It is extremely rare – and important – to have a Fed chairman willing to take the risk that inflation will exceed the Fed’s target for a short period of time in exchange for very low unemployment and growth in prices. robust wages.
Powell was prepared to take that risk.
In 2019, the unemployment rate was on average 3.7%, the lowest since 1969. Conventional wisdom said that the Fed should have frantically raised interest rates, convinced that this unemployment rate signaled impending economic overheating. . But when asked if he was worried about this scenario during testimony in Congress, Powell shook #EconTwitter by replying, “We have no basis or evidence to call it a job market.” hot. We have not seen wages increase as sharply as in the past. To call something hot, you have to see heat. This determination to probe how much unemployment could be permanently reduced is a huge progressive step forward in monetary policy – something the left has fought for for years.
Some have argued that Powell’s complacency in recent years is political: a Republican Fed chairman helping a Republican president before the Covid-19 strike, then simply doing what any other president would have done during the pandemic to keep the economy afloat. These skeptics argue that when the inflation-to-unemployment trade-off gets brutal under a Biden presidency, Powell will stab the administration in the back. It is not convincing. If Powell was looking for an opportunity to tighten monetary policy to block the Biden administration, the rise in inflation of the past few months was perfect. But Powell has remained firmer on a conciliatory approach than almost any other policy maker during this period.
In short, Powell has broadly adopted exactly the approach to monetary policy that progressives have recommended for decades. Along the way, the evidence he highlighted in support of this position has succeeded in convincing even many of those who would not describe themselves as progressives. But this approach has not yet become the dominant paradigm so that all Powell’s replacement would be sure to adopt him – even if that was their goal. He needs champions with wide respect in Washington, DC Powell, a former Republican investment banker, has turned out to be, and this is extremely valuable to progressive causes.
The most common cases against Powell are based on allegations that he has been flexible on financial regulation and insufficiently proactive on climate change. There is some truth in these accusations. But replacing Powell is neither necessary nor sufficient to solve these problems, and it does not make sense to unnecessarily risk the gains made for workers under the Powell Fed.
On financial regulation, the real center of the progressives’ anger should be the Fed’s vice chairman for oversight, Randal Quarles. Quarles has watered down a slew of post-financial crisis regulations, and he is expected to be replaced when his tenure in that position expires in October.
Do I wish that as Powell crafted a transformative change in the way the Fed’s monetary policy is conducted, he also publicly opposes the decisions of his vice president for oversight? Absoutely. But I also have sympathy for someone who wants to focus on one drastic policy change at a time, and I think replacing Quarles with a strong vice president for oversight can solve most of this problem. (Indeed, Powell relied heavily on the person in that position 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 decision-maker and institution in society – should act with more urgency. Yet the actual political tools he controls have tiny effects (at best) on emissions. Therefore, an activist Fed chairman alone cannot materially affect the level of greenhouse gas emissions over the next decade is unrealistic. I understand why people want this to be true – unlike much of Washington, DC, the Fed has shown a minimal level of proficiency and public interest in recent years, and there is no systematic obstruction to block its decisions.
But there is also no real tool the Fed currently controls that would have serious effects on emissions. Much of what people claim the Fed can do about the climate is actually to advise banks and other financial institutions not to be dumb and not to underestimate climate risks in their portfolios. This is fine, but it will not result in a material reduction in emissions. The Fed could also buy bonds from renewable energy companies to make debt financing cheaper for those companies. But debt financing is already cheap for just about every business in the United States. guaranteed consumers, which the Fed cannot provide.
Could the Fed get really radical and declare that banks are just not allowed to deal with fossil fuel companies, strangling this sector on the financial supply side? Almost certainly not. Why would a Congress hostile to transformative climate policy allow the Fed, which it oversees, to do so? And if we had a Congress that was not hostile to transformative climate policy, why wouldn’t lawmakers just pass direct and more effective legislation to tackle climate change, since fiscal and spending policies provide much more direct tools to reduce emissions?
The Fed should certainly use its enormous research capacity to examine and highlight the economic fallout from climate change. Among other things, it is an important question for the way they conduct their own politics. But there is no finality around the need to convince lawmakers to take climate change seriously. This fact could literally be the end of all of us, and it is infuriating. But it is not a fact that changes if you choose another Fed chair.
What changes if you choose another Fed chair is that it sets off a series of musical chairs in the Fed Governing Council that could shift the balance from conciliatory to hawkish. After all, in that case, Powell would step down from the board and a Senate-approved replacement would be needed. It is hard to imagine the easy Senate approval of a strong dove. Even someone like Fed Governor Lael Brainard – who is often bred as a replacement and would indeed be a great Fed chairman – would likely face more opposition. The Senate will already have to confirm several vacancies, and Biden is expected to focus on appointing a slate of top candidates to fill those vacancies.
Ultimately, the progressive argument for keeping Powell in place is simply that he has taken our approach to what is by far the most important part of his job, and that approach is crucial to fostering justice. economic and racial in the years to come. It’s not the kind of thing that should be casually tossed aside.