– November 18, 2020
Jerome Powell

Senate Majority Leader Mitch McConnell (R-KY) appears intent to fill the two remaining vacancies on the Federal Reserve’s Board of Governors. Judy Shelton and Christopher Waller were formally nominated by President Donald Trump in January and approved by the Senate Committee on Banking, Housing, and Urban Affairs in July. Last Thursday, McConnell took procedural steps to set up a full Senate vote for Shelton. (Note: Shelton was previously the director of the Sound Money Project, before it moved to AIER.) The motion to limit debate (and proceed to a vote on the nomination) failed (47-50) on Monday. McConnell joined the “No” voters at the last minute, however, which permits him to reconsider the motion in the future.

Will McConnell make another attempt to confirm Shelton? It would seem likely, provided that he has the votes. Sens. Rick Scott (R-FL) and Chuck Grassley (R-IA) were absent on Monday, as both are in quarantine. Their votes, with McConnell’s, would bring the “Ayes” to 50. Vice President Mike Pence breaks a tie. 

The timing is tricky, though. The Senate will be away for Thanksgiving next week. And Sen. Martha McSally (R-AZ) will soon be replaced by Democrat Mark Kelly. If McConnell fails to get Shelton confirmed before Kelly is seated, he will be left looking for a vote. That would be a tough task. Sens. Lamar Alexander (R-TN), Susan Collins (R-ME), and Mitt Romney (R-UT) have all committed to vote against Shelton.

A vote for the far-less-controversial Waller will probably take place in December. Waller received unanimous support from the Senate Committee on Banking, Housing, and Urban Affairs and would likely be confirmed by a large margin if brought to the Senate floor.

If both Shelton and Waller are confirmed, and no current Governor resigns, President-elect Biden will have few options for replacing Powell as Chair. For starters, Powell’s four-year term as Chair does not end until 2022; and, while there is some legal uncertainty, Powell probably cannot be fired for his policy views. 

Even in 2022, however, Biden’s options will be limited. In brief, he can:

  1. Reappoint Powell as Chair.
  2. Replace Powell as Chair with Governor Lael Brainard.
  3. Replace Powell with one of the other five Trump-appointed Governors.
  4. Refuse to reappoint Vice Chair Richard Clarida as Governor and nominate a new Governor to serve as Chair.

For Biden, reappointing Powell is the path of least resistance. It would bolster his plea to put aside partisan differences for the good of the country and enable the left to continue billing itself as the guarantor of democratic institutions. Biden might even come to see Powell as his man at the Fed. Powell and Trump often clashed over policy. And, while Powell was elevated to Chair by Trump, he was originally nominated to the Fed’s Board of Governors by President Obama.

Do not be fooled by Powell’s Obama-era appointment, though. He is a Republican. His initial nomination was part of a deal with Senate Republicans to get Obama’s preferred candidate Jeremy Stein confirmed. (Stein’s nomination had previously been filibustered.) Biden might naturally prefer to have someone from the home team in charge.

Governor Lael Brainard is perhaps the most likely person to replace Powell. She’s a Democrat, Obama-era appointee with a lot of experience. She is already on the Board and stands a good chance of getting the requisite votes for confirmation as Chair in a Republican-controlled Senate. She could also serve as Chair for a long time. She is only fifty-eight years old and, since she was initially appointed to fill the balance of a term, could be reappointed for another fourteen years when her current term as Governor expires in 2026. (Alan Greenspan held the job for 18 years and five months, retiring just shy of his 80th birthday.)

The Biden administration might have other plans, though. Brainard’s name has been floated for Treasury Secretary. Her resignation from the Board in a move to Treasury would free up a spot for Biden to appoint a potential Powell replacement. But the nomination would need to be sufficiently moderate to make it past the Senate.

The prospects for replacing Powell beyond that are pretty bleak. If Shelton and Waller are confirmed, President Trump will have appointed five of the seven members on the Board. Governor Miki Bowman’s term will not expire until 2034. Vice Chair for Supervision Randy Quarles can stick around as Governor until 2032. Waller and Shelton are set to fill the balance of terms ending in 2030 and 2024, respectively.

Vice Chair Richard Clarida’s partial term as Governor expires in 2022, at which point he is eligible for another fourteen-year appointment. Biden could refuse to reappoint him, but that would be imprudent. Clarida is arguably the sharpest mind on the Board. He is a well-established macroeconomist with more than twenty-three thousand citations to his work. No doubt some Governors struggle to understand the Dynamic Stochastic General Equilibrium Models employed by Fed staffers. But not Clarida. He has spent a career developing those models. In short: it is hard to imagine Powell finding a better candidate more to his liking who would also be able to get fifty votes in the Senate.

Biden’s only other play would be to lean on historical norms. Fed Chairs rarely stick around to serve out their terms as mere Governors when they are not reappointed to the top spot. Janet Yellen resigned in 2018, when Trump replaced her as Chair with Powell, despite having nearly six years left on her term as Governor. Biden might hope Powell will follow suit.

William J. Luther

William J. Luther

William J. Luther is the Director of AIER’s Sound Money Project and an Assistant Professor of Economics at Florida Atlantic University. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including Journal of Economic Behavior & Organization, Economic Inquiry, Journal of Institutional Economics, Public Choice, and Quarterly Review of Economics and Finance. His popular works have appeared in The Economist, Forbes, and U.S. News & World Report. He has been cited by major media outlets, including NPR, VICE News, Al Jazeera, The Christian Science Monitor, and New Scientist.

Luther earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Capital University. He was an AIER Summer Fellowship Program participant in 2010 and 2011.

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