Update 553 — Last Rodeo at Jackson Hole?
Rush to Renominate Fed Chair Powell Slows
Investors and observers await Federal Reserve Chair Jerome Powell’s speech tomorrow at the Kansas City Fed’s annual Jackson Hole Conference. Issues abound: inflation, the still-recovering labor market, tapering down Fed’s balance sheet, and the economic uncertainty from the Delta variant. Unspoken is whether this will be Powell’s last year chairing the Fed.
Powell’s term ends in six months, plenty of time for conjecture and for candidates to emerge. What aspects of Fed policy might reflect a campaign for Chair, by Powell or others? All things being equal, should President Biden re-nominate Chair Powell for another four years?
Here, we review Biden’s options for Fed Chair and other upcoming Fed nominations.
Reports earlier this week indicate that Treasury Secretary Janet Yellen supports Powell’s renomination, and the administration’s mixed signals since suggest that the administration is carefully weighing this crucial nomination. The administration would do well not to rush this decision, though reports indicated one is expected around Labor Day.
From a progressive standpoint, Powell’s record has been mixed — commendably flexible, innovative monetary policy in pandemic conditions combined with a steady weakening of critical Dodd-Frank big-bank regulations and a legacy of market concentration.
A Chance to Reshape the Fed
President Biden will soon make several key nominations for the Fed’s Board of Governors, which currently has five Republicans, one Democrat, and one vacancy. These nominations will signal how far Biden is willing to go to reshape the Board’s ideological composition.
- Chair: Powell’s four-year term as Chair of the Board of Governors ends in February. In recent years, presidents have typically renominated the Chair for a second term — a practice broken by Donald Trump when he named Powell in 2018 instead of renominating Janet Yellen. We explore the dynamics behind Biden’s decision on this nomination in detail below.
- Vice Chair: Richard Clarida was nominated as Fed Vice Chair by Trump, and his four-year term is set to expire in January. As the No. 2 position at the Fed, the Vice Chair directly oversees monetary policy decision-making. The administration has not signaled whom Biden might nominate to replace Clarida in this position.
- Vice Chair for Supervision: This position is relatively new but extremely important. The role, created by the Dodd-Frank Act, has only had one occupant: Trump appointee Randal Quarles. The VC for Supervision has the consequential, but often overlooked, responsibility of managing the Fed’s role as the primary regulator for the country’s biggest banks. Quarles, whose four-year term ends in October, has overseen a roll back of regulation over the last four years. An appointee with a more aggressive view on regulatory policy would send a strong signal to Wall Street.
- Open Governor Seat: In 2019, Trump nominated Republican operative and Fed critic Judy Shelton for this open seat. Sheldon’s extreme views on monetary policy (including support for the gold standard) led to the Senate defeating her nomination late last year. Biden is reportedly considering nominating Michigan State professor Lisa Cook or AFL-CIO economist William Spriggs to this spot. Both have solid progressive credentials. How this seat is filled could depend on whether Clarida and Quarles serve their full terms as Governor after their Vice Chair terms expire.
Key Decisions Ahead for the Fed
With his job as Fed Chair potentially on the line, Powell’s speech tomorrow will be watched closely both in terms of the tone he strikes and any new policy decisions he indicates may be coming. Inflation also remains a key unknown — an unexpected spike in prices in the near term could significantly impact Powell’s chances of renomination.
Powell’s Jackson Hole speech comes amid a period of economic uncertainty, as the COVID-19 Delta variant may slow and incomplete recovery. Powell is expected to clarify the flexible average inflation targeting framework unveiled last year. Analysts and the market believe he is unlikely to indicate when and how the Fed will begin to taper its monthly asset purchases — a sign of uncertainty in the trajectory of the recovery.
The Federal Open Market Committee’s July meeting highlighted the key upcoming decisions facing the Fed as the economy produces mixed signals, including GDP exceeding its pre-pandemic peak but stubbornly deep unemployment. The meeting minutes indicate members are increasingly willing to begin the process of tapering asset purchases this year.
The FOMC is expected to decide on tapering in the coming months. But Powell and other members might be less willing to start the process if the Delta variant impedes the economic recovery. A delay in tapering would reaffirm Powell’s dovish credentials. Whether Powell maintains this dovish stance may indicate both his views on the economic recovery and his desire to be renominated by a White House that undoubtedly supports a continued accommodative monetary policy.
Assessing Powell’s Renomination
Biden will weigh competing instincts on Powell’s renomination: He could take the route perceived by many as “safer” by choosing Powell, or he could take this opportunity to influence the future of Fed policy. The decision is complicated by Powell’s mixed record:
- Monetary Policy: Powell’s record on monetary policy has been generally unimpeachable. The Fed took swift action at the start of the pandemic that likely prevented a widespread financial collapse from occurring, and Powell was a vocal proponent of fiscal stimulus from Congress. Powell has kept interest rates at zero and has prioritized supporting the economic recovery and labor market. The Fed’s new monetary policy framework places a greater emphasis on its maximum employment mandate, a welcome development after decades of hawkish monetary policy at the Fed.
- Bank Supervision: Powell’s tenure as Chair also marked a significant shift in financial sector regulation in favor of the banking industry, with the Fed rolling back many post-2008 standards. Powell’s Fed weakened supervisory stress test programs, diluted liquidity and margin requirements, and softened living wills and risky investment restrictions. These actions introduced significant new risk into the financial sector — and contrast directly with the financial policy agenda on which Biden campaigned.
The conventional wisdom is that renominating Powell would be Biden’s “safer” route, but this may be misguided. The market would not react poorly if Biden were to instead nominate Lael Brainard — just as it did not when President Obama nominated Yellen to the post in 2014. Brainard is an experienced public servant with a solid center-left record. Her views on monetary policy align with Powell’s this past year and a half, but she has been a key dissenter on many of Powell’s deregulatory decisions since 2018. For Biden, choosing Brainard may be just as “safe” as renominating Powell, but with the added benefit of having a Chair much more aligned with progressive financial regulatory policy priorities.
Personnel is Policy
President Biden’s impending decision on Powell’s renomination will have significant implications for monetary, supervisory, and regulatory policy. If Biden gives Powell a second term, will he then nominate progressives like Brainard to be Vice Chair or Vice Chair for Supervision? Doing so could signal a new course at the Fed, but those individuals’ ability to shape policy could be constrained by Powell as Chair. The administration should not look this gift horse of an opportunity to reshape Fed in the mouth, fleeting as it is. Once appointed, Fed Governors serve long terms and make decisions famously independently, from which there is no appeal.