OF ALL AMERICA’S many job openings, this was the most important. On November 22nd President Joe Biden announced that he would renominate Jerome Powell as chairman of the Federal Reserve when his current term expires in February. Investors and analysts had long expected the reappointment, with initial reports suggesting that it would come nearly three months ago. The delay reflects a worrying pattern of indecision and gaps in personnel appointments by the White House. None are more crucial than naming the head of the Fed, a position with outsized power over the economy. So it is reassuring that Mr Biden has at last made the obvious choice, opting for a steady pair of hands at a time of economic danger.
Mr Powell must now confront two broad challenges. The first, and by far the most pressing, is how to tame inflation, now running at its highest rate in more than three decades. Mr Powell was rightly commended for presiding over a prompt, forceful response to last year’s pandemic-induced slowdown. Unwinding those stimulus policies will be even more treacherous. With consumer prices up by 6.2% in October compared with a year earlier, and likely to rise still higher in coming months, the Fed is under clear pressure to act.
That, however, is more complicated than it sounds. Before raising interest rates, Mr Powell has all but committed himself to bringing the Fed’s quantitative easing to a halt—that is, halting its monthly purchases of bonds that helped reinvigorate the economy over the past 20 months. The Fed is starting to reduce, or taper, its asset purchases this month, but it is only on track to stop them altogether by June 2022. This means that a first rate increase is still at least half a year into the future.
The immediate question for Mr Powell, then, is whether to taper more quickly. Doing so would be sensible. As it stands, even if the Fed is reducing its monthly purchases, it is still pumping cash into the financial system at a time when the stockmarket is near record highs and interest rates, in inflation-adjusted terms, are deeply negative. Moreover, an earlier completion of the taper would give the Fed more options. It need not commit itself to raising rates early next year, but it would be wise to have that on the menu.
Yet it would take courage for Mr Powell to do this. Scarred by its first experience with tapering back in 2013, when global markets panicked at the mere hint of it, the Fed has carefully telegraphed its moves to investors this time around. “If suddenly you have a new taper schedule and, critically, it has clear implications for rates, you are rolling the dice as to the market reaction,” says Krishna Guha of Evercore ISI, an advisory firm. But sticking to gradual tightening as inflation gallops higher is just as big a gamble. Over the past year the Fed has consistently underplayed the inflationary threat, forecasting that prices would be lower than they actually are. That cannot continue. The shift to tighter policy will be a decision for the entire Fed board, but as chairman Mr Powell must steer the discussion in that direction before it is too late.
The other big challenge for Mr Powell is the question of the central bank’s fundamental role. The principal alternative candidate to lead the Fed was Lael Brainard, a governor on the Fed’s board who was favoured by the progressive wing of the Democratic Party. Mr Biden has nominated her to be vice-chairwoman, giving her more influence over big decisions. She and Mr Powell have differing views in three areas: how to regulate banks; how to approach climate change; and whether to launch a digital version of the dollar. Over the course of Mr Powell’s second four-year term, all of these questions will come to the fore.
Under Mr Powell the Fed has slowly chipped away at some of the rules erected to make the banking system safer after the global financial crisis of 2007-09. This deregulation earned Mr Powell the enmity of left-wing Democratic politicians, including Elizabeth Warren, a senator, who called him a “dangerous man”. Ms Brainard, by contrast, regularly voted against these relaxations. Most of the rule changes have in fact been relatively mild and, most importantly, banks’ capital buffers are much higher than a decade ago. But with Ms Brainard now second only to Mr Powell, the signal to banks is that the regulation may tighten. (The White House is, however, yet to fill the important role of vice-chair for supervision, which was occupied until October by Randal Quarles.)
On climate, Mr Powell has encouraged financial institutions to weigh global warming in their thinking about future risks, but he has also said that climate change is not a big factor in the central bank’s own decisions. That is defensible: the Fed must keep its focus on the economy and leave the environment, in the main, to other parts of the government. But Ms Brainard wants the climate to figure more prominently in the Fed’s calculus. Mr Powell must find a way to accommodate that demand without it becoming a distraction.
Similarly, Ms Brainard has called for the Fed to launch a “central bank digital currency”, to ensure that the dollar remains the dominant global currency in the 21st century. Mr Powell’s longstanding position is that he wants the Fed to study the matter further, saying that it is better to be right than to be first. At least he need not worry about being first: China is already well ahead of America in the digital race.
Mr Powell will, in short, have a crowded agenda over his second term. And he just has to start with the simple matter of quelling inflation without crashing the economy. Time to get to work.
Source: Finance - economist.com
