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Nov. 27, 2021, 1:49 p.m. EST

Why it matters to you that Jerome Powell will serve another term as chair of the Federal Reserve

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By Veronika Dolar

The person who helms the Federal Reserve is  one of the most powerful  figures in the world. They can have a big impact on the lives of ordinary Americans, not to mention others across the world.

That will be especially true in the coming months as the Fed seeks to tame  soaring prices  without jeopardizing the economic recovery. The consequences of getting it wrong could be catastrophic and result in higher inflation, a  return to recession  or, worse, the Fed might have to  deal with stagflation —in which you get both rising prices and a sluggish economy.

Jerome Powell is the current chair  of the Fed, but his first term was set to expire in February.  Progressive Democrats had been pushing  President Joe Biden to replace him with  Lael Brainard , an economist who is currently serving as the  only registered Democrat  on the board of governors of the Federal Reserve System. Progressives preferred her in part because she appeared to be more sympathetic to  more financial regulation  and  Fed action on climate change .

Breaking news: After letting suspense build, Biden taps Powell for second term

Biden  announced Monday he was sticking with Powell , after weeks in which Wall Street investors, economists like me and other central bankers around the world impatiently waited word. Powell had long been considered  very likely to keep the job . Biden also elevated Brainard, nominating her to be vice chair. Both moves are subject to Senate confirmation.

But what are the responsibilities of the Fed and its chair? And what serious challenges will Powell face come 2022 and beyond?

Meet the chair

Most introductory macroeconomics textbooks—like the ones I use to teach my students—note that  the chair of the Fed is so influential  that he or she can make financial markets /zigman2/quotes/210599714/realtime SPX -2.01% /zigman2/quotes/210598065/realtime DJIA -1.56% crash or soar just by uttering a few words in public. Investors admit they scrutinize and dissect  every single word the Fed chair says  and even count the number of times a certain key phrase is used—I call it “Fed speech bingo.”

While all of this might be a bit of a hyperbole to make students pay more attention to an admittedly boring chapter on money and banking, it’s undeniable that the Fed chair is very important.

The position is ultimately responsible for regulating the banking system, promoting stability of the financial system and conducting monetary policy by controlling the money supply and setting interest rates—the main duties of the Federal Reserve. Seven governors, including the chair, oversee the Fed, and each has a single vote over key policy decisions like interest rates. But the chair wields significant power by setting the agenda and acting as the public voice of the Fed.

The Fed’s most important job is conducting monetary policy, which involves the control of the money supply in order to promote sustainable economic growth. The main tool used to achieve this is “targeting” the short-term interest rate to achieve low inflation and stable employment. This is what is referred to as  the Fed’s dual mandate . In recent years, the Fed  has also turned to more unconventional methods , like purchasing commercial bonds and other assets.

What this means for the rest of us is that the Fed helps set the rates we pay on mortgages, car loans, credit cards and other types of borrowing. Lower rates mean credit is cheaper, which boosts the economy. But this in turn can drive up inflation.

The Fed can lift rates to reduce inflation, but raising the cost of credit can hurt economic growth and lead to higher unemployment.

This is exactly the careful balancing act facing the Fed right now.

Americans across the country are seeing higher prices at the mall, grocery store and gas pump as inflation, as measured by the consumer price index,  shows it soaring at the fastest pace in over three decades . At the same time, the labor market hasn’t fully recovered from the pandemic-induced recession early last year, with 4 million fewer employed people than in February 2020.

The focus for the Fed right now is clearly on the price increases that were  initially expected to be short-term  and should have stabilized by now. Most economists believe the  recent price gains  reflect temporary supply bottlenecks and the fact that prices fell sharply in the spring of 2020 at the onset of the COVID-19 pandemic, which make inflation figures now look much larger.

The big decision that the Fed and its chair will have to make in the coming months is when to begin raising interest rates to tame inflation. If they move too much or too soon, they risk causing an economic downturn, which could lead to substantial job losses. If they act too little or too late, they risk letting inflation get out of control—as Americans last experienced in the late 1970s.

In the language used by Fed watchers, this is the difference  between being a hawk and a dove . That is, a hawk is more concerned more about fighting inflation, while a dove focuses more on growth and jobs.

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