Biden bets big on continuity at the Fed
By Neil Irwin
In the end, President Joe Biden bet that the leaders of the Federal Reserve could finish what they started.
Jerome Powell, who was reappointed Monday as head of the central bank, and Lael Brainard, a Fed governor newly nominated to be his No. 2, had steered the economy from the depths of the pandemic to its current place — a robust job market coupled with very high inflation. Biden’s bet is that they are best positioned to try to rein in the latter without undoing the former.
Another way to put it: Powell’s great second-term challenge is to try to undo some of the unpleasant side effects of his first-term actions without accidentally causing a recession.
The decision is not without risk for Biden. High inflation is walloping his approval ratings, and in polls Americans say they are deeply dissatisfied with the economy despite a low unemployment rate, a booming stock market and strong growth in wages. If Biden wanted to pivot to full “whip inflation now” mode, the clearest way to do it would be with his appointment power to the one entity of the U.S. government most explicitly charged with maintaining stable prices.
Instead of taking some abrupt turn, the president is entrusting Powell and Brainard — who has been a key player at the Fed throughout the pandemic economic response — to wean the economy from its diet of zero interest rates and other forms of monetary stimulus without starving it.
It is a bet that as seasoned central bankers who have credibility with markets, they will have more ability to thread that needle than fresh faces would.
“Why am I not picking fresh blood or taking the Fed in a different direction?” Biden said at an afternoon event announcing the nominations. “Put directly, at this moment both of enormous potential and enormous uncertainty for our economy, we need stability and independence at the Federal Reserve.”
If they move too gingerly in winding down this period of very cheap money, it could feed into the inflationary psychological dynamics that may already be setting in. In that cycle, high spending levels, rising consumer prices and higher worker pay feed into a spiral that creates a lot of discontent without leaving anybody better off.
But if they were to accelerate the pace of interest rate cuts, there are opposite risks. It is easy for the Fed to break things when it raises interest rates, as the world saw most notably in late 2015 when a shift toward tighter money caused a steep pullback in heavy industry, agriculture and related fields. Many financial markets look bubblier now than they did then, and it is anybody’s guess what might happen to stocks and countless other risky assets if the second-term Powell Fed tilted toward tighter money.
The economic recovery, while robust so far, may not be firmly entrenched. The unemployment rate is low at 4.6%, but that masks millions of people who have dropped out of the labor force. And it remains uncertain how many of them will return as the effects of the pandemic fade.
Powell and Brainard have spoken repeatedly of the importance of keeping an open mind on how strong the labor market can get, and of the human costs of preemptively cutting off a jobs recovery. They will be loath to take any action that might stop further healing in the job market.
“I am committed to putting working Americans at the center of my efforts at the Federal Reserve,” Brainard said Monday.
It is Powell’s focus on achieving as strong a job market as possible that probably secured his renomination, against the wishes of many progressives. While acknowledging his commitment to full employment, many on the left — and at least three Democratic senators — had wanted a candidate with a more agreeable philosophy on regulating the financial system and using the Fed’s powers to try to fight climate change.
So what did Biden gain with his choice for continuity in the top two jobs at the central bank, a move that has disappointed key allies on the left?
Powell and Brainard are known quantities. Now, a newly minted central banker won’t have to face the typical bumps that come with starting in the world’s most important economic policy job. Powell and predecessors Janet Yellen and Ben Bernanke each had difficult communications miscues in their early months.
The decision to reappoint Powell, a Republican and former private equity executive who was named to lead the Fed by former President Donald Trump, is also a mild gesture of bipartisanship. His Senate confirmation should be a notch easier than alternatives. This is assuming enough Republican senators vote to confirm him to make up for defections on the left, including those telegraphed by Sens. Elizabeth Warren, Jeff Merkley and Sheldon Whitehouse.
“Especially now in such a politically divided nation, I believe we need to do everything we can to take the bitter partisanship of today’s politics out of something as important as the independence and credibility of the Federal Reserve,” Biden said.
Notably, Biden did not accompany his nominations of Powell and Brainard with two other key Fed nominations: for a vice-chair for supervision or an open governor’s seat. The president will come under intense pressure from the left to use those vacancies to include candidates with a more aggressive regulatory bent and to add racial diversity to the seven-member Board of Governors. (All six current members are white.)
None of that changes the basic discomfort in which the Powell Fed now finds itself.
Inflation, for now at least, is far above the Fed’s 2% target, and the job market is strengthening rapidly. Yet its monetary policies look like those from 2014, when the labor market was limping along and inflation was below the Fed’s goals.
Can Powell bring down inflation without breaking the economy? Biden is betting the answer is yes, and the success of his presidency may depend on it.