Biden nominates Powell to second time period as Fed chair

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President Joe Biden has decided to grant Fed chairman Jerome Powell a second term of four years, the White House said on Monday.

Powell, a moderate Republican with a career in investment banking, was originally named chairman by Donald Trump in 2017.

Biden had limited his search to Powell and Fed Governor Lael Brainard.

Biden has decided to appoint Brainard as vice chairman of the Fed.

“I have full confidence after your fire trial for the past 20 months that Chairman Powell and Dr. Brainard will provide the strong leadership our country needs, ”Biden said in a statement.

Powell has worked hard to strengthen ties with Capitol Hill that were lost under his predecessors Ben Bernanke and Janet Yellen. It is expected to be easily ratified by the Senate, with considerable Republican support.

“It tells you that Biden is taking care of his polls. He doesn’t want a fight. He wants a real bipartisan candidate to sail through, ”said Steve Blitz, chief economist at TS Lombard.

Biden will soon be able to fill three more posts on the central bank’s seven-member board of governors, thereby putting his stamp on the Fed.

Markets are increasingly concerned about inflation as the economy recovers from the coronavirus pandemic and talk of the need for more aggressive monetary policy from the Fed.

Consumer prices topped 6% in October, the steepest increase since 1990 and well above the Fed’s 2% target.

However, the central bank has only just begun slowing bond purchases at a rate of $ 15 billion a month. At this rate, the central bank will buy bonds that will stimulate the economy through June next year.

Meanwhile, the financial markets have priced in two Fed rate hikes in 2022.

Investors are wondering whether the Fed will decide to “reduce” asset purchases faster or even raise short-term interest rates.

Fed officials are divided over the road ahead. Some want the central bank to move in a restrictive direction to tackle high inflation, while others want the central bank to be patient to raise interest rates until unemployment continues to recover from the pandemic.

Read: Top Fed officials signal that rate hikes are on the table in 2022

For much of the year, Powell temporarily ditched the spike in inflation amid supply shocks from business freezes during the pandemic. He has expressed more concern in recent weeks, promising to raise short-term interest rates to curb inflation if it does not ease.

That summer, Powell’s renomination was deemed safe, but as the time dragged on without notice, analysts had concerns.

The Democratic left wing urged Biden to choose another candidate who would take a tough stance on banking regulation and focus more on climate change.

Massachusetts Democratic Senator Elizabeth Warren, a harsh critic on Wall Street, accused Powell of watering down financial safeguards in the aftermath of the 2008 panic. She even called the Fed chairman a “dangerous man”.

The Senate is expected to confirm the 68-year-old Powell before his first term expires in February. He is expected to ask difficult questions about climate change and banking regulation during his hearing on the nomination of progressives.

Powell’s first term saw Trump vitriol followed by the pandemic

Powell took over the chairmanship of the Fed in February 2018 after serving on the Fed’s executive board since 2012, when he was nominated by former President Obama.

His tenure has been marked by two distinct phases – the first was bitter criticism from Trump, although Powell gained broad sympathy for his silence while he was heavily criticized by Trump.

After the Trump tax cuts were passed, the Fed continued to hike short-term rates, sparking fierce objections from an angry president, who indicated that Europe and Japan were keeping their policy rates near zero.

Trump labeled Powell an “enemy” and “nobody” and allegedly called his nomination the worst mistake of his presidency. He even looked for ways to fire him.

The Fed reversed course in 2019 and cut rates after the financial markets collapsed.

The election of Biden raised the prospect of a quieter time for Powell, but the central bank soon saw a threat of economic collapse due to the rapid spread of the coronavirus in early 2020.

Powell and his colleagues were quick to react and cut short-term interest rates to near zero in two quick steps in March. To help a stalled bond market, the Fed also bought trillions of dollars in bonds. The resulting recession was the deepest in the post-war period, but the downturn was short-lived.

As a result of its contingency measures, the Fed’s balance sheet has doubled to over $ 8 trillion, and concerns remain that the Fed will have to bail out markets that are considered “too big to fail”.

The yield on the 10-year government bond TMUBMUSD10Y rose 1.593% after the announcement to hit 1.585%.

Some Republicans and economists on Wall Street say Powell made a mistake by not moving away from easy money policies sooner. They fear that the Fed will have to “step on the brakes” and plunge the economy into recession to slow the rise in US inflation.

Powell and other senior Fed leaders blame the price hike on widespread supply shortages related to the reopening of the economy and trade disruptions caused by the pandemic.

However, many observers, such as ex-Treasury Secretary Larry Summers, blame fiscal policy, which led to massive stimulus payments to Americans and boosted consumer demand for goods and services.

Under Powell’s leadership, the Fed passed a new framework to give more weight to reducing unemployment. Former Fed leaders tended to worry that low unemployment would lead to higher inflation.

The surge in inflation this year has cast doubt on this new monetary policy stance.

In addition, Powell has been haunted by a financial scandal in recent months that resulted in the resignation of two of his regional Fed presidents.

However, the Powell Fed has put more emphasis on inequality.

“The economic downturn has not hit all Americans equally, and those who are least able to bear the burden are hardest hit,” Powell said last week. “Despite the progress, unemployment continues to fall disproportionately among African-American and Hispanic-Americans.”

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