New York

28/06/2021 – 19:36

There is no stitch without thread in Washington DC. That is why coincidence, or not, the chairman of the Federal Reserve, Jerome Powell, used last Tuesday for market relief a somewhat more accommodating tone in his appearance before the American legislators.

His words before the House Subcommittee on the Coronavirus Crisis came one day later from a meeting with US President Joe Biden and Treasury Secretary Janet Yellen and less than a week after the central bank’s Open Markets Committee (FOMC) surprised the market with a potential advance of the first interest rate hike.

Biden will decide if he will continue at the helm in January, with Brainard and Bostic as candidates

And it is that the brief tantrum of investors in the middle of this month when they intuited that the Fed could implement up to two rate hikes in 2023 It came at a time when scrutiny on Powell, a veteran Republican who served in the Georg HW Bush administration, is higher than ever. Ultimately, the implementation of Biden’s ambitious economic agenda depends on a smooth transition to monetary normalization that should create favorable conditions to continue financing growing public spending.

All this at a time when the Fed faces one of the most delicate situations in recent times. In an economic recovery that glimpses the largest expansion of real GDP in recent decades, with the labor market still experiencing multiple challenges under the height of inflation, which according to the underlying reading of the personal consumption expenditure index reaches its biggest rebound in almost two decades.

The marked times

This context coincides with Biden’s opportunity to tailor a Fed more to suit him. On October 13, the term of Randal Quarles, another Republican within the central bank, as the Fed’s banking supervisor, expires. Although his presence on the governing council may last until January 31, 2032.

More critical still is Powell’s tenure as Fed chairman, which comes to an end in February 2022, with possible revalidation in his position, while his role as a member of the governing council expires on January 31, 2028. The journey of Fed Lieutenant Governor Richard Clarida, also a Republican, ends in September 2022.

“An important decision for the Biden Administration is whether to keep Powell and Clarida in their positions at the Fed, or to replace them,” explains Matthew Hornbach, a strategist at Morgan Stanley, who insists that this could lead to more instability in the markets.

Experts believe that the decision is not yet discounted in the market and that it will bring instability

Recall that in August 2013, the backstage race between Yellen and Larry Summers to take over the Fed chairmanship caught investors off guard and sent Treasury yields higher. Precisely, at that time, the market unleashed its tantrum Given the prospects of the announcement of a potential tapering, as the process of reduction of purchases by the central bank is known. This is a first step before a potential rate hike.

The Fed is expected to telegraph its cut plan sometime before the end of the year. “Investors have yet to participate seriously in this debate, but will become relevant in the second half of this year. Until now, the Biden Administration has not ruled on the matter, “Hornbach clarifies.

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Currently, of the top Fed officials, all except Lael Brainard, are Republicans appointed to their current duties by former President Donald Trump. Brainard, who occupied the pools to become Secretary of the Treasury of the Biden Government (since it finally ended up in the hands of Yellen), is next to Raphael Bostic, president of the Atlanta Fed, some of those favored by the Democrats to take the reins of the Fed.

History suggests that US presidents often appoint a Fed chairman who shares their political ideology at some point during their presidency. But it is also true that new presidents, such as Biden and as happened with Obama, tend to reappoint them even if they do not belong to the same party. In the last 60 years, only twice Fed Chairman has been replaced by a White House tenant: Jimmy Carter (Democrat) replaced Arthur Burns (Republican) in 1978 and Trump (Republican) replaced Yellen (Democrat) in 2018.

At this time, Biden must carefully consider what the departure of the two most important leaders on the Fed’s governing council could mean for markets, confidence in the prospects for monetary policy as well as the impact on economic activity.

El-Erian warns: Fed underestimates price hike and another recession is at stake

El-Erian warns: Fed underestimates price hike and another recession is at stake

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