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What Jerome Powell must do next as Fed chairman

OF ALL AMERICA’S many job openings, this was the most important. On November 22nd President Joe Biden announced that he would renominate Jerome Powell as chairman of the Federal Reserve when his current term expires in February. After a drawn-out selection process, it was reassuring that Mr Biden at last made the obvious choice, opting for a steady pair of hands at a time of economic danger. Mr Powell must confront two broad challenges. The first, and by far the most pressing, is how to tame inflation, now running at its highest rate in more than three decades (see next story). Mr Powell was rightly commended for presiding over a strong response to last year’s pandemic-induced slowdown. Unwinding stimulus will be more treacherous. Before raising interest rates, Mr Powell has all but pledged to halt the Fed’s monthly purchases of bonds that helped reinvigorate the economy over the past 20 months. The Fed has started to reduce, or taper, its purchases this month, but it is only on track to stop them altogether by June 2022. This means that a first rate increase is at least half a year into the future. The immediate question for Mr Powell, then, is whether to taper more quickly. As it stands, even if the Fed is reducing its purchases, it is still pumping cash into the financial system when the stockmarket is near record highs. Moreover, an earlier completion of the taper would give the Fed more options. It need not commit itself to raising rates early next year, but it would be wise to have that on the menu. Yet it would take courage for Mr Powell to do this. “If suddenly you have a new taper schedule and, critically, it has clear implications for rates, you are rolling the dice as to the market reaction,” says Krishna Guha of Evercore ISI, an advisory firm. But sticking to gradual tightening as inflation gallops higher is just as big a gamble. The other big challenge for Mr Powell is how to define the central bank’s role amid ever-increasing demands on it. The alternative candidate to lead the Fed was Lael Brainard, a governor on the Fed’s board who was favoured by the progressive wing of the Democratic Party. Mr Biden has nominated her to be vice-chairwoman, giving her more influence. She and Mr Powell have differing views on three questions that are now coming to the fore. First, under Mr Powell the Fed has chipped away at the most onerous rules erected around the banking system after the global financial crisis of 2007-09. This deregulation earned Mr Powell the enmity of left-wing Democratic politicians, and Ms Brainard regularly voted against it. Now that she is second only to Mr Powell, the signal is that regulation may tighten. On climate, Mr Powell has said that global warming poses economic risks but is not a big factor in the central bank’s own decisions. That is defensible: the Fed should leave the environment, in the main, to other parts of the government. But Ms Brainard wants the climate to figure more prominently in the Fed’s calculus. Mr Powell must accommodate that demand. Similarly, Ms Brainard has called for the Fed to launch a “central bank digital currency”, to ensure that the dollar remains the dominant global currency. Mr Powell’s position is that he wants the Fed to study the matter further, saying that it is better to be right than to be first. At least he need not worry about being first: China is already well ahead of America in the digital race. Mr Powell will, in short, have a crowded agenda over his second term. At the top of it is quelling inflation without crashing the economy. Time to get to work. ■

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