Policy differences between Jay Powell and Lael Brainard — the only names on Joe Biden’s shortlist for the seat of Federal Reserve Chairman — are narrow. However, it is reasonable for the president to prioritize continuity over change by Powell innovation for a Second term. It can be doubted that picking Brainard will have much of an impact on the rate at which the Fed plans to tighten in the near future, although markets view her as more dovish than Powell.
Either way, the Fed will begin withdrawing $120 billion a month of quantitative support for the US economy from next month, while the futures market has already priced in two rate hikes in 2022. with potential danger turning point For markets and the economy, Biden has chosen wisely. Coupled with Powell’s re-appointment, Brainard’s election as vice chairman gives the impression of continuity in monetary policy with a tighter regulatory approach.
However, the left-wing Democrats are not happy with Biden’s decision. The gap between Powell and Brainard on banking regulation is much wider than on monetary policy. Elizabeth Warren, a Massachusetts senator, called Powell “a dangerous man” for loosening capital and restricting liquidity on US banks – moves that Brainard often opposes. But the political realities of leftist discontent will only improve the chances of a timely Powell confirmation in a 50:50 Senate meeting.
Powell was promoted to the role by Donald Trump in 2018. Despite being a Republican, he resisted Trump’s bullying before the pandemic to keep interest rates low in a faltering economy. heated up. This means that Powell will have the courage needed to withdraw from the Fed’s unusual accommodation in the wake of the Covid-19 downturn. Biden is likely to appease the left by picking Democrats to fill three of the Fed’s vacancies, including vice chairman of oversight.
In addition to his confirmation, Powell will face two great challenges. The first is controlling US inflation, which stood at 6.2% last month, the highest in more than three decades. The Fed has repeatedly argued that this is a “temporary” problem caused by temporary disruptions to global supply chains. That may be the case – and there are signs that some bottlenecks may be being untied. But the Fed has been slow to recognize the magnitude of the commodity shortages and the potential for further inflation.
It may need to change faster than intended. The easing of asset purchases, slated to end next June, may have to happen more quickly. The risk that higher inflation expectations may be anchored in the real economy is not small. Moderate tightening now can save the need for more severe contractions later.
The second challenge will be the Fed’s expansion of the budget, especially on climate change. Powell has said that global warming should be addressed by other government agencies. Brainard has readily absorbed the Fed’s regulations on carbon finance. Biden’s statement stressed both Powell and Brainard “share my profound belief that it is urgent to [Fed] action is necessary”. This means that Powell has moved his views closer to what the European Central Bank and the Bank of England are doing. Indeed, the ECB on Monday warned European banks “ultimately” could face higher capital charges if they don’t take climate risks seriously.
Such thoughts by the central bank should be welcomed. However, the political response, especially in the US, can be complex. The Republican right will see Powell’s change as a reason to vote against his nomination. However, most Democrats and some Republicans are likely to take him over the edge. Bipartisan confirmation would be good news for the Fed and the US economy.
