A Brainard Fed Could Finally, Openly Embrace the World

(Bloomberg Opinion) -- Lael Brainard, the Federal Reserve policy maker who Joe Biden has interviewed for the most powerful economic job on the planet, is often shorthanded as a dove. Translated from central bank jargon, that means she’s characterized as advocating low interest rates. The lower, the better; the longer, the more desirable the economic and social outcomes. This napkin sketch misses a key part of her approach: She is an unabashed internationalist in an institution that has sometimes seemed tone-deaf to the rest of the world.

For years, the terrain beyond U.S. borders has exerted a growing influence on the central bank, but the leadership has hesitated proclaiming it too loudly. Brainard, whose tougher line on bank regulations has earned her fans among progressives, has been one of the people nudging the Fed to take a more expansive view of policy responsive to developments in Asia and Europe. If Biden picks her to be the next Fed chair, the global economy may come in from the cold. The White House is weighing whether to give incumbent Jerome Powell a second four-year term, broadly in keeping with recent tradition, or install its own person — always a temptation when it comes to Fed gigs. Brainard is a veteran of the previous two Democratic administrations and her name was floated for Treasury Secretary after Biden was elected last year. That role ultimately went to Janet Yellen, herself a former Fed chief. (Many economists say Powell is still the probable choice,  though not the safe bet he looked a few months ago.)  

Brainard’s work at the intersection of domestic priorities and global realities has marked her out, both in her current job as a member of the Fed’s Board of Governors and other pivotal positions in government since the 1990s. The daughter of a foreign-service officer, Brainard spent part of her childhood in Germany and Poland. In the Clinton White House, she developed the U.S. response to the Asian financial crisis in the late 1990s. As the top diplomat at the Treasury under Barack Obama, she nudged Europe toward resolving its debt crises without blowing up the euro — avoiding a potentially seismic event for investors stateside.

Brainard joined the Fed Board in 2014 and soon began articulating what the central bank had been plodding unevenly toward: the realization that what happens abroad can have a direct and significant impact on the economy at home, not least through financial markets, in addition to the standard historical view of trade as the main driver. Policy ought to be set with that in mind, and in some circumstances, coordination among global authorities not only makes sense but is desirable.

Her speech in New York on Feb. 26, 2016, was a prime example. To set the scene: It was fashionable to see the period as one of divergence among major economies, as the U.S. and U.K. pulled ahead after the global financial crisis. The euro zone was lagging, while Japan would still struggle to lift inflation toward its 2% target, then-Prime Minister Shinzo Abe's eponymous stimulus program notwithstanding. China was facing important challenges: Growth was slowing from its double-digit clip and the economy was shifting away from exports to consumption. Currency ructions had spilled into emerging markets. Monetary policy was seen as similarly bifurcated; the Fed had recently raised rates and projected multiple hikes in the coming year. 

But, Brainard probed, what if conventional views missed the mark? Might it be better, in an inter-dependent world, for everyone to be on the same page of tightening or easing? Shocks get transmitted quickly, she argued. Scope for radically different policy paths might be smaller than widely believed. 

While perspectives like this might sound obvious, they were controversial at the time, even among the close-knit community of Fed staff and alumni. (My Bloomberg News colleagues Craig Torres and Christopher Condon wrote about the kerfuffle.) The bank has never denied that global developments are a factor in some decisions, but it's also very mindful of opinion in Congress, from where its mandate of stable prices and maximum employment derives. Anything that has a whiff of bailing out or shows too much deference to foreigners at U.S. expense gets backs up on Capitol Hill. The Fed makes decisions independently, but keeps close tabs on the political climate. The role of international factors needs careful positioning.

Brainard's ideas ended up being on target. The Fed raised rates just once in 2016, not the four times that officials had projected the previous December, when they lifted borrowing costs for the first time in almost a decade. Her deep international experience made her a dove before Yellen, during her term as Fed chair, called inflation shortfalls “a mystery.”

She will likely have to draw on that reservoir before long. Even since Powell was picked, the Fed’s footprint has expanded considerably. When global markets seized up in early 2020 as the Covid-19 pandemic spread, it was the Fed that calmed investors through an expansion of its dollar swap lines with foreign central banks. (No country seen as a U.S. antagonist got a swap line, indicative of the political considerations at play.)

Despite China's attempts to turn the yuan into a major reserve currency, the dollar is the linchpin of the global economic order. The early challenge from the euro has petered out. It's a dollar world, possibly to be presided over by Brainard if she’s nominated and the Senate confirms her, and Yellen. Confirmation isn’t assured, despite the significance of the role and the enormous stakes. Brainard angered some Republicans by donating to Hillary Clinton’s presidential campaign — entirely legal, but ill-advised given the Fed strives to be seen as impartial. The GOP is also trying to use a jump in inflation against Biden. Brainard, in the event she is the nominee, may even have to sound a bit hawkish.  Her tough stance on some aspects of financial regulation may not sit well with the powerful banking lobby.  

Yet an array of global factors increasingly shape the parameters within which the Fed acts. Perhaps the rest of the world should also take a vote. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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