The sudden turmoil over whether Jerome Powell should serve as chairman of the Federal Reserve Board of Governors highlights an unhealthy aspect of both our economy and our politics. The Fed seems to play a huge role in policy, which any one central bank should. It needs to be fixed, but no one is talking about it.
Aristotle said, “Nature hates emptiness.” Congress has neutralized itself and does not seem to be able to act as the author of the constitution, so the gaps that the Fed has filled since 9/11 are bailout melddown or Covid-1.
The problem is that, despite strong demands from outsiders for and against the Fed’s great power, all central banks can primarily increase monetary growth, the most fundamental measure of money supply. Households, businesses and markets perceive it as low or high interest rates and respond accordingly. Second, in its role as a bank regulator, it may direct the actions of donors, but these are essentially token measures.
The level of US money supply growth since 2001 is unprecedented in history and volatile in the long run. Some adjustment will eventually happen. The longer the delay, the greater the final adjustment of needs, and potentially, a bigger push in business and the economy.
These are historic, turbulent times. The people must understand that the choice of who will be the next Fed chair is similar to the presidential elections of 1916 and 1940 – intelligent voters realized that they were choosing a leader for the upcoming war. Now we are choosing a monetary policy leader for the impending return from historically abnormal financial conditions.
Nobody really talks about it. Political left progressives, especially New York representatives. Financial sector players are concerned about any change that could upset the market and lower asset prices. Both will be disappointed – AOC because his wishes will not be fulfilled, financial sector players will be afraid because of them.
Now for the details of the situation. Seven federal reserve governors have served 14-year terms. There are few legal provisions to dismiss them and never have. Two of them serve as chairs and vice-chairs for four years.
In 2012, Barack Obama appointed Powell to the Board of Governors. She was nominated to replace Janet Yellen in February 2011. This appointment is completed within four months. Should he be named four more years, as is often the case? Or should the job go to someone else?
Unfortunately, some have identified this as a question from President Joe Biden’s “sacked” Powell. This is not helpful. Although there have been only nine Fed chairs since the post was created, there are enough precedents for re-appointing or replacing resigners. Both are valid.
Chairs nominated by a president often last until the term of a successful person, even from another party. Bill Martin, initially appointed by Harry Truman in 1951, served five terms, including Eisenhower, Kennedy and Johnson, before resigning in January 1970, one year into Richard Nixon’s first term.
Nixon, named Arthur Burns, served one year in Jimmy Carter’s administration in January 1978. If anyone is most responsible for the inflation of the 1970s, it was Burns.
Carter was then the corporate head. Named after William Miller, who was put in the most incompetent chair ever. Carter kicked him to the top Treasury secretary and replaced him with Paul Volker, perhaps the greatest Fed chair of all time. Volker ended an inflationary cycle – but there was great pain.
Volker’s term continued in the Reagan administration. He was reappointed in 1982, but Reagan’s party did not like what hard money was paying Republicans in the election and ran the process of his resignation. It’s as close as we’ve been “fired” in a board chair. Reagan then named Alan Greenspan, who had been cherished for a long time after the job.
When Greenspan’s term was coming to an end, George HW Bush reappointed him. The Fed immediately squeezed money, creating a brief recession that helped Bill Clinton hit the electoral balance. When Bush later said, “I re-hired him and he disappointed me,” it was a simple account of what happened.
Clinton and George W. Bush were reappointed and moved from term to term in Greenspan. He oversaw a large and long-term cut in interest rates after 9/11, and the mortgage-backed-bond party kept rates low despite a wild financial ordeal, but resigned at the end of a normal term in January 200.
Bush 43 then hired Ben Bernanke, who manages the “zero interest rate policy” that continues to this day. After two terms and a year as President of Barack Obama, he was replaced by Janet Yellen. Four years later, Powell had already been named chairman of the board.
So it is common to re-assign chairs. But there are other examples when a president, Nixon, Carter and Obama, hire a new person at the first opportunity.
Powell is competent enough and chairs like a worker, but who is not interested in swinging in a boat. He recently said a number of vague things about the “early stages” of climate change and what the Fed could do later. He should say that he can make little monetary policy on the issue and that what the Fed can do as a bank regulator is limited.
However, some liberal economists, including Nobel laureate Joe Stiglitz, think the Fed could do more in a number of cases and call for Powell’s replacement. Financial market pundits warn everyone that any volatility will threaten the value of corporate stocks and other assets and push for re-employment.
It would be nice if Biden would name a qualified economist or executive who would admit that we do not have the courageous new world of inflation and unlimited government orrow capacity, as the progressives imagine. Instead, we are in a chronic inconsistency that will eventually end.
Biden is unlikely to choose anyone who would comment. The difficulty is that he will allow Powell to resign but will instead replace him with someone who is not very different and is not interested in making any waves.
St. Paul economist and author Edward Lotterman can be reached at [email protected]