What To Expect From Powell 2.0

By renominating Jerome Powell as Federal Reserve chair over Fed governor Lael Brainard, whom he nominated to be Vice-Chair, President Biden has supposedly chosen the safer and less political route. But rest assured that in Powell's second term, which requires Senate confirmation, likely to be a slam dunk, the Fed will be involved in politics like never before.

That's because Biden has several other seats to fill on the seven-member Fed board of governors, and the composition and thinking of that board promises to be a lot different than the current roster, even if it has the same chair. It will likely move more aggressively to implement the current administration's progressive policies.

Indeed, while Biden may have chosen Powell to serve another term, it will likely be Sen. Elizabeth Warren and her acolytes who will have the biggest influence on Fed policy in the years to come.

The most important seat other than the top two is likely to be that of the vice chair for supervision, currently held by Randal Quarles, who said he plans to resign from the Fed board by the end of the year. If Sen. Warren and her allies have their way, that position will go to someone who will further the left's agenda to impose and enforce stricter regulations on banks, including climate change policies.

"Powell's failures on regulation, climate, and ethics make the still-vacant position of Vice-Chair of Supervision critically important," Warren said in reiterating her commitment to vote against Powell. "This position must be filled by a strong regulator with a proven track record of tough and effective enforcement, and it needs to be done quickly."

And Powell himself has already conceded the point.

"I respect that that's the person who will set the regulatory agenda going forward," Powell said back in September. "It's fully appropriate to look at, for a new person to come in and look at the current state of regulation and supervision and suggest appropriate changes."

Biden still has another seat to fill on the Fed board, besides Brainard's. If confirmed by the Senate, which is not a sure thing, according to press reports, she would succeed Richard Clarida, a Trump appointee whose term ends in February.

As it applies to monetary policy, the Powell 2.0 Fed is unlikely to depart too much from Powell 1.0. If anything, the Fed may be even more dovish than it has been since the onset of the Covid-19 pandemic.

The Wall Street Journal last week dubbed Powell and Brainard "Tweedledum and Tweedledee," noting their near lockstep agreement on keeping monetary policy accommodative and interest rates low. If anything, while Brainard is certainly more hardline than Powell on bank regulation, she's even more dovish on monetary policy, which is saying a lot since Powell is about as accommodative a Fed chair as there has ever been.

Loose monetary policy is something that just about everyone, including, if not especially, progressive Democrats, can agree on. So while we can probably expect the Fed to continue to move forward with its already-announced plan to reduce its asset purchases in the face of high inflation, it may hesitate to raise interest rates once that process is finished, probably next spring. If the Fed is lucky and inflation does start to recede as supply-chain bottlenecks and work shortage ease a big maybe there will be less pressure on it to start raising rates.

However, if you're an investor in bad old fossil fuel and bank stocks and the like, the new Fed probably won't be to your liking. As we know from their many public statements on the subject, progressive Democrats will be more than happy to try to stretch the Fed's mandate, with or without the consent of Congress, to include dictating what types of companies investors can invest in and what types of industries banks can lend to.

Already we've seen oil companies move more of their business to private lenders and away from large commercial banks, which, either on their own or under shareholder and political pressure, have backed away from the sector. Right now, the Fed only regulates the very largest banks, JPMorgan Chase, Bank of America, and the like, but has little or no jurisdiction over private firms.

But that probably won't stand in the way of Warren and her friends to try to command what they can and can't do, which is why Warren was so vehemently opposed to renominating Powell, who did seem to recognize that Fed power does have its limits. However, based on his public comments, he appears to have surrendered on this issue while not actually endorsing it.

So, while Fed monetary policy is likely to remain accommodative for the foreseeable future, it's also likely to continue to insinuate itself further into the lives of ordinary Americans. Did somebody say, "Postal Banking?"

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George Yacik
INO.com 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 INO.com) for their opinion.

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