Jerome Powell remains head of the Federal Reserve

Status: 11/22/2021 3:36 p.m.

Whoever heads the US Federal Reserve has an impact on the financial system around the world. Because the rate of the Federal Reserve moves interest rates and the dollar. Now US President Joe Biden has decided on the sensitive personnel.

US President Joe Biden has decided against a change in head of the most powerful central bank in the world, demanded by left-wing Democrats. Jerome Powell, the current President of the Federal Reserve (Fed), is to receive a second term. Biden has nominated the 69-year-old Republican for this. Powell is expected to lead the US Federal Reserve for another four years. His contract was originally due to expire in February 2022.

Biden preferred Powell to Lael Brainard. The 59-year-old central banker was the only opposing candidate. The Democrat has been a member of the Central Bank Council since 2014 and was the favorite of Powell critics from the party’s left wing. Brainard was once nominated by Democratic President Barack Obama.

Nevertheless, Brainard is also gaining influence. Biden nominated the economist, who was born in Hamburg, as future Vice President of the Federal Reserve.

Should be deputy of the Fed chief: The economist Lael Brainard.

Bild: picture alliance/AP Photo

Left Democrats versus Powell

The left wing of the Democrats had called for Fed President Powell to be replaced. Among other things, the well-known Congressman Alexandria Ocasio-Cortez had asked Biden not to grant Powell a second term. Senator Elizabeth Warren even called the Fed chief a “dangerous man”. Powell has weakened the US banking system through softer regulation.

In the past, Brainard followed a significantly stricter course in banking regulation. However, it is regarded as a so-called “dove” in monetary policy, as it advocates a looser course for the Fed. Powell, on the other hand, belongs to the camp of “hawks” who want to tighten monetary policy.

Signal for the independence of the central bank

The decision in favor of Powell and against Brainard is also seen as an affirmation of the principle of an independent central bank. According to Commerzbank economist Bernd Weidensteiner, if Brainard had been nominated for the top of the Fed, the US president would have made himself vulnerable. Republicans could have accused Biden of fueling inflation.

Biden’s predecessor Donald Trump had raised doubts about the independence of the central bank with his decision to replace Janet Yellen with Powell at the top of the Fed in 2018. Trump later attacked Powell for raising interest rates.

Fed needs to tame inflation

The Federal Reserve faces a number of challenges. From the end of the year, the central bank wants to reduce the bond purchases that should support the economy after the corona slump. There is also the problem of galloping inflation, which has been significantly higher for months than the Fed is aiming for in the medium term. The target is two percent. In October, the inflation rate rose to 6.2 percent over the year – more than it has been in 31 years.

The US Federal Reserve continues to believe that higher inflation is primarily a temporary phenomenon as a result of the pandemic. But many economists and investors accuse the Fed of underestimating the risk of inflation. Mohamed El-Erian, for example, Allianz’s chief advisor, has criticized the Fed’s stance on inflation as “the biggest miscalculation in decades”. In his opinion, the central bank should have started reducing bond purchases much earlier.

“In the USA, inflation has gotten out of hand,” said Commerzbank chief economist Jörg Krämer at Euro Finance Week recently. The Fed must act now and possibly raise interest rates in 2022. Because of the prospect of interest rate hikes, the dollar has also risen massively recently. The European Central Bank (ECB), on the other hand, is not expected to raise interest rates anytime soon.

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