Reappointed U.S. Fed chair Powell faces challenge in curbing inflation

U.S. President Joe Biden has announced that he will reappoint U.S. Federal Reserve Board (FRB) Chair Jerome Powell. It is hoped that Powell will demonstrate his ability to deal with the difficult task of balancing stable growth with curbing inflation.

Powell became the chairman in February 2018. In March 2020, when novel coronavirus infections had begun to spread, he adopted an extraordinary monetary easing policy of virtually zero interest rates, along with quantitative easing to supply funds on a large scale, leading the recovery of the U.S. economy.

Many people praised his quick response to the coronavirus pandemic and his careful communication of information. Biden seems to attach importance to policy continuity and stability.

Powell’s second four-year term will begin from February 2022. Lael Brainard, a member of the Board of Governors of the Federal Reserve System, who was backed for the chairmanship by progressives in the Democratic Party, will be promoted to vice chair. Their appointments are subject to approval by the Senate.

Biden cited Powell’s leadership based on bipartisan congressional support as a reason for his reappointment. Since Powell was nominated by former President Donald Trump, he is likely to win Republican approval easily.

The biggest challenge will be curbing inflation for Powell in his second term.

While the U.S. economy is recovering due to the normalization of economic activities, commodity prices are rising due to “supply constraints” caused mainly by labor shortages, sluggish logistics and difficulty in procuring semiconductors. The rise in gasoline prices has added fuel to public discontent.

Powell has repeatedly said inflation is a “temporary” phenomenon, but there is no sign of inflation abating as the U.S. consumer price index in October rose by more than 6% from a year earlier for the first time in about 31 years.

As monetary easing would work to boost commodity prices, the FRB decided early this month to scale back its quantitative easing policy. There are also predictions of multiple interest rate hikes in 2022.

However, if the central bank raises interest rates too quickly, it will adversely affect the economy. Experts say there is fear that such a move would trigger turmoil in global financial markets, such as a potential plunge in the U.S. stock market, which has also been described as a bubble.

Conversely, if interest rate hikes are delayed, inflation could drag on. Powell needs to properly handle the timing and pace of interest rate hikes.

With the announcement of Powell’s reappointment, the yen weakened against the dollar based on the belief that the Powell-led direction of monetary policy will be maintained. This is because if interest rates continue to rise, it will be more advantageous to manage assets in the United States, making the dollar more attractive.

On the other hand, an excessively weak yen would have a negative impact on the Japanese economy, such as an increase in import prices. The government and the Bank of Japan should keep a close eye on the FRB’s policy and exchange rate developments.

— The original Japanese article appeared in The Yomiuri Shimbun on Nov. 26, 2021.