Despite his shortcomings, Jerome Powell should be reappointed as Fed chairman
WGROUP NOMINATION the chairman of the Federal Reserve, the US president chooses the person who wields the greatest immediate power over the world economy. The Fed’s leadership brings with it control of US interest rates, responsibility for an $ 8.3 billion balance sheet, and the obligation to regulate the world’s most important banks. One mistake in the Eccles building can throw millions of people out of work, disrupt global markets or trigger inflation. The Fed even supports offshore financial markets by offering foreign central banks an immediate supply of dollars.
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The fate of Jerome Powell, the outgoing president whose term expires in February, is in the hands of President Joe Biden. It’s unclear how history will view Mr Powell’s first term. Before the pandemic, its lax monetary policy helped unemployment reach historic lows without causing inflation. When the economy stalled in the spring of 2020, the Fed prevented a collapse in financial markets with massive and swift interventions, some of which, like the implicit underwriting of the corporate bond market, were unprecedented. In August 2020, the central bank fine-tuned its 2% inflation target, which it had so far exceeded, by averaging it over the business cycle, meaning the Fed would have to compensate for its past failures. .
Recently, however, Mr. Powell’s hand has seemed less stable. According to the Fed’s target measure, inflation jumped to 4% a year earlier, or 6.4% if you annualize quarter-over-quarter price increases. The central bank’s inability to predict rising prices made its promises of lower inflation less reassuring. The Fed could still be forced into a sudden reversal of the stimulus.
Moreover, the new inflation target, while desirable in theory, remains vague and poorly understood in practice. And the central bank persists with $ 120 billion a month in quantitative easing (QE), buying bonds with newly created currency. today QE is unlikely to directly benefit the economy, but it creates hidden financial risks for taxpayers because it involves the Fed, which they underwrite, putting up short-term reserves to buy long-term bonds. If short-term rates rise, the interest bill the Fed has to pay on these reserves will skyrocket.
Despite this mixed record, Mr Biden is expected to renew Mr Powell. That’s in part because any replacement the White House is likely to consider would likely be even more keen to extend. QE, and may also be skeptical of the welcome tidying up of banking regulations that Powell also chaired. (The leading candidate of this type is Lael Brainard, a governor of the Fed.) But the most important reason for keeping Mr. Powell in office is that it would be a terrible time to make it look like the White House wants to influence. the Fed.
In the short term, the danger is that high inflation will persist in persisting. With Mr Powell in charge, that would look like an honest mistake, a mistake his record suggests he would try to correct quickly. In 2018, the Fed raised rates as the economy warmed; in June, he signaled that he would respond to higher inflation with tighter monetary policy, a plan the markets have found credible. However, with a person named by Biden at the helm, chosen primarily for his penchant for stimulus, the Fed may appear insufficiently independent and therefore need to raise rates further – and thus slow the economy further – to convince investors it was determined to contain inflation.
In the long term, the economic environment threatens the independence of central banks. As interest rates fell close to zero, they ran out of ammunition. QE, central banks’ main alternative to lowering rates, is easily confused with monetary financing of fiscal deficits. Their arsenal must be reconstituted and the distribution of responsibilities between central banks and the government’s fiscal policy must be rethought. Politicians and lunatics must also cooperate to study central bank digital currencies (CBDCS), which have the potential to transform how money and banking work. Decisions concerning CBDCs should be taken by elected leaders, but the independent opinion of technocrats will be crucial. A new appointment risks fueling suspicions that all of these reforms will politicize the central bank.
Church and State
Mr. Powell got his job four years ago because Donald Trump set a precedent, intact since the 1970s, that presidents should renew Fed bosses chosen by their predecessors, even those of opposing parties. Mr. Biden would do well to reaffirm this principle and thus send the message that the executive respects the independence of the Fed. ■
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This article appeared in the Leaders section of the print edition under the title “The Powell punt”