Powell likely to remain chair and hike twice next year

Key takeaways

• President Joe Biden has a lot of important decisions to make in coming months, which will affect the Federal Reserve.

• We expect President Biden will re-nominate Fed Chair Jerome Powell as Chair.

• We expect governor Lael Brainard will succeed Randy Quarles as Vice Chair for Supervision but Quarles may choose to stay on the board as an ordinary governor.

• We expect Richard Clarida, which term as both governor and vice chair expires soon, to leave the board. This would mean that Biden has another vacant seat to fill (besides the one already vacant) and most likely is searching for a new Vice Chair.

• President Trump nominated Powell on 2 November 2017, which was later than for Bernanke (25 August 2009 and 24 October 2005) and Yellen (9 October 2013). Hence we expect an announcement within two months.

• The Federal Reserve Banks of Boston and Dallas are both looking for a new President amid Fed trading scandal. Biden is not part of these discussions.

• Although it is important to notice in what direction the Fed goes, we do not expect major changes to how the Fed conducts monetary policy overall. The Federal Reserve is usually very consensus-based, also heavily relying on staff. That said, the shift in voting rights among regional Presidents make the FOMC more hawkish, all else equal.

• Looking at recent Fed communication, not much have changed. We still expect the Fed to announce tapering at the next meeting in November and is likely to conclude tapering in Q2 22. We expect the Fed to hike the target range twice in H2 22 (September and December).

• The blackout period ahead of the next FOMC meeting starts on Saturday 23 October.

Fed chair: We expect Biden to re-nominate Jerome Powell

The most important question is whether President Joe Biden will re-nominate current Fed Chair Jerome Powell, whose term as Fed chair expires on 5 February. Not long ago it seemed likely but the Fed trading scandal has definitely hurt Powell’s reputation, see e.g. The Hill. It is not long ago Senator Elizabeth Warren (left-wing Democrat) called Powell a “dangerous man”. The left-wing Democrats are not only concerned about the trading scandal but also relaxation of regulation. It is, however, not a big surprise. When Powell was approved in 2017, Warren was the only one (also among Democrats) voting against Powell’s nomination in the Senate Banking Committee, see AP News.

We stick to our view that Biden will re-nominate Powell (which also seems like the consensus view). It was unprecedented when former President Donald Trump did not renominate Janet Yellen as Fed Chair and if Biden chooses someone else, it is difficult to say the central bank is as independent as before. At least all future Presidents can say it is now common practice to replace the incumbent Fed chair. Is Biden really different from Trump if he does exactly the same?

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