Biden Puts Fresh Stamp of Autonomy on a Battered Federal Reserve

(Bloomberg) -- President Joe Biden gave the Federal Reserve’s political autonomy a needed boost by renominating Republican Jerome Powell as chair, despite calls from some Democrats for a pick more closely aligned with Democrats’ interest in fighting climate change and racial inequity.

“Why am I not picking a Democrat?” Biden asked rhetorically in announcing his decision on Monday. “Put directly, at this moment of both enormous potential and enormous uncertainty we need stability and independence at the Federal Reserve.”

“Having Fed leadership with broad bipartisan support is important,” the president added in a White House ceremony, flanked by Powell and Fed Governor Lael Brainard, who was tapped to become vice chair.

Biden’s decision comes at a politically delicate time for the central bank. Its reputation as straight-shooting economic steward took a knock with the recent revelation that some policy makers had traded in financial securities while the Fed was aiding the markets and the economy.

It’s also caught in a political tug of war between lawmakers. Progressive Democrats want an expand remit, with more action to fight income and racial inequality and climate change. Conservative Republicans want a narrow focus on the goals of price stability and full employment, with special emphasis on containing inflation.

Trade-Off

What’s more, Powell and his colleagues face a tricky policy trade-off with potentially huge political consequences: Should they try to slow the economy down and rein in surging inflation at a time when millions of Americans remain out of work and the U.S. is still saddled with the pandemic?

Biden has a lot at stake in Powell’s getting it right.

“You see the president with terrible poll ratings and the Democrats probably going to lose the House -- and one of the reasons voters cite is inflation,” said Greg Valliere, chief U.S. policy strategist at AGF Investments, told Bloomberg television on Monday. Democrats’ control of both chambers of Congress is up for grabs in the November 2022 midterm elections.

Brookings Institution Senior Fellow Sarah Binder said that in one sense Biden is trying to shelter himself a bit from some of the criticism over inflation.

Buying ‘Insulation’

“This cross-party appointment provides a film of insulation for Biden to some degree,”she said. “This is not the Biden Fed, this is the Powell Fed.”

Peter Conti-Brown, associate professor at the University of Pennsylvania’s Wharton School, praised the Powell pick, saying “it indicates a desire from the president to separate partisan politics from Fed appointments.”

Economists are in general agreement that independent central banks are beneficial, because they allow monetary policy makers to make politically unpopular choices that may hurt the economy in the short run but are good for its longer-term health.

“Reappointing Jerome Powell helps alleviate some concerns about politics compromising the independence of the Federal Reserve,” said Greg McBride, chief financial analyst for Bankrate.com.

Undoing Trump

In tapping Powell, Biden returned to the tradition that prevailed prior to Donald Trump in which presidents renominated Fed chairs of the opposite party. Trump broke with that norm by tapping Powell to replace Janet Yellen -- then went on to publicly harangue his pick for not easing monetary policy after he took the helm.

Yellen, who is now Biden’s Treasury secretary, backed Powell for the post. She did not want to see the choice of Fed chair become politicized, according to people familiar with her thinking. She also valued continuity of leadership, they said.

Binder said it is hard for any institution -- even the Fed -- to protect itself from what has become a highly partisan atmosphere in Washington.

That same atmosphere makes it difficult for lawmakers to get that much done on their own, and increases the likelihood they’ll lean on the Fed to fill in the gap. That seems to be case when it comes to climate change, where some Democrats are pushing the central bank to do more to fight global warming.

Reassuring Democrats

Biden sought to reassure Democrats skeptical of Powell’s bona fides on that front.

“He’s made clear to me a top priority will be to accelerate the Fed’s effort to address and mitigate the risk that climate change poses to our financial system and our economy,” the president said.

Addressing another concern of some progressive Democrats, Biden said Powell recognizes the importance of the Fed taking a more proactive role on financial regulation.

Powell is likely to face questions on both fronts in confirmation hearings before the Senate in coming weeks.

The president will have a chance to put a more direct stamp on the Fed’s regulatory stance when he names his pick for the central bank’s key position of vice chair of supervision. Two further board slots are also set to be filled. The administration is looking to finalize its decision in the “next couple of weeks,” White House National Economic Council Director Brian Deese said. 

©2021 Bloomberg L.P.