If Lael Brainard is named the new chair of the Federal Reserve this week, she won’t be fretting about raising interest rates to combat inflation any time soon. Expect a central bank under Brainard’s stewardship to be more proactive about other things, though: climate change, for instance, and digital currencies.
Brainard, an economist who has been on the Fed’s board of governors since 2014, is one of the front-runners for the post currently occupied by Jerome Powell. President Joe Biden formally interviewed her on Nov. 4, and sources told the Wall Street Journal that their meeting went “better than expected.” Biden may announce his pick as early as this week.
If she is nominated and confirmed, Brainard will take office in February 2022, as only the second-ever woman to occupy the chair. It will be an important juncture. The Fed will be halfway through tapering off its pandemic stimulus; the government will be rolling out spending programs; inflation and employment will still be suffering the after-effects of the pandemic; and challenges like cryptocurrency and climate change will become only more persistent. Given these circumstances, how would the Fed behave under Brainard?
Brainard’s remarks over the past couple of years allow us to gauge her positions on these issues. Like Powell, she believes that any inflationary pressure felt at the moment is transitory. “I expect inflation to decelerate, and pre-covid inflation dynamics to return when covid disruptions dissipate,” she said in a speech in September. Employment was still below the levels seen before the pandemic, she added, and the delta variant of the coronavirus continued to inflict damage on the economy. The speech set out Brainard’s stance clearly: The most pressing concern at the moment is the economic recovery and not consistent inflation.
But Brainard diverges somewhat from Powell in her enthusiasm for digital currencies. In September, speaking at an event for the National Association of Business Economics, she pointed out how digital payments had gained salience during the pandemic, particularly given the number of Americans left out of traditional financial networks. “Nearly 6% of American households…don’t have bank accounts. It was hard to get…payments to them.” If other countries introduce central bank digital currencies “not only for domestic payments but international payments,” Brainard said, “it’s just very hard for me to imagine that the US, given the status of the dollar as a dominant currency in international payments, wouldn’t come to the table…with a similar kind of offering.” Powell, in contrast, had said about digital currencies in July: “I’m legitimately undecided on whether the benefits outweigh the costs or vice versa.”
With private cryptocurrencies, though, Brainard has sounded notes of caution. “Nonbank issuers of private money are not regulated to the same extent as banks,” she said at a conference in May. An official digital dollar would offer the kind of safety and security other cryptocurrencies don’t, she added.
In the wake of the COP26 summit in Glasgow, Brainard’s belief about central banks’ role in the climate crisis is notable as well. She has been the Fed board’s leading voice on the environment, and in a speech in October, she highlighted the cost of climate-related disasters in the US over the past five years: at least $630 billion. In the 2008 financial crisis, banks were subjected to stress tests to determine how exposed they were to financial risk, she said, and suggested that similar tests be developed for climate change-related risk.
In orienting itself towards the climate crisis, the Fed is already somewhat lagging behind other central banks; Brainard has singled out the European Central Bank and the Bank of England, in particular. Speaking at a climate finance summit in February, she even mooted an idea that sounds bold for the US but that has become standard in Europe: compulsory disclosures by financial institutions of their climate risk exposures. “Ultimately, moving toward standardized, reliable, and mandatory disclosures could provide better access to the data required to appropriately manage risks,” she said. Rendering institutional portfolios transparent could open entirely new avenues by which governments, investors, and activists can push for fossil fuel divestment and other action on climate change.