Fed Leadership Uncertainty Muddies Rate-Policy Outlook: WSJ

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Fed Chairman Jerome Powell’s term expires in February.

Photo: kevin dietsch/pool/Shutterstock

When Federal Reserve Chairman Jerome Powell steps to the microphone at a news conference next week, he may be unable to answer one of investors’ most pressing questions: Will he return for a second four-year term in February?

Uncertainty over whom President Biden will name to lead the Fed next year hangs over the central bank’s looming policy decisions on what to do if the recent rise in inflation turns out to be more persistent than anticipated.

The Fed is likely to detail at its meeting next week its plans to begin winding down its $120 billion-a-month bond-buying stimulus program and end the purchases by next June. Mr. Powell could use his postmeeting press conference to provide additional nuance about how the Fed sees the outlook for economic growth, employment and inflation.

Because Mr. Biden hasn’t decided on who will run the Fed, however, analysts say there is a potential for increasing uncertainty over how and when the central bank might raise interest rates from near zero next year. Recent comments from Fed officials have indicated more internal divisions over this question.

“This tension may occur in concert with a possible leadership vacuum at the Fed,” said Tim Duy, chief U.S. economist at SGH Macro Advisors, in a note to clients. “The lack of White House attention to the Fed creates potentially enormous policy uncertainty [when] the Fed may be at a policy pivot point.”

A White House representative said, “The president is engaged on these issues with his senior economic team and will make decisions in a thoughtful manner.”


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Mr. Powell’s term as Fed chair expires in February, meaning he will lead the central bank’s policy meetings next week, in mid-December and in late January.

Presidents have typically announced their nominee in October or by early November to give the Senate sufficient time to confirm their pick. For example, then-President Donald Trump announced Mr. Powell to succeed Janet Yellen on Nov. 2, 2017.

Mr. Biden is set to depart Thursday for a six-day trip to Europe, meaning he is likely to make his announcement at a later date than his recent predecessors.

“It’s starting to become urgent,” said Goldman Sachs chief economist Jan Hatzius. “By this time, you should have a pretty clear idea who” will be leading on policy decisions.

If Mr. Powell isn’t reappointed, Fed governor Lael Brainard is widely seen as the most likely candidate to take his place. Ms. Brainard has argued in recent months for the Fed to unwind its stimulus policies at a marginally slower pace than Mr. Powell, but the two are otherwise largely in sync on monetary policy.

A major policy shift is seen as unlikely if Ms. Brainard becomes chair because interest-rate policy is agreed upon by a group of up to 12 officials, called the Federal Open Market Committee. The body includes all seven Fed governors, the New York Fed president and a rotating group of four other reserve bank presidents.

A major policy shift is seen as unlikely if Fed governor Lael Brainard becomes chair.

Photo: Al Drago/Bloomberg News

U.S. bond markets have started to reflect expectations of Fed interest-rate increases next year. Last week, the probability of at least two quarter-percentage-point rate increases by the end of next year rose to 75%, according to futures market prices tracked by CME Group. That was up from around a 20% probability at the conclusion of the Fed’s meeting last month.

Mr. Biden has been consumed in recent weeks with negotiations between congressional Democrats over how to winnow a $3.5 trillion social spending and climate plan that they hope to approve without Republican support.

Another reason for the delay on Fed personnel: The White House is managing a mix of other appointments with an eye toward announcing a slate of nominees simultaneously. There is one vacancy on the Fed’s board, and there will be at least one more after Fed Vice Chairman Richard Clarida’s term expires in January. Mr. Biden also has to designate someone to a four-year term of vice chairman of bank supervision after that post, held by Fed governor Randal Quarles, expired earlier this month.

Initially, the ramifications of a delay were largely political, as it encouraged Sen. Elizabeth Warren (D., Mass.) and other critics of Mr. Powell to step up their campaign for Mr. Biden to select someone else to succeed him. Ms. Warren last month said Mr. Powell’s record favoring somewhat looser financial regulations made him a “dangerous man” to lead the central bank.


In June, Federal Reserve Chairman Jerome Powell described the outlook for inflation in the U.S. economy. Credit: Al Drago/Associated Press

A controversy over disclosures of stock trades by senior Fed officials, which resulted in the sudden retirements of the presidents of regional Fed banks in Dallas and Boston, has further polarized the fight over who should lead the Fed.

Ms. Yellen, Treasury secretary, has voiced support inside the White House for Mr. Powell’s reappointment, according to people familiar with the matter. She rebutted one prominent argument progressives have advanced against Mr. Powell by defending his record on bank regulation in a CNN interview on Sunday.

“During his term—and during my term and [Ben] Bernanke’s term—regulation of financial institutions has been markedly strengthened,” she said, adding that those improvements in bank supervision “have stayed in place during the Powell regime.” Ms. Yellen’s defense of Mr. Powell’s record was notable because she voiced some concern last year about the direction of regulatory policy under his watch.

So far, the only Democratic senator to publicly oppose Mr. Powell’s reappointment is Ms. Warren. Several outside groups have called for Mr. Biden to name someone who will champion a bolder approach on progressive priorities such as climate change. But Republicans have expressed alarm about how, under Mr. Powell, the Fed has already veered into policy issues such as climate change and racial justice that they say are beyond the central bank’s remit to boost employment and keep inflation low and stable.

The fight over Mr. Powell’s future is coming at a delicate moment for the institution. He, Ms. Brainard and other senior Fed leaders initially described inflationary pressures this year as transitory, suggesting price increases would be short lived. But some officials are now bracing for a longer interval of higher prices as supply-chain bottlenecks worsen and as energy and other commodity prices rise.

One risk for the Fed is that even if officials are ultimately right about the prices of certain goods moderating, business and consumers might come to expect higher prices to continue. Officials refer to this as the “un-anchoring” of inflation expectations, and they are closely monitoring consumer surveys and market-based gauges for signs that expectations are drifting higher.

“The next year will be the hardest for the Fed since Volcker,” said Claudia Sahm, a former Fed economist, referring to then-Fed Chairman Paul Volcker’s interest-rate increases of the early 1980s that brought down inflation at the cost of a steep recession. “These appointments should have been made in August.”

Write to Nick Timiraos at nick.timiraos@wsj.com

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Source: https://www.wsj.com/articles/fed-powell-biden-interest-rates-11635357963?siteid=yhoof2

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