On Monday, President Biden nominated Jerome Powell (a Republican) to the Federal Reserve Chair for a fourth-year term. Powell is a solid hand that helped pull the U.S. out of the COVID-19 depression and who has strong bipartisan support.
Biden also nominated Fed Governor Lael Brainard as vice chair of the Fed’s board of governors.
The decision caps a weekslong race between Powell and Brainard, a Democrat, for the nation’s top economic post. Biden, reportedly under the pressure of progressive Democrats, took Brainard seriously over recent days after Powell appeared to be a lock for the top economic post.
“While there’s still more to be done, we’ve made remarkable progress over the last 10 months in getting Americans back to work and getting our economy moving again,” Biden said in a statement. “That success is a testament to the economic agenda I’ve pursued and to the decisive action that the Federal Reserve has taken under Chair Powell and Dr. Brainard to help steer us through the worst downturn in modern American history and put us on the path to recovery.”
This nomination is timely for the economy’s reopening. Inflation has seen its highest jump in 30 years last month, while growth is slowing after its tumultuous pace in the past year due to COVID spikes triggered by the delta variant.
The next Fed chief faces the delicate task of raising the central bank’s key short-term interest rate from near zero to fight inflation without derailing a recovery that remains solid but faces hurdles such as lingering infection waves, supply-chain bottlenecks and worker shortages.
“We’re at an inflection point from a policy perspective and continuity is very important,” Tom Porcelli, chief U.S. economist of RBC Capital Markets, said of Biden’s decision to pick the even-keeled Powell. Biden is also expected to fill three more vacancies on the Fed’s board of governors by early next year
A former investment banker, private equity executive and lawyer, Powell, 68, was appointed to the Fed’s board of governors by President Obama in 2011 and nominated as chair by President Trump in 2017.
Both Democrats and Republicans support Powell and he faces confirmation in Senate much more easily than Brainard.
“He will be confirmed with a strong vote,” Mills says.
If Powell had replaced the Fed chair during an uncertain economy, “He owns the economic outcome of that leadership change,” Mills says.
Democratic losses in this month’s election, rooted partly in Biden’s sinking approval ratings due to the inflation surge, likely solidified his choice of Powell, who may be perceived as more likely to aggressively fight inflation by raising rates next year, Porcelli says.
Powell’s nomination renews a tradition of U.S. presidents retaining Fed chairs first picked by a president of the opposing party, a string that was broken when Trump tapped Powell over then-Fed Chair Janet Yellen in 2017.
Republican Fed governors are often viewed as more “hawkish,” or focused on hiking interest rates to head off inflation than as “dovish,” or intent on keeping rates low to spark the economy and job growth, while the reverse is true for Democrats. However, this distinction is becoming blurred over the years.
In 2018, Powell, for instance, continued Yellen’s rate hikes as the economy improved slowly after the Great Recession in 2007-09, despite harsh criticism from Trump. Powell, along with the rest of the Fed’s policymaking committee, abruptly halted the hikes the following year amid sluggish growth and a tumbling stock market.
“His policies haven’t shifted” despite political pressure, Mills says.
Powell swiftly reacted to the pandemic that triggered over 20 million job loss in March 2020. He spearheaded a sharp cut in the Fed’s benchmark short-term rate to near zero and a revival of the massive Treasury and mortgage bond purchases that followed the Great Recession to hold down long-term rates.
The following August, with inflation stubbornly below the Fed’s 2% target, Powell led a significant policy shift, with the Fed stating it would wait for inflation to pick up before raising rates rather than preemptively boosting them to stave off a jump in prices, as it has traditionally done. Brainard was the co-author of this new approach.
Powell actually has made it more likely that he is able to achieve his goal of helping millions of Americans return to work, despite inflation worries. His tenure has been tainted by his monthslong insistence that the current inflation bout would be “transitory,” an assessment he recently modified, saying it could last longer than anticipated as supply-chain troubles and workers shortages persist.
He was also responsible for a trading scandal which led to resignations by two Fed bank chiefs.
Last month, the Fed said it would begin scaling back the bond purchases and it’s slated to end them in June. The Fed is then expected to raise rates twice in the second half of 2022 as the economy reaches full employment, according to Fed policymakers’ forecasts.
According to economists, Brainard might have followed a similar path. Even though she was wary of rate rises, she supported raising rates occasionally. Brainard supported gradual rates being raised in 2018 as the economy improved. But, she suggested that these rate increases could need to be increased faster if inflation rose or financial markets become too frothy.
“I don’t see a difference in monetary policy” between Powell and Brainard, Porcelli says. He said both would look to raise the rate two times next year. Powell, however, might move sooner.
Investors, however, likely viewed Brainard as more likely to keep rates low to ensure the recovery doesn’t lose steam, says Tim Duy, economics professor at the University of Oregon and author of the FedWatch blog. He believes that this could have helped push stocks slightly higher.
Brainard, 59, served as an economist in President Clinton’s White House and at the Treasury Department under President Obama before joining the Fed’s board in 2014.
Progressive Democrats backed Brainard in part because she has opposed a Powell-led loosening of bank regulations enacted after the 2008 financial crisis. Her advocacy for planning to address the threats that climate change presents to the banking industry is also more prominent.