Jay Powell should get a second term at the Fed
First-term US presidents running for re-election love the aphorism: “You do not change horses in midstream.” Reeling from disappointing election results in New Jersey and Virginia, President Joe Biden should heed the proverb himself and reappoint the current Federal Reserve chair Jay Powell for a second term. That will provide businesses and investors with at least one source of stability at a time of great economic uncertainty.
Powell has for the most part acquitted himself admirably at the world’s most powerful central bank. He shepherded the US economy through the coronavirus pandemic, forestalling market meltdowns and preventing the downturn from being deeper than necessary. The current bout of higher inflation is, if anything, a vindication of stimulus efforts and reflects just how robust the recovery has been. As the central bank now prepares to begin withdrawing support, Powell has demonstrated an admirable capacity for communicating his intentions and laying the groundwork for “normalising” policy.
He has, however, found himself in the crossfire of two conflicts. The first is a genuine black mark against the central bank: two regional Fed chairs resigned earlier this year after actively trading stocks during a period of market turbulence. Questions were also raised over Powell’s own trades and those of vice-chair Richard Clarida. The Fed chair has now rightly tightened the rules governing the central bank official’s financial holdings. The whiff of scandal, nevertheless, persists.
In the second conflict Powell is mostly a bystander. He is caught between two warring factions of Democrats, more centrist moderates and a more left-leaning progressive wing. With much of Biden’s domestic agenda snarled up in Capitol Hill horse-trading, Biden needs to retain as much of the support of both as possible. That Powell is a life-long Republican and was appointed by former president Donald Trump — disapproval of whom is one of the only things that unites all Democrats — further alienates his leftwing critics.
Replacing Powell with Lael Brainard, currently a member of the Fed’s board of governors and the leading alternative candidate, would mean little change in monetary policy. Powell’s ultra dovishness, having shifted the central bank to aim for “full employment” and make up for shortfalls in inflation, is in agreement with both Brainard and the progressives. If anything, criticism of his monetary policy record is more likely to come from the right, with some lawmakers objecting to the Fed chair’s comments on race or the environment.
Instead, leftwing critics focus on Powell’s more permissive attitude to financial regulation; Senator Elizabeth Warren called him a “dangerous man” earlier this year. Some of that is beyond his control — regulation is fragmented in the US between different agencies — but on banking, which is firmly the Fed’s remit, there is a case to answer. A post-financial crisis ban on proprietary trading, allowing banks to speculate on their own accounts, has been watered down as have the stress tests used to assess the bank’s financial health and vulnerability to a downturn.
A compromise is obvious. The former Federal Reserve vice-chair of supervision, Randal Quarles, stepped down on Monday and Biden must nominate a candidate to fill that vacancy as well as Fed chair. Appointing Brainard to the role would help allay some of the concerns of the Democrats’ progressive wing while allowing Powell to finish the “normalisation” process he has now begun.