Original title: Powell’s remaining term of office is less than half a year. The next chairman of the Federal Reserve needs to face these challenges directly. Source: Chinanews.com
According to a Reuters report on the 7th, Fed Chairman Powell’s term of office will end in February 2022. US President Biden is about to decide whether Powell will be re-elected at this critical juncture or whether another person will be at the helm of the Fed.
Progressive members of the Democratic Party hope that the Fed will play a broader role in the economy, increase its efforts to promote employment, prevent climate change risks, and solve inequities. Conservatives hope that they will stick to the established line of monetary policy and pay more attention to controlling inflation and reducing their influence in financial markets and supervision.
No matter who Biden chooses in the end, the next Fed chairman needs to address key issues such as monetary policy and the nature of the currency. The Fed chairman will face these major challenges in the next four years:
Reasonable policy
After the outbreak of the new crown epidemic, the Federal Reserve lowered its target interest rate to near zero and bought trillions of dollars in government bonds and mortgage-backed securities.
With the rapid economic recovery, Fed policymakers may begin to reduce the scale of asset purchases later in 2021.
But according to the new policy framework adopted in August, they plan to wait until the economy achieves full employment and the inflation rate reaches 2% and is expected to be slightly higher than that level before raising interest rates.
This is a promise that the new Fed chairman may find it difficult to keep. Most Fed policymakers believe that the current inflation of more than 2% is temporary. However, if price increases are actually more permanent, then no matter who leads the Fed, it may not wait for full employment to consider raising interest rates.
The Federal Reserve as a regulator
Analysts said that if the Fed’s new framework requires it to maintain loose monetary policy for a longer period of time in order to pursue a stronger job market, it may need to tighten financial supervision to avoid risky behavior that may trigger a crisis.
David Wilcox, a former senior economist at the Federal Reserve and now a senior fellow at the Peterson Institute for International Economics, said, “In my opinion, financial regulation is the second largest issue on the agenda. Under the circumstances, it is especially necessary to continue to solve the problem of containing financial risks.”
Wilcox said that whoever leads the Fed needs to pay more attention to financial stability issues.
The systemic weaknesses in US spot bonds and currency market transactions were fully exposed in March 2020, when the financial market nearly collapsed after the epidemic-related shutdown.
Going digital?
A major question is whether the Federal Reserve will decide to issue its own digital currency. Powell has not made a clear statement so far. Another major candidate for the chairman of the Federal Reserve-Federal Reserve Governor Brainard has said that she can hardly imagine not doing so. The Fed plans to publish a discussion paper on this issue in September.
Proponents say that a well-designed digital currency can reduce transaction costs and increase opportunities for disadvantaged groups to enter the banking system. Others worry that if American households and businesses do not need their usual checking accounts, but instead deal directly with the Fed, the banks may step aside.
Climate risk
The Fed chairman will also be under pressure to understand and resolve the effects of uncontrolled wildfires, super hurricanes on the economy and financial markets, and other destructive effects caused by climate change.
Both Powell and Brainard stated that the Fed’s job is to ensure that banks are resilient and able to cope with the decline in asset value caused by severe weather events or government restrictions on carbon dioxide emissions.
But the Fed’s responsibilities do not include any direct response to climate change, as is the case with some other central banks.
The Fed established two internal groups in 2020, one group focused on individual banks’ climate-related risks, and the other group focused on system-wide threats. It also became the last major central bank to join the green financial system network, which provides recommendations for central banks to tackle climate change.
Both may become a tool for the Fed chairman to take more action on climate, but without new legislation, it may be difficult to have a more aggressive stance comparable to other central banks.
Race and gender gap
Fed officials have also become more outspoken about the possibility of race and gender inequality dragging down economic growth.
Republican US Senator Pat Tumi called it “mission creep.” However, many political leftists say that this is not enough and accuses the Fed’s bond-buying program of satisfying the pockets of the rich by boosting stock prices.
Julian Coronado, a former Fed economist and now president of MacroPolicy Perspectives, said, “This has caused people to feel uneasy about the Fed’s work to solve some of today’s major problems, including labor market results and unequal wealth distribution. Equality and difference”.
Coronado said that whoever leads the Fed can fine-tune its tools to close some of these gaps, including through programs and regulatory reforms aimed at increasing loans to small businesses, encouraging banks to work with consumers who are struggling to repay their loans.
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