Jerome Powell faces a plethora of politically complicated economic problems with few precedents in the 107-year history of the Federal Reserve now that he has been appointed to head the central bank for another four years.
The thorny topics cluttering the Fed chairman’s inbox span the gamut, from managing an economy emerging from a pandemic only in a century to deciding to create a digital dollar. The stakes are high: a misstep on either front could turn the economy around and trigger a recession.
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“The Fed is facing the most difficult period in its history” since Paul Volcker was president more than a quarter century ago, said Bloomberg Opinion columnist and former central bank official Claudia Sahm.
Making the job even harder: A highly partisan political environment in which the Fed is increasingly seen as no longer above the fray and its reputation has been tainted by a trade scandal involving a few few policy makers.
Monitor the economy
It’s always at the top of any Fed chairman’s inbox. But what’s different this time around is that the central bank faces a policy dilemma that hasn’t been seen in decades.
Inflation is well above the Fed’s 2% target, while the central bank falls short of its maximum employment target. That’s a combination that policymakers didn’t foresee when they adopted a new monetary policy framework in 2020 with the aim of raising inflation after years of price hikes below target.
Amid accelerating price growth, the Fed appears to be on its way to considering a more rapid downsizing of its gigantic $ 120 billion-a-month bond buying program, just weeks after it instituted a plan to cut back on purchases. methodically.
Last week, Vice President Richard Clarida, Governor Christopher Waller, and Federal Reserve Bank of St. Louis President James Bullard noted that the issue of a faster drawdown could be on the table when the Federal Market Committee Open meets December 14-15.
A faster reduction of the so-called quantitative easing program would give policymakers an earlier opportunity to raise interest rates from near zero if they deemed it necessary to prevent the economy from overheating.
Ensure financial stability
The Fed’s super-lax monetary policy has encouraged investors to take more risks and pushed the prices of stocks, housing and other assets into the stratosphere. The result is what Fed staff have called “notable” vulnerabilities that leave the financial system susceptible to collapse.
The explosive growth of cryptocurrencies and related assets also poses potential risks to the system, in particular the rise of stablecoins as an alternative means of payment to the dollar.
Create a digital dollar?
The take-off of stablecoins is putting pressure on the Fed to follow China’s lead and issue its own digital currency.
Proponents argue that it would help expand access to the financial system to the millions of Americans without a bank account and speed up and lower the cost of transactions. Opponents warn that it would run the risk of emptying the banking system when money is pulled from financial institutions and parked in digital dollars at the Fed.
It is “a battle for the soul of the financial system,” said former Bank for International Settlements economic adviser and digital dollar skeptic Stephen Cecchetti.
A decision to go ahead would likely require at least tacit approval from lawmakers, which could entangle the Fed in politically treacherous terrain.
Repairing the Fed’s tarnished reputation
That terrain will be even tougher to traverse after the central bank’s reputation as a direct economic manager took a hit with the revelation that some policy makers were trading financial securities while the Fed helped markets and the economy.
The news prompted the resignation of the presidents of the Dallas and Boston reserve banks and the adoption of stringent new restrictions on operations by top Fed officials, including a ban on the purchase of individual stocks and bonds.
This “is a start, but we can’t stop now,” Senate Banking Committee Chairman Sherrod Brown, the Ohio Democrat who leads the panel overseeing the Fed, said in a statement after the restrictions were announced on the 21st. October. Americans need to be able to trust the Federal Reserve to work for them. ”
Also looming over the Fed: An ongoing investigation into the trade scandal by its internal watchdog.
The Fed is already caught in a tug of war between Democrats and Republicans over what it can and should do to combat global warming.
After years of lagging behind other central banks, the Fed has stepped up its research on climate change and is actively considering the risks a warming planet poses to financial stability. Last year, bank officials created a climate committee, joined a key global group of central banks on the issue, and began working with the Treasury Department on Biden’s climate executive order.
But that has failed to appease progressive Democrats, some of whom opposed Powell’s appointment before it was announced. They want the Fed to be much more active in fighting climate change. Meanwhile, some Republicans have accused the central bank of mission slippage.
The Fed is also caught in the political crosshairs of the debate over racial and income inequalities.
Policymakers have been much more direct than in the past about the deleterious effects such disparities can have on the economy. And, as part of their new monetary framework, they have broadened the definition of their maximum employment goal to make clear that they seek “broad-based and inclusive” job gains.
But they have faced criticism from the left for contributing to the same income inequality they denounce by pursuing an aggressive quantitative easing program that has raised the prices of stocks and other assets in the hands of the rich. And they have been attacked for being a mostly white male club with no racial and gender diversity.
Biden could address these issues in the coming weeks. He will announce his election for the Fed’s vice chairman of oversight along with additional nominations for vacant seats on the Board of Governors beginning in early December, the White House said Monday.
Democrats have also been urging the central bank to improve diversity among Fed leaders with their presidential choices to run the Dallas and Boston reserve banks, while Republicans warn not to be swayed by political pressure.
© 2021 Bloomberg