But Does it Really Matter? President Joe Biden broke the suspense Monday on who will be the next Chair of the Federal Reserve renominating Jerome Powell to a four-year term beginning next February. Markets, which believe that Powell will taper bond purchases faster than his rival Lael Brainard would have, sent the yield on two-year Treasurys up sharply from 0.46% at the beginning to the week to 0.64% by Wednesday's close. Brainard got the consolation prize, being elevated to Vice Chair.

Biden emphasized continuity in naming Powell, stressing as well that "we need…independence at the Federal Reserve." But the decision was clearly influenced by the fact that either nominee will require confirmation in an evenly balanced Senate. Powell's confirmation is likely to prove easier with support from both Republicans and mainstream Democrats. Brainard would have encountered opposition from Republican Senators.

But is the presidential decision really such a momentous one for future Fed decisions? As the Wall Street Journal Editorial Board said recently, both Powell and Brainard have remained supportive of continued expansion in the central bank balance sheet despite a surge in inflation way beyond what the Federal Reserve had expected. Furthermore, whether Powell will accelerate taper a few months earlier than Brainard would have done will make little difference in controlling inflation that has already taken firm roots.

While Powell is a registered Republican and Brainard contributed to the 2016 Hillary Clinton presidential campaign even as she served on the Federal Reserve Board, they both have an interest in not rocking the boat ahead of the crucial November 2022 congressional elections – so much for Fed "independence". They have also been firm adherents of the "transitory" mantra on inflation, Powell at almost every public opportunity, Brainard during internal discussions.

Biden will soon have the opportunity to nominate three more individuals to seats that will become vacant on the Board, including the person who will supervise bank regulation. Don't expect the new Fed nominees to include anyone who wants to raise interest rates soon to control inflation. The emphasis will be on keeping the stimulus ahead of the November elections. The newly nominated officials are likely to insist that the inflation pickup will not last, only that it will take sometime in 2023 before it comes down to more normal levels.

It is politically convenient when you can define "transitory" to be any length of time you want, changing the definition when your previous forecast proves incorrect!

As the global appearance of the Omicron variant trashed global equities on Friday and forced investors to flee to the safety of risk-free bonds, a key question is whether Powell will switch to preferring a slower taper, making any difference between him and Brainard even less significant. There is the precedent of his having promised several rate hikes at his press conference in December 2018, only to pivot significantly after equities cratered in the final days of the year. 2019 turned out to be a year of interest rate reductions. The shift was prompted by a plunge in equity prices, not by changes in employment and inflation that are the twin objectives of the central bank.

The difference between January 2019 and January 2022 is likely to be that inflation will be significantly higher in the latter instance, limiting flexibility for a Powell pivot. Also, unlike 2019, inflation has become a major political issue rather than just be a topic economists discuss among themselves. In short, a renominated Chair Powell and new Vice Chair Brainard will likely find themselves in a corner for which they can blame no one except themselves.

What will the Fed end up doing? Expect Powell to return to his "transitory" argument regarding inflation and to suggest that the central bank will not speed up taper. Such a posture will likely find support from the President who nominated him. However, inflation is unlikely to observe political niceties.

As inflationary pressures persist boosted by continued expansion in the Fed's balance sheet, Powell may find it increasingly difficult by March to maintain that inflation is transitory. Bond bulls may no longer be able to depend on Uncle Jay to bail them out.

Dr. Komal Sri-Kumar

President

Sri-Kumar Global Strategies, Inc.

Santa Monica, California