Last Monday, President Joe Biden put an end to months of speculation when he announced his decision to nominate Jerome Powell to a second term as chair of the Federal Reserve, opting for continuity as inflation broaches generational highs and the labor markets struggles to return to full employment.
While analysts were broadly upbeat about the announcement, the market reaction was mixed. The S&P 500 (NYSE: SPY) fell 0.3%, the Dow Jones Industrial Average (NYSE: DIA) climbed by 0.1%, and the Nasdaq Composite Index (NASDAQ: QQQ) sank by 1.3% as concerns about rising interest rates continued to weigh heavy on tech stocks.
The President also announced plans to elevate Lael Brainard, whom progressives had favored to replace Powell, to the role of vice-chair at the nation's central bank.
Despite concerns from the left side of the President's party, Powell enjoys broad bipartisan support, which was a critical factor in Biden's decision, advisors told The Wall Street Journal.
The top Democrat, Sherrod Brown (D-OH), and the top Republican, Pat Toomey (R-PA), on the Senate Banking Committee have each signaled their support for Powell's second term. Good news, as the President can ill-afford any contention surrounding Powell's reappointment as he looks to shepherd his $1.7 trillion Build Back Better initiative through the Senate.
"Put directly: at this moment both of enormous potential and enormous uncertainty for our economy, we need stability and independence at the Federal Reserve. Jay has proven the independence that I value in a Fed chair," said President Biden in remarks to reporters last Monday.
The Fed will have to keep up a careful balancing act as it moves forward, keeping prices stable while fostering conditions to support maximum employment.
Rising consumer demand and supply-chain bottlenecks pushed consumer prices up 6.2% in October, the sharpest increase in 31 years. Meanwhile, the labor market is short some 3 million workers.
If the Fed sets interest rates too high, too soon, in response to this inflation, the risk is that the demand for new hires will fall, leaving millions stranded outside the workforce.
At the same time, the ongoing worker shortage could push up wages, which some fear could ignite a 70's style inflation cycle, where rising wages push up prices, resulting in higher wages and so on.
Powell, who was with the President on stage last Monday, said that the Fed would "use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched."
The Fed has already announced plans to end its massive bond purchasing program by June 2022, with analysts expecting as many as two to three rate hikes come next year.
Meanwhile, President Biden also had to balance his priorities carefully when choosing to nominate Powell. The President spent months fielding concerns about Fed policy and climate change from both sides of his party.
Last Monday, the President remarked that Powell has pledged to make climate action a priority at the Fed going forward and that Powell would remain keyed into emerging regulatory risks.
Such assurances will likely do little to win over progressives in the President's party. Sources told the New York Times that President Biden was in consultation with Senator Elizabeth Warren, who has called Powell a "dangerous man," as late as Nov. 9. Warren has said that she will not be giving Powell the nod for a second term.
Nevertheless, President Biden will have a further two seats on the Federal Reserve Board come next year, giving him more chances to respond to progressive calls for greater inclusion at the central bank.
"While Jay and Lael bring continuity and stability to the Fed, my additions will bring new perspectives and new voices," the President said of his upcoming nominations. "I also pledge that my additions will bring new diversity to the Fed, which is much needed and long overdue in my view."