(Bloomberg) — There’s a lot at stake for the Federal Reserve in Tuesday’s election even with monetary policy set to remain ultra-loose for years to come.
With the economy struggling to regain its pre-pandemic strength, Fed officials expect interest rates will stay near zero for at least three more years. Moreover, behind Chair Jerome Powell the Fed’s rate-setting panel has just unanimously endorsed a new long-run strategy that promises to keep rates lower coming out of this recession than officials had dared during previous recoveries.
That means the president will get what he wants from monetary policy, whether that’s Republican incumbent Donald Trump or Democratic challenger Joe Biden.
“For either candidate, on monetary policy Jay Powell has got their back,” said Vincent Reinhart, a former director of the Fed’s division of monetary affairs. “The Fed will provide as much stimulus as they think is necessary.”
Much still will depend on which party controls the White House and Congress. A Democratic sweep will allow Biden’s party to deliver a much larger package of fiscal support than Republican lawmakers would approve. That could bring forward the timetable for an eventual tightening of policy by the Fed, but only modestly.
“We’re talking about the difference between 2023 and 2024,” Reinhart said.
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The presidential winner will also have the ability to reshape the Fed’s leadership by 2022 — when Powell’s term is up — potentially changing the chair and both vice chairs. In addition, there are currently two vacant Fed board seats to fill, and possibly a third if Biden wins and, as some expect, makes Fed Governor Lael Brainard his Treasury secretary. Finally, a victory for Biden will push the Fed into taking a tougher approach in banking regulation.
Should Trump hang onto the presidency, he’ll have little reason to berate Powell over interest rates the way he did from mid-2018 through January 2020. But if he still wants a Fed boss he can push around, he’ll be tempted to dump Powell when his term as chair expires.
Yet Trump could struggle to appoint someone more pliable. After making a series of conventional Fed picks early in his term — including the promotion of Powell to the helm — Trump was denied by senators in his own party when he tried to place political loyalists on the board.
Roberto Perli, a partner at Cornerstone Macro and a former Fed economist, has argued it will be safer for Trump to stick with Powell, who’s trusted in financial markets and on Capitol Hill, presuming Powell wants another four years.
“Why take the risk of upsetting a policy course that is presumably consistent with its views?” Perli told clients in a presentation. “The administration wanted an easy policy and Powell has provided as easy a policy as I can possibly imagine.”
Fed spokeswoman Michelle Smith declined to comment when asked whether Powell would accept a second term if renominated by either Trump or Biden.
If Biden prevails, he’ll have no beef with Powell on monetary policy either, but Democrats will want a shift in banking oversight. Washington’s treatment of big banks got much tougher when they last held the White House with the passage of the 2010 Dodd-Frank Act, but has softened somewhat under Trump.
The Fed’s vice chairman for supervision, Randal Quarles, has softened bank stress testing, loosened restrictions on proprietary trading and dialed down constraints on regional banks. That’s not a dismantling of Dodd-Frank, but his critics say the banking system is considerably weaker than four years ago.
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Several economists who follow the Fed said they expect Biden would replace Quarles when his term as vice chair for supervision expires in October 2021.
Powell’s fate under Biden is tougher to predict. The new president would come under pressure from some in his party to pick a Democrat, especially after Trump broke with a 40-year tradition of presidents sticking with the Fed chair chosen by their predecessor.
Instead, Trump dumped Janet Yellen, the first woman to lead the U.S. central bank, and replaced her with Powell, a Republican who was already serving as a Fed governor after being appointed by Barack Obama.
“There are a lot of Democrat-leaning economists who’ve been advising Biden at one time or another who are darlings of the think tanks,” said Reinhart. “A Biden White House will have lots of loyalties. If someone pulls the ticket on one of those loyalties” that may be enough to oust Powell.
Biden is already being lobbied by some groups to use appointments to improve diversity at the Fed, which has traditionally been dominated by White men, notwithstanding Yellen’s 4-year term.
His economic team also wants the Fed to focus more on racial inequality in the economy, and Democrats in Congress have introduced legislation to add that goal to the Fed’s existing mandate for price stability and maximum employment. This could have implications for the central bank if a Biden administration decided to endorse it.
But Powell and his colleagues have repeatedly addressed this topic themselves since Black Lives Matter protests swept the nation earlier this year. Importantly, the new strategy introduced in August explicitly promises more patience in raising interest rates than in the past to push the benefits of a tight labor market deeper into minority communities.
What Fed Wants
In the near term, it’s worth asking what the Fed may want from this election, said former Fed economist Julia Coronado.
With the economy’s recovery slowing in recent weeks, Fed officials have been unusually vocal in calling for more fiscal stimulus. Powell has said the Fed can lend plenty, but what the economy now demands is government spending. To his disappointment, elected officials failed to agree on a new aid package before the election.
A Democratic sweep on Tuesday will give the central bank more of what it wants for the economy, according to Coronado.
“What’s at stake for the Fed is whether they will have a partnership with fiscal policy that will allow them to achieve their mandate,” said Coronado, co-founder of Macropolicy Perspectives.
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