Denver Jerome Powell is currently focused on preparing the end of the ultra-loose monetary policy. Now, however, he finds himself in a debate about his future at the helm of the US Federal Reserve (Fed). The senator and former candidate for the Democratic presidential nomination Elizabeth Warren had criticized Powell unusually harshly at a hearing on Tuesday.
During his tenure, Powell made sure that the banking system became more insecure. “And that makes you a dangerous man at the top of the Fed,” clarified the banking critic, who is known for her criticism of big banks and for her pointed appearances. You will therefore not vote for his re-election.
This means that the discussion about Powell’s second term in office is in full swing – not only in politics, but also in the financial world. “Is Powell limited in time?” Teased independent capital market expert Ed Yardeni in an analysis – an allusion to the Fed chief’s view that the inflation that the US is currently experiencing is only a temporary phenomenon. “Powell remains the favorite,” believes Ed Mills of the US financial services company Raymond James. “But his chances of a second term have just decreased a bit.”
The Fed is entering the debate at a time of uncertainty. Because Powell’s deputies, Richard Clarida and Randal Quarles, will also end their first term in office in the coming weeks. Another position on the Fed’s governing body is still vacant.
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Powell, who holds a doctorate in law and who worked for many years at various US investment firms and is a member of the Republican Party, was appointed to the governing body of the Federal Reserve by the then – Democratic – US President Barack Obama in 2012, an unusual occurrence. In February 2018, the then incumbent US President Donald Trump appointed him Fed Chairman and successor to Janet Yellen. After four years, Powell’s term of office ends normally in February 2022.
Difficult consideration for Biden
The Democratic US President Joe Biden, who has to decide on a second term or a replacement for Powell, is faced with a difficult trade-off: He would have the chance to nominate a Democrat to head the Fed. “That could go down particularly well with the left wing of the party,” says Daniel Alpert of the investment bank Westwood Capital.
But in view of the difficult economic situation, the person would have to have a lot of experience to get the necessary majorities in the Senate. Alpert believes that if the Fed had to hike rates under new leadership to fight rising inflation, possibly sending the country into recession, Biden would be to blame.
And: “Powell has done his job extremely well so far. He is valued both on Wall Street and in politics. “
Warren has been the only Senator to date to have openly expressed her opposition to a second term. Many Republicans expressed their support to Powell. Powell’s determined intervention at the start of the pandemic is given high credit because it prevented a deep financial crisis.
The 68-year-old lawyer is considered a monetary dove. Over the past few months, economists have repeatedly expressed surprise at how much the Republican cares about supporting the labor market and helping all those who have been hit particularly hard by the pandemic – and in return, accepting higher inflation rates.
In the end, however, this has also brought him severe criticism. Mohamed El-Erian, Allianz’s chief economic advisor, has been complaining for months that the Fed should have started reducing bond purchases, known as tapering, much earlier. Since the corona pandemic broke out, the Fed has been buying bonds worth $ 120 billion every month. These are now to be reduced from November, as Powell announced at the Fed meeting at the end of September.
Central bankers’ securities trading overshadows Powell’s plans
A further complicating factor for the Fed chief in the follow-up discussion is a controversy over securities transactions, in which he himself, as well as two regional central bank chiefs, is involved.
Robert Kaplan, head of the Dallas Fed, announced last Monday that he would be stepping down on October 8th. He drew the consequences of a debate over multimillion-dollar stock trades in companies like Amazon and Chevron that he made during the pandemic. According to Powell, that was probably within the framework of the existing code of ethics. However, these would have to be changed to avoid the appearance of a conflict of interest.
Eric Rosengren, head of the Boston Fed, is stepping down at the end of September for health reasons. He also made headlines with his securities deals. There it was mainly about real estate funds, so-called Reits.
According to Powell, there is a “legal review” of the incidents. “We will tackle the matter and address it appropriately,” he clarified. Powell says he has held municipal bonds for many years. They also benefited from the Fed’s bailout, as the central bank bought municipal bonds for the first time.
Since the Biden government has not yet commented on Powell’s second term in office, his chances are limited anyway, believes Krishna Guha of Evercore ISI. The controversy surrounding the securities purchases “further reduced the probability,” says Guha, adding: “Senator Warren’s remarks have made her plunge even further.”
It is also unclear what decisions Biden will make to succeed Randal Quarles and Richard Clarida. Quarles, whose term ends on October 13, is the primary banking regulator as vice chairman of regulatory affairs. He was also appointed by Donald Trump and, among other things, has significantly relaxed the regulations for stress tests. The financial market expert Kathryn Judge from Columbia Law School is being traded as a possible candidate for his office.
Clarida, also appointed by Trump, is in office until the end of January. Observers assume that Biden will also replace him. However, the President is keeping a low profile. Biden “will name candidates whom he believes will be most effective in implementing monetary policy,” said a spokeswoman.
More: Fed is already suggesting a turnaround in interest rates for 2022 – and plans to reduce bond purchases soon