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 Exchange 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 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.
“In this moment of enormous uncertainty, we need stability and independence in the Federal Reserve,” said the Democratic president in a joint ceremony with Powell and the candidate for vice president of the Fed, Lael Brainard, in the White House. “We will use all our tools to support the economy and a strong labor market, and to prevent further inflation from consolidating,” Powell said at the hearing. If confirmed by the Senate, Powell, 68, will continue to lead the Fed for another four years. That of Powell and Brainard is one of the last important appointments of the Democratic Executive. According to the statement released by the White House, both “will continue to focus on keeping inflation low, prices stable and achieving full employment.”
Powell put the Fed’s capacity to the test with unprecedented aid, consisting of the monthly purchase of bonds worth 120,000 million dollars (about 105,000 million euros) and keeping the price of money at 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 among some officials of the regional banks – which the Fed was forced to tackle with a strict protocol – Powell benefits from the broad support of the ruling class Democrat, among whom 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 most left-wing sector of the party, 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.
Democrats gave up the option of a future inflation scapegoat in favor of someone known and respected who had Yellen’s support. Although on paper Powell opts for a slightly more aggressive stance than Brainard, the policies of both are very similar and Powell brings more coherence and less uncertainty. Biden still has more appointments pending to make up the final composition of the Fed, ”says Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC.
Powell’s confirmation at the head of the Fed had sent rivers of ink flowing in recent months, both politically and economically, but most sources were undoubtedly in favor of continuity. “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 presciently, “what the market is setting at the moment is an early and preventive tightening of monetary policy, which would not need to go very far to prevent inflation from becoming uncontrollable. 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. “
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