the federal reserve

The Big Problem With the Left’s Case Against Jerome Powell

Photo: Susan Walsh/POOL/AFP via Getty Images

Next year, Joe Biden will have the chance to nominate a person to one of the most powerful economic policymaking jobs on the planet. Some Democrats say he should pick an old white Republican who used to work in investment banking. Others say that Biden should nominate someone else.

The first group has a stronger case.

I’m alluding to the roiling intra-Democratic debate over whether the president should give Jerome Powell a second term as chair of the Federal Reserve. The battle lines in that controversy aren’t entirely intuitive. Elizabeth Warren, Alexandria Ocasio-Cortez, and other House progressives have come out in opposition to Powell’s reappointment, while various moderate Democrats have rallied to his defense. But the gray-haired Trump appointee also boasts a phalanx of left-wing proponents, including the socialist economist J.W. Mason, economic historian Adam Tooze, and various progressive columnists (whose ranks I now join). What separates Powell’s progressive defenders from his detractors aren’t ideological judgements so much as political ones.

Before elaborating on that point though, it’s worth sketching out the Fed chair’s substantive virtues and vices, from a lefty point of view.

On the plus side, Powell recently prevented a catastrophic global depression. In 2020, the COVID pandemic triggered the equivalent of a worldwide bank run, as investors sold off their assets in a flight to cash. If the Fed chair and his colleagues hadn’t prioritized efficacy over orthodoxy — and found ways of plugging the holes in all major credit markets — our epidemiological crisis would have become a financial one, and unemployment would have soared far higher than it ultimately did.

More critically, Powell has maintained a pro-worker monetary policy. The Federal Reserve has a range of authorities. But its chief responsibility is to set the price of credit throughout the economy. When the Fed lowers interest rates, businesses and consumers can borrow money more affordably. As a result, demand for goods and services — and thus for the workers who provide them — goes up. When the Fed raises interest rates, businesses and consumers are forced to tighten their belts, and demand for labor declines.

By law, the Fed is supposed to set the price of credit with an eye toward two objectives: promoting full employment and maintaining price stability. These goals can come into tension. Low interest rates facilitate tight labor markets (i.e., “full employment”). But when jobs are abundant and workers are scarce, workers have the power to demand higher wages — and higher wages can lead employers to raise prices. Workers may then respond to price increases by demanding still-higher wages, setting off an inflationary cycle.

For most of the past four decades, terror of such “runaway inflation” led the Federal Reserve to err on the side of needlessly condemning millions of Americans to perpetual unemployment. Rather than waiting for inflation to exceed the central bank’s 2 percent target before raising interest rates, the Fed would preemptively raise rates when unemployment fell too low (in the estimation of the central bank’s wealthy, comfortably employed governors).

Even the last Democratic Fed chair, current Treasury Secretary Janet Yellen, bought into this operating procedure. In 2015, she decided to start hiking interest rates even though inflation remained lower than the Fed’s target, while unemployment remained above 5 percent. Yellen’s concern was that, if unemployment fell too low, there would be a “risk of overheating.” As it turned out, the economy faced no such risk. The unemployment rate fell to 3.5 percent in February 2020 without sparking a hint of inflation. There was, in retrospect, a significant risk that higher interest rates would tip the Midwest into a mini-recession (and, arguably, reduce the region’s support for Democrats by just enough to get Donald Trump elected).

The Fed’s decades-long bias toward inflation prevention had a profound influence on America’s entire political economy. By keeping labor markets perennially loose, the central bank shifted the balance of power in the economy from workers to bosses. And by erring on the side of excessively high interest rates, the Fed shifted income from debtors to creditors, while also fortifying the political opposition to deficit-financed public investment.

Under Powell, the Fed has embraced a new pro-employment orthodoxy. Not only has the Fed chair disavowed raising rates simply because unemployment is at a low level, he’s also revised the Fed’s inflation target: Instead of aiming to keep inflation under 2 percent at all times, the central bank now strives to ensure that inflation averages 2 percent over an extended period of time. This means that, if inflation runs below 2 percent for a long time (as it did for much of the past decade), then the central bank will tolerate inflation above 2 percent for a period before raising rates.

The case for retaining Powell therefore boils down to a simple question: Why fire a Fed chair who’s trying to get Americans hired?

Powell’s left-wing opponents offer a simple reply: The man is a Republican.

And not just “in name only.” Powell might not feel entirely at home in the party of Trump. But his personal endorsement of a 2017 bill that relaxed lending rules for major banks — and his light-touch approach to enforcing financial regulations at the Fed — testify to his Reaganite origins. Sure, he’s done a fine job on interest rates. But there are other levers the central bank could be using to advance progressive goals.

For example, the Fed could combat racial inequity in access to credit by ramping up enforcement of the Community Reinvestment Act, if it had a chair interested in doing so. And it could also do more to mitigate climate change — or at least protect the financial system from a global warming–induced implosion.

It’s true that the Fed does not have a mandate to reduce carbon emissions; Congress never delegated that power to the agency. But the central bank has been tasked with managing risk in the financial system. And, as central banks in Europe and Asia have acknowledged, climate change poses some serious risks to major banks. In Japan and France, central banks have incorporated such hazards into their “stress tests” of financial institutions. Which makes sense: If a bank is holding a lot of coastal real estate and fossil-fuel debt, you can’t fully assess its financial stability without accounting for the threat that rising sea levels or a green transition would pose to its balance sheet.

And yet, under Powell’s leadership, the Fed has declined to integrate climate risk into its stress tests, while also refusing to take other actions that might discourage lending to CO2-emitting firms. As the head of the European Central Bank recently declared, “Our planet is burning, and we central bankers could look on our mandate and pretend that it is for others to act and that we should simply be followers. I don’t think so.” Powell, meanwhile, said in June, “We are not and we don’t seek to be climate policymakers.”

Besides those specific objections, Powell’s critics note that Biden won’t get to appoint many officials more powerful than the chair of the Federal Reserve. So, why allow Republicans to retain their grip on America’s central bank, instead of appointing someone who shares more of the Democratic Party’s priorities?

This is a fair question. I can’t speak for every member of the progressive, pro-Powell posse. But my own answer is that (1) Powell’s leadership on monetary policy is uniquely valuable, (2) there are other ways to advance the left’s goals on financial regulation besides replacing him, (3) substantially reducing carbon emissions through Fed policy would require stretching the bank’s mandate to the breaking point, and (4) no one willing to do that could be confirmed by the Senate.

I’ve already explained why a full-employment monetary policy is indispensable for economic justice. But it’s also vital for achieving a green transition for three reasons. First, transforming America’s energy system will require vast amounts of fixed investment, which will be harder to achieve in a high interest-rate environment. Second, in an economy where jobs are scarce because credit is tight, enacting policies that rapidly reduce employment in the fossil-fuel sector will be even more politically difficult. And finally, since high interest rates increase the projected cost of deficit spending, an accommodative Fed is likely to be a prerequisite for large public investments in green infrastructure (both this year and in the future).

For these reasons, it would be risky to replace any Fed chair who has a proven commitment to full employment with a lesser-known quantity. But what makes Powell uniquely valuable is the combination of his policy instincts and Republican pedigree. And this is where the disparate political judgments of Powell’s progressive defenders and detractors come into play.

Some on the left disdain the Fed chair’s Wall Street background and partisan loyalty. But it is precisely because Powell is an old white multimillionaire appointed by Donald Trump that he has been able to push monetary policy leftward without provoking much pushback from congressional Republicans, mainstream news outlets, or financial markets. Any action Powell takes is by definition bipartisan.

Crucially, Powell has not just used that aura of reasonableness to keep inflation fears and interest rates low. He’s also deployed it in service of expansionary fiscal policy. Powell offered tacit support for every stimulus package that Congress considered since the pandemic’s onset. Earlier this year, when Biden was pushing for the American Rescue Plan’s passage, Powell helped consolidate Democratic support for the measure by assuring Congress that the “economic dislocation” of workers remained a bigger macroeconomic problem than inflation. It seems unlikely that this analysis would have been as compelling to either moderate Democrats or the mainstream media had it come from an AOC–approved Fed chair rather than a Mitch McConnell–approved one. In this key respect, Powell provides value that a progressive replacement could not.

So, if you’re going to give up the gift of a pro-employment Republican Fed chair, you need to have a very good reason. And this is especially true in a context where inflation is on the rise, and moderate Democrats are trying to shrink the president’s agenda. The last thing Biden needs is to spark an inflation panic in financial markets (which replacing Powell with someone less congenial to Wall Street traders surely could). And the last thing Chuck Schumer needs is something else he needs to beg Joe Manchin to vote for.

In other words: Forfeiting Powell’s strengths, while starting another intra-Democratic Senate fight, has costs. And I don’t think any of Powell’s plausible replacements would provide enough value to offset them.

The left’s most widely invoked alternative is Lael Brainard, an economist who currently sits on the Fed’s Board of Governors. Brainard is indeed to Powell’s left on financial regulation. All else equal, I’d rather have her leading the central bank. But as already noted, all else is not equal. Further, Biden can probably get the Fed to adopt a tougher posture toward Wall Street without ditching Powell, who has historically deferred to the Fed’s vice-chair of supervision on regulatory questions. If Biden elevates Brainard to that role next year — when its current occupant, conservative Randy Quarrels, will complete his term — then the president should be able to have his stricter regulatory enforcement and pro-labor Republican Fed chair too.

It’s also important to be clear about the limits of what Brainard would plausibly support. It’s possible to imagine the Fed giving more weight to climate risks when assessing the financial system’s stability under Brainard’s leadership. But even if the central bank took a more ecologically conscious approach to stress tests, this wouldn’t have much impact on carbon emissions. So long as there’s massive demand for fossil fuels, banks will keep lending to Big Oil, even if it requires them to hold a bit more capital. There are things that a central bank could do to significantly move the dial on carbon reduction, such as offer preferential financing to backers of green-energy firms, or refuse to purchase any mortgages that don’t conform to a set of green standards. But those actions would stretch the Fed’s mandate, at least as traditionally interpreted. And it’s difficult to imagine Brainard supporting them (let alone, the rest of the Board doing so at her behest).

The American Prospect’s David Dayen, a leading progressive proponent of replacing Powell, actually acknowledges this point, writing:

I’m not as convinced that Lael Brainard, the Tim Geithner protégé whom the progressive world has gotten religion on, would necessarily shock the Fed out of lethargy on climate either. Her name has seemingly been floated because Powell opponents judge her the most acceptable to Biden should he desire to make a change. But climate is too important to leave to someone inside the Fed bubble.

Dayen therefore argues that Biden must nominate someone who has demonstrated an interest in vigorously combating the fossil-fuel industry. Yet anyone who meets Dayen’s criterion could not possibly meet Joe Manchin’s.

Climate realism must not lead us into politics denial. The Democratic Party has only 50 senators. One of them is a self-styled champion of the coal industry who is presently vowing to kill any reconciliation bill that includes a clean-energy standard. There is no way that he is going to vote for a Fed nominee who promises to throttle carbon emissions.

Critics of Powell are correct that central banks in other countries take climate change far more seriously than the Fed does. But that fact says less about the politics of foreign central bankers than those of foreign right-wingers. The Bank of England did not incorporate sustainability into its mandate over the opposition of British conservatives; it did so at their command.

Progressives cannot wish away the reactionary bent of our nation’s politics, nor evade it through the appointment of radical technocrats. We can only hope to deftly navigate America’s unfavorable terrain by attending closely to its openings and pitfalls. And the lay of this land counsels Powell’s reappointment.

The Big Problem With the Left’s Case Against Jerome Powell