In a new setback for the progressive faction of the Democratic party, President Joe Biden has formally bet on the continuity of Jerome Powell at the head of the Federal Reserve (Fed, US central bank). The stock market reacted enthusiastically after learning of the revalidation of Powell’s mandate, who had been appointed by Republican Donald Trump in 2017. The election of Powell, whose term expired in February, implies maintaining the the status quo, in an inflationary situation and on the eve of the gradual withdrawal of stimuli that helped keep the country’s economy afloat during the pandemic.
“President Powell has exercised firm leadership during a period of unprecedented challenges, including the largest economic contraction in modern history,” the White House said in a statement on Monday. The document underscores Biden’s confidence that Powell and the next Fed vice president, Lael Brainard, “will continue to focus on keeping inflation low, prices stable and achieving full employment.” If confirmed by the Senate, Powell, 68, will continue to lead the Fed for another four years. Powell and Brainard’s is one of the last major Democratic Executive appointments.
Powell put the Fed’s capacity to the test with unprecedented help, consisting of the monthly purchase of bonds worth 120,000 million dollars (about 105,000 million euros) and keeping the price of money around 0% since March 2020. Now, with the tapering (withdrawal of stimuli, in technical jargon) in the making, and despite the scandal caused by conflicts of interest by some officials of regional banks – which the Fed was forced to tackle with a strict protocol – Powell benefits from the broad support of the establishment Democrat, in which he enjoys support as decisive as that of Janet Yellen, Secretary of the Treasury. Powell’s management has convinced Biden and has made him disdain the reluctance and criticism of the party’s most left-wing sector, led by Senator Elizabeth Warren, who has come to describe Powell as a “dangerous man.” Other progressive Democrats had come out in favor of a candidate who would include the perspective of climate change as a key factor in his administration.
Powell’s confirmation at the head of the Fed had sent rivers of ink flowing in recent months, both politically and economically. “While we think the market is too price aggressive with respect to the Federal Reserve and too optimistic about the possibility of a bloodless tightening, the credibility of the Fed is one of the reasons we believe Joe Biden could return to appoint Jay Powell, ”Gilles Moëc, chief economist at AXA Investment Managers, explained last week in a note addressed to his clients. “That the Fed remains credible helps contain any market-driven tightening of financial conditions while we wait for inflation to finally decline,” he adds.
Persistent inflation, initially considered a transitory phenomenon but which over the months has acquired essential character, has been one of the reasons that, according to experts, have convinced President Biden to opt for continuity and avoid experiments when the economy faces a crisis multifaceted, also caused by the great global traffic jam in the production and distribution chains and by a labor shortage that seriously affects the activity of key sectors.
“In summary”, Moëc concluded foreboding, “what the market is setting at the moment is an early tightening and price quotation of monetary policy, which would not need to go very far to prevent inflation from spiraling out of control. The key is that the market believes that Powell could do it without causing a massive loss of production and that is a positive net result. “