After several progressive members of Congress came out against renominating Jerome Powell to lead the Federal Reserve, a great many pundits suddenly had a great many opinions on the Fed — mostly, why the anti-Powell left is wrong, and these (exclusively) men are right.
This has led to many embarrassing results.
For one thing, several of the most condescending writers got their basic facts wrong. Robinson Meyer at the Atlantic derided climate activists opposing Powell as “so ignorant about the economy,” then had to edit out his own misunderstanding of the word “capital,” a change which The Atlantic has not acknowledged on its site. (Here’s an archived copy of the original piece.) Matt Yglesias, after incorrectly claiming that the Federal Communications Commission has power over banking rules, wrote that the Fed’s key regulatory appointee is “the Vice Chair for Regulation, where we also have a Trump-era holdover in Richard Clarida.” The job is called the Vice Chair for Supervision, the person holding the job is Randal Quarles, and as we’ve repeatedly explained, the Fed Chair is the person who ultimately determines policy.
But even when these pundits have the facts right, their actual argumentation is still pretty weak. Public Citizen has an excellent rebuttal piece, so we thought we’d instead start a taxonomy of the poor arguments for Powell, and explain in detail why they’re wrong. To illustrate, we’ll be using quotes from a piece by Josh Barro, a center-right Insider columnist and host of KCRW’s Left, Right and Center, titled “The Arguments for Firing Jay Powell are Tiresome and Stupid.”
The Argument From Jeopardization
The Argument: “[T]he 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.”
Why it’s wrong:
- Activists including ourselves have coalesced around Lael Brainard, currently the only Democratic vote on the Open Markets Committee.
- Brainard has consistently been more dovish than Powell on monetary policy. Brainard’s record indicates she’s even more willing than Powell to keep prioritizing full employment — she’s been doing so for years, even when it wasn’t popular.
- Powell, in his early Fed career, was advocating for the sharp monetary policy jolts which led to 2013’s “taper tantrum.” His policy has decisively shifted since then, but even at the time, Brainard remained dovish.
- Powell is not pro-worker. Aside from the fact that he is historically a middle-of-the-road weathervane vote, he spent most of his career at the secretive private equity firm Carlyle Group, which has a long record of union-busting.
- If one needs an ideological basis for Powell’s dovishness, the likelier explanation is that private equity’s debt-dependent business model benefits more from low interest rates than most of the rest of Wall Street. That doesn’t mean it’s not deeply pro-worker to keep rates low, it just means that Powell isn’t exactly a card-carrying member of the AFL-CIO.
- But any ideological explanation for Powell’s dovishness is flawed, because Powell isn’t an ideological dove. In 2020, the economy faced an historic downturn. Every macroeconomic textbook says that’s the time to cut rates and buy bonds, so that’s what Powell did. As Joseph Stiglitz put it, “that is a bare minimum for qualification. Almost anybody reasonable would have done something similar.”
The Argument from Charisma
The Argument: “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.) […] If you fire Powell and replace him with a Democrat, many of the policy issues Powell has successfully depoliticized will become politicized.”
Why it’s wrong:
- This basically claims that Powell is playing fourth-dimensional chess with Congress, using some unique charisma and personal touch to woo Senators into supporting his policies. There’s no clear evidence to support this, and it engages in fantastical thinking about how Congress and persuasion work, a la Chris Cillizza-style “insider” journalism. Politics is Veep, not The West Wing.
- Count the votes. Without Powell (and his peon Randal Quarles, who’s gestured that he’ll stay on if Powell does), Biden gets to nominate four new Fed Governors in a matter of months. He can pick four people committed to full employment, no matter what any hawks in Congress say.
- Anybody who thinks Powell has “quieted political criticism” hasn’t been paying attention to Joe Manchin, Larry Summers, or the most powerful Republican in Congress, Mitch McConnell. One could claim that the yelling about inflation would be even louder without Powell, but that is another unprovable hypothetical.
- Just because Powell took a lot of meetings on the Hill doesn’t mean he was doing so to argue vociferously for full employment. Isn’t the likelier explanation that he’s whipping votes for his renomination, including any promises and compromises necessary? Even if one doesn’t think that’s likelier, how can one prove it? How does anyone who wasn’t in the room know anything about what Powell was actually saying?
The Argument From Bipartisanship
The Argument: “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.”
Why it’s wrong:
- If Powell’s Republican affiliation is completely indispensable to making full employment tolerable, then it must be the case that anyone who’s not a Republican and supports full employment would never be confirmed for the Fed. Brainard’s presence on the Fed Board disproves this.
- By this view, Biden would never be able to get any Democrats appointed to the Fed Board at all, which would likely be intolerable to the Democratic Senate majority. If that were to happen, full employment remains unreachable.
- But more likely, Congress would not permit that degree of public chaos, and will relent to the President’s nominations. Particularly if Brainard, who is already a Board of Governors member, were nominated for the Chair, it would almost certainly be in no Senator’s interest to pick such a divisive partisan fight over such a wonky, technocratic issue.
- Even if Congress did grind the Fed to a halt over partisan divides, there are tools available to ensure that a Democratic appointee runs the Federal Reserve on a temporary basis.
- Even if Congress disapproves of the Fed’s policies, it is an independent part of the federal government. If the Fed Chair has few friends in Washington, they are not supposed to care.
The Argument From Prioritization (Again)
The Argument: “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. […] 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.”
Why it’s inaccurate:
- Share buybacks have played no part in the conversation about Powell as far as I’ve seen, because the Securities and Exchange Commission has jurisdiction over share buybacks, not the Fed.
Why it’s wrong:
- The proper time to worry about financial regulation is not when it’s generally acknowledged as “a leading economic risk facing the country,” or in other words, after there’s a crisis.
- If, as we all agree, there’s no way to predict definitively when the next crisis will happen or what is going to cause it, then isn’t it a good idea for the biggest and most systemically important banks to always be properly regulated to de-link their risks?
- Powell has attacked cash reserve requirements, bankruptcy resolution plans, stress tests, and the Volcker Rule. Nothing forced Powell to eliminate each of these rules.
The Argument From Proper Administration
The Argument: “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).”
Why it’s wrong:
- If climate-focused financial regulation is too silly to take seriously, perhaps someone should inform the Treasury Secretary, who has convened all federal financial regulators to implement climate concerns into their work, on direct order from the President.
- The European Central Bank has already announced plans to implement climate considerations into its monetary and regulatory activity. There is also the global Network for Greening the Financial System (NGFS), a consortium of central banks and regulators committed to using their powers to fight climate change. Powell only joined the NGFS on December 15, the day Biden was confirmed as the next President by the electoral college. Powell could have joined the consortium at any time of his chairmanship.
- Graham Steele, the nominee for Treasury Undersecretary for Financial Institutions, wrote an influential paper on climate-focused financial regulation which directly implicates the Fed multiple times.
- No climate activist is claiming the Fed “is supposed to be driving climate policy,” i.e., all climate policy should be centered in the Fed. Aside from the technocratic argument detailed above, the basic moral argument for climate policy at the Fed is applicable to all federal agencies. We are in an existential crisis for the future of society on our planet. Should not every institution do everything in its power to prevent the worst-case scenarios we are barreling towards even if it is not the most important agency toward accomplishing that goal?
The Argument From Ineffectiveness
The Argument: “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.”
Why it’s wrong:
- The policy referenced — increasing banks’ capital requirements in proportion with banks’ fossil fuel investments — doesn’t aim to affect the entire real economy. Its only purpose is to disincentivize lending to one particular sector, fossil fuels.
- If banks need to hold onto ever-increasing capital just to support one capital-intensive, middlingly profitable, highly politically unpopular sector, they’ll be disincentivized to cut these deals.
- Either way, this proposal is just one among many climate policies the Fed should pursue. These including implementing climate into stress testing; increasing margin requirements on securities deals for major corporate polluters; capping the overall size of polluting assets in lending and investment portfolios using Section 165 powers; and, most tantalizing, to mandate SIFI divestment from fossil fuel assets on grounds of protecting financial stability under Section 121.