Biden sidesteps Fed fight, disappointing progressive allies

President Biden sidestepped a battle over the leadership of the Federal Reserve by disappointing progressive allies and sticking with Jerome Powell, whom former President Trump nominated as Fed chairman four years ago.

Senate aides predict Powell will easily have enough votes to secure confirmation to a second term atop the central bank and warned that Biden would have had a much tougher fight on his hands had he instead picked Lael Brainard, the only Democrat on the seven-member board and the favorite of a number of progressives.

“You’re going to get ample votes for him. I think it’s going to be an easy path,” said one Senate Democratic aide. 

The aide said choosing Brainard to replace Powell would have risked an all-out battle that could have ended in defeat if Republicans managed to convince Sens. Joe Manchin (D-W.Va.) or Kyrsten Sinema (D-Ariz.) to vote with them. 

The president offered an olive branch to progressives by nominating Brainard to replace Richard Clarida as vice chair.

“Powell is the obvious smart choice when you’re an administration that doesn’t need an evil fight,” the aide added. “Powell is the much easier path, and Powell is a Republican who can talk to a 50-50 Senate about inflation. He’s an easier messenger for the president.”

The incumbent Fed chairman secured a victory last week when Manchin, a key Senate vote, said he was “looking very favorably” at Powell after the two discussed inflation and quantitative easing, two issues Manchin identifies as major concerns.   

Senate Republicans have made rising inflation a top political issue in recent months, and some Democratic strategists see Powell as a better messenger to respond to criticisms about rising prices because he is a Trump appointee.

But the choice of Powell further deflates progressives. They are already disappointed that Biden’s Build Back Better agenda has stalled in Congress and that top priorities such as the Clean Electricity Performance Program, a national paid family leave program and expanded Medicare dental and vision benefits have been cut out or are in danger of being jettisoned. 

“I think it’s a huge deal,” said Jeff Hauser, executive director at the Revolving Door Project, a liberal advocacy group that reviews executive branch appointees. “The Federal Reserve chair is in charge of implementing Dodd-Frank and a whole swath of financial regulatory laws and we don’t trust Jerome Powell on those issues whatsoever.”

“He went along with [Fed board member] Randal Quarles, a fellow Trump appointee, and undercut Dodd-Frank implementing regulations pretty significantly and pretty broadly, and he’s been extremely reluctant to urge financial institutions to adequately take into account the climate crisis and the downstream effects we’re going to see in terms of financial instability,” he added.

Biden’s progressive allies, including Sen. Elizabeth Warren (D-Mass.), who called Powell “a dangerous man to head up the Fed,” expressed disappointment Monday, with some of them warning that Biden could come to regret the decision.

“It’s no secret I oppose Chair Jerome Powell’s renomination, and I will vote against him,” Warren said in a statement Monday, warning that his nomination makes it especially important that the Senate also confirm Brainard as Fed vice chair and appoint a strong regulator to replace Quarles as vice chair of supervision. 

“I will support the president’s nomination of Lael Brainard as Vice Chair. Powell’s failures on regulation, climate, and ethics make the still-vacant position of Vice Chair of Supervision critically important. This position must be filled by a strong regulator with a proven track record of tough and effective enforcement — and it needs to be done quickly,” she said.  

Yet Warren observed in an interview with Bloomberg TV in August that much of the central bank’s power resides with the chairman. 

“The problem is the chair of the Federal Reserve is where the power is concentrated,” she said. “It is the chair who decides what policies go forward. It is the chair who decides when to call a vote.”

Progressives argue the choice of Powell undermines the Democratic Party’s longer-term goal of reining in Wall Street and curbing the dangerous risk-taking that led to the 2008-2009 financial collapse. 

They also warn that Powell’s reluctance to use the Fed to prepare the U.S. economy for the potentially devastating effects of climate change is short-sighted, though Powell is believed to have softened his aversion to letting Fed decisionmaking be influenced by climate considerations.

“President Biden’s re-nomination of Chair Powell doubles down on reckless Wall Street deregulation and dangerous dawdling on climate-related threats to the financial system, flouting Biden’s own whole-of-government approach to stemming climate threats,” said David Arkush, managing director of Public Citizen’s Climate Program. 

“As the 2008 financial crisis showed, fecklessness by financial regulators doesn’t appear terribly dangerous until catastrophe suddenly materializes. That is the path Powell has put us on,” he said.  

By tapping Powell to serve another term as chairman, Biden made the safer political choice in the short term.

Stock markets rallied, and senators on both sides of the aisle immediately released statements signaling that Powell will glide through the upper chamber.

Senate Banking Committee Chairman Sherrod Brown (D-Ohio) and ranking member Pat Toomey (R-Pa.) both praised the decision to renominate Powell as chairman.

“Chair Jerome Powell has led our economy through a historic pandemic, and under his and President Biden’s leadership, unemployment has fallen and workers are seeing increased bargaining power,” Brown said in a statement.

He touted Brainard as someone who has “spent her life fighting for a stronger, fairer economy.”

Toomey said he is looking forward to supporting Powell’s confirmation and said he “acted swiftly and took extraordinary and necessary steps to help stabilize financial markets and the economy” during the outbreak of the pandemic in 2020.

The senior Republican senator said he disagreed with Powell’s decision to continue the Fed’s emergency accommodative monetary policy long after the economy stabilized but expressed hope he would be able to tamp down inflation.

“Chairman Powell’s recent comments give me confidence that he recognizes the risks of higher and more persistent inflation and is willing to act accordingly to control it,” he said.

Desmond Lachman, a senior fellow at the American Enterprise Institute, said Biden’s choice of Powell over Brainard “was a prudent choice.” 

He said picking Brainard, the only Democrat on the Fed, would “send a very bad signal to the markets because what it would do is send a signal [of] politicizing the Fed.”

Lachman, who previously worked as managing director and chief emerging market economic strategist at Salomon Smith Barney, said financial markets might have interpreted Brainard’s selection as a sign that the Fed would prolong accommodative policy for political reasons, which could stoke concerns about inflation.

“You better stick with the horse that you got in the race,” he said.

But Lachman said Powell is by no means a perfect candidate.

“He’s let inflation get too hot. He’s let the stock market and the housing market get too overheated, so he’s got his problems,” he added.