The Federal Reserve will continue to walk its tightrope between providing sufficient stimulus to spur economic recovery and keeping inflation expectations anchored as prices surge.
That was not an easy path in 2021 and it will become harder in 2022. Fed Chairman Jerome Powell has abandoned the word transitory to describe inflation but he has not really changed his posture. Other policymakers on the Federal Open Market Committee are belatedly realizing that they have to start raising interest rates this year to rein in inflation, but they think they can wait a few months.
Next Up: More Hawkish Regional Bank Heads
The FOMC itself faces the annual rotation of regional bank presidents, bringing four new officials into voting positions. Also, President Joe Biden is said to be readying a slate of three nominees to the board of governors after originally promising to announce them in early December.
The new voting members are somewhat more hawkish than the outgoing regional bank chiefs, though it hardly matters as long as the panel moves in lockstep without any dissent. Kansas City Fed President Esther George, probably the most hawkish of the group, rotates into a voting position. In the past, she has not hesitated to object to the consensus statement and consistently advocates tighter monetary policy.
Dissent has a long tradition at the Kansas City bank. George’s predecessor, Thomas Hoenig, who headed the bank for 20 years, also frequently voted for tighter policy. He hasn’t changed. Interviewed for a recent long profile in Politico, Hoenig, who went on to serve as vice chairman of the board at the Federal Deposit Insurance Corp. until 2018, had this to say about choices faced by Fed policymakers:
“There is no painless solution. It’s going to be difficult. And the longer you wait the more painful it will end up being.”
James Bullard, head of the St. Louis Fed, will also be a voting member in 2022. He was calling for interest rate hikes this year before anyone else on the committee and wants to start raising them in the spring.
Cleveland Fed chief Loretta Mester, also a hawk, becomes the third of the rotating bank presidents to get a vote. In an early December interview, Mester said she had favored a faster pace for reducing the Fed’s asset purchase in September, but the panel didn’t approve the acceleration until December.
The fourth voting position is for the Boston Fed, which currently has no president after Eric Rosengren stepped down in September in the wake of the political backlash for share trades by the FOMC members. Philadelphia Fed chief Patrick Harker, a centrist, will take his place as alternate voting member until the board of the Boston bank chooses a successor.
Diversity In Board Of Governors Search Key Focus
Regional bank presidents don’t face Senate confirmation, but they must get approval from the Washington board of governors. In the current political climate, it is unlikely the Boston board will choose a white male, and board chair Christina Paxson, who is president of Brown University, pledged a broad search.
Diversity is also the byword for Biden’s slate of nominees for the Fed’s board of governors. The Washington rumor mill for a time had former Ohio attorney general Richard Cordray, the first head of the Consumer Financial Protection Bureau, as the likely nominee for the vacant post of vice chairman for regulation, but his chances have faded, not least because his nomination would be controversial.
Now the talk for the regulatory post is focused on Sarah Bloom Raskin, who served a stint as Fed governor in the Obama administration and went on to become deputy secretary of the Treasury. Michigan State University economist Lisa Cook and Davidson College professor Philip Jefferson, both of whom are black, are names being circulated for two other vacancies on the board of governors.
All three potential nominees are likely to be sympathetic to the administration’s push for progressive policies. Raskin, in addition to her service in the Obama administration, is married to prominent Maryland Democratic congressman Jamie Raskin; Cook is backed by the progressive Democratic chairman of the Senate Banking Committee, Sherrod Brown; and Jefferson (like Cook) is on the advisory board of the Minneapolis Fed’s Opportunity and Inclusive Growth Institute.
Nominees to the board of governors face confirmation in the evenly divided Senate. The White House and lawmakers have been preoccupied with passing the administration’s social spending legislation so it is uncertain how quickly confirmation—including that of Powell for a second term—will go.
The remaining current board members are Chairman Powell, Lael Brainard, a Democrat who has been nominated for the post of vice chair, Michelle Bowman, a former small bank officer who was state bank regulator in Kansas, and Christopher Waller, former chief economist at the St. Louis Fed under Bullard. All governors are permanent voting members of the FOMC.
It is hard to foresee just how their backgrounds would influence new FOMC members’ views on monetary policy (the Dallas regional bank is also looking for a new president), but it seems likely the rumored board nominees would tend to be dovish and offset any hawkish influence from the 2022 voting members.
Ultimately the question of how and how quickly Fed policymakers rise to the twin challenges of COVID-19 and inflation depends on Powell’s leadership. It will be a test.