by all accounts had done a good job in reviving jobs and growth by sticking to an easy monetary policy, slowing down the reversal of the quantitative easing programme, was in line for a second term — except that she perhaps earned the US President’s disfavour by speaking out for more regulation of the financial sector. While Powell is believed to be dovish, he is less inclined to push for financial regulation. In this respect, his views appear to chime with those of President Trump, who has repeatedly expressed his dismay over the Dodd Frank law — a post-2008 legislation that curbs big banks from engaging in unbridled investment and speculative activity. With Powell expected to go slow on rate hikes, bond market yields have remained subdued. He signifies more continuity than change in Fed policy — of gradual normalisation of interest rates through 2018. Read along with looser financial regulation, it would seem that easy monetary policy is here to stay.

However, Powell, who has been a finance sector insider, is neither an economist by training nor a person with hands-on experience in handling economic and financial shocks. While the IMF has pointed to a scenario of global economic stability in 2017 and 2018 as being conducive to reviving growth, there are some chinks in the financial world. Chief among these is the spectre of ballooning debt in China. If that unravels, it could lead to financial and economic chaos all over. The other concern relates to the size and lopsided structure of the derivatives market, even with Dodd-Frank regulations in place. According to the second quarter (April-June 2017) report of the US Office of the Comptroller of the Currency on ‘Bank Trading and Derivatives Activities’, “Derivative notional amounts increased in the second quarter of 2017 by $7.2 trillion, or 4.0 percent, to $185.5 trillion”, with such trade being concentrated in the hands of a handful of commercial banks. This sum, about 10 times the US’ GDP, remains a looming concern.

India needs to be alert to the consequences of a gradually changing monetary climate, even as it tries to put its own banking house in order. While ‘taper tantrums’ may not repeat themselves, a liquidity shock cannot be ruled out. India needs to watch its widening current account deficit in these circumstances. Powell takes over in interesting times.