Fed musical chairs takes away Wall Street’s seat

Biden’s nominees for other watchdog positions already suggest a tougher approach to Wall Street

  
Federal Reserve Chairman Jerome Powell responds to a question during a House Financial Services Committee hearing on "Oversight of the Treasury Department's and Federal Reserve's Pandemic Response" in the Rayburn House Office Building in Washington, U.S., December 2, 2020. Greg Nash/Pool via REUTERS

Federal Reserve Chairman Jerome Powell responds to a question during a House Financial Services Committee hearing on "Oversight of the Treasury Department's and Federal Reserve's Pandemic Response" in the Rayburn House Office Building in Washington, U.S., December 2, 2020. Greg Nash/Pool via REUTERS

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

WASHINGTON  - Change at the Federal Reserve could come with a catch for Wall Street. President Joe Biden has a chance to rehire or replace central bank Chair Jay Powell and his top enforcer Randal Quarles when their terms end over the next year. Powell has made himself easy to keep. The same isn’t true of Quarles, unfortunately for the companies whose soundness he helps oversee.

Powell, who addresses a Senate hearing on Tuesday, has favored full employment and fiscal stimulus in a way that aligns him with Biden. Even though he was installed by Biden’s predecessor, there’s little reason to shunt him aside next February. The jobless rate has fallen to 6.3% in January from a high of nearly 15% last April.

Quarles, though, is likely to be for the chop as vice chair of supervision in October. During his tenure, the Fed rolled back some regulations, like the Volcker rule that limits proprietary trading. While he backed curbs on bank share buybacks during the pandemic, he also helped ease them in December.

Biden’s nominees for other watchdog positions already suggest a tougher approach to Wall Street. At the Fed, that could mean Governor Lael Brainard as a replacement for Quarles. She opposed the Volcker rollback and the easing of buyback rules, and speaks often about the need to close racial wealth gaps. Brainard is alone in having voted against measures her fellow governors backed in 2020.

The commander-in-chief has also emphasized diversity, which is lacking on the all white, seven-member Fed board. Michigan State University economist Lisa Cook, under consideration to fill a vacant seat, according to Axios, would be the first Black woman to have such a role.

Absent Quarles, annual stress tests that provide a de-facto standard for how much capital banks must hold, are likely to get more stressful. Though the industry expects restrictions to be eased as Covid-cases decline, a tougher enforcer could keep them in place as a cautionary measure.

The worst case for Wall Street would be an enforcer who believes big banks should be broken up. Fortunately for them, the Democrats’ slim majority in the Senate, which would need to approve any appointment, makes that unlikely. But the upcoming game of musical chairs could still leave the biggest financial institutions without a seat.

CONTEXT NEWS

- Federal Reserve Chair Jerome Powell is scheduled to testify before the Senate Banking Committee on Feb. 23 as part of his semi-annual monetary policy report. He will appear before the U.S. House of Representatives the following day.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by John Foley and Amanda Gomez) ((gina.chon@thomsonreuters.com; Reuters Messaging: gina.chon.thomsonreuters.com@reuters.net))

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