The pressure on Joe Biden had been great, but in the end the president resisted the sometimes shrill demands from his own ranks to completely rebuild the top of the US Federal Reserve and to fill vacancies exclusively with party friends who were loyal to the party. As the White House announced on Monday, Biden will propose to the Senate that incumbent Federal Reserve Governor and enrolled Republican Jerome Powell be re-elected for another four years beyond February 5, 2022. The economist Lael Brainard, favored by the left wing of his Democratic Party, is left behind. The 59-year-old, who has been a member of the Fed’s Executive Board since 2014, will at least be promoted to Powell’s deputy and take on the extremely important bank regulation department.
With the package solution, Biden hopes to appease the critics in his own ranks, to ensure strict regulation of the financial industry, to advance the fight against inflation and at the same time to prevent criticism. “If we want to build on the economic success of this year, we need stability and independence at the Federal Reserve,” said Biden in a written statement. “I have full confidence that, after the acid test of the past 20 months, CEO Powell and Dr. Brainard will show the leadership that our country needs.”
Indeed, the Fed will need leadership – especially if it tries to prevent the latest wave of inflation from leading to a dangerous wage-price spiral. In October, the inflation rate had reached 6.2 percent, its highest level in a good 30 years, with petrol, gas and many foodstuffs the increases were in some cases even far higher.
The high inflation rates have massively damaged Biden’s popularity
The massive price increases, long underestimated by the Fed, have played a key role in the fact that Biden’s popularity ratings among citizens have plummeted to a dramatic low in recent months. The president has therefore made the fight against inflation an absolute priority and instructed his officials to take countermeasures. But the central bank is also under pressure: Many experts are calling for the Fed to reduce its measures to support the economy and the labor market faster than previously planned and to accelerate the change of course that has been initiated towards a more vigorous fight against inflation.
Against this background, a disempowerment of Powell and the nomination of Brainard would have sent a potentially fatal signal to the public, because the diplomat’s daughter, who was born in Hamburg, is considered a capable and experienced monetary politician. But it also has the reputation of giving more importance to efforts to achieve full employment than to fighting inflation and to keep key interest rates low for too long rather than too short a period. In view of the latest price developments, it would have been questionable whether she would have brought together the majority in the Senate for her appointment, because in addition to many Republicans, some Democrats have also expressed doubts about her.
It is also true, however, that she and Powell have voted equally on all monetary policy decisions in recent years. This applies to the step-by-step rate hikes in 2017 and 2018 as well as to the radical lowering of the rates to practically zero immediately after the outbreak of the corona pandemic. The claim of some Republicans that the economist is a kind of left-wing radical is therefore unfounded.
Powell initiated many resolutions that are more in line with the Democrats
Conversely, Powell is by no means the lobbyist of the financial industry and a friend of lax banking rules, as left-wing Democrats like Senator Elizabeth Warren from Massachusetts repeatedly portrayed him. It is true that Brainard is more energetic than the Fed chairman on both banking regulation and the question of what role monetary policy should play in the fight against climate change. However, calling this a “dangerous man”, as Warren had recently done, met with incomprehension, even among many Democrats. Even the authors of the great banking reform of 2010, the former Democratic members of Congress Christopher Dodd and Barney Frank, rejected the criticism: They said that under Powell there had been “no significant attacks” by the Fed on their legislative package.
Other party friends Warrens, Dodds and Franks go even further and point out that Powell has initiated many resolutions in the past four years that a Fed chief from the ranks of the Democrats would hardly have been better off can initiate. Right at the beginning of the pandemic, he courageously opened the caskets of the central bank and thus saved the economy from an even worse crash. He sponsored projects against racial discrimination, against inequality and for more climate protection and had a new strategy developed, thanks to which the central bank’s inflation target is no longer two percent today, but only an “average” two percent Time was below this value, then also significantly higher for a while – as is currently the case. This allows the Fed to keep the key interest rate low for longer than before, for example to enable marginalized groups to re-enter the labor market.
At first it remained open whether Biden would fulfill another wish of many politicians and activists and appoint more women and representatives of social minorities to the Fed leadership. Three of the seven positions are or will soon be vacant.