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OPINION

In reappointing the Federal Reserve chair, Biden asserts his independence — and the central bank’s

At a time when the post-pandemic economy is still incredibly volatile and the tea leaves still hard to read (though the US labor market looks red-hot), the choice of Jerome Powell made Fed policy more predictable.

Jerome Powell, chairman of the Federal Reserve, listens as President Biden speaks in Washington, D.C., on Nov. 22.Samuel Corum/Bloomberg

Give President Biden, a Democrat, credit for reappointing Jerome Powell, a Republican, to a second four-year term as chair of the US Federal Reserve. In doing so, Biden passed up Lael Brainard, a Federal Reserve governor and the candidate much preferred by progressives, who in the abstract would also have been an excellent choice. He instead promoted her to vice chair. Firmly resisting strong pressure from the left wing of the Democratic Party, Biden accomplished several things.

First, he reaffirmed the central bank’s independence from political pressures. His predecessor, Donald Trump, inherited a very capable central bank head, Janet Yellen, and he acknowledged as much. But he decided that it was preferable to have his own person in charge, perhaps hoping that he could call on Powell not to tighten monetary policy in the runup to the 2020 presidential election.

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In reappointing Powell, Biden also took an important step toward establishing his own independence, in particular from his party’s strident left wing, which until now has exerted enormous influence. Biden tacked hard toward the center, basing his choice almost entirely on competence, and picked a candidate whom many Republicans also endorsed.

Perhaps some of Biden’s newfound emphasis on competence will rub off elsewhere in his administration. Having campaigned as a centrist who knows how to cross the aisle, Biden showed it when the stakes were high. This was the most important appointment of his presidency. Anyone who has studied political business cycles knows that the central bank can have an enormous influence by timing interest-rate cuts to gin up the economy just before an election.

At a time when the post-pandemic economy is still volatile and the tea leaves hard to read (though, frankly, the US labor market looks red-hot), the choice of Powell made Fed policy more predictable and easier to interpret.

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The most recent figure for the consumer price inflation number, at over 6 percent, was eye-popping. True, so far, financial markets seem to believe Powell’s argument that most of the current inflationary trend is transitory: Medium-term inflation expectations are just over 2 percent — not yet particularly high by the standards of the past decade. With Powell no longer looking over his shoulder as Biden decides on his reappointment, one might argue that he will feel less constrained in tightening monetary policy in 2022. Indeed, on Tuesday, the Fed chair said he no longer viewed the inflation problem as transitory.

It’s a tough call. There is a chance that the factors underpinning recent inflation spikes turn out to be transitory, so that the Fed can double down on its dovish policy and later say, “We told you so.” Unfortunately, there is also a good chance that wage and price hikes start chasing each other, with inflation proving far from transitory. If that happens, and if the public begins to lose confidence in price stability, it may take a rather significant recession to restore faith.

At that point, some might say that the Fed should just opportunistically recalibrate and tell everyone that it intends to raise its inflation target to 3 or 4 percent. This scenario was a key recommendation of one of the core papers the Fed commissioned in its 2019 reassessment of its monetary framework. Unfortunately, to allow inflation to drift inexorably higher, and only then tell the public that there is now a higher new normal, would probably prove extremely destabilizing.

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A much more elegant way to create space for interest-rate cuts in a deep recession involves negative interest-rate policy. True, this would require that the Fed be prepared to avail itself of one of the increasingly many options for discouraging cash hoarding that might otherwise limit the policy’s effectiveness.

Of course, the Fed could hike interest rates preemptively, but that might crash markets and put the economy into recession, particularly given the latest jitters over the Omicron variant.

There are no easy options for the Fed at his point, and that would have also been true had Brainard, not Powell, gotten the nod. So give Biden credit for understanding that no matter how much political pressure his administration was facing to bring the Fed to heel, it was better to uphold central-bank independence — and his own.

Kenneth Rogoff, a former chief economist of the International Monetary Fund, is professor of economics and public policy at Harvard University. © 2021 by Project Syndicate, www.project-syndicate.org.