The Biden administration has no quarrel with the way the Fed has conducted monetary policy during Powell’s first term. Challenged by the pandemic, the central bank maintained strong and steady support for demand and succeeded in keeping financial markets functioning well — neither of which should be taken for granted. In recent months, inflation has climbed higher than most analysts expected owing to supply-chain disruptions. Some of this rise is likely to be temporary, but how much is unclear. Policy needs to be adjusted, and this is in train: The Fed has announced it will taper its bond purchases over the coming months, and financial markets are starting to anticipate an earlier lift-off in interest rates.
Maintaining confidence in the Fed’s ability to fulfill its dual mandate on inflation and employment is crucial. It might’ve been better to start tapering earlier, when the first signs of higher-than-expected inflation appeared. But this was a close call, and not one on which Powell and Brainard were at odds. Looking forward, abruptly tightening in an effort to catch up with recent developments would also be a mistake. Better to nudge investors’ expectations in the right direction than shove them too forcefully. Again, Powell and Brainard most likely agree. Appointing a new chief amid this delicate transition would’ve served no purpose except to call the continuity of policy into question — an unnecessary risk.
Any suspicion of political calculations would’ve seriously compounded that error. Powell is a Republican and Brainard a Democrat. Their ability to work closely as colleagues is welcome in its own right, and sets an example for other parts of government. Choosing Brainard over Powell in response to calls from progressives for a partisan appointment would’ve simply aroused opposition to Brainard in Congress and moved the Fed one step closer to being seen as a political actor rather than a politically independent entity serving the public interest. Give Biden credit for recognizing this drawback.
Granted, though broadly agreeing on monetary policy, Powell and Brainard haven’t always seen eye to eye. Brainard favors a stricter approach to regulation and has dissented from many of the Fed’s moves to lighten financial controls in recent years. But reappointing Powell as chairman doesn’t foreclose a review of the central bank’s approach to regulation. The Fed’s board currently has a vacancy and two more will arise shortly; Biden also has leadership roles to fill, including vice chair for supervision. If the president prefers more forceful financial oversight, he’ll have the opportunity to encourage it.
At this juncture, signaling continuity and bipartisan competence in monetary policy needed to be the top priority. Biden chose well.
Editorials are written by the Bloomberg Opinion editorial board.
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