With Fed monetary policy at a crossroads, the conventional wisdom is that it is not good to change the chairman when there is policy choice uncertainty. Given the policy choices of the past few years and the choices ahead, it is not clear what is the value of conventional thinking other than a new choice may create even greater uncertainty.
Chairman Powell was the easy choice, but it may not have been the right choice. Taper speed will be an issue. Inflation is an issue. A rise in rates is an issue. Global finance is an issue. Bank regulation is an issue. Many of these issues are the making of the Fed. The argument will be made that the Fed did the best job possible given the events of the pandemic, and any criticism is just ex post sore grapes. We are not questioning the response in March 2020. The issue is the length and intensity of policy which now weighs on markets.
The tougher choice would provide some fresh perspective and admit there may have been mistakes, but that would have been in opposition of existing administrative thinking. The easiest choice is to accept that any failure could not have been avoided because the environment is out of the Fed's control, and they did the best it could.
Should Lael Brainard been given the nod? She is smart and talented, but it will not matter if the core policies are unchanged. We will see her skills put to the test as vice-chairman. This appointment should be a positive.
Both Powell and Brainard have commented on inflation being the top problem to be addressed in their thank you responses. This is a turn-around from the last few months. The market reaction was swift. The real question is how much the Fed is going to change course and become more aggressive addressing the inflation question now that the announcement has been made. Hearings are ahead, and both must now get in control of inflation.
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