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Joe Biden’s decision Monday to elect Jay Powell for a second term as long-serving Federal Reserve chairman is seen as a natural consequence to a president who wants to control the US central bank in the face of a series of financial crises.
But Powell’s move to another four-year term as Fed seat was not straightforward: he had to deal with a major crisis from Fed Governor Lael Brainard, a. commercial fraud which has shaken the central bank in recent months, and rebellion from advancing on its economic history.
Powell’s passing on the final process of securing the Senate is expected to be easy, as he is backed by Democrats and Republicans in the upper room.
But, nonetheless, he faces serious challenges as he embarks on another four years as America’s chief financial officer – in particular, how to manage a economy that has not returned to full-time jobs at a time when inflation is rising sharply.
“If this time next year inflation is a big problem, the Fed will be quick to tighten it [monetary policy], and markets are unreliable. . . then Powell’s legacy will be shattered, “says Vincent Reinhart, who worked for a central bank for more than 20 years.”
Although Biden nominated Powell for the Fed seat, he nominated Brainard to run for office, placing them as a group that could attract US investment.
When Powell was first joined to lead the Money and Donald Trump in 2018, he was seen as an impossible – “old accident”, according to Peter Conti-Brown, a Fed historian at the University of Pennsylvania.
Powell, an attorney trained without a medical doctor, stepped down only after Trump took office, Janet Yellen. The Republican was originally elected by Barack Obama to the Federal Committee in 2012, when he had not served in government for almost two decades since he became Treasury chief under George HW Bush.
Powell’s election as president of democracy and in the face of growing opposition is a major change for Powell. “He has proven himself to be a middle-class banker and not subject to theories or ideas,” said Conti-Brown.
The economic downturn that resulted from the plague in 2020, as well as the response to the subsequent policy, strengthened Powell’s position in the Federal Federal Reserve.
“The Fed did very well in March 2020,” said Jeremy Stein, a Harvard student who was nominated by Obama and Powell to serve on the 2011 Fed governors’ board.
“Powell had his Draghi time and he experienced it in every way,” Stein said, referring to a crucial moment in the eurozone crisis when then-President Mario Draghi of the European Central Bank promised to do “anything it could” to save one. money.
When the US closed in early 2020 and millions of jobs were disrupted, the Fed took immediate action. A few days later, the central bank reduced interest rates to zero, infiltrated US government bond markets and revealed a number of emergencies.
“He took our game book from 2008-09 and accomplished this and added,” added Donald Kohn, who served as vice-chairman of the Fed during the 2008 global financial crisis.
A major change in the way the central bank thinks about implementing the monetary policy, which Powell unveiled in August 2020, also confirmed a timely change.
Instead of raising interest rates on the initial outlook for inflation, as the Fed did in the wake of the global financial crisis, the central bank has promised to invest more money in an effort to make better returns for the benefit of the larger group. of America.
By doing this, it means keeping interest rates at current rates that are close to zero until inflation reaches 2 percent and the Fed will accomplish more.
“Jay Powell has set economic precedents as in the history of the Fed,” said Reinhart, now an economist at Mellon.
“This means that Fed officials are no longer in the temple. People understand the Fed better and appreciate the Fed more,” he added.
But some Fed observers and former officials warn that Powell may have to burn down the political capital he has found in recent years if inflation is a bigger problem than expected and the central bank is forced to take action to end it.
“This is a very difficult time for the Fed for many years,” said Randall Kroszner, a former Fed ambassador between 2006 and 2009.
“There will be major challenges on both sides: critics will say the Fed is forgetting its responsibility for inflation and some will say they are not doing enough to support growth and job creation,” he added. “We are hearing all these criticisms now and they are only getting worse.”
There are already indications that the Fed may move inflation faster than expected, when the central bank chief last week opened the door to quickly end its massive bond program, which could lead to early interest rates. the price goes up.
Alan Blinder, a former deputy vice-chairman of the Fed, said that in order to stop some major Covid-19 cases in the coming months, the US central bank should speed up the “taper” and raise interest rates soon.
Eager to speak clearly, Powell established himself as some kind of central banker. “She’s the best spokeswoman for any Fed chair I know,” said Claudia Sahm, a former economist and senior economist at the Jain Family Institute.
Those skills were tested long before coronaviruses arrived on the US border last year, when Trump expanded his campaign on his nominees.
The former president – who once asked whether Powell or Xi Jinping of China was a major enemy of the US – challenged the already-held belief that the White House should not meddle in politics. Instead, Trump forced the seat to reverse the huge interest rate Powell had in 2018 to advance the solid path that began under Yellen.
More recently, progressive Democrats have criticized what they say has been a setback to the economic crisis under Powell’s leadership, adding to the amount of money needed, measuring less pressure and banning the sale of big banks.
“In terms of finances, Powell has done a very good job of focusing on work, but he has done less to focus on the economic,” said Kathryn Judge, a professor at Columbia. A university with expertise in financial management. Elizabeth Warren, a Massachusetts senator, went so far as to call Powell a “dangerous man”.
The trade turmoil that erupted in September after government officials were found to be financially active last year while the Fed strongly encouraged financial markets also strengthened its opponents.
Two regional bank executives have resigned and Powell is determined to tighten sanctions on investment, but some Fed observers warn that it will take time for the agency’s loyalty to be healed.
For Republicans, the Fed’s loyalty is further undermined by what Senator Patrick Toomey of Pennsylvania calls the “wake-up call”, with several branches of local banks exploring topics such as racism and climate change.
Powell has tackled this opposition with ease, however, thanks to the strong ties he has formed with Congressional members on both sides of the political agenda.
“There are two corporations in Washington that are chosen to be sacred: one is the Supreme Court and the other is the Fed,” said Peter Hooper, who worked for the Fed for nearly three decades. “People need to have confidence and confidence in both, and it helps to have an independent and disconnected person for doing well on both sides of Capitol Hill.”
In his second term, Powell will advance the goals of the central bank and the reformed Fed regulators. While John Williams, president of the New York Fed, and Brainard as vice-chair remain unchanged, they have lost Richard Clarida and Randal Quarles, vice-president. The White House will take on additional responsibilities at the Fed board next month.
These responsibilities will be particularly important as the central bank launches the next phase of strong financial statements that could be challenging in 2022.
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