With all eyes focused on the presidential election there’s been little attention paid to the Federal Reserve and its make-up. The intersection with the presidency is close, especially for whoever takes office in January. The new president will have an opportunity to uniquely influence the Federal Reserve for years to come, years where how the Fed acts or doesn’t act will have great economic impact.
“One by-product of the 2020 election is that the Federal Reserve might swing from the current Republican majority on the Board of Governors to a board dominated by Democrats,” said Rick Sharga, Executive Vice President with RealtyTrac, a leading source of investor leads and real estate data. “The result might be a different approach to interest levels, inflation goals, and potentially mortgage rates that could be substantially lower.”
How the Fed works
The Federal Reserve System was established in 1913. It’s run by a seven-member Board of Governors and each serves a 14-year term. The terms are staggered with a new appointment every two years. Each governor is appointed by the President subject to confirmation by the Senate.
Also, the Chair and two Vice Chairs are picked by the President from the Board of Governors, subject to Senate confirmation. Those selected for leadership services have a separate four-year term.
The reason for staggered terms is to make the Fed independent of the political process. That’s the idea but – like Supreme Court nominees – politicians are plainly involved with appointments and want governors who reflect their views.
Here is the current list of governors, their party, and when their terms end.
- Jay Powell, Chairman (Republican – Chairmanship ends in February 2022, governorship ends in 2028)
- Charles Clarida, Vice Chair (Republican – Vice Chair ends term ends September 2022, governorship ends in January 2022)
- Randy Quarles, Vice Chair of Supervision (Republican – Vice Chair term ends October 2021, governorship ends January 2032)
- Lael Brainard, governor (Democrat – term ends January 2026)
- Michelle Bowman, governor (Republican – term ends January 2034
So far we have accounted for five of the seven governors. Two other seats are currently vacant but replacement candidates – Chris Waller and Judy Shelton – were nominated in January by President Trump. Waller, a St. Louis Fed official, is a shoo-in. Shelton is not. She questions if the Fed should exist and supports a return to the gold standard. Both are Republicans.
Republicans vs. Democrats
Right now the Fed is dominated by Republicans, 4-1. If the two current nominees go through the count will be 6-1 in favor of Republicans.
Things will change substantially with a Biden Administration. In the coming four years the next chairman and both vice chairs would be Biden appointees. Ditto with new nominations for the seats held by Powell, Clarida, Brainard as well as the vacancy to be filled by Shelton, if she is approved by the Senate.
A Different View
The Board of Governors is supposed to pursue “maximum employment, stable prices, and moderate long-term interest rates” according to the legislation guiding the Fed. A Biden presidency might produce a very different Fed.
First, with additional Democratic governors the Fed might have a greater interest in employment.
Second, with a Democratic majority there might be more support for lower interest rates, really lower rates.
For example, when asked on 60 Minutes whether he favors negative interest rates, Powell told Scott Pelley that “people would be depositing money in the bank and that money would be shrinking. They’d be paying interest to put their money in the bank. So it’s not a particularly popular policy, as you can imagine.”
“It can also tend to depress the profitability of banks,” Powell added, “which makes them likely to lend less, which weighs on economic growth.”
Democrats might have a different view. They might argue that negative rates will reduce the cost of government debt and make a lot of capital available for business expansion – thus maximizing employment.
This approach actually parallels President Trump’s view.
“I feel strongly we should have negative rates,” said the President in May. “Negative rates is basically where they pay you interest if you borrow money. This is a new one. I’ve been looking for something like that all my life. That’s a pretty good one.”
Not to be overlooked, with negative interest we will see mortgage rates lower than even today’s record-busting interest levels. This will greatly increase real estate affordability, leading to new demand and a new boon in home sales and refinancing. Local governments would love the new taxes from sales, refinancing and higher values. Banks and savers would lose out.
If negative interest levels seem odd and peculiar consider this: Negative rates are fairly common worldwide.
As Bloomberg reported in July, “the world’s pile of debt with a negative yield — bonds that cost investors money simply by holding them — has climbed to near the $15 trillion mark, prompting investors to take on more risk.”
Look for the Fed – along with the economy – to have a few tumultuous years ahead. After all, as a result of the pandemic, we’re entering new financial territory, a territory that includes different approaches to interest levels, inflation, and full employment.