Federal Reserve Chairman Jerome (Jay) Powell is set to remain the steward of the United States economy after President Joe Biden on Monday nominated him for a second, four-year term.
Fed Governor Lael Brainard, who had been touted as a possible replacement for Powell in the top job, was tapped by Biden to be the Fed’s vice chair – the second most powerful position within the US central banking system.
During a press conference on Monday, Biden lauded Powell for his leadership during the unprecedented economic and financial upheavals caused by the COVID-19 pandemic.
“When our country was haemorrhaging jobs last year and there was panic in our financial markets, Jay’s steady and decisive leadership helped to stabilise markets and put our economy on track to a robust recovery,” said Biden.
Powell was nominated for his first term as Fed Chair by former President Donald Trump, who repeatedly broke with White House tradition by criticising Powell and the Fed for not bending to his wishes on interest rate policy.
On Monday, Biden noted that his decision to renominate a Fed chief who had been put in the job by a Republican administration was partly due to Powell’s insistence on maintaining the Fed’s independence during the Trump years.
“In the last administration, he stood up to unprecedented political interference and in doing so successfully maintained the integrity and credibility of this institution,” said Biden.”It’s just one of the many reasons Jay has support from across the political spectrum.”
Biden also highlighted Powell’s efforts to bring the economic impacts of climate change more firmly into the Fed’s focus when crafting policy.
“He’s made clear to me, a top priority will be to accelerate the Fed’s effort to address and mitigate the risk that climate change poses to our financial system,” said Biden.
In the run-up to Monday’s announcement, speculation was rife that Biden could nominate Lael Brainard for the Fed’s top job. The only Democrat on the Fed’s Board of Governors, Brainard has carved out a reputation for being worker friendly and tough on Wall Street that has made her a favourite of progressives in Washington.
By selecting Brainard to be Powell’s number two at the Fed, Biden said he is ensuring the central bank’s leadership has broad support across the political spectrum.
“Especially now in such a politically divided nation, I believe we need to do everything we can to take the bitter partisanship of today’s politics out of something as important as the independence and credibility of the Federal Reserve,” said Biden. “That is why I am so proud as well to nominate Dr Lael Brainard to serve as vice chair of the Federal Reserve.”
Balancing jobs and inflation
The US central bank has a dual mandate to achieve price stability and maximum employment. But finding the right policy mix to achieve those goals has become the subject of heated debate this year.
After years of subdued inflation that trended below the Fed’s target rate of 2 percent, price pressures have come roaring back with a vengeance, thanks to supply-chain snarls and shortages of raw materials and workers that have increased costs for businesses.
Firms, in turn, are passing at least a portion of those higher costs on to consumers. Last month, US consumer prices accelerated at their fastest annual pace in 30 years.
But despite mounting price pressures, Powell and his fellow policymakers have continued to prioritise getting Americans back to work, even as businesses struggle to fill a near-record number of job openings and workers feel so confident about their employment prospects that they are quitting their jobs at a record rate.
The most powerful tool at the Fed’s disposal for reining in higher prices is its benchmark interest rate, which it slashed to near zero during the opening days of the pandemic last year.
If the Fed raises interest rates too soon, it could potentially derail the recovery by discouraging economic growth. But if it waits too long to declare liftoff, prices could spiral out of control, forcing an even more dramatic interest rate hike.
Wages are rising for American workers, as employers attempt to lure scarce job seekers with better pay and benefits. But fatter paycheques are not keeping up with inflation.
Moreover, higher prices for essentials like food, energy and rent are disproportionately hurting lower-income households – a hardship noted by Powell during his joint press conference with Biden on Monday.
“We know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials, like food, housing and transportation,” he said. “We use our tools both to support the economy and a strong labour market and to prevent higher inflation from becoming entrenched.”
So far, Powell and his fellow policymakers at the Fed have insisted that this year’s inflation spike will prove “transitory” – a word that Powell has acknowledged is subject to interpretation.
During its last policy-setting meeting, the Fed determined that the economy had recovered enough to start tapering bond purchases that have helped keep a lid on longer-term borrowing costs. But Powell said at the time that the process of starting to dial back that stimulus should not be taken as a signal that the Fed is getting ready to raise interest rates as well.
Many Fed watchers see Powell’s renomination on Monday as confirmation that the US central bank is on track to start hiking rates sometime near the middle of next year.
“The continuity in Fed leadership likely signals continuity in the current monetary policy stance, and we continue to expect liftoff shortly after tapering ends, with the first hike in July 2022, the second in November, and a pace of two hikes per year thereafter,” said Goldman Sachs economists led by Jan Hatzius in a note to clients on Monday.