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Tuesday, November 23, 2021
Monetary policy just got a lot more political
The first part of Jerome Powell’s tenure as Federal Reserve chairman was defined by an increasingly acrimonious battle with the president who appointed him.
The next phase of the Powell-led central bank will be defined by its response to surging prices. And President Joe Biden — who on Monday decided to reappoint Powell in the face of pressure to shift course — will now find his political fortunes inextricably bound to Fed policy in a way his recent predecessors have not.
It bears repeating that, while the Fed chair is a political appointment, the hallmark of monetary policy is its independence. It’s one of the reasons why former President Donald Trump found himself so enraged with Powell that he openly flirted with the idea of jettisoning him.
Presuming that Powell passes Senate confirmation, which by all indications he will, given the relatively high levels of bipartisan support he enjoys, both he and the president will find themselves joined at the hip as a still vigorous economic expansion gives way to inflation.
When the president thought about “a Federal Reserve that would implement the kind of economic policy [people] associate with Joe Biden — providing opportunities for lower- and middle-income people and making sure Wall Street is amply regulated — he decided Jerome Powell was the right man for the job," Bernstein said.
However, amid elevated inflation that’s making the public increasingly unhappy and sandbagging Biden’s approval ratings, what happens next will inevitably be a reflection on both men and their legacies.
Powell’s split with Trump, who vociferously opposed the Fed’s rate hike campaign, refracted Fed policy through an uncharacteristically political lens. Yet it had the side effect of insulating the White House from the effects of an independent monetary policy.
By doubling down on the Powell era, Biden has given a tacit endorsement of the Fed’s response to COVID-19, and will have to own the consequences of spiking prices, and how next year’s expected rate hikes will impact the expansion.
“This means Biden now owns politically the policies of the Powell Fed and its consequences,” wrote Eurasia Group’s Jon Lieber and Robert Kahn on Monday.
While Powell’s renomination was a “lower risk strategy” given market expectations for continuity, “his confirmation will be a referendum around inflation," Eurasia's analysts wrote.
"There will be multiple protest votes from Republicans over the direction of monetary policy and its continued focus on ‘maximum employment’ as inflation grew in 2021. Any elevated inflation prints between now and February will cost him more votes,” they added.
Indeed, the markets are already rendering a preliminary verdict on the Powell sequel. According to Tradeweb data, the belly and the front-end of the Treasury yield curve (1-, 2-, 3- and 5-year debt) hit their highest peaks in well over a year after Powell's renomination was announced. Meanwhile, markets are also pricing in rate hikes next year (though exactly when those will come is anyone's guess).
While it’s far too early to call it a no-confidence vote, Monday’s jump in yields was in keeping with a fairly consistent message that bond investors have sent for weeks. They are worried about inflation, and believe Powell’s credibility hangs in the balance of containing those pressures.
The respective tenures of former Fed Chairs Ben Bernanke and Janet Yellen were marked by quantitative easing, incalculable sums of stimulative bond buying that led critics to look for inflation that never actually surfaced.
However, Powell will have the dubious distinction of clean-up duty for surging prices — the likes of which haven’t been seen in decades. He’ll have to own the outcome of effective yet highly controversial policies he implemented — and so will the 46th president who chose him for a new term.
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