President Joe Biden is right to nominate Federal Reserve Chair Jerome Powell for a second term. No disrespect to Lael Brainard, who will be nominated as vice chair instead. Both are eminently capable central bankers.
But two good reasons argued for Powell: The need for continuity, and the need to resist politicising the Fed now when its independence might come into question.
The Joe Biden administration has no quarrel with the way the Fed has conducted monetary policy during Powell’s first term. Challenged by the Covid-19 pandemic, the Fed maintained strong support for demand and kept financial markets functioning well — neither of which should be taken for granted.
In recent months, inflation has climbed. Some of this is temporary, but how much is unclear. Policy needs to be adjusted, and this is in train: The Fed will taper over the coming months, and financial markets are anticipating an earlier lift-off in rates.
Maintaining confidence in the Fed’s ability to fulfil its dual mandate on inflation and employment is crucial. It might have been better to start tapering earlier, but this was a close call, and not one on which Powell and Brainard were at odds. Abruptly tightening in an effort to catch up with recent developments would also be a mistake. Better to nudge investors’ expectations in the right direction than shove them too forcefully. Appointing a new chief amid this delicate transition would have served no purpose except to call the continuity of policy into question.
Any suspicion of political calculations would have seriously compounded that error. Powell is a Republican and Brainard a Democrat. Their ability to work closely as colleagues is welcome in its own right, and is an example for others.
Choosing Brainard over Powell in response to calls from progressives for a partisan appointment would have simply aroused opposition to Brainard in Congress and make the Fed seen as a political actor rather than an independent entity serving public interest. Give Biden credit for recognising this.
Though broadly in agreement, Powell and Brainard have not always seen eye to eye. Brainard favours a stricter approach to regulation and has dissented from many of the Fed’s moves to lighten financial controls in recent years. But reappointing Powell as chairman does not foreclose a review of the central bank’s approach to regulation.
The Fed’s board currently has a vacancy and two more will arise shortly; Biden also has leadership roles to fill, including vice chair for supervision.
If the President prefers more forceful financial oversight, he will have the opportunity to encourage it. At this juncture, signalling continuity and bipartisan competence in monetary policy needed to be the top priority. Biden chose well. — Bloomberg Opinion
