Seven months and ticking, the case for keeping Powell as Fed chair builds

7 Minute Read by, (Reuters) – WASHINGTON (Reuters) – With the US Federal Reserve in the midst of a difficult policy transition, central bank analysts believe Jerome Powell will be re-nominated for a second four-year term as Fed chairman, a view reinforced by Powell’s status inside the Biden administration and a Senate that is closely divided. FILE PHOTO: Federal Reserve Chair Jerome Powell appears on Capitol Hill in Washington, D.C., on June 22, 2021, during a hearing on the coronavirus outbreak held by the House Oversight and Reform Select Subcommittee. REUTERS/File Photo/Graeme Jennings/Pool President Joe Biden’s advisers say he hasn’t decided whether to reappoint Powell, a private equity lawyer appointed to the Fed’s Board of Governors by Barack Obama and promoted to the top job by Donald Trump, whose current term ends in February. However, a number of variables appear to be working in his favor, with many Democratic economists applauding Powell’s change to a more jobs-focused monetary policy amid a difficult labor market situation. Two senior Biden administration officials told Reuters that they are pleased with Powell’s handling of the pandemic recovery, acknowledgment of Biden’s fiscal program’s economic support, and management of an increasingly problematic inflation environment. Furthermore, with approximately half a year left in Powell’s term, little evidence has surfaced that Biden intends to flip – and risk market repercussions if he does – at a critical time for the economy. Prior Fed leadership transitions have occurred amid relative policy clarity, rather than on the eve of potentially divisive issues like when to phase out crisis-era bond purchases or how to deal with a possibly long-term spike in inflation. Powell’s policy change is depicted graphically. “Uncertainty about who will be the next chair translates straight into policy concern, which leads to market uncertainty,” Cornerstone Macro analyst Roberto Perli said. “Coworkers may be less willing to accept cues from a chair that might or might not be there in a few months,” Powell says. “If he’s a lame duck, you’re kind of in no man’s land for a bit,” said Sarah Binder, a political scientist and Fed historian at George Washington University. “And, more importantly, who can be confirmed? I can’t think of somebody more dovish on monetary policy who would get 50 votes automatically and easily. And I’m guessing (Biden) is hoping for a vote of 70 to 80 percent.” Holdings stable (graph): ON THE HEIGHTS Powell is scheduled to testify before the Senate Banking Committee on Thursday as part of the twice-yearly congressional assessment of monetary policy and the economy. The committee, which is chaired by Ohio Democrat Sherrod Brown, is the first stop in the confirmation process for anybody Biden picks in the 100-member Senate, which is evenly split between Democrats and Republicans. Powell would be in peril if top Democrats on the panel took a united stance against him. While Brown and Massachusetts Senator Elizabeth Warren have attacked the Federal Reserve’s efforts to loosen bank regulation during the Trump administration, this issue may have a remedy of its own. The Fed’s vice chair for regulation, Trump appointment Randal Quarles, has a leadership term that ends in October, giving Biden a means to influence bank oversight separate from the Powell decision. If not reappointed, Vice Chair Richard Clarida, who helped create the stage for the Fed’s new structure, would step down at the end of January. Another position on the Fed’s seven-member board, which is presently vacant and whose term expires in January next year, would be available. Brown’s objective, according to a source familiar with his thinking, is to toughen up on Wall Street and diversify an all-white Federal Reserve board. Meanwhile, two Republicans on the Senate panel, North Carolina’s Thom Tillis and Montana’s Steve Daines, told Reuters that they back Powell’s re-election. AN EXTREMELY RARE CHANCE The Biden administration sources’ signals of appreciation for Powell’s performance were repeated by some of the most influential voices in Democratic policy debates. “To replace him now would be a signal that something is profoundly wrong, and I don’t believe they believe that,” said Josh Bivens, research director at the Economic Policy Institute, a pro-labor think tank that helped the Fed debate how to restructure monetary policy to encourage more employment. “Powell has taken a significant step toward transforming the Federal Reserve into a progressive force.” Others argue that Biden should look more broadly about the situation, while acknowledging that inertia alone favors Powell at this stage. “It is probably right that is how it will unfold,” said Dennis Kelleher, CEO of think tank Better Markets, with Powell reappointed as chair and Quarles replaced by “someone with serious alignment” with Biden’s priorities and promise of tougher Wall Street oversight.But “if Powell gets reappointed just because of status quo, inevitability it is a missed opportunity for the Biden adm.” EXTREMELY IMPORTANT MOMENT Because the Fed prefers consensus, its most critical decisions are designed to endure changes in staff. The road for continued interest rate hikes was firmly determined when Powell took over from Janet Yellen in 2018. When Yellen took over from Ben Bernanke four years ago, the Fed’s bond-buying program from the financial crisis was winding down. The Fed’s leadership has not been up for change in a time of broad policy uncertainty since Jimmy Carter’s presidency in the 1970s. The Fed is expected to decide how to wind down its $120 billion in monthly bond purchases by the end of the year, as well as assess whether the current bout of inflation is as short-lived as expected – issues that could put any Fed chair’s credibility to the test, especially one who may be on his way out. The absence of clear trial balloons or leaks, just seven months before Powell’s term ends, means that either the Biden administration is exceptionally good at withholding information, or inclined toward continuity, according to Howard University and AFL-CIO economist William Spriggs, a possible candidate for the open board seat himself. “You’d have to notify us” in time to construct the case for a replacement if they aren’t going to renominate, he added, given the Senate’s dysfunction. Howard Schneider contributed reporting, while Dan Burns and Andrea Ricci edited the piece./nRead More