Brainard's move to the White House leaves a big gap for Biden to fill at the Fed

Published Wed, Feb 15 20232:00 PM ESTUpdated Wed, Feb 15 20233:23 PM EST

In her more than eight years as a Federal Reserve official, Lael Brainard was an influential voice, particularly for the side that favored keeping monetary policy loose and interest rates low. So her departure as Fed vice chair — which comes after she was named this week as head of the National Economic Council for President Joe Biden — creates a gap at the central bank that will require a deft hand to fill. "Brainard's departure from the Fed leaves a dove-sized hole in its monetary policy," Beacon Policy Advisors wrote in its daily newsletter Wednesday. "It's not an understatement to say she was a major presence at the Fed board." Indeed, Brainard's influence only accelerated the longer she served as a Fed governor. In the days when Janet Yellen served as chair, Brainard was considered a close ally of hers and almost a proxy for which way Yellen, who now serves as the Treasury secretary, was leaning on policy. In fact, as Biden was preparing to take office in late 2020 and early 2021, Brainard herself was thought to be a top candidate to lead the Treasury. Her subsequent appointment in 2022 as vice chair solidified her influence, installing her as part of the "troika" of policy-directing power that includes current Chairman Jerome Powell and New York Fed President John Williams. Along with all of that, she was the lead advocate for the Fed to consider adopting a central bank digital currency , an idea that otherwise has gained little traction among top officials. More immediately, though, markets will focus on not having her as a voice in pushing for a less aggressive monetary policy as the Fed looks to bring down inflation. "It's not just her views but her institutional experience that will leave Fed hawks more emboldened," Beacon noted. "Her absence could mean a more aggressive and sustained path forward in raising and holding rates at a restrictive level, increasing the risk of a recession later this year or early next year. Ironically, Brainard's departure could politically hurt the man she will directly be working for." Tilting to a recession Biden is walking a thin line nowadays between wanting to see inflation go down but not having the Fed's efforts result in a painful recession. Economic growth was held to a crawl in 2022 and is expected to do the same this year, with many experts looking for at least a mild contraction ahead . The president, then, will have to pick someone relatively aligned with Brainard's approach but who won't cause a political uproar in an evenly divided Senate that will have to confirm the new governor and vice chair. "We anticipate that the Biden administration will look to replace Brainard with another center-dovish policymaker who is serious about inflation control but ready to put some weight on two-sided risk management at this juncture and try to avoid hawkish overkill," wrote Krishna Guha, head of global policy and central bank strategy at Evercore ISI. Until her successor is chosen, Brainard's absence could mean a slightly more hawkish tilt to the Fed, meaning a central bank that might be willing to take interest rates higher than expected. However, Guha advised that investors "not overdo this" as the rate-setting Federal Open Market Committee — to a large extent — takes its cues from Powell and the Fed's economic staff. A recent hawkish shift has seen markets price in quarter percentage point rate hikes in both March and May, followed by one last increase in the summer before the Fed pauses to assess the impact its policy is having on inflation and broader economic growth. In recent days, pricing has shifted away from the probability of a rate cut later this year, according to CME Group data . However, those moves have coincided mostly with stronger economic data and more resilient inflation , rather than a reaction to Brainard's exit. Possible replacements Still, Biden will likely want at least a moderate voice on the Fed. "The ability to get monetary policymaking right is critically important both for the country and for the president's re-election prospects," Guha said. There already are multiple names being tossed around as potential successors on the Fed board. They include current regional presidents Mary Daly (San Francisco), Austan Goolsbee (Chicago) and Susan Collins (Boston). Current Governor Lisa Cook could get consideration as vice chair, though she has given public policy speeches only a handful of times in her less than a year on the board. Some candidates outside the Fed ranks, according to Guha, include Karen Dynan, Jason Furman, Janice Eberly and Christina Romer, all of whom served under former President Barack Obama (and his vice president, Biden). He also named Brian Sack, who ran the trading desk at the New York Fed, along with Seth Carpenter, chief economist at Morgan Stanley and a former Fed official.