As 2020 came to an end, a fierce debate was underway among economists and lawmakers over what role the Federal Reserve should continue to play in the coronavirus recovery.
Indeed, one of Treasury Secretary Steve Mnunchin's last political battles was over his decision to claw back money given to the Fed to backstop emergency lending and to discontinue credit facilities designed to provide relief to municipalities and small businesses.
The political winds have shifted since then, however, with Democrats about to take control of both the White House and the Senate after a surprise two-for-two win in the Georgia runoff election.
"The results of that Georgia runoff were significant," said Tom Kozlik, head of strategy and credit at HilltopSecurities. "That makes it so there is the potential for the Democrat's legislative agenda to materialize and materialize pretty quickly."
President-elect Joe Biden confirmed this Thursday night in a speech outlining a $1.9 trillion plan to combat the virus and boost the economy, which he said will be his top legislative priority.
While Republicans will likely resist parts of the plan, as well as its overall price tag, the Fed at least appears to be on board with taking more of a backseat in the recovery. Fed Chair Jerome Powell has signaled from the beginning of the crisis that more fiscal stimulus was a must.
That doesn't mean the Fed's easy money policies are ending anytime soon, or its aggressive bond buying programs. Prior to Biden's speech, Powell on Thursday committed to keeping interest rates low for the foreseeable future.
“Now is not the time to be talking about exit," Powell said in a webcast with Princeton University. "I think that is another lesson of the global financial crisis, is be careful not to exit too early."
Kozlik noted that Biden's plan is still just a plan though, and how the Fed acts will in many ways depend on how much stimulus actually makes it into the economy and when.
"It all depends on what the general and specific aid that is not just proposed but what actually passes," he said. "That's really going to move the needle on what the Fed ends up doing."
Biden and the Fed
Looking beyond the next stimulus package, it's unclear whether the Biden administration's relationship with the Fed will significantly differ from his predecessor. Most Fed-watchers, however, anticipate that it will be more cordial than the sometimes contentious tug-and-pull between Trump and Powell.
"My guess is that Biden will shy away from the kind of direct criticism that we saw from Trump," said Tim Duy, an economics professor at the University of Oregon and author of the Fed Watch blog.
Back in 2019, Trump routinely criticized Powell for not lowering interest rates enough, even as the unemployment rate reached historic lows and the stock market boomed. At one point, he even tweeted that Powell and the Fed had “no ‘guts,’ no sense, no vision!”
Technically, though it works closely with the Treasury Department, the Fed is an independent agency, so a more hands-off relationship would be a return to the status quo of recent presidents who, with some notable exceptions, have avoided pressuring the central bank.
Richard X. Bove, a financial strategist at Odeon Capital Group, argued that this is because the Fed in recent history has largely hewed to what presidents want: loose monetary policy. He pointed to former Fed Chairman Alan Greenspan as kicking off the current trend of generally keeping rates low, regardless of the economy's health.
"As long as the Fed does exactly what the president wants, then there's no problem," he said. "It's only when there's a difference of opinion between the Fed and president that you get a conflict."
One area where Biden will have a direct impact on the Fed is in filling at least one vacant seat in the crucial Federal Open Market Committee, which is responsible for setting interest rates. He'll also have the option to replace Powell in 2022 with a new chairman, though presidents across the ideological spectrum have often kept Fed chairs appointed by their predecessors.
"Whenever he gets around to filling these spots, they'll be somebody who's probably on the dovish side, probably somebody who is somewhat center-left and a little bit more interested in regulatory oversight of the financial sector than a Trump appointee would be," Duy said.
Dovish, in Fed parlance, means willing to keep rates low, though the current arrangement between Powell and the new Biden administration will likely be plenty dovish, he added.
"With [former Fed Chair Janet Yellen] as Treasury Secretary and Powell as the Fed Chair, I don't think they're going to lack the ability to creatively use 13-3 facilities should they need to," he said, referring to the special credit facilities launched by the Fed to address the pandemic-induced downturn.
Another area where the Biden administration and Powell-led Fed might see eye-to-eye is on inequality and racial justice. Over the summer, Powell issued a statement committing the Fed to address racial injustice in the economy. Congressional Democrats followed this up with a bill that would make reducing racial inequality a part of the Fed's mandate.