There is a reshuffling underway at the Federal Reserve
RACHEL MARTIN, HOST:
There is a reshuffling underway at the top of the Federal Reserve. The U.S. central banking system faces big questions about how to steer the economy through a burst of inflation and the persistent disruptions to labor markets and supply chains caused by the pandemic. President Biden has three slots to fill on the seven-member Fed board in Washington. And two of the 12 regional Fed banks are looking for new presidents.
For more, we turn, as we often do, to David Wessel. He is director of the Hutchins Center at the Brookings Institution.
Good morning, David.
DAVID WESSEL, BYLINE: Good morning, Rachel.
MARTIN: Who is President Biden thinking about for those three board vacancies?
WESSEL: Well, we've been expecting the White House to announce the nominees any day now since the beginning of December. The betting is that the president's going to pick Sarah Bloom Raskin to be vice chair for bank supervision. She's a lawyer, former Fed governor, deputy treasury secretary and is sure to be much tougher on the banks than her predecessor, a Trump appointee, Randy Quarles. And that's a priority both for the White House and many congressional Democrats.
For the other two spots, well-sourced reporters say the White House is looking at two academics - Lisa Cook of Michigan State and Phil Jefferson, who's now dean of faculty at Davidson College. Both of them are Black. So if these three are nominated, and confirmed by the Senate, of course, the Fed board will for the first time have more women than men and more than one Black governor.
MARTIN: So thinking about inflation, what difference do these changes mean - these personnel changes mean - for the interest rates that the Fed sets?
WESSEL: Actually, not much - new governors tend to follow the lead of the chair. And, of course, President Biden has renominated Jay Powell for a second term. His confirmation hearing at the Senate is tomorrow. And by the time these three are seated, the Fed probably will have set its tentative course for 2022.
Now, you know, the Fed has been surprised by the persistence of price increases and by the reluctance of millions of people to return to the workforce. So financial markets have shifted quite a bit. And they now anticipate the Fed will lift rates from zero, where they've been since the pandemic began in March, and will lift them two or three times more during 2022. I think one task the Biden appointees might face is explaining to progressives in the public just why the Fed is raising interest rates - taking its foot off the monetary accelerator, if you will - even though so many people will still probably be hurting from the pandemic in 2022.
MARTIN: So, David, what drove the Fed to speed up its timetable for raising interest rates? And does it risk triggering a recession if it goes too far?
WESSEL: Well, inflation is running well above the Fed's 2% target - 5.7% in the past year, by its favored measure. And even though inflation is likely to abate as kinks in the supply chain are worked out, Fed officials worry that too long a period with scary headlines about inflation could really lead people to expect higher inflation going forward, and that could become a self-fulfilling prophecy. At the same time, the Fed thinks that with unemployment down to 3.9% and so many unfilled job openings, we're very close to what they call maximum employment.
But I think there are a couple of risks here. One is they wait too long. We get too much inflation. They have to really jack up interest rates. That could cause a recession. But the other is that they are too mesmerized by today's inflation readings. They tighten monetary policy just as the economy slows - less federal spending coming into the economy. And that too could trigger an unwelcome recession. So it's a very delicate balancing act they face right now.
MARTIN: David Wessel, we always appreciate when you come on. We appreciate you - director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. Thanks.
WESSEL: You're welcome.
(SOUNDBITE OF SUFF DADDY'S "LAMBORARRI")
NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.