Brainard’s stance on regulation sets up early test for Fed

If Lael Brainard was disappointed as she stepped in front of a White House podium on Monday to accept Joe Biden’s nomination to become vice-chair of the Federal Reserve, she did not show it.

For weeks, the 59-year-old Fed governor, considered one of the most talented Democratic economic policymakers of her generation, had been in the mix to lead the US central bank.

But ultimately not even an eleventh-hour campaign from progressive senators could secure her the top job, and on Monday Biden confirmed the reappointment of sitting Fed chair Jay Powell.

If confirmed by the Senate, Brainard’s elevation to the most important deputy position within the Fed will give her a more prominent perch to shape policy, and possibly a springboard to become Treasury secretary or Fed chair in the future.

The role of Fed vice-chair — currently held by Richard Clarida, and in the past by officials including Donald Kohn, Stanley Fischer and Janet Yellen — is an influential one at the central bank, with the occupant expected to provide intellectual underpinning for policy moves and to help signal any shifts to financial markets.

Biden on Monday presented his pair of picks very much as a team and Brainard — who was already considered part of the inner circle on the Fed board — said she had felt “privileged” to work with Powell on the central bank’s response to the pandemic.

But there have been some areas of divergence between Brainard and Powell that could provide an early test of their new working relationship.

In the seven years that Brainard has served as a Fed governor, she set herself apart on the issue of banking regulation, dissenting more than 20 times on board votes surrounding rule changes that would loosen restrictions on the largest and most important financial institutions.

Her efforts to safeguard the post-global financial crisis regulatory apparatus won her plaudits from progressives, and made her their preferred candidate for chair over Powell, a former financier who has been criticised for a perceived weakness in his role as one of Wall Street’s main watchdogs.

“What is clear is that Lael Brainard has been a strong opponent of deregulation,” said Jeremy Kress, a former lawyer in the banking regulation and policy group at the Fed.

Jay Powell, left, with Daniel Tarullo and Lael Brainard
Jay Powell, left, with Daniel Tarullo and Lael Brainard at a Fed governors meeting in 2016 © AP

She garnered further acclaim among Democrats for her commitment to strengthening rules around how banks service disadvantaged communities and for pushing the Fed to more seriously consider climate-related financial risks.

In the days leading up to Biden’s decision, Democratic senators singled out Powell’s less forceful approach to tackling such issues as the main argument for denying him a second term.

Meanwhile, some worry that Brainard — who is considered dovish on inflation and has advocated a patient approach to monetary tightening — could prove more hesitant than Powell to move forward with interest rate increases as persistently high prices become a dominant preoccupation for the central bank.

But others stress that she remains closely aligned with the chair’s thinking, and very much a known quantity when it comes to crafting policy. “She is not like a stranger dropping in from Mars,” said Alan Blinder, the former Fed vice-chair and Princeton University professor.

Brainard has also already shown signs of adapting her views as the economic conditions shift. “She has been at the Fed in challenging times and she has had policy positions where she has had to make tough decisions,” said Randy Kroszner, the former Fed governor who overlapped with Brainard at Harvard University. “She is battle-ready.”

On Monday Brainard appeared to put the fight against inflation at the very top of her agenda, suggesting it was by no means a secondary concern to achieving full employment.

“I am committed to putting working Americans at the centre of my efforts at the Federal Reserve,” she said. “This means getting inflation down at a time when people are focused on their jobs and how far their pay cheques will go.”

Brainard’s policy experience dates back to serving in the administrations of Bill Clinton and Barack Obama, in addition to a long period working on global development at the Brookings Institution, a Washington think-tank.

Under Obama, she served at the Treasury as under-secretary for international affairs, as the US emerged from the financial crisis and had to contend with the fallout from a eurozone sovereign debt meltdown that threatened the US recovery.

She also helped to manage economic relations with China as Washington’s stance towards Beijing started to become more confrontational.

Brainard was intimately involved in the establishment of the central bank’s new framework for setting monetary policy in 2020. The upshot was that the Fed would not raise interest rates at the first hint of price pressures, as it has traditionally done, but rather run the economy “hot” to try to foster a stronger recovery that benefited a broader group of Americans.

In practice, this has meant keeping rates at today’s near-zero levels until inflation averages 2 per cent and the Fed achieves maximum employment. Brainard had a hand in ensuring that latter goal was met in a “broad-based and inclusive” manner, effectively promising that, this time, fewer Americans would be left behind as the economy recovered.

Claudia Sahm, a former Fed economist, said this shift marked a “sea change” in monetary policy.

Just over a year since its inception, however, the new mantra has come under pressure due to soaring inflation. That leaves Brainard, if confirmed, to help adapt the new framework to a very different economic reality than when it was unveiled.

It is an issue that will make for a “trying” 2022, said Stephen Cecchetti, an economist at Brandeis University, who previously led the monetary and economic department at the Bank for International Settlements.

Bill English, a Yale professor and former director of the Fed’s division of monetary affairs, added: “When the inflation and employment goals are out of alignment, how do you choose? That issue may come up fairly soon in the next six months to a year, and the Fed may have to respond to that.”

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