RSM Chief Economist Joe Brusuelas talks about the circumstances behind Fed chair Jerome Powell's re-appointment by the Biden administration.

Video Transcript

- Let's bring in our first guest for the hour. We've got Joe Brusuelas, RSM chief economist. Joe, it's good to get your insights on a big day at the Fed. You could argue that Jerome Powell offers a steady hand, especially when the US is coming out of recovery or trying to steer the path on recovery.

But I was struck by this White House statement that really seemed to go out of its way to connect these two names between Powell and Lael Brainard, saying, essentially these two together will be the ones that will be trying to keep the recovery on the right path.

JOE BRUSUELAS: I think it sends the signal of policy continuity. The market clearly liked it. You see equities rising. I see yields rising, bond prices falling, and a much stronger dollar. But once we get beyond the navel-gazing around financial market's reaction, and what you get the sense is, is that we've got some monumental decisions ahead in coming months from the Fed, not just on inflation and the risks around the outlook to inflation, but on climate change, on regulation, and of course, the imposition of a central bank digital currency, which does carry the real possibility that we're going to be observing a real evolution in monetary policy in the years ahead.

And Lael Brainard, just as much as Jay Powell, is going to direct and shape that. Don't discount the fact that she did not take over the supervisory title. She'll have a wide and far ranging portfolio and it'll be a very powerful position, perhaps one of the more powerful vice chairs we've seen in some years.

- Yeah, Joe, and I wonder what that does, when we talk about how the politics-- the Fed is supposed to be neutral out there. And really, we saw that kind of endangered under President Trump after he was bashing his own appointee there in Jay Powell.

But now that he's sticking with him, as Joe Biden has, I mean, when you look at maybe kind of how politics plays into where it goes in making some of those decisions, there are some, I mean, I know the market likes keeping Jay Powell in the Fed chair post.

But there are some that might be afraid of what happens with Lael Brainard now, maybe pushing some of maybe what the Biden administration might want to have done. I mean, how do you kind of look at how it changes some of that thinking?

JOE BRUSUELAS: Well, it's a distinction without difference. I mean, the difference between Powell and Brainard here is, we have a dove and a dove. There's not much policy differentiation, except perhaps on bank regulation where I think their views are widely understood.

Look, it's a signal that central bank independence is both a necessary and sufficient function of financial markets. And it's a good thing the federal government continue to emphasize that, given the interesting four years that we've all just been through.

My sense here is that financial markets will interpret this as, well, he reappointed Jay Powell over the vociferous opposition of the senior Senator from the state of Massachusetts. I'm assuming she's not going to vote for his nomination.

And that does tell us that we need an independent central bank and a chair who when we enter times of crisis, like we went through last year in 2020, at the worst of the crisis, Powell acted boldly, decisively, and was willing to sustain that policy well beyond. It made other comfortable.

Now that's what you want in a Federal Reserve chairman. And to be honest with you, he deserved reappointment on the merits of this actions he took during what was the worst public health crisis in over a century. And the shocks we've seen to the economy rivaled what we went through, in some cases, exceeding the great financial crisis. I give Mr. Powell very high marks for how he's performed during his tenure.

- With that said, Joe, how do you think his second term will look different from his first four years?

JOE BRUSUELAS: OK, the first thing is, you'll likely to see at the December meeting a pulling forward of the pace of tapering operations, which makes sense, giving where inflation is. Second, I think that the climate change material is going to be absolutely critical.

And then, I'm emphasizing this now, sort of an over-the-horizon view-- central bank digital currencies do carry with them the possibility of altering the relationship between monetary and fiscal policy, especially as it applies to negative nominal interest rates as opposed to negative real interest rates, which of course, we've always been with.

The Federal Reserve has some big steps ahead of it. And I think Jay Powell and Lael Brainard are the two shepherds to get us through this next evolution in the most important institution outside the Congress and the administration.

- Yeah, you mentioned Senator Elizabeth Warren's take on Jay Powell. And I think we all remember when she called him a dangerous man, talking about maybe not doing as much on bank regulation and also critiquing some of the trading activities that we saw at the Fed as well.

But, I mean, when you look at kind of the job, as you said, the market enjoyed the way that Jay Powell was able to navigate this and keep the economy on track in the pandemic. When you look past it, though, in terms of those key decisions that they're going to have to make, I mean, what does it look like in terms of where we're at right now? Given coming out of this pandemic, potential fears of a fourth wave, this lockdown we're seeing in Europe now. What it means for the state of the economy here when you look into the data and how consumers are shaping up and fearing continued inflation?

JOE BRUSUELAS: Well my sense here is that consumers are responding to the price of gasoline. You all are pointing to the University of Michigan survey. You might want to take a look at The Conference Board survey, which is far more sensitive to the unemployment rate. You'll get two very different outcomes in terms of consumer confidence, and of course, the narrative will change as the data evolves.

Now, I think that we're going to have a very strong close to the year in the economy. And I don't know about you guys, but I'm watching what's going on in global oil markets. The price of oil is coming back. If we see a release of the Strategic Petroleum Reserve by the United States, by China, by Japan, you can expect further declines. And all of a sudden, that narrative not quite the same. But again, the data will tell the tale.

And I want to reemphasize this. The decisions that are going to be made around the greening of finance and central bank digital currencies are absolutely critical and huge. And it's important that we begin to think this through in a thoughtful, rational public way, because they will lead to lasting changes in the way in which monetary policy operates.

And it's important that we have public servants like Jay Powell and Lael Brainard, who-- let's be honest-- could do something very different without half the hassle and the BS. I don't envy anybody who's at the Federal Reserve right now given the very difficult decisions that lie ahead in the months ahead.

- And Joe, the president is still looking at three vacancies here on the Fed's board of Governors. How do you think he tries to put his stamp on the central bank with those appointments?

JOE BRUSUELAS: Well, it's very clear that when you're the president of the United States from whatever party, you want to leave your own premature on central bank. You want to appoint people who reflect your values and the direction in which you want to take the economy in the country. I'll give you an example.

We haven't ever had an African-American woman on the Federal Reserve Board. It's high time that that be remedied. Dr. Lisa Cook-- Michigan State-- a very good economist. My sense here is that that's somebody who's going to warrant and merits. A deep look at that possible appointment, and there are plenty of other economists out there who really do merit attention.

And I think it would be good going forward that the central bank reflect the diversity and balance of opinion in the economy in the country. That's good for the central bank. It's good for the Federal Reserve. It's good for the United States.

- Joe Brusuelas, always good to get your insights. Appreciate you joining us today. RSM chief economist.