Powell Comments Prompt Mini-Tantrum, Vice Chair For Supervision Likely Between Bostic, Raskin and Cordray

FS Insight Team

The financial media is abuzz with whether Lael Brainerd or Jerome Powell will be the next Chairman of the Federal Reserve. We have been reporting on the issue as political trade winds have blown and despite Powell’s steadily diminishing chances, we’d say that as of right now it looks likely that he will be reconfirmed. Part of this is because of the confirmation math. Powell was confirmed in 2018 with 84 votes and 68 of those Senators are still in their office.

So, during Powell’s comments two things seemed to roil markets and the diligent chorus of Fed Watchers and also seemed to contradict what seemed like common logic. Despite the risks posed by the Omicron variant, the Fed will still be discussing an accelerated taper timeline.

Most had thought, based on recent history, that the exacerbation of the healthcare situation and another potential macroeconomic risk would lead to more accommodation. Instead, a newly nominated Powell appeared to reflect the sentiments of the more hawkish elements of his Governors.

Another wrinkle in the testimony is that Powell said we should probably ‘retire’ the term ‘transitory’ when explaining inflation. Given his sticking to that term like glue over the past months in the face of rising worries and white-hot numbers in the inflation data, it took some people off-guard and suggested that Powell may take a more hawkish approach than folks had previously grown accustomed to.

In another surprise, Lael Brainerd was nominated to Vice Chair instead of the position that wields the most supervisory authority, the Vice Chair for Supervision. While Powell did not end up being the offering to progressives they appear to have gotten a consolation prize specifically intended to appease Elizabeth Warren and the progressive wing who have chided Powell for elements of the regulatory framework being rolled back on his watch.

Who will get the nod for the crucial position? It appears that Raphael Bostic, Richard Cordray and Sarah-Bloom Raskin are amongst the top candidates. Mrs. Raskin has already been a Fed governor and is the wife of Congressman Jamie Raskin. Richard Cordray is the former Attorney General of Ohio (an advantageous resume given Senator Brown’s committee leadership) and also was the first head of the Consumer Financial Protection Bureau.

The unique agency was the brainchild of Elizabeth Warren herself and was formulated by the Dodd-Frank Act and was given unprecedented power and independence to protect consumers that was subsequently chipped away by the Trump Administration through Mick Mulvaney, who headed the agency after Cordray. So, this bureaucratic bone to pick has significance for the progressives and will allow them to bolster elements weakened by the Trump Administration.

In Washington, they used to say “hands off my Dodd-Frank!” as the act is considered one of the pinnacle legislative achievements for Democrats since the New Deal. Elements of it certainly helped uphold financial stability back in March 2020 and having a well-capitalized financial system was worth quite a lot during that dire hour.

The tapering of monthly purchases of $80 bn of Treasuries and $40 bn of MBS began in November, with a reduction of $10 bn and $5 bn respectively. The Fed will discuss an accelerated timeline at its December meeting which will occur on December 14th and 15th. The benchmark yield on the 10-year settled down a bit from last week at 1.356%.

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