Fed Watch: COVID-19 Resurgence Challenges Economy As Powell Renomination Looms

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With Jerome Powell's current tenure as Fed Chair due to end in February, 2022, President Joseph Biden may still decide to reappoint him as chairman of the Federal Reserve, but tea leaf readers might have noticed a subtle shift in the discussion.

For one thing, there is a discussion—which was desultory at best when Alan Greenspan or Ben Bernanke were up for reappointment. That seems to have been energized in recent weeks regarding Powell’s future.

Continuity And Stability Vs. Diversity Catch-22

Then there is the fact that Biden has done the opposite of virtually everything former President Donald Trump did. However, that could cut either way, since Trump appointed Powell, but he also broke with the tradition of reappointing the Fed chair across party lines.

Lael Brainard, the most likely alternative for Fed chair, is the only Democratic appointee on the board of governors, and as a woman, would fit in with the drive for greater diversity. She dutifully sacrificed her ambitions to be Treasury secretary in deference to Janet Yellen, and even if there was no formal deal, Democratic powers that be may feel they owe her.

But she may also be caught in a diversity Catch-22. Progressives have been waiting months for Biden to name a Black economist to the open position on the board, with Michigan State’s Lisa Cook and AFL-CIO’s William Spriggs the names most often mentioned.

Brainard, who was born to a U.S. diplomat in Germany and grew up mostly in Europe, is White, with the classic elite education via Wesleyan and Harvard. Cook, by contrast, graduated from the historically black Spelman College in Atlanta, and studied for a master’s degree in Senegal before getting an economics doctorate at Berkeley. Spriggs went to Williams and got his doctorate at University of Wisconsin in Madison.

Dennis Kelleher, head of a leftist advocacy group who comments often on the Fed, has criticized Powell for being too lax on bank regulation and said recently the chairman has not been a leader on climate policy. Democratic lawmakers like Senators Sherrod Brown and Elizabeth Warren have also criticized the Fed’s record on regulation under Powell.

Republican legislators like Powell, which may not work in his favor. Economists overwhelmingly believe he will be reappointed—but when was the last time they were right?

The main thing in Powell’s favor is his reappointment would signal continuity and stability. Biden’s staff may be waiting to pair a Powell reappointment with a progressive Black nominee. (Powell wouldn’t have to leave the board if he wasn’t reappointed chairman, but it’s very rare for someone to stay after stepping down.)

Meanwhile, a paper published last week by the National Bureau of Economic Research, using artificial intelligence and voice analytics, found Powell to be the most negative of the last three Fed chairs. Researchers found that the tone of his answers in press conferences was more downbeat than that of his immediate predecessors, Janet Yellen and Ben Bernanke, and tended to adversely influence market reactions.

Policymakers are expected to discuss the Fed’s bond purchase program at the Federal Open Market Committee meeting this week, and investors will be disappointed if Powell doesn’t have something to say about it, even if only to hint about a timeline for reducing the purchases.

A resurgence in COVID-19 infections due to the Delta variant is giving the Fed some cover in holding off a decision as it has become more challenging to predict the course of the economy.

The variant is a two-edged sword. A new wave of infections—especially if accompanied by mask mandates and other restrictions—can further disrupt supply chains, pushing up prices, but it could also disrupt the recovery itself, dampening demand.

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