I realize this is very contrarian, but…
This morning President Joe Biden announced that he will renominate Jerome Powell to another four-year term as chairman of the Federal Reserve.
Wall Street sounds like it’s generally happy with the move–continuity is usually seen as good by the financial markets–although bond yields are up as of 2:30 p.m. this afternoon with the 10-year Treasury yield climbing to 1.62%, a gain of 7 basis points.
That’s a reflection, in my opinion, of a little bond market disappointment that Biden didn’t nominate Lael Brainard to replace Powell, She was seen as more likely to hold interest rates lower for longer than Powell.
Powell’s nomination faces opposition from progressive Democrats who don’t like the financial deregulation that has continued during his term or who don’t think the U.S. central has done enough on global warming. Powell also faces opposition from conservative Republicans because they believe the Fed should be moving faster to stomp on inflation.
My view is a little different than either Democratic or Republican objections.
I think that if Biden had been more confident of the economy recovery he would have nominated Brainard. That would have put a Biden stamp on the U.S. central bank.
That he didn’t argues to me that the White House thinks there’s a reasonable chance that the U.S. economy will slow more than expected next year and that inflation, despite the Fed’s hope, will not fall very quickly. That would leave the Fed with a huge policy challenge to figure out some way to stimulate the economy and to fight inflation.
That may well be impossible.
And if it turns out to be impossible and we get some toxic mix of slower growth and higher inflation in 2022, the Biden White House would be more than happy to be able to point to Powell, a Fed chair appointed by a Republican and who identifies as Republican, and say, “See it’s not our policy change that did this.”
A Brainard nomination would have left Biden “owning” Fed policy next year.
And that’s not a position that looks particularly attractive right now in my view.
