Five Challenges the Fed Chief May Face in the Next Four Years

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The imminent decision of the president of USA, Joe Biden, about whether to bring the chair back from the Federal Reserve, Jerome Powell, after his term ends in February or handing over the reins to someone else, will come at a critical time for the US central bank.

You democrats progressives want the Fed to take a broader role in the economy, intensifying efforts to boost employment, avoiding climate risks and tackling inequality. You conservatives they want him to stick to monetary policy, paying more attention to curbing inflation and reducing his footprint on the financial markets and the supervisory front.

Whichever the Democratic president chooses, the next Fed chief will need to resolve the main questions about monetary policy and the nature of money.

Here are some of the biggest challenges of the next four years:

GETTING MONETARY POLICY RIGHT

After the coronavirus hit, the Fed cut its benchmark interest rate to almost zero and bought trillions of dollars in Treasury bonds and mortgage-backed securities.

With the economy recovering quickly, Fed officials will likely begin to slow down asset purchases later this year.

But under a new monetary policy framework adopted last August, they plan to wait to raise interest rates until the economy reaches full employment, and inflation is at 2% and on track to moderately exceed that level.

It’s a promise a new Fed boss may have a hard time keeping. Most Fed monetary policy makers believe the current surge in inflation above 2% is temporary. But if price increases prove more persistent, whoever heads the central bank could end up supervising a rate hike before all aspiring workers get a job.

In August, there were 5.3 million Americans less employed than before the pandemic.

“There are a lot of things that will be different going forward that are implicit structural aspects of the economy that I think we’ll have to pay close attention to to make sure we’re properly calibrating our policy for the economy,” said Cleveland Fed Chair Loretta Mester, in an interview in August.