Joe Biden has an extraordinary opportunity to remake the leadership of one of the most powerful institutions in the world. He has taken an inordinate amount of time deciding how to do it, but now he seems to be about to act.
The fate of at least three and potentially four of the seven seats on the US Federal Reserve board of governors, including its chairman, depends on Biden’s decisions.
How they are filled is of great interest to other central banks, financial market participants, and economists because they will occur at an exceptionally sensitive time for markets and the economy.
The key decision should be the simplest. President Jerome Powell’s term expires in February and since he is incumbent, he enjoys broad bipartisan support, would provide continuity, and would not disrupt markets, his reelection should be automatic.
Except he’s not. While he is overwhelmingly favored for a second term, he has received criticism from progressive Democrats, including scathing criticism from the chair of the Senate Banking Subcommittee, Elizabeth Warren, and has also taken some blows from the recent resignations of two bank presidents. regional about securities trading scandals.
The time it is taking for Biden to decide on Fed leadership and that as of last week they had met only once since Biden’s inauguration adds to the feeling that an extension of Powell’s term is not a fait accompli.
There is a push from progressives for Powell to be replaced by another Fed board member, Lael Brainard, a Democrat who has criticized the Fed’s relaxation, during Powell’s term, of harsh rules imposed on banks afterward. of the 2008 financial crisis.
Both Powell and Brainard met with Biden at the White House last week, separately, suggesting a decision is imminent.
There is a compromise result. Powell’s supervisory vice president, Randal Quarles, the architect of the rollback of some of the post-2008 banking reforms, announced Monday that he would resign from the bank next month. The term of another vice president, and Powell’s deputy, Richard Clarida, expires early next year.
Biden could reappoint Powell and give Brainard the key banking supervision position or elevate her to the position of senior vice president.
That would reassure the markets, placate progressives, and probably have the best chance of garnering Republican support in the Senate for nominations.
Quarles and Clarida’s resignations create two opportunities for Biden to fill.
There is another vacant seat, the one Donald Trump desperately tried to fill last year with a string of candidates so peculiar he couldn’t even get the Republicans to back them, and potentially Powell’s job if he is not re-elected and decides to step down. Fed.
That’s at least three and possibly four appointments from Biden to the Fed leadership and either way, with Brainard (an Obama appointment), a majority of the Democrats appointed to the seven-seat board.
While Powell’s term doesn’t end until February, there is some urgency associated with Biden’s decisions. Nominations for seats on the Fed’s board are generally made by early November at the latest due to the time it takes to get appointments in Congress.
The current Congress is so bitterly divided along partisan lines that the process could drag on into next year, turning Powell into a lame duck and gutting the Fed board, if Biden doesn’t imminently move or nominate someone for whom. Republicans object.
Powell, originally appointed to the board by Obama and elevated to the presidency by Trump (breaking a long tradition of giving the incumbent president a second term) has enough support across party lines to get through that nomination process fairly quickly. . That’s despite some Republican reservations about the Fed’s increased interest in social and climate policies during his tenure.
He also has the support of the president he displaced (now US Secretary of the Treasury), Janet Yellen.
Biden’s decisions that will fundamentally overhaul the leadership of the world’s most powerful and influential central bank come at a delicate time.
Under Powell, the Fed responded to the pandemic with unprecedented and unconventional monetary policies, reducing the federal funds rate to zero, buying by pouring liquidity into financial markets through the purchase of bonds, mortgages, and even some corporate debt. The Fed’s balance sheet has expanded from less than $ 4 trillion to more than $ 8.5 trillion during the pandemic.
Amid the pandemic, the Fed also implemented a new monetary policy strategy, the result of a 12-month review commissioned by Powell.
Rather than its traditional approach of trying to get ahead of inflation, the Fed is now committed to trying to control inflation only after it has been set above the Fed’s target two percent rate. Instead of being proactive, the Fed will fight inflation once it has obviously taken hold.
US inflation (in fact, global inflation) has skyrocketed since the pandemic, driven by unprecedented fiscal spending, rising energy prices, and supply chain disruptions.
Until recently, Powell and other Fed officials, including Brainard, described rising inflation to its highest levels in 30 years as “transitory”; now they are not so sure that the genie has not escaped from the bottle.
Last week, the Fed announced that it would begin “cutting” its $ 120 billion ($ 162 billion) a month in bond and mortgage purchases, with the expectation that it would be out of the markets by the middle of next year. He doesn’t expect rates to start rising until 2023.
However, unless inflation slows, the Fed could face the need to accelerate the reduction and advance interest rate increases, potentially quite aggressively, to avoid even tougher actions that would damage the economy and destabilize the financial markets if it took hold today. levels.
The United States has little, if any, the experience of changing Fed leadership during a time of monetary policy uncertainty, let alone changing most of the board during such uncertain times.
That could push Biden to retain Powell as he elevates Brainard and nominates clear candidates for vacant seats to avoid politicizing the Fed and having the Senate thwart his appointments.