The suddenly strident kerfluffle over whether Jerome Powell should continue to chair the Federal Reserve Board of Governors illustrates an unhealthy facet of both our economy and our politics. The Fed seems to play an enormous role in policy, one larger any central bank should. This needs to corrected, but no one is talking about that.
Aristotle said, “nature abhors a vacuum.” Congress has neutered itself and cannot seem to act as the writers of the Constitution intended, so the Fed has filled the vacuums that occur, whether post-9/11, the collateralized mortgage meltdown or COVID-19.
The problem is that, despite grandiose claims by outsiders both for and against the Fed’s great power, all the central bank can primarily do is increase in the monetary base, the most fundamental measure of the money supply. Households, businesses and markets experience this as low or high interest rates and respond accordingly. Secondarily, in its role as a bank regulator, the Fed can direct the actions of lenders, but these are largely token moves.
The scale of the increase in the U.S. money supply since 2001 is unprecedented in history and unsustainable in the long run. Some adjustment will occur eventually. The longer the delay, the larger the needed eventual adjustment, and potentially, the larger the shock to businesses and the economy.
These are historic, unsettling times. People must realize that the choice of who will be the next Fed Chair is akin to the 1916 and 1940 presidential elections — savvy voters understood they were choosing a leader for an impending war. Now we are choosing a monetary policy leader for an impending return from historically unusual monetary conditions.
No one really discusses that. Progressives on the political left, especially New York Rep. Alexandria Ocasio-Cortez and her allies, demand more Fed action to control climate change, equalize income distribution, reduce poverty and the economic effects of racism. Financial sector players fret about any change that would upset markets and cause asset prices to drop. Both will be disappointed — AOC because her wishes won’t come true, financial sector players because their fears will.
Now for the details of the situation. Seven Federal Reserve Governors serve 14-year terms. There is little legal provision for firing them and none ever have been. Two of them serve as chair and vice-chair, both in four-year appointments.
Powell was appointed to the Board of Governors by Barack Obama in 2012. He was named as chair, to succeed Janet Yellen, starting in February 2018. That appointment expires in four months. Should he be named to another four years, as often happens? Or should the job go to someone else?
Unfortunately, some frame this as a question of President Joe Biden “firing” Powell. This is not the helpful. Though there have only been nine Fed chairs since the position was created, there are ample precedents for either reappointing or replacing an incumbent. Both legitimate.
Chairs named by one president often continue into the term of a succeeding one, even from the other party. Bill Martin, initially appointed by Harry Truman in 1951, served five presidents, including Eisenhower, Kennedy and Johnson, before stepping down in January,1970, a year into Richard Nixon’s first term.
Nixon named Arthur Burns, served through January 1978, a year into Jimmy Carter’s administration. If anyone was most responsible for 1970s-era inflation it was Burns.
Carter then named corporate head G. William Miller, hands down the most inept chair ever. Carter kicked him upstairs to Treasury Secretary and replaced him with Paul Volcker, probably the greatest Fed chair ever. Volcker ended an inflationary cycle — but there was great pain.
Volcker’s term continued into the Reagan administration. He was reappointed in 1982, but Reagan’s team did not like what tight money was doing to Republicans in elections and engineered his resignation. This is as close as we have come to a Board chair being “fired.” Reagan then named Alan Greenspan, who had long lusted after the job.
When Greenspan’s term was ending, George H.W. Bush reappointed him. The Fed promptly tightened money, setting off the short recession that helped tip the electoral balance to Bill Clinton. When Bush later said, “I reappointed him and he disappointed me,” it was a simple description of what happened.
Greenspan went from term to term to term, being reappointed by Clinton and George W. Bush. He oversaw a large and prolonged cut in interest rates after 9/11 and kept rates low even as the mortgage-backed-bond party became a wild financial orgy, but stepped down at a normal term end in January 2006.
Bush 43 then appointed and reappointed Ben Bernanke, who led the “zero-interest-rate-policy” of very low rates that continues today. After two terms, and one year into Barack Obama’s presidency, he was replaced by Janet Yellen. After four years, Powell, already on the Board, was named chair.
So it is common for chairs to be reappointed. But there are other instances when a president, Nixon, Carter and Obama, place a new person in the job at the first opportunity.
Powell is well qualified and a workman-like chair, but who is not inclined to rock any boats. He recently said some pretty clueless things about being the “early stages” of climate change and that the Fed might act later. He should have said that there is little monetary policy can do about the problem and that what the Fed can do as a bank regulator also is limited.
However, some liberal economists, including Nobel laureate Joe Stiglitz, think the Fed could do more in several areas and call for Powell’s replacement. Financial market pundits all warn of how any instability will threaten values of corporate stocks and other assets and insist on reappointment.
It would be nice if Biden would name a qualified economist or executive who would acknowledge that we are not in a brave new world of no inflation and of unlimited government borrowing capacity, as progressives imagine. Instead, we are in a prolonged anomaly period that eventually must end.
There is zero chance of Biden choosing someone who would voice that view. The odds are he will let Powell step down but will replace him with someone not very different and not inclined to make any waves.
St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.
Real World Economics: Fed is limited in its ‘great power’ - TwinCities.com-Pioneer Press
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