As Fed fights inflation, ‘dovish’ may not define Biden’s newest nominees


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By Ann Saphir and Howard Schneider

(Reuters) – In the summer of 2005, Philip Jefferson spent several weeks learning from fellow Swarthmore College professor Amy Vollmer how to genetically engineer bacteria to resist antibiotics, an unusual interlude for a tenured economics professor.

He says his brief foray into her field gave him fresh ideas for teaching in his own discipline; years later, Vollmer says, he told her it was one of the best things he had ever done.

Jefferson, now dean of faculty at Davidson College in North Carolina, is poised to again push boundaries after being picked by U.S President Joe Biden to join the Federal Reserve Board, which runs the central bank of the world’s biggest economy.

He and fellow nominees Michigan State University economist Lisa Cook and former Fed governor Sarah Bloom Raskin appear Thursday at the U.S. Senate Banking Committee for a confirmation hearing. If Cook and Jefferson are confirmed it would be the first time two governors who are Black would serve on the seven-member Fed Board at the same time, with Cook being the first non-white woman ever to hold the job.


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Raskin, whose nomination as Fed vice chair of supervision would make her the Fed’s top banking regulator, is almost certain to draw the lion’s share of senators’ questions.

Her views on climate risk and banks’ capital requirements – welcomed by some Democrats as likely signaling more restrictions for Wall Street and panned by Republicans for the same reason – will come under particular scrutiny.

But investors are also keen to know exactly where the three nominees – none of whom responded to requests from Reuters for comment – stand on monetary policy, now at a crossroads as the Fed prepares to battle searing-hot inflation.

DOVES OR HAWKS?

Wall Street analysts expect the Fed to start tightening policy next month, raising interest rates faster than it has in decades and shrinking its balance sheet rapidly as well, as it unwinds the emergency measures it unleashed to limit the economic damage from the COVID-19 pandemic.

Many of those same analysts have also pegged all three Fed nominees as leaning “dovish” – that is, more concerned with supporting the full-employment side of the Fed’s dual mandate than on fighting inflation, which often takes a toll on economic growth and employment.

They point to Raskin’s support for a go-slower approach on policy tightening in 2013, when she was on the Fed Board. They cite Jefferson’s research focus on poverty and Cook’s on the drag that inequality exerts on economic growth as evidence that they would tolerate higher inflation as the price for a stronger labor market.

That said, it is far from clear how strongly any new Fed policymaker would push for easy policy with inflation running at its highest since 1982, eating into wage gains and making it harder for Americans – lower-income households in particular – to make ends meet.

Indeed, Dartmouth College’s Andy Levin says the eye the nominees have trained on regular Americans suggests the opposite, at least for now.

“It’s bad for ordinary people if inflation stays at 5% or continues to go upward,” he said. “They are all going to be strong advocates of the dual mandate, but that doesn’t mean being complacent about inflation.”

It is a theme also heard from Michelle Holder, president at Equitable Growth, a think tank largely focused on economic inequality.

“Given the weightiness, the sheer importance that inflation possesses for most American families and individuals, the Fed simply has to make primary controlling inflation,” she told Reuters. Though that doesn’t mean the Fed can stop worrying about jobs, “controlling inflation probably has to take precedence now.”

And it is one that Democrats, gearing up for what may be a heated hearing Thursday, are eager to emphasize.

On Wednesday, Senate Banking Committee Chair Sherrod Brown’s office put out a memo saying Cook “believes we need to put workers first in our economy by focusing on the Fed’s full employment mandate and lowering prices so paychecks go farther,” and Jefferson would “tackle the economic challenges faced by all the Americans who’ve been left behind in our economy.”

A ‘THICK MIDDLE’ AS ANCHOR

Moreover, with all three nominees joining a Fed that is remarkably united on the need to remove policy accommodation, it’s unlikely even strongly held dovish views would budge that.

“At a very high level the mandate is fairly clear, so that ‘thick middle’ is not going to change and the perspectives are not going to change depending on who is sitting in the chairs,” Atlanta Fed President Raphael Bostic said in a January interview.

Senator Pat Toomey, the top Republican on the Banking committee, has suggested the nominees are partisan, in part because of their attention to issues like racial inequality and climate change.

But on some level, the nominees personify the Fed’s own deepening research into the economic implications of such issues.

Once inflation is better contained, Bostic said, “you will see many of us lean back in to say we started ‘lower for longer,’ we started ‘being patient,’ now that we have inflation under control we are going to return to that kind of approach.”

Still, people who know the nominees say it would be a mistake to make too many assumptions about what their perspectives will be.

Trevon Logan, an economics professor at Ohio State University, pointed to a research project with Cook that began as a “bet” on a new approach she was taking to mine census data.

“I began essentially doubting her, and ended up with egg on my face” when it turned out to work, he said. “I’ve been continuously struck by her creativity.”

The idea that Jefferson would be a policy dove “is probably not right,” said Swarthmore economics professor Mark Kuperberg, who worked and lunched with Jefferson regularly for two decades. He said Jefferson as an economist “is quite middle of the road.”

John Caskey, another colleague in the Swarthmore economics department, declined to speculate on Jefferson’s policy learnings, but pointed to the nominee’s stint as a microbiologist those many years ago. “He has an open mind,” Caskey said.

(This story corrects first name to Trevon in paragraph 24)

(Reporting by Ann Saphir and Howard Schneider; Editing by Dan Burns and Andrea Ricci)

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