What Brainard's departure means for the Fed, bank policy and her career

February 15, 2023 9:00 PM

Federal Reserve Vice Chair Lael Brainard's upcoming departure from the board of governors will influence policymaking at the central bank in several key ways.

When Vice Chair Lael Brainard leaves the Federal Reserve next week to become the White House's top economist, she will also hand off leadership duties on several key initiatives at the central bank.

On Tuesday, the White House announced that Brainard would become its next director of the National Economic Council. That same afternoon, she submitted her resignation from the Fed board, effective on or around Feb 20.

Technically, the role of vice chair carries no special duties beyond assuming leadership responsibilities when the chair is absent. But, during the past nine years — the longest tenure by a nonchair in two decades — Brainard has carved out a distinctive sphere of influence on the board of governors, including on matters of payments, research and financial stability.

She leads four of its eight committees and has, on multiple occasions, been the senior ranking economist on those committees — a byproduct of Chair Jerome Powell's background as a lawyer and investment banker, as well as the long stretches of time when there were multiple vacancies on the Fed board.

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Following the departure of former Chair Janet Yellen in February 2018, Brainard was the only Ph.D. economist on the board for several months, until Richard Clarida was confirmed as vice chair that September. Before Christopher Waller joined the board in December 2020, lawyers outnumbered economists on the board 3-2. Also, until Michael Barr was sworn in as the Fed's vice chair for supervision last July, Brainard had not served on a full seven-member board.

Though she only became vice chair last May, Brainard's standing as the sole Democrat-appointed governor during much of the Trump administration gave her an elevated profile. While she had just one vote on policy matters, she used it to oppose several policy changes spearheaded by then Vice Chair for Supervision Randal Quarles that were aimed at modifying regulatory standards set by the Dodd-Frank Act of 2010.

More recently, she has been among the more dovish voices on the Federal Open Market Committee. While she supported every interest rate increase enacted by the Fed last year, she has struck a softer tone when discussing the current inflationary environment.

"I do think Brainard was an important voice on monetary policy, generally more dovish than Chair Jay Powell," said David Wessel, a senior fellow in economic studies at the Brookings Institution and director of the Hutchins Center on Fiscal and Monetary Policy. "Until her successor is nominated and confirmed, her departure makes the FOMC slightly more hawkish."

Below are the other ways in which Brainard's departure will likely affect the board, the various initiatives in her portfolio and her own trajectory in government.

Leadership shuffle

Brainard's departure will create openings on several of the board's committees. While some argue that the designation of committee members is merely an organizing tool for the Fed, as all final policy decisions go before the full board for a vote, others see the chair positions as being desirable and influential.

Karen Petrou, managing partner at Federal Financial Analytics, said this is especially true of the committee on economic and monetary affairs, as well the committee on payments, clearing and settlement. Brainard was the head of both.

With Waller sitting on the monetary affairs committee and Gov. Michelle Bowman sitting on payments, Petrou said the new chair appointments could influence how the Fed looks at key issues. Both Waller and Bowman were appointed by President Donald Trump.

"In terms of seniority, the desirable committees of payments and settlements and monetary affairs could be led by two Republican governors, Waller and Bowman," Petrou said. "They don't always agree with Brainard, but the Fed is very institutional."

Derek Tang, co-founder of the Washington-based research firm Monetary Policy Analytics, said whoever helms the monetary affairs committee also oversees international finance — the Fed's "diplomacy arm," which serves as a liaison with central banks around the world — as well as research and statistics.

"This is a pretty crucial time in terms of figuring out where the economy is going," Tang said. "So, that's going to be interesting to see if there's a change in the research agenda and what they want to investigate."

Brainard also chairs the committee on financial stability. That position will likely be filled by Barr, given he is already a member of the committee and the obligations of the role tie in closely with his regulation and supervision mandate, multiple Fed watchers say.

The final chair seat that will be left open upon Brainard's departure is for the committee on board affairs. Petrou said the administrative responsibilities that come with that role make it a "pain in the neck," but noted that it is often used to give newer board members a chance to cut their teeth.

"They use it to teach the junior governors the ropes," she said. "You have two new governors, Philip Jefferson and Lisa Cook, who have no administrative experience — they're academics. So it's possible one of them might get the short end of that stick."

Kaleb Nygaard, a research fellow at the University of Pennsylvania who specializes in Fed history, said Brainard's departure could create an opportunity for Powell to reshape the board and its leadership on certain issues for years to come, possibly exceeding his current term, which ends in May 2026.

"I suspect that the board and Powell may decide to shake up even more than just the committees that Brainard was involved with," Nygaard said. "Given Brainard's significant internal leadership role on so many initiatives, I suspect this will be an opportunity for the Fed to reassess even the ones she wasn't on and there will be a general reshuffle of those committee assignments and big projects."

CRA and FedNow

Two projects that Brainard has been spearheading for years are on the verge of reaching completion: a substantial update to the Community Reinvestment Act and the introduction of a Fed-run real-time payment network known as FedNow.

The Fed, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency introduced a draft framework for overhauling the CRA last May and are currently wading through various comments received over the summer.

Brainard has been a proponent of updating the 1977 law — which has not been substantially changed since 1995 — for years. In 2020, she raised concerns about the overhaul initiative being led by the FDIC and OCC, but those worries seem to have dissipated with the current proposal.

In a July webinar, Brainard described the effort as a "once-in-a-generation opportunity to strengthen the CRA to bring greater credit, investment and banking services to the communities that have faced the greatest challenges."

Kathryn Judge, a Columbia University law professor who specializes in bank regulation, said Brainard has been "absolutely critical" in crafting the CRA framework currently under consideration, but she expects whoever takes on the issue next — likely Barr, in her estimation — will champion the effort well in her place.

"Given Barr's expertise and portfolio, he's incredibly well positioned to really step in and take over the torch on issues like that," Judge said.

FedNow is another long-delayed project that seems to be nearing the finish line. After a decade of consideration and nearly four years of dedicated work, the real-time payment network is scheduled to go live sometime this summer.

Brainard, as the chair of the Fed's payment's committee, was set to oversee the initial rollout and gradual expansion of FedNow, which promises to be a lengthy process as banks lay the groundwork for connecting to the system.

Aaron Klein, senior fellow for economic studies at the Brookings Institution, said that, unlike with Barr and the CRA reform effort, there is not an heir apparent for payment matters.

"On payments it is less clear, and it will be interesting to see who chairs that committee," Klein said. "In my experience, few folk come to the Fed seeking to go deep into payments. That's one reason why the Fed failed to modernize their payment system for decades."

Digital dollars

In recent years, Brainard has become the closest thing the board has seen to a proponent of implementing a central bank digital currency, or digital dollar.

While she has stopped short of endorsing the creation of a CBDC, she has made efforts to acknowledge the benefits one might bring the U.S. in terms of global competitiveness and financial stability, going so far as to call it a "natural evolution" of the payment system

Brainard's neutrality on the idea of a digital dollar, stands in stark contrast to other board members, such as Bowman and Waller, who have been "highly skeptical" of the concept.

Petrou said a CBDC is unlikely to move forward without authorization from Congress, but how the Fed thinks and talks about the topic is among the top open questions raised by Brainard's departure, at least as far as payments are concerned.

"The two key policy issues are CBDC and interoperability, and those are still significant, outstanding questions," she said.

Tang said if Bowman or Waller were to take a leading role in the payments space, it would likely mean a significant change in tone for conversations around a digital dollar.

"They would really be saying, 'Let's slow down, let's take a step back and think about why do we need a CBDC, is this a solution looking for a problem?'" Tang said. "They're really not convinced at all that this is something that's needed. You've heard that from them quite consistently."

Ultimately, Wessel said, the divergent opinions of Brainard and other board members are largely academic, as Congress does not appear poised to issue authorizing legislation on the matter anytime soon.

"She may be more interested in a Fed digital currency than some of the other governors, but that isn't moving very fast anyhow," he said.

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Career moves

Since rumors began circulating several weeks ago about Brainard potentially taking the reins at the NEC, Fed watchers and economic professionals have debated the merits of the move.

Some say it's something of a step back for Brainard, who served as under secretary of the Treasury for international affairs under President Barack Obama and was a deputy director on the NEC under President Bill Clinton.

"This is certainly, at best, a lateral move," Nygaard said. "As far as cultural reputation goes, I think it's a step down."

Others see the roles as being too different from one another to make meaningful comparisons, noting that while the NEC does not hold the same power as the Fed, its broad responsibility enables it to influence myriad economic policy decisions.

"It's an apple to an orange move. Some situations are clearly a step up, some situations are clearly a step down, and this is lateral, but only in the absolute loosest sense of the term, because it really is just such a different type of role," Judge said. "She had clear and direct policy influence in the role she was playing at the Fed, but this gives her the ability to work more closely as part of the administration in furthering and defining their broader economic agenda."

Brainard is leaving less than a year after she formally took the vice chair position last May. Short stays are not uncommon on the board of bovernors, but there is no precedent for someone vacating the board's second in command post after less than a year.

The closest parallel might be Ben Bernanke, who left a governor position on the board for a brief stint as chair of the Council of Economic Advisers in 2005. He then returned to the Fed in 2006 as chair.

There is a belief that Brainard might be angling for a similar trajectory. Tang noted that time at the NEC could set her up for a position as the Treasury secretary, a role she has long been rumored to be in consideration for. A return to the Fed as chair would also not be out of the question, he added.

Either way, Brainard's fate would ultimately hinge on whether a Democrat keeps occupying the White House, Tang said.

"It's a great springboard for her if she wants to be Treasury secretary. Having that NEC experience is actually much better preparation than staying on as Fed vice chair for another few years, but it is a high-risk, high-reward situation," Tang said. "She could stay in the vice chair role until Powell's term is up in 2026, but with the NEC role, that really depends on who wins the next presidential election. If the Democrats win again, it's smooth sailing for her, but if a Republican wins, then she has to regroup and think about what she wants to do for the next four or eight years to bide her time."