Inflation is falling, but Jerome Powell has nothing to do with it. Our democracy and climate face mounting instability—and he has everything to do with that.
This article was originally published by The Sling. Read on the original site here.
Larry Summers and other corporate apologists asserted for over a year that the Federal Reserve would have to engineer a recession to bring down prices. But as inflation continues to fall with no corresponding rise in unemployment, doomsayers’ insistence on the need to throw millions of people out of work to restore price stability has been discredited. Although the United States is on track to achieve a soft landing once thought improbable, don’t give Fed Chair Jerome Powell credit; disinflation without mass joblessness is happening despite his move to jack up interest rates, not because of it. And while the Fed is expected to begin lowering interest rates later this year, Powell should still be regarded as a hazard to the health of our polity and our planet.
Just a few weeks ago, Powell told security to “close the fucking door” on a group of climate campaigners who interrupted a speech he was giving. Powell’s palpable contempt for the protesters was another reminder that President Joe Biden should never have renominated the former private equity executive to lead the Fed. The magnitude of Biden’s mistake has become increasingly clear in the roughly two years since he made it.
Put bluntly, Powell is doing a bang-up job of hastening the end of civilized life on Earth. First, his refusal to use the U.S. central bank’s regulatory authority to rein in the financing of fossil fuels is locking in more destructive warming. Second, his prolonged campaign of interest rate hikes is hindering the greening of the economy at a pivotal moment when there is no time to waste. Last but not least, the high interest rate environment Powell has created is improving Donald Trump’s 2024 electoral prospects—and given Trump’s coziness with the fossil fuel industry, his election would be a death knell for the climate.
Nevertheless, we have yet to hear a mea culpa from prominent Powell cheerleaders, who argued that the Fed Chair’s pre-2022 dovishness outweighed his regulatory deficiencies. What has become painfully clear is that Powell’s actual hawkishness is undermining the investment incentives of Biden’s green economic agenda.
Biden tapped Powell for a second four-year term despite opposition from public interest groups, including Public Citizen and the Revolving Door Project, where my colleague Max Moran identified several better candidates. The recent anniversary of Powell’s renomination should invite critical reflection on the arguments made by his supporters and detractors alike during the drawn-out battle to staff Biden’s Fed. Struggles to reshape financial regulation will only grow more fierce in the coming years, and the left needs to be prepared to fight for central bank leaders who are committed to advancing whole-of-government responses to the intertwined climate and inequality crises.
What were people thinking? Reassessing the cases for and against Powell
As evidence mounts that rate hikes imposed by Powell (and many of his central banking peers abroad) are making global climate apartheid more likely, it’s worth revisiting why many establishment liberals and even some progressives advocated on his behalf in the summer and fall of 2021—and why others on the left sounded the alarm.
According to Powell’s defenders at the time, the Fed Chair’s response to the Covid crisis demonstrated that he would strive, unlike his predecessors, to fulfill both parts of the institution’s dual mandate: maintaining low inflation and pursuing full employment. Furthermore, they insisted, Powell’s GOP affiliation would allow him to do so while retaining the support of congressional Republicans, the corporate media, and Wall Street.
Powell’s opponents welcomed the chair’s dovish approach to monetary policy from 2018 to 2021, though they simultaneously acknowledged his history of changing positions based on political whims. They remained unconvinced, however, that Powell was the only candidate who would give maximizing employment equal priority as keeping inflation below the Fed’s arbitrary and untenable 2 percent target. Lael Brainard, then the only Democratic member of the Federal Reserve Board of Governors, could be expected to do that and perform better at other, equally important aspects of the job, they argued, regardless of whether right-wing lawmakers backed her.
Obviously, the notion that Powell’s purported commitment to full employment would lead the Fed to keep interest rates low was quickly brought into disrepute. Just one week after Biden renominated him, the Fed chair had already changed his tune. And in early 2022, Powell launched the most drastic and sustained campaign of rate hikes in decades, earning comparisons to Paul Volcker.
But Powell’s critics, especially those concerned with climate justice, didn’t need the benefit of hindsight to see that the incumbent was a problematic pick. They had already argued convincingly that Powell’s weaknesses on financial regulation should be disqualifying. The passage of time has revealed how wrong Powell’s supporters were to dismiss progressives’ warnings about Powell’s ethical failures as well as his penchant for deregulation, which reared its ugly head with the 2023 collapse of Silicon Valley Bank and Signature Bank.
Robinson Meyer, the founder of climate media outlet Heatmap and contributor to the New York Times, was an early Powell supporter. His piece, titled “The Planet Needs Jerome Powell,” is an emblematic pro-Powell article published by The Atlantic in September 2021, amid the lengthy fight over Biden’s pick for Fed chair. Meyer admonished the climate left for its supposed lack of seriousness about the Fed’s role in macroeconomic management. According to Meyer’s narrow interpretation (shared by neoliberal blogger Matt Yglesias), the Federal Reserve as an institution is basically reducible to monetary policy and has little of consequence to do with financial regulation.
The demand from “regulation hawks” for a central bank leader who would ramp up Wall Street oversight was misguided, Meyer suggested, because the Fed’s actions on this front “won’t directly reduce carbon pollution.” “Employment hawks,” on the other hand, were right to focus on Powell’s dovishness, he added, because keeping interest rates low to spur green investment is the best a central banker can do on climate. It’s a sad irony that the Fed’s ensuing imposition of rate hikes has undermined the decarbonization effort that Meyer said Powell was best suited to oversee (more on that later).
Contra Meyer, financial regulation is a key aspect of the Fed’s work. If the central bank were to earnestly address the climate emergency’s threats to the financial system (and financiers’ threats to the climate), it would lead banks and other lenders to cease new investment in fossil fuels, an increasingly risky asset class that is not only highly destructive but also likely to become stranded. The continued financing of greenhouse gas emissions makes predatory subprime lending look tame by comparison.
Powell has refused to curb lending to planet-wrecking fossil fuels
Future historians will be at pains to explain why the world’s 60 largest private banks provided more than $5.5 trillion in financing to the fossil fuel industry from 2016 to 2022, including over $1.5 trillion after 2021—the year the International Energy Agency declared that investments in new coal, oil, and gas production are incompatible with its net-zero by 2050 pathway.
Those historians might also ask why regulators allowed Wall Street to pour vast sums of money into ecologically destabilizing and soon-to-be-outdated infrastructure during this crucial decade. At a time when transformative interventions are necessary, the Treasury Department has opted to release voluntary principles for net-zero financing and investment, while the Securities and Exchange Commission is finalizing rules that would require companies to report some of their greenhouse gas emissions and make other climate-related disclosures. Meanwhile, all the Fed has done so far is bail out fossil fuel companies at the beginning of the Covid pandemic and publish—alongside the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency—weak guidance for climate risk management at big banks.
As watchdogs observed earlier this year, the Fed’s proposals are “much vaguer than the detailed expectations laid out by global peers.” This is unconscionable, especially because Powell and other top U.S. regulators have already been empowered by Congress to rein in reckless lending by “too-big-to-fail” or systemically important financial institutions.
Specifically, Section 121 of the Dodd-Frank Act instructs the Federal Reserve to determine whether a bank holding company or nonbank SIFI poses a “grave threat to the financial stability of the United States.” With the approval of the Financial Stability Oversight Council (FSOC), the Fed “can take a host of actions, including imposing limitations on an institution’s activities, prohibiting activities, or forcing asset divestiture,” Graham Steele, former Assistant Secretary for Financial Institutions at the Treasury Department, explained in a landmark 2020 report published before he joined the Biden administration. “While this authority contains some built-in procedural complexity, a Federal Reserve determined to mitigate climate risks should use it to force the largest, most systemic bank holding companies, insurers, and asset managers to divest of their climate change-causing assets.”
The Fed not only has the authority to minimize climate-related financial risks, but doing so falls squarely within its core responsibilities, regardless of Powell’s insistence to the contrary. The Fed is tasked with macroprudential regulation (i.e., managing systemic financial risks), and the existential threat of climate change by definition endangers economic stability. To ignore it is a clear dereliction of duty.
It’s not hard to imagine the outsized positive impact that a progressive leader of the Fed could have on shutting down planned increases in fossil fuel combustion. Consider, for instance, that just four U.S.-based financial giants—JP Morgan Chase, Citi, Wells Fargo, and Bank of America, all of which are SIFIs—account for roughly one-quarter of the aforementioned lending to coal, oil, and gas firms, much of which is bound to end up as stranded assets.
The Fed Chair has not only failed to halt fossil fuel expansion, but also has simultaneously inhibited the buildout of a more sustainable economy by embarking on an unwarranted campaign of interest rate hikes. Powell’s alleged dovishness turned out to be remarkably shallow, and it remains true that better Fed Chair candidates dismissed by Meyer and ignored by Biden were more dedicated to the Fed’s full employment mandate.
Powell has imposed transition-impeding interest rate hikes
Since the start of 2022, Powell has raised the federal funds rate from 0.08% to 5.33%, increasing the costs of borrowing enough to stymie the green economic transition while doing little to alleviate inflation (the professed reason for the rate hikes).
It has become ever more apparent over time that rising interest rates are hampering efforts to decarbonize energy supplies and electrify transportation, housing, and other key sectors. High interest rates have had the dual effect of rolling back productive investment and lowering consumer demand, causing substantial drops in the stocks of major solar, wind, and other renewables-based companies; undermining the deployment of offshore wind projects; delaying the construction of electric vehicle (EV) factories; and slowing the installation of heat pumps.
In effect, Powell is exercising veto power over the Inflation Reduction Act and ruining “the economics of clean energy,” as David Dayen explained recently in The Prospect. President Biden’s signature climate legislation contains hundreds of billions of dollars in subsidies for green industrialization, but repeated interest rate hikes have driven up financing costs enough to outweigh them. As Dayen noted, this is especially the case because the law’s reliance on tax credits requires upfront investment decisions.
It’s worth stressing here that while inflation has declined significantly since its June 2022 peak, Powell’s crusade had little to do with it. The Fed Chair made clear that his goal with interest rate hikes was to “get wages down” (and thus suppress demand) by ramping up unemployment. Fortunately, inflation diminished even in the absence of an uptick in joblessness. The upshot is that while Powell surely wants credit for taming inflation without provoking a recession, he doesn’t deserve it. His chief accomplishment has been to unnecessarily stifle the nascent shift to a greener economy, an ominous development with negative ramifications.
Powell is boosting Trump’s electoral chances
Powell—a lifelong Republican and former private equity bigwig—isn’t just thwarting the green economic transition right now. His obdurate leadership of the U.S. central bank is increasing the costs of housing, automobiles, financed consumer durables, and credit card debt—contributing to widespread anger about the state of the economy even as “Bidenomics” delivers low unemployment and much-needed wage compression. Economic discontent is helping Donald Trump’s 2024 election chances and thus hurting humanity’s long-term prospects for averting the worst consequences of the climate crisis.
It’s a cruel irony that Powell’s interest rate hikes have inflicted real-world harms while being incapable of addressing their purported target: inflation. That’s because the cost-of-living crisis of the past two years didn’t result from a wage-price spiral, as promised by Larry Summers; it was fueled by sellers’ inflation, or corporate profiteering, and exacerbated by the elimination of the pandemic-era welfare state. When the onset of Covid and Russia’s invasion of Ukraine upended international supply chains—rendered fragile through decades of neoliberal globalization—corporations bolstered by preceding rounds of consolidation capitalized on both crises to justify price hikes that outpaced the increased costs of doing business. That safety-net measures enacted in the wake of the coronavirus crisis were allowed to expire only made the situation worse.
Given that the inflation saga of the past two years is inseparable from preexisting patterns of market concentration, progressives have argued against job-threatening rate hikes (note that jacking up unemployment is the only mechanism through which the Fed could lower inflation; for more, see my colleague’s deep dive on the matter) and for a more relevant mix of policies, including a windfall profits tax, stronger antitrust enforcement, and temporary price controls. Unlike the blunt instrument that Powell has been wielding ineffectively, those tailored solutions—the last two of which are within the Biden administration’s ambit—have the potential to dilute the power of price-gouging corporations without hurting workers.
Although inflation is easing, prices remain elevated compared with people’s historic expectations, and rising rents and debts continue to overwhelm households. Biden needs to use his bully pulpit to advocate for a government crackdown on corporate villains. The outcome of the next election—and the fate of U.S. democracy and the planet writ large—depend on it.
Tight monetary policy is making Trump’s return more likely. That makes Biden’s decision to renominate a Trump appointee whose main priority (to allegedly attack profit-driven inflation with the ill-equipped tool of interest rate hikes) conflicts so sharply with the White House’s own stated industrial policy goals (to spur investment in green technologies) all the more nonsensical.
Biden already has to contend with obstructionism from congressional Republicans (and a handful of corporate Democrats) as well as the Supreme Court’s far-right majority. Now, thanks to his own unforced error, the president has to deal with obstructionism from his hand-picked Fed leader—a former partner at the Carlyle Group, one of the world’s most notorious union-busting and fossil fuel-investing private equity firms.
Moving Forward
It bears repeating that careful observers of the Fed are right to worry about climate change—and to stress the agency’s rulemaking authorities and obligations—because nothing else poses a greater threat to economic well-being. What the planet needs more than anything is for Powell to start taking his entire job seriously.
Powell’s inaction is hardly surprising given his January 2023 declaration that the Fed is not and never will be a “climate policymaker.” But Powell’s assertion could not be more wrongheaded; central bankers around the world are key climate policymakers whether or not they identify as such. The United Nations warned ahead of COP28 that the world is currently on pace for a “hellish” 3°C (or about 5.4° Fahrenheit) of warming by 2100. Do Powell and his colleagues seriously think that such a calamity wouldn’t imperil macroeconomic performance?
Frankly, millions of people’s lives and billions of dollars of property are already being destroyed by an ostensibly “safe” amount of climate change (the world is roughly 1.3°C warmer now compared with preindustrial averages). More than doubling extant temperature rise by century’s end would unleash increasingly frequent and severe extreme weather disasters, inflict trillions of dollars in monetary damages, and cause incalculable amounts of pain, including significant losses of lives, livelihoods, cultural artifacts, and biodiversity. A world beset by intensifying heatwaves, droughts, wildfires, storms, and floods will be a world full of ruined cities, factories, and farms. It will also be a far more expensive place to live.
Despite Powell’s apparently steadfast commitment to maintaining price stability, he is actively undermining the possibility of steady prices in the long-run. Again, this isn’t for a lack of tools. It’s for a lack of political willpower. While some of the Fed’s foreign counterparts are currently exploring or implementing mandatory disclosure rules, more stringent climate stress tests of banks’ assets, and direct investment or lending policies that prioritize green enterprises, the U.S. is falling further behind.
Powell should have listened to those activists he dismissed recently because they are right—it’s past time for the Fed to protect the climate from the havoc wreaked by the financial system and vice versa. If Powell won’t do everything in his power to restrain fossil fuel financing and incentivize green investment, then Biden should explore whether he can fire him for cause and appoint someone who will.
The above photo of Fed Chair Jerome Powell is a work of the U.S. federal government and in the public domain.