In a world where politics didn’t matter, it might make sense to replace Jerome Powell.
The White House is currently debating whether to reappoint the Federal Reserve chair when his current term ends in February. At the moment, he seems close to a lock. Powell reportedly has the crucial backing of Treasury Secretary Janet Yellen, his predecessor at the central bank. He is also widely liked by lawmakers from both parties on Capitol Hill—Republicans are already calling for him to be renominated—and would likely enjoy an easy confirmation process.
And it’s no wonder why: As captain of the world’s most powerful financial institution, Powell has offered something for almost everybody to love.
If you’re a progressive: Powell has arguably been the single most worker-friendly Federal Reserve chair of the past 40 years. Under his leadership, the central bank has torn up and rewritten its official playbook for managing the economy, putting less emphasis on smothering inflation and more on making sure Americans have jobs.
If you’re a conservative: Powell, a Republican former private equity executive, has been relatively light on bank regulation, going along with numerous efforts to loosen some of the reforms put in place after the 2008 financial crisis.
Nonetheless, Powell has run into one vocal bloc of opposition, as critics on the political left have staged a long shot bid to try and stop his return. His detractors are frustrated with Powell’s gentle handling of Wall Street, as well as his stance on issues such as whether the Fed should be involved in combating climate change. The discontent boiled over this week when Reps. Alexandria Ocasio-Cortez, Rashida Tlaib, and Ayanna Pressley—aka members of the Squad—called on the White House to name someone else.
“We urge President Biden to re-imagine a Federal Reserve focused on eliminating climate risk and advancing racial and economic justice,” the congresswomen said in a statement to Politico. “We urge the Biden Administration to use this opportunity to appoint a new Federal Reserve Chair.”
And you know what? Powell’s naysayers aren’t insane, as some have argued. While parts of the progressive rap against him are flimsy (which we’ll get to in a minute), it gets at a core truth: There are other plausible nominees President Joe Biden could pick who are more in sync with Democratic policy priorities. On paper, there are better options.
But are they so much better that it’s worth paying the political price to try and upgrade? No, probably not.
The Case for Powell
For Democrats, the argument in favor of Powell really boils down to two words: full employment.
For most of the past four decades, America’s central bankers generally believed that it was dangerous to let the unemployment rate fall too low, and made a point to stop such a thing from happening. To a noneconomist, this might seem a bit perverse. But there was a logic to it. If not enough people were looking for work, the thinking went, wages might rise too quickly and force businesses to raise their prices, leading to runaway inflation. And that was the ultimate scourge to be avoided—the sea monster lurking at the edge of the economic map.
This caution was born in large part from the inflation crisis of the late 1970s and early 1980s, which taught a generation of Washington policymakers and economists that once prices began to spiral, it could be difficult to bring them back under control. From then on, the Fed generally sought to stamp out inflation before it could ignite, preemptively hiking interest rates to cool down the economy when unemployment was expected to drop more than desired.
There were some important exceptions. Alan Greenspan famously held off on rate hikes and let the economy rip like a Mountain Dew–addled tween on rollerblades during the late 1990s, for instance. But for the most part, Fed officials lived by the creed that they should take away the punch bowl from the party before the good times got out of hand. Even Yellen, who was considered relatively dovish for the time, began gradually hiking interest rates in 2015 to try and get ahead of inflation, even though the economy was still shaking off the aftermath of the Great Recession. That year, she told her fellow Fed board members that if unemployment fell too far, “we would want to check the pace of employment growth somewhat to reduce the risk of overheating.”
That decision ended up being a turning point. As the Fed tightened its policy under Yellen and later Powell, it discovered that the unemployment rate could fall much further than it thought without causing inflation. The outcome demonstrated to many that rising prices were less of a threat than in the past, and Yellen’s strategy of raising rates early is now widely looked at as a mistake that needlessly slowed the jobs recovery while possibly helping trigger a mini-recession in the Midwest.
The experience taught Powell that it made sense to keep rates lower for longer for the sake of a strong job market. In 2019, he pivoted away from the strategy of gradually pulling up rates that he inherited, and began cutting them to bolster the economy. From there, he became a vocal advocate for a more relaxed approach to monetary policy, famously testifying to Congress that “we have learned that the economy can sustain much lower unemployment than we thought without troubling levels of inflation.”
That same year, Powell led a historic rethink of the central bank’s framework for monetary policy. The final product, published in 2020, was subtly revolutionary: The Fed declared that it would no longer worry about unemployment dropping too low, and would wait until inflation actually averaged 2 percent over time before it hiked rates. In short: It would no longer actively try to raise unemployment to combat an imaginary threat of inflation. There are still big questions about how exactly the Fed will implement its new approach, especially during these strange, pandemic-rattled economic times. But if the humming labor market we saw just before COVID hit is any hint, having a central bank focused on pushing the country to full employment could make the economy vastly better for workers over the long term.
Powell has earned support from Democrats (and a good deal of devotion among online economics commentators) in other ways as well. He was a reassuring adult in the room during the early days of the coronavirus crisis, deftly breaking out and building on the Fed’s 2008 crisis-fighting playbook to keep the financial markets afloat while other government institutions seemed to be short-circuiting or revealing their fundamental dysfunction. (In other words, he made the money printer go brrr while the Centers for Disease Control and Prevention was busy screwing up testing.) As the pandemic wore on, he was a vocal advocate for more relief spending, and in the face of an unexpectedly strong burst of inflation in 2021, he’s urged calm, arguing that price increases were likely the temporary results of supply chain issues rather than a return of Carter-era malaise, all of which has given political breathing room to Joe Biden. As far as monetary policy goes—which, in the end, is the most crucial part of the Fed’s job—he’s been the ideal captain.
The Case Against Powell
Why would the White House want to swap out a popular, mild-mannered Republican who has quarterbacked a generational shift in monetary policy thinking and provided public cover for some of its economic plans? The argument can be a bit sprawling because it reflects the myriad interest groups that make up the activist left. (The best summary I’ve seen comes from a 55-page report by the pro–financial regulation group Better Markets, which hasn’t explicitly opposed Powell but tiptoes up to the line.) But in general, you can break it down into a few buckets.
For starters, many of Powell’s critics object to aspects of how the Fed handled emergency lending programs during last year’s early stage of the pandemic. A lot of these issues are fairly technical and take a while to litigate (there’s a whole debate about whether the island of Guam should have been able to get a loan). But in the end, some boil down to complaints that the bank didn’t take steps that would have enraged the Trump administration and congressional Republicans at the time, possibly inviting legislative backlash, such as excluding fossil fuel companies from their bailouts or offering much more generous lending terms for cities and states. They also tend to dance around the basic fact that the Fed’s efforts ultimately did a remarkable job of keeping debt markets for corporations and municipalities from collapsing in on themselves, preventing needless, painful bankruptcies.
Another line of attack is that the Fed isn’t doing enough to address racial inequality. On some levels, the point seems reasonable—it sounds plausible that the Fed could enforce the Community Reinvestment Act more stringently to get more credit flowing to Black households. On others, it’s a little strange; the Fed’s pursuit of a full-employment economy is already a huge boon to marginalized groups, since lower-income minorities are often the last to be hired, and it’s not clear there’s really a workable way Powell could do more than he already is for them through the blunt tools of monetary policy.
Climate is a much more central and interesting part of the debate. From Europe to Japan to the U.K., some of the world’s most important central banks are beginning to think about how they can combat or at least mitigate the effects of global warming. A lot of the ideas are new and experimental. They could include helping to finance a clean-energy transition by buying green bonds, or simply taking steps to gird the financial sector for a warming planet by requiring banks to incorporate climate change’s impact into their risk analysis and planning (you don’t want a megabank to collapse along with the Miami real estate market one day). “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,” European Central Bank head Christine Lagarde has said. Powell, in comparison, has been very slow to make policy moves in this space—the Fed has basically started a couple of working groups—and has been cautious in his rhetoric, too. “We are not and we don’t seek to be climate policymakers,” he said in June.
This all frustrates some progressives to no end. But it’s also pretty obvious why the Fed hasn’t tried to moonlight as an ersatz EPA: Powell and company have to worry about retribution down the road from the GOP, one of the few major parties in the developed world devoted to climate denial. If the Fed moves too fast or too dramatically, support for oil and coal could quickly become a Republican litmus test for its future appointments. Unlike in Britain or Japan, our central bankers are walking a political tightrope on this.
That brings us to the most critical and convincing part of the indictment against Powell: his record on Wall Street oversight, an issue that has earned him criticism from key Senate Democrats like Elizabeth Warren (“My concern is that over and over he has weakened the regulation here”) and Banking Committee Chair Sherrod Brown (“I like what Chair Powell has done on monetary policy, I do not like what he’s done on regulation”).
While monetary policy is fundamentally the central bank’s most critical role in the economy, the Fed is also a crucial financial overseer that supervises bank and financial holding companies, issues regulations, and approves bank sales and mergers, among other responsibilities. Under Powell’s chairmanship, the Fed has repeatedly taken steps loosening rules for the industry, from watering down the stress tests meant to make sure it can withstand a financial crisis to weakening the capital requirements that are meant to cushion banks when they take losses. It also OK’d the merger of BB&T and SunTrust, bringing more concentration in the sector. (Some would argue it also gutted the Volcker rule banning proprietary trading, and at the very least made it easier for banks to invest in risky hedge funds.)
The Fed wasn’t acting alone in its deregulatory agenda; Congress passed a major bill that freed many smaller to midsize banks from the post-2008 reforms. But Powell himself backed that legislation. And the central bank often went above and beyond what was explicitly called for by law, especially when it came to the treatment of somewhat larger financial institutions. “They exercised their discretion,” Dennis Kelleher, president of Better Markets told me. “And every exercise of discretion weakened the rules.”
Some of Powell’s defenders have argued that he’s not really inclined to coddle banks at heart, but generally defers on these issues to whomever happens to be serving as the Fed’s vice chair for supervision, its lead regulator. He consistently voted with President Barack Obama’s appointee, Dan Tarullo, and has mostly done the same with President Donald Trump’s, Randy Quarles. But the idea that the Fed chair is just a go-along, get-along type on regulation is a bit tough to swallow, in part because he’s defended the Fed’s regulatory changes before Congress—arguing that the experience of the pandemic showed that “the level of loss-absorbing capital in the system is about right.” Of course, the Fed also kept the system afloat by running the money printer. (Not that there was anything wrong with that decision.)
Are any of these changes truly so terrible that they outweigh Powell’s contributions to monetary policy? In the grand scheme of things, no. What makes the progressive case for replacing Powell somewhat compelling is that, as they point out, there just happens to be a very good alternative available. That would be his fellow Fed Governor Lael Brainard, a widely respected central banker who basically shares Powell’s macroeconomic instincts, but is much more in sync with the Biden administration on banking oversight. Brainard has distinguished herself over the last handful of years by repeatedly dissenting from the Fed board’s deregulatory decisions, which is unusual in a body known for seeking consensus. Ironically, Brainard was briefly seen as the favorite to become Biden’s treasury secretary, and came under attack from the left then for various supposed shortcomings. But that she was under serious consideration speaks to the fact that, on most issues, she’s largely simpatico with the administration.
And if picking the Fed chair were just about policy positions, that would probably be enough to make her the right choice. Powell’s run has felt a bit miraculous because he was the unexpected product of the otherwise mostly wretched Trump administration, the silver-haired lining of an epically disastrous presidency. But it’s possible that an actual Democrat could be a better fit for a Democratic administration.
But life is about more than policy positions.
Why Biden Should Probably Just Keep Powell
In the end, Powell has three things going for him over any other conceivable candidate. All three boil down to politics.
First, there’s politics in Congress. Powell is probably the easiest possible candidate to confirm at a moment that the Biden administration is trying to put out a new political fire seemingly every hour. Sen. Thom Tillis, the Republican from North Carolina, has predicted that he could be moved through with 70 votes, while almost any other candidate would provoke a fight. And it’s not clear how eagerly moderate Democrats, who are lukewarm on banking regulation, would support someone looking to take the Fed in an aggressive new direction.
Second, there’s the internal politics of the Fed. Brainard is a Fed veteran at this point and could probably lead it with plenty of authority. But Powell has shown he definitely knows how to build consensus behind big, progressive change like his monetary policy framework, and at a time when the central bank is being pressured over inflation, it probably will help to have someone tested in charge. In the meantime, Biden can try to push the Fed to be a little tougher on Wall Street by making Brainard the head of supervision, which right now seems to be the plan the administration is leaning toward.
Finally, there’s the long-term politics of monetary policy. If there’s any hope of making it a bipartisan consensus that the Fed should aggressively pursue tight labor markets, it will probably help to have an amiable Republican financier continue to serve as its frontman. Progressives lucked into finding a messenger for the gospel of full employment whom even GOPers can love. Is Biden really going to pick a fight just to give that up?