Biden stays safe in the continuity of the Fed

Biden stays safe in the continuity of the Fed



Policy differences Jay Powell with Lyle Brainard The only name on Joe Biden’s Fed Chairman’s Candidate List is narrow.Nevertheless, the president wisely put continuity above change Update Powell For one the second termIt is doubtful whether choosing Brainard will have too much influence on the speed at which the Fed plans to tighten policy in the near future, even though the market considers her to be milder than Powell.

Either way, the Fed will withdraw its quantitative support for the US economy of US$120 billion per month from next month, and the futures market has already digested the expectation of two interest rate hikes in 2022. Turning point For the market and economy, Biden’s choice is wise. Together with Powell’s re-election, Brainard was promoted to vice chairman, giving the impression of continuity in monetary policy and more robust supervision methods.

Nevertheless, the Democratic left is not satisfied with Biden’s decision. The differences between Powell and Brainard on bank supervision are far greater than the differences on monetary policy. Senator Elizabeth Warren of Massachusetts called Powell “a dangerous man” for relaxing the capital and liquidity restrictions on Bank of America-a move that Brainard usually opposes. But political reality shows that the dissatisfaction of the left will only increase the possibility that the Senate will confirm Powell in time at 50:50.

Powell was promoted to this role by Donald Trump in 2018. Although he is a Republican, he resisted Trump’s bullying before the pandemic to keep interest rates low in the heating economy. This means that as Covid-19 fades, Powell will have the necessary perseverance to withdraw the Fed’s special easing policy. Biden may reassure the left by selecting Democrats to fill three vacancies at the Fed, including the vice chairman of supervision.

In addition to his confirmation, Powell will face two games Big challengeThe first is to control inflation in the United States. Last month’s inflation rate was 6.2%, the highest level in more than 30 years. The Fed has always argued that this is a “temporary” problem caused by the temporary disruption of the global supply chain. It may be so-and there are signs that some bottlenecks may be unraveled. But the Fed is aware of the scope of the commodity shortage and the risks of inflation that come with it, it is too late.

It may need to change faster than planned. Asset purchases originally scheduled to end in June next year are gradually decreasing, and may have to proceed more quickly. The risk that higher inflation expectations may anchor the real economy is not trivial. Moderate tightening now can avoid more severe contractions in the future.

The second challenge will be the Fed’s expanding mandate, especially with regard to climate change. Powell once said that global warming should be resolved by other government agencies. Brainard is more receptive to the Fed’s regulation of carbon financing.Biden’s statement emphasized that Powell and Brainard “both deeply believe in [Fed] Action is needed.” This means that Powell has turned his stance on what the European Central Bank and the Bank of England are doing. In fact, the European Central Bank warned on Monday that if European banks fail to take climate risks seriously, they may “finally” Facing higher capital requirements.

This idea of ??the central bank should be welcomed. But the political response, especially in the United States, may be divided. The Republican right will view Powell’s change as a reason to vote against his nomination. However, most Democrats and some Republicans may let him cross the bottom line. The confirmation of the two parties is good news for the Fed and the US economy.


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