President Biden on Monday nominated Federal Reserve Chair Jerome Powell, a Republican, for a second four-year term, opting to stick with the powerful head of the central bank who helped lift the U.S. economy out of the COVID-19 recession and who enjoys strong bipartisan support.
Biden also nominated Democrat Fed Governor Lael Brainard as vice-chair of the Fed’s board of governors, succeeding Republican Richard Clarida.
The decision caps a weekslong race between Powell and Brainard, a Democrat, for the nation’s top economic post. Biden reportedly considered Brainard more seriously in recent days under pressure from progressive Democrats after Powell initially seemed a shoo-in. Brainard has taken a tougher stance than Powell on banking regulation.
“While there’s still more to be done, we’ve made remarkable progress over the last 10 months in getting Americans back to work and getting our economy moving again,” Biden said in a statement. “That success is a testament to the economic agenda I’ve pursued and to the decisive action that the Federal Reserve has taken under Chair Powell and Dr. Brainard to help steer us through the worst downturn in modern American history and put us on the path to recovery.”
The nomination comes at a critical juncture for the reopening economy, with inflation notching its biggest jump in inflation in three decades last month even as growth is slowing from its torrid pace earlier this year amid COVID spikes driven by the delta variant.
The stock market rose following the news, with the Dow Jones industrial average rising 262 points, or 0.7%, to 35,865, in early Monday trading.
The next Fed chief faces the delicate task of raising the central bank’s key short-term interest rate from near zero to fight inflation without derailing a recovery that remains solid but faces hurdles such as lingering infection waves, supply-chain bottlenecks and worker shortages.
“We’re at an inflection point from a policy perspective and continuity is very important,” Tom Porcelli, chief U.S. economist of RBC Capital Markets, said of Biden’s decision to pick the even-keeled Powell. Biden is also expected to fill three more vacancies on the Fed’s board of governors by early next year
A former investment banker, private equity executive and lawyer, Powell, 68, was appointed to the Fed’s board of governors by President Obama in 2011 and nominated as chair by President Trump in 2017. His current term expires in January.
Powell enjoys broad support from both Democrats and Republicans in Congress and faces a far easier confirmation in the Senate than Brainard, says Ed Mills, Washington policy strategist at Raymond James.
“He will be confirmed with a strong vote,” Mills says.
If Powell had replaced the Fed chair during an uncertain economy, “He owns the economic outcome of that leadership change,” Mills says.
Democratic losses in this month’s election, rooted partly in Biden’s sinking approval ratings due to the inflation surge, likely solidified his choice of Powell, who may be perceived as more likely to aggressively fight inflation by raising rates next year, Porcelli says.
“While Powell’s continuance as Fed Chair will not spark a major fresh move upward in stocks, replacing him could have triggered major downward pressure on stocks, as investors dislike uncertainty and the unknown,” says George Ball, chairman of Sanders Morris Harris, a Houston-based investment firm. “Replacing Jerome Powell would have sent a psychological signal that the progressives are in power, which would have been unsettling to markets.”
Powell’s nomination renews a tradition of U.S. presidents retaining Fed chairs first picked by a president of the opposing party, a string that was broken when Trump tapped Powell over then-Fed Chair Janet Yellen in 2017.
Republican Fed governors are often viewed as more “hawkish,” or focused on hiking interest rates to head off inflation than as “dovish,” or intent on keeping rates low to spark the economy and job growth, while the reverse is true for Democrats. But that distinction has blurred in recent years.
In 2018, for example, Powell continued Yellen-led rate increases as the economy slowly improved after the Great Recession of 2007-09 despite vitriolic criticism from Trump. Powell, along with the rest of the Fed’s policymaking committee, abruptly halted the hikes the following year amid sluggish growth and a tumbling stock market.
“His policies haven’t shifted” despite political pressure, Mills says.
In March 2020, as the pandemic triggered more than 20 million job losses, Powell acted swiftly. He spearheaded a sharp cut in the Fed’s benchmark short-term rate to near zero and a revival of the massive Treasury and mortgage bond purchases that followed the Great Recession to hold down long-term rates.
The following August, with inflation stubbornly below the Fed’s 2% target, Powell led a significant policy shift, with the Fed stating it would wait for inflation to pick up before raising rates rather than preemptively boosting them to stave off a jump in prices, as it has traditionally done. Brainard co-authored the new approach.
If anything, Powell has elevated the goal of bringing millions of Americans back to work over inflation concerns. His tenure has been tainted by his monthslong insistence that the current inflation bout would be “transitory,” an assessment he recently modified, saying it could last longer than anticipated as supply-chain troubles and workers shortages persist.
He also has presided over a trading scandal that led to the resignations of two regional Fed bank presidents.
Last month, the Fed said it would begin scaling back the bond purchases and it’s slated to end them in June. The Fed is then expected to raise rates twice in the second half of 2022 as the economy reaches full employment, according to Fed policymakers’ forecasts.
Economists believe Brainard would have taken a similar approach. Although she has been wary of some rate increases, she has stood out for her support of lifting rates at times. In 2018, with the economy picking up, Brainard backed gradual rate increased but said they might need to be accelerated if inflation surged or some frothy financial markets became overheated
“I don’t see a difference in monetary policy” between Powell and Brainard, Porcelli says. Both, he says would seek to lift rate twice next year, though Powell might be more likely to move earlier.
Investors, however, likely viewed Brainard as more likely to keep rates low to ensure the recovery doesn’t lose steam, says Tim Duy, economics professor at the University of Oregon and author of the FedWatch blog. That could have pushed stocks modestly higher, he says.
Brainard, 59, served as an economist in President Clinton’s White House and at the Treasury Department under President Obama before joining the Fed’s board in 2014.
Progressive Democrats backed Brainard in part because she has opposed a Powell-led loosening of bank regulations enacted after the 2008 financial crisis. She also has been more vocal about planning for the risks that climate change poses to the banking sector.