‘The world’s best bureaucrat.” Those are the words that New York magazine used to describe Federal Reserve chairman Jay Powell in October 2020. And they were right to say so. Under Powell’s chairmanship, GDP has grown by more than 10 percent, and the U.S. has seen a rapid recovery from the pandemic with actual GDP now equaling neutral GDP. Indeed, most sensible observers ought to agree that this record has earned him a reappointment as Fed chairman.
It should come as no surprise, then, that three members of the “Squad” — Representatives Alexandria Ocasio-Cortez, Rashida Tlaib, and Ayanna Pressley — have called on Joe Biden to find someone else to do the job.
Why? Because Powell hasn’t done enough to address climate change and racial inequality. To be sure, these are important issues, but effectively adding them to the Fed’s mandate would almost inevitably spur more partisan involvement in monetary policy, the consequence of which would be a severe blow to its independence.
Recall the central bank’s fundamental purpose. The Federal Reserve Act of 1977 requires that the bank target maximum employment, moderate long-term interest rates, and stable prices. This might seem like too narrow a mandate to some, especially considering the abundance of beneficial macroeconomic goals that could be pursued. It is, nevertheless, very important that the rules remain simple. This is because even this narrow-seeming mandate gives the Fed an enormous amount of discretion — one that has only grown in the last couple of decades. The more that discretion is constrained, the greater the accountability that can be maintained. Expanding that mandate is a pathway to the exercise of even more discretionary power, something that risks increasing the democratic deficit that is always an issue with an independent central bank.
The argument against enabling excessive discretion isn’t just philosophical — there is also strong evidence that an overly discretionary Fed creates monetary instability. This is problematic, as it distorts price signals by adding noise to the market prices, making for an inefficient distribution of resources. Stanford economist John Taylor has identified two distinct periods in the modern history of the Federal Reserve: a rules-based era between 1985 and 2003, and an ad hoc era from 2003 to 2012. Taylor found that under strict rules, we tend to see longer periods of expansions, in addition to more stable inflation and output.
We know that central banks work best when they’re free of political control. Even so, that independence has to have firm parameters, not just to ensure that unelected technocrats stick to their jobs but also to make certain that politicians don’t bow to populist surges against the Fed’s decisions. Indeed, former governor of the Federal Reserve Ben Bernanke commented in his memoirs that the anti-Fed movement — from both Bernie Sanders on the left and Ron Paul on the right — undermined his ability to effectively craft policy.
A strict, rules-based framework, therefore, serves as guardrails, ensuring that the bank doesn’t stray too far from its fundamental goals. Adding more elements to the mandate will only result in unaccountable officials being granted more power over the nation’s economy. Given the clear economic evidence of the benefits of a narrowly constrained central bank, it would be ludicrous for anyone to look to provide more opportunities for the Fed to stray.
The additions that AOC and other progressives are demanding — whether de facto or de jure — are thus designed to circumvent the democratic process. And, whatever one may think of those objectives, they are constructed in such a way that risks doing serious damage to our economic system. The best way for these representatives to achieve their objectives is through legislation.
As it is, a better way of achieving social justice — at least in any reasonable sense of that term — is simply allowing Jay Powell to continue his fine work. Overly restrictive monetary policy has previously resulted in inadequate access to credit during downturns in the economy. In this case, if entrepreneurs wish to acquire a loan needed to create new technologies, they find it more difficult to do so than the merits of their project would otherwise suggest. Powell’s interventions to help achieve full employment — as he is legally required to do — might help the next climate innovation. Moreover, we know that the burden of tightening the money supply falls more on racial minorities.
If Biden wishes to usher in four more years of the economic growth that the U.S. needs to increase well-being for minorities and to provide the resources needed — one way or another — to deal with climate change, he must reappoint Jay Powell. Giving in to the demands of the bloc led by AOC will only weaken the credibility of the Fed and risk bringing economic destabilization in its wake.