President Biden voted for continuity in monetary policy with his renomination of Jerome Powell to another four-year term as Federal Reserve Chair. He also elevated Governor Lael Brainard to Vice Chair, replacing Richard Clarida. We believe Powell and Brainard are likely to be confirmed in the Senate, removing a layer of uncertainty around central bank leadership, particularly at a time when the Fed is just beginning to normalize policy.
Markets cheered the President’s decision as equities moved higher on Monday’s open given it seemingly preserves the status quo, however, it should be recognized that Fed leadership is still likely to be reshaped in the next year. The seven-person Board still has one vacant seat; Vice Chair of Supervision, Randal Quarles has submitted his resignation effective December1; and Richard Clarida’s term will expire in January, leaving three vacant seats on the Board. The President has already announced he would look to fill these seats in early December.
Given the administration’s focus on diversity, officials who favor tougher bank regulation, and its uphill battle in maintaining a majority following the midterm elections next year, we could see a few Democrat appointments to Fed leadership, tilting policy even more dovish. As a result, we would expect the yield curve to steepen as rate hikes are pushed out. With that said, policy is arguably already too dovish and it’s highly unlikely the committee will deviate from its tapering timeline outlined at its last policy meeting.
Politically, Powell is probably the safer choice and suggests the administration is confident in his ability to continue to lead us through this pandemic recovery. Following the central banks massive response to the COVID pandemic, Powell faces challenges in the months ahead as rising consumer prices and an economy barreling towards full-employment could complicate the committee’s current stance on rate policy. Nonetheless, the Fed’s policy framework is robust and regardless of leadership, economic conditions will need to continue to improve towards the Fed’s dual mandate in order to justify liftoff in second half of next year.