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Biden opts for continuity at the Fed: Powell nominated for second term

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  • The White House announced that President Biden will nominate Jerome Powell for a second term as Fed Chair. His main rival, Lael Brainard, will be nominated as Vice Chair
  • Powell is seen as less dovish than Brainard and has a less strict approach to regulation
  • Nevertheless, the difference between the two is marginal. Both represent continuity of the flexible average inflation targeting strategy
  • Powell’s nomination may help restore the bipartisan approach to second term nominations for the Fed Chair, which was interrupted by former President Trump when he replaced Yellen after only one term. This should be beneficial to the Fed’s independence from partisan politics
  • For the left, this is a missed opportunity. While Biden is pursuing expansive left-wing fiscal policies to redistribute income and wealth from the rich to the poor, his nominee for Fed Chair will maintain a monetary policy approach that is increasing wealth inequality

Introduction

The White House announced that President Biden will nominate Jerome Powell for another term as Fed Chair from February 2022 through February 2026. His main competitor, Lael Brainard, will be nominated as Vice Chair of the Fed. Biden’s nomination of Powell took place after it became clear during the weekend that the votes for Brainard as Chair simply weren’t there in the Senate. So the progressives lost, but Biden at least showed his willingness to make an attempt. Now he can claim to be above the parties and the Fed’s independence from partisan politics is restored. In the end, the difference between the two is marginal with Brainard perceived the more dovish of the two. But with inflation being more persistent than expected, she too would have had to address the inflation problem. Recently, current Vice Chair Clarida already opened the door to faster tapering. And today, at the press conference, Biden, Powell and Brainard all talked about inflation.

While President Biden gets to nominate the next Fed Chair, the confirmation of his nominee is up to the Senate. Usually, the US President announces his nomination in early November, allowing enough time for the Senate to confirm by early December. This time it takes longer, but Powell’s first term does not end until early February. Today’s announcement suggests that there are sufficient votes in the Senate for Powell as Chair, and Brainard as Vice Chair, while there were not enough votes for Brainard as Chair.

The choice between Powell and Brainard

Recently, the choice for the next Fed Chair was narrowed down to Powell and Brainard. Both are currently members of the Fed’s Board of Governors, with Powell as the Fed Chair until February 2022. So hardly a choice between two radically different alternatives. Both support the Fed’s flexible average inflation targeting strategy that allows for temporary overshoots of the 2% inflation target to make up for past undershoots. Powell has been on the Board of Governors since 2012 and started as Fed Chair in February 2018 after being nominated by former President Trump. Brainard joined the Board in 2014. So both are Fed insiders and not likely to challenge the Fed’s paradigm.

So the choice between the two was a choice between two versions of the flexible average inflation targeting strategy. Brainard is seen as the more dovish of the two, which may not have helped her win over Republicans and centrist Democrats in the Senate. What’s more, Brainard is more strict when it comes to regulation of the financial sector than Powell. This got her the support from left wing Democrats, but Fed nominations are confirmed by the Senate, where centrist Democrats decide the fate of Democratic initiatives. But however this was going to turn out, it would be continuity by design.

Powell’s nomination may help restore the bipartisan approach to second term nominations for the Fed Chair, which was interrupted by former President Trump when he replaced Yellen after only one term. This should be beneficial to the Fed’s independence from partisan politics. At his press conference today, President Biden said that we need stability and independence of the Federal Reserve. He stressed that Fed leadership with bipartisan support is important and that. Jay (Powell) and Lael (Brainard) bring continuity.

Table 1: Comparison of the Fed Chair and new Vice Chair
Table 1: Comparison of the Fed Chair and new Vice ChairSource: Wall Street Journal, Rabobank

 

House of Cards

Why did it take so long to nominate Powell? Usually, the Fed Chair nomination takes place in early November. Not so long ago, Powell appeared to be Biden’s clear favorite. However, the internal problems in the Democratic Party with Biden’s fiscal policy agenda started to affect the Fed Chair issue. Progressives and centrists reached a stalemate regarding the bipartisan infrastructure bill and the climate, education and health care bill. Then progressives gave in and allowed the bipartisan infrastructure bill to move first. As I said to Bloomberg News earlier this month: “Powell may become a pawn in the struggle between progressive and moderate Democrats. Biden could offer the replacement of Powell by Brainard to appease the progressives in exchange for concessions to the moderates.” In fact, it was easy for Biden to give Brainard a chance, because Republicans and centrist Democrats were likely to shoot her down. So last week, noses were counted in the Senate and evidently by the weekend it was clear that there were not enough votes for Brainard. So Biden has fulfilled his promise to the progressives to give Brainard a chance, but now he can nominate his earlier favorite and act as the President who stands above the parties and restore the bipartisan approach to second terms. So Biden wins, the Republicans win, and the left loses.

Conclusion: How the Left Lost Out

In fact, framing the Fed Chair decision as a choice between Powell and Brainard was the first defeat the left suffered. The search for the next Fed Chair boiled down to a choice between two current members of the Fed’s Board of Governors. It does not appear that Biden’s advisors were casting their net wide. The choice between Powell and Brainard was a choice between two Fed insiders who share the Fed’s groupthink. Biden’s advisors should realize that while the President is pursuing expansive left-wing fiscal policies to redistribute income and wealth from the rich to the poor, they have advised him to maintain a monetary policy approach that is increasing wealth inequality. Instead of spending trillions through fiscal policy, Biden could have started the reversal of monetary policies that have led to a rapid increase in wealth inequality since the global financial crisis spurred the Fed into quantitative easing, which is boosting the assets of the rich. A missed opportunity for the ‘social justice warriors’, another victory for the stock markets. Happy Thanksgiving!

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Author(s)
Philip Marey
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 71 21437

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