The Biden administration looks set to soon announce its pick for who will lead the nation’s economic steward: the Federal Reserve.
The White House appears to be weighing two options: keeping Jerome Powell as Fed chair or replacing him with current Fed Governor Lael Brainard. Both reportedly met with President Joe Biden earlier in the month.
Biden said on Tuesday, per the White House press pool, that a decision would come in about four days (or Saturday, November 20).
Personnel could change the course of policy at the central bank, which spent the last two years engineering an economic rescue plan to prevent the COVID crisis from spinning out into a financial crisis.
Post-vaccine, the Fed has faced a puzzling combination of high inflation and a slow labor market recovery. Prices are rising at a pace not seen in three decades, but tightening policy now risks stranding the millions of jobless people still on the sidelines of the labor market.
The Fed, which is still keeping interest rates at near-zero, has only recently begun to tighten the spigot on its easy money policies. Earlier in the month, the Fed said it would start slowing (or “tapering”) the pace of its asset purchases.
But the Fed has a number of other policy questions to answer, ones that will be critical for whoever the Biden administration chooses to go with.
As a primary regulator of the nation’s largest banks, the Fed chair will have the power to determine where to place the guardrails on the likes of JPMorgan Chase and other giants in the financial services industry. The Fed is also in the midst of considering climate policies in its regulatory framework.
And, of course: cryptocurrencies. The Fed and the Biden administration at large are still forming a regulatory approach to stablecoins, which may be intertwined with the Fed’s work on its own possible digital currency.
So where do Powell and Brainard stand on these issues?
Over a year and a half after the shutdowns began en masse in the U.S. to respond to COVID, the economic picture looks unusual when zoning in on the Fed’s dual mandate of stable prices and maximum employment.
The Fed’s zero rates and asset purchases aim at stimulating demand. Cheaper borrowing costs (alongside stimulus from the Trump and Biden rescue plans) have supported consumption, thus lifting prices. It has also supported businesses, who have so far re-hired over 18 million of the people who lost their jobs in the depths of the pandemic.
Brainard and Powell have been closely aligned in keeping the easy money flowing, with Brainard supporting every policy-setting decision from the Federal Open Market Committee.
But the conundrum lies in the fact that the labor market recovery has been slower than the bounceback in inflation; 4.2 million people still remain out of jobs compared to pre-pandemic levels.
Brainard’s commentary suggests she may be more sympathetic to keeping policy easy until the labor market fully heals.
“I see no reason employment should not reach levels as strong or stronger than before the pandemic,” she said in September. By contrast, Powell has been optimistic about further recovery in the jobs market but remarked in November that he’s “very open to the thought” that the goal post of maximum employment may have moved.
Still, Brainard has supported the tapering process which would ready the Fed to begin raising rates as soon as next year, signaling that she would not support any immediate reversal of the slowdown in Fed stimulus.
Powell and Brainard differ noticeably on how to regulate the nation’s largest banks.
Brainard has voted against several of the Powell-era rollbacks in bank rules. Most of them were led by Trump appointee Randal Quarles, who served as vice chairman of supervision and broadly felt that post-2008 bank regulations needed to be better tailored among banks of different sizes. Quarles’s term as regulatory czar expired in October — and he subsequently announced plans to leave the Fed in December.
Although some of the rules were modified at the direction of Congress, Brainard felt some of the Quarles-led changes — supported by Powell – went too far.
“I am concerned that we may be whittling away at that core resilience of our financial system,” Brainard told Yahoo Finance in an interview in 2019.
She dissented on a tailored approach to bank liquidity requirements and unsuccessfully advocated for temporarily raising bank capital requirements prior to the pandemic.
For his part, Powell has insisted that the changes leave bank capital requirements at strong levels.
Brainard’s dissents continued through the pandemic, notably criticizing the Fed’s decision to limit big bank stock buybacks — but allow the pay out of dividends — in the depths of the pandemic.
Climate-related financial risks
Brainard has spearheaded efforts within the central bank to pay more mind to the financial risks posted by extreme weather events and the transition to greener energy.
She has floated the idea of using “climate scenario” analysis to evaluate how the financial system handles the “high uncertainty” associated with climate change. The idea: to apply hypothetical stress to assess the resilience of individual firms and the system at large.
The issue may be politically thorny (and likely to surface in any confirmation hearing), as GOP members on Capitol Hill attack the Fed for what it sees as a bias away from the fossil fuel sector.
Powell, who has supported the broad idea of assessing climate-related financial risks, has at the same time clarified that he does not want the Fed to push the envelope.
“We are not, and we do not seek to be, climate policymakers,” Powell said in June. He added that “[the Fed] should avoid trying to fill in public policy where governments haven’t done so yet.”
Central banks around the world are trending toward a supervisory approach to climate risks. The Fed was one of the last of the major central banks to join the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), a global cohort designed to facilitate international cooperation on assessing climate-related risks.
The Fed is currently exploring the possibility of launching a digital U.S. dollar, which could have the impact of taking some steam out of privately-issued stablecoins that have gained popularity in recent years.
Powell has emphasized the need to study and explore the pros and cons of issuing a digital dollar, but has not committed to actually launching one.
Brainard, by comparison, appears to favor the idea of a central bank-issued digital currency that could increase financial inclusion among unbanked and underbanked households. During a crisis (like the pandemic), a digital currency could also more quickly deliver relief payments.
Beyond any work on a Fed-issued digital dollar, the next Fed chair will have a seat at the table for the broader issue of cryptocurrency regulation. Any framework for regulating the space extends far beyond the Fed, and the U.S. Treasury will continue to head interagency work that will also involve other regulators (like the Securities and Exchange Commission).
Still, as a primary bank regulator, the next Fed chair will likely be pressed to take its own stances. Battle lines are already being drawn on how regulators should treat bank exposure to crypto assets.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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