Democrats weigh in on support for Jay Powell as the Fed leadership election approaches

Brad Sherman, a California Democrat in the House of Representatives, said what many in his party believe in private when he asked President Joe Biden to re-appoint Jay Powell for a second term as chairman of the Federal Reserve.

“I’ve experienced two economic crises in Congress: 2008 and 2020. And 2020 was much better managed,” Sherman told the Financial Times. “Reassure people at a time when we are trying Covid and some level of inflation it’s a good idea. “

Democrats, at the very least, leave the door open for Powell to stay for another four years when his current one expires in February. This happens as deliberations escalate in the Biden administration over key Fed appointments in the coming weeks.

Randal Quarles’ term as vice president of banking supervision will end in October and a vacancy remains on the governing council. They are pieces of a puzzle that Biden will have to solve with his economic team. When CNBC asked him on Friday if he would recommend Powell for a second term, U.S. Treasury Secretary Janet Yellen said she would hold “a discussion” with Biden on the issue, but was pleased with the central bank’s performance. .

“I have a lot of respect for the Federal Reserve. And it’s important that they make independent judgments about what’s right. I think you know, the Fed has done a good job, “he said.

The renewal of the Fed’s presidency has always been a big time for U.S. presidents. But traditionally, even the heads of the central banks of parties opposed to the White House have received the head at least once. Ronald Reagan re-appointed Paul Volcker, Bill Clinton twice renewed Alan Greenspan’s position and Barack Obama approved Ben Bernanke for another round during the financial crisis. It was Donald Trump who broke the precedent when he chose to elevate Powell, a Republican whom Obama brought to the Fed to replace Janet Yellen as head of the Fed when he ended his term in early 2018.

Some Democrats, especially on the progressive side of the party, believe Biden should do the same and put his own firm stamp on the leadership of the US central bank. But they have struggled to find areas to blame Powell: he has led the Fed toward a highly accommodating and obedient response to the pandemic and set a new policy framework that promises to keep preventive rate hikes and pursue full employment. than in the past.

He also publicly supported a strong fiscal response to the coronavirus crisis in 2020 and showed more empathy than usual for Fed leaders on the impact of central bank policies on ordinary Americans. . The only area of ​​persistent criticism of Powell by Democrats is that he is too lenient with the banks.

“The Fed has withdrawn significant guarantees, making it easier for larger banks to raise the price of their shares and increase their already huge power in our economy,” Sherrod Brown, Democratic chairman of the Senate banking committee, said during a hearing with Powell on Thursday . But Brown, a key voice on Capitol Hill, has not called for Powell’s replacement and has voted to confirm him for the first time.

Some Capitol Hill observers say the dilemma for left-wing Democrats is whether there is a candidate to replace Powell who can get confirmation, at least as bad as the current Fed president, without distracting Congress from its highest priority: advancing the remaining $ 4 billion of Biden’s economic agenda.

“I just don’t know if there will be enough juice to fight over whether or not President Biden should rename Powell or whether he should go elsewhere,” says Meghan Pennington, a former Democratic aide to the Senate, now at Hamilton Place Strategies. a consultancy in Washington.

One possible negotiation between the Progressive Democrats and the White House could be to see Powell as Fed chairman, while Lael Brainard, a more rigorous Fed governor in financial regulation, takes Quarles ’position as oversight vice president.

For the open seat on the council, many Democrats are pushing for a person of color, adding racial diversity to the Fed’s top professionals: Brown supports Lisa Cook, a professor at Michigan State University. But whether this deal could work will depend on how Powell’s performance is judged over the next few months, as it navigates rising inflation and the start of the reduction process as the Fed begins to slow the $ 120 billion pace. monthly asset purchase.

Many investors, economists, and market strategists say it would be prudent for Biden to offer Powell another term. “Whether you like politics or not, stability is what the markets will look for,” said Padhraic Garvey, ING’s regional head of research for the Americas.

Roberto Perli, a former Fed member and head of global policy research at Cornerstone Macro, said Powell’s new appointment would be the “safest path.”

“Markets, which are already skeptical of the Fed’s commitment to the new framework, would probably question the ability of a potential new chairman to lead the committee in a direction consistent with the new framework and the result would probably be some kind of higher interest rates, ”he said.

Sherman removes Powell’s rebukes for regulatory reasons, saying that in terms of “prudent solvency,” things had gone pretty well. “The only thing that can be criticized is that banks make too much money, and between being angry that banks make too much money and being worried that they will be locked up or need an old bailout,” he said.

As a member of the House, Sherman will have no vote on the Fed presidency. He “suspects” that Powell will get a second term, but “doesn’t bet on it” and warns colleagues of negative political repercussions in next year’s midterm elections if the new nomination fails.

“The first item on the progressive agenda is to elect Democrats… Economic uncertainty is not a great way to do that,” he said.

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