Prepare For A Post-Powell Fed

If financial market participants were voting, Jerome Powell would likely win a resounding second term as Federal Reserve chair. He would also probably be approved by the Senate, but that would assume President Biden nominated him. Unfortunately, that's become less likely to happen.

The latest straw against him was the trading scandal that led to the resignation of two of the Fed's 12 regional bank presidents. While the Fed last week announced new restrictions on trading to prevent this from happening again, it also brings the scandal back into the public eye at the worst possible time for Powell, whose terms end in February. While he certainly can't be blamed for the deeds of others—especially when they happened at the Fed's regional banks, not the Fed itself—and he deserves credit for acting swiftly and decisively in their wake, the fact is that they occurred on his watch. As a result, he won't be able to deflect all of the blame.

More to the point, it exposes how cozy the Fed is to the financial markets when its officials are supposed to be purer than Caesar's wife. While Powell probably didn't know about those two Fed presidents' trades beforehand, the episode makes it look like the Fed chair isn't in charge of his own house.

The incident was certainly a gift to his progressive opponents. They oppose Powell's renomination for this and other reasons, namely his failure (in their minds) to clamp down harder on the nation's big banks and to fully embrace their climate change agenda. While Powell hasn't shown any particular opposition to that agenda, he has been circumspect on how fast he believes the Fed can move on that score. Now, if he came out tomorrow in favor of banning banks from making loans to the oil industry, that might change their minds about him, but that's unlikely to happen.

Another thing that's likely to be held against him is the burgeoning inflation that Powell keeps insisting is "transitory" when every day it becomes more and more evident that rising prices are going to be with us for quite some time. The Fed has been trying to lift inflation for more than 10 years. Well, now we've got it. While it's arguable that the recent spike in oil prices will eventually abate, we shouldn't expect energy prices to fall much, given the progressives' renewable energy agenda and mission to stamp out fossil fuels. And that will eventually lead to higher prices for lots of other things, not to mention higher interest rates as well.

So, if not Powell, who?

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The only alternative we've seen mentioned is Lael Brainard, a member of the Fed's board of governors appointed by President Obama in 2014, which apparently is reason enough to elevate her in some eyes. However, she also receives plaudits from the progressive camp for being just about the only Fed member to vote against recent moves by the central bank to reduce restrictions on the big banks.

One possible strike against her is the regional bank trading scandal since one of her responsibilities is to oversee those banks. However, there hasn't been much noise about that, and her supporters in Congress and the financial press are unlikely to make a big thing about it. She's also not the Fed chair, so she's unlikely to take as much blame as Powell might.

There are two other possible candidates, and both, ironically, come from the regional banks.

They are, respectively, the presidents of the Atlanta and San Francisco Feds, Raphael Bostic and Mary Daly. As the first two openly gay presidents of regional Fed banks, both tick off the diversity boxes nicely. Both also are experts in areas that are key focuses of the Biden Administration, namely income and wealth inequality. In addition, both are currently voting members of the Fed's rotating monetary policy committee.

Bostic, who is also black, took office in 2017. His area of expertise is housing. According to his bio on the Fed's website, his work on the Community Reinvestment Act during his tenure at the Fed's Division of Research and Statistics from 1995 to 2001 "earned him a special achievement award." During the Obama Administration, he was assistant secretary for policy development and research at HUD. He currently serves on the FDIC's Advisory Committee on Economic Inclusion and Georgia's Partnership for Inclusive Innovation.

According to her Fed bio, Daly "focuses on labor market dynamics and the aggregate and distributional impacts of monetary and fiscal policy. In addition, she has published work on economic inequality." While her resume is a bit thin, San Francisco has recently been a launching pad for other Fed careers: Janet Yellen was president of the San Francisco Fed before she became Fed chair, and John Williams, president of the powerful New York Fed, succeeded Yellen in San Francisco.

Back in July, I put Powell's odds of being renominated at less than 50-50. I think they've dropped even further since then. Better start preparing for a Fed with different personnel and a different agenda.

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George Yacik Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.

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