Federal Reserve Chairman Jerome Powell had a rocky start and a cool reception when he took the central bank helm. Now, the Trump appointee’s biggest fans are some of the progressive lawmakers who voiced skepticism about how a non-economist would fare in one of the world’s most influential banking posts.
Powell’s term as chairman is up in early 2022, leading to speculation about whether or not President Joe Biden will choose to reappoint him or replace him.
Fed watchers say Biden has a unique opportunity to reshape the Fed’s influential board of governors to align more with his administration’s priorities. In addition to Powell, two members appointed by President Donald Trump have terms that end during the Biden administration.
Vice President for Supervision Randal Quarles’ term in that position ends next year. He would still be on the Fed’s Board of Governors, but there is speculation that he would be likely to depart rather than remain after his former role goes to someone else. Board member Richard Clarida’s term ends next year, and there is a current vacancy on the board, due to the inability of Trump nominees Stephen Moore and Judy Shelton to garner enough Senate support to be appointed.
“He has the potential for a real shakeup of the Fed board,” said James McCann, deputy chief economist at Aberdeen Standard Investments. “It's a very significant chance. I think it’s an opportunity there to really reshape how the Fed board leans in terms of policy, in terms of not just that classic hawkish versus dovishness, but also thinking about those broader issues.”
In Powell’s biannual testimony to Congress this week, these tensions were on full display. Despite Powell’s Republican bona fides, he has come under increasingly sharp criticism from the GOP in Congress for a commitment to accommodative monetary policy. In the House, ranking member of the House Financial Services Committee Patrick McHenry, R-N.C., said Powell deserves another term, saying he’s been a “steady hand,” although he also criticized using central bank policy to address broader and less explicitly monetary issues like climate change.
Over in the Senate, ranking member Pat Toomey, R-Pa., leveled sharper criticisms at the central bank, saying the extension of accommodative policy put the Fed at risk of being “behind the curve” when it comes to rising prices. “Past experience has shown it’s very difficult to get the inflation genie back in the bottle,” he said.
Powell, while reaffirming the Fed’s longstanding belief that the current inflation pressures are transitory, acknowledged that they are higher than policymakers expected. “This is not moderately above 2 percent… This is well above,” he said. “This is a shock going through the system.”
Like McHenry, Toomey also criticized the Fed’s more inclusive policy outlook that touches on climate change and racial equity, saying these topics were “clearly beyond the Fed’s mission and expertise.”
Powell also faced challenges from Democrats. Senate Committee Chairman Sherrod Brown, D-Ohio, pushed the Fed to do more on the regulation of big banks, and a number of Democratic lawmakers pushed him to elaborate on how racial minorities and low-income families have been disproportionately affected by the harmful economic effects of the pandemic.
To some extent, this kind of jockeying is typical. “The questions always have a bit of partisan tilt, as people try to make their political points through this,” McCann said.
McCann noted, though, that despite the picture of exploding inflation painted by Congressional Republicans, Wall Street does not seem to share the tenor of that concern. “I think the market is more closely bought into the Fed's view that a lot of the short term numbers are transitory,” he said. “It’s not to such an extent they think this is something that will threaten the business cycle.”
Observers say potential contenders to replace Powell who are already part of the policymaking apparatus include current Fed Governor Lael Brainard and Atlanta Fed President Raphael Bostic. Brainard has pushed back on some Trump-era Fed moves to loosen banking regulations, a key progressive priority.
“While I do believe the odds are that President Biden will reappoint Chairman Powell, I am highly confident that the only person he would replace him with is Lael Brainard,” said David Bahnsen, chief investment officer, The Bahnsen Group. “The truth is that Brainard’s ideology appears to be a moving target, so while she is accurately portrayed as left-leaning and progressive, she has shifted in various aspects of her monetary philosophy,” he said.
Bostic has been vocal about how racial inequity weighs on the nation’s economic growth — another important topic for the left. Appointing Bostic would also give Biden the distinction of installing the first Black Fed Chairman. Bostic, though, has recently expressed more hawkish sentiments on inflation.
There are other strong arguments in favor of keeping Powell — not the least of which is that the country remains overshadowed by the Covid-19 pandemic. Powell himself touched on concerns about Covid spread during his testimony. “I worry that could undermine the economy and, ultimately, financial stability,” he said.
He is a known quantity and one whose policy trajectory aligns with current Wall Street interests, said Mitchell Goldberg, president of ClientFirst Strategy. “Powell is respected by market participants for being forthcoming, open minded, and for having a firm grasp of the global economy. Not to mention that investors prefer money printing and patience over tightening monetary policy too early,” he said.
“It’s going to be a close call. On balance, we think he’ll get the nod, we think he’ll be reappointed,” McCann said. The biggest point in Powell’s favor, McCann said, is that much of the Fed’s recent activities have roughly aligned with the administration’s goals. “The policy agenda he's delivering is pretty close to what the center of the Democratic caucus would want,” he said. “He’s been very important in trying to raise the profile of labor market equity and the impact of crises on communities.”
Stephen Myrow, managing partner at policy research consulting firm Beacon Policy Advisors, noted that the divisions among lawmakers go deeper than Democrat versus Republican. “There’s a party line breakdown for sure, and I think there's even a bit of an intra-party breakdown among Democrats,” Myrow said. “You're seeing knife fights over every single position.”
Myrow said that having so many positions open could give Biden political cover to reappoint Powell, then assuage the left flank of his own party by choosing someone favored by progressives for one of the other open spots. “If he were to reappoint Powell, it means he’s got to give progressives a win on the vice chair for supervision,” he said.