The arguments for firing Jay Powell are tiresome and stupid


Federal Reserve
has a number of functions and responsibilities, but the most important thing the central bank does is set monetary policy. I feel weird even needing to write that sentence, but given the increasingly tedious arguments I’m seeing for replacing current Chairman Jerome Powell, apparently some people need a reminder.

The problem for Powell’s opponents is that he has done a truly excellent job leading monetary policymaking during his tenure — both in crafting an effective response to the COVID-driven economic crisis that prevented it from snowballing into a financial crisis, and in implementing a longer-run shift of the Fed’s priorities to tolerate more inflation and focus more on promoting full employment and wage growth.

A lot of progressive commentators recognize how good this record is, which is why Powell, a Republican, enjoys quite a bit of progressive support for his reappointment, and why President Biden, a Democrat, will probably nominate him for another term. Powell’s progressive support comes especially from the parts of the movement with close ties to organized labor, which has good reason to be clear-eyed about pro-worker Fed policies being the key issue in choosing a chair.

And even those who oppose Powell mostly admit he has succeeded at the central bank’s core mission, which has led to them to contend the choice of a Fed chair is not primarily about monetary policy. They characterize his monetary policies as areas of consensus that any Democrat-appointed Fed chair could and would continue, while doing better on whatever niche issues the critics care about. (Or, if you want to be creative like Berkeley economist Brad DeLong, you can simply invent the idea that Powell secretly disagrees with the monetary policies he’s implemented for the last four years and will become totally different if reappointed.)

The truth is that the Fed’s monetary policy achievements under Powell have been real and large, are not automatic, and are fragile. You need someone with a commitment to pro-worker monetary policy at the head of the bank in the face of concerns about rising inflation. Who better than Powell himself, who has demonstrated both a commitment to the policy and an ability to gather political support for it and get it implemented?

You risk workers’ livelihoods by being blasé about monetary policy

Before we get to the niche issues, let’s talk about why Powell’s progressive critics are wrong to be so confident about the durability of his monetary policies.

One, they overstate the extent of the consensus in favor of the new, more-inflation-tolerant framework. Inflation is currently well above target, and calls for tightening to stave off inflation are getting louder. Members of the Federal Open Market Committee cannot even agree on what it means that the Fed now targets “average” inflation, or on how long the Fed should wait to raise interest rates in the face of rising prices. So the question of how much of an inflation overshoot the Fed will accept in order to boost the labor market is an open one — one where the left’s preferred candidates to replace Powell could end up favoring tighter, less worker-friendly policy.

For example, Mark Carney, the former Bank of England governor who is The American Prospect editor David Dayen’s choice to replace Powell, told David Wessel of the Brookings Institution in June that the “balance of risks” has shifted toward the possibility of too much inflation, a remark that caused Wessel to observe that Carney would be on the hawkish side of the FOMC, were he to sit on it.

Then there is the issue of political support for unconventional monetary policy.

Powell’s new policies are controversial, and his political skill has been necessary to sell them

People who have drawn the baffling conclusion that Powell’s monetary policy actions reflect a broad consensus that any Fed chair could have followed may been fooled by the fact that Powell makes the politics look easy. Powell has worked assiduously to build respectful relationships on both sides of the aisle on Capitol Hill, and the personal trust he has built has quieted political criticism and given the Fed more room to operate. (In just the first six months of this year, Powell took meetings with 33 senators.) It also helps that Powell is a moderate Republican with a staid, bankerly image — he has overseen a bold shift in monetary policy and yet he does not come off as a radical to anyone.

If you fire Powell and replace him with a Democrat, many of the policy issues Powell has successfully depoliticized will become politicized. Republican calls for tighter money will get louder under a new chair, and they’ll be more listened to — including by the ideologically diverse FOMC the new chair would need to get to agree to a monetary policy agenda.

That’s all reason to worry that even a new chair with solidly dovish views would end up making more hawkish policy than Powell would.

Bank regulation is less important than monetary policy, and the Fed is just one of many bank regulators

Okay, so what about the other issues?  The bank regulation-focused Powell critics are upset about certain moves in recent years they consider to have been too easy on banks, such as letting them resume share buybacks after the financial markets had stabilized but before the COVID pandemic was over.

Bank regulation used to be a top-tier economic policy issue. Banks and households both took on too much leverage in the lead-up to the 2008 financial crisis, and risky lending was a key factor that created a terrible global

. But policy improvements, including the Dodd-Frank law, have greatly improved the financial condition of banks. Household finances are also currently unusually strong. And of course, the Fed’s bold monetary policy actions were themselves an important policy for promoting soundness of the financial system, because they made it possible for firms to roll over debt instead of defaulting.

Wall Street

Chinese career agencies promise to help students land top-tier internships

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This overall environment of stability and soundness is why people whose personal brand is financial regulation have to hype the corporate debt markets so much: the most economically salient places for there to be too much leverage in the economy look fine, and you have to start looking under the cushions for sources of leverage-driven financial instability.

This is simply not a leading economic risk facing the country, especially in comparison to the risk that the Fed might choke off the labor market recovery by tightening monetary policy too soon. And the risks in this area can be addressed by other regulators, including the Fed’s own vice chair for supervision, a position that will be open for Biden to fill later this year.

The Fed is not a climate policy organ

As Matt Yglesias writes, there are a lot of professional activists, particularly in the climate change space, who seem to view their job as complaining about whatever the Democratic party is doing. If Democrats want Powell renominated, that must be a mistake, and there must be something more left-wing that can be found to do. This has led to a lot of Rube Goldberg thinking about how the Fed is supposed to be driving climate policy (as a reminder, we are talking about the central bank, not the EPA).

california wildfires approaching homes

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There are some perfectly worthy proposals about how the Fed should consider climate related risks when evaluating the soundness of the financial system, but the idea that this would constitute a significant climate change policy is wrong. As the Roosevelt Institute’s Mike Konczal notes, you can improve banks’ resiliency against climate change without doing anything at all about climate change itself — all you have to do is change what sort of investments are financed where.

Many of the people now telling us that bank capital requirements can significantly affect fossil fuel-related behavior in the real economy are the same people who spent the last decade-plus telling us that higher bank capital requirements won’t much affect the real economy. They were right the first time.

And if the Fed implemented policies that really did move the needle on carbon emissions, those policies would necessarily conflict with the Fed’s mandate to promote maximum employment. The climate-focused critics won’t say this in so many words. But Erik Gerding admitted to the Atlantic’s Robinson Meyer that he objects to the Fed’s low-interest-rate policies — a cornerstone of the Fed’s pro-worker efforts — on the grounds that they encourage carbon-intensive cryptocurrency mining.

Think about that for a second: Low interest rates only encourage crypto speculation because they have been good for asset prices in general. The crypto bubble (and I do believe it’s a bubble) is part of the overall bullish environment for investment that has businesses growing and investing and hiring, which is what’s been creating relatively positive conditions for workers.

Trying to pop the crypto bubble with higher rates in an attempt to curtail carbon emissions would also discourage investment overall, cooling the labor market and possibly causing a recession. If that’s what you want, you oppose full employment. And if it’s not what you want, then you’re just fiddling around the edges with bank regulations that will have little effect on either climate or the real economy.

Finally, let’s be real about the politics of climate change: If you run around telling people the Fed’s full employment policies are actually, secretly climate policies, you’re only going to undermine support for full employment policies. Climate policy is best done through Secret Congress; announcing that the Fed is now a climate-policy organ is the opposite of that.

Monetary policy doesn’t care whether you think it’s interesting

If I sound contemptuous of the people who want Powell fired, that’s because I am. He led by far the most effective policy response to COVID of any US government agency and significantly improved the framework for monetary policymaking in the US and now they want to put those policies at risk by getting rid of him. I think these attacks can only be explained as a matter of emotional impulses.

As I noted at the top, progressive figures who conceive of their project as fighting for workers have generally gotten Powell right. You see this with Bill Spriggs of the AFL-CIO, or Dean Baker of the Center for Economic and Policy Research: they have strongly endorsed Powell’s reappointment.

The thinkers who have gotten Powell wrong are the ones who conceive of their project as fighting against powerful forces, and as a result are constitutionally incapable of caring about monetary policy, because monetary policy does not provide an adequate villain to oppose.

Federal Reserve Chairman Jerome Powell

Federal Reserve Board Chairman Jerome Powell testifies before the Senate Banking, Housing and Urban Affairs Committee July 15, 2021 in Washington, DC.

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With bank regulation, you can fight reckless and greedy Wall Street fat cats. On climate change, you get to stand up to big oil and gas companies. A worker-focused monetary policy produces very large benefits for ordinary people without defeating any obvious opponent. It does not provide that emotional oomph that drove many left activists to get involved with policy in the first place.

Sure, you can identify hedge-fund managers who grumble that the Fed’s actions to boost the economy are creating inflation and making it hard for them to find corporations willing to borrow money at 15% interest. But the same companies that are forced to pay higher wages and offer better conditions to attract workers in a tight market also enjoy strong consumer demand and an environment with attractive opportunities to invest and grow.

You only need to look at the stock market alongside the wage and job growth data to see that a hot economy is good for workers and owners alike — and a lot of people on the left clearly just don’t find it emotionally satisfying to focus on an economic policy that does not pit the rich against the masses.

And I understand why people prefer emotionally satisfying arguments to arguments about monetary policy, which is admittedly a boring subject. But it’s a pretty dumb thing to gloss over when you’re picking the head of a central bank.

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