What Biden Is Really Picking With a Fed Boss
(Bloomberg Opinion) -- The Federal Reserve is inching toward a decision to trim the massive stimulus unleashed to fight the pandemic. Around the same time, Joe Biden will need to settle on who leads that gradual withdrawal at the central bank. While leadership counts, the monetary shift is likely no matter whom the president picks. There’s more than the Fed’s revered independence at work in this dynamic. Economic conditions, market sensibilities and the organization’s sometimes entrenched views of the world matter as much — sometimes more — as any individual.
Whether Biden sticks with tradition and gives Jerome Powell a second term as chair or opts for his own person, it takes a lot for the Fed to undergo a course correction. The bank is the most powerful economic agency on Earth, vastly more important than its Chinese counterpart. But that clout overstates the degree of immediate change that personnel bring. Newbies tend to follow the cues of their predecessors, at least for a time. Interest rates are set by a committee. Staff wield enormous sway, particularly the Division of Monetary Affairs, whose alumni dot the research departments of the biggest banks and hedge funds and make for a formidable — and reinforcing — diaspora. When disaster strikes, existing tools and ideas tend to play a big role. Powell and his two predecessors, Ben Bernanke and Janet Yellen, served as Fed governors before their appointments. To varying degrees, they reflected the board’s priorities and philosophies. Lael Brainard, seen as an alternative to Powell, has been on the board since 2014. (She has staked out some different ground on financial regulation; this column focuses on monetary policy.)
It’s not quite institutional capture, but history suggests an element of autopilot in the leader’s first year, sometimes longer. When he succeeded Alan Greenspan in early 2006, Bernanke made clear he’d begin by continuing policies in place: nudging up benchmark rates up by a quarter point at regular intervals until mid-year. Yellen was bequeathed the task of retiring quantitative easing and laying the ground for rate hikes. Powell spent his first year adhering to Yellen’s process of tightening every few months. Such predictability and, less desirably, inertia, aren’t solely American. The first three European Central Bank presidents were heads of national central banks. Christine Lagarde broke that pattern, though as a former French finance minister and head of the International Monetary Fund, she wasn’t exactly a stranger. Reserve Bank of Australia governors have usually been promoted from deputy. There are few outsiders in this club.
The Fed leaders each had their moments of drama. Bernanke was dealt the global financial crisis; Yellen got a market flux stemming from a botched recalibration of Chinese currency policy. Powell was on duty when Covid-19 arrived. They altered direction when their storms hit, but perhaps not so dramatically as it seemed at the time. Yes, Bernanke deployed near-zero rates and quantitative easing. But rates had been very low in the early 2000s under Greenspan. As a governor, Bernanke had pondered how to give activity an added jolt when borrowing costs were already rock-bottom. He was inspired by his academic work on the Great Depression and interest in Japan’s pioneering of unconventional methods. By the time Bernanke left in 2014, he’d set in motion a tapering of QE that Yellen completed. Yet rates were lifted far more slowly than envisaged. Yellen also fretted about too-low inflation, something she famously labeled “a mystery.” The strategic review into the Fed’s framework, which Powell unveiled last year, had its seeds in Yellen-era concerns.
When Covid struck, Powell quickly returned the Fed to effectively zero rates, quantitative easing, and a raft of measures aimed at supporting the flow of credit to businesses. The swift response drew on templates and practices of the previous bust, which had quaintly been called the “Great Recession.” Institutional memory was again at work.
The other part of the leadership equation said to be on the White House mind is a bias toward continuity, dating back to at least Ronald Reagan with Paul Volcker, of re-appointing your predecessor's Fed chief. As with so many things, Trump is the only recent president to buck such established practice, refusing Yellen another term and picking Powell. But is this tradition overrated, or past its use-by date? Barack Obama and Bernanke might say yes.
By the summer of 2009, the first-term Democrat was presiding over an economy in early recovery from an epic downturn. He thought Bernanke, first chosen by George W. Bush, had done a good job. Obama wanted a sound economy when he ran for re-election in 2012 and was loath to risk a market fright. He decided to wrap it up early, before the guessing game got too feverish. What better place to convey a sense of calm and stand beside Bernanke than a podium at Martha's Vineyard?
At the time, I was working in Washington and heading Bloomberg’s team of reporters and editors responsible for covering the U.S. economy. We had a tip that something might be afoot during the presidential vacation off the coast of Massachusetts. It seemed a bit early, but we pursued it, even contemplating staking out entry points to the island. We got the scoop and Obama got his man. But the pick was unveiled too early — almost six months before the new Fed term began. By the time Bernanke came up for a Senate confirmation vote, it was dicey. Senators began deserting him, including Democrats. He got over the line by 70-30, a very grudging endorsement by historical standards.
None of this is an argument against a new chair, nor a dismissal of bipartisanship. It is a reminder that a fresh leader doesn't necessarily bring a fresh start, if one is even warranted. And getting both sides of the aisle on board would probably be an impossible criteria in today’s Washington. There’s far more to the Fed than the person who will flank Biden for the photo ops at some point in coming months. It’s time to taper unfairly high expectations of personal economic leadership.
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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