Jay Powell was appointed by Trump. Trump denied Janet Yellen, the previous chair of the Federal Reserve, another term in 2018. Trump preferred to have his own pawn. He did not succeed. Powell and thus the Federal Reserve remained independent. Next year Powell can be replaced, but it will not be easy.
Under Powell, the Fed reacted quickly to the Covid crisis and a looser monetary policy than today’s is hard to imagine. Also, the central bank under Powell is much more concerned about the labour market and labour market inequality. In this way, Powell fits in perfectly with Biden’s policy. Powell also has the support of Republicans and a large part of the Democrats, which is not insignificant in a country as polarised as the United States.
More attention to regulation
It is only in the area of regulation that Powell is more supportive than the Democrats would like. In this respect, his rival, Lael Brainard, takes a much harder line.
Brainard was the only Fed executive to demand in March 2019 that large commercial banks maintain a larger buffer. She also supports a digital version of the dollar. Last week, Brainard gave a major speech at the Aspen Economic Strategy Group.
She suggested that in addition to monetary and quantitative policy, it is now time for the third pillar of central bank policy, namely more regulation.
Low interest rates have led to excesses and such a complex situation can only be countered by appropriate regulation, she said. And Brainard doesn’t need to be Fed Chair to do that. If Powell wants to ensure his reappointment, he need only follow Brainard’s lead on regulation.
China sets the example
Yesterday, the Bank for International Settlements (BIS) released a discussion paper entitled ‘Regulating big techs in finance’. The BIS warns of the rapid growth of technology in financial services. In particular, market concentration and data monitoring are creating new challenges. It seems that the Chinese government has already had access to the BIS study.
Since the normative conversation the Chinese government had with Alibaba’s Jack Ma, Beijing has been trying to bring all financial activities of Chinese high-tech companies under regular scrutiny.
The Chinese central bank is certainly not alone. Politicians around the world are watching the creation and distribution of the new currency with suspicion. With crypto-currencies as a crowbar, central banks are even dreaming up their own form of digital currency. China’s central bank is leading the way in regulation and is also well advanced in the field of digital currency (DC/EP).
Risks partly in the price
By its very nature, Big Tech uses network effects and the resulting market concentration is not what financial regulators are looking for. According to macroprudential supervision, it is then soon the institutions that are important for the system, with the stricter rules that follow. It seems only a matter of time before other central banks copy the Chinese central bank’s policy.
Soaring house prices, shortage of used cars, the US economy is kept alive by cheap money and the government has become dependent on the Federal Reserve for funding.
So there shouldn’t be a shadow banking system in the form of Big Tech that could potentially get in the way. The only difference is that Chinese Big Tech has now been heavily discounted on the basis of stricter supervision and its US counterparts are setting new price records every day.
Han Dieperink is an independent investor, consultant and knowledge expert for Fondsnieuws. Earlier in his career he was investment director at Rabobank and Schretlen & Co. Dieperink provides analysis and commentary on the economy and markets.