It is extremely rare – and important – to have a Fed chairman willing to take some risk of inflation tipping over the Fed’s target for a short period of time in exchange for very low unemployment and robust wage growth remain.
Powell was ready to take that risk.
In 2019, the unemployment rate averaged 3.7 percent, the lowest since 1969. Conventional wisdom has it that the Fed should have hiked interest rates frantically as it is certain that this unemployment rate signals impending economic overheating. But when asked if he was worried about this scenario during the congressional hearing, Powell fluttered #EconTwitter by replying: “We have no basis or evidence to call this a hot job market. We have never seen wages rise as sharply as in the past. To call something hot, you have to see some heat. ”This determination to find out how to reduce unemployment sustainably is a huge step forward in monetary policy – something the left has fought for years.
Some have argued that Powell’s reluctance over the past few years is political: a Republican Fed chairman helped a Republican president before the Covid-19 outbreak and then just did what any other chairman would have done during the pandemic to keep the economy afloat to keep. These skeptics argue that Powell will stab the government in the back if the tradeoff between inflation and unemployment becomes stark under a Biden presidency. That is not convincing. If Powell was looking for an opportunity to tighten monetary policy to block the Biden administration, it was the spike in inflation of the past few months the perfect one. but Powell has stayed firmer more reluctant than almost any other policy maker during this period.
In short, Powell has adopted largely the very same monetary policy approach that the progressives have been recommending for decades. Along the way, the evidence he highlights in support of this stance has managed to attract even many who would do not consider themselves progressive. But this approach has not yet become the dominant paradigm, so any Powell replacement would be guaranteed to accept it – even if that was their goal. It Takes Champions With Wide Respect in Washington, DC Powell, a Republican retired investment banker, has proven himself one, and that is tremendously valuable for progressive purposes.
The most common lawsuits against Powell are based on allegations that he was lenient with financial regulation and insufficiently proactive with climate change. There is some truth in these allegations. But replacing Powell is neither necessary nor sufficient to address these issues, and there is little point in unnecessarily risking the gains made for workers under Powell’s Fed.
As for financial regulation, the real focus of progressives ire should be on the Fed’s vice chairman Randal Quarles. Quarles has watered down a number of post-financial crisis rules and should be replaced when his term expires in October.
Do I wish Powell, while envisaging a transformative change in the Fed’s monetary policy, also publicly opposed his vice chairman of oversight’s decisions? Certainly. But I also sympathize with someone who may want to focus on one political change at a time, and I think that replacing Quarles with a strong vice chairman of oversight can solve most of this problem. (As a matter of fact, Powell largely bowed to the person in this post while he was a member of the Fed, whether it was Quarles or Barack Obama who picked Daniel Tarullo.)
When it comes to climate change, the Fed – and literally every other policy maker and institution in society – should act more urgently. But the actual policy tools it controls have a tiny (at best) impact on emissions. It is therefore unrealistic that an activist Fed chairman alone cannot significantly influence the level of greenhouse gas emissions over the next decade. I understand why people want this to be true – unlike much of Washington, DC, the Fed has demonstrated a minimal level of competence and public purpose in recent years, and there is no filibuster to theirs Making decisions.
But there is also no real instrument currently controlled by the Fed that would have a serious impact on emissions. Much of what people say the Fed can do about climate change is real only advise banks and other financial institutions not to be stupid and underestimate climate risks in their portfolios. That is fine, but it does not result in significantly lower emissions. The Fed could also buy bonds from renewable energy companies to make debt financing cheaper for those companies. But debt financing is already dirt cheap for almost every company in the US guaranteed consumerswhat the Fed can’t do.
Could the Fed really get radical and state that banks are simply not allowed to do business with fossil fuel companies, which is curbing this sector from the financial supply side? Almost certainly not. Why should a Congress that is hostile to transformative climate policies allow the Fed that oversees it to do so? And if we had a Congress that is not hostile to transformative climate policies, why wouldn’t lawmakers simply pass direct and more effective laws to combat climate change, since tax and spending policies offer much more direct tools to reduce emissions?
The Fed should certainly use its enormous research capacity to investigate and highlight the economic consequences of climate change. Among other things, it is an essential question how they conduct their own politics. But there is no end to convincing lawmakers to take climate change seriously. That fact could literally be the end of us all, and that’s insane. But it’s not a fact that changes when you choose a different Fed chair.
What changes when you elect a different Fed chairman is that he creates a series of musical chairs on the Fed Board of Governors that could shift the balance from deaf to hawkish. Eventually, if that happened, Powell would be leaving the board and a Senate-approved replacement would be required. It’s hard to imagine the Senate simply approving of a strong pigeon. Even someone like Fed Governor Lael Brainard – who is often brought up to replace and actually would be an excellent Fed chairman – would likely face more resistance. The Senate already has several vacancies to approve, and Biden should focus on appointing a high-level selection of candidates to fill those vacancies.
Ultimately, the progressive argument for keeping Powell in place is simply that he adopted our approach for by far the most important part of his job, and that approach is critical to promoting economic and racial justice for years to come. It’s not the kind of thing that should be casually tossed aside.