What New Challenges Will the Fed Face?
The Fed under Biden: New mandates, a close White House tie and big challenges ahead
There likely will be no nasty tweets in the middle of the night excoriating the Federal Reserve to lower interest rates. Nor will its officials be called “boneheads” should their actions not be in keeping with President Joe Biden’s wishes. But that doesn’t mean the U.S. central bank won’t face pressure as it looks to navigate its way through a new administration. Challenges ahead include the coronavirus pandemic, as well as demands for a more inclusive economy and a stronger approach toward social issues, such as racial equality and climate change.
There also will be an interesting new dynamic, where Treasury Secretary nominee Janet Yellen will, if confirmed, have the added benefit of being a former Fed chair. Broad monetary policy changes are unlikely ahead. Biden likely will enjoy the same low interest rate environment that the last two holders of the office have held. For his part, Biden won’t be nearly as vocal as Donald Trump was when the ex-president hectored the Fed for even lower rates. Trump often resorted to schoolyard name-calling as he pushed for the negative rates that Japan and some European countries employed in an effort to stoke growth.
But all presidents watch the Fed closely, and Biden won’t be an exception as he looks to get through the current crisis. “He will respect the office,” said Christopher Whalen, a finance veteran and head of Whalen Global Advisors. “Biden’s an old-fashioned guy. He’s an anachronism, really,” Whalen added. “It’s good that we have him. He’ll serve as a brake on many of the extreme people in his party.” Most everyone in public office likes low rates, and Biden won’t be an exception. His party, though, has a vocal wing that will be pushing hard for big answers to the pressing social issues of the day, and it won’t stand for a Fed that prioritizes the low rates that Wall Street loves without trying to do something more to aid Main Street.
Bigger policy questions
In a case of potential mission creep, the Fed in recent months has been pushed to use its policy levers to help with racial economic equality, and to assist in the battle against climate change. That comes following an extraordinary year in which the central bank rolled out never-before-used emergency lending programs to help those impacted by the Covid-19 damage. So while the Fed during the Biden administration can expect to face less overt attacks, it still will be under various levels of pressure. “The Fed can relax a bit as far as having to deal with hostile, nasty tweets is concerned,” said George Selgin, senior fellow and director of the Center for Monetary and Financial Alternatives at the Cato Institute. “I’m sure we’ll see a more cordial relationship between Fed officials and the administration, particularly the president.”
Teaming with Treasury
Capitol Hill veteran Ed Mills, who analyzes Washington policy and politics for Raymond James, recalled the sentiment of former Fed Chairman Alan Greenspan, who felt the organization is “independent within the federal government, but not independent of the federal government.“I think we’re really about to see that dynamic play out,” said Mills, who sees tight coordination coming between the Fed and its former Chair Yellen, who is expected to be confirmed Thursday as Treasury secretary. “Policy coming out of the Treasury and policy coming out of the Fed is going to be the most aligned we’ve ever seen,” Mills said. “The focus is going to be almost completely on economic recovery.