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A year and a half ago, President Joe Biden renominated Jerome Powell for a second term as Federal Reserve Chairman. This came after a protracted, public debate among journalists, think-tankers, activists, and some members of Congress.
The Pro-Powell camp ultimately won out on two major arguments. First, that Powell alone was uniquely capable of keeping interest rates low thanks to his Republican businessman persona. Powell, we were told, had proven he was a true ally of workers and deeply committed to full employment, but his upper-class patrician style helped his fellow Fed governors and Republicans to feel comfortable going along with a more liberal policy. The second argument for Powell was a blanket assurance that the first argument was all that mattered. His supporters conceded that under Powell, the Fed had drastically weakened financial regulations and bank oversight. But according to them, none of that mattered in comparison to the staggering power of having a true-blue dove as Fed Chair.
Today, both of these arguments have proven categorically false. The first thing Powell did upon confirmation was begin the fastest set of interest rate hikes in decades, with the explicit goal of killing full employment. The only thing that’s seemingly begun to persuade him to stop is a continuing bank crisis. But that could have been avoided altogether if his own bank supervisors were permitted to do their job under Powell, as a report from the Fed itself laid out last week.
Op-ed after newsletter after article throughout 2021 assured readers that Powell was a staunch ally of workers and that his deregulations were insignificant in comparison. Many took a sneering tone toward his critics, using the issue for yet another proxy fight between Democratic moderates and progressives, wherein the moderates could demean the left as immature, uninformed, and politically unsavvy. But since then, their thesis — no matter how estimable, enlightened, and clever their rhetoric was — has crumbled into bits.
Is anyone in the pro-Powell camp going to admit this? Are Matt Yglesias, Josh Barro, Robinson Meyer, and their pals mature enough to say they were wrong?
For our part at the Revolving Door Project, we had a few key arguments against Powell.
- A look at his entire history on the Board of Governors showed that he was a weathervane vote: he raised interest rates when that seemed easiest and lowered them when that seemed easiest.
- The man comes out of private equity. Almost by definition, he cannot be considered an ally of the working class who’ll help the little guy when push comes to shove.
- His financial deregulations were genuinely dangerous. He endorsed the deregulatory 2018 bill, S.2155, and approved of going above and beyond what the bill required in easing oversight and restrictions on the banks.
- The Fed has an indispensable role to play on climate-related financial regulation, and Powell had proven ambivalent at best and outright dismissive at worst to the thought that his institution should care about the planet.
I’m not Joe Biden, so I can’t say exactly why the Pro-Powell arguments ultimately proved more persuasive. But I have to think that at least one reason is that the Powell camp’s case was just a lot simpler.
Taking the Fed’s supervisory role seriously means complicating one’s mental model of the central bank and, frankly, that’s really annoying. If all that really matters is interest rates, then picking a Fed chair is easy: just nominate whoever seems most likely to adjust rates to your preferences. Historically, that’s all that Presidents considered, and institutionally, that’s clearly all that the Fed really cares much about. This failure to consider other institutional powers and responsibilities lies at the heart of why being wrong about Powell has proven so dangerous.
In addition, most Fed reporters (who’d be writing news stories about this issue) are used to reporting mainly on interest rates, since that’s what the broadest audience of people who read financial journalism (investors, primarily) are interested in. Bank supervision also mostly takes place in confidential bank-regulator interactions, so it’s harder to get experience covering the topic in the first place.
And yet, since the passage of the Dodd-Frank Act in 2010, the Fed has become one of the most important financial regulators in the country. Like it or not, that means that financial regulation has to be a major factor in choosing who leads the central bank for as long as the Fed has those responsibilities. (Ideally, I’d like to give them over to the Federal Deposit Insurance Corporation.)
It’s annoying, especially because the Fed’s finreg duties are so much more multivarious than whether interest rates go up, down, or stay the same. The Fed designs and administers hyper-technical stress tests, sets capital and leverage ratios, develops forward-looking risk models, and more. Only lawyers deep into the weeds on regulation really understand all of the details of this, but those details matter tremendously, as we’re seeing with the SVB-induced banking crisis.
Consider also that renominating Powell required a lot less work for the President; it’s always easier to keep things as they are than to shake up power dynamics in the federal government. It didn’t help that the anti-Powell camp took a while to agree on Lael Brainard as our alternative candidate, and that even this endorsement was qualified, since Brainard is strong on Fed-specific issues but historically weak on non-Fed issues.
So when Powell was up for renomination, many economists and political insider-types had a straightforward, familiar argument for renominating Powell, while a smaller coalition of activists had a more legalistic, reading-intensive, and hedged argument against him. The Powell camp’s case also struck a tone which ought to be familiar to Biden, the winner of the 2020 Democratic primary: wisened, mature moderates have a common-sense and optimistic perspective that trumps the policy-intensive and dour arguments made by progressive agitators. It makes sense why one side would come off stronger than the other in this fight.
But all of the progressives’ pessimism, legalism, research, and hedging were because we were trying to look at the full picture of the issue, in all of its messiness, uncertainty, and interdisciplinarity. It’s good politics to keep things short, simple, cheerful, and light on workload. Unfortunately, that’s rarely how the world really works. It’s good policy to recognize that.
At the very least, we hope the way that Powell’s second Chairmanship has played out so far gets his backers in the punditry to look inward at why they so quickly believed a convenient fantasy. But they got everything they wanted out of the issue, so unfortunately, I doubt it.