President Joe Biden on Monday formally announced his intent to nominate Jerome Powell to serve as the chairman of the Federal Reserve for a second term and nominate Lael Brainard to serve as the Fed's vice chair.
Powell's four-year term is up in February, and the President faced a key decision of whether to keep Powell, who was put in the job by a Republican, in the government's most important economic policy job.
At a time when rising consumer prices, inflation and shortages caused by the supply chain crisis are urgent concerns of the White House, there has been heightened focus on who the President was going to pick to lead the nation's central banking system.
The White House cited Powell's "steady leadership" amid the economic turbulence of the pandemic as a reason for the decision. The Powell-led Fed took a series of unprecedented steps in March and April 2020 that helped ensure the Covid recession did not morph into a full-blown depression.
Economic recovery, the White House said in a statement, "is a testament to the success of the President's economic agenda, and it is a testament to decisive action by Chair Powell and the Federal Reserve to cushion the impact of the pandemic and get America's economy back on track."
Biden expressed his "full confidence" in Brainard and Powell in a statement.
"I'm confident that Chair Powell and Dr. Brainard's focus on keeping inflation low, prices stable, and delivering full employment will make our economy stronger than ever before. Together, they also share my deep belief that urgent action is needed to address the economic risks posed by climate change, and stay ahead of emerging risks in our financial system," Biden said.
Tough road ahead
Assuming he gets confirmed by the Senate, Powell faces a very challenging situation in his second term at the helm of the Fed.
The United States is grappling with its first inflation scare in decades, parts of the economy remain scarred by the worst pandemic in a century and the Fed's credibility has been called into question by a trading scandal.
Although Powell seemed to put out the fire over the insider trading scandal with tough new ethics rules, inflation looks like the trickiest obstacle facing the Fed over the coming months.
Up until very recently, the Fed has kept its foot firmly on the pedal, with rock-bottom interest rates and a massive bond buying program stimulating the US economy and financial markets. That's despite the fact that inflation is surging, hiring is booming and the housing market is arguably hotter than ever before.
Although managing inflation is the responsibility of the Federal Reserve, sticker shock is coming at a political cost to Biden, whose poll numbers have taken a hit in recent months as voters get more worried about the economy.
"All Americans are feeling inflation," Narayana Kocherlakota, former president of the Minneapolis Fed, told CNN. "Biden is saying, 'I am trusting my political future in this Fed leadership. I trust them to get inflation under control.'"
By keeping Powell in charge, the White House is signaling support for the central bank's view that inflation is a temporary phenomenon, albeit one that has lasted longer than the Fed anticipated.
But there was little evidence Biden was seriously considering a Fed chair who would be much more aggressive on inflation. Brainard, who ultimately did not get the top job, has monetary policy views more or less in line with Powell's.
"It's not like Brainard is a stealth hawk," said Kocherlakota.
Indeed, Goldman Sachs said Monday after the Powell news that it continues to expect the Fed to only gradually lift interest rates, beginning in July.
Why Biden picked Powell
By sticking with Powell, the Fed is opting for continuity and confirmability. Not only has Powell garnered the support of Republicans and moderate Democrats, he is well respected on Wall Street and investors are very comfortable with his communication strategy.
Switching to a new face risked adding uncertainty to the confirmation process that could have rattled markets. And it would have added complexity to the already difficult task of reassuring investors nervous about the Fed unwinding its emergency policies.
"After an atypically lengthy deliberation phase, the White House ultimately went with the safest choice," said Isaac Boltansky, director of policy research at BTIG,. "The Powell pick provides leadership continuity that the market always appreciates and should give the White House a victory via a quick and relatively painless confirmation process. "
By choosing Powell, Biden is also sending a strong signal about the importance of an independent Fed, a norm that came under attack during the Trump era.
Powell vs. Brainard
Biden recently met with Powell and Brainard, a Federal Reserve governor, separately at the White House as he weighed his decision, CNN previously reported. Brainard had been viewed as the leading contender if the President decided against Powell for a second term.
"This is a good decision," former Dallas Fed President Richard Fisher told CNN. "While Lael Brainard is a most capable economist, appointing her under pressure from progressive Senators like Elizabeth Warren would have sent a signal that the Fed has been overtly politicized, irreparably damaging its reputation for independence."
Powell has faced significant opposition from some progressive Democrats, who criticize his track record on financial regulation.
Sen. Elizabeth Warren of Massachusetts said at a recent Senate hearing that Powell was a "dangerous man to head up the Fed" and that he has "regularly voted to deregulate Wall Street." She said a Republican majority at the Fed under Powell's leadership could "drive this economy over a financial cliff again."
"It's no secret I oppose Chair Jerome Powell's renomination, and I will vote against him," Warren said in a statement Monday. "I will support the President's nomination of Lael Brainard as Vice Chair. Powell's failures on regulation, climate, and ethics make the still-vacant position of Vice Chair of Supervision critically important. This position must be filled by a strong regulator with a proven track record of tough and effective enforcement - and it needs to be done quickly."
Former Minneapolis Fed president Kocherlakota agrees that in recent years the Fed has undone a lot of the protections put in place to prevent a repeat of the 2008 financial crisis.
"I feel strongly that we need a correction on that course," Kocherlakota said.
Brainard has been much tougher on Wall Street, voting against some of the deregulatory steps the Fed has taken in recent years.
Yet Biden ultimately decided against nominating Brainard to fill the open vice chair for supervision role, which would have put her in charge of overseeing Wall Street.
But some key Democratic constituencies, such as organized labor, have signaled their support for him. Powell won Senate confirmation overwhelmingly for the position in 2018.
Some progressives have also accused Powell of failing to do enough to address the climate crisis.
Democratic Senator Sheldon Whitehouse said in a statement that he's "disappointed" in Biden's choice to keep Powell in charge of the Fed. "I sincerely hope that, if confirmed, Powell will reassess his past opposition to utilizing the Fed's regulatory tools to minimize climate-related risks to the financial sector."
The chair's renomination comes at a time of tumult on the Board of Governors and a trading scandal that had threatened to block Powell from being picked for a second term.
The Fed recently unveiled sweeping changes to its ethics practices in response to the scandal about personal stock trading by then-regional Fed Presidents Robert Kaplan and Eric Rosengren, who led the Dallas and Boston Feds, respectively. Both Kaplan and Rosengren announced early retirements amid criticism about their trades.
Powell, a Republican, was nominated to the Fed's Board of Governors by then-President Barack Obama. He was elevated to chair by then-President Donald Trump in November 2017 to succeed Janet Yellen, who is now Biden's treasury secretary. His term as a member of the Board of Governors doesn't expire until January 2028.
He has been leading a widespread emergency market rescue in response to the economic crisis that followed the coronavirus pandemic.
Though the US has made considerable gains -- its economy beat expectations and added 531,000 jobs in October -- there are still millions of people sitting on the sidelines of a tight labor market.
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