Browse all articles on the Federal Reserve
David Dayen: Introduction
Dean Baker: Reappoint Powell as Fed Chair
Max Moran: Jerome Powell Went Easy on Wall Street
Tracey Lewis: Reimagining the Federal Reserve
INTRODUCTION
BY DAVID DAYEN
Analysts expect gross domestic product to grow by 10 percent in the second quarter of this year, with the economy filling the entire chasm created in the pandemic by the end of June. For 2021, the expectation is for the fastest economic growth since the 1980s. Though jobs may not come all the way back until next year, the relatively rapid recovery is a remarkable achievement for the U.S., due in no small part to strong fiscal policy that carried on well beyond the initial response. But we also must credit the Federal Reserve for doggedly sticking to a zero-interest-rate strategy, and holding firm to that commitment to make the job market as favorable as possible for workers.
The architect of that strategy is Jerome Powell, the former private equity executive who has spent nearly a decade on the Federal Reserve Board and was appointed chair by Donald Trump in 2018. Powell’s dovish monetary policy has given the economy space to recover for everyone, including the marginalized groups the central bank often leaves behind by tightening too soon. It has led many progressives to enthusiastically endorse Powell’s reappointment by President Biden when his term expires in January.
But Powell is also the architect of the most persistent bank deregulation of the post–financial crisis era (or at least, the head of the organization that led the way on that deregulation). Wall Street has grown more dangerous on his watch, for a multitude of reasons. The unavoidable climate crisis also poses significant hazards to the financial system, and Powell has been reluctant at best to take steps that other central banks globally have taken to guard against this. The Fed also hesitated to use its prodigious resources and legal authority last year to help cash-strapped states and smaller businesses, instead devoting its efforts to supplying cheap credit to the biggest firms.
This has led progressives in nearly equal measure to counsel Biden to depose Powell, and pick a similarly dovish Fed chair who would be better on financial supervisory and climate issues. A decision could come by the end of the summer, and given the dim hopes of legislative action and Biden’s reticence to aggressively use executive authority, it could be the key policymaking variable of the president’s first term.
The situation has produced an unusual thing in politics lately: a genuine debate. The Prospect is proud to host it. Economist Dean Baker makes the full case for Powell as someone with the experience and credibility to keep America’s experiment with full employment going. Max Moran, Baker’s colleague at the Center for Economic and Policy Research, cites Powell’s financial regulatory record as a mark against him. And Tracey Lewis of 350.org highlights the Fed’s ability to protect the financial system from climate-fueled disaster, and how Powell has been reluctant to use that power.
We hope this series can help inform this critical decision for the administration.
Reappoint Powell as Fed Chair
BY DEAN BAKER
It would be difficult to overestimate the importance of the Federal Reserve Board. While it cannot always boost the economy as much as it would like when the country falls into a recession, the Fed’s ability to raise interest rates gives it the power to impede economic growth and to keep millions of people from getting jobs.
It has repeatedly used this power in the last half-century, slowing growth and in some cases bringing on recessions. In each case, it has justified its decision to slow the economy through concerns about inflation. The argument has been that inflation risks getting out of control if the Fed allows the labor market to get too tight.
The story was that if too many people have jobs, then workers will have more bargaining power, and be able to get larger pay increases. These higher pay increases would get passed on in higher prices, which would lead workers to demand still higher wages, and we suddenly have a wage-price spiral like in the 1970s.
As Federal Reserve chair, Jerome Powell has broken sharply with this fixation on inflation. He has listened to the complaints that progressive Fed critics have been making for decades.
We have said that inflation is not always just around the corner. And when the Fed raises rates, it disproportionately hits those who are most disadvantaged in the labor market: Blacks, Hispanics, the disabled, workers with less education, and people with criminal records. We argued that the Fed needs to take seriously its legal commitment to full employment, not just its commitment to price stability.
Continue reading “Reappoint Powell as Fed Chair”
Jerome Powell Went Easy on Wall Street
BY MAX MORAN
The Federal Reserve chair is the single most powerful person in our financial regulatory regime. The 2010 Dodd-Frank Act gave the Fed a central role in pursuing the elusive but essential goal of ensuring that the financial system actually serves the needs of ordinary Americans. The Fed sets rules and scrutinizes lenders to ensure the system is well managed, stable, and focused on financial intermediation, not speculation.
That is indispensable to any discussion of American political economy. As Americans for Financial Reform has written, the easy monetary policy that all of today’s writers strongly support inevitably leads to asset bubbles, if not paired with aggressive supervision and regulation. We’re currently living through a financial speculation heyday, as the Prospect’s David Dayen has covered at length. When big bubbles pop, history shows, poorer communities and communities of color suffer the most. Black wealth, which already unconscionably trailed white wealth, has never fully recovered from the 2008 crash. To put it another way, loose monetary policy grows the economic pie tremendously, but strict regulatory policy is how the pie gets sliced equitably.
This means that, to assess a Fed chair, we have to consider how they’ve handled all of their responsibilities. Just as a president shouldn’t only be judged on whether or not they started a war, Fed chairs shouldn’t only be judged on whether they raised or lowered interest rates. That’s their most salient power, but they have other, more complex ways of affecting our lives. Financial regulation is one of the most important of these, and it’s one on which current Fed chairman Jerome Powell has failed badly.
Continue reading “Jerome Powell Went Easy on Wall Street”
Reimagining the Federal Reserve
BY TRACEY LEWIS
Since spring 2020, we’ve awakened each day to a frightening new normal—a raging pandemic, deadly hurricanes, hellish wildfires, nightmarish regional deep freezes. Our new reality-based president reminds us that the climate crisis is an “existential threat to the planet.”
With the sweep of his pen, President Biden has introduced a flurry of climate-related executive orders, including one signed last month that requires financial regulators, including Treasury Secretary Janet Yellen and the Financial Stability Oversight Council (FSOC), to assess climate change risks to our federal financial system.
The Biden administration’s bold steps cleared a path for the Federal Reserve to take a leadership role among other global central banks, and during the Green Swan Conference put on by global central banks and financial regulators last Friday, it seemed that Fed Chair Jerome Powell was prepared to take that lead. “There is no doubt that climate change poses profound challenges for the global economy and certainly the financial system,” said Powell in his virtual remarks.
Yet Powell continues to resist the push from progressive organizations like Public Citizen and legislators like Reps. Mondaire Jones (D-NY) and Rashida Tlaib (D-MI) to increase the financial system’s resilience to climate risks.
Indeed, at the conference, Powell demurred in acknowledging that the U.S. central bank is already empowered to address climate risks, and does not have to wait for elected officials to grant permission. “We are not, and we do not seek to be, climate policymakers as such,” Powell said, making it clear he rejects the argument that the Fed can take the lead in addressing climate risks in our financial system.
However, as noted expert on the climate crisis and financial regulation David Arkush of Public Citizen reminds us, “[a]ddressing climate risk is … a critically urgent task for financial regulators and one for which they have both the legal authority and the tools necessary to act.”
