Part 1: The new leaders for the Fed, Chair Jay Powell and Vice-Chair Lael Brainard
Biden's nominees to the Board of Governors, if confirmed, will make history. This post, the first in three part series, focuses on the Chair and Vice-Chair.
Biden’s five nominees to be confirmed by a Democratic-led Senate, along with Trump’s two nominees confirmed by a Republican-led Senate, are a strong team.
Today’s post—the first in a three-part series—explains why Jay Powell and Lael Brainard, as Chair and Vice-Chair respectively, are excellent choices to lead the Fed toward its monetary policy goals.
The qualifications of leaders at the Federal Reserve must always be evaluated in terms of the institution's mission, as determined by the U.S. Congress and not the whims of economists. If a person does not like the law, talk to Congress. If a member of Congress does not like the law, pass new legislation.
The Federal Reserve Act of 1913, which Congress has amended several times since its adoption, as well as the Community Reinvestment Act of 1977; The Full Employment and Balanced Growth Act of 1978 (the Humphrey Hawkins Act); The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), and other Fed-related legislation are THE LAW.
The law is a helpful starting point for this discussion of the Governors of the Federal Reserve System. Here are some key excerpts from the Federal Reserve Act:
Section 2A, added to the Act in 1977, defines the dual mandate:
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
This section is interpreted as the Federal Reserve’s “dual mandate” of maximum employment and stable prices. It is a guiding principle of monetary policy.
Section 2B, added to the Act in 1978 with the passage of the Humphrey-Hawkins Act:
1. In General. The Chairman of the Board shall appear before the Congress at semi-annual hearings, as specified in paragraph (2), regarding--
A. the efforts, activities, objectives and plans of the Board and the Federal Open Market Committee with respect to the conduct of monetary policy; and
B. economic developments and prospects for the future described in the report required in subsection (b).
Also relevant is the part of the Federal Reserve Act that sets goals for the Board's composition. Congress was concerned with representation from the start, which remains an important consideration today.
Section 10 of the Federal Reserve Act:
In selecting the members of the Board, not more than one of whom shall be selected from any one Federal Reserve district, the President shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country. In selecting members of the Board, the President shall appoint at least one member with demonstrated primary experience working in or supervising community banks …
Note that “academia” or the “economics profession” is not on the list. Under the law's letter and spirit, economists have been over-represented on the Board for decades.
The Fed’s relationship with its legal responsibilities is a complicated one. Starting with Paul Volcker in 1979, the Fed pushed back on the employment goal, arguing that lowering inflation was the only path to sustainable employment. That view continued for over thirty years. After Federal Open Market Committee meetings, the official statement did not mention the word “maximum employment” until September 2010.
The Board that will likely serve in 2022 would improve the country's representation and strengthen the Fed’s commitment to and achievement of its dual mandate.
PART ONE: JAY POWELL AND LAEL BRAINARD
The Chair and Vice-Chair of the Board of Governors are its two key leaders. Both nominees are highly qualified and ready to fulfill the Fed’s duties.
Chair Jay Powell
Jay Powell’s first joined the Board in 2012 as a Governor and then assumed the role of Chair in 2018. During his tenure, Powell’s background in financial markets has been essential,1 especially during the Covid pandemic and economic crisis. Starting in March of 2020, under his leadership, the Fed intervened aggressively to stabilize financial markets and keep them functioning during the first year of the Covid pandemic. In doing so, the Federal Reserve fulfilled the long-standing role of central banks worldwide: the lender of last resort.
Then when the recovery achieved significant progress toward the Fed’s goals in 2021, Powell as Chair guided the Fed through the slowing of its purchases of Treasury bonds and Mortgage-Backed Securities, referred to as tapering. This transition in monetary policy was considerably smoother than after the Great Recession, mainly owing to Powell’s ability to communicate clearly to market participants.
In 2022, if confirmed, Powell will lead the Fed as it gradually reduces its support to demand. That will occur—not because of the Fed's more “hawkish” (or inflation-focused) approach—but a recognition that as the shortfalls in employment due to Covid narrow, inflation must move back down to achieve the Fed’s dual mandate. Again, Powell’s consensus builder and communicator skills will be crucial.
As I argued in an opinion piece last year, it is fortunate that Powell does not have a background in academic macroeconomics.
One of Mr. Powell’s greatest strengths may be that before joining the Fed, he had not spent his career steeped in macroeconomics as his two predecessors had. He’s been an avid learner, but also a critical thinker. In a 2018 speech that continues to age well, he took a tactful, almost playful, jab at the high priests of macroeconomics, criticizing some key metrics the Fed was using to guide its policymaking. Translated into plain English, he told them that many of the metrics are effectively made-up numbers.
The models and approaches in the elite macro community have not served the Fed well in achieving its dual mandate, particularly after the Great Recession. Powell is committed to the dual mandate and not the debunked thinking of macroeconomists.
His views are aligned with the challenges that the Fed faces now. I highly recommend listening to Powell’s confirmation hearing. He provided a good overview of how he thinks about the economy and monetary policy.
Vice-Chair Lael Brainard
Lael Brainard, an economist by training, has served as a Fed Governor since 2014. Before that, she was a Treasury official in the Obama Administration and a professor at a business school.2 Brainard’s background in macroeconomics, both domestic and international, as well as her experience working with Powell on the Board, will make her an excellent Vice-Chair.
Most importantly, Brainard, as Vice-Chair, will continue to build the new intellectual underpinnings of the Fed’s new monetary policy framework, adopted in August 2020:
The maximum level of employment is a broad-based and inclusive goal that is not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the shortfalls of employment from its maximum level …
The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate … the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.
Brainard is credited with adding “broad-based” and “inclusive” to the employment goals; however, as of yet, the Fed has not clearly defined what that and “maximum employment” itself means. This year the Fed will be under increasing pressure to explain how it thinks about the labor market and the tradeoffs with inflation.
In addition to monetary policy, Brainard’s wide-ranging portfolio as a Governor will put her in a position to shape other Fed policies. She was the lead Governor on faster payments, central bank digital currency, climate change, and Community Reinvestment Act. These are all issues that the Fed needs to make progress on.
Here is Brainard’s confirmation hearing. It went very well too.
Wrapping up
As Chair and Vice-Chair, Jay Powell and Lael Brainard would be a powerful team to lead the Fed through the challenges ahead. The sea change in monetary policy is well underway, and both have already made notable contributions. The Fed’s work is not done, and the duties are formidable. Powell and Brainard are up to the task.
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The views here are my own and do not represent Jain Family Institute or my colleagues.
A former partner at the private equity fund, Carlyle Group, would also be the only member of the Board who represents “financial interests,” as set out in the Federal Reserve Act.
She began her career as a McKinsey consultant and was an assistant and associate professor at MIT’s business school. Thus, at least in part, she could represent the “commercial interests” in the Federal Reserve Act.