November 26, 2021

Why could Powell's 2nd term as Fed chair be good for American economy?

 In the United States, stock exchanges were closed yesterday for Thanksgiving. So, stock indices were traded flat. Nevertheless, the S&P500, NASDAQ, and Dow Jones are still hovering around their highs. Consequently, it is too early to talk about the end of the uptrend. Yesterday's macroeconomic calendar was empty. There were also no fundamentals to influence the market. So, today we will discuss Powell's reappointment as Federal Reserve's chair and whether it will be good for the American economy.

There are both pros and cons of his reappointment for the second term. The fact that Jerome Powell was at the helm of the regulator at the time of the coronavirus crisis is in his favor. The outbreak of the deadly virus delivered a severe blow to the US economy, and it slumped to levels unseen since the Great Depression. Indeed, Powell's decisive actions saved the American economy. When comparing it with the European economy, we can see that Powell has done everything right. Of course, one can argue that the huge size of the quantitative easing program has triggered a sharp rise in prices in many sectors that often exceed the actual inflation rate. Nevertheless, the situation is no different either in the European Union or the United Kingdom. At the same time, US GDP soared in the 4th quarter, unlike in the EU. Powell was not afraid to cut rates to zero at the very start of the pandemic and begin a large-scale QE program. Many experts say he handled inflation well. As a reminder, before the indicator reached the 30-year high, inflation was steady below the 2% rate for a long time. So, the central bank decided to allow inflation to rise above this level to offset the periods of a low price increase. Powell is also believed to be behind the decision to focus on the jobs market when adjusting monetary policy. It helped the United States to approach the pre-pandemic levels of employment. Unemployment in the country is falling with each new month.

Powell's possible inflation miscalculation is not in favor of his second term. The CPI has accelerated dramatically and keeps rising still. Now it will be very hard to dampen its growth, and the regulator seems reluctant to raise the key rate. Overall, such a measure could not be entirely wise. Moreover, the QE program is likely to end as early as April if the pace of taper is increased. It will be good if inflation really starts to slow down by itself next year, as Powell, Yellen, Lagarde, and Bailey believe. If not, the American economy will have to deal with negative consequences. However, at this stage, the appointment of Lael Brainard as the Fed's chair would hardly change anything.