Summary: On January 20, Eastern Time, Biden was officially sworn in as the 46th President of the United States, ushering in a new era. With Biden taking office, the relationship between the new administration and the Federal Reserve has become a focus of market attention.
On January 20, Eastern Time, Biden was officially sworn in as the 46th President of the United States, ushering in a new era. With Biden taking office, the relationship between the new administration and the Federal Reserve has become a focus of market attention.
During former President Trump's tenure, the Fed had a hard time. He more than once tweeted in the middle of the night ordering the Fed to cut interest rates, and would call Fed officials "fools" for not doing as he wished. That kind of thing will not happen again.
Christopher Whalen, a senior financial figure and head of Whalen Global Advisors, said: "Biden will respect the Fed; he is an old-school guy. His taking office is a good thing and will be a stumbling block for many extremists in the party." At the same time, U.S. Treasury Secretary nominee Janet Yellen has also served as Fed chair, a relationship that undoubtedly brings the Fed and the administration even closer.
Low interest rates will continue. The Fed is unlikely to make broad monetary policy changes. Like his two predecessors, Biden is expected to enjoy the current low-interest-rate environment. For his part, Biden will not be as outspoken as Trump in attacking the Fed for being too slow to cut rates. Although the Fed's current interest rate is near zero, Trump was still dissatisfied and kept hoping the Fed would follow European and American countries in implementing negative rates.
Biden can still nominate one more Fed governor, and this appointment will convey his intended direction to the Federal Open Market Committee. There is widespread expectation that the appointed governor will be a minority, support dovish monetary policy, and be willing to push for a broader social mission.
But Biden and the Fed also need to satisfy another major constituency—financial markets, which will push back if they find the nomination unacceptable. "Everyone on the Biden team has to be careful, because I think we have lost a lot of credibility on the dollar issue. If we are not careful, the market will give us a big surprise," said Ed Mills, a Washington policy analyst.
Still will face pressure. Although the Fed's relationship with current President Joe Biden may be more harmonious than with former President Donald Trump, that does not mean the Fed will not face pressure under the new administration.
George Selgin, senior fellow and director of the Center for Monetary and Financial Alternatives at the Cato Institute, said: "The Fed can relax a bit and no longer have to deal with those hostile, unpleasant tweets. I'm sure we will see a more friendly relationship between Fed officials and the Biden administration, especially with new President Biden. That is clear. However, it must be pointed out that this does not mean the Fed will not face various pressures from the government to change its policy orientation." The central bank's future challenges include fighting the COVID-19 pandemic and using a more inclusive economy and more robust methods to address social issues such as racial equality and climate change.
When Fed Chairman Jerome Powell appears on Capitol Hill, he is often asked what he and his colleagues can do on climate and inequality. Although the Fed has limited tools in these areas because it focuses on monetary policy and bank regulation, it has still implemented some measures to address these issues.
Earlier in the year, the Fed launched emergency lending programs never before used to help Americans hit by the pandemic. Most notably, months ago policymakers changed their attitude toward inflation, agreeing to let inflation run above the traditional 2% target for a period—even when unemployment is below what is generally considered full employment. The move was intended to spread the benefits of low unemployment across different racial and income groups.
On climate, the Fed joined the Network for Greening the Financial System, a global central bank alliance aimed at addressing climate change. There are also rumors that the Fed has instructed the banks it regulates to incorporate climate loss reserves into stress tests.
Working closely with the Treasury. Although the Fed has always emphasized its independence, it is unrealistic for it to operate completely free of political influence.
Former Fed Chairman Alan Greenspan believed that the Fed can be independent of the federal government, but cannot be independent of the federal government's influence. Ed Mills agreed.
But he believes the Fed can work closely with Yellen, the former Fed chair and incoming Treasury secretary.
"The policies coming out of the Treasury and the policies coming out of the Fed will be the most aligned we have ever seen, and the focus will be almost entirely on economic recovery."
"I have always seen the Fed respond to the political environment in Washington," Mills said. "Most importantly, what the Fed wants to do is maintain as much power as possible, and the way they maintain power is to keep the ruling party happy."