In the end, President Biden bet that Federal Reserve executives could finish what they started.
Jerome Powell, who was re-appointed as head of the central bank on Monday, and Lael Brainard, a Fed governor newly appointed to be his number 2, had led the economy from the depths of the pandemic to its current place – a market robust labor coupled with very high inflation. Mr. Biden’s bet is that they are in the best position to try and subdue the latter without defeating the former.
Another way to put it: Mr Powell’s big challenge in the second term is trying to undo some of the nasty side effects of his actions in the first term without accidentally causing a recession.
The decision is not without risk for Mr. Biden. High inflation is weighing on his approval ratings, and in polls, Americans say they are deeply dissatisfied with the economy despite low unemployment, a booming stock market and strong wage growth. If Mr. Biden were to switch to the “whip inflation now” mode, the clearest way to do so would be with his power to appoint the single U.S. government entity most explicitly charged with keeping prices stable.
Instead of taking a sharp turn, the president instructs Mr. Powell and Ms. Brainard – who has been a key player in the Fed throughout the economic response to the pandemic – to wean the economy off its rate regime. zero interest and other forms of monetary currency. stimulate without starving it.
Chances are, as seasoned central bankers who have credibility with the markets, they will have more ability to thread that needle than new faces.
“Why don’t I pick fresh blood or take the Fed in a different direction? Mr. Biden said at an event in the afternoon announcing the nominations. “Said directly, at this time of both enormous potential and enormous uncertainty for our economy, we need stability and independence at the Federal Reserve.”
If the Fed acts too cautiously to end this period of very cheap money, it could fuel the inflationary psychological momentum that may already be setting in. In this cycle, high spending levels, rising consumer prices and rising wages for workers fuel a spiral that creates a lot of discontent without letting anyone do better.
But if they were to accelerate the pace of interest rate hikes, the risks are opposite. It’s easy for the Fed to break things when it raises interest rates, as the world saw most notably at the end of 2015, when a shift to a stricter currency caused a sharp pullback in l heavy industry, agriculture and related fields. Many financial markets seem more bubbling today than they were then, and anyone can guess what could happen to stocks and countless other risky assets if the Powell Fed in the second term leaned towards monetary tightening.
The economic recovery, while robust so far, may not be firmly entrenched. The unemployment rate is low at 4.6%, but that masks millions of people who have dropped out of the workforce. And it’s not yet clear how many of them will return as the effects of the pandemic wear off.
Mr. Powell and Ms. Brainard have spoken repeatedly about the importance of keeping an open mind about the strength of the labor market and the human costs associated with preemptive termination of a job resumption. They will be reluctant to take steps that might prevent further healing in the labor market.
“I am committed to putting American workers at the center of my efforts at the Federal Reserve,” Ms. Brainard said Monday.
It was Mr Powell’s emphasis on creating as strong a labor market as possible that likely secured his re-appointment, against the wishes of many progressives. While acknowledging his commitment to full employment, many on the left – and at least three Democratic senators – had wanted a candidate with a nicer philosophy on regulating the financial system and using the powers of the Fed to try and fight. against climate change.
So what did Mr. Biden gain with his choice for continuity in the two main central bank positions, a move that disappointed key allies on the left?
Mr. Powell and Mrs. Brainard are known quantities. Now a newly created central banker will no longer have to face the typical hurdles that come with entering the world’s most important economic policy post. Mr. Powell and his predecessors Janet Yellen and Ben Bernanke each had difficult communication challenges during their first few months.
The decision to re-elect Mr. Powell, a Republican and former private equity executive who was appointed head of the Fed by President Trump, is also a slight move of bipartisanship. Its confirmation in the Senate should be a notch easier than the alternatives. This assumes that enough Republican senators vote to confirm it to make up for defections on the left, including those telegraphed by Senators Elizabeth Warren, Jeff Merkley and Sheldon Whitehouse.
“Especially now in such a politically divided nation, I think we need to do all we can to eliminate the bitter partisanship of the current politics of something as important as the independence and credibility of the Federal Reserve,” Mr Biden said.
Notably, Mr Biden did not accompany his appointments of Mr Powell and Ms Brainard with two other key Fed appointments: for an oversight vice president or an open governor’s seat. The president will come under intense pressure from the left to use these vacancies to include candidates with a more aggressive regulatory bent and to add racial diversity to the seven-member board of governors. (The current six members are white.)
None of this changes the basic malaise that the Powell Fed now finds itself in.
Inflation, for now at least, is well above the Fed’s 2% target, and the labor market is strengthening rapidly. Yet its monetary policies resemble those of 2014, when the labor market was limping and inflation was below the Fed’s targets.
Can Mr. Powell lower inflation without breaking the economy? Mr Biden is betting that the answer is yes, and the success of his presidency may depend on it.