While we usually think of the Federal Reserve as above the fray of politics, the current president has been vocal about Fed policies and the current chair, Jerome Powell, who he appointed in 2018 to replace Janet Yellin. In addition, Congress often takes its own shots at the Fed after an economic crisis has resolved and has ideas about updating the Fed’s legislated mandate. Given these recent unprecedented scenarios, 2021-2022 should be ripe for a Federal Reserve reassessment – and, possibly, reform.
Fed leadership
The U.S. Congress created the Federal Reserve System with seven governors serving 14-year terms staggered every two years. Unexpired terms are filled for their remaining time with the incumbent being eligible for reappointment, and these appointments are made by the president with the advice and consent of the U.S. Senate. The Fed’s chair and vice chairs are presidentially appointed for four-year terms from among the serving governors.
President Trump has appointed four of the current five governors and has nominated candidates for the two current vacancies. If confirmed, he will have appointed six of the seven governors. Barring resignations, the next open seat would be in January 2022 and then not until 2026. Former Chairs Alan Greenspan and Ben Bernanke were reappointed by a succeeding president of a different political party. Conversely, Yellin was not and was replaced by Powell, who was appointed to a Fed seat by President Obama.
This is all important context and background for when we think about how an election might change the Fed leadership. As mentioned, the next opportunity for an appointment is in 2022 — when Vice-Chair Richard Clarida’s term expires in January. Powell’s chairmanship term expires in February. To name a new, different chair, the elected president would need to elevate an existing governor. Lael Brainard is the most likely choice for former Vice President Joe Biden, should he win, and thought to be a leading candidate. Another possibility would be leveraging Clarida’s term expiration to name a new governor, whom he would elevate to the chairmanship.
Biden, should he win the election, has committed to appointing women and minorities to senior positions in his administration. Brainard was Under Secretary of the U.S. Treasury in the Obama-Biden administration and served in the Clinton White House. She is in the running for a senior appointment, including Treasury Secretary or Fed chair, if Powell is not reappointed. Also mentioned as possible Fed chair is Raphael Bostic, a prominent African-American candidate, who is currently president of the Federal Reserve Bank of Atlanta and previously served in the Clinton and Obama administrations.
Public attitudes
The ultimate overseer of the Fed is Congress, and it is in tune with the electorate and their advocacy groups. After any economic or financial crisis, Congress will examine the performance of the Fed against a standard of what it might have done to mitigate the negative impact to its constituencies. While the Fed’s quick response to the COVID-19 crisis is seen as timely, aggressive, and effective in keeping credit markets functioning smoothly, it is also viewed by its critics as having served “Wall Street” at the expense of “Main Street.”
Although few Americans understand the Fed’s mandate, its recession-fighting efforts or its recent change to an “average inflation rate” strategy to improve wage and job opportunities for disadvantaged labor sectors, the public’s general mistrust of the Fed looking out for its interests versus the interests of banks, Wall Street and wealthy individuals will have an impact on how Congress examines the Fed after the November election. An Axios/Ipsos Sept. 24-27 poll showed 62% of U.S. adults surveyed had “not much” or “none at all” trust in the Fed to look out for their best interests.
Public pressure
At a time when executive-congressional gridlock makes the swift and far-reaching actions of the Fed alluring, the Fed will come under increasing pressure to do more to address income and wealth inequality. While the Fed is already focused on these issues and most reliably reports quarterly on wealth inequality, it will be asked to do more and to redress the growing imbalances in the U.S. financial system. Even within the Fed itself, there is growing concern about whether the Fed’s recession response has focused too much on asset prices, effectively nationalizing the bond market and creating a Fed “put” for stock prices.
How all this plays out will be determined in large measure by the election results and the appointment of new leadership in a Biden-Harris administration and in a Democrat-controlled House and Senate: the Blue Wave. How “progressive” the new leadership decides to act will affect what roles the Fed will need to assume and support. Greater transparency and responsiveness to congressional leadership will be primary among them.
Lastly, we can also expect that there will be a greater focus on the protection of consumers versus financial institutions, a greater expectation of the Fed using its unlimited bond-buying authority to cover rising fiscal deficits (an extension of Modern Monetary Theory), greater support for smaller businesses needing credit access, greater support for job creation for disadvantaged labor, and a Federal Reserve digital currency for providing direct support for individuals in time of crisis.
While we await election results to better understand the future of the Fed, it is important to understand the impact a Blue Wave — or maintaining the status quo — could be based on the candidates’ promised policies. Like so many others, we will be closely following the results to better understand what may be next for the Fed and U.S. economy as a whole.
