The man who heads the Federal Reserve is one of the most powerful figures in the world. His work is also one of the most influential on the lives of ordinary Americans, not to mention others around the world.
This will be especially true in the coming months as the Fed seeks to contain rising prices without jeopardizing the economic recovery. The consequences of getting it wrong can be catastrophic and lead to high inflation, a recession or, worse, the Fed dealing with stagflation – in which you get both rising prices and a sluggish economy.
Jerome Powell is the current chairman of the Fed, but his first term ends in February, and progressive Democrats are pushing for President Joe Biden to replace him with Lyle Brainard, a Harvard economist who currently serves on the Board of Governors. Serving as the only registered Democrat in the of the Federal Reserve System. Progressives like her partly because she appears to be more sympathetic to greater financial regulation and Fed action on climate change.
Wall Street investors, economists like me and other central bankers around the world have been eagerly awaiting Biden’s now-imminent decision for weeks. The markets are predicting that Powell is going to keep his job. But will it matter if he chooses someone else?
I believe the best way to answer this question is to consider the responsibilities of the Fed and its chairman, as well as the serious challenges that lie ahead in 2022 and beyond.
meet the chair
Most introductory macroeconomics textbooks – such as the ones I use to teach my students – note that the Fed chair is so influential that it can crash or elevate financial markets just by uttering a few words in public. Investors admit they scrutinize and dissect every single word the Fed Chair says and even count the number of times a certain key phrase is used – I call it “Fed Speech Bingo”. I say
While it may all be exaggerated to make students pay more attention to a boring chapter on money and banking, it is undeniable that the Fed chair is very important.
The position is ultimately responsible for regulating the banking system, promoting the stability of the financial system, and conducting monetary policy by controlling the money supply and setting interest rates – the main duties of the Federal Reserve. Seven governors, including the chair, oversee the Fed, and each has a single vote on key policy decisions such as interest rates. But the chair wields significant power by setting the agenda and acting as the Fed’s public voice.
The Fed’s most important job is to conduct monetary policy, which involves controlling the money supply to promote sustainable economic growth. The main tool used to achieve this is to “target” the short-term interest rate to achieve low inflation and stable employment. This is known as the Fed’s dual mandate. In recent years, the Fed has also turned to more unconventional methods, such as buying commercial bonds and other assets.
What this means for the rest of us is that the Fed helps determine the rates we pay on mortgages, car loans, credit cards, and other types of lending. Lower rates mean credit is cheaper, which boosts the economy. But this in turn can increase inflation.
The Fed can raise rates to reduce inflation, but raising the cost of credit can hurt economic growth and lead to high unemployment.
This is precisely the careful balancing act facing the Fed at the moment.
Double Mandate – Falcon and Pigeon
Americans across the country are seeing higher prices at malls, grocery stores and gas pumps as inflation, as measured by the Consumer Price Index, shows it rising at the fastest pace in three decades. At the same time, the labor market has not fully recovered from the pandemic-induced recession early last year, with 4 million fewer employed people than in February 2020.
The focus for the Fed right now is clearly on price increases that were initially expected to be short-lived and should have stabilized by now. Most economists believe that recent price increases reflect temporary supply constraints and the fact that prices fell sharply in spring 2020 at the start of the pandemic, making inflation figures look much larger now.
The big decision the Fed and its president will have to make in the coming months is when to start raising interest rates to tame inflation. If they move too much or too quickly, they risk an economic downturn, which can lead to substantial job losses. If they act too little or too late, they run the risk of letting inflation spiral out of control – as Americans last experienced in the late 1970s.
That’s the difference between being a hawk and a dove, in the language used by Fed watchers. That is, an eagle is more concerned with fighting inflation, while a pigeon is more focused on development and jobs.
While most monetary policy experts agree that things will be pretty much the same, whether Powell or Brainard is in charge, the latter is little more than a dove—meaning it’s more likely to be employed before fighting inflation. Is.
In 2022, the Fed chair will have to quickly decide what will be its top priority – with stagflation another possible scenario.
Other issues on the agenda of the chair
The Fed is also responsible for promoting the stability, integrity and efficiency of the country’s monetary and financial systems, primarily through regulation.
Financial bubbles are rising in many markets – from stocks to digital currencies – thanks to the Fed’s easy money policy that has helped prop up prices. Inattention to financial stability was one reason the Fed so long missed out on the great financial crisis.
The Fed chairman will have to decide whether to make it a higher priority, especially if it raises interest rates too soon. Doing so can result in a market crash.
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Finally, the Fed is facing pressure to tackle problems beyond its mandate, such as climate change and inequality. This is one of the main reasons why Brainard ran in the first place.
Progressive Democrats and activists are urging the Fed to use its regulatory powers to restrict the flow of capital from carbon-intensive industries and redirect money toward more climate-friendly ones. The idea is controversial because it is not in its mandate, it risks hurting the independence of the Fed and could ultimately lead to an incorrect allocation of resources.
Similarly, Nobel Prize-winning economist Joseph Stiglitz and other liberals want the Fed to do more to fight inequality. Research shows that the Fed’s policies are contributing to wealth inequality.
While the Fed may not have been able to fix the issues of wealth and income inequality – these are complex, complex issues that require congressional action, new legislation or law enforcement – it is at least starting to pay more attention to its actions. so that it doesn’t are actively contributing to the problem.
continuation or change
But choosing a Fed chairman isn’t the only way Biden will be able to make his mark on the central bank.
In the following weeks, he will have to fill three other open positions on the Federal Reserve’s board of governors, which gives him the opportunity for a complete turnaround and allows him to shift the Fed’s board toward a more Democratic-dominated one.
That could mean helping the Fed advance progressive goals like fighting climate change and inequality, regardless of who the chair is.
Either way, Americans would be wise to pay attention to who Biden chooses.