US Treasury Secretary Janet Yellen provided a delicious irony in the aftermath of the President Biden’s nomination of current Fed chair, Jay Powell to a second term on Monday.
A former one term Fed chair (and denied of a second by Donald Trump’s appointment of Powell) Ms Yellen said in an interview that Mr Powell and his new deputy, Lael Brainard will have an important role to play over the longer term to ensure that inflation does not become “endemic.”
In her time at the head of the Fed it was Treasury secretaries and others who urged her to take a certain course of action, so for her to be urging her successor to keep his eye on inflation had a touch of irony.
The first big question is what happens at the Fed’s December 14-15 meeting.
Powell and Brainard made no secret of inflation’s importance and both addressed the subject in brief comments after President Biden’s announcement on Monday.
Both noted the impact high inflation is having on the US economy and American families
“We know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials, like food, housing and transportation,” Powell said in comments alongside Biden and Brainard.
“We will use our tools both to support the economy – a strong labor market – and to prevent higher inflation from becoming entrenched.”
Investors will now be looking for signs from both about how ’transient’ they see inflation for 2022.
Any move to drop that word or modify the belief that inflation will ease next year would see a rise in the dollar and bond yields, and possibly force Wall Street onto the back foot.
The second nomination of Powell and the elevation of Ms Brainard from a senior governor to Deputy Chair won the approval of markets in the US and elsewhere on Tuesday.
The ASX bounced back from a fall in overnight futures trading with a second daily rise in iron ore prices helping as well as the favourable reaction to the renomination of Powell and that of Ms Brainard.
Yellen said she believed Powell’s nomination and that of Ms Brainard would win broad support in Congress and that she was confident in their ability “to make good judgments” on balancing the Fed’s dual mandates of maintaining maximum employment and price stability.
“I think we do have to be concerned about inflation. It’s reached the levels that concern most Americans who are seeing it and their pocketbook when they go to the store to buy food or to fill up their cars,” said Yellen, who was Fed chair from 2014 to 2018.
She adding she believes that it is due to a supply-demand imbalance and economic bottlenecks that need to be worked out and expressed confidence the surge in prices would subside.
“Over the longer run, the Fed needs to play an important role to make sure that this doesn’t become endemic. And I know that he can be counted on to do that,” she said of Powell.
Ms Yellen said the US is now experiencing a “strong growth spurt” that will continue into next year and it is up to the Fed to determine how much monetary support is needed, given falling unemployment, built-up household savings and other factors.
“What we do see in the marketplace, with a strong dollar and generally low, longer-term interest rates, is confidence that inflation is not something that is going to become long lasting or endemic in the U.S. economy and that’s important.”
She said the Fed was gearing up to include analysis of climate change as part of its stress testing because it “poses a major risk to financial institutions.”
The approach on climate change will be the biggest change from Yellen’s time as chair
Investors think the new pairing at the top of the central bank will start tightening monetary policy faster than previously forecast and that’s going to be bad news for big techs.
All up the reaction tells us that continuity matters more to investors than a new face at the top of the Fed, and that’s what the Powell nomination offers.
Fed Governor Lael Brainard, considered the main rival to Powell, was named for the role of vice-chair of the world most powerful central bank – a move that will keep progressives in the Congressional Democrats happy.
Biden also has three Fed seats to fill, including the Vice Chair for Supervision, and intends to make those in early next month – that will change the complexion of the Fed for the next four or so years. This is now going to be a major focus.