Powell was again nominated as Fed chairman The only contender was nominated as vice chairman The difference between dovish and more dovish

On November 22, 2021 local time, US President Biden nominated Jerome Powell as the next Fed chairman candidate. After the nomination is confirmed by the Senate, Powell will begin his second term as Fed chairman in February. In addition, Lael Brainard, Powell's only previous contender, was nominated as Fed vice chairman. At this point, the market's speculation about the choice of Fed chairman has settled.

Biden said in a statement, "As I have said before, we cannot just return to pre-pandemic conditions, but need to better rebuild the economy." I am confident that Chairman Powell and Dr. Brainard will remain focused on lowering inflation, stabilizing prices, and providing full employment to build a stronger economy."

It is worth noting that Biden's announcement of the nomination is later than in the past. Previously, President George W. Bush nominated Bernanke as Chairman of the Federal Reserve at the end of October 2005, Oba President Ma nominated Bernanke for re-election at the end of August 2009, Yellen in early October 2013, and President Trump nominated Powell in early November 2017.

After the news of Powell's nomination, the dollar index and US Treasury yields rose intraday, the dollar index rose 0.45% to 96.5036 on November 22, while the price of gold fell 2.22% to $1804.28 / ounce, the largest one-day decline in nearly three months. The three major U.S. stock indexes performed sluggishly, with the NASDAQ down 1.26%, the Dow up 0.05% and the S&P 500 down 0.32%.

Dovish Fed

Powell took office as Fed chairman in February 2018 and will be extended to January 31, 2028, when he is nominated again. Born in Washington, D.C., Powell received his B.A. in Political Science from Princeton University in 1975, his J.D. from Georgetown University in 1979, and worked for many years in law firms, investment banks, and private equity firms.

Compared with Powell, Brainard has a more obvious academic background in economics. Brainard was nominated by Obama to serve on the Board of Governors of the Federal Reserve in June 2014 and served as Deputy Secretary of the Treasury from 2010 to 2013. Brainard received his Ph.D. in economics from Harvard University and has held positions as Vice President of the Brookings Institution and Associate Professor of Applied Economics at the Massachusetts Institute of Technology.

The Western Securities Research Report pointed out that Powell and Brainard are both dovish, but the latter is particularly serious. In terms of monetary policy claims, both have a high tolerance for inflation, allowing inflation to temporarily rise above the Fed's long-term goal. In the middle of the year, Powell and Brainard agreed that high inflation reflected a temporary mismatch between supply and demand in a few industries; both stressed the importance of maintaining the size of bond purchases and accommodative monetary policy to drive a recovery in the labor market.

The data shows that since April this year, the main inflation indicators in the United States have remained high, mostly at the highest level in nearly three decades. In October, the CPI grew 6.2% year-on-year to its highest level since December 1990; the core CPI grew 4.6%, the highest since September 1991; and the PPI grew 8.6%, the highest since data were available in 2010. It is worth noting that the PCE and core PCE, which the Fed mainly refers to, grew by 4.4% and 3.6% respectively in September, and are also at their highest levels since 1991.

However, Brainard is more concerned about the adequacy and equality of the recovery of the labor market. She said the pandemic has caused profound and varied damage, highlighting the critical importance of full employment, especially for low- and middle-income workers and those facing systemic challenges in the labor market. She also said that "the pandemic has severely affected the labour market position of many mothers, particularly black and Hispanic mothers, mothers with younger children and mothers with lower incomes".

In terms of the pace of the rate hike, Brainard is widely regarded as the most dovish member of the Federal Open Market Committee. If they take office, they may maintain a relatively relaxed environment for a longer period of time. On the one hand, Brainard values the "equality" of the job market recovery more, and on the other hand, Brainard has been more worried that the Fed will be too early rather than too late to cancel economic stimulus measures.

Similarly, Powell showed enough patience for rate hikes and stressed that interest rates will not rise until the U.S. economy returns to near-full employment levels. In addition, after drawing lessons from the "reduction panic", Powell's treatment of monetary policy is also more flexible.

Zhang Jingjing, chief macro analyst at Western Securities, believes that no matter who is elected, the fed's first interest rate hike may not be earlier than December 2022. She stressed that the pace of the Fed's monetary policy is often related to political factors, with moderate relaxation in midterm and general election years and relatively tight in other years. She said that because both candidates have a dovish attitude toward monetary policy and superimpose political factors, it is expected that no matter which one is nominated, the fed's first interest rate hike will not be earlier than the end of next year.

The divergence focuses on financial regulation and climate issues

The market generally believes that the most obvious difference between Powell and Brainard is in financial regulation. Powell, nominated by the Republican president and immersed in Wall Street for years, supported the deregulation agenda. During Powell's tenure, the U.S. government passed the Dodd-Frank Act "Rollback" bill, which eased the Fed's "stress test" to reduce regulatory pressure on thousands of small and medium-sized banks so that banks did not need to hold more assets to prevent cash shortages.

Brainard actively emphasized strengthening financial supervision and macroprudential policies, and publicly opposed the above-mentioned "rollback" bill. They tend to prevent asset bubbles by adopting tougher regulatory instruments, increasing capital adequacy ratios, conducting stricter stress tests on banks, or limiting the scope of bank investment proprietary transactions. Brainard has been opposed to deregulation of banks in the wake of the financial crisis, arguing that large banks should remain responsible and conservative.

In an interview in August, Veteran Democratic Senator Elizabeth Warren praised Brainard for "her job of explaining very well why the Fed's job is to act as a police officer in this area and ensure that the biggest financial institutions don't put our economy at greater risk." At the same time criticizing Chairman Powell for overprotecting large financial institutions, calling Powell a "dangerous man"; Warren said, "My concern is that he has weakened regulation here again and again" "We need someone who understands and uses monetary policy tools and regulatory tools to ensure our economic security, and we don't forget what happened in 2008".

On the climate issue, Brainard is actively committed to addressing the risks posed by climate issues to the financial system, arguing that the Fed should establish scenario analysis models to assess the impact of climate issues on the banking sector. Powell has previously insisted that climate change is not a major factor in monetary policy considerations, but should be addressed by the government.

However, Biden made it clear in his statement that both Powell and Brainard agreed that they needed to take urgent action to address the economic risks posed by climate change and to be prepared in advance to deal with risks to the financial system.

In addition, in terms of digital currencies, Brainard believes that the United States should not lag behind other countries in issuing digital currencies, and digital currencies should not be issued by the private sector, which will undermine the financial stability of the United States. Powell, on the other hand, was more cautious, supporting only calls for a regulatory framework for stablecoins, without considering government issuance.

Political factors are hard to ignore

Foreign media reported that two progressive Democratic senators had previously issued a joint statement opposing Powell's re-election, saying that the latter had done enough to deal with climate change, and the Fed chairman needed to pay attention to climate change from the perspective of financial stability and supervision. President Biden must appoint a chairman who can ensure that the Fed fulfills its responsibility to defend the financial system and agree with the administration's view that addressing climate change is the responsibility of all policymakers, the statement said.

On the other hand, Powell also gained the support of several cross-party lawmakers, Republican Senator Pat Toomey and others clearly expressed their opposition to Brainard, and Democratic Senator Jon Tester also clearly expressed support for Powell.

"Looking back at the fed's history, incumbent presidents are more inclined to choose Fed chairs who are willing to 'cooperate.'" Chen Xing, an analyst at Zhongtai Securities, said.

Chen Xing believes that the statistical results of the successive Fed chairmen and presidential parties since 1914 show that it is not uncommon for the Fed chairman and the presidential party to be different in the same period. And, by comparison, during the Democratic administration, there was a higher tolerance for Fed chairmen from the Republican Party. However, compared with the past, the background of this Fed chairman nomination has its own particularity: on the one hand, Trump, who nominated the current Fed Chairman Powell, has not been re-elected as president, and Biden's current popular support rate continues to decline. On the other hand, 2022 is the midterm elections during Biden's term, and throughout the U.S. midterm elections, the results are usually unfavorable to the president's ruling party.

He said that considering that Biden's approval rating continues to decline, it is currently facing greater pressure, in order to stabilize next year's midterm elections, so that the Democratic government can gain the support of voters, it may choose a candidate with a more dovish view of monetary policy and a higher degree of cooperation with the government. Eventually, whoever is appointed may face pressure to use monetary policy with the government to stimulate the economy ahead of the midterm elections.

CICC Research Report believes that on November 8, 2022, a total of 34 Senate seats and all 435 House seats will be re-elected. The Current Democrats control only two houses of Congress by a narrow margin, with the Senate Democrats having 50 votes, just over half, and the House Democrats leading by a narrow margin of 222-213. From the historical experience, in the midterm elections in the first term of the new president, the ruling party loses more than wins and wins less, and President Biden's support rate continues to decline, and the Democratic Party wants to continue to control Congress and faces challenges. If democrats lose complete control of Congress, then the Biden administration's subsequent economic policies may be difficult to implement, and uncertainty about the US economic outlook will increase.

Economic Observation Network reporter Liang Ji

Editor/Fan Hongwei