Democrats weigh backing Jay Powell as Fed leadership choice looms

Brad Sherman, a California Democrat in the House of Representatives, was saying what many in his party privately believe when he called for President Joe Biden to reappoint Jay Powell for a second term as chair of the Federal Reserve.

“I’ve lived through two economic crises in Congress: 2008 and 2020. And 2020 was handled much better,” Sherman told the Financial Times. “Reassuring people at a time when we are dealing with Covid and some level of inflation is a good idea.”

Democrats are, at the very least, leaving the door open for Powell to stay on for another four-year stint when his current one expires in February. This comes as deliberations ramp up within the Biden administration over key Fed appointments in the coming weeks.

Randal Quarles’ tenure as vice-chair for banking supervision is set to end in October, and there is one remaining vacancy on the board of governors. These are pieces of a puzzle that Biden will have to resolve with his economic team. When asked by CNBC on Friday if she would recommend Powell for a second term, Janet Yellen, the US treasury secretary, said she would have “a discussion” with Biden about the issue but was pleased with the central bank’s performance.

“I have a lot of respect for the Federal Reserve. And it’s important for them to make independent judgments about what’s appropriate. I think, you know, the Fed has done a good job,” she said.

The renewal of Fed chair posts has always been a big moment for US presidents. But traditionally even central bank chiefs from opposing parties to the White House have gotten the nod at least once. Ronald Reagan reappointed Paul Volcker, Bill Clinton renewed Alan Greenspan’s position twice, and Barack Obama tapped Ben Bernanke for another round during the financial crisis. It was Donald Trump who broke with precedent when he chose to elevate Powell, a Republican who was brought in to the Fed by Obama, to replace Janet Yellen as Fed chief when her term ended in early 2018.

Some Democrats — particularly on the progressive side of the party — believe Biden should do the same and put his own, firm stamp on the US central bank’s leadership. But they have struggled to find areas to fault Powell: he has steered the Fed towards a highly accommodative, dovish response to the pandemic, and set a new policy framework that promises to hold off on pre-emptive rate increases and pursue full employment more thoroughly than in the past.

Moreover, he publicly supported a strong fiscal response to the coronavirus crisis in 2020, and showed more empathy than is usual for Fed chiefs over the impact of the central bank’s policies on ordinary Americans. The one area of persistent criticism of Powell from Democrats is that he is too lenient on the banks.

“The Fed has rolled back important safeguards, making it easier for the biggest banks to pump up the price of their stock and boost their already enormous power in our economy”, Sherrod Brown, the Democratic chair of the Senate banking committee, said during a hearing with Powell on Thursday. But Brown, a key voice on Capitol Hill, has not called for Powell’s replacement and voted to confirm him the first time.

Some observers of Capitol Hill say the dilemma for leftwing Democrats is whether there is a candidate to replace Powell who could secure confirmation, be at least as dovish as the current Fed chair, while not distracting Congress from their biggest priority — advancing Biden’s remaining $4tn economic agenda.

The Fed has rolled back important safeguards, making it easier for the biggest banks to pump up the price of their stock and boost their already enormous power in our economy

“I just don’t know that there’s going to be enough juice to have a fight over whether or not president Biden should renominate Powell or if he should go somewhere else,” says Meghan Pennington, a former Democratic aide in the Senate, now at Hamilton Place Strategies, a consultancy in Washington.

One possible bargain between progressive Democrats and the White House could be to see Powell remain as Fed chair while Lael Brainard, a Fed governor who is tougher on financial regulation, takes Quarles’ position as vice-chair for supervision.

For the open seat on the board, many Democrats are pushing for a person of colour, adding racial diversity to the Fed’s top brass: Brown is backing Lisa Cook, a professor at Michigan State University. But whether such an arrangement might work could depend on how Powell’s performance is judged over the coming months, as he navigates the surge of inflation and the start of the tapering process when the Fed begins to slow its $120bn per month pace of asset purchases.

Many investors, economists and market strategists say that it would be prudent for Biden to offer Powell another term. “Whether you like policy or not, stability is what markets will be looking for,” said Padhraic Garvey, regional head of research for the Americas at ING.

Roberto Perli, a former Fed staffer and head of global policy research at Cornerstone Macro, said Powell’s reappointment would be the “safer course”.

“Markets, which are already sceptical of the Fed’s commitment to the new framework, would likely question the ability of a potential new chair to steer the committee in a direction consistent with the new framework, and the result would likely be higher interest rates,” he said.

Sherman brushes off the rebukes of Powell on regulatory grounds, saying in terms of “prudential solvency” things had gone quite well. “The only thing you can criticise is that the banks are making too much money — and between being angry that the banks are making too much money and being worried that they’re going to be shut down or need a bailout I’ll take the former”, he said.

As a House member, Sherman will not have a vote on the Fed chair. He “suspects” Powell will get a second term but is “not betting the house on it” and warns colleagues of negative political repercussions in next year’s midterm elections if the reappointment fails.

“The number one thing on the progressive agenda is to elect Democrats . . . Economic uncertainty is not a great way to achieve that,” he said.