The Corner

Monetary Policy

The Fed: Jay Stays

Federal Reserve Chairman Jay Powell (Al Drago/Reuters)

It is not always (#understatement) that President Biden gets something right on the economy but given the alternative, nominating Jerome Powell for another term as Fed chairman was the correct decision to make, not least as a nod to continuity before what may well be rough seas ahead. Given that outlook, reappointing the man who was at the helm when the Fed came to the rescue of a tottering Treasury market in March 2020 makes particularly good sense. Perhaps some market fundamentalists might object to that rescue, but if the Treasury market had been allowed to collapse, it would have set off a spiral of catastrophe that could have led who knows where — well, nowhere good anyway. Equally, many of the other extraordinary measures taken by the Fed at that time can be justified by the exigencies of the moment, not a few of them, of course, the product of government reaction to the pandemic rather than the coronavirus itself.

The fact that Powell successfully handled one profoundly dangerous situation is a good reason to keep him in charge, but so is the reassurance that his track record ought to bring with it, reassurance that might help either calm or even avoid panics to come.

Turning to a different topic, Powell also made some effort to push back against the idea that the Fed should get involved in climate policy. However, he has clearly seen the way that the politics have been shifting on this topic, and decided that this was not the hill on which his candidacy should die. In the last year or so, the central bank has gradually positioned itself to take a much more activist line on this issue, a positioning that would have turned into a charge had the other candidate, Lael Brainard, been given the top job. And what “activist” means in this context is the imposition of a regulatory regime designed (directly or indirectly) to increase the cost of capital for fossil fuel companies, the justification for which would have been the supposed risk that climate change poses to the financial system. Anyone who thinks that this risk is real in any material sense — please remember that this is a discussion about the risk that climate change may pose to the financial system, not about climate change itself — should read John Cochrane’s latest Supply & Demand column. I discussed Cochrane’s column (and related matters) here. This risk is a confected, bogus risk, but as a device to implement policy in a way that avoids the usual democratic controls, it will do very nicely.

Under the circumstances, it was not, therefore, reassuring to read this in the Wall Street Journal:

The president, in his remarks at the White House on Monday, said Mr. Powell told him that he would make accelerating the Fed’s efforts to address the risks that climate change pose to the U.S. financial system a priority. . . .

The best, I think, that those who would prefer climate policy be decided by legislative action rather than administrative fiat can hope for is that Mr. Powell will be able to moderate or slow what is coming. That might be difficult.

From the Wall Street Journal:

Mr. Biden can put his stamp on the central bank with three additional appointments. There is already one vacancy on the Fed’s seven-member board of governors, and Fed Vice Chairman Richard Clarida’s term as governor will expire in January. The four-year term of the vice chair of bank supervision, previously held by current Fed governor Randal Quarles, expired in October and he plans to retire around the end of the year. Mr. Biden will announce those nominations in early December, the White House said Monday, likely prompting renewed efforts by progressive Democrats to influence the president’s picks.

Then there’s the small matter of inflation. A Fed with Powell, rather than Brainard, in charge is more likely to take action to deal with that formerly transitory problem, but that is a low bar. Complacency still seems to be the name of the game, but that has to change, and change soon, something that will not be easy.

To be sure, the Fed is starting to reduce its asset purchases, but the retreat from Quantitative Easing (QE) will not be completed until the middle of next year. Memories of the taper tantrum linger on, but they need to be overridden by memories of the inflationary past, a past that Mr. Powell is old enough to remember, and, hopefully, wise enough not to want to relive. To put it another way, the pace of this current taper needs to be sped up, opening the door to rate hikes sooner than is currently expected. With asset prices at the level they now are, that may well lead to those rough seas, but (to take the nautical analogy further, possibly, than it should go) they may well be the only route away from the inflationary storm.

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