What the Fed Could Look Like in 2021
In addition to the gains in the stock market on Monday, uncertainty about covid, and the economy, is another concern regarding the outcome of this election, as reported by CNN:
This week, all eyes are on the Trump-appointed General Services Administration administrator, Emily W. Murphy, to recognize Joe Biden as the winner of the election and president-elect.
This high-ranking bureaucrat has the job of “officially affirming Biden has won the election on behalf of the Trump administration,” something which, so far, has yet to occur. Moreover, the US Senate outcome is still not officially set, although Republicans had a narrow lead at the start of the week. Assuming Biden is inaugurated and the Republicans hold the Senate, what, if anything, could this mean for the Fed?
First, Judy Shelton’s long shot at joining the Fed has now become an even “longer shot.” Considering Trump couldn’t even persuade fellow Republicans like Mitt Romney or Susan Collins to vote for her, it’s unlikely Biden would have much more success. The nominations expire when Congress is adjourned at the end of the year. So her appointment probably won’t happen.
As for promotions of central bankers, various reports from the mainstream media are saying Governor Lael Brainard could be asked to leave the Fed’s inner circle to become secretary of the Treasury, making her the first woman in history to hold that position.
Regarding the role of the Fed chair itself, it remains to be seen whether Biden would prefer to continue with Powell. As a registered Republican, Powell would likely have support from a Republican-controlled Senate. In the middle of a global pandemic, as David Wessel of the Brookings Institution said to the Washington Post:
No president likes to replace generals in the middle of a war.
Of course, sometimes the “war” can be waged by the state upon its own people, as in the case of the war on drugs or the war on poverty, etc. In the case of monetary policy, the war waged by the inflationists on the general public continues. We are often told mild inflation is good and to not worry about the money supply, the debt levels, and currency debasement. In the press, Reuters explains:
Modern Monetary Theory, the idea that governments which print their own money can and should spend whatever they want provided it’s fuelling [sic] economic growth and productive employment. Biden is already a partial convert, with Stephanie Kelton, an MMT proponent, on a task force that in July laid out 110 pages of policy recommendations.
Imagine the Fed in 2021; no Judy Shelton, a governor with respect for sound money. Combine this with a president considered a “partial convert” of MMT, we can only imagine what kind of money expansion programs will be crafted. Maybe Biden takes the MMT spending-to-prosperity approach, then at least we can have a (very) faint hope that a Republican-controlled Senate could try to stop him. If so, imagine a gridlocked US Congress; fiscal stimulus bills would become very difficult to pass. Who would be charged to “fuel economic growth” if not the Fed?
While we wait to see who will head our government into the new year, and while we expect a new change in government could also bring changes to the Fed, we cannot reasonably expect these changes will amount to anything more than superficial. Unless a hard money advocate, or someone with an understanding of free markets, whether from within Congress or the Fed, is appointed, there is little to no indication that policies will change drastically.
Bernanke lowered interest rates and increased the money supply during the last recession. Jerome Powell did the same during this recession. Until someone in a position of authority can explicitly address the problems, and eventually reject this doctrine, it won’t make much difference who runs the central bank. The Fed seems to be running on autopilot, sticking to accommodative policies, with press conferences between policy decisions to remind us this is indefinite. Should we have a lame duck presidency, expect the Fed to do “whatever it takes” to get the wheels of commerce turning again.