There’s a vigorous debate going on in Washington right now about whether President Biden should reappoint Jay Powell as Chair of the Federal Reserve. There are liberals who would like a greater focus from the Fed on climate change and racial justice, while conservatives would like more aggressive action to fight inflation.
From my perspective, Powell absolutely deserves reappointment. Before the pandemic, he had shepherded the U.S. economy to its strongest point and lowest unemployment in decades. During the pandemic, he’s taken bold action to cushion the economy and help it rebound quickly. And as we come out of the pandemic, he’s keeping a laser focus on full employment, which should be the top priority for a Fed Chair.
For decades, Fed chairs from both parties have not pushed hard enough for full employment, to the detriment of the American worker. Why is full employment important? When unemployment is very low, ordinary workers have more bargaining power, allowing them to get higher wages and more interesting and fulfilling jobs. Employers have to compete for employees, and end up offering benefits ranging from improved career development opportunities to better health insurance packages in order to lure workers. In addition, companies look to offset the pressure of higher labor costs by using technology to improve productivity - we see a great example of that right now with restaurants offering QR codes to easily order without waitstaff. Everyone benefits from a full employment economy.
Beyond the focus on full employment, Powell has shown an unusual dedication to the welfare of ordinary Americans. He has gone on listening tours across the country to understand the economic concerns of workers. He has emphasized that “the risks of a weak recovery are greater than that of overheating,” taking a different stance than previous Fed chairs who have prioritized the fight against inflation at the expense of working Americas. He has proactively noticed and mentioned that the unemployment gap between whites and minorities is an issue that needs to be addressed. These are all radical and forward-thinking moves from a Federal Reserve chair.
So why are people taking issue with Powell? On the left side of the aisle, there’s concern that the Federal Reserve should be doing more about climate change. Personally, I’m extremely concerned about climate change, but I’m skeptical of how much the Fed can do to deal with the issue. They can very indirectly affect the financial system through climate stress testing, but it would never be politically feasible for the Fed to ban financial institutions from making loans for fossil fuel projects, as some might wish, no matter who is the Fed Chair. At the end of the day, climate issues need to be legislated by Congress or regulated by the executive branch. The Fed is not the place to fight the climate battle.
On the right side of the aisle, there’s concern that the Fed has not done enough to fight the current bout of inflation. It is always tough to identify the source of economy-wide inflation, but it is clear that the pandemic has forced supply shortages and bottlenecks in unusual places. Powell is correctly being patient and seeing if the inflation is due to transitory supply shocks before taking drastic action that might impede the recovery as a whole.
Finally, there’s a fair argument I’ve heard that a Democratic administration should appoint a Democratic Fed chair rather than reappoint a Republican one. To that argument, I would say that right now we have a Fed chair who shares the Biden Administration’s full employment goals and has credibility on both sides of the aisle. That’s an uncommonly good situation for the Administration.
From an economic and political perspective, the case is clear - Jerome Powell should be reappointed to another term as Fed Chair.
PS: The Fintech Explorer is back from a summer hiatus. Let me know which topics you’d like to read about!