Fed certainty boosts President Biden’s economic agenda

As Joe Biden firms up the leadership of the all-important US Federal Reserve, the nitty-gritty of his tax and spending plans is yet to be agreed.

| 6 min read

US policy has been mired in uncertainty for some months. The Democrats have been locked in arguments about the size of its stimulus package of spending rises and tax increases, whilst the Republicans organise themselves as a more-effective opposition disagreeing with any likely outcome.

The President stood by and watched as Democrat Senator Elizabeth Warren and her friends launched an attack upon various senior members of the Federal Reserve in an effort to force substantial changes of personnel and policy on that crucial economic body. Mr Biden sought to resettle the US relationship with China after the abrupt and ill-judged departure of US forces from Afghanistan led to a sizeable redistribution of power in the Middle East and doubts about his global resolve.

Powell returns as expected

This week, the first pieces of the new Biden presidential jigsaw have been put into place. After much delay, he has decided to reappoint Jerome Powell as Chairman of the Federal Reserve Board, and to praise his handling of the pandemic crisis so far. At the same time, to reassure the outspoken left of his party, he has promoted Lael Brainard from board member to Vice Chairman and has announced her new job alongside Mr Powell. He has helped script what the pair of them should do, adding substantial parts of the Warren/Brainard agenda to the Fed under Powell.

The new settlement stresses the need to avoid credit risks to the financial system.

Ms Brainard and Mr Powell tended to agree about monetary laxity to promote jobs and growth. Their disagreements in the past were over climate change and bank regulation. Under President Trump Chairman Powell had assisted the administration to relax some banking controls to promote more loans for investment.

The new settlement stresses the need to avoid credit risks to the financial system. Under Mr Trump, little emphasis was given to combatting climate change as the President was a fan of plenty of cheap fossil-fuel energy to power growth and industrial onshoring. The new pairing promises to tackle the financial risks posed by climate change and to do their bit for adaptation and prevention investments. Both the president and the chairman stress the need to promote more jobs for all, including poorer minority groups. This was Donald Trump’s as well as Biden policy.

President Biden still has considerably more work to do at the Fed. There are three board vacancies and a vice chair of banking regulation is also needed. The refusal to give this post to Ms Brainard is significant, as she is a hawk on these matters and often was in a minority of one on the board. Whilst the general policy talks of the need to control risks,, we will only know how tough this is going to be when we see who is appointed – and hear what they have to say. It looks as if the President, steered by his Treasury Secretary Yellen, has opted for a tilt to Democrat policies on social inclusion, climate change and banking risk whilst wishing to keep some more market friendly signals to avoid undue damage to recovery.

Republicans will oppose all the way

We still await the budget package of taxes and spending and the crucial vote on lifting the debt ceiling. The Democrats should assume no help from the Republicans, so they need to convince every one of their Senators and almost all their Congress members to support their package. The long delay has come from stand outs amongst the moderates who think the tax rises are too high and the spending too large. Secretary Yellen now thinks the government can carry on meeting its bills until 15 December, extended from her old deadline of 3 December, to give yet more time before the Christmas break to try to reach an agreement. The current shape of the spending package is around $1.75 trillion, half the opening level many wanted.

  • $1.75 trillion The cost of Joe Biden's new infrastructure package

All this has slightly increased the yield on Treasury bonds and knocked the shares of the digital economy a little as they are thought to be interest-rate sensitive. Nothing is final yet, as Powell needs to be confirmed after a Senate hearing, though this seems likely to pass. It looks as if the deal entails Powell going along with the President's expansionary agenda and not frightening the recovery with too many rate rises, whilst agreeing to bend the powers of the Fed to the causes on climate change, inclusion and bank controls.

Whether this will be enough to rein in inflation, which shocks the Fed and the administration alike, remains to be seen. it looks as if for the time being, they regard slowing growth as a more serious problem than leaping prices. The state of inflation means they will need to announce some tightening of policy soon. The current inflation rate remains a threat to bond valuations. The tax rises to come will not be helpful to shares.

Meanwhile, the President’s global initiative to reverse some of the oil-price rises by selling some of the US’s strategic oil reserves alongside action by allies produced some weakness in oil prices in the run up to the announcement. On confirmation that 50 million barrels will be sold by the US, the oil market did not react further, as the amounts of oil involved are small compared to daily consumption of almost 100 million barrels. Energy prices are likely to be more determined by how cold the northern winter proves to be. The prices rises that have occurred so far have been large and are still working their way through to consumer bills and into price indices.

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Fed certainty boosts President Biden’s economic agenda

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