US Federal Reserve Board Chairman Jerome Powell
US Federal Reserve Board Chairman Jerome Powell Image Credit: AFP

For everyone who lives in the UAE and draws a salary — and particularly if you send or spend dirhams beyond its shores — the renomination last Monday of US Federal Reserve Chair Jerome Powell will help determine just how far your hard-earned money will go. Or, more specifically, Powell’s leadership at the Fed — the US central bank — will intrinsically affect the value of the dollars to which the dirham is directly pegged at a rate of Dh3.67 to each greenback.

The global economy is facing pressures as never before, struggling to kick-start from the forced hibernation brought about by Covid-19. Supply chains are stretched, making it more difficult than ever to get goods to market in a global marketplace where restrictions of movement, mothballed factories, pent-up demand and prices rising at rates of inflation not seen since the mid- to late-1970s are all putting pressure on central bankers.

So why should you care about Powell’s renomination? Well, simply put, economics is about supply and demand: The greater the demand, the higher the price. But when prices go too high too quickly, there’s less money to go around. And the only way the supply of money can be controlled is through higher interest rates — making it more expensive to borrow money to cover off those higher prices.

Back to those dirhams in your pocket and that direct pegged to the US dollar, the key currency favoured globally. Adjust interest rates in the US and there’s less supply of it — it’s worth more, and if you don’t have enough, it costs more to borrow. You may not believe it, but the dirhams you earn will be worth more to other currencies. But, of course, you’ll have to spend more because things cost more. That’s the inflationary cycle.

Now imagine that at a scale hundreds of billions times more — and that’s the scale of the job facing Powell. And that’s why he’s important to you.

Making the nomination, President Joe Biden ended months of speculation over who would run the central bank for the next four years.

“We’ve made enormous progress in this country,” Biden said when he introduced Powell and current Fed governor Lael Brainard, his nominee for vice chair. “It’s a testament to the Federal Reserve.” He also cited Powell’s “steady and decisive leadership” in calming markets and supporting the economy during the pandemic.

But Powell’s renomination is also about continuity at a time when the US is deeply divided and even the validity of Biden’s own election is rejected by many in the Republican party. He was nominated first by former president Donald Trump four years ago to succeed Janet Yellen, and his renomination is as much to do with politics now as with economics.

As a Republican appointed in 2017 by a Republican president to lead the Fed, Powell had drawn solid support from lawmakers for much of his first term. Now, that support will be severely tested as inflation surges. Raise rates too quickly and the economy suffers. Raise rates too slowly, and the economy suffers.

“We know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials like food, housing, and transportation,” Powell said this week. “We will use our tools both to support the economy and a strong labour market, and to prevent higher inflation from becoming entrenched.”

In layman’s speak, that means he intends to raise rates but will be flexible — and the quarterly meetings of the Reserve Board will be very closely watched to see what kind of signals it will be sending.

Economists and policymakers had been speculating for months as to whether the White House would take the unusual step of choosing not to reappoint Powell, a dovish economist, to a second term.

The 68-year-old’s first term had been among the most tumultuous in the central bank’s history — facing its greatest peacetime challenge as the world’s largest economy went into pandemic-enforced hibernation. His second term won’t necessarily be much easier.

He and his policies have been the spotlight largely because of the pandemic that caused the deepest economic downturn since the Great Depression — an event that is still deeply ingrained in the US cultural psyche.

From the right, he faces attacks from Trumpistas. The former president who appointed him later turned, calling him a “fail” with “no guts.” On the left, he is under fire for not doing enough to support the fight on climate change.

The first time around, Powell was confirmed in a 84-13 Senate vote — now, that margin isn’t likely to be as generous. Should he be rejected, the shock waves will hit the dollar’s value — and sharply.

He came to the Fed with a long resume and spent much of his career as an attorney and investment banker before moving to public service. He served as assistant secretary and as undersecretary of the Treasury under President George H.W. Bush, with responsibility for policy in areas including financial institutions and the Treasury debt market.

Born in Washington, D.C., he received a bachelor’s degree in politics from Princeton University in 1975, followed by a law degree from Georgetown University in 1979. While at Georgetown, he was editor-in-chief of the Georgetown Law Journal.

He has also worked as a lawyer and investment banker in New York City.

He was first appointed to the Fed’s board of governors by former President Barack Obama in May 2012 to fill an unexpired term, and reappointed by Obama to the board in 2014.

Before his appointment to the Board of Governors, Powell was a visiting scholar at the Bipartisan Policy Center in Washington, D.C., where he focused on federal and state fiscal issues. From 1997 through 2005, Powell was a partner at The Carlyle Group.

Powell is married with three children. That’s a good thing. We all know how expensive children can be.