the money game

How Joe Biden Is Deciding Who Will Lead the Federal Reserve

Jerome Powell and Lael Brainard. Photo: Getty Images

President Joe Biden is expected to announce at any moment his nominee for what’s going to be a pretty hellish job for the next four years, the chair of the Federal Reserve. Of the two main contenders, the most likely to get the nod is the one who’s currently occupying the seat, the silver-haired Jerome Powell, a Trump pick originally appointed to the Fed’s Board of Governors by Barack Obama. Over the course of four years, Powell has remain generally popular in D.C. and beyond, including navigating the treacherous economic challenges of the pandemic and overseeing massive stimulus programs, like the Paycheck Protection Program, without any major blowups.

The other front-runner is Lael Brainard, a member of the Fed Board since 2014 who pushed a dovish new framework for thinking about inflation and is popular with the Warren wing of the Democrats for writing about climate change and infrastructure, advocating for more diversity in her field, and pushing for banks to hold more money to protect against economic shocks.

For Biden, choosing who he’ll nominate is a decision that’s going to reverberate through the economy at a sensitive time. The Fed has a dual mandate to keep unemployment low and prices steady. While unemployment is falling quickly, global trade increasingly resembles the Ever Given stuck in the Suez Canal — a tangled mess that could reverse the economic gains made since the depths of the pandemic. “Given the unique circumstances facing the country, which arise out of a once-in-100-year pandemic, there is no playbook for what happens and what one should do,” Dennis Kelleher, co-founder and CEO of Better Markets, a nonprofit that advocates for stronger regulation. Get this wrong and companies could shed jobs, higher prices could nullify rising salaries, and loans or mortgages could become prohibitively expensive. Busted economies have sunk presidencies before, and, as former Obama adviser Lawrence H. Summers pointed out in an essay on Monday, sustained high inflation in the months and years ahead — even a continuation of the current 6 percent rate — could quite possibly pave the way for Donald Trump to return to the White House.

The odds-on favorite to get the nod from Biden is Powell. Treasury Secretary — and former Fed chief — Janet Yellen supports his nomination, as do international betting markets. On the much-asked question of how Powell and Brainard would differ over handling inflation, the answer seems to be: probably not much. Right now, the plan seems to be to keep rates near zero and continue supporting debt markets by buying $120 billion a month in government bonds and mortgages — though with a plan to begin tapering that amount later this month. Brainard has advocated for giving the Fed more flexibility on how it measures inflation, giving the central bank more discretion on when to raise rates if they thought that it would hurt the economy. According to minutes of the Federal Open Market Committee, the body that controls rates, Powell votes the same way on these questions — suggesting he agrees with that approach. Brainard has recently said that inflation was a temporary phenomena, echoing the central bank’s consensus analysis.

Where they differ is on the Fed’s powers to regulate and supervise banks, including forcing financial institutions to hold onto more money in good times in order to absorb potential shocks in bad ones. A stricter approach here — the one favored by Brainard — can depress lending to businesses, which can lower the gas on expansion and help keep the economy from overheating (potentially useful in an inflationary environment). She hasn’t been shy about dissenting from Powell’s tendency for easing rules on banking, making it something of a signature issue for her. She would be a top choice for the Fed’s chief bank regulator if she doesn’t get the top spot. (If she were to get that position, it would likely create a scenario where she would try to make bank rules stricter — like having them hold more money — putting Powell in a position where he may have to reverse some of his positions from his first term).

Could Brainard end up pulling an upset? Powell certainly has his detractors. Representatives Alexandria Ocasio-Cortez and Rashida Tlaib signed a letter calling on Biden to dump Powell, in part for his lack of attention paid to climate change. Senator Elizabeth Warren, who’s made her name on reining in the big banks, called him a “dangerous man” for diluting some of the Obama-era restrictions on Wall Street banks, arguing that his reappointment would lead to more dismantling of regulations and for a riskier financial system. Economist Joseph Stiglitz has advocated for his ouster, and other groups that advocate for stronger regulation have made hay out of his regulatory history.

But it’s still a long shot. Bank regulation, as important as it’s been in keeping the financial system steady during the last decade, simply isn’t the issue of the moment. “There’s only so much oxygen in the political system,” Kelleher said. “The reality is that the infrastructure bill, reconciliation, debt ceiling, the budget, Afghanistan, and — let’s not forget, the ongoing massive effort to defeat the pandemic — is crowding out virtually everything else.” Which is to say, Biden is unlikely to spend any political capital here by bucking the orthodoxy and choosing the underdog candidate.

Whoever the next Fed chair is, the main job is going to be putting out fires. By calling the recent bout of inflation “transitory,” the central bank’s credibility has been questioned by prominent economists like Mohamed El-Erian. Wall Street already thinks the Fed will screw up in responding to the challenge (and likely be forced to raise interest rates before too long). The reality is, even if the next Fed chair does everything right, there’s a lot that can go wrong — and whoever’s in that position will feel the heat. Who wants a job like that?

How Joe Biden Is Deciding Who Will Lead the Federal Reserve