On Monday, five progressive House members called on President Joe Biden not to reappoint Jerome Powell as chair of the Federal Reserve. Their concern is that Powell “has taken very little action to mitigate the risk climate change poses to our financial system” and “has substantially weakened many of the reforms enacted in the wake of the Great Recession regulating the largest banks.”
Even if these are fair criticisms, they are the wrong grounds on which to remove Powell from the helm of the central bank. With the already enacted American Rescue Plan and the forthcoming Build Back Better social spending bill, Biden is making a multi-trillion-dollar bet on progressivism. But if the enactment of the president’s agenda is followed by an extended period of inflation, the entire progressive project will be discredited for a generation. Last Friday, the Biden administration more than doubled its estimate for this year’s degree of inflation, and the U.S. Bureau of Economic Analysis released data showing that a key inflation measure had risen to its highest level in 30 years.
What progressives need at the Fed is someone they can count on to make a tough call on interest rates if necessary, so inflation doesn’t get out of hand—even if a rate hike is hard for progressives to swallow.
Progressives are actually divided over Powell precisely because he has been an inflation dove while taking a moderate-to-conservative tack on other matters.
The progressive groups Americans for Financial Reform and the Revolving Door Project recently published harsh critiques of Powell, who was appointed Fed chair by Donald Trump after being selected as a Fed board member by Barack Obama. As the AFR put it, “The Powell Fed contributed mightily to the overall assault by Trump-appointed regulators on bank regulations designed to prevent financial crises.”
The progressive economist Dean Baker delivered an able defense of the Fed leader, crediting Powell for moving the Fed “away from its obsession with inflation, which often meant raising rates and throwing people out of work.” Instead, Baker continued, Powell “wants the Fed to target full employment and only raise rates once we see the sort of unemployment rates we had before the pandemic.” Baker further argued that the Fed chair position is not critical to the pursuit of stronger financial regulation: “Firing Powell because he has not been good on regulation would be like dumping the great pitcher Bob Gibson from the team because he wasn’t a good base runner.” Mike Konczal of the progressive Roosevelt Institute praised Powell for executing a “Revolution in Macroeconomic Policy” and counseled activists that “one of the crucial battles this year . . . is ensuring that the changes Powell put into motion over the past several years become embedded in the everyday policy and practices of the Federal Reserve.”
Powell is no inflation hawk. Just last week, he maintained that recent price increases appear temporary and do not warrant monetary tightening. But he also laid out criteria for determining when inflation would require a policy shift. For example, Powell and his team at the Fed are now monitoring “a range of measures meant to capture whether price increases for particular items are spilling over into broad-based inflation.” They are watching whether wages “move materially and persistently above the levels of productivity gains and inflation” to the point where “businesses would likely pass those increases on to customers,” creating a “wage-price spiral.” And they are looking out for “common patterns across [inflationary] measures,” because “measures of inflation expectations are individually noisy.”
“If sustained higher inflation were to become a serious concern,” Powell concluded, the Fed would “certainly respond and use our tools to assure that inflation runs at levels that are consistent with our goal.”
Knowing exactly when it is time to pivot toward fighting inflation is hardly an exact science, as Powell is all too aware. He noted that “central banks have always faced the problem of distinguishing transitory inflation spikes from more troublesome developments.” Reappointing Powell doesn’t guarantee inoculation from inflation. Inflation hawks, mostly conservative, would probably ditch him as fast, if not faster, than Powell’s progressive critics.
But progressives, to protect progressivism, should want someone leading the Fed who, unencumbered by ideological blinders, is willing to raise interest rates. Without someone minding the monetary store, robust social spending and an activist government risk being tagged as incongruous with economic stability, dooming any hope for aggressive action on climate change, bank regulation, and just about everything else progressives consider essential.
Powell isn’t infallible. But there isn’t anyone else out there who has a bipartisan background, is easily confirmable, holds a progressive view on full employment, and retains the capacity to take inflation seriously should the need arise.
Progressives are already on the verge of a major breakthrough with the likelihood that Biden signs into law a massive bill expanding government support of preschool education, community colleges, elder care, renewable energy, and health coverage—along with an extension of the poverty-busting expanded child tax credit. Making sure those reforms stick should be progressives’ number one priority. Biden has already made one very big bet. There’s no need to roll the dice on a new Fed chief.