Change Looms at the Fed: What Will It Mean for Monetary Policy?

Capital markets are focused intently on the expected transition away from US quantitative easing (QE) right now, but we expect that attention to pivot soon to another transition-potential leadership changes within the Federal Reserve itself.

Jay Powell's term as chair of the Fed's Board of Governors expires this coming February, and an announcement about his future is likely from US President Joe Biden this fall. Powell's isn't the only seat in motion: Vice Chair Richard Clarida's term expires in January, and Randal Quarles's term as Vice Chair for Supervision expires next month-though his term as a Fed governor doesn't.

Powell Again…or Possibly Brainard?

With three possible departures and one seat already vacant, the Biden administration will have the opportunity to select as many as four of the Fed's seven governors over the next few months (not every seat will necessarily change hands). As we see it, there are good odds that Powell is reappointed: he enjoys broad support from both political parties for his conduct of monetary policy.

If Biden does decide to replace Powell, or if Powell declines reappointment, however, current Fed Governor Lael Brainard, at the Fed since 2014, would seem the most likely successor. We wouldn't expect a change in the path of monetary policy if she were to take the reins. Policy continuity would be a box to check with external candidates, too: the current approach has served the economy well through the pandemic and seems very gradually headed toward normalization. A new chair wouldn't be eager to rock that boat.

A Firmer Hand on Banking Regulation

What congressional criticism Powell has received focuses largely on regulation: some detractors see too much deference to the financial sector-specifically big banks.

For that reason, we don't expect Quarles to be reappointed. A more hands-on regulator is probable, with Brainard a candidate for that role, too, if she isn't named chair. Well-versed and experienced in regulatory policy, Brainard has favored more active oversight-a stance that should appeal to legislators wanting tighter enforcement of regulatory guidelines.

While most members leave the Fed when their vice chair terms expire, Quarles has indicated that he's at least considering staying on as a governor. That would be an unlikely break with past precedent, but it's a possibility. At the very least, he might choose to stay until a new vice chair is confirmed, keeping the Fed's regulatory infrastructure from being too shorthanded.

Vice Chair Clarida's term expires in late January, and his departure seems all but certain. Biden could choose to reappoint the Illinois native, but we believe the president will look beyond the Fed to fill that seat as well as the current open seat. Given the board's current composition, we think any external search will focus on candidates who can bring a diverse perspective to the Federal Open Market Committee.

Policy Implications-with Question Marks

So, what will all of these potential moving chairs mean for monetary policy?

Because the Biden administration likely values continuity, there's a strong argument to be made for emphasizing stability at the Fed. That puts a low probability on personnel changes that would result in a course correction for monetary policy-particularly if Powell is reappointed as chair.

Over the long run, a new mix in the Fed's ranks could have more impact. For now, the central bank is willing to tolerate higher inflation if it drives healthier employment. If Biden appoints governors who share that view, inflation tolerance could become a longer-term policy. The financial sector might also see a stronger regulatory architecture, with big banks in particular facing a tighter leash.

Other effects from leadership turnover at the Fed will need to be ferreted out as we move forward, but because the Fed remains a key player in economic policymaking, appointments made in this reshuffle will certainly matter in the years to come.

Eric Winograd is a Senior Economist at AllianceBernstein (AB).

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.