Original title: Nancai Express: What does Biden mean by nominating Powell for re-election as Fed chairman?
On the morning of November 22, US Eastern Time, US President Biden nominated Jerome Powell (Jerome Powell) for re-election as Chairman of the Federal Reserve. In Washington, where political differences are severe, Powell’s re-election nomination has received broad support from both parties, and it is expected that his nomination will be successfully confirmed by the Senate of Congress. If the nomination is passed by a majority vote, Powell will begin his second four-year term in February next year.
The Federal Reserve is the world’s largest economic research institution. It is essentially the “Central Bank of the United States”. It has independent decision-making powers on monetary and financial policies. It is responsible for the declaration of commercial bank reserves, loans to commercial banks, and issuance of Federal Reserve Notes. It also formulates economic policies for the United States from a macro perspective, and shoulders the dual mission of maintaining low unemployment and stable prices. Powell was nominated by Obama to serve as a member of the Federal Reserve 10 years ago. Trump promoted him to chairman during his tenure. Biden has nominated Powell for re-election as chairman. What is the significance? What will Powell face after his re-election?
Powell has won the trust of Wall Street in response to the epidemic
The political and economic circles in the United States highly praised Powell and the Fed’s stimulus plan launched in the early stages of the epidemic. In 2020, the new crown pneumonia epidemic hit the US economy severely. In response to the economic recession, the Fed launched an unprecedented loan program, and cut interest rates to a level close to zero in a short period of time, and quickly formulated a monthly asset purchase plan. This series of rapid and large-scale reactions has increased the US Treasury bonds and mortgage-backed securities held by the Federal Reserve by more than US$4 trillion, stabilizing the financial market and ensuring that the US economy avoids excessive impact from the epidemic.
During his previous tenure, Powell has done remarkable work in responding to the economic crisis brought about by the new crown epidemic and monitoring large-scale stimulus plans, and he has given full play to the power of the Federal Reserve under very difficult circumstances. This reflects Powell’s flexible response when facing a risk attack. He can use his observation and understanding of the economy to implement what he believes is the correct monetary policy, and will not be influenced by other external factors. This won him a reputation and high praise from Wall Street people. Biden specifically pointed out: “Powell’s stable leadership has soothed panic markets, and his firm belief in monetary policy to support full employment has made me believe that Powell is the right person to help the U.S. economy tide over the difficulties.”
Powell’s re-election helps maintain consistency in monetary policy
Inflation is not a short-term phenomenon predicted by the Fed. The United States has not stopped quantitative easing since the subprime mortgage crisis in 2008, especially the unprecedented stimulus policy introduced after the epidemic has exacerbated the spread of inflation. From the perspective of the United States, it is really helpless to take another massive quantitative easing in response to the impact of the epidemic, but it eventually led to national and even global inflation. The accumulation of currency circulation over a long period of time has made inflation a thorny but not urgent problem. Once a rapid monetary policy change is initiated in response to inflation, it may puncture the stock market bubble and the real estate bubble represented by the United States. , The consequences can be catastrophic.
Therefore, in order to avoid a sharp turn in policy, Powell’s re-election will help maintain the continuity of the Fed’s monetary policy and market expectations will be more stable. When the economy has not fully recovered, the turmoil of the epidemic still exists, and the currency remains high, the continuity of monetary policy becomes even more important. Previously, the market has been worried that if Brainard takes over as chairman, the monetary policy easing period will be longer, but there may be unexpected interest rate hikes due to worsening inflation. If Powell is re-elected, the market will flexibly adjust expectations with Powell’s every move within a predictable framework. On the whole, the market is more familiar with Powell, and maintaining the continuity of monetary policy is more conducive to financial stability.
After the conclusion of the November interest rate meeting, the Fed stated that it would begin to reduce bond purchases, reducing about 15 billion US dollars a month, and is expected to end its bond purchase plan in late spring or early summer of 2022. In addition, Powell emphasized on November 22: “We know that high inflation will bring losses to families, especially those who cannot afford the rise in necessities such as food, transportation, and housing. Therefore, we use our tools to support the economy and A strong labor market and prevent deep-rooted high inflation.” The Fed is expected to slowly but steadily withdraw from the ultra-loose monetary policy. Although the stagflation situation in the United States will not be significantly alleviated in the short term, how does the Fed respond to the post-epidemic era of the US economy? Choosing an appropriate adjustment rhythm is still worthy of attention from all walks of life.
(Lin Faqin is a professor in the School of Economics and Management of China Agricultural University, and Zhang Qianqian is a student of the School of Economics and Management of China Agricultural University)
(Author: Lin Faqin, Zhang Qianqian Editor: Li Jingyun)