Economy

After a tumultuous week, Jay Powell faces a more difficult path to his second Fed term.

The prospects of a second term for Jay Powell as Federal Reserve chair have been hit by growing backlash from the Democratic party’s left flank as President Joe Biden nears a decision on the US central bank’s leadership.

Powell received a public lashing this week from Elizabeth Warren, the Democratic senator from Massachusetts, a day after two regional Fed bank presidents, Eric Rosengren and Robert Kaplan, resigned following revelations about their controversial trading practices, which put a harsh spotlight on the central bank’s ethics guidelines.

The Fed’s indication last week that it could move more quickly to tighten monetary policy also ignited nervousness among some Democrats about Powell’s commitment to aggressively pursuing full employment.

“Confidence in the likelihood of reappointment ebbed a bit as time passed with no action from the White House, weakened some further when the controversy over trading by Dallas Fed president Kaplan and Boston Fed president Rosengren threatened to contaminate Powell, and took a dive [Tuesday] as Senator Warren went for the jugular,” said Krishna Guha, vice-chair at Evercore ISI and formerly of the New York Fed.

Just a month ago, the chances of Powell staying at the helm of the Fed after his term expires in February 2022 were bright.

Having navigated the world’s largest economy through the sharp contraction caused by the pandemic, he won plaudits for staving off a financial crisis and limiting damage to households and businesses.

His decision to steer the Fed towards more accommodative monetary policy under a new framework that prioritised an inclusive recovery at the expense of higher inflation also endeared him to progressive-leaning Democrats. So did his support for the enormous Covid relief packages passed by Congress.

While he is still seen as more likely than not to receive the nod for a second term, biting attacks from prominent lawmakers in Biden’s own party have injected greater uncertainty into the process as the nomination window narrows.

Warren assailed Powell on Tuesday as a “dangerous man” — for taking a position on banking regulation she regards as too lax — and said a second term was “not a risk worth taking”. 

When asked if Warren’s comments would complicate Powell’s hopes for a second term, one Senate Democratic aide said: “Sure it does”. 

Sherrod Brown of Ohio, the Democratic chair of the Senate banking committee, had also previously criticised Powell on banking regulation. More recently he took issue with Powell’s comments that the employment target set by the Fed to begin reducing monetary stimulus was “all but met”. 

“Chair Powell, you have talked about your commitment to competitive labour markets . . . now is not the time to declare victory,” warned Brown, who has not yet declared his stance on Powell’s nomination.

So far, the White House has remained mum about Biden’s intentions.

A decision is expected soon — Donald Trump tapped Powell for his first term in early November 2017, while Barack Obama announced his support for a second term for Ben Bernanke in August 2009. Janet Yellen’s nomination was announced in early October 2013.

“The president will continue to engage with his senior economic team in a careful and thoughtful process to appoint a Federal Reserve chair in a timely manner,” a White House official said. “And the president will appoint the candidates who he thinks will be the most effective in leading the Federal Reserve.” 

Powell demurred on Wednesday when asked about his renomination prospects at a panel hosted by the European Central Bank, stressing that he is focused on doing his job.

Economists following the debate in Washington say a second term for Powell would be likely to receive bipartisan support, even if Biden risks disappointing his party’s progressives, including Alexandria Ocasio-Cortez, who recently joined a group of fellow House Democrats in advocating new leadership at the Fed.

Democratic Senator Sheldon Whitehouse of Rhode Island told the FT that whoever leads the Fed must use its tools to “head off the climate-driven financial crisis we know is coming”. Powell has said climate change is a not something the Fed “directly considers” when setting monetary policy.

On the Senate banking committee, Democrats Jack Reed and Jon Tester have backed another term for Powell, as have Republicans Thom Tillis, Mike Rounds, Steve Daines and Kevin Cramer.

“The alternative to Jerome Powell is not going to be better than Jerome Powell,” Cramer said on Wednesday.

“When it comes down to it, if there is a more progressive candidate, you’re going to have a 50-50 split, whereas if Powell is to be renominated you’re still looking at somewhere in the 60s or 70s [of senators in favour],” said one Republican Senate aide.

“He will be one of the most bipartisan nominees,” said Julia Coronado, a former Fed economist now at MacroPolicy Perspectives.

The Biden administration has other positions at the central bank to fill, including a replacement for Randal Quarles, the current vice-chair of supervision, whose term ends in October. The vice-chair job, currently held by Richard Clarida, will also open up next year.

Fed governor Lael Brainard is most often mentioned as a possible candidate either to replace Powell or Quarles. Other names that have been floated for leadership roles include Lisa Cook, an economist at Michigan State University, and William Spriggs, chief economist of the AFL-CIO labour union.

One argument in favour of Powell’s renomination is the uncertainty that a leadership change could bring at a sensitive moment for the economy and central bank. But Powell and Brainard are seen as broadly aligned on major policy issues, Fed watchers say.

“All the people talked about for these jobs . . . basically agree on the contours of monetary policy and the Fed’s response to the Covid crisis,” said Adam Posen, president of the Peterson Institute for International Economics. “In the end from a public policy point of view, this is all OK.”

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