1. Fed Chair will be the most important nomination President Biden will make other than the Supreme Court.
The Fed is, in many ways, the Supreme Court of economic and financial policy making. That’s why the Fed’s policies historically have had such an impact on the success or failure of presidents and their administrations. But, at this momentous time in history, the decisions made by the Fed will have an impact far beyond the current administration. Given the pandemic and multiple crises facing the country, the choice of the Fed Chair is more critical than ever for the country.
With a four-year term, the Chair has enormous power, authority, and influence, and really can’t be removed. The Chair decides agenda, priorities, assignments, etc. If the Chair is against something, it doesn’t get done. The Chair has a de facto veto, including over regulation, climate, mergers, supervision, racial justice, etc. Importantly, this doesn’t require outright opposition, but quashing via assignments, priorities, workload, focus, slow walking, etc. -- the Chair’s positions will dictate what happens at the Fed. This important agenda-setting power is something Trump understood, which is why he replaced Chair Yellen with Powell in the first place. Those are the implications of renominating Powell to be Chair until February 2026.
2. Jay Powell is a good guy, but not the right guy.
No question, Jay Powell is intelligent and capable. He did an excellent job of handling President Trump’s attempt to bully him and the Fed pre-pandemic, but that’s not the right criterion for deciding who should lead the Fed for the next four years.
3. The decision should be based on a comprehensive review of candidates’ records AND who would most reliably support Biden’s agenda, priorities, and values, not about whether Powell should be reappointed.
It should be about who is best suited to be a leader of the Fed for the next four years.
Important to remember that Fed’s legal mandates go well beyond monetary policy and include:
o Financial regulation and stability
o Financial inclusion and consumer protection
o The payments system
o Influence other arenas of government like FSOC, FSB, etc.
It’s important that the president pick someone who reflects the president’s general views on those and related topics. That’s one of the critical ways that the democratic system of government ensures a measure of democratic accountability at the Fed. That’s not politicizing the Fed or injecting partisanship. Democratic accountability is built in and fundamental.
The key question is: who would be best/who can you trust most to support and increase the likely success of Biden’s agenda, priorities, and values to:
o Keep the recovery going
o Keep unemployment low
o Keep inflation on target
o Have sufficiently strong financial regulation to prevent crashes/contagion
o Seriously address the impacts of climate on finance, financial firms, and financial
stability
o Ensure that the maximum employment mandate addresses racial injustice and
inequality
o Have a robust competition/antitrust policy
o Meaningfully pursue diversity at all levels of the Fed and banking.
Any fair-minded analysis would conclude that the risks to the pandemic recovery as well as the risk that Biden’s other priorities will be delayed or stopped are significantly higher if Powell is reappointed, than if someone else were named Fed Chair.
4. If the Republicans retake the Senate in 2022, there is huge risk in reappointing Powell.
While Powell currently shares progressives’ views on the recovery, unemployment, and inflation targeting, they are at risk if Powell is Chair and Republicans retake the Senate in 2022.
o As economists say, there will be a reversion to the mean -- Powell will revert to
his right-of-center Republican instincts with a GOP Senate pushing him there.
After all, that’s why Trump appointed him and why he received and continues to
receive enthusiastic support from Republicans in the House and the Senate.
o This could put the recovery at risk and definitely threatens Biden’s employment,
climate, racial justice, antitrust, inequality, and financial regulation agendas.
o This requires very deep thinking about who you can really trust and who will
really be reliable over time.
This will also impact interagency rule-making among the banking regulators because, at least for now, Trump’s Republican Chair of the FDIC has stated her intent to serve out her term, which does not expire until June 2023.
5. The possibility of a big bipartisan Senate vote for Powell would only be due to Powell’s opposition to Biden’s agenda, which should be a disqualification.
Some people say that bipartisan support in the Senate for Powell is a reason for Biden to reappoint him. In fact, it’s a huge red flag not to reappoint him.
o A bipartisan vote for Powell would be a Pyrrhic victory that results in Biden’s
agenda being stymied at the worst possible time, i.e., before the midterm
elections and the president’s re-election.
Bloomberg recently reported that Republican senators only support Powell’s reappointment because he is against Biden’s agenda:
o “Republican senators are fairly sold on Powell…. But that comes with a warning
that they want him to speak out against Biden’s spending and tax plans, sound
a louder alarm on inflation and stay out of issues like social justice and climate
change. Some have also been pushing for him to act sooner on issues like
tapering the Fed’s asset purchases.”
They want tapering fast so it can kill the recovery long before midterms so they
can run the same playbook against Biden in the 2022 midterms they ran
against Obama in 2010, when congressional Democrats got a “shellacking.”
o And those Republican senators love Powell’s Wall Street deregulation,
opposition to climate, other “social issues,” etc.
For example, Sen. Tillis said that anyone other than Powell “would be a step
back from the progress we’ve made over the last 3 or 4 years.” If you think
what happened “over the last three or four years” during the Trump
administration was progress and you want more of it, then Powell’s your guy!
Put differently, bipartisan support for Powell is rooted in Republican opposition to Biden’s agenda…and Republican senators’ knowledge that Powell will be an ally in their efforts to eliminate financial safety rules and prevent action on climate, racial equity, competition, etc. A big bipartisan Senate vote is actually an argument against Powell, not for him.
6. The “just appoint a strong Vice Chair for Supervision” argument misunderstands how the Fed works and would be unworkable.
Some argue that the way to counterbalance Powell’s pro-Wall Street instincts would be to appoint a VC for Supervision who is committed to strong regulation. However, this misunderstands the power of the Chair as well as the actual power of the VC, and it would result conflicts that would prevent the effectiveness of the VC for Supervision, if not sideline that person altogether.
o You can’t have a Fed Chair with a very clear record and very strong views that
are directly opposite to the Vice Chair for Supervision. Even a “strong” VC for
Supervision isn’t going to be able to overcome the opposition of the Chair.
o Just as Powell stopped the Fed from taking any action on climate until allowing
it to be the last major central bank in the world to join the Network for Greening
the Financial System on December 15, 2020, Powell is not going to allow
anything to come before the Board that he doesn’t support.
For example, he is not going to allow a financial (re)regulation agenda of any
VC for Supervision that undoes the deregulation he just spent three years
voting for and recently testified is just right (including on the Volcker Rule ban
on prop trading, the level of capital, Wall St’s biggest banks, and just about
everything else). No Fed Chair would allow that kind of public repudiation of
his work and votes.
It is important to understand that almost any increased financial regulation
would be re-regulation of what Powell just voted to deregulate, and therefore
would require him to:
(1) directly and publicly repudiate the last three years of his voting record on
(de)regulation and
(2) contradict his testimony before Congress, including just recently.
But this very serious conflict is not limited to financial regulation - the same is
true for Powell’s views on climate, competition, racial justice, etc. For example,
Biden’s recent anti-monopoly/pro-competition executive order is not
applicable to the Fed. Therefore, any Fed action in this area will be entirely
discretionary and, therefore, depend entirely upon the inclination of the Chair
to make it a priority.
While Powell might talk a good game here, his past actions prove he doesn’t
agree and his future is highly likely to be consistent with his past actions, not
anything he says while campaigning for reappointment.
o Also overlooked, anyone qualified to be a “strong” VC for Supervision will be
reluctant to take the job given it will result in civil war and be frustrating at best.
Remember, Dan Tarullo was able to accomplish all that he did as de facto Vice
Chair because he had the full support of Chairs Bernanke and Yellen. Without
the full support of the Chair, it would just be setting someone up for failure.
7. Powell is not just soft on Wall Street; he gave Wall Street most of what it wanted.
Contrary to what many Powell supporters have argued, there really was significant deregulation during this chairmanship.
Yes, Randal Quarles was in the lead as VC for Supervision, but Powell supported and voted for every single weakening of the rules that Quarles proposed.
o That shouldn’t be surprising given Powell is a long-time Wall Street financier
who made his fortune in the private equity industry. This was one of the reasons
Trump’s Treasury Secretary Steve Mnuchin was so strongly in favor of Powell
replacing Yellen as Chair.
Revealing his allegiances and inclinations, Governor Powell met with Wall
Street executives more than 50 times in the year before he was even
nominated to be Chairman.
the broader banking industry, including:
§ Weakening stress tests
§ Giving the banks stress test information (i.e., transparency)
§ Creating additional size categories for bank (de)regulation
§ Routinely approving consolidations/acquisitions/mergers
§ Weakening supervision
§ Taking foreign banking organizations out of LISCC and other FBO
weakening
§ Weakening liquidity requirements (NSFR)
§ Enabling more proprietary trading (weakening the Volcker Rule)
§ Weakening the swap margin rules
§ Weakening 23A restrictions on transactions with affiliates
§ Weakening restrictions on capital distributions.
Powell voted for/supported these actions, which directly increase the threat of a financial crisis, hitting the jobs, homes, and savings of hardworking Main Street Americans. Not coincidentally, that deregulation makes the too-big-to-fail problem much worse, which increases the likelihood of taxpayer bailouts in a crisis.
Importantly, Powell did this knowing the dangers and risks. They were pointedly spelled out in connection with each of his votes by Gov. Brainard, who opposed Powell/Quarles’ deregulation throughout the Trump years.
8. The concern about Wall Street’s reaction is grossly overstated.
There is legitimate concern about an adverse market reaction if someone unknown is nominated.
o That reality (like it or not) dramatically narrows the list of viable candidates, as
does the current composition of the Democrats in the Senate, particularly the
so-called moderates.
o The list of possible viable candidates to replace Powell is also narrowed due to
the multiple crises facing the country and consuming the administration, and the
timing for nomination and Senate consideration.
The result is that there is really only one viable alternative to Powell: current Fed Governor Lael Brainard.
o She and Powell have very similar views about the recovery, unemployment and
inflation targeting.
o However, they have very different views on financial regulation, the climate crisis,
racial injustice, competition policy and diversity.
There is little if any risk that there would be an adverse market reaction to Brainard’s nomination due to monetary policy and other continuity.
o Brainard is well qualified, well known, and well liked, including by many
Republican senators, the business community, Wall Street, the markets, and the
global financial community.
o Given her longstanding service on the Fed, her role on the FOMC, participation
in the new framework, etc., Brainard’s nomination as Chair would be the
definition of monetary policy continuity and stability.
A final thought on why Powell should not be the next Fed Chair
Biden should not pick a (1) a wealthy Wall Street financier (not a businessman) who made his money in private equity and only got the job because of the fulsome support of then-Treasury Secretary Steve Mnuchin and (2) who is neutral to hostile to key parts of Biden’s agenda when there is a (1) well-qualified successor who has been a stalwart ally throughout the Trump administration, and (2) who reliably reflects Biden’s values, priorities, and agenda.
Put differently, why have a Trump Republican run the most important financial/economic agency that, in significant respects, will determine the fate of the administration when there is a fully capable, fully qualified, and well-known Biden appointee readily available?
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