In what likely will be just a few months’ time, the Federal Reserve will look a lot different: Three new governors, a new vice chairman, a new banking chief and likely a couple new regional presidents.
But while the parts of the institution’s upper echelon may change quite a bit, the whole could look pretty much the same.
That’s because Fed-watchers think ideologically there probably will be little change, even if Sarah Bloom Raskin, Lisa Cook and Philip Jefferson are confirmed as new members on the Board of Governors. White House sources say President Joe Biden will nominate the trio in the coming days.
Of the three, Raskin is thought to be the biggest change agent. She is expected to take a heavier hand in her prospective role as the vice chair for bank supervision, a position until December that had been held by Randal Quarles, who took a lighter touch.
But while Raskin could ramp up the rhetoric on the financial system, there are questions over how much that actually will translate into policy-wise.
“She’s a former regulator. She knows this stuff. This is not something she’s going to screw up,” said Christopher Whalen, founder of Whalen Global Advisors and a a former Fed researcher. “The bankers will be surprised that the rhetoric is going to be maybe a little bit more extreme. But the substance? What are they doing to do to these guys? It’s not like they take a lot of risks.”
Indeed, the level of high-quality capital U.S. banks are holding compared to risk assets has progressed continually higher since the financial crisis of 2008, from 11.4% at the end of 2009 to 15.7% as of the third quarter in 2011, according to Fed data.
Still, the banking industry has remained a favorite target of congressional Democrats, led by Massachusetts Sen. Elizabeth Warren, who is thought to have favored Raskin for the supervision role.
Yet the nominee’s biggest impact could come in some of the ancillary places where the Fed had dipped its toes recently, such as the push to get banks to plan for the financial impact of climate-related events.
“The main point of controversy in her confirmation will be around climate policy where she has in the past expressed support for implementing both Fed monetary and regulatory policy in a way that promotes the green transition,” Krishna Guha, head of global policy and central bank strategy for Evercore ISI.
While Guha sees Raskin “adopting a materially firmer line on regulation” than Quarles, he also sees her as being “pragmatic” on issues such as reform in the Treasury market, specifically pandemic-era changes to the Supplementary Leverage Ratio. The SLR dictates the weighting for assets banks hold, and industry leaders have called for changes to differentiate between things like Treasurys and other far riskier holdings.
The financial system also has continued to see unusual trends in the pandemic era, such as dramatically higher liquidity demand from the Fed’s overnight reverse repo agreements, where banks can exchange high-quality assets for cash. The operations set a single-day record on New Year’s Eve in 2021 with nearly $2 trillion changing hands, and Thursday’s activity saw more than $1.6 trillion in transactions.
Monetary policy challenges await
Those issues will demand attention from Raskin, as will broader questions of monetary policy.
Cook and Jefferson are expected to bring dovish views to the board, meaning they favor looser policy on interest rates and other such matters. If confirmed, though, they would come to the board a time when the Fed is pushing toward a more hawkish approach, teeing up rate hikes and other tightening moves in an effort to control inflation.
“We think it would be a mistake to view them as likely to form a hardline dovish bloc on arrival and oppose the hawkish shift in Fed policy underway,” Guha wrote. “Rather, we think they – like [Governor Lael] Brainard and other erstwhile doves [Mary] Daly and [Charles] Evans – will view policy as a game of two halves and explain what this means and how it may play out.”
Daly is the San Francisco Fed president while Evans helms the central bank’s Chicago operation.
They, among multiple other policymakers in recent days, have talked about the need to raise rates. So even if the new trio of officials would come in wanting to hit the brakes on policy tightening, they’d likely be drowned out by a desire to curb price increases running at their highest rate in nearly 40 years. The Fed also is expected to halt its monthly asset purchases in March
Where the board seems less decisive is on reducing some of the more than $8.8 trillion in assets the Fed is holding. Some officials at the December meeting said balance sheet reduction could start shortly after rate hikes begin, but others in recent days have expressed uncertainty about the process.
“People want the Fed to do something about inflation. But as growth starts to slow around the spring, people aren’t going to way to pay higher borrowing costs,” said Joseph LaVorgna, chief economist for the Americas at Natixis and chief economist for the National Economic Council under former President Donald Trump.
“They’re going to be pretty dovish on the rates side, and may indeed push back on the balance sheet reduction,” he added.
Other changes for the Fed will see Brainard likely take over as vice chair of the Federal Open Market Committee, which sets interest rate policy. The position effectively makes her Chairman Jerome Powell’s top lieutenant; statements during her Senate confirmation hearing Thursday indicate she likely will be voted through.
There also are two regional president positions open, after Boston’s Eric Rosengren and Dallas’ Robert Kaplan resigned last year amid controversy over market trades by Fed officials in the early days of the pandemic.
Whalen, the former Fed official, said the new policymakers will have plenty to keep them busy though they aren’t likely to push for wholesale changes.
“I think Fed governors actually may spend more time this year talking nuts and bolts of financial markets than they have the last couple of years,” he said. “It’s very clear they made mistakes. Yet, they’re not very good at saying that.”
In what likely will just a few months’ time, the Federal Reserve will look a lot different.