WASHINGTON — President Biden will soon have a unique opportunity to leave a mark on the Federal Reserve when he names his picks for key leadership posts at the central bank. But his ability to remake the Fed will ultimately be determined by Congress.
There is already one vacant seat on the Fed’s Board of Governors. In addition, Fed Vice Chair of Supervision Randal Quarles's term expires in October (though he can serve as a Fed governor until 2032), followed by Fed Chair Jerome Powell's term expiring in February. Fed Vice Chair Richard Clarida’s term expires in January.
Biden will likely feel pressure from the left to use the upcoming appointments to push the Fed to be tougher on the industry, focus on consumer protection, narrow racial inequity in the financial system and address climate-related risks.
The administration will likely seek to replace Quarles, who has been criticized by Democrats for many of his stances on capital rules and other issues. Though Powell has received bipartisan praise for his handling of the financial impact of the coronavirus pandemic, some might urge the White House also to name a more daring pick for the head of the central bank.
“I think there's going to be a significant amount of pressure put on the president, vice president and the folks that help them nominate to choose someone that's more aligned philosophically with where the progressive wing of the Democratic Party is,” said Chris Campbell, former assistant secretary of the Treasury Department for financial institutions and chief strategist at Kroll, a corporate consulting firm. “That would significantly rearrange the relationship with Washington and Wall Street.”
But it still remains to be seen if Biden will side with progressives or opt for the status quo. The appointment process will be complicated by the razor-thin majority in the Senate. The chamber is split evenly between the Democratic and Republican caucuses, but Vice President Kamala Harris can cast a tiebreaking vote.
Republicans and even some moderate Democrats such as Joe Manchin of West Virginia and Kyrsten Sinema of Arizona could potentially object to Fed nominees they find too liberal.
“I absolutely would expect the picks that [Biden] makes to be on board with regulating banks with an eye towards environmental policy and climate change [and] regulating banks with an eye towards the social justice concerns,” said Alexander Salter, senior fellow at the American Institute for Economic Research and an economics professor at Texas Tech University. “I definitely think that that's a concern.”
Republican lawmakers have been increasingly frustrated with the Fed's work on studying the impact of climate change on financial stability, as well as events held by some regional Fed banks dealing with the racial wealth gap.
Since taking office, Biden has not specified which issues he would like the Fed to prioritize. But while campaigning for president, he called for legislation that would require the central bank to report on racial wealth gaps and take those gaps into account when it sets policy.
Climate change and racial equity will “be greatly probed by the Republicans” at nomination hearings, said Campbell.
“I think that it's going to require a lot of skill in whoever the nominee is to be able to thread the needle in a way to be able to gain Republican votes, but not lose Democratic votes,” he said.
Candidates for the Fed leadership posts will also likely have to answer tough questions about inflation. Current senior Fed officials have insisted that the rise in prices across many sectors is temporary and should abate without any intervention from the central bank. But some Republicans have been dubious of those claims.
“It's long overdue for the Fed to begin the process of normalizing its monetary policy,” Sen. Pat Toomey, R-Pa., the ranking member of the Senate Banking Committee, said in a June 10 tweet. “The combination of the Fed’s average inflation targeting and its view that inflation will be transitory virtually guarantees the Fed will be behind the curve if inflation is enduring.”
Depending on where prices stand when Fed candidates appear before Congress, inflation could become a flashpoint.
“The inflation issue is very salient right now and something that a lot of consumers are obviously unhappy about,” said Salter. “Consumers are also voters, so that's something that politicians on both sides happen to care about.”
Inflation may become “a battle line” in Senate hearings, agreed Bart Naylor, a financial policy advocate at Public Citizen.
“If we really are going into a period of some inflation, then yes, I can imagine that Republicans will be pretty feisty,” he said. “[But] if inflation abates, then I guess the Republicans don't have as much to stand on.”
Still, Salter expects regulatory policy to take center stage in the consideration of any potential Fed nominee as opposed to monetary policy.
“The appointments are going to hinge on the regulatory mandate,” he said, suggesting that monetary policy is more in the domain of the Federal Open Market Committee. “What do we actually consider within our purview — our being the Fed — in terms of what the central bank is doing and what it can control?”
Most Fed watchers expect Biden to name a replacement for Quarles as vice chair of supervision, given frustration on the Democratic side with the Fed’s tailored bank supervisory regime that Quarles has overseen. Democrats have generally expressed concern that Quarles has been too cozy with Wall Street and has undermined the key tenets of post-crisis regulation.
“He’s a nice man. I know him, I’ve talked to him many times, but he should not be there after October,” Senate Banking Committee Chairman Sherrod Brown, D-Ohio, said in a July 8 interview with Bloomberg. “I’d be very surprised if the president reappointed him.”
But it’s less clear where Biden might stand on reappointing Powell, whom former President Donald Trump originally nominated to lead the Fed in 2018.
“Powell is sort of Quarles with an even more gentle demeanor. It's difficult to be angry with Powell,” said Naylor. “He says many of the right things about poverty, income inequality, racial justice — even climate change.”
Powell has received high marks from members of Congress on both sides of the aisle, and is known on Capitol Hill for his efforts to engage with lawmakers.
“Everybody's replaceable and there's good people out there,” Sen. Jon Tester, D-Mont.,
While many on the left have taken issue with Powell’s involvement in rules that have rolled back elements of Dodd-Frank, many have acknowledged that there’s much to like about Powell’s shift to a focus on maximum employment, which they say prioritizes workers over Wall Street.
“I think that Powell has, in my opinion, proven to be very adept to adapt[ing] to the changing political environment in D.C.,” said Campbell, who is urging Biden to consider reappointing Powell.
Ultimately, while the changes the Fed made to rules around stress tests and bank capital requirements under Trump were “upsetting,” said Naylor, “they haven't been so outrageous as to cause us to fall out of our chairs.”
“The Biden administration, which is well stocked with leadership that I think sees the world similar to the way we do, ideally will put forward some good candidates to replace the likes of Quarles,” who has been the “No. 1 problem” at the Fed for progressives, Naylor said.
Moreover, reappointing Powell could bring a level of consistency to the economic recovery — former President Barack Obama made a similar move when he nominated then-Fed Chair Ben Bernanke for a second term in 2009.
“Given that level of uncertainty in that capacity and challenges that may lie ahead, I think there's a great need for someone with a lot of experience at the helm at the Fed,” said Campbell, “because one wrong move can be really devastating to the U.S. economy and thereby the worldwide economy.”
