If you want to understand why President Joe Biden chose the right Federal Reserve chair, go back to March 2020.
The novel coronavirus was sweeping the globe. On March 8, Italy was the first country to go into a real lockdown, the kind where you couldn’t go outside or for a drive. On March 11, the World Health Organization declared a global pandemic with its center in Europe. On March 16, President Donald Trump banned travel to the U.S. from 26 European nations. By the end of the month, one-third of the earth’s nearly 8 billion people would be under some kind of lockdown.
During this time, it’s not an exaggeration to say that Federal Reserve Chair Jay Powell rushed to save the world. Taking a page from the playbook of his predecessor, Ben Bernanke, Powell organized the Fed to make rapid decisions that might typically take months. On March 17, after the stock market had sunk to its lowest levels in more than three years, the Fed announced a series of actions that went beyond Bernanke’s aggressive stamps to save the U.S.—and global—economy during the financial crisis. It did so in coordination with other central banks around the globe. The markets stopped hemorrhaging. The monetary tools were in place to rescue America. That Powell, a Republican banker, had the vision to do this owes much to Bernanke, a student of the Great Depression who knew that inaction turned a stock market crash into a global catastrophe. But it’s also a tribute to Powell’s flexibility and pragmatism that he learned to go all out rather than wait and see.
Under Powell, the Fed cut interest rates to zero, snapped up government debt, and lent directly to corporations for the first time—all in an effort to ease the slow-rolling disaster of COVID-19 and shutdown-induced mass unemployment. To be fair, every Fed governor backed his actions, so it wasn’t like he was some lone officer on the bridge of the Titanic warning of the iceberg. Whatever their faults, the Trump administration and Congress were on board, too. Powell understood that the country’s biggest problem was burning cash and credit while the economy was brought to a halt. Thanks to aggressive monetary policy—and fiscal moves—the country got through 2020 and now is having the best recovery of any economy.
None of this could have happened without Powell’s leadership and his willingness to forgo Fed formalities. No wonder Biden, after considerable delay, is renominating him.
The world of 2021 is different. The crisis of 2020 has been replaced by different problems: price hikes, supply chain interruptions, labor shortages. COVID has cooled enough in the U.S. that the Fed has announced its plans to taper its quantitative easing, its extensive purchase of public and private bonds that buoyed the economy during the financial crisis. A tick-up in interest rates seems likely. It’s the new normal.
Powell’s COVID heroism shouldn’t get the Winston Churchill treatment. The prime minister who saw Great Britain through VE Day was tossed out by voters in 1945, just months after the war. They decided he was the wrong man to rescue the nation’s struggling postwar economy. But we haven’t defeated COVID the way we did the Nazis, and we need a Fed chair on a wartime footing. The disease is still out there, and the U.S. and global economies are more likely to face another crisis requiring powerful Fed intervention. COVID has not and will not disappear. Powell will maintain Churchillian vigilance.
Progressive allies of the president hoped that he would choose Fed Governor Lael Brainard, a veteran of the Clinton and Obama administrations, to take the post. Their thinking was that Brainard would take the Fed’s role as a bank regulator much more seriously than the Republican Powell. That’s not an absurd claim, and Brainard would be a good chair. But there’s a stronger argument for choosing Powell.
Could Brainard have been confirmed? Once again, Washington would have been engaged in Kremlinology over every Joe Manchin statement. The West Virginian has declared himself an inflation hawk, and he might have balked at Brainard’s nomination, making for another drama that the Biden administration does not need as it tries to get its Build Back Better bill enacted.
Second, it’s somewhat amusing that Brainard is considered a progressive hero. During the Clinton era, she was seen by the left as an evil corporate moderate. Yes, the Overton window has shifted, and the Democratic Party has moved to the left, but still . . .
Finally, the primary fight over banking regulation is likely to come in 2023, when an almost-certain Republican majority tries to make mischief with Dodd-Frank and other staples of banking reform. Besides, it’s not as though Powell is a sworn enemy of banking reform. He just lacks the zeal of Democratic banking reformers.
Biden is trying to square the circle as best he can by promoting Brainard (as Fed vice chair) along with Powell. “Fundamentally, if we want to continue to build on the economic success of this year, we need stability and independence at the Federal Reserve—and I have full confidence after their trial by fire over the last 20 months that Chair Powell and Dr. Brainard will provide the strong leadership our country needs,” Biden said in a statement. He’s right. Plus, he has other vacancies to fill, and there are plenty of progressives to place in those slots, including those eager to see stricter banking regulation. Like a chief justice who wants to sign on to majority opinions, Powell is likely to be swayed by the gravitational pull of being in the majority.
As for the attacks on Powell, mainly from the right, that he’s insufficiently hawkish on inflation and has shown himself to be too hesitant to raise interest rates, they aren’t terribly persuasive. He’s expressed concern about rising prices, but like that left-wing outfit Goldman Sachs, he sees it as a relatively short-term phenomenon, and he’s expressed a willingness to shift if the data merits it. If inflation proves to be more enduring, there’s no reason to think the longtime financier won’t support hiking rates. Given how low rates are now, he has plenty of runway to boost them.
No Fed chair is perfect. But Powell is light-years from the risible charge of Elizabeth Warren that he’s a “dangerous man.” Like Senators Jeff Merkley and Sheldon Whitehouse, she and other Powell critics who oppose his nomination are now free to vote against Powell, who will be reconfirmed with Republican votes. That’s a happy outcome.