Thoughts on the Federal Reserve Nominations

A couple of days ago, President Biden announced that he would renominate Jerome Powell for another term as chair of the Federal Reserve, the nation’s central bank which is responsible for its monetary policy and control of the money supply. It was a choice between him and Lael Brainard, who serves on the board of the Fed, and who was also picked by the president to be the Vice Chair. In the end, though, I think it was more politically feasible to choose Powell, both to maintain stability in the central banking system and to show bipartisanship (since the president and Powell are of differing political parties.) 

What does the chair do? According to the website of the St. Louis Fed, they are responsible for carrying out the Fed’s dual mandate (price stability and maximum employment), as well as reporting on the Fed’s actions to Congress. The chair heads the Board of Governors, who are also responsible for the central bank’s decisions, in part by being a component of the Federal Open Market Committee. This committee is responsible for conducting open market operations (usually the buying and selling of bonds) to control monetary policy. In short, the role of the chair is important and one that usually requires much attention and intelligence.

So what does Powell’s reappointment mean for the U.S economy? Notably, he has a reputation for being committed to achieving low unemployment, one of the two components of the organization’s mandate. This is usually done by advancing expansionary monetary policy, which involves reducing the reserve requirement ratio and buying bonds to keep the money supply high and interest rates low. However, this could lead to higher inflation levels, which conflict with the other part of the mandate. For his part, Powell has kept interest rates very low for quite some time now, including during the pandemic when the goal was to get people back to work. Now, however, a spike in demand due to stimulus checks and the reopening of many businesses has led to higher prices and higher inflation. Powell has stated that in order to reduce inflation, interest rates would have to go back up, which could derail the economic recovery from the pandemic. However, it remains to be seen what he would do in the near future. I wouldn’t be surprised if interest rates increase somewhat to fight inflation, even in a pandemic recovery.

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