Janet Yellen gets the chance to shape the Fed, this time from the outside

Janet L. Yellen has devoted most of her professional life to the Federal Reserve. She has held her most senior positions, including as president of the Federal Reserve Bank of San Francisco, on its Washington-based board of directors, and as the first female president of the central bank. When President Donald J. Trump decided to replace her in this role in 2017, she was deeply disappointed.

Now, as Secretary of the Treasury, Ms. Yellen has another chance to shape the future of the institution. She will be a critical voice in deciding who should lead the central bank in what some see as a unique opportunity to remake an institution that guides the US economy and helps regulate its biggest banks.

Jerome H. Powell’s tenure as president, which began in 2018 after Mr. Trump chose him to succeed Ms. Yellen, ends in February. Positions for the Fed’s vice president and chief banking regulator will also be up for grabs soon, and a post on the Fed’s board of governors is already vacant. Assuming officials leave when their terms are over, the Biden administration might, in quick succession, be able to appoint four of the Fed’s seven board members, powerful policymakers who have constant votes on monetary decisions and exclusive regulatory authorities.

Many progressive Democrats are pushing to oust moderate Mr. Powell and replace him with a candidate who focuses on tough financial regulation, climate change and digital money – most likely Fed Governor Lael Brainard. Mr. Powell’s supporters see him as a champion of full employment and would like him to be seen as a sign that competent leadership is rewarded.

It’s unclear exactly where Ms Yellen’s preferences lie, but it is common knowledge that she was unhappy when Mr Trump broke a tradition of renewal in her case.

Many who would like to see Mr Powell replaced are playing down the role she will have in shaping President Biden’s decision. But Treasury secretaries have traditionally been at the heart of the Fed’s selection process, helping to advise and guide the president to a choice that will be welcome on Wall Street and in the Senate, which must confirm board candidates. from the Fed.

Ms. Yellen’s views will carry significant weight in the deliberations, determining both who is considered and the end result. Discussions about the choice are also taking place between Brian Deese, director of the National Economic Council; Ron Klain, Chief of Staff to the President; and Cecilia Rouse, chair of the Council of Economic Advisers, according to people familiar with the proceedings. Mr. Biden will have the last word.

Conversations about who should lead the institution could stretch into October, as they have in past decisions by the Fed’s leadership. But speculation about who will win the top positions is already rampant.

The Treasury Department declined to comment.

The argument to replace Mr. Powell, a Republican who was appointed Fed governor by President Barack Obama, has to do with things other than traditional interest rate policy. Democrats generally say he has done a relatively good job of guiding the economy with the help of monetary tools.

Under Mr. Powell’s leadership, the Fed parried Mr. Trump’s push to cut rates when the economic environment was strong, and it responded quickly and effectively to the economic collapse triggered by the pandemic. The Fed is also credited with averting a financial crisis early last year as key markets grabbed. Mr. Powell’s Fed overhauled its entire policy framework last year to focus in a more concerted manner on creating a strong labor market that extends its benefits to as many people as possible.

Ms. Yellen has repeatedly praised Mr. Powell’s performance.

“He’s doing extremely well,” she told the New York Times in early 2020, discussing Mr. Powell’s conduct as he was attacked by Trump’s White House.

But Mr. Powell has opponents among the more progressive groups. He often relied on the vice president of the Fed – appointed by Trump – for regulatory oversight, regularly voting for adjustments to banking and financial rules that quietly undermined post-crisis financial reforms. He has also been criticized by climate-focused groups for being too slow to elevate the Fed’s role in controlling environment-related finances. Climate activists plan to protest at the Fed’s annual symposium this year in Jackson, Wyo., And Mr Powell “will be a key target,” Thanu Yakupitiyage, US communications manager at 350.org, said in an e -mail. The group is one of the main organizers of the event.

Regulation and the climate are the main reasons some Democrats are lining up behind Ms Brainard, the Fed governor and another top candidate. Ms Brainard, who also has a good relationship with Ms Yellen, has opposed the Trump administration’s efforts to ease banking supervision by strongly opposing a series of regulatory decisions, often issuing meticulous statements detailing where they have taken. gone bad.

She is considered a powerful and effective Fed governor who has played a key role in shaping pandemic response programs. And although they are closely aligned with monetary policy, she distinguished herself from Mr Powell by pushing for a bigger role for the Fed on climate issues and a more proactive stance towards the development of a digital currency. .

It could also help anchor a management team that could usher in a new era for the Fed, its supporters argue.

Andrew Levin, a former Fed economist, is one of many people pushing the idea for the White House to appoint Ms Brainard as president and Sarah Bloom Raskin, a former senior Fed and Treasury official, to the regulatory post on higher from the central bank. Mr Levin, now a professor of economics at Dartmouth, would also support the appointment as vice president Lisa Cook, a professor at Michigan State University who has studied racial disparities and labor markets and has worked to improve the diversity in economics.

This group would be diverse, compared to the typically white, male executive team of the Fed. The Fed has been run by a woman – Ms. Yellen – for just four of its nearly 108 years. If she were named vice president, Ms Cook would be the highest ranked black woman in her history.

“It’s a comprehensive deal that should work together,” Mr. Levin said. “This administration wants to send the message that it cares about everyone who falls through the cracks.”

These are not the only names proposed for key positions. William Spriggs, chief economist at the AFL-CIO (and himself a fan of keeping Mr Powell at the top), is also on some vice president or governor lists.

Progressive groups have spoken to lawmakers arguing that Mr Powell should be replaced, and Major Democrats support some of their arguments.

“My concern is that time and time again it has weakened regulations here, it has led the Fed to relax there,” Senator Elizabeth Warren, Democrat of Massachusetts, told Bloomberg TV this month. “We need someone who understands and uses both the tools of monetary policy and the tools of regulation to keep our economy safe.”

But it remains to be seen whether such objections will kill Mr Powell’s chances. Powerful Democrats listening to the issue, like Senator Sherrod Brown of Ohio, have not made a definitive indication that they will vote against Mr. Powell if he is re-elected. Even if Mr Powell is selected, new faces in other key positions could inject diversity and expertise on issues such as climate and financial surveillance into the senior ranks of the Fed.

And another argument works in Mr. Powell’s favor: tradition.

When Mr. Trump replaced Ms. Yellen, he overturned a long-standing practice that Fed chairmen were reappointed if they had done a good job, regardless of their political background. The tradition is in part a nod to the fact that the Fed is supposed to be independent from partisan politics.

Democrats and their allies were furious.

The move was “apparently rooted in a simple-minded partisanship that demanded that a Republican president replace a Democrat appointed as Fed chairman,” wrote Josh Bivens, research director at the Typically Liberal Institute for Economic Policy, in a press release at the time. “This move breaks a long-standing standard of not elevating partisanship over competence when choosing Fed chairmen.”

Mr Bivens, in an email last week, said the standard “is quite broken”, but the decision to replace a Fed chairman should still hinge on whether the incumbent has done any good. work. There are good reasons to keep Mr Powell on the basis of his monetary policy at a time of heated debate over the direction of Fed policy, he believes.

Ms. Yellen remains aware of the tradition. She reacted sadly in 2018 to Mr. Trump’s decision to replace her, saying in an interview with CBS News that she made it clear that she would have stayed and that she felt a “sense of disappointment.”

“It is common for people to be returned to their positions by the presidents of the opposing party,” she said.