Republicans have seized on a burst of inflation to hammer President Joe Biden’s economic agenda, but the most important policymaker on the president’s side is one of the GOP’s own.
Federal Reserve Chair Jerome “Jay” Powell, who worked in the George H.W. Bush administration and was elevated to central bank chief under President Donald Trump, has been the strongest voice in reassuring financial markets and Congress that higher prices will ease as the economy fully emerges from the pandemic.
That stance puts Powell in lockstep with the White House, which could smooth his path to reappointment by Biden, a pivotal decision that’s due in the coming months. Either way, Biden’s political fate is intricately tied to whether Powell is right, since the president's sweeping recovery plans depend on the Fed striking the right balance between a growing economy and controlling inflation.
Treasury Secretary Janet Yellen, Powell’s predecessor at the Fed, has echoed the central bank chief’s argument, and she will be crucial to the debate over whether to appoint him, according to a senior White House official.
“There’s very little daylight between Yellen and Powell on their inflation view,” said Mark Spindel, founder of Potomac River Capital and co-author of the book, “The Myth of Independence,” about the Fed’s relationship with Congress. “I think it is Jay’s job to lose.”
Biden barely knows Powell — they’ve only spoken in their current roles once, at a White House meeting of financial regulators just last week — but the Fed leader worked with Yellen for nearly six years at the central bank, including when she was chief, and the two enjoy a close working relationship.
At the heart of the discussion for both officials is how quickly the job market will heal and how long higher inflation will last. Powell has cited the risk of prematurely raising rates, which are near zero now. Increased borrowing costs are the Fed’s main tool aimed at making sure prices don’t rise too rapidly, but they also slow down activity — something the central bank doesn’t want to do while millions of Americans are out of work.
“A pretty substantial part, or perhaps all of the overshoot in inflation, comes from categories that are directly affected by the reopening of the economy,” Powell told lawmakers at a hearing last week.
Over the next few months, central bank officials will be watching whether that data shifts to suggest a more persistent rise in inflation. Powell has promised vigilance and humility — “there’s a lot to be humble about,” he told reporters this month, referring to the challenges of forecasting. But that question won’t be settled before autumn. His immediate political fate will rise and fall on the job he has already done.
“There’s nothing the Fed can do about inflation between now and the hearings for the next Fed chair” because the central bank’s policies take time to work their way through the economy, said Jason Furman, who served as chief economist under President Barack Obama.
Of course, issues other than inflation will factor into the decision on whether to keep the Fed chair. Though Powell has prominent defenders on the left, some progressive groups have called on Biden to pick a more liberal candidate who will do more to prepare banks to deal with the financial risks posed by climate change and regulate lenders more aggressively. Others have pressed the president to take into account the lack of diversity on the Fed board.
Powell will also have a tricky communication job this summer as debate on the path forward on monetary policy heats up within the Fed. Policymakers are increasingly split over when to begin removing the central bank’s massive support for the economy, the most consequential government decision for financial markets over the coming years.
Some officials are talking about hiking interest rates as early as 2022 — an election year — setting up a contentious divide inside the central bank under Powell or his successor, since most officials don’t foresee higher rates until 2023 or later.
More imminently, the Fed could decide later this year to begin slowing its purchases of U.S. government debt and mortgage-backed securities, as the economy picks up speed. The central bank has been working to gradually prepare financial markets for that, to avoid a repeat of the “taper tantrum” of 2013 in which stock and bond markets sold off sharply after the Fed initiated a similar process of winding down its bond buying.
The possibility of spooking investors could pose risks both to the economy and to Powell’s political future.
“The September [policy] meeting could turn out to be an important one” for the Fed, said Krishna Guha, vice chair of financial research firm Evercore ISI and a former New York Fed official. “Initiating tapering is always a roll of the dice. You can try to prepare for this as they surely will — very, very carefully — but at the end of the day, we still don’t know how the market will react.”
Meanwhile, against the backdrop of the Fed’s current market support has been a surge in cryptocurrencies, Special Purpose Acquisition Companies and so-called meme stocks like GameStop, raising worries that the central bank’s easy money policies are feeding financial bubbles.
That could bolster calls for a Fed chief who’s more aggressive on regulation — a major point of criticism for Powell among progressives in particular.
Sheila Bair, a former Republican head of the Federal Deposit Insurance Corp., a bank regulator, argued that requiring banks to raise more loss-absorbing capital would be prudent in this environment.
“It seems to me, if you’re worried about the risk of overheating, that’s where you should look,” she said.
Still, financial markets themselves are not showing signs of stress about the prospect of inflation, suggesting that, so far, they trust Powell.
“The markets don’t believe inflation is a problem,” said Bill Spriggs, a professor at Howard University and the chief economist at the AFL-CIO whose name has been mentioned as a possible Powell replacement himself. “He’s done a good job in explaining that this is the rough wind as we re-enter whatever normal’s going to be.”
The Fed chair has also maintained close relationships with lawmakers on both sides of the aisle amid a four-year term that has included rate hikes, blistering attacks from Trump, turbulence in funding markets and a global pandemic. The strength of his candidacy is a sign of his skill at adapting to both the political and policy needs of the moment, said Ed Mills, Washington policy analyst at Raymond James.
“He seems like the Fed chair that has had nine lives,” Mills said.
Ben White contributed to this report.
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