Brainard’s Fed Contention Puts Focus on Inflation, Jobs Views
Investors are gauging how she would handle an economy that’s enduring a historic surge in prices.
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Federal Reserve Governor Lael Brainard’s recent interview for the U.S. central bank’s top job has heightened focus on her views on inflation and employment as investors gauge how she would handle an economy that’s enduring a historic surge in prices.
Neither Brainard, who joined the Fed board in 2014, nor Chair Jerome Powell, who’s been on the panel since 2012, have until this year faced making monetary policy amid the prospect of sustained inflation rates well exceeding the central bank’s 2% target.
While Powell has repeatedly addressed questions on his approach toward policy choices and economic risks in post-Fed-meeting press briefings and congressional hearings, Brainard comments less frequently in occasional speeches.
Powell -- who was elevated to the chairmanship in 2018 -- was for months almost universally seen as set for reappointment by President Joe Biden. But Brainard’s interview with Biden for the top job earlier this month, alongside a similar meeting for Powell, elevated her perceived chances for the post, even as most economists still anticipate Powell to get another term.
Brainard advocates, including former Republican-appointed Federal Deposit Insurance Corp. Chair Sheila Bair, have become more vocal amid criticism of Powell over his regulatory record. An announcement on Biden’s pick is expected before Thanksgiving.
Some financial market participants have speculated that Brainard, a Democrat, may put more weight on the employment side of the Fed’s dual mandate, which also includes stable prices.
Brainard declined to comment for this story.
But there is no direct evidence that Brainard, 59, can’t be tough on inflation. History shows that Democratic nominees can sometimes be more hawkish than GOP ones, as was the case with Governor Laurence Meyer, who served with the Republican Fed chief Alan Greenspan. And Paul Volcker, the Democratic chair who whipped inflation in the 1980s, was the most famous hawk in Fed annals.
What is clear is that Brainard has been a big supporter of the Fed’s new policy framework, which was designed to overcome two big problems: constant undershooting of the 2% inflation target -- which kept rates too close to zero -- and too much pre-judging of what the level of maximum employment might be.
Though it wasn’t publicly revealed, Brainard -- a Ph.D. economist -- was a co-author of the new language around the employment goal that came out of the strategy overhaul unveiled in August 2020.
Maximum employment is now defined as a “broad-based and inclusive goal,” and Fed policy will no longer pre-judge the level of maximum employment. The shift marked a critical embrace of broader readings of the labor market and a move away from simplistic models that rely mainly on the single national unemployment rate. The change came after analysis highlighting how the Fed in the past started tightening even while minority unemployment rates remained elevated relative to Whites.
Unlike some Fed officials, Brainard hasn’t been ready to conclude that labor supply has been permanently reduced by the pandemic -- something that, if true, would suggest raising rates before pre-Covid-19 employment metrics were achieved.
“I see no reason employment should not reach levels as strong or stronger than before the pandemic,” Brainard said on Sept. 27. By contrast, at the July Fed policy meeting, “several” policy makers thought “the pandemic might have caused longer-lasting changes in the labor market,” minutes of that session showed.
As time passes, Brainard’s position looks increasingly bold -- because measures such as the labor force participation rate aren’t budging, despite strong job gains.
Job Shortfalls
Powell has most recently communicated that the Fed policy committee is starting to shift on this question -- though he is not conclusive.
“We have a completely different situation now, where we have high inflation and we have to balance that with what’s going on in the employment market,” he said at his Nov. 3 press conference. “There’s room for a whole lot of humility here as we try to think about what maximum employment would be.”
As for inflation, Brainard’s exposure to overseas economies -- she was the Treasury Department’s top international official during the Obama administration -- offered insight into how damaging escalating prices can be to hard-pressed households without the ability to maintain their purchasing power.
“Inflation and price stability to her are about the mandate, but also about how far people’s paychecks are going,” said Navtej Dhillon, who worked with Brainard at the Treasury.
Brainard sees inflation as a significant risk, but has also called for patience while Covid-19 supply constraints unwind. That’s essentially the position of Federal Open Market Committee, which has started to scale back its asset purchases but isn’t planning to raise rates anytime soon.
The board member has frequently noted the risk that the U.S. economy could slump back into a period of low inflation once bottleneck issues are resolved. This suggests that her timeline for overshooting 2% inflation might be a bit longer, though also contingent on keeping the public’s expectations for price gains anchored.
Brainard advocates, including Bair, Nobel laureate Joseph Stiglitz and Massachusetts Institute of Technology Professor Simon Johnson, have tended to highlight her record on financial regulation rather than monetary policy -- given the clearer differences with Powell on that front.
Brainard has dissented frequently on bank-rule changes that Powell went along with in the name of making regulations more efficient.
“Lael is as expert on regulation as the Fed’s powerful staff. She has mastered its complexity,” Bair said in an email. “These actions were billed as ‘simplification’ but in fact, cumulatively, significantly weakened the safeguards put in place after Dodd-Frank” financial reforms, she said.
However, the politics of inflation are of the moment, after a report Wednesday showed consumer prices surged 6.2% in October from a year before, the most since 1990. And the key question for the Fed in coming months will be how strongly to stick with a patient approach on price gains to allow further improvement on the jobs front.
“Putting the modifiers of ‘inclusive’ and ‘broad-based’ employment, that upped the stakes because you are not going to get that if you don’t allow trade-offs with inflation now,” said Claudia Sahm, a former Fed staff member who is now a senior fellow at the Jain Family Institute.
Now it is up to Brainard and those who included the modifiers to explain how they will balance that with inflation, Sahm said.
“They don’t have a lot of time,” she said.
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