Michael Brochstein/Sipa USA via AP Images
Federal Reserve Chair Jerome Powell speaks at a hearing of the Senate Committee on Banking, Housing, and Urban Affairs, July 15, 2021.
On Wednesday, Fed Chair Jay Powell will testify before Congress once again on the economy, inflation, and monetary policy. He is likely to say that the inflation we’ve seen lately is mostly transient, but that the Fed will reserve the option to tighten gradually and slightly as conditions warrant.
Money markets will approve, and the Reappoint Powell lobby will have another talking point. Permit me to weigh in on the other side.
The Powell forces have leaked to various outlets that his reappointment is now certain, hoping to create a bandwagon effect. (If all the leaks to Bloomberg of sure things proved accurate, Rahm Emanuel would now be ambassador to six countries.)
My sources continue to say that Powell is a leading candidate, but that President Biden and his chief of staff Ron Klain have not yet decided.
The Powell chorus, which includes some progressives such as Dean Baker, makes the following points. Powell is a conservative Republican who is giving Biden just what he wants on monetary policy. So what’s not to like? Yes, the Fed also does financial regulation, which the cool kids trivialize as “finreg.” But that’s less important.
And Biden will get to name a tough financial regulator when he replaces Randy Quarles, the truly awful Fed governor who is vice chair for financial supervision and toady for the big banks. Quarles’s term in that post expires in October.
Sounds plausible, but here’s the case against Powell.
First, financial regulation matters immensely. Under Powell, the Fed has repeatedly sought to weaken the protections of the Dodd-Frank Act, which were none too strong to begin with.
In 2020, with Powell’s strong support, the Fed voted to weaken the terms of bank stress testing under Dodd-Frank, allowing weaker capital standards and leverage ratios. This gives banks more money with which to speculate, and less of a cushion if their bets go bad.
Powell has been terrible on banking concentration, including the widely criticized merger of BB&T and SunTrust.
Since 2018, the Fed has also weakened supervisory standards governing when banks are allowed to make capital distributions to shareholders. This initiative was led by Quarles, but had Powell’s full support. And the Fed reduced supervisory and capital standards for banks in the $250–$700 billion range, leaving tougher standards in place only for the very biggest banks.
One of the important provisions of Dodd-Frank was the requirement of “living wills”—advance plans for resolutions in the event of the failure of a large bank. The Fed under Powell’s leadership has also weakened these, requiring them to be updated only once every four years.
The Powell Fed also made it easier for the big banks to engage in highly speculative proprietary trading for their own accounts, something supposedly prohibited by the Volcker Rule in Dodd-Frank. But banks have relentlessly sought to open up loopholes, and Powell has been their ally.
And that’s only regulation. Another issue where Powell has been terrible is on banking concentration, including the widely criticized merger of BB&T and SunTrust in North Carolina, which created the nation’s sixth-largest bank and dramatically restricted competition and consumer access in its basic service area.
Recently, Biden issued a pathbreaking order putting the entire federal government on the side of reducing economic concentration. The order comprised 72 separate directives to more than a dozen agencies to take actions within their executive and regulatory authority to make key industries less hyper-concentrated, at the expense of both consumers and economic efficiency.
Powell is totally on the other side of this core question. He has voted to approve most bank mergers or acquisitions that have come before the Fed. He has also been dismal at settling for slaps on the wrist when bankers break the rules.
There is also the issue of the Fed’s role on climate change, a core issue for Biden. With a different chair, the Fed could take a close look at bank investments in increasingly precarious companies that traffic in carbon fuels, and others that are at risk of stranded assets.
The other argument made over and over again on behalf of Powell is that reappointing him, a conservative Republican named by Trump, would be good for Biden’s relations with the GOP and would give him “cover” for a loose money policy. That also sounds plausible, but it falls apart on close examination.
Senate Republicans just blew up the supposed bipartisan compromise on infrastructure. Exactly how would redesignating Powell as Fed chair win over even a single Republican vote on any other issue? There is simply no carryover.
The fact is that the U.S. Chamber of Commerce and the big Wall Street banks want Powell’s loose money policy just as much as Biden does. Biden doesn’t need “cover” for this. Deficit hawkery and inflation phobia have never been more out of fashion.
The last argument you hear is that Powell’s confirmation is a sure thing, and the confirmation of others might be iffy. Not so.
The other contender for the job, Fed governor Lael Brainard, a centrist Democrat who served at the Obama Treasury, has views that are identical to Powell’s on monetary policy, but she has courageously defied the Fed’s norms of consensus by publicly dissenting on several moves that weakened bank safety and soundness. She has also been terrific on community reinvestment, and headed off several bad proposals behind the scenes.
Brainard would likely be confirmed by a safe margin, maybe not quite as large as Powell’s, but more than good enough. So this is not over, nor should it be.
Unlike Powell, Brainard has not been mounting a lobbying campaign for the job, which would put her in the awkward position of challenging her chairman. But her views on a range of issues are far more in keeping with Biden’s.
