Powell’s second term odds increase with Key Yellen approval

(Bloomberg) – Jerome Powell’s chances for a second term as Federal Reserve chairman have gained momentum with the approval of Treasury Secretary Janet Yellen, a move that would reduce uncertainty over the path to monetary policy amid the risks of inflation and the delta variant.

Yellen told senior White House advisers she was in favor of appointing Powell, whose current term ends in February, according to people familiar with the matter. President Joe Biden has yet to decide and is expected to make his choice around Labor Day, which falls on September 6 of this year, people said.

Her support, reported on Saturday, gives Powell a huge boost – given both the weight of his post as chief of the Treasury and her personal stature having herself led the Fed for four years, ending a banking career. power plant that lasted nearly two decades.

Still, Fed Governor Lael Brainard maintains some support within the administration for the Fed chairman post, according to a person familiar with the matter. The former Obama-era official, whom Biden envisioned for the post of Treasury secretary last year, has the backing of progressive Democrats, many of whom work for the Biden team.

“One of the great benefits of keeping Powell in the chair is continuity,” said Derek Tang, economist at Monetary Policy Analytics. “It’s very reassuring in this time of uncertainty. It is a firm hand. The markets see it that way and that’s why it helps.

Powell’s appointment for a new term would need confirmation in the Senate, where there is a partisan 50-50 divide. In recent weeks, GOP senators have backed the current president, who served as Fed governor from 2012 until his rise in 2018, when then-president Donald Trump took over from Yellen for his own second. mandate.

Yellen’s approval comes at an important time. Powell will deliver a long-awaited virtual speech on Friday at the Federal Reserve Bank’s annual Jackson Hole symposium in Kansas City – perhaps indicating when and how the central bank is likely to start withdrawing some of its extraordinary support for the economy .

“This is a great opportunity for him to show off his consensus building skills,” Tang said. Powell will have the opportunity to show the White House and others how he threads the needle in his own committee, given their differing views on when to start withdrawing support for the economy. .

Powell and his colleagues applied a new policy framework – announced at Jackson Hole last year – that modifies a previous approach of raising interest rates to contain inflation based on expectations of jobs and economic growth instead. only results. Investors debated the strategy’s appropriateness at a time of major disruption triggered by a pandemic in supply chains and the labor market. The installation of a new Fed chief in February could increase market uncertainty.

Critics, including Republicans and even some Democrats, have said the Fed risks letting inflation get out of hand for the first time in more than 30 years. They urged Powell to start pulling out the Fed’s massive bond purchases, which help stimulate the economy by removing long-term borrowing costs.

“Monetary policy is at a critical juncture,” wrote economists at Deutsche Bank AG led by Peter Hooper, who previously worked at the Fed, in a note to clients this month. Replacing Powell with someone more accommodating “could prove counterproductive, as it could lead to increased perceived inflation risks, higher bond yields and a lower sense of risk, which would delay the return of the economy to its pre-pandemic state “.

Brainard option

Biden administration officials have studied speeches and comments from Brainard, who is seen as a more liberal candidate who moves closer to Biden’s economic agenda and is much more of a hawk when it comes to banking regulation. Brainard’s nomination would win praise from progressive Democratic senators, but it would set up a deadly confirmation fight – potentially even a 50-50 Senate vote with Vice President Kamala Harris as the tiebreaker.

While many top Democrats have praised Powell, Unified Democratic support is not a given. Senators Sherrod Brown and Elizabeth Warren declined to say whether they would back him for another term, both criticizing Powell’s handling of financial regulation on issues such as bank share buybacks.

Several more openings are pending at the board, giving Biden a chance to put his mark on the Fed and remake it after Trump’s five picks.

In addition to Powell, Biden has the option of replacing the vice president of oversight, who oversees banking regulation, a position now held by Randal Quarles and the vice president position now held by Richard Clarida, as well as an open seat at Fed board of directors.

Inflation readings

Meanwhile, inflation – an economic phenomenon that has barely entered U.S. politics for 40 years – represents a vulnerability in the 2022 midterm elections.

Most recent readings remain high: the consumer price index rose 5.4% in the 12 months to July, although it fell from the previous month for the first time since November .

The concerns surfaced this month when data showed consumer confidence in early August fell to its lowest level in nearly a decade according to one measure, and US retail sales fell in early August. July more than expected.

“Inflation-linked assets should benefit significantly” if Brainard were named Fed chairman, analysts at Wells Fargo & Co., including Mike Schumacher, head of macro strategy, wrote this month. They predicted a widening of the yield spread between inflation-linked T-bills and T-bills as a result of the news.

However, the Wells Fargo team also said, “To be clear, we and the online marketplaces still expect Powell to retain its seat.”

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