All Eyes on the Fed
At this moment, President Joe Biden, top White House officials, Senate Majority Leader Chuck Schumer (D-N.Y.), and progressive members of the U.S. House are doing everything they can to convince moderate senators to support Democrats’ Build Back Better plan.
But don’t think for a second that this intraparty squabble is the only issue that has Democrats in Washington divided right now.
As we discussed last week, lawmakers including Sen. Elizabeth Warren (D-Mass.) were upset with President Biden’s choice to renominate Jerome Powell as Federal Reserve chair instead of naming Lael Brainard to the position. The disappointment goes even deeper, though. The president not only passed over Brainard for chair, he chose not nominate her for the position of vice chair of supervision. Instead, President Biden asked her to serve as one of the Fed’s two general vice chairs.
What is the big deal?
To understand progressives’ disappointment with their president, let’s examine the Fed’s structure — and the vice chair for supervision’s place in it.
The Structure of the Fed
The structure of the Federal Reserve probably is a mystery to most Americans. People know the board makes frequent announcements about employment and inflation, and that it sets interest rates, but who are these people who wield so much power over the economy?
The Fed clearly understands how opaque its operations are. In fact, it has an educational website that tries very hard to inform people about the Fed and its role. There are even quizzes readers can take after reading the materials. (We’ll spare you.)
As the Federal Reserve Bank of San Francisco explains, the Federal Reserve System is split into two parts: a central authority called the Board of Governors and a group of 12 regional banks. Chair Powell runs the central authority. The San Francisco bank is one of the dozen Federal Reserve banks around the country.
The Board of Governors is made up of seven people who serve 14-year terms. These long terms, as the San Francisco bank says, are “designed to shield Board members from political pressures.” The chair of the Board of Governors (currently Jerome Powell) serves a four-year term. So do the two vice chairs. The Senate must approve every member of the Board of Governors who, together, oversee the entire Fed system.
The 12 regional banks “carry out much of the System’s day-to-day operations.” Specifically, the 12 banks, along with their 24 branches, “gather data and other information about the businesses and the needs of local communities” in their region. The Fed uses this information to make policy.
Speaking of policy, readers are probably also familiar with the Federal Open Market Committee (FOMC). The FOMC is the entity within the Federal Reserve that sets the country’s monetary policy, including interest rates. The FOMC has 12 voting members: the seven members of the Board of Governors and a rotating group of five regional Fed bank presidents. Chair Powell, like all Fed chairs before him, chairs the FOMC. The president of the Federal Reserve Bank of New York permanently serves as FOMC vice chair.
According to the Fed Board of Governors, together these entities:
Carry out U.S. monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;
Promote the stability of the financial system and minimize and contain systemic risks;
Promote the safety and soundness of individual financial institutions;
Foster payment and settlement system safety and efficiency; and
Promote consumer protection and community development.
Congress set the Fed’s structure, and it has the power to change it. In fact, it did just that 11 years ago.
What Is the Fed Vice Chair of Supervision?
The Dodd–Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, altered the Fed’s structure. The law added two entities: the Consumer Financial Protection Bureau, a new, independent federal agency tasked with protecting consumers in the financial system, and the Office of Minority and Women Inclusion, which oversees the Fed’s involvement with minority- and women-owned businesses and reviews financial institutions’ diversity and inclusion policies.
Dodd-Frank also created a new position at the Fed: the vice chair of supervision. This person is nominated by the president, approved by the Senate, and sits on the Board of Governors.
The following explanation is how scholars at the Peterson Institute for International Economics described this role, and the power of the person filling the position:
“The creation of the vice chair for supervision signals a potential shift with respect to regulatory matters away from the chair (and potentially the rest of the Board) to a single individual. The identity of that vice chair will presumably set the tone for the Fed’s entire regulatory apparatus, which is significantly expanded under Dodd-Frank. … [T]he identity of the first vice chair for supervision will matter enormously — everything done by that office will have ramifications for the way the office is held thereafter.”
Appointed by former President Donald Trump, Randal Quarles assumed the position of vice chair in 2017. He resigned recently and the position is now vacant.
Sen. Warren was no fan of Quarles. In February 2020, she criticized comments he had made regarding bank supervision. She said Quarles’ remarks “strongly suggest[ed] that the Fed intends to severely undermine the effectiveness” of the vice chair’s ability to supervise and examine financial institutions. She said the Fed’s examination program, is one of the “most potent tools to ensure the safe operation of banks and the protection of the consumers they serve.”
In other words: Quarles was not being tough enough.
As The Wall Street Journal explained, with Quarles gone, progressives want President Biden to appoint someone who will use the vice chair of supervision’s “broad powers to discipline banks.” Indeed, in her statement announcing her opposition to Powell’s nomination, Sen. Warren said, “Powell’s failures on regulation, climate, and ethics make the still-vacant position of vice chair of supervision critically important.”
With Brainard no longer a contender for the role, Democrats already seem to have one specific person in mind to get tough on banks.
Who Will Be the Next Fed Chair of Supervision?
The White House released some of the tension surrounding the Fed nominations this week by floating a name for who the president might nominate to be the next vice chair of supervision.
That name was Richard Cordray.
This idea helps the White House’s relationship with progressives because Cordray is a close friend and confidant of Sen. Warren. Cordray served as the first head of the Consumer Financial Protection Bureau from 2012 to 2017. (Readers might recall that the CFPB was Sen. Warren’s brainchild.) He is currently serving in the U.S. Department of Education, overseeing the federal government’s $1.6 trillion student loan program. He also has served as Ohio’s attorney general.
When Cordray ran for Ohio governor in 2018, Sen. Warren said, “Rich isn’t flashy. He’s quiet. He’s unassuming. But under that humble shell there is a fighter. And not just any kind of fighter – Rich is the kind of fighter I love. A fearless fighter.”
If confirmed for another term as Fed chair, is Powell willing to work with this fighter?
Well, Powell also attempted to alleviate some tension surrounding his nomination this week. In Capitol Hill testimony unrelated to his nomination, he told members of the Senate that he will allow the vice chair of supervision — whoever that person is — to pursue a robust regulatory and supervisory agenda.
Powell made those comments in direct answer to questioning from Sen. Warren.
It is doubtful that those assurances will change Sen. Warren’s mind about voting against Powell. After all, lack of regulatory supervision is not her only quibble with Powell. in a Senate floor speech in October, Sen. Warren also blamed Powell for “ethically questionable financial activity by high-ranking Fed officials.”
But Powell’s comments could defuse a brewing intra-party squabble between the White House and other Senate progressives.
What’s Next for the Powell Nomination?
The U.S. Senate Committee on Banking must consider Powell and Brainard’s nominations before the full Senate votes. While a timeline for the nominations has not yet been set, committee Chair Sherrod Brown (D-Ohio) has said he would like to move quickly, possibly even this month. The White House is expected to send over formal paperwork on the nominations this week — a move that would kick off the process.
There is one complication, however: while he testified in Congress this week, Powell will spend much of December silent – at least publicly.
As the Federal Reserve Bank of St. Louis explains, Federal Reserve policy “limits the extent to which” Federal Open Market Committee participants and staff can speak publicly or grant interviews before its meetings. The FOMC meets mid-month. The blackout period for this month is December 4-16.
Chair Powell and Brainard actually would not be able to come — or speak — before the committee until December 17.
It is unlikely Fed nomination hearings will be underneath Congress’ tree during the week before the Christmas holiday. We will therefore likely have to wait until 2022 to see how the intra-party fireworks play out.