If one finds value or believes value can be found in diversified ideas, certainly rationality would suggest central banks would embrace it as a practice. This is especially true within the predominant global central bank.
President Biden and his team are thinking through a unique challenge amidst some very common political drag. One way to help around the margins of this economic recovery, and possibly address the challenge, would be to cobble together a new Federal Reserve Board that draws more praise than pain.
Qualifications and the complimentary skills of the nominees are more important than the politics of the process. In the current political context, even Paul Volcker would not be confirmed unanimously (98-0) as he was in 1979. But the president would want most if not all his central bank nominees to receive bipartisan support. That will require a highly justifiable approach to protecting monetary policy independence within the enigma of putting his imprimatur on the Fed.
Among the seven seats, only two are fully settled; Governors Christopher Waller and Michelle Bowman have many years on their appointments and represent the center-of-right. In the labeling game, it is fair to say Governor Lael Brainard anchors the center-of-left. Assuming the president has the open seat, and the seats of Richard Clarida and Randal Quarles, nominating two doves and one hawk presents balance. Three doves would invite unnecessary complication. Even if they eventually were confirmed, the process and noise would be brutal and follow those individuals into their seats during what likely will be a very complex 2022/23 for Fed policy making.
That would leave Chairman Jerome Powell. If he is let go, the White House and Democrats would be forced to pursue five confirmation hearings which will consume plenty of resources for which other issues contend. The payoff for taking such risk isn’t immediately apparent, especially considering Biden likely would want and need to find a right-of-center candidate with connections to the capital markets. He has that in Powell.
White House optics can be a useful tool. Any president can meet in private within his office without that becoming known until six months later, if at all. Even if the president does not plan to nominate Brainard for chair, the White House would want to be able to say Biden considered her for the chair to avoid potential perceptions of oversight. She is qualified beyond question and known to major constituencies including market participants and influential congressional economic policy leaders of all factions in both parties. That we know about the meeting and that it included Powell and Brainard elicits the question of motive(s).
Should Biden nominate Brainard, the White House of course would value her input on rebuilding the board. Brainard has served at the National Economic Council, Treasury, and the Fed. She holds a Ph.D. in economic development from the Massachusetts Institute of Technology. Few people are as qualified to contribute to monetary policy and financial services regulation. Powell too has supporters, including leading Democrats. Treasury Secretary Janet Yellen offered her latest endorsement late last month while overseas; it was the third since last summer. We reject the notion that Powell and Brainard are rivals. They along with Yellen have been main elements of the Fed power axis for the past five years
We stand by our call that Powell will be reappointed chair and Brainard named vice chair of supervision. In addition to her board management duties, she has been a strong, clear voice on bank regulation, often at odds with Powell and Quarles (the current vice chair for supervision). But on monetary policy, she has often voted with Powell. This is crucially true related to the March 2020 announcements.
Circumstances put a premium on Biden being perceived by most interested parties as maximizing the Fed opportunities. In this case that means calming rather than stirring markets and ameliorating as many reasonable political factions as possible. It is a bit more defense than offense; too much statement politics and not enough monetary and macroprudential policy stewardship would be a mistake, in our view.
The longer speculation builds about President Biden’s plans for the central bank, the deeper the White House falls into palace intrigue. The deeper into that hole he goes so too does the ability of Senate Banking Committee Chairman Sherrod Brown to effectively manage the remaking of the Fed when few other policy bodies matter more.
Diversity of thought benefits organizations. President Biden would contravene this view, one he publicly supports, were he to nominate four left-of-center candidates to the Federal Reserve while nominating Governor Brainard to become chair. He would invite market doubt, if not outright scorn, and complicate the confirmations of all nominees. Few chief executives walk their organizations into such mayhem, especially when that executive leads the country that owns the world’s primary reserve currency.
