The Biden administration’s widely expected reappointment of Jerome Powell as chairman of the Federal Reserve on Monday is a strong step toward providing stability and clarity for financial markets at a time when the central bank is under pressure to accelerate efforts to address inflation.
The reappointment is a strong step toward providing stability and clarity for financial markets.
In our estimation, Powell’s performance during the worst of the pandemic in April 2020—the United States had lost roughly 22.3 million jobs—in itself warranted reappointment even though inflation has recently surged well above the Fed’s 2% target.
This decision will be well received in financial markets and is an important marker laid down by the administration about the central bank’s independence and continuity.
The prospective elevation of Lael Brainard, a Fed governor, to vice chairwoman, pending approval by Congress, should not be underestimated. She is a bit more dovish on policy than Powell, who is a dove himself, and favors tougher regulation on the financial system, which reflects the preferences of the Biden administration.
Digital currency
Aside from the difficult policy judgments linked to inflation in the coming months, we believe that there is no more important decision than the Fed’s potential creation of a digital currency that will be in part directed and shaped by Brainard.
A digital currency created by the Fed would usher in a new world of nominal negative interest rates and it would alter the theoretical and practical balance of power between fiscal and monetary firepower.
Monetary navel gazing around relative movements in the 10-year Treasury yield and the status of the greenback will always preoccupy markets as central bankers come and go. Yet the appointment of two doves to lead the Federal Reserve speaks volumes about the regulation of the financial system and the evolution of U.S. monetary policy.
