Last Monday, US President Joe Biden announced the renewal of the term of the head of the central bank (Fed), Jerome Powell, for four years, ignoring votes from the Democratic Party that asked him to make another choice.
Biden’s decision came as no surprise, however, despite the fact that Powell, 68, is politically identified with the Republican Party, having served as Undersecretary of Finance in the 1992 administration of George W. Bush.
And it was no surprise, because Powell, who has worked for large investment companies such as the Carlyle Group, showed remarkable skills in the four years of his first term, which made him very popular in the markets and in most of the political system.
One of them was that he defended the Fed’s independence from political interference when it raised interest rates, angering then-President Donald Trump. Trump had chosen him as president of the central bank, but then accused him with frequent posts on Twitter, going so far as to call him “enemy of the country.” Trump had reportedly explored the possibility of ousting him from the Fed at the time, but Powell insisted he would remain in office.
Powell, whose studies are not in economics but in law and political science, may have been launched by Trump at the top of the Fed, but the door to his central bank career had been opened by Barack Obama. In 2012, he appointed him to the Fed’s Board of Directors to replace another member who had resigned before the end of his term. It was the first time since the late 1970s that an American president had nominated a rival party for the post of Fed Governor. In 2014 he was re-appointed for a full term as a member of the Board. of the central bank, with his appointment approved by the Senate relatively easily (with 67 votes in favor and 24 against).
Biden mainly praised Powell’s effectiveness in dealing with the pandemic crisis and his ability to communicate well his policies, which give markets confidence. The central banker may have continued the policy of small interest rate hikes of his predecessor – and current Finance Minister Janet Yellen – but stopped it in mid-2019, just before the coronavirus broke out. Earlier, it had stopped the policy of reducing the central bank’s assets, when there were significant upheavals on Wall Street.
In the second half of 2019, the Fed reduced its key interest rate by one percentage point – to 1.5% from 2.5% – and in April 2020, after the pandemic broke out, it zeroed it. At the same time, at Powell’s suggestion, a huge program of buying government bonds and securitized bonds (with pawn mortgages) was decided, amounting to $ 120 billion a month. This reaction, combined with the US government’s massive multibillion-dollar support packages, kept the US economy afloat in 2020 and allowed it to recover rapidly this year, with growth expected to be between 6% and 7%.
The huge liquidity that was given had as a side effect the jump in the prices of shares, bonds and other assets, such as real estate. Wall Street stocks have hit record highs, with the S&P 500 gaining nearly 70% since Powell took over the reins of the Fed in early February 2018. He was accused by several parties of making the rich richer with his policies, as the value of their wealth increased even more, widening income inequalities. Others criticized Powell for failing to take action to regulate markets, but all these criticisms did not affect the big picture, that the economy had escaped the risk of a prolonged recession.
Stronger is the criticism that the high liquidity given to the economy facilitated the jump in inflation, which gradually climbed to 6.2% in October, the highest level since 1990. Inflation was based on rising energy prices and supply chain problems due to the coronavirus, but the truth is plenty of money in the economy has exacerbated price increases, causing them to spread throughout the economy.
To the criticism of inflation, Powell responds by arguing that it is largely temporary and will de-escalate in 2022. However, the increase in recent months has been so great that in November the Fed announced the phasing out of QE. Markets are now expecting QE to end next March and then interest rate hikes will begin.
Withdrawal of monetary support in a period of great uncertainty will of course lead to risks to the recovery of the economy. In this respect, the most difficult for Powell will be in his second term. Inflation has eroded Americans’ incomes and led to a significant decline in Biden’s popularity, who said Monday he was confident Powell’s focus on inflation and full-time employment would make the US economy stronger than ever. That, of course, remains to be seen.
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