JPMorgan's top economist sees 'significant chance' Powell could be out as Fed chairman

Published Thu, Jul 22 202110:59 AM EDTUpdated Thu, Jul 22 202111:55 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

JPMorgan's chief U.S. economist says there's a "significant chance" Jerome Powell will not be nominated to a second term as Federal Reserve chairman even though his response to the pandemic has been viewed positively. Powell's term is up in February, and he is widely expected to be nominated for another term. But JPMorgan's Michael Feroli's out-of-consensus view is based on his belief that progressive Democrats may want Powell out. He says Fed Governor Lael Brainard would be a candidate to replace him. Powell, 68, was appointed Fed chair by then-President Donald Trump. "Even though the framework review that he led moved monetary policy in a direction favored by progressives, the Fed has responsibility for more than just monetary policy," Feroli wrote in a note released late Wednesday. "Given the central bank's significant regulatory and supervisory powers, left-leaning voices in the administration likely will not want a Republican like Powell to remain chair." "We see a significant chance that Powell is not nominated to serve another four-year term as chair after his current term expires in January," the economist added. Feroli said the Fed could also see some other changes. He said it is unlikely Randal Quarles would be nominated for another term as vice chair of supervision when his term ends in October, though he may stay on as governor until his term ends in 2032. Vice Chairman Richard Clarida's term as governor and vice chair ends in January. There also remains a vacancy on the board, which President Joe Biden could decide to fill. "The same political dynamics that may put Powell's job at risk could also affect Clarida. These decisions could interact; if Quarles and Clarida departed, the administration could be assured of a Democratically-controlled Board even with Powell as chair," Feroli wrote. Other candidates to replace him include Michigan State professor Lisa Cook and Howard University professor and AFL-CIO chief economist William Spriggs. Feroli said either candidate would put a strong emphasis on the employment mandate and both would reinforce the Fed's current dovish stance , though their policy views are unclear. "There is a modest risk that if a leadership transition is viewed as too extremely dovish by the market, this may ironically induce a more hawkish policy response to insure the Fed hasn't completely lost inflation-fighting credibility," Feroli wrote. He added the risk would be greater if the market's expectations for inflation run persistently above the Fed's 2% target. Feroli said Powell will likely resign as a governor if he was not nominated to another term as chair. His term expires in 2028. However, most signals point to Powell's job being safe. Just last week, his former Fed colleague and now Treasury Secretary Janet Yellen told CNBC the Fed has done a good job under Powell's leadership. Several surveys also have indicated that Powell likely will get a second term, despite the pressure Biden may face to appoint a more politically progressive leader. "Fed chair Powell's response to the COVID-19 financial crisis and recession was aggressive, creative, and determined; his leadership during that period has justly received applause from economists and legislators across the political spectrum," he wrote.

Federal Reserve Chair Jerome Powell testifies during a U.S. House Oversight and Reform Select Subcommittee hearing on coronavirus crisis, on Capitol Hill in Washington, June 22, 2021.

Graeme Jennings | Pool | Reuters