I didn’t expect to write again about Powell’s reappointment as Fed chairman, I expected Biden to have made a choice now, but here we are. Now that Larry Summers has sentenced the Fed “woke up” for not having suppressed inflation, it seems useful to recap what is in question.

What we are seeing right now is a Federal Reserve Board doing the right thing in the face of the hysteria of its critics. Critics want to see him act quickly to slow the economy down so they can get good help on the cheap again. Specifically, they would like the Fed to end its quantitative easing program (buying bonds and other assets) and raising the short-term interest rate it controls, in order to reduce demand in the economy. ‘economy.

Higher interest rates will slow the economy by making it more expensive to buy homes and cars, as they now have to pay a higher rate of interest on their mortgages and car loans. Higher interest rates will also end a mortgage refinancing boom that has saved homeowners tens of billions of dollars in interest payments. The arithmetic on this is simple. If someone had a $ 250,000 mortgage at 4.25% interest rate and was able to refinance at 3.25%, they would save $ 2,500 on their annual interest payments by refinancing.

This is a big deal for a middle income family earning $ 80,000 a year. Some of the money saved on interest payments will go to other spending, providing another channel to stimulate the economy.

Higher rates will also increase the interest charges that state and local governments would face if they wish to borrow to finance such things as improving infrastructure, expanding broadband access, or expanding access to broadband. renovation and repair of schools. And, higher interest rates can make it more difficult for companies to raise money to invest, providing another channel to slow growth and job creation.

In previous decades, the Federal Reserve has been very quick to raise interest rates due to concerns about inflation. In fact, under Greenspan, Bernanke, and Yellen, they often preemptively raised interest rates, slowing the economy and job growth before inflation even started to rise. These rate hikes were justified by appealing to the Fed’s mandate to aim for price stability.

However, this is only half of the Fed’s mandate in conducting monetary policy. Its mandate is also to promote a high employment rate. Powell made a clear break with his predecessors by giving equal priority to a high employment rate, acknowledging the huge gains for the country from maintaining low unemployment rates.

As Powell noted, the big winners from low unemployment rates are those at the bottom of the labor market – the people who experience the most discrimination. When the unemployment rate drops, as before the pandemic, the workers who get jobs are disproportionately blacks, Hispanics, people with less education, people with disabilities, and people with criminal records. These are workers that employers often avoid hiring when unemployment is high, but in a tight labor market, they must seek to hire workers they would not otherwise consider hiring.

Tight labor markets also allow tens of millions of workers at the middle and lower levels to realize real wage gains. For most of the past four decades, the real wages of middle and lower workers have stagnated, as most of the gains in productivity growth have gone to those at the top of the income distribution. But when labor markets tightened, during the boom of the 1990s and in the years just before the pandemic recession, workers in the middle and bottom saw their real wages rise.

This is also the case today, as workers in many low-wage sectors, such as hotels and restaurants, are see substantial salary gains because employers have to compete for their workforce. This is the problem that Larry Summers and many others want the Fed to tackle. They want this to raise interest rates, slow the economy and take away the bargaining power that these workers currently have.

Fortunately, Powell still holds firm to his commitment to high employment. This is even as supply chain disruptions create shortages for certain items and lead to higher inflation in many areas.

Powell pursues the policy that many progressives have required of the Fed for decades. Some of us thought that would give him a lock to be reappointed by a president who has apparently pledged to increase wages and workers’ bargaining power. Incredibly, many progressives are now scrambling to deny Powell a second term as Fed chairman.

The case against Powell

The main issues raised are Powell’s position on financial regulation and global warming. On the first front, people pointed to several actions where Powell supported measures to weaken banking regulation. In my opinion, these are mistakes, but Powell always deferred to the Fed governor responsible for overseeing the regulatory powers of the Fed.

Until 2017, it was Daniel Tarullo, a pro-regulation Democrat appointed by President Obama. For the past four years, the governor overseeing the Fed’s regulatory actions has been Randal Quarles, an anti-regulatory Republican appointed by Trump. Quarles’ tenure ended on Wednesday, which seems to raise the question of why Biden hasn’t appointed a pro-regulation replacement. FWIW, Powell has indicated his intention to continue to rely on the governor responsible for regulatory oversight in his future votes.

It should also be noted that the Fed’s regulatory actions are much less consistent than its monetary policy actions. Whereas it is important to minimize waste and abuse in the financial sector, we have other regulators. Moreover, the consequences of a poorly regulated financial system are not as dire as those of a Fed that unnecessarily throws millions of people to work to stem inflation fears.

Some progressives have exaggerated the importance of regulation because they misunderstand the cause of the Great Recession. The story is simple, we had a huge real estate bubble which was stimulating the economy. Its collapse was certain to cause a sharp slowdown. This recognition did not require a great deal of regulatory control, it required that people look at the GDP reports that the Commerce Department publishes every three months.

As someone who warned of the accident long before it happened, I appreciate being lectured on the importance of regulation by people who have been taken by surprise. But, I’m used to the way things work in Washington.

The other big thing in the case against Powell is his actions, or lack thereof, on climate change.[1] It would be great to have a central bank that acts aggressively to try to reduce greenhouse gas emissions. While it is possible to interpret this responsibility in the Fed’s mandate, it is very clear that Congress has not explicitly given this role to the Fed.

The idea that the Fed could somehow have taken significant steps to stop the flow of capital to fossil fuel companies, without a major backlash from Congress, is more than a bit politically driven. hair. It is even more of a stretch to think that a new candidate for the Fed president, with an explicit commitment to use the power of the Fed to try to limit greenhouse gas emissions, would be approved by a Senate of 50. -50.

We absolutely need to act quickly to slow global warming, but giving imaginary powers to government agencies will not do the trick. The Fed may use its research capabilities in a productive way to draw attention to the costs that many players in the economy will be forced to bear if global warming is not controlled, but this will not provide a back door to bypass a Congress which is not ready to act.

Rename Powell now

In short, in my opinion, the case for Powell’s reappointment is overwhelming. I wish Biden would end the guessing game now and strengthen Powell in his efforts to hold the line against the inflation hawks. But, of course, I argued for bringing Powell back “now” several months ago as well. Biden is also expected to appoint a strong regulator to fill Quarles’ post, such as current Gov. Lael Brainard or the former Governor, and Assistant Treasury Secretary Sarah Bloom Raskin.

President Biden will face many difficult calls during his presidency. Renaming Powell shouldn’t be one of them.

Remarks:

[1] I know some people have dug up other responsibilities of the Fed as well. As far as I know, Powell hasn’t done a good job keeping the sidewalks of Constitution Avenue clean after a snowstorm. I wouldn’t recommend Biden to take that into account in his decision to renew Powell.

This first appeared on Dean Baker’s Beat the press Blog.


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