In the end, President Biden bet the Federal Reserve leaders could finish what they started.
Jerome Powell, who will be reappointed Monday as head of the central bank, and Lael Brainard, a Fed governor recently nominated as its No. 2, had steered the economy from the depths of the pandemic to its current place — a robust job market in coupled with very high inflation. The bet of Mr. Biden is that they are best positioned to try and rein in the latter without undoing the former.
Another way to put it: Mr. Powell’s big challenge for the second term is trying to undo some of the unpleasant side effects of his first term actions without accidentally triggering a recession.
The decision is not without risk for Mr Biden. High inflation is pushing his valuations up, and polls say Americans are deeply dissatisfied with the economy, despite low unemployment, a booming stock market and strong wage growth. If Mr. Biden wanted to switch to full “inflation now” mode, the clearest way to do it would be with his nominating powers with the single entity of the US government most explicitly charged with maintaining stable prices.
Rather than take an abrupt turn, the president is entrusting Mr. Powell and Ms. Brainard — who have been key players at the Fed during the pandemic economic response — to wean the economy from its diet of zero interest rates and other forms of monetary policy. stimulant without starving it.
It’s a bet that if seasoned central bankers have credibility with the markets, they’ll have more ability to cut that needle than new faces.
If they proceed too cautiously in phasing out this period of very cheap money, it could add to the inflationary psychological dynamics already emerging. In that cycle, high spending levels, rising consumer prices and higher wages send workers into a spiral that creates a lot of dissatisfaction without anyone benefiting.
But if they were to accelerate the pace of rate cuts, there are opposing risks. It’s easy for the Fed to break things when it raises interest rates, as the world most noticed in late 2015 when a shift to tighter money caused a sharp downturn in heavy industry, agriculture and related areas. Many financial markets now look more vibrant than they did then, and it’s a mystery what could happen to stocks and countless other risky assets if the Powell Fed leaned toward tighter money in the second term.
The economic recovery, which has been robust so far, may not be firmly anchored. The unemployment rate is low at 4.6 percent, but that masks millions of people who have left the labor market. And it remains uncertain how many of them will return as the effects of the pandemic wear off.
Mr Powell and Ms Brainard have repeatedly discussed the importance of an open mind about how strong the job market can become, and the human cost of preemptively cutting a job recovery. They will be reluctant to take any action that could stop further healing in the labor market.
It is Mr Powell’s focus on achieving the strongest possible job market that has likely secured his reappointment, against the wishes of many progressives. While acknowledging his commitment to full employment, many on the left — and at least three Democratic senators — would have wanted a candidate with a more agreeable philosophy about regulating the financial system and using the Fed’s powers to try and tackle climate change. to fight.
So what has Mr Biden gained by choosing continuity in the top two central bank jobs, a move that disappointed key allies on the left?
Mr. Powell and Mrs. Brainard are known quantities. Now, a newly created central banker doesn’t have to go through the typical bumps that come with starting out in the world’s premier economic policy job. Mr. Powell and his predecessors Janet Yellen and Ben Bernanke each had difficult communication difficulties in their early months.
The decision to reappoint Mr. Powell, a Republican and former private equity executive appointed by President Trump to lead the Fed, is also a gentle gesture of bipartisanship. His Senate confirmation should be a lot easier than alternatives. This assumes enough Republican senators vote to confirm him to make amends to the defectors on the left, including those telegraphed by Senators Elizabeth Warren, Jeff Merkley and Sheldon Whitehouse.
Notably, Mr. Biden did not accompany his nominations of Mr. Powell and Ms. Brainard with two other major Fed nominations: for vice chair for oversight or an open governor’s seat. The president will come under intense pressure from the left to use those vacancies to recruit candidates with a more aggressive regulatory bent and to add racial diversity to the seven-member board of directors. (All six current members are white.)
That doesn’t change the fundamental discomfort the Powell Fed is now in.
Inflation is, at least for now, well above the Fed’s 2 percent target, and the labor market is picking up quickly. Still, his monetary policy is similar to 2014, when the labor market was limping and inflation was below the Fed’s targets.
Can Mr. Powell Cut Inflation Without Breaking The Economy? Mr. Biden is betting the answer is yes, and the success of his presidency could depend on it.