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Powell will continue to hold this position for four years.
US President Biden nominated Chairman Powell of the Federal Reserve Board (Fed) for re-election on Monday (November 22) for a four-year term. Another popular candidate, Lael Brainard, was nominated as vice chairman. The two need to be confirmed by the Senate before they can formally assume the above-mentioned positions.
Powell was nominated by former President Trump in November 2017 and formally took office in February 2018. It is scheduled to expire in February 2022. Although nominated by Trump, the Fed has always focused on maintaining policy independence. After Powell took office, he reversed the loose monetary environment, frequently raising interest rates and shrinking the balance sheet to prevent the economy from overheating. But this move was criticized by Trump, believing that his policies hurt economic growth.
At the beginning of 2020, the new crown epidemic hits. Powell’s policy suddenly turned, not only an emergency cut in interest rates, but also unlimited quantitative easing. The intensity of the policy was beyond the market’s expectations. The influx of dollars into the market stimulated the economy, but it also brought a series of sequelae such as high inflation.
Biden pointed out that Powell’s “stable leadership” has calmed the panic market, and he believes that monetary policy can support full employment. “I believe Powell is the right person to help us tide over the difficulties.”
After the epidemic has stabilized, Powell’s new term needs to promote the transition of monetary policy from a “crisis mode” to a normal mode, but the difficulty is far greater than when he took office in 2018.
After the announcement of Powell’s nomination, the US stock market hit a record high. U.S. Treasury yields have also risen, and the U.S. dollar has strengthened.
Attack decisively during the epidemic
At the beginning of 2020, the new crown epidemic swept the world. The Fed took decisive action and was hailed as avoiding a potential Great Depression.
The Fed, which plays the role of the “global central bank”, “finished all bullets in one breath” and prescribed the prescription of “zero interest rate + quantitative easing”. The last time this prescription was prescribed was after the 2008 financial crisis. Called “crisis mode”.
In fact, with the same prescription, the amount of medicine has been greatly enhanced. The Fed purchased more than 4 trillion assets during the epidemic, which is equivalent to nearly 20% of the US GDP. The scale of asset purchases far exceeds the financial crisis, and the Fed’s balance sheet has rapidly expanded to nearly 8.7 trillion U.S. dollars.
In the following year, governments of various countries followed the pace of the United States and launched various stimulus plans, totaling more than 10 trillion U.S. dollars.
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Brainard (right) was nominated as vice chairman.
This move by Powell was even praised by then-President Trump. After the interest rate cut, Trump said, “I congratulate the Fed for doing this. This is great for our country… I have to say, I am very happy. (The Fed) did not choose to do it in four steps for a long time. , But choose to do it in one step.”
He also stated that he would not speak ill of Powell in the next two months.
Trump said this because Powell, a Republican who was nominated by him, raised interest rates four times in his first year in office. In order to cooperate with the interest rate hike, Powell also continued the policy of his predecessor Yellen, who is a Democrat, and began to implement the Quantitative Tightening policy in 2018.
In other words, because of these policies, there is less money in the market. These policies are not good news for Trump, who is eager to improve his economy and fight for greater opportunities for re-election.
Trump not only criticized Powell in public on many occasions, tweeted that he lacked foresight, told reporters that the Fed is the biggest risk to the U.S. economy, and even consulted with White House lawyers to remove Powell from chairmanship and demote him to the Fed. The feasibility of the board of directors.
Trump’s remarks are considered to have broken the government’s practice of not interfering with the independence of the Fed’s policies. But it also established Powell’s image of resisting pressure and insisting on independence.
“I respect Powell’s independence,” he said in his speech when Biden nominated Powell. “At this moment when our economy shows great potential and faces great uncertainty, we need the Fed to maintain stability and independence.”
The threat of inflation
However, Powell released huge liquidity during his tenure, and also showed the consequences-a large amount of money flowed into the market, which is bound to increase prices. The US Consumer Price Index (CPI) has also increased by more than 5% year-on-year for five consecutive months.
“The inflation bomb that our country is facing is partly due to the fact that we are printing a lot of money.” A tweet by U.S. Senator Ted Cruise in August hit the inflation board on the United States itself.
Generally speaking, if the dosage is small, it may be a “good medicine”, and if the dosage is large to a certain extent, it may be a “poison”.
When the inflation rate is maintained at a low level (2-3%), economists call it an economic “lubricant”, because a small increase in prices can increase the income of entrepreneurs, stimulate them to invest further, and increase economic vitality. In fact, the Fed has long set its target inflation rate at around 2%.
However, if the inflation rate rises further by more than 10%, it will enter a more dangerous range, which is called sharp inflation. At this time, people began to shake their trust in currency, people were robbing purchases of money, the order of production and consumption was disrupted, and a certain degree of turbulence occurred in the society.
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Climate protesters held a rally last month, calling on the Fed to pay more attention to climate change.
Although sharp inflation is dangerous, it is not uncontrollable. The real catastrophic consequence is when the inflation rate exceeds 100% and enters the “hyperinflation stage”, the government completely loses control of prices, the people completely lose confidence in the currency, and society collapses. Hyperinflation is not uncommon in history, but every time it occurs, it is often accompanied by political consequences.
Facing the ever-increasing inflation rate, Powell has repeatedly repeated that “inflation is temporary”, but he has not fully convinced the market that controlling inflation will remain one of his main challenges in the next four years.
Adam Posen, director of the Peterson Institute for International Economics, said that Powell is a moderate Republican promoted by former President Trump. Brainard served in previous Democratic administrations. The combination of the two makes A more realistic assessment of the inflation risks facing the United States may have the credibility of non-partisanship.
Both nominees mentioned the dangers posed by inflation.
“We know that high inflation is taking a toll on households, especially those who cannot afford the soaring prices of food, housing and transportation and other necessities,” Powell said. “We will use our tools to support the economy-to build a strong Labor market and prevent high inflation from becoming entrenched.”
Brainard added that she is also committed to putting American working class at the center of the agenda. She said, “This means reducing inflation while people are concerned about their jobs and how much their salaries can rise.”
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