Jerome Powell’s poisoned chalice

Jerome Powell (right) will lead the US central bank for another four years from February 2022

(Image credit: © JIM WATSON/AFP via Getty Images)

What do Turkey’s tumbling lira and America’s oil raid have in common?

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.

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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.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.