After letting suspense build, Biden taps Powell for second term

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The White House announced Monday that President Joe Biden has decided to give Fed Chairman Jerome Powell a second four-year term.

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Powell, a liberal Republican with a career in investment banking, was originally nominated as president by Donald Trump in 2017.

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Biden had narrowed his search to Powell and Fed Governor Lyle Brainard, who would be nominated to serve as Fed vice president.

“Following their trial over the past 20 months, I am confident that Chair Powell and Dr. Brainard will provide a strong leadership to our nation,” Biden said in a statement.

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Powell worked hard to cement ties on Capitol Hill that had ended under his predecessors Ben Bernanke and Janet Yellen. He is expected to be easily ratified by the Senate with large Republican support. Brainard’s way to Senate confirmation was rockier.

Pat Tommy, the ranking Republican on the banking committee, immediately issued a statement saying he looked forward to supporting Powell’s confirmation.

Meanwhile, analysts said Powell’s popularity in the Senate between the two sides was a major factor in the final decision.

“It tells you that Biden cares about his poll numbers. He doesn’t want to fight. He wants a real bipartisan candidate going forward,” said Steve Blitz, chief economist at TS Lombard.

Jim O’Sullivan, chief US macro strategist at TD Securities, agreed, saying, “Maybe it just came down to counting votes.”

O’Sullivan said it’s hard for Democrats to get the 50 votes needed to pass the law in the face of a resolute Republican opposition.

“Brainard faced the same kind of arithmetic,” he said.

Biden will soon be able to fill three more vacancies on the central bank’s seven-member board of governors, putting his stamp on the Fed. The president has no role in choosing the presidents of 12 Fed District banks. In full force, the voting members of the Fed’s interest rate committee consist of seven board governors and five regional bank presidents — four of whom rotate annually. Only the New York Fed chairman has a standing vote on the committee, as is the Federal Open Market Committee, or FOMC.

Wall Street sees Powell as best option despite high inflation

Brainard would also have to be confirmed by the Senate as vice president, but the stakes are now very low for that vote.

If confirmed, Brainard, 59, who has been Fed governor since 2014, will take the No. 2 leadership position at the Fed, working alongside Powell and New York Fed Chairman John Williams.

While Brainard missed out on the top job, his nomination as vice president “places him at the core of Fed policymaking and positions him as a potential future Fed chairman or Treasury secretary,” said Krishna Guha, a former top executive. Fed employee and now head of central bank strategy at Evercore ISI.

Brainard was seen by the markets as a more liberal option than Powell. Following the announcement of Powell’s nomination, prices in the market firmed up a bit.

Markets are becoming more concerned about inflation as the economy bounces back from the coronavirus pandemic and talk of the need for more aggressive Fed monetary policy is common.

Consumer prices rose 6% in October, the biggest increase since 1990, and well above the Fed’s 2% target.

However, the central bank has only begun to slow asset purchases at a pace of $15 billion a month. At this rate, central banks will continue to buy bonds until next June, which stimulate the economy.

Meanwhile, financial markets have stoked two interest rate hikes by the Fed in 2022.

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The high was reached after the announcement, reaching 1.585%.

Investors are wondering whether the Fed will decide to “reduce” asset purchases at a faster pace or even start raising short-term interest rates.

Fed officials are divided on the road ahead. Some want central banks to move in a faster direction to counter high inflation, while others want central banks to be patient about raising interest rates until the unemployment pandemic further recovers.

Top Fed officials indicate interest rate hikes are on the table in 2022

For most of the year, Powell has dismissed rising inflation, temporarily given supply shocks as a result of trade lockdowns during the pandemic.

In recent weeks, he has moved to express more concern, vowing to raise short-term interest rates to slow inflation if inflation shows no signs of easing.

This summer, Powell’s reappointment was seen as a sure thing, but as time dragged on without an announcement, analysts had other views.

“In June, I was saying Powell had an 80% or 90% chance. And in the past few weeks, it was barely looking 50-50,” said Greg Vallier, chief US policy strategist at AGF Perspectives.

Valierre said the delay showed Biden had “reservations” about Powell because he was too optimistic on inflation.

The left wing of the Democratic Party urged Biden to choose a different candidate who would take a tougher stance on bank regulation and focus more on climate change.

Democratic Sen. Elizabeth Warren of Massachusetts, a sharp Wall Street critic, accused Powell of undermining financial safeguards imposed after the 2008 panic. She also called the Fed chairman a “dangerous man.”

In a statement after Biden’s choice was announced, Warren said she would vote against Powell but support Brainard’s confirmation. Warren said she was focused on who Biden would tap to become the Fed’s vice president for bank supervision.

Bank stocks jump as decision on top Fed bank police looms

The Senate is expected to confirm Powell, 68, before his first term ends in February. Progressives are expected to face tough questions about climate change and bank regulation during their confirmation hearings. No date of hearing has been set.

Powell’s first term saw pandemic after Trump vitriol

Powell took over as Fed chairman in February 2018 after serving on the Fed board since 2012, when he was nominated by former President Barack Obama.

His tenure has been marked by two distinct periods – the first bitter criticism of Trump, although Powell won widespread sympathy for remaining silent while being brutally criticized by Trump.

After the Trump tax cut was passed, the Fed continued to raise short-term rates, prompting strong objections from an angry president, who pointed out that Europe and Japan were keeping their benchmark interest rates near zero.

Trump referred to Powell as “the enemy” and “nobody” and reportedly called his nomination the worst mistake of his presidency. He even found ways to set her on fire.

The Fed reversed course in 2019, cutting interest rates after plunging financial markets.

Biden’s election raised the prospect of a calmer time for Powell, but the central bank soon saw the risk of an economic slowdown from the rapid spread of the coronavirus in early 2020.

Powell and his colleagues reacted swiftly, slashing short-term interest rates to near zero in two sharp moves in March. To aid the faltering bond market, the Fed also bought trillions of dollars in bonds. The resulting recession was the deepest in the post-World War II era, but the recession was brief.

As a result of its emergency actions, the Fed’s balance sheet has doubled in size to more than $8 trillion and there are concerns the Fed needs to protect markets that were deemed “too big to fail.”

Some Republicans and economists on Wall Street say Powell made a mistake in not moving quickly away from the easy-money policy stance. He worries the Fed will have to “slam on the brakes” and push the economy into recession to quell the rise in US inflation.

Powell and other senior Fed leaders blamed the rise in prices on a widespread shortage of supplies linked to reopening the economy and business disruptions caused by the pandemic.

However, many observers, such as former US Treasury Secretary Larry Summers, blamed fiscal policy that resulted in massive stimulus payments to Americans, leading to increased consumer demand for goods and services.

Under Powell’s leadership, the Fed has adopted a new framework to put more weight on reducing unemployment. Past Fed chairmen expressed concern that low unemployment would lead to high inflation.

The spurt in inflation this year has cast doubt on this new policy stance.

In addition, in recent months, Powell has been troubled by a financial scandal that forced the resignation of two of his regional Fed chairmen.

However, the Powell Fed has placed greater emphasis on the problem of inequality.

“The economic downturn has not hit all Americans equally, and those who are least able to bear the burden have been hurt the most,” Powell said last week. “Despite progress, unemployment on African Americans and Hispanics continues to fall.”

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Powell moved higher on Monday after the nomination was announced, but gave up most of its gains by the end of the trading session.

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