The US regulator is facing the so-called "five-by-four problem"; it has to resolve five important issues in four years. The result is difficult to predict
The Fed's challenges were preceded by political and economic imbalances in the US. The Democratic Party urged the Fed to increase economic activity, deal with employment problems and reduce climate risks. The US Conservative Party insisted on maintaining the current monetary policy and curbing high inflation by the regulator. These domestic battles took place amid the anticipation of the US President Joe Biden's decision on the possible reappointment of Jerome Powell as the Fed Chair. Notably, his term as the Federal Reserve head expires in February 2022. According to analysts, this decision will be a turning point for the central bank.
The next Fed head, appointed by the US president, or the one and only Jerome Powell for four years will have to deal with the key economic issues, relating to the current monetary policy and the further strategy of the regulator. Experts have voiced five such challenges.
1. Getting priorities right
Currently, most economic issues revolve around the potential winding down stimulus programs. It is important to get the priorities right, beginning with the main challenges, and then dealing with the less pressing ones. Notably, according to the new strategy adopted in August 2020, the regulator intends not to raise interest rates. A decline in unemployment rate and acceleration of inflation to the target 2% will be drivers for the next hike. However, it will be rather difficult for the new Fed Chair to implement this program. Most regulators believe that the recent jump in inflation above 2% is temporary. However, experts believe that in case of further price growth, the Fed will have to raise rates.
2. Consolidation of Fed's role as supervisory authority
According to experts, the regulator will have to maintain soft monetary policy for a long time to stabilize the US labor market. Experts believe this strategy may lead to tightening financial regulation. Risky actions, provoking a crisis on the market, will decrease. According to David Wilcox, former Fed chief economist, financial regulation is considered to be number two on the agenda, especially with minimizing financial risk in a low-interest-rate environment. The next Fed head will have to address this very issue and focus on financial stability.
3. Use of digital technology
Currently, the key problem is the proper use of innovative technologies. This mainly refers to digital currencies. One of the major issues facing the Fed is the ability to launch its own virtual asset. Previously, Jerome Powell circumvented this topic. However, Lael Brainard, one of the candidates to the US Central Bank head, said she was ready to consider and implement the idea. Notably, the Fed plans to publish a corresponding discussion paper this month. Supporters of digital currencies back the idea, considering that its proper use will reduce transaction costs and expand access to the banking system for low-income citizens. Skeptics, on the other hand, fear that banks will become secondary if the US businesses and households reject traditional accounts. The alternative would be direct Fed's transactions, and this may undermine the banking system.
4. Addressing climate issues
The new Fed head will have to respond quickly and clearly to any climate risk situations. He should properly assess the impact on financial markets of such cataclysms as powerful wildfires, intense hurricanes and other devastating phenomena. According to Jerome Powell, the regulator's aim is to ensure the smooth functioning of banks. However, emergencies associated with climatic disasters contribute to a fall in assets value. At the same time, the Fed does not have the authority to fight hard against climate change. Its intervention is indirect, unlike that of other central banks.
5. Minimizing racial and gender inequality
According to the Fed, racial and gender inequality have a negative impact on economic growth. Many analysts value the Fed's contribution to solving this global problem, but urge the regulator to be more active. Experts mention imbalances in the labor market and distortions in the distribution of world prosperity among the most important problems of the present time. The new Fed chairman will have to regulate the key financial instruments of the current system. This primarily concerns programs aimed at lending to small businesses, as well as supervisory changes that allow banks to work effectively with consumers entering into arrears.
The material has been provided by InstaForex Company - www.instaforex.com