President Joseph Biden reappointed Jerome Powell for a second term as Federal Reserve chairman, signaling that the institution will continue its policies as inflation surges and economic uncertainty spikes due to an emerging variant of the coronavirus.
“At this moment, of both enormous potential and enormous uncertainty for our economy we need stability and independence at the Federal Reserve,” President Biden said during remarks at the White House. “And we need people of character and integrity, who can be trusted to keep their focus on the right long-term goals of our country, for our country.”
Biden also nominated Lael Brainard, a Fed governor championed by many progressive groups, as The Fed’s vice chair to mollify political leftists. Former President Donald Trump appointed Jerome Powell as Fed Chair in replacement of Janet Yellen, who served the previous term under President Obama. This caused many leftists to want to replace Powell, although he could hardly be described as a Trump advocate. In fact, President Biden pointed out that he supported Powell for standing up to political pressure when the former president came down on him for “following” when The Fed “should be leading.”
Additionally, Biden’s decision to reappoint Powell demonstrates his commitment to keeping the Federal Reserve independent from political gamesmanship. By rejecting the call from progressives to nominate a Democrat as Fed Chair, Biden has avoided increasing regulations on banks and further expanding The Fed’s reach to combat climate change.
Essentially, Biden is banking on the fact that The Fed chair is more aligned with his policy decisions than Republicans in the Senate, who demand quicker action by The Fed and to tamp down rising prices.
Under Powell and Brainard, The Fed has kept interest rates near zero despite high prices for nearly all goods, as it focuses on returning the economy to full employment and policymakers argue that inflation will prove temporary. Powell has stated interest rates will remain low until the economy reaches maximum employment and inflation exceeds its 2% target to make up for past shortfalls.
So far, the unemployment rate has declined substantially to a new low of 4.6% since the pandemic began. However, rising consumer prices are becoming an increasing concern amongst many Americans with inflation now approaching 6.2% — the highest it’s been in 30 years.
The rapid surge in inflation is placing even more pressure on Powell to scale back asset purchases and begin raising interest rates. But the current issue presents a conundrum: If the Federal Reserve does not raise interest rates, then inflation surges; but if they raise interest rates too early, it could start a recession.
Currently, inflation is rising to crisis levels and consumers are bearing the brunt of the increased cost, stated a report by The Hill. As a result, November’s measure of consumer sentiment fell to its lowest level in a decade — worse than any other point during the pandemic — according to the University of Michigan Consumer Sentiment Survey.
Powell and his colleagues believe that today’s price hikes are the result of temporary factors tied to the pandemic, which should ease on their own as health outlook improves.
“We know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials like food, housing and transportation,” Powell said during a White House meeting, adding that the Fed would “use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”
New COVID Variant
Furthermore, the emergence of the new COVID variant spooked the market last Friday, causing spectators to question whether this news will rock The Fed’s course on slowing monetary support to the U.S. economy.
Expectations for faster tapering has ramped up, as have forecasts for the amount of rate hikes in 2022. Prior to Thanksgiving, Fed funds futures markets priced in a 31% chance of three 25-basis point rate hikes next year. Due to Friday’s variant-induced market sell-off, those odds fell to 25%.
The new, heavily mutated variant of coronavirus detected in South Africa. In response to the news, investors sold off their risk assets, triggering a 1,000-point drop at one point in the Dow Jones Industrial Average as well as large sell-offs of oil, cryptocurrencies and airline and cruise stocks.
Still, the current administration remains positive about our economy’s recovery. “As I’ve said before, we can’t just return to where we were before the pandemic, we need to build our economy back better, and I’m confident that Chair Powell and Dr. Brainard’s focus on keeping inflation low, prices stable, and delivering full employment will make our economy stronger than ever before,” Biden said.
