Fed Watch

Biden Administration Announces New Nominees for Fed, March Hike Looking More Likely, Powell Calms Balance Sheet Worries

Biden Administration Announces New Nominees for Fed, March Hike Looking More Likely, Powell Calms Balance Sheet Worries

The Biden Administration announced their nominations for the Federal Reserve this morning. While the administration disappointed progressives re-nominating Powell, they appear to have aimed to please them with this round of nominees. Sarah Bloom Raskin will be nominated for the new Vice Chair for Supervision. She has ample experience as Deputy Treasury Secretary and was also previously a Governor and voting member on the FOMC.

Like Lael Brainerd, she has been fiercely advocating that financial regulators should be more proactive in trying to tackle climate change. So, the battle lines are being drawn over this bout of nominations because they suggest that the Fed might be thinking about more than just the dual mandate and supervision. Powell also recently said in his testimony that climate change in supervision will likely be a priority.   We’ll keep you posted on this issue as it develops. The other two nominees Lisa Cook and Phillip Jefferson also have professional experience at the Federal Reserve.

If confirmed, Lisa Cook would be the first African American female to be a Fed Governor in history. Additionally, if Bloom Raskin and Cook are confirmed, there will be for the first time a majority of women on the FOMC with Raskin, Cook, Brainerd and Bowman occupying four of seven Board of Governors seats.

Inflation came in hot again this week at an annual rate of 7% which was the fastest rate since 1982. Powell’s confirmation testimony made clear that tightening would likely occur and getting inflation under control is a priority. He also provided some comfort when promising that any shrinking of the balance sheet would be handled in a dainty way. Lael Brainerd let markets know just how hawkish the Board had grown this week as well when she commented on inflation and a prospective lift-off in March.

The Fed has been trying its best to communicate effectively but a lot of uncertainty still exists. The minutes from the December meeting introduced the uncertainty around how many rate hikes will occur and whether or not they will potentially be larger than .25%. The pace and aggressiveness of how quickly and by what methods the Fed will tighten are up in the air at this point.

Powell seemed to assuage markets a bit with his comments during his confirmation.  When he was questioned about why the Federal Reserve got inflation wrong, he said the chaos in supply chains was largely to blame. Next week we’ll zoom in a bit on how the Fed’s use of data has changed over the years.

The Federal Reserve making a policy mistake is considered the primary downside risk for 2022. It will be a tug of war between the strength of the economy and earnings and how well the Fed handles what may be one of its most difficult challenges in history. The tapering of monthly purchases of $80 bn of Treasuries and $40 bn of MBS began in November, and was accelerated in December. The Fed is currently purchasing $60 billion of securities a month, half of the original level of purchases. The Fed will be done with asset purchases in mid-March 2022 at this pace.  The benchmark yield on the 10-Year Yield was 1.782%.

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