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Tuesday, September 22, 2020

Fed’s Covid-19 response could score once-embattled Powell another term


Federal Reserve Chair Jerome Powell was once on the verge of being fired by President Donald Trump for not doing enough to turbocharge the U.S. economy. Now, he stands a decent chance of keeping his job no matter who is elected president.

Powell’s extraordinary pledge to spend trillions of dollars to support the economy and keep borrowing rates at historic lows during the pandemic has helped stock prices roar back to pre-Covid levels — Trump’s favorite barometer of his performance. Removing the Fed chair would rattle world markets.

Maintaining market stability would be a major consideration for Democrat Joe Biden, too. But under Powell’s leadership, the Fed has also unveiled a sweeping new policy promoting “broad-based and inclusive” job gains, a major acknowledgment that the central bank should help disadvantaged Americans — in line with a call by Biden’s campaign for the Fed to directly tackle racial inequality.

Powell, who will testify before Congress three times this week, has also cultivated allies on both sides of the aisle. He met roughly 250 times with lawmakers from when he took the helm of the central bank in February 2018 through July, according to his personal calendars. He has garnered bipartisan praise for his actions during the pandemic — including from Trump, who has called him the “most improved player” in government, a remarkable turnabout from a president who publicly abused him for more than a year for not cutting interest rates.

“He’s done a fantastic, very smart job,” Rep. Patrick McHenry (R-N.C.), the top Republican on the House Financial Services Committee, said of Powell at a recent POLITICO event. “I would commend to both Biden or Trump for this decision to keep Jay Powell on for another term. I think he deserves it.”

Asked whether Biden should keep Powell as head of the central bank, a top economic adviser, Jared Bernstein, declined to answer directly. But he added: “I’m hard pressed to find all the positive adjectives I can think of for Jay Powell’s job.”

Bernstein cited Powell’s data-driven focus, looking for actual signs of inflation rather than assuming that it would appear at a certain level of unemployment, responding to a common complaint by Democrats that the Fed has been too quick to raise interest rates in the past, to the detriment of working class Americans.

Powell’s term as chair doesn’t end until early 2022, but the decision will likely be made months in advance with an eye toward not spooking investors. Whichever direction the next president goes, the stakes couldn't be higher. The Fed chair is the single most important economic appointment the president will make, especially now with the coronavirus crisis expected to weigh on economic growth for years to come.

His reappointment, even by a new president, would be more the recent norm than not. Three of the past four Fed chairs had their terms renewed by different presidents.

Still, Powell, a Republican who served in the Treasury Department under President George H.W. Bush, faces barriers to reappointment, despite the 84 votes he received in the Senate in 2018 when Trump first appointed him as Fed chief.

On the Republican side, Trump might see Powell as insufficiently loyal. His quarrel with the Fed chair in 2018 centered on the central bank’s steady rate increases, done in the wake of tax cuts and increased government spending that the Fed worried would stoke inflation, since the economy was already healthy.

The president last year, exasperated with the Fed chair for keeping rates above zero, even asked in a tweet whether Powell was a bigger enemy to the U.S. than Chinese President Xi Jinping.

In another post, he said: “The USA should always be paying the lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of ‘Boneheads.’”


In early March, with an eye toward the damage that could be caused by the pandemic, the Fed slashed rates to zero, which also ended its main source of conflict with Trump.

However, the president has often expressed a desire for rates to go below zero, something the Fed has never done. Powell has declined to endorse the concept of negative rates, citing mixed evidence of their effectiveness in Europe and Japan.

“Powell at crucial moments proved he was not someone who could be pushed around by Trump,” said Ed Mills, Washington policy analyst at Raymond James. “It seemed as though Trump was more likely to try to find a way of firing Powell than to ever consider reappointing Powell.”

But since the pandemic, the Fed chief has kept financial markets functioning, which could go a long way toward putting him back in the president’s good graces, along with his close working relationship with Treasury Secretary Steven Mnuchin.

“The real argument for his reappointment would be he has just dealt with one of the most difficult periods in the history of the Fed,” Mills said. “He acted quickly, he acted boldly, and he prevented a health emergency from becoming a financial emergency on top of it.”

The Fed’s actions notably have also been lauded by Sen. Pat Toomey (R-Pa.), who would chair the Banking Committee if Republicans keep the Senate and historically has been critical of Fed intervention in the economy.

Even at the height of Trump’s broadsides against Powell, GOP lawmakers repeatedly complimented the central bank chief for maintaining a commitment to Fed independence, a reference to its freedom to stress long-term policy over short-term politics.

Biden also defended Powell last year from the president. “I’m not going to get into the personalities, but I do say this: The president should not be trying to pressure the Fed,” the presidential candidate said on CNBC, calling it an example of Trump’s “abusing power across the board.”

But on the Democratic side, too, there are criticisms, the most prominent being that he has been too willing, in their eyes, to go along with rolling back rules imposed on banks after the 2008 financial crisis.

The central bank has moved to give those institutions more leeway to make risky trades and more advance information about tests that examine their preparedness for severe recessions, although it has not been as aggressive in deregulating as many Republicans would like.

Powell has also overseen an erosion in the loss-absorbing cushions of capital that big banks were required to build up after the crisis, said Amanda Fischer, policy director at the Washington Center for Equitable Growth.

“There’s been a bunch of tiny things that if you’ve not been a close observer you might not have noticed, but it’s all added up to a serious diminution in capital standards,” she said.

He has also done little to address growing Democratic calls for the Fed to do more to regulate banks through the lens of climate change.

But Powell, who was appointed to the Fed board by President Barack Obama in 2012, also stuck by Fed Governor Lael Brainard, the last remaining Democrat on the central bank’s board, when she refused to go along with fellow bank regulators in overhauling rules under the Community Reinvestment Act.

That landmark anti-redlining law is designed to combat discriminatory lending practices against poor and minority borrowers, and the effort by the Office of the Comptroller of the Currency to relax the regulation faced heavy criticism from Democrats and community groups.

“The glass half full is he’s clearly a thoughtful, politically savvy guy, who understood that crossing the civil rights community was not the fight he needed to have,” Fischer said. “The glass half empty is, the only reason he did that was because there was tremendous public pressure from policymakers and advocacy groups.”

Many on the left balk at keeping a Republican chair and highlight this as a historic opportunity to install a nonwhite Fed chair, such as Atlanta Fed President Raphael Bostic. That’s particularly relevant as key Democrats push the Fed to do more to address economic disparities among minority groups.

Here, Powell has made inroads, making a significant pivot recognizing that the Fed should not raise rates in anticipation of inflation that might never be coming. The central bank’s historic tendency to preempt inflation has coincided with decades of high unemployment among Black Americans and other minority groups.


Rep. Denny Heck (D-Wash.), a Financial Services Committee member who is not seeking reelection, called that new policy framework “the most important thing that’s happened to our country and its economy in more than 40 years.”

Heck has spoken strongly in favor of reappointing Powell. “He’s been an amazingly accessible Federal Reserve chair,” he told POLITICO. “He comes and visits [lawmakers] one on one in their offices. He is simultaneously super smart and very down to earth.”

Rep. Don Beyer (D-Va.) also said at a POLITICO event that he would like to see Powell stay.

But Rep. Ayanna Pressley (D-Mass.) is among those who have called on Powell to take more action to address racial inequality.

“While his recent remarks demonstrate an understanding of the stark employment disparities for communities of color, they do little to address these disparities in a meaningful way,” said Ricardo Sanchez, her spokesperson, in a statement to POLITICO.

“She believes the Fed deserves a chairman willing to actively address these inequities through monetary policy — something VP Biden has called for in his own economic plan,” he added. “Whether or not Mr. Powell chooses to be that chairman is entirely up to him.”



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