Tuesday, August 10, 2021
The Chairperson of the Federal Reserve (Fed) is appointed by the President of the United States and serves a four-year term. The current Chairperson, Jerome Powell, has held that position since 2018 so his initial term is ending early next year. As such, markets are beginning to wonder if Powell will be reappointed or if President Biden will select someone else to lead the Fed. While the (re)appointment of the Fed chair has largely been a non-event, what makes this time different is that this will be the first time in modern memory that a potential leadership change is taking place just as monetary policy is about to change as well. A surprise selection by the President has the potential to add uncertainty and, thus, volatility to markets.
“If monetary policy alone wasn’t already market moving, we now have to watch for a potential change in leadership at the Fed,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “Markets think Powell gets another four years so a shift in leadership could potentially be disruptive for markets.”
So, if not Powell, the leading candidate to replace him is Lael Brainard. A comparison between the two candidates follows:
- On monetary policy: Both Powell and Brainard are considered “doves” as both believe current levels of monetary accommodation are still warranted and that we still have not made substantial further progress towards full employment.
- On financial regulation: Brainard has expressed her frustration with Powell’s inability to aggressively regulate big banks, which recently caught the attention of the more progressive wing of the Democratic Party. The assumption here is that Brainard would use all the regulatory tools at the Fed’s disposal to head off financial excesses.
- On including social goals within monetary policy: Conventional wisdom is that Brainard would be more willing to incorporate social considerations when enacting monetary policy. However, Powell has put a lot of emphasis on the breadth and inclusiveness of the job market recovery, especially when it comes to lower income households and communities of color.
- On political ideology: While the Fed has claimed political independence, the sitting President still nominates the Fed Chair and the Senate vets the selection. Powell, a Republican, was nominated by then-President Trump, so there will likely be political pressure from Democrats to choose a candidate from their side of the aisle. Brainard, a Democrat, spent time at the U.S. Department of the Treasury and served as the deputy national economic adviser and deputy assistant to President Clinton.
Our best guess is that Biden will reappoint Powell but it is not a sure thing. Powell has done a commendable job supporting markets during the COVID-19 shutdowns. Moreover, while we’re out of the recession, we aren’t through with the pandemic and we think stability and leadership continuity is important. Plus, Biden has other opportunities to influence the make-up of the Fed as the Fed Vice Chair’s term ends next January and the Vice Chair of Supervision’s term in that position ends in October 2021. Moreover, there is a vacancy on the board as Trump’s final nominees failed to garner enough Senate support to be appointed.
All that said, regardless of who is ultimately appointed to lead the Fed, he/she will be chiefly responsible for overseeing a balance sheet that continues to grow. As seen on the LPL Research Chart of the Day, the Fed’s balance sheet continues to grow and will continue to grow even after the taper announcement. The Fed is buying $120 billion a month ($80 billion in Treasury securities and $40 billion in mortgage securities), adding to its over $7 trillion of bond holdings. Once the tapering process starts, the Fed will continue to purchase bonds, in ever-smaller monthly increments, until it is no longer purchasing bonds at all, which will likely be in the middle of next year. Conceivably though, the Fed’s balance sheet could eclipse $8 trillion next year.
While we do not think a change in Fed leadership will change the trajectory of tapering, it may change the timing and pace of interest rate hikes. Additionally, the Fed has indicated a willingness to eventually start to reduce its balance sheet, which could be a key responsibility of the next Fed Chair. It’s still too soon to know for sure which direction Biden will go but markets will be watching.
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