Jay Powell faces a major challenge in the second act as Fed chairman

For a long time, Joe Biden (Joe Biden) decided to choose Jay Powell (Jay Powell) re-elected as the chairman of the Fed. For a long time, this seems to be a natural result of a president seeking to stabilize the helm of the Fed when faced with a series of economic challenges.

But Powell’s four-year tenure as Fed chairman is far from straightforward: he must overcome a severe challenge from Fed Governor Lyle Brainard. Transaction scandal Shocked the central bank in recent months, and attack From progressive people about his record in financial supervision.

Powell’s final confirmation process through the Senate is expected to be relatively smooth, because he has the support of most Democrats and Republicans in the upper house.

However, despite this, during his four-year tenure as the country’s top monetary policy maker, he will still face major challenges—mainly how to manage an economy that has failed to return to full employment during a period of disturbingly high inflation.

“If inflation is a serious problem at this time next year, the Fed is eager to tighten [monetary policy], The market is not trusting. .. Then Powell’s legacy will be damaged,” said Vincent Reinhart, who has worked for the central bank for more than 20 years. “In a sense, we will rewrite his history. “

Although Biden chose Powell as the chairman of the Federal Reserve, he appointed Brainard as the vice chairman and shaped them into a team to jointly drive the monetary leverage of the U.S. economy.

Federal Reserve historian Peter Conti-Brown at the University of Pennsylvania stated that when Powell was first appointed as Fed chairman by Donald Trump in 2018, he was seen as an impossible Candidates-this is a “historical accident”.

Powell is a lawyer without a doctorate in economics, and Janet Yellen started working only when Trump was sitting in a chair. The Republican was originally appointed to the Federal Reserve Board by Barack Obama in 2012 when he did not work in the government for nearly two decades after assuming a senior Treasury position in the George HW Bush administration.

Powell was re-nominated by the Democratic president and faced fierce progressive opposition. This was a major coup for Powell. Conti-Brown said: “He has shown that he is a flexible central bank governor and is not overly bound by dogma or ideology.”

Powell met with former President Donald Trump in 2017. Trump once asked whether Powell or China’s Xi Jinping was the greater enemy of the United States. He abandoned the belief that the White House should be outside monetary policy matters © Drew Angerer/Getty

The economic collapse caused by the 2020 pandemic, and the policy response that followed, consolidated Powell’s position among the famous Fed chairmen.

“The Fed was in its best shape in March 2020,” said Harvard scholar Jeremy Stein, who was nominated by Obama as a member of the Federal Reserve Board of Governors along with Powell in 2011.

“Powell experienced his Draghi moment, and he encountered it in every aspect,” Stein added, referring to the critical moment of the Eurozone crisis, when European Central Bank President Mario Draghi promised ” Save the single currency at all costs.

As the United States closed in early 2020 and millions of jobs suddenly disappeared, the Fed responded quickly. Within a few days, the central bank lowered interest rates to zero, actively intervened in the US government bond market, and introduced a series of new emergency measures.

Donald Kohn, who served as the vice chairman of the Federal Reserve during the global financial crisis in 2008, added: “He has adopted our script from 2008-09, implemented the plan and redoubled his efforts.” “He went all out. Invented new things.”

Powell’s announcement in August 2020 has undergone a major change in the way the central bank considers monetary policy, further highlighting the transformative nature of his tenure.

The Fed did not raise interest rates as soon as price pressures appeared, as the Fed did after the global financial crisis, but promised to heat up the economy in order to produce a more substantial recovery that would benefit a wider group of Americans.

In practice, this means maintaining interest rates at current levels close to zero until inflation reaches an average of 2% and the Fed maximizes employment.

“Jay Powell formulated monetary policy in an inclusive way unprecedented in the history of the Federal Reserve,” said Reinhart, now chief economist at Mellon University.

“This means that Fed officials are no longer locked in the temple. People know the Fed better and appreciate it more,” he added.

But some Fed observers and former officials warned that if the inflation problem is worse than expected and the central bank is forced to take measures to control it, Powell may have to consume most of the political capital he has accumulated in recent years.

“This is one of the most challenging times for the Fed in decades,” said Randall Kroszner, who served as a governor of the Fed from 2006 to 2009.

“Both parties will face tremendous pressure: critics will say that the Fed has forgotten its inflation mission, while others will say that they are not doing enough to support growth and create jobs,” he added. “We have heard these two criticisms now, and they will only intensify.”

There are already signs that the Fed may act faster than expected to curb inflation. Last week, a senior Fed official opened the door to its huge bond purchase program, which may be a precursor to an early rate hike. The rate has risen.

Alan Blinder, a former vice chairman of the Federal Reserve, said that unless another wave of serious Covid-19 cases occurs in the next few months, the Federal Reserve may accelerate its “scaling” and raise interest rates faster.

Powell likes to be outspoken and has established himself as a different type of central bank governor. “He is better at communicating than any Fed chairman I know,” said Claudia Sahm, a former Fed economist and senior researcher at the Jain Family Institute.

As Trump stepped up his attacks on his nominees, these skills were tested long before the coronavirus spread to the United States last year.

In 2019, Powell took a photo with Mark Carney, then Governor of the Bank of England
In 2019, Powell took a photo with Mark Carney, then President of the Bank of England. © David Paul Morris/Bloomberg

The former president once asked Powell or China, Xi Jinping is the greater enemy of the United States, and he discarded the long-held belief that the White House should stay outside of monetary policy matters. Instead, Trump put pressure on the chairman to reverse the series of interest rate hikes that Powell presided over in 2018 to advance the austerity cycle started under Yellen’s leadership.

Recently, progressive Democrats have criticized what they call the retrogression of key regulations following the financial crisis led by Powell, shifting the scale to looser capital requirements, less arduous stress tests, and looser trading restrictions on the largest banks.

Kathryn Judge, a professor at Columbia University, said: “In terms of monetary policy, Powell has done a great job in focusing on employment, but he has not done a good job in really focusing the attention needed on financial regulation. “University with expertise in financial regulation. Senator Elizabeth Warren from Massachusetts even called Powell a “dangerous man.”

In September last year, when the Fed strongly supported the financial markets, senior officials were found to be active investors, and the subsequent trading scandal made critics even more bold.

Two regional bank presidents later resigned, and Powell took decisive action to tighten restrictions on personal investment, but some Fed observers warned that the institution’s credibility will take time to fully recover.

For Republicans, Pennsylvania Senator Patrick Toomey’s “wake up mission contagion” has also damaged the Fed’s credibility. Some regional bank branches have delved into topics such as racial differences and climate-related risks.

However, Powell easily withstood many of these criticisms, partly because he established strong connections with members of Congress on both sides of the political aisle.

“The appointment of two institutions in Washington is sacred: one is the Supreme Court and the other is the Federal Reserve,” said Peter Hooper, who has worked at the Federal Reserve for nearly three years. “People must have basic trust and confidence in both, and it will be helpful to have a moderate centrist who is admired by both sides of the Capitol aisle for his performance.”

During his second term, Powell will advance the central bank’s goals through the reformed inner circle of Fed governors. Although New York Fed President John Williams and new vice chairman Brainard will remain unchanged, but he has lost two current vice chairs Richard Clarida and Randall Quarles. The White House stated that it will make more appointments to the Fed’s board of directors starting next month.

These roles will become even more important as the central bank begins the next phase of monetary tightening in 2022, which may be challenging.

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