President Joe Biden Re-nominates Jerome Powel as Fed Chair

One of the most critical decisions that President Joe Biden took in the recent past was re-nominating Jerome Hayden Powell as Chair of Fed on November 22, 2021 and nominating Dr Lael Brainard as Vice Chair of the Board of Governors of the Federal Reserve System, hoping that the leadership of these two will deliver: one, “focus on keeping inflation low, prices stable and delivering full employment”, and two, by addressing the “economic risks posed by climate change” and staying “ahead of economic risks in our financial system”, will make the US economy “stronger than ever before”.

Much against the wish of the left wing of his party, and ignoring the equally strong candidature of Lael Brainard, by nominating a Republican and a former private equity lawyer whom former President Trump had elevated for the first time to the Fed’s Chair, President Biden not only established his own independence but also kept alive the bipartisan approach that has been practised in the recent decades to fill the position of Fed Chair.

Over it, “for the first time in 30 years inflation has become the salient political issue”, in the US. On one hand the team ‘transitory’ asserting that it is the pandemic-induced bottlenecks that disrupted supplies leading to price rise, argue that the current price rise is a transitory phenomenon and needs no action. They are even arguing that a small rise in prices is indeed beneficial, for inflation expectations were too low during pre-pandemic period.

As against this, the ‘permanent’ block argues that temporary bottlenecks are not the only forces that are pushing prices. They fear that persistence of inflation is likely to emerge from sharp rise in spending that is mostly resulted from the very large fiscal stimulus launched to fight the pandemic blues. According to them, monetary authorities have failed to temper this demand. There is thus a common feeling among certain economists that Powell is not proactive enough in the fight against inflation.

Joseph Stiglitz, commented in a column that Powell “supported former President Donald Trump’s deregulatory agenda, risking the world’s financial health”. A similar feeling is expressed even by some of the democrats: he is “too soft as a bank regulator.” Stiglitz also observed that Powell is “reluctant to address climate risk though other central bankers around the world are declaring it the defining issue of the coming decades”. He wonders that Powell might say “that climate issues are not included in the Fed’s mandate” which in his opinion is wrong because, there is no greater threat to financial stability than climate change.

As a member of the Fed Board of Governors, Powell, according to Stiglitz, “has a history of misjudgements in tightening monetary policy dating back to the ‘taper tantrum’ of 2013”.  There is yet another criticism that came up recently against the Fed: ethics scandal involving market trades during the pandemic made by top Fed officials that benefited them financially. Perhaps, taking all these aspects into consideration, Stiglitz opines that the US “needs a Fed that is genuinely committed to ensuring a stable, fair, efficient and competitive financial sector”.

Indeed, he subtly favours Lael Brainard, who “has already shown her mettle” while being on the board already. Incidentally, Kenneth Rogoff, former Chief Economist of IMF, while opining that Lael Brainard might have proved to be an excellent choice, observed that she still would have “required a period of adjustment for markets to understand her language and signals” whereas re-nomination of Powell made Fed policy more predictable and easier to interpret” for the markets, more so in the post-pandemic economic scenario, where the economy is “still incredibly volatile.”

Over and above all these arguments, one factor must be borne in mind: Chairman of the Federal Reserve of the US, the world’s largest economy and de facto reserve currency, is a very important position. For, Fed Chairman enjoys a greater say in the realm of economic policy. The Chair could even assert enormous influence on the behaviour of economy by timing interest rate cuts in such a way that it favours the sitting President in the elections.

Amidst such a scenario, re-nomination of Powel as Chairman calls for political gumption and that’s what President Biden, unlike his predecessor, exhbited to ensure the independence of the Fed. And this in turn ensured that the US has a seasoned hand at Fed to steer the economy through the post-pandemic recovery.                                                

Simultaneously, Biden, being a seasoned politician, calling Lael Brainard “one of the country’s most qualified and dedicated public servants” who is committed to “getting inflation down…”, nominated her to Fed as Vice Chair. This move shall simultaneously take care of the anxiety of a section of the Democrats about Powell being “too soft as a bank regulator”, for Brainard is a known stricter on the banking industry.

With this duo at the helm of affairs, let us hope that America’s economy will be “able to recover from a once-in-a-generation health and economic crisis”, which in turn shall pave the way for global economy to rebound from the ills of the Covid-19.