There likely will be no nasty tweets in the middle of the night excoriating the Federal Reserve to lower interest rates. Nor will its officials be called “boneheads” should their actions not be in keeping with President Joe Biden’s wishes.
But that doesn’t mean the U.S. central bank won’t face pressure as it looks to navigate its way through a new administration.
Challenges ahead include the coronavirus pandemic, as well as demands for a more inclusive economy and a stronger approach toward social issues, such as racial equality and climate change.
There also will be an interesting new dynamic, where Treasury Secretary nominee Janet Yellen will, if confirmed, have the added benefit of being a former Fed chair.
Broad monetary policy changes are unlikely ahead. Biden likely will enjoy the same low interest rate environment that the last two holders of the office have held.
For his part, Biden won’t be nearly as vocal as Donald Trump was when the ex-president hectored the Fed for even lower rates. Trump often resorted to schoolyard name-calling as he pushed for the negative rates that Japan and some European countries employed in an effort to stoke growth.
But all presidents watch the Fed closely, and Biden won’t be an exception as he looks to get through the current crisis.
“He will respect the office,” said Christopher Whalen, a finance veteran and head of Whalen Global Advisors. “Biden’s an old-fashioned guy
“He’s an anachronism, really,” Whalen added. “It’s good that we have him. He’ll serve as a brake on many of the extreme people in his party.”
Most everyone in public office likes low rates, and Biden won’t be an exception.
His party, though, has a vocal wing that will be pushing hard for big answers to the pressing social issues of the day, and it won’t stand for a Fed that prioritizes the low rates that Wall Street loves without trying to do something more to aid Main Street.
Bigger policy questions
In a case of potential mission creep, the Fed in recent months has been pushed to use its policy levers to help with racial economic equality, and to assist in the battle against climate change.
That comes following an extraordinary year in which the central bank rolled out never-before-used emergency lending programs to help those impacted by the Covid-19 damage.
So while the Fed during the Biden administration can expect to face less overt attacks, it still will be under various levels of pressure.
“The Fed can relax a bit as far as having to deal with hostile, nasty tweets is concerned,” said George Selgin, senior fellow and director of the Center for Monetary and Financial Alternatives at the Cato Institute. “I’m sure we’ll see a more cordial relationship between Fed officials and the administration, particularly the president.”
“That’s clear. However, it must be said that that doesn’t mean the Fed isn’t going to face different kinds of pressure from the administration to alter its policy orientation,” Selgin said.
Fed Chairman Jerome Powell routinely faces questions during his Capitol Hill appearances on what he and his colleagues can do regarding climate and inequality.
With its focus on monetary policy and bank regulation, the Fed has a limited range of tools in that regard, but has implemented some measures to tackle those issues.
Most prominently, several months ago the policymakers changed their approach to inflation, agreeing to let it run above the traditional 2% target for a period of time — even if the jobless rate runs below what normally would be considered full employment.
That move was in furtherance of an “inclusive” employment mandate that seeks to ensure the benefits of low joblessness spread across the racial and income divide.
On climate, the Fed has joined the Network for Greening the Financial System, a global central bank consortium aimed at addressing climate change. There’s also been talk of the Fed directing the banks it oversees to include climate loss provisions in stress tests.
For Selgin, some of the moves about expanding the Fed’s responsibilities are part of “a disturbing trend in my opinion of trying to make the Fed responsible for achieving ends that are better achieved by other means.”
Still, the idea that the Fed can operate free of political influences is nice in a theoretical sense, but largely impractical.
Teaming with Treasury
Capitol Hill veteran Ed Mills, who analyzes Washington policy and politics for Raymond James, recalled the sentiment of former Fed Chairman Alan Greenspan, who felt the organization is “independent within the federal government, but not independent of the federal government.”
“I think we’re really about to see that dynamic play out,” said Mills, who sees tight coordination coming between the Fed and its former Chair Yellen, who is expected to be confirmed Thursday as Treasury secretary.
“Policy coming out of Treasury and policy coming out of the Fed is going to be the most aligned we’ve ever seen,” Mills said. “The focus is going to be almost completely on economic recovery.”
“What I have always seen the Fed do is respond to the political environment that is in D.C.,” he added. “Above all else, what the Fed wants to do is to keep as much power as they can, and the way in which they keep their power is to keep the party in charge happy.”
After Trump was able to name four appointees to the seven-member board of governors, Biden only will get to nominate for one open position that his predecessor notably stumbled numerous times in trying to fill.
Mills expects the appointment will be “a message” to the current Federal Open Market Committee about his intended direction.
There’s considerable expectation that the appointee could be a minority and regardless will be someone aligned with dovish monetary policy, as well as one willing to push toward meeting broader social mandates.
But Biden and the Fed also have another major constituency to satisfy – the financial markets, which will rebel if they find the pick unacceptable.
“Can we separate politics from substance? That’s the real challenge for the Fed and Biden,” Whalen said.
“All these guys in the Biden group have to be careful, because I think we’ve spent a lot of our credibility when it comes to the dollar,” he said. “If we’re not careful, the market is going to give us a big surprise.”