A Trump-era holdover central to determining what direction the U.S. financial system is going may be poised to cause political problems for the White House, just as President Joe Biden was enjoying the slightest of improvements in the economy.
Federal Reserve Chairman Jerome Powell once again this week opted for an interest rate hike amid his managing historic economic turmoil in the form of banking failures that sparked fears on the financial market.
The White House consistently uses one word to describe the Fed — independent.
Biden renominated Powell, a Republican, when he took office, which came in the face of opposition from most prominent progressive politicians.
Since then, officials have worked hard to create distance between Biden and Powell to hone in on the notion that the Fed is in fact a separate agency.
But some political watchers say there’s only so much distancing Biden can do when he takes to the campaign trail if financial markets are spooked by Powell’s moves and Americans continue to still face gorging prices on goods and higher rates than in recent years to borrow money for homes and cars.
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The personal relationship between Biden and Powell is not something the White House advertises.
While Speaker Kevin McCarthy (R-Calif.) on Monday said he talked to Powell “often” during the weekend that Silicon Valley Bank collapsed and regulators were deciding how to handle it, it’s unclear how often Biden and Powell spoke.
Powell does meet weekly, however, with Treasury Sec. Janet Yellen.
Whenever press secretary Karine Jean-Pierre is asked about Powell or movements by the Fed, she makes a point to separate him from the White House.
“First and foremost, the Fed is independent, and we do not comment on, interfere on their policies,” she said on Wednesday. “The president wants to make sure that we give…the Fed the space needed to make their decisions on monetary policy.”
Biden’s centrist politics were on display when he re-nominated Powell, as opposed to a Fed chair who would be more inclined to go easier on rate hikes. But Powell enjoyed broad bipartisan support and his nomination passed the Senate in an 80-19 vote.
Progressives like Sen. Elizabeth Warren (D-Mass.) didn’t support his nomination and have been constant Powell critics. Warren this week warned that millions of Americans could lose their jobs if the Fed doesn’t pause interest rate increases.
She teamed up with conservative Sen. Rick Scott (R-Fla.) on a bill to require an independent inspector general, who would be appointed by the president and confirmed by the Senate, to oversee Federal Reserve Board of Governors and the Consumer Financial Protection Bureau.
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Others have also been critical of the rate hike and raised questions over if enough is enough.
“While I think that the White House is right that their best move is to appoint good people and then have faith in their judgement, I don’t agree with Powell’s recent rate hikes, nor the reasoning behind them,” said Josh Bivens, research director at the Economic Policy Institute, a left-leaning think tank.
“I think lots of evidence is out there that disinflationary pressures are building while there are also lots of building risks to keeping unemployment low,” he said.
Biden is unlikely to break with Powell on policy
Despite some pressure on Biden to break with Powell, it would be shocking if the president did. The White House has time and time again stressed that Biden stands by Powell.
“The president still has confidence in Jerome Powell,” Jean-Pierre said on Wednesday, adding that the White House won’t interfere or get involved with his decisions.
The political pressure for Biden to step in on the Fed’s decisions is mostly coming from the left, and arrives when the president doesn’t yet have any serious challengers for the Democratic nomination in 2024.
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“The president is an institutionalist who has been pivoting to the center on multiple issues and needs a recovering economy in 2024. The Fed is the ultimate centrist institution with massive power to impact the election year economy,” said Bruce Mehlman, former assistant secretary at the Commerce Department under President George W. Bush.
“The only risk of hugging it out with Powell is if he gets primaried from the left,” Mehlman said.
What can Biden do to slow down rate hikes?
There’s also not much Biden can do to oppose the Fed besides publicly speaking out against it.
Former President Donald Trump did just that when he said in 2019 that Powell is doing a bad job, he disagrees with him entirely, and he has the right to fire him.
While the Federal Reserve Act of 1913 allows a president to remove a Fed chair “for cause,” Powell pushed back on Trump at the time and said that the law is clear that he has been approved for a four-year term.
“I cannot imagine Biden would ever speak publicly about disagreements with Powell. ‘The Fed is independent’ has always been a strongly-held stance among executive branch policymakers, and, I don’t see any indication that the Biden admin believes this any less than predecessors,” Bivens said.
“The obvious exception is Trump and I think the contrast with Trump just adds one more reason why the Biden admin would be more likely to adopt a public stance that is protective of Fed independence,” he added.
Why is the Federal Reserve independent?
Other economists say that the White House’s strategy to stress that the Fed is independent is the smartest move.
“It’s a great strategy and it’s also one that is an institution,” said Ellen Hughes-Cromwick, a former chief economist at the Commerce Department under Obama and a fellow at the centrist Democratic think tank Third Way.
“The administration of any White House restrains their comments so that the Fed can exercise independence. It’s absolutely critical,” she said. “We really can’t have a Fed that’s got a White House breathing down their neck in every turn.”
While Powell has been the face of numerous monetary policy decisions while the U.S. has grappled with high inflation for months, another official could take some of the heat off of him.
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Michael Barr, Federal Reserve vice chair of supervision, has been tasked with conducting an assessment of how the Fed ran oversight practices for Silicon Valley Bank.
Some more heat could be taken off of Powell over his move to raise interest rates because the Fed projected that rate increases will slow down this year. And, they projected that rates will drop in 2024, which would be good news for the president in an election year.
What can Biden do to reduce inflation?
The high prices of gas and other goods were a major talking point for Republicans in the midterm election and one of the reasons behind the president’s stubbornly low approval ratings over the last year.
Inflation will continue to haunt Biden politically if he doesn’t support steps to take it on, Hughes-Cromwick argued.
“The president has been on record, indicating that it’s so important for the Fed to achieve their mandate on inflation,” she said.
“I’m sure any White House would want to see those objectives achieved and that the Fed really has to be successful in that we cannot have five to six percent inflation for a long period of time without absolutely crippling the economy.”