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Lael Brainard’s stance on bank regulation provides an early test for the Fed

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If Lael Brainard was disappointed when she stood at the White House podium on Monday and accepted the nomination of US President Joe Biden as vice chairman of the Federal Reserve, she did not show it.

For weeks, the Fed governor, considered one of the most talented Democratic economic policymakers of her generation, has been leading the U.S. Central Bank.

But in the end, even the last-minute campaign of the progressive senator could not ensure that she would become the highest office. Biden confirmed the reappointment of Federal Reserve Chairman Jay Powell on Monday.

If confirmed by the Senate, Brainard’s promotion to the Fed’s most important deputy position will enable her to occupy a more prominent position in policy-making, and may become a springboard to become the Secretary of the Treasury or the Chairman of the Fed in the future.

The role of the Fed’s vice chair—currently held by Richard Clarida and in the past by officials such as Donald Cohen, Stanley Fisher, and Janet Yellen—has an influential role in the central bank and is expected to serve It will provide intellectual support for policies and help signal any changes to the financial markets.

Biden showed off his two candidates as a team on Monday, and Brainard, who has been considered a member of the inner circle of the Fed’s board of directors, said that she feels “fortunate” to work with Powell to jointly respond to the Fed’s pandemic.

But there are some differences between Brainard and Powell that can provide early testing for their new working relationship.

During her seven years as a governor of the Federal Reserve, Brainard has been unique in banking supervision issues. She has voted against more than 20 changes in the board of directors around rule changes that will loosen restrictions on the largest and most important financial institutions.

Her efforts to protect the regulators of the post-global financial crisis won the applause of progressives and made her the preferred candidate for Chairman Powell.

“It is clear that Lyle Brainard has always been a strong opponent of deregulation,” said Jeremy Kress, a former attorney with the Fed’s Banking Supervision and Policy Group.

Jay Powell, Daniel Tarullo and Lyle Brainard in 2016

Jay Powell (left) with Daniel Tarullo and Lael Brainard at the Fed Board Meeting in 2016 © Associated Press

Brainard received further praise from the Democrats for his efforts to strengthen the rules on how banks serve disadvantaged communities and to push the Fed to consider climate-related financial risks more seriously.

In the days before Biden’s decision, Democratic senators cited Powell’s less powerful approach to such issues as the main argument for rejecting his re-election.

At the same time, some people worry that Brainard — who is considered to be dovish on inflation and advocating a patient monetary tightening approach — may be more hesitant than Powell whether to continue raising interest rates, because prices continue to rise as the central bank’s main focus focus point.

But others emphasized that she is closely aligned with the chairman’s ideas and is well known in policy formulation. “She is not like a stranger from Mars,” said Alan Blind, a former Federal Reserve Vice Chairman and Princeton University professor.

As the economic situation changes, Brainard has also shown signs of adjusting his views. “She has been working at the Fed during challenging times, and her policy stance has forced her to make difficult decisions,” said Randy Kroszner, a former Fed governor, who worked with Bray at Harvard University. Nader has had overlaps. “She is ready to fight.”

On Monday, Brainard seemed to put the fight against inflation at the top of her agenda, indicating that this is by no means a secondary issue of achieving full employment. “I am committed to making working Americans the core of my work at the Fed,” she said. “This means reducing inflation when people are focused on their jobs and how far their salaries can go.”

Brainard’s policy experience can be traced back to his tenure in the Bill Clinton and Barack Obama administrations, and he has also been engaged in global development work at the Brookings Institution, a Washington think tank.

Under Obama’s leadership, she served as the Deputy Secretary of International Affairs in the Treasury Department. At that time, the United States got rid of the financial crisis and had to deal with the impact of the euro zone sovereign debt crisis that threatened the recovery of the United States.

As Washington’s stance on Beijing began to become more confrontational, she also helped manage economic relations with China.

Brainard was closely involved in the establishment of a new framework for the central bank to formulate monetary policy in 2020. As a result, the Fed will not raise interest rates as soon as price pressures appear as traditionally, but will run the “hot” economy in an attempt to promote a stronger recovery and benefit the wider Americans.

In practice, this means maintaining interest rates at current levels close to zero until inflation reaches an average of 2% and the Fed maximizes employment. Brainard is involved in ensuring that the latter goal is achieved in a “broad and inclusive” manner, effectively promising that this time, as the economy recovers, fewer Americans will be left behind.

Claudia Sahm, a former Federal Reserve economist, said this shift marked a “great change” in monetary policy.

However, just over a year since its launch, the new spell has been under pressure due to soaring inflation. This allows Brainard (if proven) to help adjust the new framework to economic realities that are very different from when it was announced.

Brandeis University economist Stephen Cecchetti said that this is a “difficult” issue that will lead to 2022, and he has led the currency and economic departments of the Bank for International Settlements.

Bill Inglis, a professor at Yale University and former director of the Federal Reserve’s Department of Monetary Affairs, said: “When inflation and employment goals are inconsistent, how do you choose? This problem may arise soon in the next six months to a year, and the Fed may not be able to Do not respond to this.”

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