Fed leadership uncertainty worsens rate-policy outlook

Uncertainty over who will name President Biden to lead the Fed next year hangs over the central bank’s impending policy decisions if the recent rise in inflation becomes more persistent than anticipated.

The Fed may elaborate at its meeting next week that it will begin winding down its $120 billion-a-month bond-buying stimulus program and end purchases by next June. Mr. Powell may use his postmeeting press conference to provide additional information about how the Fed views the outlook for economic growth, employment and inflation.

Because Mr Biden has not decided who will run the Fed, however, analysts say uncertainty is likely to increase over how and when the central bank can raise interest rates to zero next year. Recent comments from Fed officials indicate greater internal divisions on this question.

“This, coupled with a potential leadership zero at the Fed, could lead to stress,” Tim Dew, chief US economist at SGH Macro Advisors, said in a note to clients. “White House attention to Fed potentially creates enormous policy uncertainty [when] The Fed may be at a policy pivot point.”

“The president is engaged with his senior economic team on these issues and will make an informed decision,” a White House representative said.

Mr. Powell’s term as Fed chairman ends in February, which means he will lead central bank policy meetings next week in mid-December and late January.

Presidents usually announce their nominees in October or early November to give the Senate enough time to confirm their choices. For example, then-President Donald Trump announced Mr. Powell to succeed Janet Yellen on November 2, 2017.

Mr Biden is due to depart for a six-day visit to Europe on Thursday, meaning he could make his announcement at a later date than his recent predecessors.

It’s starting to become urgent, said Jan Hetzius, chief economist at Goldman Sachs. By this time, you should have a clear idea of ​​”who will be leading the policy decisions.”

If Mr. Powell is not reappointed, Fed Governor Lyle Brainard is widely seen as the most likely candidate to replace him. Ms Brainard has argued in recent months for the Fed to open its stimulus policies at a slightly slower pace than Mr Powell, but the two are otherwise largely in sync on monetary policy.

If Ms. Brainard becomes president, a major policy change is seen as impossible because interest rate policy is agreed upon by a group of up to 12 officials, called the Federal Open Market Committee. The body includes a rotating group of all seven Fed governors, the New York Fed chair and four other Reserve Bank presidents.

US bond markets have begun to reflect expectations of a hike in Fed interest rates next year. Last week, the odds of at least two quarter-percentage-point rate hikes rose to 75% by the end of next year, according to futures market prices tracked by CME Group. This was above the nearly 20% probability at the conclusion of the Fed meeting last month.

Mr Biden has been consumed in recent weeks with talks among Congressional Democrats on how to win a $3.5 trillion social spending and climate plan he hopes to approve without Republican support.

Another reason for the delay on Fed personnel: The White House is managing a mix of other appointments, as well as gearing toward announcing a slate of nominees. There is one vacancy on the Fed’s board, and there will be at least one more after Fed Vice Chairman Richard Clarida’s term ends in January. Mr Biden will have to nominate someone for a four-year term as vice president of bank supervision, after that position, held by Fed Governor Randall Quarles, expired earlier this month.

Initially, the effects of the delay were largely political, as it encouraged Sen. Elizabeth Warren (D., Mass.) and other critics of Mr. Powell to step up their campaign for Mr. Biden so that he would have no one to succeed. and can be selected. Ms Warren said last month that Mr Powell’s record in favor of somewhat lax financial rules made him a “dangerous man” to lead the central bank.

Controversy over the disclosure of stock trades by senior Fed officials, which resulted in the abrupt retirements of the presidents of regional Fed banks in Dallas and Boston, has further polarized the fight over who should lead the Fed.

According to people familiar with the matter, Treasury Secretary Ms Yellen has expressed support inside the White House for Mr Powell’s reappointment. He refuted a major argument from progressives against Mr. Powell, defending his record on bank regulation in a CNN interview on Sunday.

“During his tenure—and during my tenure and [Ben] Bernanke’s tenure-regulation of financial institutions has clearly been strengthened,” he said, adding that reforms in bank supervision “have been in place during the Powell regime.” Ms Yellen’s defense of Mr. Powell’s record was notable as she had previously Years had expressed some concern about the direction of regulatory policy under his supervision.

So far, the only Democratic senator to publicly oppose Mr. Powell’s reappointment is Ms. Warren. Several outside groups have called on Mr Biden to name anyone who would support a bold outlook on progressive priorities like climate change. But Republicans have expressed alarm about how, under Mr. Powell, the Fed has already turned to policy issues such as climate change and racial justice, which they say will boost jobs and keep inflation low and stable. are beyond the approval of the central bank to keep.

The fight over Mr. Powell’s future is coming at a critical moment for the institution. She, Ms. Brainard and other senior Fed leaders initially described inflationary pressures this year as fleeting, suggesting that price increases would be short-lived. But some officials are now prepared for a longer hiatus of higher prices as supply-chain bottlenecks worsen and as energy and other commodity prices rise.

One risk for the Fed is that even if officials are correct about eventually softening prices of some goods, businesses and consumers can expect higher prices to continue. Officials refer to this as “un-anchoring” inflation expectations, and they are closely monitoring consumer surveys and market-based gauges to see that expectations are moving higher.

Claudia Sahm, a former Fed economist, said, “The next year will be the toughest for the Fed since Volcker,” referring to then-Fed Chairman Paul Volcker’s interest rate hikes in the early 1980s, which had led to a sharp price rise. But brought down inflation. recession. “These appointments should have been made in August.”

This story has been published without modification to the text from a wire agency feed