Powell Is Unlikely to Be Renominated as Fed Chair
posted by Michael Lewis on May 26, 2021 - 12:00am
Next Chair Will Share Ultra-Dove Outlook, But the Data Will Force Faster Policy Normalization
Once upon a time, the chairmanship of the Federal Reserve was a lifetime appointment. Or so Alan Greenspan made it seem. Like J. Edgar Hoover at the FBI, “Maestro” Greenspan rode out changes in presidents and parties effortlessly for decades. Greenspan did not even have to blackmail anyone (that we know of…). Those days are gone.
It is still very difficult for a president to fire a Fed chairman, but recent presidents have declined to renominate the prior two Fed chairs. Instead, they unabashedly replaced chairs appointed by their predecessors with their own fellow partisans. The current chairman, Jay Powell, is destined for the same fate, FMI believes.
Powell’s first, and we think only, four-year term as chairman expires on February 1, 2022, just eight months away. By September, President Biden will likely make his decision clear.
The financial markets, by and large, are happy with Powell’s performance and would like to see him continue. All other things equal, the markets prefer things the same. Unfortunately for Powell, the President, not the markets, will decide.
Biden’s approach to the Fed will likely mirror that of President Obama. Then-Vice-President Biden was loitering in the background for those decisions. In 2013, as Ben Bernanke’s second term as chairman was nearing an end, President Obama had no complaints with Fed policy. Bernanke had cut the funds target rate to zero and held it there for five years; any “normalizing” would come at a glacial pace, exactly as the White House preferred.
However, Bernanke was the wrong party (Republican), had the wrong friends (appointed by George W. Bush), and was the wrong race and gender. Obama pushed Bernanke aside, brutally -- the White House announced the search for his replacement before Bernanke could even issue the usual “I’m leaving to spend more time with family” face-saving statement. Obama chose Janet Yellen, a Democratic loyalist woman who had a virtually identical policy outlook to Bernanke. Needless to say, Yellen also had a good resume.
Now, again, this White House has no complaints about this chairman’s policy: ultra-low interest rates, massive asset purchases and cheerleading for unlimited federal spending. During the crisis, of course.
However, Powell is the wrong party (GOP), has the wrong friends, and is most definitely the wrong race and gender for this White House.
FMI would add that, five months into his presidency, Biden has yet to do a single thing that is remotely bipartisan. We doubt he will start with the Fed.
Ironically, Obama first appointed Powell to the Fed Board of Governors back in 2012, but he did so only because the then-GOP Senate majority forced him as the price to approve his other nominees. No doubt some in Obama circles would like to see that evidence of weakness erased.
Powell has tried to become as “woke” as possible to boost his prospects for renomination. He supports massive increases in fiscal stimulus, bemoans income inequality and differences in unemployment rates by race, and even stresses the need to fight climate change. It is all for naught, e.g., the Sierra Club and other progressive groups have urged Biden to replace Powell with a true climate crusader. (That the Fed does not have any statutory powers in that area is a trivial detail).
FMI believes that Biden will choose a Democrat who is also a woman and/or minority. Fed governor Lael Brainard would fill the bill; that may explain why she is still hanging on to a job that most treat as a stepping stone to a bigger payday on Wall Street. Still, Brainard was Team Hillary in 2016, and there are several minority women with acceptable resumes for the post.
DOES THE FED CHAIR MATTER?
The next Fed chair, whoever she is, will share pretty much all of Powell’s very dovish policy outlook. Famously, though, Fed officials claim that monetary policy is “data dependent.” That does turn out to be true. Eventually.
No matter how much hand-waving the Fed chair does or how “transient” officials claim some data will be, sooner or later the facts win out. That is already happening. Powell had all but promised that it would be years until the Fed raised rates. He declared explicitly that the FOMC had not even “begun to think about thinking about” tapering asset purchases. But that was a month ago. Ancient history.
Now, as the minutes of the April meeting showed, FOMC members are indeed thinking about tapering asset purchases. A few are even, gasp(!), advocating it. With real GDP hitting a new peak this quarter, inflation pressures mounting, most every sector complaining of labor shortages, and, by the way, COVID-19 retreating rapidly on all fronts, a few FOMC members are daring to ask whether they need to be pressing down quite so hard on the accelerator.
While we would hesitate to call these members hawks -- anyone who thinks a funds target rate below 1% can possibly be “appropriate” is clearly a dove -- this diversity of opinion on the committee will expand, a welcome change after the last year of an utter lack of meaningful debate.
Institutionally, the Fed chair still calls the shots on monetary policy. The majority of the FOMC will go along, as they have done for the past century. But if real growth continues at a solid pace, and it will, if inflation trends remain clearly above target, and they will, and if downside risks from the pandemic go from minimal to non-existent, and they will, the next Fed chairman, no matter who it is, will have no choice but to pick up the pace of normalizing policy.