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Biden selects Jerome Powell to guide the Fed for a second time period because the US battles Covid and inflation

Jerome Powell, who led the Federal Reserve and the country's economy through the breathtaking and sudden Covid-19 recession by implementing unprecedented monetary stimulus, has been nominated for a second term as Chairman of the US Federal Reserve.

President Joe Biden made the announcement Monday morning after weeks of speculation that a progressive push could result in Fed Governor Lael Brainard getting the seat.

Brainard becomes vice chairman of the board of governors instead; It was widely expected that she would be given a separate vice-chairmanship for the regulator that oversees the country's banking system. She would succeed Richard Clarida as Vice-Chair, whose term ends on January 31, 2022.

Read more: Who is Lael Brainard?

"As I said, we can't just go back to where we were before the pandemic, we need to better rebuild our economy, and I am confident that Chairman Powell and Dr. Brainard's focus on keeping inflation down, prices stable and full employment will make our economy stronger than ever, "Biden said in a statement.

The nominations will next go to the Senate for confirmation.

In making the decision, Biden praised the Powell Fed for its "decisive" action in the early days of the pandemic.

The Fed launched an unprecedented suite of lending programs while cutting interest rates to near zero and introducing a monthly bond purchase program that would add more than $ 4 trillion to the central bank's holdings of government bonds and mortgage-backed securities.

"Chairman Powell has taken steady leadership at an unprecedentedly difficult time including the largest economic downturn in modern history and attacks on the independence of the Federal Reserve," a White House statement said. "During that time, Lael Brainard – one of our country's foremost macroeconomists – played a key role in the Federal Reserve and worked with Powell to drive our country's robust economic recovery."

The announcement coincided with a rally in the equity market, while government bond yields were consistently higher.

Markets are closely watching the pace at which the Fed is withdrawing its massive monetary support.

Officials have already announced that they will begin scaling back bond purchases, with cuts of about $ 15 billion per month that would likely complete the program in late spring or early summer 2022.

Interest rate hikes are a different matter.

Most Fed officials so far have said they will not consider rate hikes, at least until the expansion in bond purchases has subsided. However, the markets have been looking for a faster schedule for interest rates, with the first hike now priced in for June 2022.

"The president has chosen the status quo for monetary policy and financial regulation," said Mark Zandi, chief economist at Moody's Analytics. "The Fed will slowly but surely take its foot off the monetary policy accelerator."

Treasury Secretary Janet Yellen, who was Powell's immediate predecessor at the helm of the Fed, praised Powell for the way he handled the job in the face of the pandemic crisis that brought the US not only the steepest but also the shortest recession.

"Over the past several years, Chairman Powell has provided the Federal Reserve with strong leadership in effectively managing and managing unexpected economic and financial challenges, and I am pleased that our economy will continue to benefit from his leadership," said Yellen.

Controversy in the past few days

While Powell was ahead, it was not without controversy.

The Fed has recently come under fire after an ethics scandal that saw several officials trade stocks while the institution was implementing policies to stimulate markets. Powell announced that he owned municipal bonds, which the Fed also bought, and he also bought and sold funds tied to the broad stock market indices.

At the same time, the Fed was hit by the fact that inflation was running faster than expected – faster than it has been in 30 years. The Fed's official policy since September 2020 has been to let inflation rise slightly above the standard 2% target if it allows for full and inclusive employment, but prices have risen well above that level.

Powell has stuck to the line that once the pandemic-related factors return to normal, inflation will cool. However, the latest readings have raised questions about what is known as the average inflation target, which has signaled a historic turn in central bank monetary policy.

Inflation was also accompanied by a rapid economic recovery and a decline in the unemployment rate from a pandemic high of 14.8% to currently 4.6%.

The White House statement said the recovery was "evidence of the success of the president's economic agenda and of the determined action by Chairman Powell and the Federal Reserve to cushion the effects of the pandemic and get America's economy back on track." bring. "

Brainard turned out to be a key force in the race to see who would run the Fed for the next four years. She has commented on a number of issues that are important to the Biden administration, in particular the need for the Fed to protect the banking system against disruptive climate change events.

As a former secretary of state during the Obama administration, Brainard was also a strong advocate of the digital dollar to open the financial system to non-banks.

The White House statement stressed the importance of progressiveness for the Fed in the years to come.

Biden said Powell and Brainard "also share my deep belief that urgent action is needed to address the economic risks posed by climate change and to stay ahead of emerging risks in our financial system."

“If we are to build on the economic success of this year, we fundamentally need stability and independence with the Federal Reserve – and after their fire process over the past 20 months, I have full confidence that Chairman Powell and Dr. Brainard “provide the strong leadership our country needs,” he added.

Biden has even more to do at the Fed: there is a vacancy on the Board of Governors, while Clarida's position is due to be filled in January. He must also appoint a vice-chairman for oversight, a position Randal Quarles held until his term ended in October. The White House announced on Monday that these steps will be announced in early December.

The initial response from Congress to Monday's news was positive.

Sen. Sherrod Brown, D-Ohio, chairman of the Senate Central Banking Committee, who will hear the nominations first, said, “I look forward to working with Powell to stand up to Wall Street and stand up for the workers to get them share in the wealth they create. "

Pennsylvania Republican Patrick Toomey said he would support Powell despite realizing he had disagreements with the central bank's policies.

Fight back from Covid

Somewhat surprisingly, President Donald Trump appointed Powell to the position in 2018. Trump chose to bypass then-Chairman Janet Yellen, an unusual move given that Fed leaders are rarely ousted after just one term. Former President Barack Obama appointed Powell governor for a 14-year term in 2014.

Though Trump nominated Powell, he later fired scathing criticism of the Fed chief when the central bank hiked interest rates seven times in 2017 and 2018 as the economy rebounded.

As for Brainard, she is now widely expected to be appointed Vice-Chair of Supervision, a key position in the Fed to oversee the country's banking system.

The Fed is authorized by Congress to fulfill two mandates: to maximize employment in the US and to keep inflation stable. Its leaders, known as governors, are nominated by the president and vote on adjusting interest rates, regulating the country's largest banks, and overseeing the health of the economy.

To combat the spike in unemployment and recession that began in early 2020, the central bank cut rates and began buying around $ 120 billion in government bonds and mortgage-backed securities every month. It also introduced a variety of loan programs aimed at keeping the bond markets functioning after suffering significant stress at the beginning of the pandemic.

Economists attribute this quick and comprehensive response to the stabilization of the financial markets and the subsequent lowering of long-term interest rates. Lower interest rates make it easier for companies to borrow to build new factories or buy houses or cars for individuals.

"Under Powell, the Fed put more emphasis on keeping the economy running at maximum employment," said Mike Feroli, chief US economist at JPMorgan, via email.

"This is a goal that progressive economists have long advocated and one that is believed to be in line with Biden's agenda."

Treasury Secretary Janet Yellen, one of Biden's top economic advisors and advisor on his Fed nominations, told CNBC earlier this month that she was pleased with the Fed chief's job. Yellen was the first woman to serve as Fed chairperson and the country's first female Treasury Secretary.

"I spoke to him about candidates and advised him to choose someone who was experienced and credible," said Yellen. "I think Chair Powell certainly did a good job."

Powell is also popular on Capitol Hill, where lawmakers on both sides of the aisle have praised his guidance and kindness since taking over Yellen in February 2018.

The news is likely to disappoint progressives, including Senator Elizabeth Warren, D-Mass., Who said in September that the Fed's role in easing banking regulation over the past few years makes Powell a "dangerous man" and that it does would oppose his renomination.

Biden recently met with Warren to discuss the appointments, according to a source familiar with the matter.

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