WASHINGTON — Progressive lawmakers are ramping up opposition to a second term for Federal Reserve Chair Jerome Powell because of bank deregulatory measures taken under his leadership. But many observers question whether those protests will be enough to stop his reappointment.
During the Trump administration, Powell and other Federal Reserve Board governors backed rules that provided midsize banks with substantial relief from the Dodd-Frank Act and eased other capital requirements, among other things. They advanced those measures often over the dissents of Lael Brainard, the board's lone Democrat.
Liberals in Congress such as Sen. Elizabeth Warren, D-Mass., and Rep. Alexandria Ocasio-Cortez, D-N.Y., say such steps weakening the post-financial crisis regulatory regime should be a concern as the Biden administration considers re-nominating Powell when his term ends in February.
But others who criticized Trump-era deregulation are undecided on how to view Powell's record. They say his monetary policies have benefited low-income workers and efforts to contain economic damage from the pandemic should win him points.
“Powell has created an economy in which jobs can be created," said one progressive, who has criticized the Fed’s recent regulatory relief measures and asked not to be named. "Even though he used monetary policy and not financial regulation to get there, Powell’s results speak for themselves.” Powell’s record of corralling votes on the interest-rate setting Federal Open Market Committee “is something no other candidate has and warrants his reappointment,” the person said.
Some analysts believe that if Powell is replaced, it will not be because of Powell's record but more that President Biden opted for a more progressive choice.
"It would be more about what a new person would do, as opposed to what someone has done,” said Ian Katz, a director at Capital Alpha Partners.
Most assume that the White House will either reappoint Powell as chair or nominate Brainard to replace him. Brainard, who was named to the Fed by former President Barack Obama,
“My concern is that over and over [Powell] has weakened the regulation here,” Warren said in an interview last month with Bloomberg TV, adding later, “I read Lael Brainard’s dissents in many of the deregulatory actions the Fed has taken, and I have to say they are strong and powerful dissents.”
Warren has so far declined to weigh in on whether or not Biden should reappoint Powell. Biden is reportedly expected to make a decision on the Fed chair role sometime around Labor Day.
But last week, a group of progressive Democrats in the House called on Biden to replace Powell, arguing that under his watch the Fed “has substantially weakened many of the reforms enacted in the wake of the Great Recession regulating the largest banks.”
“Weakening financial regulations that were specifically created to prevent such a disaster from happening again, risks the livelihoods of Americans across the country,” Ocasio-Cortez, along with Democratic Reps. Ayanna Pressley of Massachusetts, Rashida Tlaib of Michigan, Jesus “Chuy” Garcia of Illinois and Mondaire Jones of New York, said in a joint statement.
Still, for many on the left, there is a lot to like about Powell. Under his leadership, the central bank changed its entire approach to monetary policy, shifting its criteria for raising interest rates last year in order to compensate for years of persistently low inflation. The labor movement had championed such a policy for years, arguing that the move prioritizes workers over Wall Street.
“If he's less than stellar on the regulatory side, but he's been quite accommodating on the monetary policy side, and people were pleased with how he stepped in and was willing to act quickly during COVID, that counts for something,” said a former Senate staffer.
Nevertheless, Powell’s record on bank regulation remains a hard pill to swallow for many Democrats.
“We think that the deregulation under the Powell chairmanship is quite dangerous, and has raised very significant financial stability concerns that are only exacerbated by the current monetary policy approach,” said Dennis Kelleher, president and CEO of Better Markets.
Kelleher added that looser monetary policy should accompany stronger financial regulation, because “with easier money comes higher threats to financial stability.”
“Different people weigh that differently, and I think different people weigh the deregulatory agenda of Powell differently,” he said.
Still, some have suggested that the Fed’s recent deregulatory measures were more the doing of Randal Quarles, the Fed’s vice chair of supervision, who like Powell was appointed in the Trump administration.
Quarles is effectively the central bank’s lead on bank regulatory matters and Powell could be taking some cues from him on stress tests and capital requirements. But the vice chairman’s term ends in October, and many have speculated that he could be replaced by Brainard, who could then spearhead a tougher regulatory stance.
“I do think that the chair would be respectful of ... Congress’s statute to make the person who’s the vice chair for supervision be in charge of supervision and regulation,” said Katz. “I also don’t think that everything would get rolled back. I think … that some stress tests would likely get a little bit tougher, which would, in effect, toughen capital standards.”
But others say Powell was likely the last word on deregulatory moves that progressives now criticize.
“The chair decides the agenda, the priorities, the workstreams, the committee memberships and assignments,” said Kelleher. “The chair controls literally everything.”
Senate Banking Committee Chair Sherrod Brown, D-Ohio, said in July that while he thought Powell was “overall a good chair” of the Fed, he was undecided on whether Powell deserved a second term, citing concerns with Powell’s approach to bank regulation.
“I like what Chair Powell has done on monetary policy; I do not like what he’s done on regulation,” Brown said. “We know the damage that Wall Street has done to this economy a decade ago and long before that and I don’t want to see that repeated.”
Under Powell, the Fed opted to limit the use of the “qualitative objection” in stress tests, a move that made it harder for banks to fail the assessment because of operational or risk management issues.
The central bank also lowered the frequency of large-bank resolution plans and revised the Volcker Rule to allow firms to invest in venture capital funds. The board also implemented a “stress capital buffer” meant to simplify the agency’s capital regime but that progressives worried would lower overall capital requirements for some banks. Brainard was the lone dissenting vote on each of those actions.
When pressed by lawmakers, Powell has defended his regulatory record, arguing that he “actively resisted any move” to weaken big-bank capital requirements.
“We raised capital standards on the largest banks,” he said during a July Senate Banking Committee hearing. “Full stop.”
Though Powell’s regulatory approach is likely a factor for the White House in considering whom to nominate for the role, it’s probably not the deciding one, said Katz.
“I don't think if they were to choose someone else it would be so much because they don't like what he's done in supervision and regulation,” he said. “It would be because they are convinced by progressive arguments that you need someone more progressive and more [of an] activist.”
The former Senate staffer agreed that while "there's unhappiness for sure about some of the Fed decisions on living wills" and other measures, "I think it wasn't as bad as it could have been.”
“I do think that the primary reason the White House might decide they want to replace [Powell] is less about his regulatory record, and more about the unique opportunity that replacing him provides them to remake the Fed,” the person said.
If the White House opts not to reappoint Powell, the Biden administration could potentially have as many as four seats to fill on the seven-person Fed board, which could dramatically reshape the central bank for years to come and is likely an appealing idea to some on the left.
“If you're a progressive, it's logical that you would want somebody like-minded in that position,” said Katz. “This is your chance to do it.”
