The intensifying power struggle between Republicans and Democrats nearly torpedoed Christopher Waller’s nomination to the Federal Reserve Board of Governors, but the chief economist at the St. Louis Fed squeaked through Senate confirmation on a 48-47 vote, the tightest margin in decades at least, if not ever.
Another pending nominee, economist Judy Shelton, probably won’t be so lucky. Waller’s confirmation came on a largely party-line vote—only Kentucky Senator Rand Paul voted with the Democrats against him—but Shelton faces opposition from at least three Republicans.
No one really doubts Waller is qualified to be on the Fed board. Before joining the St. Louis regional bank in 2009, he was head of the economics department at the University of Notre Dame. His nomination was voted out of committee last summer on a 18-7 vote, as five of 12 Democrats on the panel joined the Republican majority.
Fed appointments aren’t supposed to generate that much controversy, but Senate Democrats did not want to give President Donald Trump a political victory on his way out the door. As it is, Trump will have appointed what will be four of the six sitting governors, and designated Obama appointee Jerome Powell as chairman.
Unless Senate Majority Leader Mitch McConnell can pull a rabbit out of a hat and slip Shelton’s confirmation through, Joe Biden will be free to appoint the seventh governor after he is inaugurated on January 20.
Monetary Policy Unaffected, But Politics Escalate
None of these maneuverings are likely to have an impact on monetary policy, but investors will want to take note of the increasing politicization of Fed appointments. Not only has the partisan divide in Washington widened and deepened, but the type of deference given to Alan Greenspan, whose tenure of 18-plus years as Fed chairman led to a financial crisis, may have made senators more cautious about rubber-stamping these appointments.
Lawmakers last week summoned Powell and Treasury Secretary Steven Mnuchin to testify before both houses about the Fed’s emergency lending programs to counter the impact of COVID-19 lockdowns. The target was Mnuchin, who unilaterally decided to let the programs expire, but it gave Powell the opportunity to reiterate his standard warning about the uncertain course of the economy in the pandemic.
The programs Mnuchin shut down weren’t really getting much use, but again the Fed got caught in the political crossfire as Democrats portrayed the lending facilities as essential tools for a Biden administration to deal with the crisis.
As for actual monetary policy, there is some doubt that the Fed will significantly change its asset-purchase program at the Federal Open Market Committee December 15-16.
Dallas Fed chief Robert Kaplan may have the last word as policymakers enter their quiet period ahead of the meeting. In a pair of interviews last week, Kaplan, who is a voting member of the FOMC this year, said he would oppose any changes in the program even though he sees some difficult months ahead.
“I don’t know that increasing the size or extending maturities of our bond purchases would help address this situation that I’m concerned about over the next three or six months,” he said on CNBC.
In a separate interview with The Wall Street Journal, Kaplan said the committee will have to consider the timing of guidance it provides for the asset purchases. But until the rollout of the vaccines makes the situation clearer, he says he would prefer to wait on any changes.
“Then I think we’ve got to start thinking about how we want to begin to taper or communicate the composition and the size of our asset purchases,” he said.
“But I think while we’re in the teeth of this pandemic, I’m not in a rush to do that.”
It’s not certain whether Waller will be installed in office in time to participate as a voting member. In any case, he has been regularly attending the FOMC meetings in his current capacity so his thinking is likely to be in line with the consensus.