Jay Powell: Anti-Hero

Commentary

If you’re looking for a spirited argument in favor of preserving and perpetuating the independence of a central bank from political pressures and the whims of the mob, you won’t find better than the words of none other than Federal Reserve Chairman Jerome Powell.

“Long experience, in the United States and in other advanced economies, has demonstrated that monetary policy is most successful when decisions are rendered independent of influence by elected officials,” Powell said in 2015 at Catholic University in Washington in a speech on the foolishness of proposals then percolating in Congress to end the Federal Reserve’s insulation from politics. A member of the Fed’s Board of Governors, it would be three years before Powell would become Fed chairman.

He added: “As recent U.S. history has shown, elected officials have often pushed for easier policies that serve short-term political interests, at the expense of higher inflation and damage to the long-term health and stability of the economy.”

But has Powell practiced what he preached? A Gallup poll published May 9 suggests he’s taking exactly the kind of heat you would expect from someone who resists “easier policies.” The percentage of the public having “a great deal or fair amount of confidence” in Powell is down seven points from a year ago. “The 36% rating for Powell is the lowest Gallup has measured for him during his six years as Fed chair. It is also the lowest reading Gallup has had for any prior Fed chair,” the pollster reported.

Before getting too carried away with these findings, let’s bear in mind the sad fact that the average American doesn’t really know what the Federal Reserve is or does—in no small way thanks to the disappearance of civics education from American classrooms and little if any basic instruction in economics, or in the federal government’s economic functions or policies. A year ago, an Axios/Ipsos poll found that only 34 percent of American adults even know that the Fed is tasked with stabilizing prices. One in five admitted they know nothing about the responsibilities of the Federal Reserve; another 33 percent said they didn’t know very much; and 38 percent said they know just a little; a mere 7 percent of adults claimed they know a lot about the Fed’s functions. Nearly half—47 percent—were under the false impression that Congress has to approve any action the Federal Reserve takes.

In the Gallup survey showing a lack of confidence in Powell, he was lumped in with the same questions regarding President Joe Biden, Treasury Secretary (and Powell’s immediate predecessor in chairing the Fed) Janet Yellen, and Democrat and Republican leaders in Congress. Interestingly, the Republicans in Congress scored slightly higher than all the other officials Gallup asked about.

With inflation still at about twice the sustained low rate it was prior to COVID, though, and the economy in or near recession, blame from the public has a wide dispersal, hitting everyone in Washington with responsibilities for the economy. No way Powell would be spared that ire.

Faced with the worst inflation since the days of lines at gasoline stations in the 1970s, what has Powell done? Last week, the Federal Open Market Committee implemented a modest increase in the Federal Funds rate that applies to inter-bank lending by 25 basis points up to the 5–5.25 percent range, stating that that may be it in its series of interest rate hikes designed to fight inflation. It was the Fed’s 10th interest rate increase over a period of little more than one year.

Early this month, far-left Democrats led by Sen. Elizabeth Warren (D-Mass.) and Congressional Progressive Caucus chairwoman Rep. Pramila Jayapal (D-Wash.) wrote to Powell claiming that his policies could “throw millions of Americans out of work,” accused him of “overreaction,” and called on Powell to “respect the Fed’s dual mandate to promote employment as well as fight inflation, pause your rate hikes, and avoid engineering a recession that destroys jobs and crushes small businesses.” Powell’s Fed has been criticized from the right too.

It’s exactly the kind of political pressure Powell vowed he must not cave to. In fact, the Fed under Powell’s leadership has fallen far short of the level of tightening necessary to conquer Biden’s inflation. As Mickey Levy, Chief Economist for Americas and Asia at Berenberg Capital Markets, and Michael Bordo, director of the Center for Monetary and Financial History at Rutgers University, reported in a paper presented to the private Shadow Open Market Committee last month, “Despite the Fed’s significant rate increases, the real Federal Funds Rate is still negative, which by historical standards suggests the Fed remains accommodative.” In other words, as tough as the Fed may seem to have been over the last year or so, it hasn’t been nearly as tough as is needed.

Powell was quite right in 2015: central bank independence is all-important. Evidence of this is how, after decades of political direction, the Bank of England in 1997 was given independence from the British Treasury in its policymaking—by a Labor government. Britain’s central bank is now poised to make its 12th consecutive interest rate hike to fight inflation, something that would have been impossible before its independence. As former Fed Vice Chairman Stanley Fischer has pointed out, “subsequent researchers have linked this independence to declines in both longer-term inflation risk premiums and inflation expectations” in Britain.

Fischer, who was appointed to the number two position on the Fed by President Barack Obama, also warned that “political horizons are typically shorter than those that need to be taken into account in making monetary policy decisions.”

Powell, eight years ago, declared, “The Congress has wisely given the Fed the tools it needs to implement monetary policy and respond to future crises, as well as crucial independence to do its work free from short-term political influence.”

Unfortunately, Powell hasn’t used those tools to anything approximating a heroic extent. Literature may offer some apt comparisons: Not unlike the angst-driven wanderings of Holden Caulfield in Catcher in the Rye, or serial party thrower Jay Gatsby’s ambitions ultimately reaping dissatisfaction and disappointment, or even Gatsby’s unobtainable Daisy Buchanan’s boast that she would always “wait for the longest day of the year and then miss it,” Jay Powell’s pathetic role is that of anti-hero on the Washington stage.