President Biden this week renominated the chair of the Federal Reserve, Republican lawyer Jerome H. Powell, for a second term. Biden’s choice came down to Powell or his Fed colleague, Democratic economist Lael Brainard. Liberal Democrats favored Brainard for her tougher approach to regulating banks and addressing climate change. She would also have extended Biden’s record of prioritizing diverse and inclusive appointments. But a broad array of Senate Republicans and Democrats seemed to favor Powell.
After opting for Powell, Biden elevated Brainard to be vice chair of the Fed. The Senate — which is split 50-50 between the parties — will now consider and vote on both of their appointments.
Why didn’t Biden, like President Donald Trump before him, select someone from his own party?
Returning to the norm — and avoiding a tough confirmation battle
In selecting Powell, Biden returned to a long-standing norm of “forbearance,” or continuing with a Republican as Fed leader when he could have appointed a fellow Democrat. GOP President Dwight D. Eisenhower started this practice in 1955 by reappointing Democratic President Harry S. Truman’s Fed chair William McChesney Martin. Nearly every president abided by the norm until Trump broke it in 2017 to elevate Powell rather than reappointing President Barack Obama’s Fed chair pick, Democrat Janet L. Yellen.
Why? To be sure, Biden loves talking up bipartisanship, even staking his presidency on a promise to tamp down the partisan fever in Washington. But Biden and his aides surely concluded that respecting the norm also served the president’s interests.
First, giving the nod to Powell saves the White House the potentially contentious confirmation contest that might have resulted had he selected Brainard. As political scientists have shown, senators can constrain presidents’ selection of Fed nominees, especially when the Fed is unpopular back home in their states. Few Republicans, if any, were likely to vote for Brainard, and some Democrats were wavering, including moderate Sen. Jon Tester (D-Mont.), who came out in favor of Powell.
Second, the White House has yet to lock down 50 Democratic votes to secure Senate passage of Biden’s Build Back Better bill. The White House probably calculated that any political capital Biden has left would be better spent on bringing moderates on board for the party’s top policy priority than diverting to a difficult confirmation battle.
Third, newly announced Fed chairs routinely endure a test of confidence by financial markets. The markets’ assessments of nominees can be tough, even for veterans like Ben Bernanke and Yellen, both of whom were top economists and experienced central bankers. When Biden announced Powell’s renomination, the stock market briefly rallied and bond markets moderated expectations about future inflation. With the economy uncertain, Biden recognized — like many presidents before him — that it’s tough to buck the norm of reappointment when the chair enjoys the confidence of financiers.
In reappointing Powell, Biden helps to protect himself and the Fed from likely Republican attacks at a Brainard-led Fed. They may yet turn on Powell unless the Fed tames the inflation surge that’s come with the pandemic recovery. But it will be that much harder for the GOP to blame Biden after his decision to keep a Republican at the head of the Fed. Judging from past GOP attacks on Yellen, Republicans would surely extend less forbearance to Biden or the Fed were Brainard at the helm.
With Powell continuity, the Fed will probably tread more cautiously than would a Brainard-led Fed on policies that would irritate Republicans. Liberal Democrats wanted Brainard for her demonstrated commitment to tougher bank regulation, confronting the sources of racial economic inequalities and having banks consider climate change as they assess the riskiness of their assets.
Republicans have already attacked Fed officials who have pushed the agency to attend to these issues, calling it mission creep. Keeping Powell at the helm helps dampen these sorts of criticisms, protecting the institution’s reputation.
Inflation has spiked to its highest level in a generation, putting Biden, Powell and Brainard in the hot seat. Central bankers say inflation will likely ebb next year as the economy and global trade recover from the pandemic. And investors don’t expect high inflation in the long run.
But voters and lawmakers are myopic: They care about prices today, leading many Republicans to blame Biden for the cost of everything from gas to bacon. What’s more, the upswing in inflation threatens Democrats’ congressional majorities in the coming midterm elections.
Presidents and lawmakers rarely want higher rates, but some “hawkish” Fed action to raise the cost of credit seems inevitable. Setting interest rates just right to tame inflation but avoid a recession is difficult. How the Fed responds will shape Powell’s policy legacy and Biden’s electoral future.
Mark Spindel is founder and chief investment officer at Potomac River Capital, a Washington-based investment firm.
Sarah Binder and Spindel are co-authors of “The Myth of Independence: How Congress Governs the Federal Reserve” (Princeton University Press, 2017).