As U.S. President Biden nominated Powell for re-election as Fed Chairman and Brainard as Vice Chairman of the Fed, some problems also followed. What do you think of Powell’s re-election? What does his combination with Brainard mean? What challenges will they face? Federal Reserve Chairman Powell, China News Service reporter Chen Mengtong/People's Visual Information Picture

Federal Reserve Chairman Powell China News Agency reporter Chen Mengtong/People’s Visual Information Map

At this time, the Fed is at a critical node. On the one hand, in the process of guiding monetary policy, the Fed has to control the highest inflation rate in decades, and cannot prevent millions of unemployed Americans from benefiting from the recovery of the job market. On the other hand, the Democrats hope that the Fed will expand its role in the economy and strengthen its efforts to promote employment, address climate risks and address inequality. Conservatives hope that the Fed will stick to its monetary policy line, pay more attention to curbing inflation, and reduce supervision.

Claudia Sahm, a columnist and former Fed official, said that the Fed is facing “the most difficult period in history” since Paul Volcker became chairman. The current highly divided political environment between the two parties in the United States makes the work of the Fed even more difficult. The Fed is increasingly seen as no longer detached from partisan disputes. The previous transaction scandals of several officials have also caused damage to the Fed’s reputation.

Biden’s dilemma

Powell is now facing too many politically difficult economic problems: from helping the economy get rid of the once-in-a-century epidemic, to Deciding whether to create a digital dollar, any discrepancy on any one side may subvert the economic growth situation and trigger a recession.

Hang Seng Bank China Chief Economist Wang Dan said in a news interview that the appointment was a dilemma for the Biden administration, and in the end he still chose Powell. Because even if it changes the chairmanship, the current Fed cannot change the direction of its monetary policy. Under this premise, it is safer to choose Powell for re-election.

First of all, the background of Powell’s nomination is that the US CPI inflation “breaks 6”, and the Fed’s monetary policy prospects are largely uncertain.

Data released by the U.S. Department of Labor on November 10 showed that the seasonally adjusted CPI rate of the U.S. at the end of October was 6.2%, the largest increase since 1990. From the perspective of CPI sub-items, the CPI for energy, housing, transportation, entertainment, and other goods and services all rose month-on-month.

Wang Dan analyzed that the Fed cannot give a clear signal to raise interest rates, nor can it say that inflation is long-term, otherwise it will be regarded by the market as a new expectation. Now only the short-term average inflation level can be regulated, so we can only continue to emphasize that inflation is temporary. And even if you change a chairman, this rhetoric cannot be changed.

In the two years when the epidemic has swept the world, in order to restore the economy, Powell not only led the Federal Reserve to quickly and decisively exhaust all the options of the mainstream monetary policy framework; the new crown epidemic Under the pandemic, Powell also led the Fed to end the 9-year monetary policy framework. Due to the prolonged period of “low growth, low interest rates, low unemployment and the flattening of the Phillips curve”, the Fed has adjusted the monetary policy framework that has been in operation for nearly 9 years. One of the core contents is to set the original 2% inflation target. Adjusted to an average inflation target (Average Inflation Targeting, AIT) of 2%.

Wang Dan believes that Powell did a very good job in his first term. He did not favor the Republican Party, but also created a stable US economy and a booming stock market. . In the face of the epidemic, the decision to make unlimited supply liquidity not only controls risk but also reflects its decisive power. Otherwise, the US economy is likely to enter a recession, which will have a negative spillover effect on the world. In the current unprecedented fierce struggle between the two parties, the most important thing is for Powell to be re-elected and achieve a balance between the two parties.

CICC Macro also stated that for Biden, nominating Powell at this time has two advantages. One is to suppress inflation expectations, and the other is to maintain the continuity of the Fed’s monetary policy. sex. After the US inflation “breaks 6”, Biden’s top priority has become to control inflation. Allowing Powell to be re-elected can increase market expectations of interest rate hikes and help achieve the goal of controlling inflation. In addition, Powell has served as the chairman of the Federal Reserve for four years, and the financial markets are familiar with him. Keeping him in office will help the Federal Reserve communicate with the market and facilitate financial stability.

What is the meaning of the “Powell + Brainard” combination?

Although Powell’s Federal Reserve turned the tide and enabled the United States to lead the economic recovery in advanced economies; the Federal Reserve became an income and raceThe political bullseye of inequality—quantitative easing has exacerbated income inequality and pushed up the prices of stocks and other assets.

Wang Dan pointed out that the position of vice chairman in charge of monetary policy has no real power, and emphasizes a higher theoretical level. The appointment of Brainard essentially reflects the Democratic Party’s emphasis on identity politics and climate change issues. But if a “player” with this background is elected as the chairman of the Federal Reserve, it may cause greater controversy in Congress. In contrast, Powell is more able to represent the interests of American business, and considers issues more from maintaining market efficiency, followed by fairness. And Brainard’s emphasis on labor protection is likely to hurt business interests. The appointment of Powell shows that the Biden administration pays more attention to market efficiency.

CICC Macro believes that, first of all, Brainard is a consistent “hardliner” in terms of financial supervision. Secondly, in terms of monetary policy, Brainard puts more emphasis on full employment and is more tolerant of inflation. Brainard pays more attention to the welfare of “marginal” groups in society and advocates not rushing to raise interest rates until more inclusive progress is made in employment recovery. In terms of inflation, Brainard played a vital role in the Fed’s formulation of the average inflation target system, and she was also one of the core officials who pushed for the average inflation target system.

CICC’s further analysis stated that the partnership between Brainard and Powell is more of a political trade-off. Powell agrees with a moderate relaxation of financial supervision. In the face of rising inflation, his monetary policy attitude may turn “eagle” at any time. Brainard is the exact opposite. She prefers to implement the Democrats’ “strict supervision” concept, and she also hopes to be more tolerant in terms of employment. Now that US inflation is exceeding the standard, Brainard acquiesced in the Fed’s suppression of inflation, which may also be due to the need to complete Biden’s mission. Once inflation drops slightly, for example, the year-on-year growth rate of CPI drops to 5% or below, Brainard is likely to sing the “pigeon” again. From this perspective, the Fed’s monetary policy still faces major variability.

What kind of Fed will Biden reshape?

On the whole, the news that US President Biden chose Powell to re-elect the chairman of the Federal Reserve gave the entire Wall Street a sigh of relief.

After Powell’s nomination was announced, the trend of asset prices reflected the above logic to a certain extent. U.S. bond interest rates went up, the U.S. dollar index went up, and U.S. stocks first rose and then fell. The higher US dollar interest rates and exchange rates reflect the market’s pricing of interest rate hike expectations.

Although the inflation level has repeatedly “exploded”, another indicator of the Fed’s attention-employment-is still not satisfactory. The number of non-agricultural employment in the United States increased by 531,000 in October, and the unemployment rate further fell to 4.6% After the unemployment subsidy was stopped in September, the labor force did not actively return to the job market, and the labor participation rate was still low (61.6%). In the context of labor shortages, wage growth remained high (4.9%). As of October, the U.S. employment population is still about 4 million fewer than before the epidemic.

According to the new framework adopted in August 2020, Fed officials stated that they plan to wait until the economy Increase interest rates when full employment is achieved and the inflation rate reaches 2% and may slightly exceed this level. Although many Fed policymakers believe that the current inflation rate of more than 2% is temporary, the market now expects that the Fed may need to be earlier than expected next year Raising interest rates to curb price increases. This may result in the Federal Reserve taking action to raise interest rates before the employment level in the United States is restored.

However, the German Commerzbank senior Economist Zhou Hao said in an interview with the news that the Fed will try to avoid the issue of inflation, or it will try to attribute inflation to structural reasons. The biggest advantage of Powell’s appointment is that it gives the market clear expectations. Powell also gave the market before. Full dovish expectations, which means that the leaders’ ideas are the same, that is, they will not raise interest rates as a last resort.

In the context of 6”, the possibility of the Federal Reserve speeding up its bond purchases is not ruled out. Although the specific pace remains to be seen, the fastest possibility is to increase the monthly bond purchase quota from the current 15 billion U.S. dollars to 30 billion U.S. dollars. As a result, the end of bond purchases will be moved forward from June to March next year. For the market, the marginal change in liquidity may be a focus of attention.

A review of history by Industrial Research says that the Federal Reserve under the Democratic presidency seems to be more hawkish, especially Volcker, nominated by Democratic President Carter, is shining through history because of the sharp increase in interest rates to overcome hyperinflation. Clinton’s period also had a relatively high Interest rates have maintained a decade of economic expansion. Whether Biden will reshape a more “hawkish” Fed is worth watching.