US economy

Biden’s chance to make a stamp on the Fed

The sparks have been flying between two poles of non-government influencers in Washington — the corporate lobbyists and lawyers clustered around K Street and the mostly progressive-leaning organisations buzzing a few blocks north around DuPont Circle

Much of that comes from the struggle over the Biden Administration’s infrastructure and social safety net legislation.

Now, though, a more personality driven drama is moving to the DC stage. Thanks to chance and years of preparation by a conservative legal machine, Donald Trump was able to put a rightwing stamp on the US Supreme Court that could last for decades. Similarly, term expirations and resignations create an opportunity for Joe Biden to install a powerful bloc of governors at the Federal Reserve.

The political oddsmakers believe Biden will reappoint Jay Powell as Fed chair before his term expires in February. Powell, though Republican, has been fairly accommodating to Biden and the Democrats.

His reappointment could be a useful way to reassure market participants worried by rising inflation, an uncertain budget, and personal-account trading scandals recently uncovered among the central bankers themselves.

Not everyone, though, would be happy with a Powell reappointment. Influential progressive Democratic senators, particularly Elizabeth Warren and Sherrod Brown, have been angry about the scandals and upset with the Fed board’s measured deregulation of the banking and securities industries.

Lael Brainard, a Democrat appointed in 2014, has been the progressive’s ally at the Fed. She has a classic liberal economist’s resume, with a PhD from Harvard, an associate professorship at MIT and an appointment to the Clinton White House. In the Bush years, she was parked at the Brookings Institution.

Under Obama, Brainard was appointed counsellor to the Secretary of the Treasury, then Undersecretary of the Treasury. During her tenure, she was US representative to the G7 Deputies, and was a member of the Financial Stability Board. Then, on to the Fed board.

Before Hillary Clinton’s loss to Donald Trump in 2016, there had been talk of Brainard’s appointment to be Clinton’s Treasury Secretary. Brainard is on record as a contributor to the Clinton campaign. Then, when Biden was elected, speculation about a Treasury secretaryship for Brainard bubbled again. And popped.

The Biden presidency followed a surprisingly progressive track. Enthusiasm for a higher profile appointment for Brainard on the Fed board has gathered among the cadre of progressive economists.

The betting is still on Powell to be reappointed. But with the Fed board of governors reduced by resignations and pending retirements, it appears quite possible that Brainard could be named and confirmed as vice chair for supervision. This influential role just became vacant this week as Randall Quarles vacated the post.

It is important therefore to look at some of the areas where Brainard has expressed a view on policy matters. She is strongly interested in the greater use of central clearing in Treasury cash markets. She also has considered in her public comments how market stability and resilience could be improved with wider access to “all to all” platforms for buying and selling Treasury securities. This would mean that market liquidity comes from customer orders offsetting each other, rather than having price and volume jumps smoothed using dealer-provided capital.

Brainard has cautiously discussed the possibility of a “Central Bank Digital Currency”, a sort of civil service crypto. In her words, it would also reduce counterparty risk in payments, providing consumer protection and financial stability benefits. She has said that “one expected benefit is that a CBDC would reduce or even eliminate operational and financial inefficiencies, or other frictions, in payments clearing, and settlement”.

One of her most recent speeches planted her green flag on the Fed building, calling for more work to be done on the financial risks of climate change.

Whether or not the vice chair is Brainard’s ultimate position, the progressives’ philosophy is not going away. Its proponents are playing a long game.


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