The policy differences between Jay Powell and Lael Brainard – the only names on Joe Biden’s shortlist for chairman of the Federal Reserve – are narrow. Nevertheless, the President was wise to prioritize continuity over change by Powell renewed for a second term. It is doubtful that Brainard’s choice would have had a major impact on the speed with which the Fed plans to step up in the near future, although the markets consider her to be slightly more deaf than Powell.
Either way, the Fed will begin withdrawing its $ 120 billion a month quantitative easing support for the U.S. economy from next month, while futures markets have priced two rate hikes in 2022. pivot point for markets and the economy, Biden chose wisely. Along with Powell’s reappointment, Brainard’s promotion to vice president gives the impression of continuity in monetary policy with a more robust approach to regulation.
The Democratic left is nonetheless dissatisfied with Biden’s decision. The gap between Powell and Brainard is much larger over bank regulation than over monetary policy. Massachusetts Senator Elizabeth Warren called Powell “a dangerous man” because he loosened capital and liquidity restrictions on U.S. banks – moves that Brainard was usually opposed to. But political reality suggests that left-wing discontent will only improve the chances of a timely Powell confirmation in a 50:50 Senate.
Powell was elevated to the role in 2018 by Donald Trump. Although he is a Republican, he opposed the bullying by Trump before the pandemic to keep interest rates low in a heating economy. This implies that Powell will have the courage to withdraw the Fed’s extraordinary accommodation as Covid-19 declines. Biden is likely to appease the left by electing Democrats to fill the three Fed vacancies, including the vice president for oversight.
In addition to his confirmation, Powell will encounter two big challenges. The first is to control U.S. inflation, which was at its highest level in more than three decades last month at 6.2 percent. The Fed has consistently argued that this is a “perishable” problem caused by temporary disruption of the global supply chain. This can be the case – and there are signs that some of the bottlenecks may be loosening. But the Fed was late in acknowledging the extent of commodity shortages and the consequent inflation risk.
This may need to change faster than planned. The dismantling of asset purchases, which is scheduled to end by next June, may need to take place more quickly. The risk that higher inflation expectations can be anchored in the real economy is non-trivial. Modest tightening now can save the need for more serious contraction later.
The second challenge will be on the Fed’s greater competence, especially on climate change. Powell said global warming should be tackled by other government agencies. Brainard was more receptive to Fed regulation of carbon financing. Biden’s statement emphasizes both Powell and Brainard “share my deep conviction that it is urgent [Fed] action is needed ”. This implies that Powell has moved his position closer to what the European Central Bank and the Bank of England are doing. Indeed, the ECB warned on Monday that European banks could “finally” face higher capital costs if they do not take climate risk seriously.
Such central banking thinking should be welcomed. But the political response, especially in the US, can be divisive. The Republican right will see Powell’s shift as a reason to vote against his nomination. Yet the majority of Democrats, and some Republicans, are likely to carry him across the line. A two-party confirmation will be good news for the Fed and for the US economy.