Will Biden’s Picks for the Fed Alter Its Hawkish Path?

(Bloomberg Opinion) -- President Joe Biden is set to reshape the Federal Reserve this year just as the central bank is shifting in a more hawkish direction to combat the highest level of inflation in four decades. Ahead of Fed Chair Jerome Powell’s renomination hearing in the U.S. Senate this week, Bloomberg Opinion columnists Daniel Moss and Brian Chappatta met online to discuss how the new composition of the board could sway monetary policy at this critical juncture. 

Brian Chappatta: The big story for markets and the U.S. economy heading into 2022 is that the Fed is clearly unnerved by inflation that has proved to be more persistent than those within the Eccles building anticipated several months ago. Powell “pivoted” in front of the Senate Banking Committee on Nov. 30, noting it’s “a good time to retire the word transitory.” The Federal Open Market Committee’s meeting a couple of weeks later was considered so hawkish that minutes of the discussion sent financial markets tumbling last week.

Powell, a Republican, has bipartisan respect for how he quickly responded to the onset of the Covid-19 pandemic. He was the obvious choice for Fed chair and should have no trouble winning enough votes in the Senate to earn a second term. Fed Governor Lael Brainard, a Democrat, is Biden’s pick to succeed Richard Clarida as vice chair. She might not earn much Republican support, but should ultimately be confirmed as well.

That brings us to the potential new board members.

Biden is reportedly considering Sarah Bloom Raskin, a former Fed board member and Treasury official, for vice chair for supervision. She would be joined on the board by economists Lisa Cook and Philip Jefferson. The early read on the trio, all of whom would vote on every FOMC decision, is that they’re more dovish than some other central bank leaders. 

Dan, you ran the Bloomberg News economics team while Bloom Raskin was on the board from 2010 to 2014. What are your impressions of her as a pick, and do you think that Biden’s slate of nominees can alter the direction of Fed policy this year?

Daniel Moss: When Bloom Raskin was a Fed governor, her monetary comments were rather bland. She mainly focused on regulatory matters. I don’t recall a single monetary remark she made. At Treasury, she was a safe-but-unremarkable deputy. She did a lot of work on the student-loan issue. That said, it’s hard for deputy secretaries to really stand out, and the Obama administration was winding down. 

I think the influence of many alleged hawks and doves is overrated on an individual basis. Kansas City Fed President Esther George has long enjoyed a reputation as a hawk, as did her predecessor Tom Hoenig — and they didn’t (and don’t) have a lot of sway. Remember former Dallas Fed President Richard Fisher? He was often perceived as a hawk and received a lot of press but had very limited clout on the FOMC. 

What matters is the leadership troika and the board staff, especially at the Division of Monetary Affairs. Staff alum clutter the corridors of hedge funds and investment banks, providing a powerful echo chamber and group of validators. At times, some individuals do matter: Brainard as a governor has emphasized the growing importance of international developments for Fed policy, for instance. She stands out as an exception. The fuss every year about who votes is misplaced. 

Circumstances largely drive the Fed you get. And the troika: Chair, vice chair and head of the New York Fed, who doubles as vice chair of the FOMC. I can’t recall a time there was any real daylight between those three people. 

Chappatta: Yes, the bond traders and strategists I talk to definitely place more weight on the words of those three. I thought this passage from Powell’s December press conference was illuminating. He was asked if his hawkish pivot had anything to do with his renomination by Biden. It proves your point and shines a light on the top-down approach within the Fed (emphasis mine):

“We got the ECI reading just before the November meeting. We got the labor market report two days after the meeting. And then, one week after that, I think on the 12th of November, we got the CPI reading. It was really the CPI reading, in concert with those two, and I just came to the view over that weekend that we needed to speed up the taper. And we started working on that. That's a full 10 days or so before the President made a decision of renominating me. So, honestly, it had nothing to do with that at all. And I just thought this is what we got to do. My colleagues were out talking about a faster taper. And that doesn’t happen by accident.”

Now this doesn’t mean that all board members or regional Fed presidents will stick to the party line until Powell gives the go-ahead. Governor Christopher Waller, for instance, was out in front of the central bank’s actions throughout 2021 and laid the groundwork for 2022, noting that March is a live meeting for an interest-rate hike and that he wants the balance-sheet runoff to start around midyear.

But I think about someone like San Fransisco Fed President Mary Daly, who leans dovish. Almost a full week before Powell’s pivot, she abruptly said she’d support faster tapering. Two days later, Atlanta Fed President Raphael Bostic echoed that. As Powell said, that doesn’t happen by accident. So even if Cook and Jefferson have some doubts about the need to tighten policy to quash inflation, it seems as if the consensus-driven nature of the Powell Fed will keep the central bank on its current course, at least this year.

By the way, do you think that Biden’s Fed picks are really all that dovish on monetary policy? I think a lot of that perception stems from some of their priorities: Bloom Raskin and climate-change regulation, Jefferson on poverty and inequality, and Cook’s research on the lack of diversity in economics and other issues around race. 

Moss: I’m glad you mentioned Daly. San Francisco, as a Fed district, does have a fairly high profile. Daly’s two immediate predecessors, John Williams and Janet Yellen, went on to greater things, so it’s important to pay heed to what she says. Biden considered Daly for one of the board vacancies in Washington, but she is said to have declined. 

Now, regarding the new crew, I doubt their dovish credentials will make much of a difference at this point. The leadership has just executed a pivot to a more anti-inflationary stance. It’s one thing to be dovish when inflation is around the 2% target. It’s now well in excess of that level. 

Importantly, there hasn’t been a dissent on monetary policy from among the Board of Governors since 2005. Group cohesion is prized. I would be surprised if one of the freshly minted governors wants to start their tenure with a rebellion. Jefferson held a number of staff positions at the Fed board. He appreciates the organizational dynamics. Lastly, not every nominee to the board ends up getting confirmed. One or more of the picks may not make it through the Senate, regardless of their qualifications.  

Speaking of politics, it’s important to remember these are confirmation hearings this week. There will be an element of telling senators what they want to hear and inflation has moved from the business pages to the front pages. It’s also an election year. Are investors prepared for additional saber rattling? 

Chappatta: The political implications of the highest inflation in decades certainly aren’t lost on the trader crowd. One of the most jarring data points in recent memory came from the University of Michigan. Its survey showed consumer sentiment tumbled in November to the lowest in a decade. Among those who identified as Republican, it was even worse than during the aftermath of the 2008 financial crisis, when unemployment was 10%, compared with less than 4% today.

Clearly, Biden is being hit by his political opponents on inflation. And while he preaches Fed independence, suffice it to say he also wouldn’t mind if the central bank found a way to gently lower price growth — ideally by Nov. 8. That’s yet another reason I think we both agree that his slate of Fed board nominees, whoever they end up being, will stick close to the central bank’s current outlook.

By Fed officials’ own estimates, their actions should bring the core personal consumption expenditures index down to 2.7% by the end of the year, from 4.7% as of November, while real economic growth should remain at a robust 4% for the year and the unemployment rate should grind lower to 3.5%. That’s a near-perfect set of economic conditions. Whether this Goldilocks scenario will actually happen is anyone’s guess, but far be it for the newcomers to mess it up themselves.

More From Other Writers at Bloomberg Opinion:

• The Federal Reserve Needs to Get a Lot More Hawkish: Bill Dudley
• Biden Fed Picks Are Boring in a Good Way: Jonathan Bernstein
• A View to 2022: The End of Easy Money: Paul J. Davies

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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