Is Lael Brainard Being Lined up to Replace Jay Powell as Fed Chair?

Jay Powell, the current chairman of the US Federal Reserve, has been in to see the president about the Fed chair job. So too has governor Lael Brainard – there are seven members of the governing body of the Fed.

The chairman’s appointment runs out in February 2022 so the appointment of a possible replacement is in the gift of President Joe Biden.

Meanwhile, governor Randal Quarles has announced that he is stepping down from his role next month, opening up another appointment for the president to fill. His position as vice chair of supervision also ends in December.

Also, another governor – Richard Clarida – sees his term come to an end in January next year. Clarida is a vice chair at the Fed.

The markets are currently of the view that Powell will be reappointed by Biden, but last week’s meetings may point to a different outcome.

Will Biden drop Powell to assuage his left wing?

The progressive wing of the Democratic Party would prefer to drop Powell in favour of a candidate more to their way of thinking as regards banking regulation and a monetary policy that better supports fiscal expansion and social spending.

Some Democrats think the Fed may be too focused on keeping the stock market trading at record highs, which is not a part of its mandate – although part of the central bank’s remit is to maintain financial stability, which could of course include preventing the emergence of “disorderly” equity markets.

Senator Elizabeth Warren’s antipathy towards the policy agenda of Powell is now well known following her description of him as a “dangerous man to head up the Fed”. Warren is a member of the Senate Banking Committee.

Biden is likely weighing the opportunity to keep the left-wing of the party on board with his policy agenda by dropping Powell at the Fed against the risk of negative fallout in the markets increasing uncertainty at a time when monetary policy is finely balanced. Policymakers are struggling with the timing of possible interest rate increases late in 2022 or early 2023 as they keenly watch the inflation rate continue to climb.

There will be more data on inflation on Wednesday, when the US CPI headline and core data for October is released. US inflation is currently running at 5.4% with the Fed last week indicating that it wanted to be “patient” when it came to future rate lift off.

Fed officials trading shares hasn’t helped Powell

The recent furore surrounding the stock trading by Federal Open Market Committee (FOMC) members and other Fed officials such as Reserve Board Presidents (all the governors sit on the FOMC), will not have endeared the current leadership team to those Democrat lawmakers already suspicious about the preponderance on Republican governors.

The Fed has introduced new rules around stock trading, which now includes a ban on holding individual stocks and bonds.

According to Bloomberg, Brainard went to see the president last week for an interview for the Fed chair job. Although her nomination for the top job would be a surprise, she is hardly a radical. Brainard earned her doctorate from Harvard and is a respected macroeconomist.

However, she is on record as favouring stricter regulation of banks and is the only Democrat among the seven governors. She was nominated four years ago by President Obama.

Brainard oversees financial stability surveillance and payments. In the latter area she is thought to be among those pushing for innovation in digital payments and modernisation of the Fed’s transaction systems.