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What the election outcome means for Fed chair Powell

Vincent Reinhart of BNY Mellon joins Yahoo Finance to discuss how the Presidential election will impact the Federal Reserve.

Video Transcript

MYLES UDLAND: All right. Let's turn our attention now to what's going on with the Federal Reserve. Their two-day policy meeting gets underway later this morning, usually kicks off right around 10:00 AM. And of course, we'll get the latest decision from the FOMC tomorrow at 2:00 PM Eastern. And for that conversation, we're joined now by Vincent Reinhart. He is Mellon's chief economist and macro strategist. We are also joined by Yahoo Finance's Brian Cheung.

So Vincent, thanks for joining the program. Let's-- it's sort of, I don't know if we know enough to really kind of go this route, but we'll start anyway. The election results, we think we know, in relation to how the Fed has plotted their course over the next couple of years. Any impacts you see there? Or will Powell and company be content to sort of continue with the path that they've certainly set out and that markets, I think, expect them to follow?

VINCENT REINHART: Yeah, the biggest question at the FOMC today and tomorrow will be among themselves. Why did we ever schedule a meeting for today and tomorrow? They just want this to go away. Jay Powell will keep the lowest profile humanly possible.

The irony is, I think to your point, is that the election outcome likely will fit their baseline, that when you write down a forecast, you assume not much of anything happens programmatically. Well, we're going to have a divided government in any outcome, in which case it's the status quo. And it's easier to forecast when politicians are delivering the status quo, as miserable as that is.

One other point is the status quo has a medium and longer term consolation that we won't have big changes across industry and a big infrastructure, big changes in taxes, either president. On the other hand, in the near term we do need something. We need some fiscal stimulus. And that's going to be harder to deliver. So one message from Jay Powell is going to be, it would be tragic if politicians don't do that.

JULIE HYMAN: Well, Vince, it's Julie here. It's good to see you. That's a message that Powell has been delivering pretty consistently, right? He's been poking that bear, so to speak, saying we need that fiscal stimulus, for a long time. If we don't get it, is there anything else that the Fed can do in order to try to add stimulus?

VINCENT REINHART: Yeah. Tragic is not a word you often associate with the Chair of the Federal Reserve. And Jay Powell called it tragic not to do more fiscal stimulus. In some sense, you know, the lady protest too much. If he's complaining so much that they need fiscal stimulus, it's probably an admission that he views monetary stimulus as somewhat limited. What they would do is more of the same. They would just look at their expansive margin, the big perimeter they have set of what monetary policy can do, and just push it out more, make the programs a little more attractive, like they've already done with the Main Street funding program a couple times, and the municipal facility a couple times.

Then they would also just do more in terms of QE. I think they've convinced everybody they're going to keep rates low for a very long time. They'll just keep them-- they'll try even harder that there will convince them that they'll keep them low for even longer. One thing they won't do, I don't think, is a negative policy rate. They just don't like that.

BRIAN CHEUNG: Vincent, it's Brian Cheung here. I want to ask you the parlor game that's happening in Washington, DC, if it does indeed become the case that Biden wins the White House and the Republicans take the Senate, what does that mean for the chances of a Powell renomination when his term as chair does expire in February of 2022? It doesn't necessarily mean that Biden could instantly renominate, and there's been some chatter that maybe they could try to put someone else with a slightly more progressive agenda on regulatory policy. But if the Senate is red, does that increase the incentive for a Biden administration to maybe keep the Republican, by title, in that position?

VINCENT REINHART: Yeah. So I think, Brian, this election outcome, or lack of an outcome, is the best chance for Jay Powell to have a second term, for a couple reasons. If it is President Biden, he is going to have to keep on good relationships with the Senate. Because the Senate is going to be controlling all nominations and any, any legislative ambitions. Jay Powell will be delivering the monetary policy he wants, extreme accommodation. He talks the talk and walks the walk more for underserved minority participation in the labor market. He has really built up relationships with the Hill. And so he'll be tough to dislodge.

Had President Biden had a Democratic majority in the Senate, Powell would be gone. There are just a lot of Democratic advisors who'd like that job. The bench is very, very long. But it's not a question of policy preference. Powell's delivering that. It would be a personality. And personality takes a back seat when you're trying to keep good relationships with Mitch McConnell.

BRIAN CHEUNG: And Vince, as a follow-up to that, I mean, when you talk about personalities, there are other personalities at the Fed Board as well. As we know, they're up to seven positions right now. There's five, there's two vacancies. So under a Biden administration, where any sort of nomination would still have to go through a Senate confirmation, what might you expect for other types of characters to be on that board? We know, for example, Randy Quarles is a pretty in line with the deregulatory policy of the Trump administration over the past few years. Would his position at the Board be at risk under a Biden administration with the Republican Senate?

VINCENT REINHART: Oh, for sure. Because although Democrats have a minority in the Senate, Elizabeth Warren is still there. And she is a powerful voice on the Banking Committee and she also has some influence. I think what it suggests is the Biden picks for governor will be very conventional, much more so with a Republican majority than had it been a Democratic majority, and veering toward the middle with regard to issues on regulation, middle to a little left of that middle, just to get through the Senate Banking Committee.

So is Randy Quarles' term at risk when that comes up? Yes. Remember, he has a four-year term as vice chair as for supervision. Hard to see a Biden administration reappointing him for that. And over time, there will be a movement, a gravity more toward, a ploy more toward the center to center left, limited by what can be done.