Key Questions: Is Another Term for Powell a No Brainard?

Cynthia Honcharenko, Senior Portfolio Manager - Taxable Fixed Income, KeyBank Investment Center, November 2021

Key Questions: Is Another Term for Powell a No Brainard?

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Consumer Price Index numbers may have swung the odds in favor of Jerome Powell’s reappointment as Federal Reserve chairman.

Last week, Bloomberg reported that President Joe Biden interviewed Lael Brainard, a member of the Federal Reserve (Fed) board of governors, for chair of the nation’s central bank, which sets monetary policy for the United States. It is not surprising that Biden is considering both current Chairman Jerome Powell, whose term expires in February, and Brainard, but the article added credibility to Brainard’s candidacy. Powell seems to have broad support in Congress and an endorsement from Treasury Secretary Janet Yellen. Still, some liberals and progressives are imploring Biden to replace him with the more dovish Brainard.

A few days later, the Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose at a blistering pace of 0.6% month-over-month for October, boosting the year-over-year increase to 0.9%, resulting in an increase of 6.2% for the 12 months ending October, the largest 12-month increase since the period ending November 1990. The details within the report signaled strengthening persistent pressures.

Owners’ Equivalent Rent and rent inflation rose 0.4% month-over-month for a second time, providing additional confirmation of a higher trend. But unlike last month, we did not get the offsets from travel-related components like lodging and airfare. Lodging prices were up 1.4% month-over- month, and airfares declined by only 0.7%, which is much less than expected and much less than the September decline of 5%.

Rents are the biggest cyclical contributor to inflation and the most crucial component for monitoring persistent price pressures. Medical care services, another stickier element, surged 0.5% month-over-month as healthcare insurance soared 2.0%, and the expectation is for this trend to continue. The surging increases in rents and across various service sectors could make the Fed begin to sweat as they wait out the return in the labor supply and easing supply chain. Clearly, the timing of interest rate hikes is likely to be pulled forward, and investors should stay tuned for shifts in Fed communication.

Before the CPI report, the scandal that led to the resignations of two of the Fed’s regional bank presidents and implicated another senior official may have tilted the odds toward Brainard. The scandal involving personal trading by officials prompted Sen. Elizabeth Warren (D-Mass.) and others to challenge the reappointment of Powell, who was named to the position by former President Donald Trump. The concern is that reputational damage involves the entire institution as well as its leadership. But the scandal also called into question for reappointing the regional bank presidents, a process overseen by Brainard, who described the process as “rigorous” and could now be caught in the debate.

Trading scandal aside, Biden says reversing rising inflation is "a top priority." And with three open vacancies (four if you count Powell's), inflation running hotter than expected, extensive changes within the Fed could threaten continuity at such a crucial time for monetary policy. President Biden recently told reporters that he expected to announce his nominee for Fed Chair in "the next four days." Senate Banking Committee Chair, Sherrod Brown, said he was "certain" the votes were there for the Senate to confirm either pick. Powell is still predicted to remain seated as Fed Chair, as Brainard is seen as the more "progressive" leaning option and dovish on most critical issues confronting the Committee. Regardless of who the next Fed Chair is, the economic data will ultimately be the key driver of monetary policy.

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Publish Date: November 15, 2021.

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