Jerome Powell’s poisoned chalice

US president Joe Biden has nominated Jerome Powell for a second term in charge of the Federal Reserve. But it could prove a “poisoned chalice” for Powell. Here's why.

US president Joe Biden has nominated Jerome Powell for a second term in charge of the Federal Reserve, ending weeks of speculation about the future direction of the world’s most important central bank. Left-wing democrats had pushed for Lael Brainard, a member of the Fed’s board of governors who has taken a tough stance on financial regulation, to succeed Powell, a Republican, in the post. Biden has instead nominated Brainard to be vice chair, keeping Powell in place for another four years. Powell will face confirmation hearings in the Senate before his new term begins in February 2022.  

Biden has made the right call, says Bloomberg. The Fed needs continuity as it conducts the delicate task of unwinding crisis-era monetary policy. A new boss would have raised the risk of miscommunication and market upsets. While Brainard takes a stronger line on financial regulation, the pair don’t seem to have any major disagreements about monetary policy. The risk was rather that Brainard, a Democrat, would have been perceived as “partisan”. The last thing the Fed needs is to get sucked into febrile party-political spats. 

Powell’s second term could prove a “poisoned chalice”, says Desmond Lachman for The Hill. Last year he threw the kitchen sink at financial markets to stave off disaster from the pandemic. That has helped send US inflation up to 6.2%, the highest in three decades. US stocks are at valuations “experienced only once before in the past 100 years”. That will put Powell in a bind next year: either he lets price rises rip – and goes down as the Fed chair who presided over the return of inflation – or he raises interest rates earlier than expected, bursting the asset-price bubble.  

Fool me twice? 

Meanwhile in the UK, Bank of England governor Andrew Bailey is “beginning to look beleaguered”, says Martin Vander Weyer in The Spectator. He appeared to suggest interest rates would rise earlier this month, only to surprise traders when they didn’t. The incident caused unnecessary market turmoil. “There’s nothing wrong with ambiguity so long as markets are convinced the central bank is ahead of the game. But in this case the governor just looked lame… and the Bank’s authority… correspondingly diminished”. 

After betting wrongly on an interest rate hike in November, markets are pricing in a hike at the Bank’s next meeting on 16 December. One of the reasons the Bank held interest rates at 0.1% was because it was waiting to see what impact the end of the furlough scheme would have on employment. Strong employment data since then has allayed those concerns, while news that annual UK inflation hit 4.2% in October has raised the odds of a hike. It remains to be seen whether the Monetary Policy Committee will disappoint markets a second time. 

Recommended

Coronavirus has had less of an impact on UK property than you might think
Property

Coronavirus has had less of an impact on UK property than you might think

The UK property market looked to have been turned upside-down as people abandoned city flats to work from more spacious homes in the country, while of…
29 Nov 2021
Index-linked bonds could prove a costly inflation hedge
Government bonds

Index-linked bonds could prove a costly inflation hedge

Index-linked bonds are designed to keep pace with inflation, but at these prices you are locking in a loss
29 Nov 2021
Three safe bets on the growing online gambling sector
Share tips

Three safe bets on the growing online gambling sector

Professional investor Aaron Fischer, creator of the Fischer Sports Betting and iGaming ETF, picks three of his favourite online gambling stocks.
29 Nov 2021
Why Britain’s supermarket chains should take over Europe
Retail stocks

Why Britain’s supermarket chains should take over Europe

Britain’s supermarkets should not sit back and wait for a takeover bid, says Matthew Lynn. They should launch their own for the continent’s chains.
28 Nov 2021

Most Popular

Don’t worry about the global population explosion – it’s unlikely to happen
Investment strategy

Don’t worry about the global population explosion – it’s unlikely to happen

One of the many things we are taught to worry about is the fast-rising global population. But in fact, says Merryn Somerset Webb, the opposite is tru…
15 Nov 2021
Four of the best new investment trust listings
Investment trusts

Four of the best new investment trust listings

Diversify your portfolio and benefit from rising dividends with these four new investment trusts coming to the market soon.
15 Nov 2021
Is it time to remortgage your home?
Mortgages

Is it time to remortgage your home?

Banks are already starting to prepare for higher interest rates, says Alex Rankine. Should you, too?
23 Nov 2021