A second Powell term will make economy run ‘hotter,’ expert says. Here’s what that means

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• Judy Woodruff:

  As we reported, President Biden has nominated Jay Powell for a second term as Federal Reserve chairman. And the president's decision comes at a tricky moment. Job growth has been better than expected, even as the country grapples with COVID, but inflation is at its highest in decades

  Both are concerns Powell and Lael Brainard as Fed vice chair, will have to balance if confirmed.

  David Wessel is with The Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. And he joins us now.

  David Wessel, welcome back to the "NewsHour."

  So, we know that Chairman Powell was reported to be looking seriously at both — I'm sorry — President Biden was looking seriously at both Jay Powell and Lael Brainard. Why is it thought he went with Powell?

• David Wessel, Brookings Institution:

  I think that the president said it clearly in his press conference this afternoon.

  He said he was looking for stability and independence, stability in that, given the tricky time at the economy, as you pointed out, having a familiar face, someone with a track record now, was a plus. Secondly, Jay Powell stood up to Donald Trump. And President Biden made a point of saying that this was — he was popular with both Democrats and Republicans.

  Powell was confirmed as chair 84-13, with nine Democrats voting against him and four Republicans voting against him.

• Judy Woodruff:

  First go-round.

• David Wessel:

  The first go-round.

• Judy Woodruff:

  Right.

• David Wessel:

  This time, I suspect the White House knows that they're not going to get all 50 Democrats, but they will get enough Republicans to push him over the edge.

• Judy Woodruff:

  So, thinking about ease of getting him — one of them confirmed.

• David Wessel:

  Right. Correct.

• Judy Woodruff:

  There has been this air of uncertainty hanging over the fed, if you will, while we're waiting to see what President Biden was going to do.

  How is it now expected that policy is going to change or stay the same?

• David Wessel:

  Well, I think the Fed is under a lot of pressure to change policy, to move more quickly to pull back on their bond purchases — it's known as the taper in the trade — and raise interest rates somewhat sooner than they anticipated, because, as you pointed out, inflation has been high.

  I think that the Fed has been a bit paralyzed by indecision at not knowing who the chair was going to be. Now they know the team will be Powell as chair, Brainard as vice chair. It gives them more flexibility if they want to speed up the process of tightening policy or taking their foot off the accelerator, if you will.

  But I think that both Powell and Brainard have made clear that they are going to be very patient. They're not panicking about this increase in inflation. They're not taking Larry Summers' advice. They're saying, we are going to wait and see because we believe inflation pressures will abate.

• Judy Woodruff:

  And why — what gives them that confidence? Because we know, several months ago, the administration and the Fed were saying, oh, no, inflation is not going to last. It has lasted.

• David Wessel:

  Well, I think they are a little less confident than they were. You are beginning to see them change their words.

  The current vice chair, Rich Clarida, made a speech the other — made a comment the other day that suggested that maybe they would speed things up. I think they look at the data and they are thinking that much of the inflation is COVID-related. And they expect it to abate.

  And they're willing to be patient and take a risk. But there is pressure from both inside the Fed and outside to say, how much more do you need to see before you begin to tighten?

• Judy Woodruff:

  And what effect is that likely to have on ordinary Americans?

• David Wessel:

  Well, I think that the Brainard-Powell team is likely to go very slow on raising interest rates and to be very much aware of the Fed's maximum employment mandate.

  So I think it means that the economy will run hotter. But I think that it also means that, now that they know that they have their secure positions — they're not confirmed, but they have the president's blessing — it gives them the freedom to pull back on the accelerator a little more than they had planned, because inflation has been so tough.

  And they know, you could see both Powell and Brainard said in their comments today they know there is a lot of public attention on inflation. It is not just some bond market vigilantes. It is ordinary Americans.

• Judy Woodruff:

  So if you are Mr. or Mrs. or Ms. America sitting at home looking at this thinking, how is this going to affect me?

• David Wessel:

  I think it means there will be very little abrupt change at the Fed. It means that they will probably be raising interest rates in 2022, but they will do it very, very gradually.

• Judy Woodruff:

  Let's ask you — let's talk about Lael Brainard, nominated — she's been on the Fed, what, since 2014.

• David Wessel:

  That's right.

• Judy Woodruff:

  A lot of speculation, as we said, about whether President Biden would make her the chair.

  She has been named the vice chair. She is known to have stricter — to be in favor of stricter bank regulations.

• David Wessel:

  Right.

• Judy Woodruff:

  What role is she expected to play?

• David Wessel:

  Well, so monetary policy — I think the Biden administration decided the most important thing the Fed does is manage the economy, manage interest rates.

  And in this new role, Lael Brainard will be one of the three people who really coordinates monetary policy, the chair, the vice chair and the president of the New York Fed. It looks like she chose not to take the other vice chair job, that for bank supervision.

  So I suspect that, when the president announces his choice for that job, it will be someone who is similarly tough on banks the way Lael Brainard would have been. And the Fed will have this — two vice chairs, one responsible for banking supervision and one really backing up that person being tough on the banks.

  So there was some relief among bank stocks that, somehow, they are relieved that Lael Brainard isn't going to be the vice chair for supervision. I think that is a mistake. Biden is going to appoint somebody tough on banking. He will have to.

• Judy Woodruff:

  But, all in all, David Wessel, a move that sends a message to people who watch the markets, who watch the economy of continuity.

• David Wessel:

  Continuity.

  The Fed is operating under a new framework, and it's one that Brainard and Powell both wrote. The fact that they came out together, a leadership team, looks to me like both of them will be confirmed. I think it gives people — it removes one big uncertainty that has been looming over the market and, in fact, the economy.

  And it gives the Fed a little more confidence that they can make the moves they need to make.

• Judy Woodruff:

  David Wessel with the Brookings Institution, thank you very much.

• David Wessel:

  You're welcome.