We must give US President Joe Biden, a Democrat, credit for confirming Jerome Powell, a Republican, for a second four-year term as head of the United States Federal Reserve (Fed). In doing so, Biden chose not to name Lael Brainard, a very solid alternative much liked by progressives, and who in the abstract world would have been an excellent choice. By firmly resisting strong pressure from the left wing of the Democratic Party, Biden accomplished several things at once.
First and foremost, it reaffirmed the central bank’s independence from political pressure. Donald Trump, his predecessor, inherited a very capable head of the central bank, Janet Yellen, and was recognized as such. But he decided it was preferable to have his own man in office, perhaps in the hope that it might prevent him from adopting a tight monetary policy in the run-up to the 2020 election.
As with so many Trump decisions, this marked a break with what had been done up to that point. Typically, new presidents appoint a competent Federal Reserve chief for a second term. Biden’s decision restores that tradition. In the unlikely event that Trump were to be elected president again in 2025, would you rule out Powel for a third term after this endorsement of Biden? Probably.
By confirming Powell, Biden also took a step to reaffirm his own independence, particularly from his party’s strident left, which has so far wielded enormous influence. Biden veered hard to the center, basing his choice almost entirely on the competition, and picked a candidate many Republicans also backed.
Perhaps part of Biden’s renewed emphasis on valuing people’s competence is rubbing off on other areas of his administration. Having campaigned as a centrist who knows how to dialogue with his opponents, Biden proved it when the stakes were high. This has been the most important appointment of his presidency. Anyone who has studied the relationship between business cycles and politics knows that the central bank can have enormous influence if it cuts interest rates in a timely manner to stimulate the economy just before elections.
At a time when the post-pandemic economy remains incredibly volatile and what’s to come is hard to predict (though, frankly, the US job market is red hot), opting for Powell has made Fed policies more predictable and easier to follow. interpret. As good as it would have been to prefer Brainard, after his appointment there would have been a period of adjustment for the markets to interpret his signals and his language.
Know in depth all the sides of the coin.
The editorial of Wall Street JournalConvinced that Fed policy will inevitably lead to superinflation regardless of who is in charge, he downplayed the choice between Powell and Brainard. But it overlooks some differences. Beyond the normative stances for which progressives praise her, Brainard, who will become vice president, has been especially open to innovative ideas about how central bank policies evolve in a world of low real interest rates. .
It is true that I have been painting a somewhat optimistic picture of the decision to confirm Powell. In fact, the latest inflation figure, over 6%, is impressive. It is also true that financial markets so far believe Powell’s argument that the rise in prices is, for the most part, transitory: inflation expectations in the medium term are slightly above 2%, not very much. above the standards of the last decade. Now that Powell doesn’t need to hold his breath waiting for Biden to decide on his confirmation, it could be argued that he will no longer feel constrained to tighten monetary policy if needed. But hasn’t the Fed waited too long?
It is a difficult dilemma. If the factors underlying the recent inflationary spikes turn out to be transitory, the Fed may redouble its appeasement policy and then declare, “We were telling you so.” Unfortunately, there is also a good probability that there will be a chain of increases in prices and wages, and that inflation will not be so transitory. If that happens, and the public begins to lose faith in price stability, it may take a major recession to bring it back.
At that point, some might say that the Fed should take the opportunity to publicly state that it plans to raise its inflation target to 3% or 4%. This was a key recommendation from one of the core reports the Fed commissioned in the 2019 reassessment of its monetary framework. Unfortunately, allowing inflation to rise inexorably, and only then telling the public that there is a higher new normal, would likely prove highly destabilizing.
I have long believed that a much more elegant way to create room to cut interest rates in a deep recession involves a negative interest rate policy. True, that would force the Fed to be prepared to use one of the increasingly numerous options to deter the accumulation of cash that would otherwise limit the effectiveness of its measures.
Of course, the Fed could raise interest rates preemptively, but that would collapse markets and throw the economy into a recession.
There are no easy options for the Fed at this point, and that would have been true if Biden had opted for Brainard and not Powell. So at the end of the day, let’s give the president credit for understanding that, regardless of the political pressure on his administration to keep the Fed at bay, it was better to assert the independence of the central bank… and his own.
Kenneth Rogoff He was Chief Economist at the International Monetary Fund and is Professor of Economics and Public Policy at Harvard University. © Project Syndicate 1995–2021
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George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.