The politics of an independent Fed

President Biden claims to have renominated Jerome Powell as Federal Reserve chair out of a high-minded desire to defend the independence of the Fed and secure broad bipartisan support for his choice at a time of political division. The truth is more likely that Lael Brainard, the preferred choice of Sen. Elizabeth Warren (D-Mass.), the so-called “Squad” of progressive House memeber and likely Biden himself, lacked the votes to be confirmed. Rather than breathing a sigh of relief that a Brainard chairmanship has been averted, senators who want a Fed that is free to fight inflation need to deny Brainard the vice-chairmanship as well.

Biden has made it clear what he wants from the Fed: easy money and an expansion of the Fed’s mandate to include climate change, among other progressive priorities. He left little to the imagination when announcing Powell’s renomination. After giving short shrift to the Fed’s mandate for price stability, he proclaimed Powell a maximum-employment man willing to use the Fed’s power to address the financial and economic risks associated with climate change. Biden then added insult to injury by giving Brainard equal billing and fawning over her credentials.

Brainard, for her part, has proven an eager ally in the Biden administration’s effort to repurpose the Fed.  A long-time Fed insider and persistent aspirant for higher office, she has staked out clear positions in support of easy money and explicit Federal Reserve involvement in climate change policy. Brainard led the charge to increase the Fed’s inflation target from its previous 2-percent ceiling to a more flexible 2-percent average inflation target over time, a revision that has proven critical to the Fed’s passive approach to rising inflation this year. She also took the lead in calling for the Fed to join the climate change fight, delivering three official speeches on the subject since Biden was elected president.

The campaign for a Brainard chairmanship almost succeeded. A well-timed leak of an obscure trading disclosure form at the Fed gave her candidacy some much needed momentum and brought her within a hair’s breadth of the nomination. That leak, which led to the resignations of Fed Presidents Eric Rosengren and Robert Kaplan and nearly cost Powell the chairmanship, should serve as a wakeup call to anyone still naive enough to believe that the Fed is free from serious political  machinations.

While Powell narrowly survived a no-holds barred campaign to unseat him, the contest for control of the Fed is just heating up. Powell will remain, but his allies are terming out and jumping ship. Richard Clarida’s term as vice-chair of the Fed ends in January and Randal Quarles resigned shortly after his tenure as vice-chair of supervision ended, even though his 14-year term on the board doesn’t expire until 2032. With the pre-existing vacancy on the board, this leaves Biden with three seats to fill on the Fed’s seven-member Board of Governors.  

Biden’s first new nominee to the Fed, Richard Cordray, appears to debunk the idea that Biden wants to keep the Fed above the political fray. Cordray is not just a progressive technocrat, he is a progressive politician who has repeatedly run for elected office, serving as a congressman, solicitor genera, and attorney general before an unsuccessful attempt to become the governor of Ohio. He was also Warren’s choice to be the inaugural head of the Consumer Financial Protection Bureau, a position for which he was confirmed after contentious hearings and despite nearly united Republican opposition.

Vigorous opposition to Cordray’s nomination to the Fed is a foregone conclusion. His nomination almost seems calculated to provide a Saule Omorova-like circus so that the more serious confirmation hearing of Brainard as vice-chair draws less attention. The strategy of nominating the unconfirmable radicals to pave the way for less flamboyant but equally radical nominees has worked for the Biden administration. Nominees like Omorova will fail, but opposing them gives Republicans the sense that they are doing something, while the Biden administration succeeds in confirming nominees who draw less attention.

Rather than fight Cordray and give Brainard a free pass, Senators who wouldn’t support her for the chairmanship should also oppose her elevation to vice-chair. Brainard is not just another governor on the board. She’s one of the most talented economic policymakers of her generation in the eyes of the progressive movement. She’s not up for just another position on the Fed’s board. She’s been nominated to join chairman Powell and New York Fed governor Williams as the third member of the Fed’s troika of key decision-makers. Senators who want an independent Fed free from the influence of Warren and the Squad would need to vote against her.

Keeping Brainard out of the Fed’s inner circle should put an end to the progressive campaign for control of the Fed and help Powell marshal the votes to raise rates and rein in inflation. With inflation running close to 7 percent and the Fed fund rate still stuck at zero, Powell is going to need every bit of the Fed’s independence to succeed.

Sean Fieler is chairman of the advocacy group American Principles Project and president of Equinox Partners, a Connecticut-based hedge fund.