Biden nominates Powell for second term as Fed chief, opting for continuity, and names Brainard vice chair

President Biden on Monday nominated Federal Reserve Chair Jerome Powell, a Republican, for a second four-year term, tapping the battle-tested centrist who helped lift the U.S. economy out of the COVID-19 recession and enjoys strong bipartisan support.

Biden also nominated Democrat Fed Governor Lael Brainard as vice chair of the Fed's Board of Governors, succeeding Republican Richard Clarida.

The decision caps a weekslong race between Powell and Brainard for the nation’s top economic post. Biden reportedly considered Brainard more seriously in recent days under pressure from progressive Democrats after Powell initially seemed a shoo-in. Brainard has taken a tougher stance than Powell on banking regulation.

“At this moment both of enormous potential and enormous uncertainty for our economy, we need stability and independence at the Federal Reserve,” Biden said at the White House Monday afternoon. “Jay has proven the independence that I value in the Fed chair.”

During the Trump administration, Powell “stood up to unprecedented political interference and in doing so successfully maintained the integrity and credibility of this institution,” Biden added. “It's just one of the many reasons why Jay has support from across the political spectrum.”

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The nomination comes at a critical juncture for the reopening economy, with inflation notching its biggest jump in inflation in three decades last month even as growth is slowing from its torrid pace earlier this year amid COVID-19 spikes driven by the delta coronavirus variant.

Stocks surged after the news, with the Dow Jones industrial average climbing more than 300 points by mid-afternoon but the index gave back most of the gains to close up just 17 points at 35,619.

Although investors value the stability Powell brings, the prospect that he may raise interest rates more quickly than Brainard hurt technology and communications stocks, says Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

Still, "Replacing Jerome Powell would have sent a psychological signal that the progressives are in power, which would have been unsettling to markets," says George Ball, chairman of Sanders Morris Harris, a Houston-based investment firm.

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The next Fed chief faces the delicate task of raising the central bank’s key short-term interest rate from near zero to fight inflation without derailing a recovery that remains solid but faces hurdles such as lingering infection waves, supply chain bottlenecks and worker shortages.

“We’re at an inflection point from a policy perspective, and continuity is very important,” said Tom Porcelli, chief U.S. economist of RBC Capital Markets. Biden is expected to fill three more vacancies on the Fed’s board of governors by early next year

A former investment banker, private equity executive and lawyer, Powell, 68, was appointed to the Fed’s board of governors by President Barack Obama in 2011 and nominated as chair by President Donald Trump in 2017. His current term expires in January.

Powell has broad support from Democrats and Republicans alike in Congress and faces a far easier confirmation in the Senate than Brainard, says Ed Mills, Washington policy strategist at Raymond James.

“He will be confirmed with a strong vote,” Mills says.

If Powell had replaced the Fed chair during an uncertain economy, “he owns the economic outcome of that leadership change,” Mills says.

Democratic losses in this month’s elections, rooted partly in Biden’s sinking approval ratings amid a surge in inflation, likely solidified his choice of Powell, who may be perceived as more likely to aggressively fight inflation by raising rates next year, Porcelli says.  

It’s surprising, though, that Biden picked Brainard for the vice chair job rather than as vice president for supervision, replacing Randy Quarles, says Brian Gardner, chief Washington policy strategist for Stifel. The latter is more influential because it takes a leading role on bank oversight, Gardner says. 

Powell’s nomination renews a tradition of U.S. presidents retaining Fed chairs first picked by a president of the opposing party, a string that was broken when Trump tapped Powell over then-Fed Chair Janet Yellen in 2017.

Republican Fed governors are often viewed as more “hawkish,” or focused on raising interest rates to head off inflation, than as “dovish,” or intent on keeping rates low to spark the economy and job growth, while the reverse is true for Democrats. But that distinction has blurred in recent years.

In 2018, for example, Powell continued Yellen-led rate increases as the economy slowly improved after the Great Recession of 2007-09 despite vitriolic criticism from Trump. Powell, along with the rest of the Fed’s policymaking committee, abruptly halted the increases the next year amid sluggish growth and a tumbling stock market.

“His policies haven’t shifted” despite political pressure, Mills says.

In March 2020, as the pandemic triggered more than 20 million job losses, Powell acted swiftly. He spearheaded a sharp cut in the Fed’s benchmark short-term rate to near zero and a revival of the massive Treasury and mortgage bond purchases that followed the Great Recession to hold down long-term rates.

The following August, with inflation stubbornly below the Fed’s 2% target, Powell led a significant policy shift, with the Fed stating it would wait for inflation to pick up before raising rates rather than preemptively boosting them to stave off a jump in prices, as it has traditionally done. Brainard co-wrote the new approach.

If anything, Powell has elevated the goal of bringing millions of Americans back to work over inflation concerns. His tenure has been tainted by his monthslong insistence that inflation would be “transitory,” an assessment he recently modified, saying it could last longer than anticipated as supply chain troubles and workers shortages persist.

He also has presided over a trading scandal that led to the resignations of two regional Fed bank presidents.

Last month, the Fed said it would begin scaling back the bond purchases, and it’s slated to end them in June. The Fed is then expected to raise rates twice in the second half of 2022 as the economy reaches full employment, according to Fed policymakers’ forecasts.

Economists believe Brainard would have taken a similar approach. Although she has been wary of some rate increases, she has stood out for her support of lifting rates at times. In 2018, with the economy picking up, Brainard backed gradual rate increases but said they might need to be accelerated if inflation surged or some frothy financial markets overheated even more.

“I don’t see a difference in monetary policy” between Powell and Brainard, Porcelli says. Both, he says, would seek to lift rate twice next year, though Powell might be more likely to move earlier.

Investors, however, probably viewed Brainard as more likely to keep rates low to ensure the recovery doesn’t lose steam, says Tim Duy, economics professor at the University of Oregon and author of the FedWatch blog. That could have pushed stocks modestly higher, he says.

Brainard, 59, served as an economist in President Bill Clinton’s White House and at the Treasury Department under Obama before joining the Fed’s board in 2014.

Progressive Democrats backed Brainard in part because she has opposed the Fed's loosening of bank regulations enacted after the 2008 financial crisis. She also has been more vocal about planning for the risks that climate change poses to the banking sector.

Contributing: Michael Collins