According to US President Biden, the current Fed chief is to remain in office for another four years.
(Photo: imago images / Xinhua)
After much hesitation, US President Joe Biden has chosen Jerome Powell. He wants to nominate him for four more years at the helm of the Fed. Biden has thus opted for the safer variant, and that is exactly the right thing to do in the current environment.
Ultimately, it was a choice between incumbent Powell – a member of the Republican Party – and Democrat Lael Brainard that was seen as the most promising alternative. Brainard has a reputation for being an even stronger supporter of loose monetary policy than the previous incumbent. If Biden had made her the new Fed chief, the impression would easily have been created that he was putting the party colleague in the position in order to get as much monetary policy support as possible before the next elections.
One can certainly question whether this is really true. Because in the past, Brainard and Powell have always been on the same line in terms of monetary policy. But just the impression of a politically motivated tactical decision would have become a heavy burden in the current environment.
Because the uncertainty about future inflation is greater than seldom. The Fed attributes the current price surge mainly to special factors caused by the pandemic. However, it underestimated the development and recently had to admit that inflation will remain high for longer than initially expected. The great danger is that the current price hike will result in further so-called second-round effects. If, for example, the collective bargaining partners anticipate higher inflation in the longer term, they could agree to correspondingly higher wages – which could trigger a self-reinforcing dynamic.
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That is exactly what we must prevent. Therefore, the reputation of the Fed is all the more important now. The people must relieve it of the fact that it guarantees price stability and does not subordinate its decisions to political interests.
Powell has already proven his political independence: for example, by resisting the attacks by Biden’s predecessor Donald Trump on the Fed and defending its independence. Although he is Republican, he has spent a lot of time establishing contacts with both sides of the political camp.
In addition, Powell has shown that he is ready to make quick corrections when economic conditions change. He hiked rates after taking office in 2018, but then changed direction when inflation eased in 2019. At the start of the pandemic, he cut rates to near zero and launched massive asset purchases to stabilize markets.
Such pragmatism is required in the current environment of great uncertainty. With him, the Fed has the best chance of coping well with the phase of the exit from the loose monetary policy.
More: Jerome Powell is allowed to remain Fed chief – the markets breathe a sigh of relief