Yellen Confirmed, New Admin, New Challenges For Fed

The Federal Reserve is supposed to be an apolitical agency, but there is little doubt that Federal Reserve Chairman Jay Powell is pleased he will no longer be publicly heckled by a sitting President. However, that doesn’t mean there won’t be any pressure coming at the Fed from 1600 Pennsylvania Avenue, or from the Treasury building that is right next door. In many of his post-pandemic legislative hearings, Powell has been repeatedly asked what the Fed can do about wealth inequality and climate change.

As a nod to both those concerns, the Fed introduced its AIT framework which lets inflation run longer with the hopes that economic gains will be distributed more comprehensively and it has recently joined the Network for Greening the Financial System, (NGFS) which already elicited a hostile response from Congressional Republicans.

One of the problems is, of course, that the Fed’s policy tools and mandates are limited and mostly blunt monetary instruments not at all tailored to the nuanced and specific policy goals that some Democratic members of Congress seem to have in mind. You can generally count on the Fed doing enough to keep lawmakers off their back while showing some deference, but the incredible demands of our time may strain this previously effective balancing act.

The issue of the Fed becoming the ‘the lender of first resort, rather than of last resort’ even held up the last stimulus package. The Fed will try to keep itself out of political arguments and both sides will try to drag it in. Keeping the traditional role of the Fed will also likely be appealing to some centrist Democrats, so we wouldn’t get too crazy about proclaiming the brave-new era of Modern Monetary Theory (MMT) just yet. Opposition to the Shelton nomination is a good analog; anyone or anything too far from the center is unlikely to succeed in the nomination process for this administration as well.

To be sure, preliminary battle lines are being drawn for a consequential ideological fight over the place of the Fed in bolstering a post-pandemic economic recovery, as well as how involved they should be in partisan policy priorities. We will keep you abreast as to developments in this showdown as they occur. Similarly, talk has been rising about tightening earlier than current consensus would indicate.

All in all, we think that minus the expired CARES Act programs, the Fed’s actions will remain mostly the same in 2021. They are being very careful to communicate clearly and well-in-advance to markets. Additionally, there may be some positives and synergies that help markets coming from the combination of Yellen’s known and steady hand on Treasury along with Powell’s so far stellar performance.

Janet Yellen is the first Treasury Secretary that is also a Fed Chair since Jimmy Carter’s nomination of then Chairman G. William Miller to Treasury which of course led to Paul Volcker’s ascension to Chairman. She got out of committee with unanimous approval. A lesser-known approval process for the twelve sitting Federal Reserve Regional Bank Presidents and their deputies was also completed on Thursday, which according to Governor Lael Brainerd was quite an undertaking and absorbed a lot of the agency’s attention of the past few weeks.

Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.1% unchanged week over week.

Disclosures (show)

Get invaluable analysis of the market and stocks. Cancel at any time. Start Free Trial

Articles Read 2/2

🎁 Unlock 1 extra article by joining our Community!

You are reading the last free article for this month.

Already have an account? Sign In

Want to receive Regular Market Updates to your Inbox?

I am your default error :)