The world’s most powerful central banker is under pressure to keep his job

A decision on who will be the world’s most powerful central banker is imminent amid severe disagreements among the US Democrats over the direction and priorities of the US Federal Reserve Board.

With Joe Biden expected to announce whether Jerome Powell’s four-year term will end or be extended at any moment, the choices he makes about the composition of the Fed’s leadership has potentially profound implications, not just for the US economy or financial markets, but the global economy and markets.

Fed chairman Jerome Powell has critics from both sides of US politics.Credit:AP

Powell is under pressure from both the “progressive” elements within the Democrats and the “hawks” within the Republican Party as well as elements of the business and financial markets communities.

For the progressives, he appears to be too keen to begin the tapering of the Fed’s $US120 billion ($162.3 billion) a month of bond and mortgages purchases soon but, more significantly, they argue he has been too soft on bank regulations and not aggressive enough in using the Fed’s authority and powers to promote action on climate change.

For the conservative critics, the Fed’s insistence that a surge in inflation is “transitory” and its shift in policy from proactively acting against a threat of inflation to reactively responding once it is clearly entrenched risks an economic and markets disaster if it is proved wrong and has to slam on the brakes.

The Fed has more than doubled its balance sheet since the pandemic emerged – it has bought about $US4.3 trillion of government and corporate bonds and mortgage securities – and they want to see those purchases tapered and, eventually, interest rates increased to avert that threat.

Biden has an opportunity to remake the Fed.

Powell’s term expires next February, the term of his vice-chairman (who’s also the key banking supervisor), Randal Quarles, ends next month and there is an open seat on the Fed’s board – the one Donald Trump desperately but unsuccessfully tried to fill in the immediate aftermath of the 2020 election.

It’s not a straightforward choice. The convention, before Trump, was to reappoint the sitting chair for a second term to provide continuity and reassurance of policy consistency. Trump broke with precedent in 2017 by denying Janet Yellen, now Biden’s Treasury Secretary, a second term and appointing Powell.

Powell, originally appointed to the board by Barack Obama in 2011, infuriated Trump by refusing to take notice of Trump’s calls for lower interest rates and a re-starting of the Fed’s quantitative easing program. Trump threatened to sack Powell on several occasions but lacked the legal authority to do it.

The choice for Biden is between retaining a central bank whose mandate remains largely a focus on inflation and maximising employment or bowing to the progressives who want the Fed to more actively intervene to prosecute a wider social agenda.

He’d also tried to stack the Fed’s board with several bizarre nominations – a pizza chain chief executive who’d raised funds for his campaign, an economist being pursued by the Internal Revenue Service for unpaid taxes and another economist who had questioned whether the Fed should be independent of politics or even exist – but failed to get their nominations through Congress.
Biden’s plans for the fed positions are likely to be more conventional and less controversial, although that doesn’t mean the Republicans will give his nominees an easy path through the confirmation process.

The biggest decision is what to do with Powell. Powell has Yellen’s support for a second term but the Democrat progressives like Elizabeth Warren and Alexandria Ocasio-Cortez have publicly opposed an extension of his term and there is a core of Republicans critical of the Fed’s shift in emphasis from combatting inflation to prioritising employment (particularly employment among minority groups).

The progressives are also fiercely critical of the Fed’s rolling back of some of the Obama-era banking regulations imposed in response to the fallout from the 2008 financial crisis – the loosening of some bank capital requirements, the weakening of the Volcker Rule restricting banks’ proprietary trading, an overhaul of the annual bank stress tests and changes to the “living wills” that provide plans for limiting the damage from a bank’s failure.

Federal Reserve board member Lael Brainard has a lot of support to replace Powell.Credit:Bloomberg

Those changes have been overseen by Quarles in his role as vice-chairman, which carries responsibility for bank supervision. They’ve also been consistently opposed by an existing Fed governor, Lael Brainard.

Brainard is supported as a contender for Powell’s position by some on the left because of her stance on bank regulation. Others argue she should replace Quarles as vice-chairman and lead bank supervisor while reappointing Powell.

Powell is thought to have a better prospect of gaining sufficient support from Republicans to offset opposition from some Democrats and therefore to get through the confirmation process. The same couldn’t be said with any level of confidences about any of the other names mooted.

At a broader level, the choice for Biden is between retaining a central bank whose mandate remains largely a focus on inflation and maximising employment or bowing to the progressives who want the Fed to more actively intervene to prosecute a wider social agenda.

Apart from tougher bank regulation, they want the Fed to act to help reduce carbon emissions (by imposing higher capital charges on bank loans to fossil fuel companies and bigger emitters) and to do more to address social inequality. They want Biden to “reimagine” the Fed.

For businesses and financial markets, of course, what counts most is monetary policy and the emergence of a new Fed tasked with achieving a range of other goals would be disconcerting and destabilising. Powell is seen as the safe choice at a delicate moment for monetary policy, the economy and markets.

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