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Musical Chairs at the Fed: Powell or Brainard?

Summary

  • Jerome Powell’s term as Chair of the Federal Reserve is scheduled to end in February, and President Biden will need to decide whom to nominate. Should he stick with Powell or go with someone else?
  • Online betting markets give Powell a probability in excess of 85% of being re-nominated with Fed Governor Lael Brainard a distant second at roughly 10%. These probabilities seem reasonable to us.
  • In our view, there is little difference in the monetary policy views of Powell and Brainard. The latter has never dissented from a FOMC decision in her seven years on the Board of Governors, and we would classify both her and Powell as “dovish.”
  • There is more difference in the regulatory views of the two front-runners. Brainard has dissented 23 times since 2018 on regulatory policy votes. Her dissents have largely come on votes relating to the easing of regulations that were put in the wake of the 2008 financial crisis.
  • A stricter regulatory environment, should one be adopted, could potentially exert some marginal downward pressure on loan growth. That said, it likely would take a radical change in regulatory policy, which does not appear to be in the offing, to have a discernable effect on lending and the economic outlook over the next few years.
  • We would not be inclined to make any changes to our economic outlook if President Biden chooses either Chair Powell or Governor Brainard.

Markets Think Powell is Biden’s Choice. Will Biden Comply?

Jerome Powell, the current Chair of the Federal Reserve System, has had a long and distinguished career at the Federal Reserve Board. He began his career as a monetary policymaker in May 2012 when he was appointed by President Obama and confirmed by the Senate as a Governor of the Federal Reserve System. President Trump gave him a promotion of sorts on November 2, 2017 when he nominated Powell to serve as the central bank’s 16th Chairperson, and the Senate subsequently confirmed him to that position on January 23, 2018 by a vote of 84-13. Because Powell’s term as Fed Chair is scheduled to end in February 2022, President Biden has a decision to make in the coming months: Should he nominate Powell for another four-year term as Fed Chair, or should he nominate someone else?1

Pricing on PredictIt.org implies that Powell has a probability in excess of 85% of being renominated. Lael Brainard, who has served as a Fed Governor since June 2014, is a distant second at roughly 10% probability. Roger Ferguson, former Vice Chair of the Federal Reserve System, Ralphael Bostic, current president of the Federal Reserve Bank of Atlanta, and former Fed Governor Sarah Bloom Raskin, all have implied probabilities of 2% or less on PredictIt.org. President Biden could very well pick one of these individuals to whom betting markets assign a low probability, or he could choose an individual who is completely off the radar screen at present. But because Chair Powell and Governor Brainard appear to be the front-runners now, we focus on their policy views in this report.

As a political aside, Powell is a Republican and Brainard is a Democrat, which would imply that Biden would naturally favor the latter. However, presidents have recently re-appointed Fed Chairs despite political affiliation. For example, Ben Bernanke, who was nominated by President George W. Bush, was re-nominated by President Obama, and Alan Greenspan, originally nominated by President Reagan, was re-nominated by Presidents Bush (#41), Clinton and Bush (#43) over the course of his 18-year stint at the Fed. We do not presume to know who President Biden will choose, but the market-based probabilities noted above seem fair to us for reasons we will note in the conclusion of this report.

Little Daylight Separates Powell and Brainard in Terms of Monetary Policy

One of the most important and most recognized responsibilities of the Federal Reserve is to formulate the monetary policy of the United States. The monetary policy decisions of the Federal Reserve are made by the Federal Open Market Committee (FOMC) and not simply at the discretion of the Chair. The FOMC, which when fully staffed has 19 members, 12 of which vote at each meeting, is a collaborative and consensus-seeking body.2 De jure, the Fed Chair simply has one vote among 12 voting members of the FOMC, and is only one voice among the 19 committee members. De facto, the Chair tends to be one of the most influential FOMC members, and many committee members defer to the Chair. So the choice of whom that individual is obviously is important to the formulation of U.S. monetary policy.

But Powell and Brainard appear to be very much aligned in terms of their monetary policy views. Brainard has never dissented on a monetary policy decision in her seven years on the FOMC, and we would classify both individuals as “dovish” on monetary policy matters. Both Powell and Brainard were FOMC members when the Committee adopted its new strategy in August 2020, and both individuals appear to be fully supportive of the strategy.3 In our view, the choice between Powell and Brainard for Fed Chair (or the other potential candidates for Chair noted previously) does not seem to be crucial for the outlook for monetary policy, at least not in the foreseeable future. A sudden turn to the “hawkish” side of the spectrum by either individual in the near term does not seem to be likely, in our view.

More Daylight Between the Two in Terms of Regulatory Policy

Where the views of Powell and Brainard seem to diverge somewhat is in the realm of regulatory policy, another important responsibility of the Federal Reserve. Over the past three years, Governor Brainard has dissented 23 times on regulatory votes by the Board of Governors. While dissenting votes are not rare, Brainard’s initial dissent in April 2018 was the first since 2011 and there has been only one dissent by other members in her time at the Federal Reserve. Brainard’s dissents have largely come on votes relating to the easing of regulatory policies that were created in the wake of the 2008 financial crisis. She has pushed back against changes to the Volker rule and swap margin requirements as well as adjustments and decisions relating to the Comprehensive Capital Analysis and Review, or bank “stress tests”. Although Brainard has voiced support for easing regulatory constraints on community banks, she has voted against actions to ease regulatory requirements for medium-sized banks ($250 to $700 billion in assets) and foreign banking organizations. Similarly, Governor Brainard has been critical of mergers of these medium-sized banks as well as other acquisitions in the financial services space, voting against two and abstaining on three others.

Powell, by contrast, has been supportive of revisiting the post-financial crisis rule book to simplify reporting and easing requirements on smaller banks in his public comments. Given his role at the helm of the consensus-driven Board of Governors, it is not surprising that he has not dissented on any measures that have come up for vote in his time as Fed Chair. Powell also voted in line with the rest of the Board in his time as a Governor from 2012-18, when the Fed was generally tightening rather than easing regulations.

Minimal Impact on Economic Outlook Over the Next Few Years

As noted previously, we do not believe there is a material difference between Powell or Brainard for the outlook for U.S. interest rates. However, different views on regulatory policy could potentially have implications for credit growth, especially if it takes the form of requirement