Opinion | Why Progressives Shouldn’t Push Biden to Oust Trump’s Fed Chair
There are people who could be as good a Federal Reserve chair as Jerome Powell. But his virtues have been deeply underestimated by too many progressives, and the cascade of risks that come with replacing him makes it not nearly worth the gamble.
As the debate gets hotter on the left over whether President Joe Biden should give Powell another term, progressives should step back and take the win. Even if it does mean letting a Republican appointed by Donald Trump keep the job.
Start with Powell’s strengths. By far the most important decision the Fed makes is when to slow economic expansions in the name of keeping inflation contained. For decades the Fed consistently hit the brakes prematurely, raising interest rates and keeping unemployment too high for most workers to gain any real leverage to demand wage increases. In a recent paper at the Economic Policy Institute, we found that the excess unemployment tolerated by the Fed (and other policymakers) to be the single most-important factor suppressing wage growth for the vast majority of American workers, and that it has done particularly grave damage to Black workers. This too-slow wage growth is, in turn, the root cause of the enormous rise in inequality we’ve seen over that time.
It’s hugely rare — and important — to have a Fed chair willing to take on some risk that inflation might nudge above the Fed’s target for a short time in exchange for keeping unemployment very low and wage growth robust.
Powell has been willing to take on this risk.
In 2019 the unemployment rate averaged 3.7 percent, the lowest since 1969. Conventional wisdom said that the Fed should have been frantically raising interest rates, sure that this rate of unemployment signaled imminent economic overheating. But when asked if he was worried about this scenario during congressional testimony, Powell set #EconTwitter aflutter by answering: “We don’t have any basis or any evidence for calling this a hot labor market. We haven’t seen wages moving up as sharply as they have in the past. To call something hot, you need to see some heat.” This determination to probe just how low unemployment could be sustainably pushed is an enormous progressive advance in monetary policy — something the left has fought to achieve for years.
Some have argued that Powell’s dovishness of recent years is political: a Republican Fed chair helping a Republican president before Covid-19 struck and then just doing what any other chair would have done during the pandemic to keep the economy afloat. These skeptics argue that when the inflation versus unemployment trade-off becomes stark under a Biden presidency, Powell will stab the administration in the back. This is unconvincing. If Powell was looking for an opportunity to tighten monetary policy to jam up the Biden administration, the inflation uptick of the past few months was the perfect one. But Powell has stood firmer on a dovish approach than nearly any other policymaker over this period.
In short, Powell has largely adopted exactly the monetary policy approach that progressives have been recommending for decades. Along the way, the evidence he’s highlighted in support of this stance has managed to win over even many who would not describe themselves as progressive. But this approach has not yet become the dominant paradigm so that any Powell replacement would be guaranteed to embrace it — even if that was their goal. It needs champions with broad respect in Washington, D.C. Powell, a Republican former investment banker, has proven to be one, and this is enormously valuable for progressive causes.
The most common cases against Powell rest on claims that he has been soft on financial regulation and insufficiently proactive about climate change. There is some truth to these charges. But replacing Powell is neither necessary nor sufficient to address those issues, and it makes little sense to needlessly risk the gains made for workers under Powell’s Fed.
On financial regulation, the real focus of progressives’ ire should be the Fed’s vice chair for supervision, Randal Quarles. Quarles has watered down a slew of post-financial crisis regulations, and he should be replaced when his term in that post expires in October.
Do I wish that while Powell was engineering a transformative change in how the Fed’s monetary policy is conducted that he also publicly opposed the decisions of his vice chair for supervision? Definitely. But I also have sympathy for somebody wanting to focus on one policy sea change at a time, and think that replacing Quarles with a strong vice chair for supervision can solve most of this problem. (Indeed, Powell has largely deferred to the person in this post while a member of the Fed regardless of whether it was Quarles or Barack Obama pick Daniel Tarullo.)
On climate change, the Fed — and literally every other policymaker and institution in society — should be acting with more urgency. Yet the actual policy tools it controls have miniscule effects (at best) on emissions. Hence, an activist Fed chair cannot by itself materially affect the level of greenhouse gas emissions over the next decade is unrealistic. I understand why people want this to be true — unlike much of Washington, D.C., the Fed has demonstrated some minimal level of competence and public purpose in recent years, and there’s no filibuster to gridlock its decisions.
But there’s also no real tool the Fed currently controls that would have serious effects on emissions. Much of what people claim the Fed can do on climate is actually just counseling banks and other financial institutions to not be stupid and underestimate climate risks in their portfolios. That’s fine, but it won’t lead to materially reduced emissions. The Fed could also buy bonds of renewable energy companies to make debt finance cheaper for these companies. But debt finance is already dirt-cheap for just about every company in the U.S. What renewable energy efforts need (and what research shows really drives investments generally) is guaranteed consumers, which is not something the Fed can provide.
Could the Fed get really radical, and declare that banks are simply not allowed to transact with fossil fuel companies, throttling this sector from the financial supply side? Almost certainly not. Why would any Congress that is hostile to transformative climate policy allow the Fed, which it oversees, to do this? And if we had a Congress that was not hostile to transformative climate policy, why wouldn’t lawmakers just pass direct and more-effective legislation to address climate change, since tax and spending policies provide far more direct tools to lower emissions?
The Fed should certainly use its enormous research capacity to examine and highlight the economic fallout of climate change. Among other things, it’s a material issue for how they conduct their own policy. But there is no end-run around the need to convince legislators to take climate change seriously. This fact might literally be the end of us all, and that’s maddening. But it’s not a fact that changes if you choose a different Fed chair.
What does change if you choose a different Fed chair is that it sets off a series of musical chairs on the Fed’s Board of Governors that might move the balance from dovish to hawkish. After all, in this case, Powell would leave the Board and a Senate-approved replacement would be needed. It’s hard to imagine easy Senate approval of a strong dove. Even someone like Fed Governor Lael Brainard — who is often raised as a replacement and would indeed be an excellent Fed chair — would likely face more opposition. Already the Senate will have to confirm several open slots, and Biden should focus on appointing a top-tier slate of candidates to fill those vacancies.
In the end, the progressive case for keeping Powell in place is simply that he has adopted our approach to what is by far the most important part of his job, and this approach is crucial to fostering economic and racial justice in the coming years. It’s not the kind of thing that should be casually tossed aside.