As Jerome H. Powell’s term as the chair of the Federal Reserve nears its expiration, President Biden’s decision over whether to keep him in the job has grown more complicated amid Senator Elizabeth Warren’s vocal opposition to his leadership and an ethics scandal that has engulfed his central bank.
Mr. Powell, whose four-year term as chair expires early next year, continues to have a good chance of being reappointed because he has earned respect within the White House for his aggressive use of the Fed’s tools in the wake of the pandemic recession, people familiar with the administration’s internal discussions said.
But the decision and the timing of an announcement remain subject to an unusually high level of uncertainty, even for a top economic appointment. The White House will most likely announce Mr. Biden’s choice in the coming weeks, but that, too, is tenuous.
The administration is preoccupied with other major priorities, including passing spending legislation and lifting the nation’s debt limit. But the uncertainty also reflects growing complications around Mr. Powell’s renomination. Ms. Warren, Democrat of Massachusetts, has blasted his track record on big bank regulation and last week called him a “dangerous man” to lead the central bank.
She has also taken aim at Mr. Powell for not preventing top Fed officials from trading securities in 2020, a year in which the central bank rescued markets, potentially giving the officials privileged information. Two regional presidents traded for their own profit in assets that the Fed’s actions could have influenced, according to recent disclosures. And Richard H. Clarida, the Fed’s vice chair, moved money from bond funds into stock funds in late February 2020, just before the Fed hinted that it would rescue markets and the economy.
“It is not clear why Chair Powell did not takes steps to prevent these activities,” Ms. Warren said during a Senate floor speech on Tuesday, after sending a letter on Monday calling for the Securities and Exchange Commission to investigate whether the transactions amounted to insider trading. “The responsibility to safeguard the integrity of the Federal Reserve rests squarely with him.”
Asked on Tuesday whether he had confidence in Mr. Powell, the president said he did but that he was still catching up on events.
The White House’s decision over Mr. Powell’s future is pending at a critical moment for the U.S. economy. Millions of jobs are still missing compared with before the pandemic, and inflation has jumped higher as strong demand clashes with supply chain disruptions, presenting dueling challenges for the Fed chair to navigate. The Fed’s next leader will also shape its involvement in climate finance policy, a possible central bank digital currency and the response to the central bank’s ethics dilemma.
“This is starting to feel like an incredibly consequential time for the Fed,” said Dennis Kelleher, the chief executive of Better Markets, a group that has been critical of the Fed’s deregulatory moves in recent years and has criticized it for insufficient ethical oversight.
The administration is under pressure to make a prompt decision, in part because the Fed’s seven-person Board of Governors in Washington will soon face a spate of openings. One governor role is already open. Mr. Clarida’s term ends early next year, leaving another vacancy, and Randal K. Quarles’s term as the board’s vice chair for supervision will expire next week, although his term as a governor runs through 2032.
By announcing key picks soon, the Biden administration could ensure that someone was ready to step into Mr. Quarles’s leadership role. And nominating several officials at once could give the president a chance to show that he is heeding the concerns of Democrats in Congress, who want to see more diversity at the Fed and officials who favor tougher bank regulation.
But the ethics scandal threatens to complicate the picks.
Recent financial disclosures showed that Robert S. Kaplan at the Federal Reserve Bank of Dallas traded millions of dollars in individual stocks last year, and that Eric S. Rosengren at the Federal Reserve Bank of Boston traded real estate-tied securities even as he warned publicly about problems in that sector. The trades have drawn criticism because they occurred during a year in which the Fed hugely influenced a wide range of financial markets.
Both men resigned from their roles as regional presidents amid the controversy, though Mr. Rosengren said he was leaving for health reasons.
Oct. 5, 2021, 7:12 p.m. ET
Attention has now turned to Mr. Clarida. All of his trades were in broad funds, not individual securities, and have been public since May, but have drawn attention amid the current reckoning. He sold a stake in a bond fund totaling at least $1 million and moved that money into stock funds on Feb. 27, 2020. The transaction gave him more exposure to stocks shortly before the Fed rolled out policies that goosed such investments.
The Fed has said Mr. Clarida’s trades were part of a planned portfolio rebalancing, but declined to specify when the planning happened.
Mr. Powell kicked off an internal ethics review last month. A Fed spokesperson said on Monday that an independent government watchdog would carry out an investigation into whether senior officials broke relevant ethics rules or laws.
But some progressives have seized on the problems to bolster their case that Mr. Powell should not be reappointed. Jeff Hauser, the founder and executive director of the Revolving Door Project, which has urged Mr. Biden to keep corporate influence out of his administration, has pointed out that the Fed chair himself moved money around last year, listing 26 transactions, albeit all in broad-based funds. He also noted that Lael Brainard, a Fed governor and a longtime favorite to replace Mr. Powell if he is not reappointed, did not report any transactions year.
“If you’re trying to go above and beyond, and be beyond reproach, not trading is the better option,” Mr. Hauser said.
It is not clear how much the blowback will ultimately fall on Mr. Powell. During his testimony to a Senate committee last week, lawmakers asked him about the ethics issues without explicitly blaming him for them.
The trades were not historically abnormal. Mr. Kaplan transacted in stocks throughout his tenure, including when Mr. Powell’s predecessor, Treasury Secretary Janet L. Yellen, led the central bank. Ms. Yellen’s vice chair, Stanley Fischer, bought and sold individual stocks, his 2017 disclosures showed. Ms. Brainard herself has in the past made broad-based transactions. It was the Fed’s more expansive role in 2020 that spurred the backlash.
Agencies often need a “wake-up call” to notice evolving problems with their oversight rules, said Norman Eisen, a senior fellow at the Brookings Institution and an ethics adviser in President Barack Obama’s White House.
“My own view is that Chair Powell is pivoting briskly to address the weaknesses in the Fed’s ethics system,” he said.
Ms. Warren cited regulation, not ethics issues, upon first announcing that she would not support Mr. Powell. Democrats have raised concerns for years about the deregulatory approach that the Fed has embraced under Mr. Quarles’s leadership. Mr. Powell has largely deferred to his vice chair for supervision as the central bank made bank stress tests more transparent and enabled big banks to become more intertwined with venture capital.
Critics say reappointing Mr. Powell amounts to retaining that more hands-off regulatory approach. And some progressive groups suggest that if Mr. Powell stays in place, Mr. Quarles will feel emboldened to stick around: He has hinted that he might stay on as a Fed governor once his leadership term ends.
That would mean four of seven Fed Board officials — a majority — would remain Republican-appointed. Two other governors — Michelle W. Bowman and Christopher J. Waller — were nominated by President Donald J. Trump.
During Mr. Powell’s Senate testimony last week, Ms. Warren said renominating him as chair meant “gambling that, for the next five years, a Republican majority at the Federal Reserve, with a Republican chair who has regularly voted to deregulate Wall Street, won’t drive this economy over a financial cliff again.”
Even without Ms. Warren’s approval, Mr. Powell would most likely draw enough support to clear the Senate Banking Committee, the first step before the full Senate could vote on his nomination, because of his continued backing from the committee’s Republicans. But having a powerful Democratic opponent whose support the administration needs on other legislative priorities is not helpful.
The Fed chair does have some powerful allies in the administration, including Ms. Yellen, the Treasury secretary. But the decision rests with Mr. Biden.
“I know he will talk to many people and consider a wide range of evidence and opinions,” Ms. Yellen said on CNBC on Tuesday.