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Jerome Powell or Lael Brainard? An Explainer on the Federal Reserve System and Who the Next Fed Chair Might Be

Editor, TRANSFIN.
Nov 19, 2021 6:21 AM 6 min read

By Friday, US President Joe Biden is expected to announce his nominee for Chair of the Federal Reserve.

The term of the current holder of that office, Jerome Powell, expires on February 5th. Powell is also the top contender, widely expected to be re-appointed by the Biden administration.

But it’s slightly more complicated than that…

Master of the Greenback

As the head of the central banking system of the world’s largest economy, the Fed Chair wields considerable power. He or she is often regarded as "the person who wields the greatest immediate power over the global economy" and their position as “the most important job in global economics”.

(Of course, the Governor of the People’s Bank of China would be an obvious competitor for these laurels were it not for the fact that, unlike Beijing, Washington can only go so far in curtailing its central bank’s independence.)

To comprehend the significance of the Fed Chair’s role in the global economy, it's important to understand America’s central banking system.

 

Federal Reserve Structure: A Primer

The Fed has three main components.

  • One, the Federal Reserve Board of Governors (FRB), which comprises seven governors appointed by the President and confirmed by the Senate. They serve staggered 14-year terms. (RBI equivalent: Central Board of Directors.) The Chair of the Fed is chosen from within the existing FRB pool for a four-year term and presides over the Board's meetings as its "active executive officer". (RBI equivalent: Governor.)
  • Two, twelve regional Federal Reserve Banks located across the US, which regulate and oversee privately-owned commercial banks. (RBI equivalent (sort of): the four Local Boards at Mumbai, Chennai, Kolkata and New Delhi.)
  • Three, the Federal Open Market Committee (FOMC), which is the Fed’s rate-setting body and thus the body that sets US monetary policy. It includes 12 members (all seven FRB governors + five of the 12 regional Federal Reserve Bank presidents). (RBI equivalent: Monetary Policy Committee.)

 

Federal Reserve and RBI: A Brief Comparison

At a fundamental level, the Fed and RBI are just two sides of the same coin. Just like India’s Central Bank, the Fed is tasked with managing inflation, supervising the country’s banking system, maintaining the stability of the financial system, and providing banking services to the government. Just like the RBI, it also routinely conducts economic research. And just like the RBI, it has to routinely fend off undue political interference to preserve its independence.

However, there are also critical differences between the two.

The RBI is a fully-nationalised autonomous public institution under the jurisdiction of the Ministry of Finance. The Fed has both public and private components within its structure (the Federal Reserve Banks are set up like private corporations). The RBI’s Central Board of Directors is a 21-member body that includes two representatives from the Union Government (which remains conveniently oblivious to the collegium idea). The FRB, on the other hand, has no representatives from Washington. The RBI Governor is appointed by the Union Government. The Fed Chair’s appointment is subject to approval by the Senate Banking Committee and a vote by the full Senate.

In terms of operations, the two institutions differ purely because of the size of the economies they manage. America is obviously a more developed economy with more moving parts and sophistication. Its banks are bigger and handle larger assets. Its actions are more closely watched around the world and seen as trendsetters. The RBI, on the other hand, has a different set of priorities, with an economy that remains agri-centric and largely unorganised. India’s financial sector is also a relatively nascent one. But its digital economy and payments infrastructure are extensive. Thus, each central bank has its own unique set of challenges.

 

One Chair to Rule Them All

Who sits on the throne at the Eccles Building is a big deal. That person would control America’s interest rates, regulate some of the largest banks in the world, and oversee an $8.3trn balance sheet. He/she also supervises the Federal Reserve Banks, which issue banknotes in US dollars - the world’s reserve currency.

Arguably, the Chair’s main responsibility is to implement the task of maximising employment while stabilising prices aka the Fed’s "dual mandate", which was enacted following the stagflation in the 1970s.

Jerome Powell or Lael Brainard? An Explainer on the Federal Reserve System and Who the Next Fed Chair Might BeFed Chairs have typically been historically important personalities. William Martin, the longest-serving Chair, was famous for fiercely defending the institution’s independence. In 1965, an irate President Lyndon Johnson reportedly physically pushed Martin up against the wall, shouting "Martin, my boys are dying in Vietnam, and you won't print the money I need!" (Martin didn’t budge.)

Paul Volcker implemented controversial (but effective) measures to stave off stagflation by advancing rate hikes. Alan Greenspan aka “The Maestro” earned Raghuram Rajan-like rockstar reputation on Wall Street, but his “easy money” policies have been criticised for causing the dot-com bubble and the subprime mortgage crisis. "The epitome of calm” Ben Bernanke oversaw the Fed’s response to the 2007-09 Great Recession while initiating quantitative easing and supervising the era’s bank bailouts. His successor, Janet Yellen, the first Chairwoman in Fed history, began the process of reversing policy rate cuts (quantitative tightening) in late 2017 and focused on controlling unemployment. (Yellen is now the US Treasury Secretary.)

And then there is Powell.

 

Powell's Tenure

Powell was appointed by Donald Trump, who threw out a decades-long precedent by deciding not to reappoint the extant Chair (Yellen). He began by continuing his predecessor’s policy of quantitative tightening, gradually raising rates in light of strong economic indicators. This brought him in direct confrontation with the White House. Trump repeatedly called for zero or negative interest rates to spur growth, even deriding Powell as an "enemy" and "equivalent to or worse than" Xi Jinping. The Chair, however, stood his ground.

Powell’s response to the COVID-19 pandemic has earned bipartisan praise. He initiated a dramatic expansion of the central bank’s balance sheet and spearheaded unique bond-buying and direct lending programmes. Significantly, at the 2020 Jackson Hole Summit, he announced an end to the decades-long Fed obsession with inflation-targeting (a Volcker legacy). Instead, the Fed would allow interest rates to remain at near-zero levels and tolerate slight increases in inflation to support economic growth.

Today, however, towards the end of his term, Powell faces a changed landscape. The pandemic in the US has begun receding thanks to the vaccination drive. Economic activity is picking up steam, ergo the Fed will “taper” its monthly asset purchases. And all eyes are on the US inflation rate, which is now at its highest point since 1990.

 

Powell Power

While the overwhelming favourite to be Biden’s pick, Powell has his share of critics. Those on the right lambast his quantitative easing policies and say the Fed didn’t predict the abrupt increase in consumer prices. Those on the left lament his support for financial deregulation and call for a more climate-conscious candidate.

Amidst all these debates is the wild card - Lael Brainard, another member of the FRB. She has earned a reputation for being the “strongest” voice at the Board for stricter regulation of the financial industry. Critically, she has the support of the Progressive wing of the Democratic Party, which after its compromises for the recent infrastructure bill and the roll-back of its darling Billionaire Income Tax might be less inclined to indulge in bargaining with Powell-backing Moderates.

However, evidence strongly suggests that, if confirmed, Brainard is likely to opt to continue Powell’s gradual policy tightening, albeit at a more gradual pace. The main area of difference is regulation - Brainard has consistently dissented against loosening regulatory curbs on financial institutions, unlike Powell (something that led to Senator Elizabeth Warren characterising the latter as “a dangerous man”).

But precedent and bipartisan considerations give Powell the upper-hand. He is the favourite of betting markets, which give him a 73% probability of re-nomination, although his margin vis-a-vis Brainard has narrowed over recent weeks.

But then again, bettors don’t decide who the next Chair of the Federal Reserve will be!

FIN.
 

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