With working Americans abused by the toughest inflation in 40 years, President Joe Biden is stacking the deck against sane monetary policies with his choices for the Federal Reserve Board of Governors.
The Fed has a mandate to maintain stable prices and maximize employment but Chairman Jerome Powell has moved the goal posts. The Fed has revised its objectives to tolerate more inflation to promote a hot labor market, and we need only look outside to see where that gets us.
After repeated forecasts that pandemic-related inflationary pressures would abate, the consumer price index registered 7.1% and 7.5% jumps in December and January. Instead of calling together the Fed’s monetary policy makers to approve prompt action, he continues to let the wounds fester with wages lagging inflation.
No good alternative
Thanks to a failure to act while the economy was expanding at a red hot 6.9% in the fourth quarter, the Fed now faces a Sophie’s choice—high interest rates in the manner of Paul Volcker that would instigate a recession or half measures like those of Arthur Burns and William Miller, which culminated in 12% inflation when control was ceded to Volcker.
Early in the pandemic, Powell’s easy-money policies were compelled to support President Donald Trump’s stimulus spending. However, when independent economists warned that Biden’s $1.9 trillion American Rescue Plan was excessive, the Powell Fed did not have to enable inflation by printing money to purchase so many U.S. Treasurys and mortgage-backed securities.
Board nominees Philip Jefferson and Lisa Cook—renowned economists but whose academic work focuses more on social justice and race than accomplishing the Fed’s mandate—can be expected to add to the pro-inflation wing at the Fed.
Along with four more years of Powell, that would institutionalize easy money, enable asset bubbles and poor investment choices and slow long-term economic and real-wage growth—and undermine the reserve currency status of the dollar
Central banks, private banks and businesses globally hold reserves and conduct business in dollars and Treasury securities, because of the past sound management and stability of our currency.
For too long now, the Fed has been creeping toward becoming a state development bank for advocates of industrial policy—potentially subverting the market allocation of capital.
Since the 2008 Financial Crisis the Fed has radically expanded its purchases of mortgage-backed securities, pushing up housing prices, rents and inflation. In 2010, Congress raided the Fed’s profits to establish the Consumer Financial Protection Bureau and in 2015, to help fund a highway bill. Members of Congress have advocated using Fed profits to fund public transit and the arts.
Now, Powell is poised to impose climate-change stress tests in evaluating bank risk exposure. That’s better left to insurance underwriters and stock analysts than the apparatchiks at the Fed.
Just last September, Sarah Bloom Raskin, Biden’s nominee for vice chairman for supervision, advocated steering lending to promote green industries. Last May, she criticized the Fed for opening its pandemic credit window to all investment-grade businesses and asserted it should have excluded the petroleum industry.
Such policies would limit domestic gasoline and natural-gas production before solar powered electrical generation and electric vehicles can meet the demand—creating shortages and high prices.
Similarly, pressures will mount for the Fed to use its lending powers to accomplish progressive social policies that the Biden administration can’t push through Congress. And with the Fed’s chief bank regulator and several board members expressing preferences for environmental and social justice causes, banks and pension funds will steer credit to curry favor.
A digital dollar is coming and that should move household checkbook balances to the Fed from banks—greatly reducing the transactions costs we bear by using bank-sponsored Visa
To protect banks—much like a man trying to outlaw automobiles to preserve the horse—Powell’s Federal Reserve is saying that is not possible.
Raskin served on the board of the Reserve Trust Co. and lobbied the Kansas City Fed to make it the only nonbank fintech company with such digital currency privileges. Yet, when interviewed by the Senate Banking Committee staff on Jan. 28, she could not recall those efforts.
The Fed may need more diversity but other than the very wise choice of Lael Brainard, Biden’s nominees don’t measure up. He could find women and minorities to serve with better monetary-policy credentials and memories, and less appetite for inflation.
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.