Why it matters to you that Jerome Powell will serve another term as chair of the Federal Reserve

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The person operating the Federal Reserve is one of the most powerful Statistics in the world. They can have a major impact on the lives of ordinary Americans, not to mention others around the world.

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This will be especially true in the coming months as the Fed seeks to tame rising prices without jeopardizing the economic recovery. The consequences of getting it wrong can be disastrous and result in high inflation, a back into recession Or, worse, the Fed may have to tackling stagflation-In which you get both rising prices and a sluggish economy.

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Jerome Powell is the current chairman. of the Fed, but his first term was due to end in February. Progressive Democrats were pushing President Joe Biden will replace him lil brainard, an economist who is currently working as Registered Democrats only On the Board of Governors of the Federal Reserve System. Progressives liked her partly because she seemed to be more sympathetic to him more financial regulation And Fed’s Action on Climate Change,

Latest News: As suspense builds, Biden taps Powell for second term

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Biden announced Monday that he is sticking with Powell, after weeks in which Wall Street investors, economists like me and other central bankers around the world eagerly awaited word. Powell was long considered very likely to hold a job, Biden also promoted Brainard, naming him as vice president. Both moves are subject to Senate confirmation.

But what are the responsibilities of the Fed and its chairman? And what serious challenges will Powell face in 2022 and beyond?

meet the chair

Most introductory macroeconomics textbooks—such as the ones I use to teach my students—note that The Fed Chair Is So Impressive that he can make the financial markets SPX,
-0.28%

DJIA,
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Crash or climb by speaking a few words in public. Investors accept that they scrutinize and dissect Every Word the Fed Chair Says And even count how many times a certain key phrase is used—I call it “fed speech bingo.”

While it may all be exaggerated to make students pay more attention to a boring chapter on money and banking, it is undeniable that the Fed chair is very important.

The position is ultimately responsible for regulating the banking system, promoting the stability of the financial system, and conducting monetary policy by controlling the money supply and setting interest rates – the main duties of the Federal Reserve. Seven governors, including the chair, oversee the Fed, and each has a single vote on key policy decisions such as interest rates. But the chair wields significant power by setting the agenda and acting as the Fed’s public voice.

The Fed’s most important job is to conduct monetary policy, which involves controlling the money supply to promote sustainable economic growth. The main tool used to achieve this is to “target” the short-term interest rate to achieve low inflation and stable employment. This is the one whom. is called Fed’s double mandate, In recent years, the Fed has also changed into more unconventional ways, such as buying commercial bonds and other assets.

What this means for the rest of us is that the Fed helps determine the rates we pay on mortgages, car loans, credit cards, and other types of lending. Lower rates mean credit is cheaper, which boosts the economy. But this in turn can increase inflation.

The Fed can raise rates to reduce inflation, but raising the cost of credit can hurt economic growth and lead to high unemployment.

This is precisely the careful balancing act facing the Fed at the moment.

Americans across the country are seeing higher prices at malls, grocery stores and gas pumps, as measured by the Consumer Price Index. It shows the fastest growing in three decades, At the same time, the labor market has not fully recovered from the pandemic-induced recession early last year, with 4 million fewer employed people than in February 2020.

The focus for the Fed right now is clearly on price hikes that were Expected to be short-lived initially And should have stabilized by now. Most economists believe that Recent Price Gains Reflecting temporary supply constraints and the fact that prices fell sharply in the spring of 2020 at the start of the COVID-19 pandemic, inflation figures now look too large.

The big decision the Fed and its president will have to make in the coming months is when to start raising interest rates to tame inflation. If they move too much or too quickly, they risk an economic downturn, which can lead to substantial job losses. If they act too little or too late, they run the risk of letting inflation spiral out of control – as Americans last experienced in the late 1970s.

In the language used by Fed watchers, this is the difference. between the eagle and the dove, That is, an eagle is more concerned with fighting inflation, while a pigeon is more focused on development and jobs.

In 2022, Powell will have to quickly decide what will be his top priority – the ghost of stagflation is also emerging as a possible scenario.

Other issues on the agenda of the chair

NS Fed is also responsible To promote the stability, integrity and efficiency of the country’s monetary and financial system, primarily through regulation.

Financial bubbles are rising in many markets From stocks to digital currencies—thanks to the Fed’s easy-money policy that has helped prop up prices. inattention to financial stability There was a reason the Fed missed the great financial crisis for so long.

Powell will have to decide whether to make it a higher priority, especially if the Fed raises interest rates too soon. Doing so can result in a market crash.

Finally, the Fed is facing pressure to tackle problems beyond its mandate, such as Climate change and inequality. This is one of the main reasons why Brainard was running in the first place.

Progressive Democrats and activists are urging the Fed to use its regulatory powers restricting the flow of capital from carbon-intensive industries And redirect the money toward more climate-friendly ones. The idea is controversial because it is not in its mandate, runs the risk of hurting Fed independence and could eventually lead to an incorrect allocation of resources.

Similarly, the Nobel Prize winning economist joseph stiglitz And other liberals want the Fed to do more to fight inequality. research shows that The Fed’s policies are contributing to wealth inequality,

While the Fed may not have been able to fix the issues of wealth and income inequality – these are complex, complex issues that require congressional action, new legislation or law enforcement – ​​it is at least starting to focus more on its actions. so that it doesn’t are actively contributing to the problem.

continuation or change

But choosing a Fed chairman isn’t the only way Biden will leave his mark on the central bank.

In the next weeks, he will have to fill Three Other Open Positions on the Federal Reserve’s Board of Governors, which offers him the opportunity for a complete turnaround and allows him to shift the Fed’s board toward a more Democratic-dominated one. And the naming of the Brainard Vice Chair also advances this agenda.

That could mean the Fed could still help the Biden administration advance progressive goals like fighting climate change and inequality, even with Powell at the helm.

Either way, Americans would be wise to pay close attention to the Fed and those who run it.

Veronica Dolar is an assistant professor of economics at the State University of New York at Old Westbury.,

This commentary was originally published by The ConversationJerome Powell keeps his job at the Fed, where he will be responsible for preventing inflation from spiraling out of control – without tanking the economy.

Wall Street sees Powell as best option to lead Fed even as inflation hits 31-year high

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