Fed Leadership Question Risks Adding New Uncertainty to Markets: FT

Press conferences after US central bank meetings rarely stray from the topics at hand: the state of the economy and how monetary policy should be fine-tuned to achieve robust growth.

But for Jay Powell, his past two gatherings — the most recent of which culminated on Wednesday in the first big move by the Federal Reserve to scale back its pandemic-era stimulus — have featured probing questions about his fate at the helm of the institution.

With just three months until Powell’s term expires, the window is narrowing for the Biden administration to decide whether it will renominate the incumbent for another four-year stint or opt for new leadership.

Further delays risk fomenting even more uncertainty. According to Fed watchers and market participants, it raises the spectre of financial volatility at a delicate moment for the US economy as it recovers from the pandemic and contends with uncomfortably elevated inflationary pressures.

“This is one of the most important decisions that can be made and needs to be made because we are running out of days to confirm,” said Diane Swonk, chief economist at Grant Thornton. “If you want to destabilise financial markets, don’t name a Fed chair.”

“This is a mistake that can be avoided,” she added.

Some progress appears to have been made in recent days. Biden, who pledged on Tuesday that he would make a decision “fairly quickly”, met Powell at the White House on Thursday, according to a person familiar with the matter.

He separately convened with Lael Brainard, a Fed governor who is seen as another possible contender for the role and enjoys support from members of the progressive wing of the Democratic party for her firmer approach to banking regulation.

Complicating the selection process is a number of other Fed vacancies the Biden administration has to fill, including the vice-chair of supervision position that was vacated by Randal Quarles in October. Another leadership position opens up in January, when Richard Clarida’s term as vice-chair ends. There is also one remaining vacancy on the board of governors.

Nominees will require Senate confirmation, a process that some fear could be dragged out into early next year.

“If we get into late January and this is still unresolved, it is going to start feeling like the debt ceiling,” said Andrew Levin, who worked on the Fed board for two decades, referring to the perennial fight over the US borrowing limit that kicks up significant uncertainty but always concludes with an eleventh-hour resolution that avoids an economic calamity.

“Financial markets will start to get uneasy,” he said.

Powell, who was tapped by Donald Trump in early November 2017 to lead the Fed and previously served as a top Treasury official under George H W Bush, has already won the backing of a number of Republican senators in addition to many Democratic lawmakers.

That bipartisan support has made his renomination seem likely, despite the central bank suffering one of the worst reputational crises in its history on his watch.

In September, senior officials were found to have actively traded in a year when the Fed was aggressively intervening in financial markets to offset the damage caused by the pandemic. Two regional bank presidents resigned and Powell moved swiftly to severely restrict personal investing.

“Powell has an easier path to confirmation than Lael Brainard given his political capital within the Senate,” added Swonk, a consideration that is all the more relevant given the looming deadline.

“There has been increased speculation [in Washington] that after the election results of Tuesday, [Democrats] are looking for some quick wins and stability, which both play into a renomination of Powell,” said Ed Mills, Washington policy analyst at Raymond James, referring to the shocking defeat delivered to Democrats in Virginia’s governor race last week.

Levin, who is now a professor at Dartmouth College, added: “It is conceivable that the White House is trying to think about how to move towards a broader, less partisan approach and maybe the slate of Fed nominees is where to do that.”

With the Fed also on the cusp of a big shift in its monetary policy stance, some economists and investors make the case that continuity is critical at this juncture.

Brainard, who served in the Clinton and Obama administrations before joining the Fed board in 2014 and is a leading contender for either of the two vice-chair positions, would be unlikely to deviate sharply from Powell’s patient approach if in charge.

But a change in leadership is still seen as risky by some at a time when Fed officials are engaged in a complicated debate about the appropriate path forward.

“This would be the first time in modern memory that we could have a new Fed chair when Fed policy is at a very uncertain stage,” said Roberto Perli, who used to work at the central bank.

When former Fed chair Ben Bernanke assumed his position in 2006, interest rate increases were well under way and expected to continue, noted Perli. When his successor, Janet Yellen, started in 2014, a reduction or “tapering” of asset purchases was already in motion and it would be about two years before any adjustments to interest rates.

“Today, while tapering has been announced, the pace might have to be changed and rate hikes might have to come in short order, depending on how inflation evolves,” said Perli, who now serves as the head of global policy research at Cornerstone Macro.

Source: https://www.ft.com/content/87d4e7f4-2f23-4c88-b70b-1f72224a4fc1