Powell reappointment - It is not the money, it is the regulation

The chances of J. Powell being reappointed as Fed Chairman is a key focus for current monetary policy discussions. It is adding to market uncertainty. President Biden can choose the devil he knows or get someone different who better aligns with his economic vision. Unfortunately, the vision beyond minimizing the cost of debt financing is not clear.

The reappointment discussion is not as clearly focused about rates, inflation, or quantitative tightening, as one would expect but seems to be centered on the role of the Fed as a regulator. The Fed Chairman is supposed to be a better bank and financial markets cop and not just a monetary controller of the macroeconomic environment. The current bank regulation scheme is too complex and beyond the understanding of any average banker, investor, or policy-maker. Some "simple" diagrams show the current regulatory complexity.

It is unclear whether the Fed should be the top bank regulator; however, under the current environment, it has that role. In fact, banks may not be the location of greatest financial risk, so the fed also has responsibility for all significant financial institutions. Does the Fed need to know the workings of the banking system? Absolutely. Does that mean that all bank regulation should be conducted by central bankers? No. Can there be conflict between bank regulation and monetary policy? Yes.

Macro-prudential policies have been a critical area of focus for the Fed as it should be given the impact of crises on the macroeconomy; however, the operational goals and oversight for these macro-prudential policies is unclear. More important than being a bank regulator is having clarity with the scope of its macro-prudential responsibilities.

The reappointment by Fed Chairman Powell should be based on his ability to meet the mandate of full employment and controlled inflation and the protection of financial markets if that is the desire of Congress. There is enough here for discussing whether he has done an effective job without adding the issue of bank regulation.