Shelton Confirmation Likely, Powell Opines on Vaccine

Vito J. Racanelli

On Thursday afternoon, Alaska Senator Lisa Murkowski announced she would support President Trump's controversial nominee for an open Fed Governor position, Judy Shelton. Christopher Waller, another but less controversial nominee, who was formerly Research Director at The Federal Reserve Bank of St. Louis, will likely be confirmed later. However, Senate majority leader Mitch McConnell has not yet moved Waller’s vote to the floor, as he has for Ms. Shelton. This all but assures her confirmation before the Senate as soon as next week. Shelton's past espousing of unorthodox views like opposing Federal deposit insurance for bank deposits, advocating a 0% inflation target, devaluing the US dollar to promote domestic industries, and denying that there was any legislative intent to make the Federal Reserve an independent agency led initially to fierce bipartisan opposition to her nomination. She had to sign a pledge not to devalue the US dollar to gain Senator Pat Toomey's support.

Jay Powell made an appearance with two of his foreign counterparts, ECB Chairman Christine LaGarde and Bank of England Gov. Andrew Bailey. Powell stuck to his well-known talking points of the need for more fiscal stimulus but also said it was too early to know what effects Pfizer's recent vaccine announcement would have on the path of the US and global economy. "From our standpoint, it's just too soon to assess with any confidence the implications of the news for the path of the economy, especially in the near-term," he said after mentioning that "The next few months could be challenging" due to the pace of rising coronavirus cases. He stated that the virus continued to be the primary risk to a continuation of the economic recovery.

In other Fed news, because the US Senate hangs in the balance, so does the fate of several of the agency's coronavirus emergency lending measures; Pat Toomey (R-PA), who will become Senate Banking Chairman should the GOP keep control, favors letting the programs expire. Sherod Brown (D-OH) would almost certainly favor extending them. The Trump administration has opposed publicly the extension of the Municipal Liquidity Facility, which provides short-term loans to state and local governments that have been particularly cash-strapped since the pandemic began. For its part, the Fed would likely lobby to keep the programs in place due to the deteriorating healthcare situation.

Another source of partisan consternation is the Community Reinvestment Act's fate, which Fed Governor Lael Brainerd addressed in a speech a few days ago. The reversal of recent changes to this law will likely be a key priority of an incoming Biden administration. In what was perhaps a friendly signal to the President-Elect, the yearly Financial Stability Report included a section on Climate Change as a key risk to financial stability in the future for the first time. Governor Randall Quarles also told the Senate Banking Committee that the Federal Reserve had sought membership in the Network for Greening the Financial System (NGFS). "We have requested membership. I expect it will be granted," said Quarles before the committee, "I suspect we could probably join before the spring."

Notes from the most recent Fed Meeting indicate that the Governors discussed raising MBS purchases to $120 billion a month if the virus hampers economic momentum enough . However, for the time being 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 0.90% up from 0.82% last week.

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Vito J. Racanelli
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