Biden would be insane to nominate anyone other than Jerome Powell for Fed chair

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Federal Reserve Chair Jerome Powell Pool/Getty Images
  • Robert Kuttner hears that Biden most likely won't renominate Jay Powell.

  • I sure hope this rumor isn't true.

  • Powell has done a great job and replacing him would be a mistake, politically and substantively.

  • This is an opinion column. The thoughts expressed are those of the author.

  • See more stories on Insider's business page.

In a post praising Federal Reserve Chairman Jerome Powell's stalwart comments on monetary policy in the face of elevated inflation, Robert Kuttner of The American Prospect remarks that he has heard from "sources" that President Biden likely will not renominate Powell to another term running the Fed. (Powell's term is set to expire early next year.)

This of course is an unsourced rumor, and I don't want to put too much stock in it. Jordan Weissmann of Slate tweets reasons to doubt Kuttner's sources' assessment:

"Nobody I talk to has heard anything substantive. However, I'm told that discussions about the next Fed chair only involve cabinet and top officials-Klain, Deese, Yellen, Rouse, and of course Biden. Maybe one of them leaked something, but I'm a little skeptical."

On the other hand, Kuttner was right last November when he said Biden would likely name Janet Yellen to be Treasury Secretary at a time when many people (including me) were expecting the pick to be Fed Governor Lael Brainard, so sometimes he seems to know things about these things.

I really hope he's wrong, though - or that if he's right, Biden will come to his senses. Failing to renominate Powell would be a huge mistake, both substantively and politically.

Powell has done an excellent job

I don't think I need to rehash my case on Powell's and the Fed's strong performance through the coronavirus crisis; you can read my profile of him for New York Magazine last year if you want more background. But basically, the Fed acted massively and successfully to prevent the epidemiological and economic crisis from turning into a financial crisis.

More broadly, Powell has continued a shift at the Fed that has appropriately reweighted the bank's focus toward promoting maximum employment, shifting away from excessive worry about inflation. This approach has promoted wage growth and empowered workers to more readily change jobs. It has also, in conjunction with fiscal policy, fostered an environment with strong consumer demand that encourages business investment and hiring.

Powell has the credibility to sell dovish monetary policy to Republicans

Powell is a really likable guy. He has assiduously developed strong relationships on both sides of the aisle in Congress. While that's always a good idea, it's especially important now, with conservatives skeptical of aggressive Fed action in the economy and wary of the recent, very real rise in inflation.

When the Powell Fed allows inflation to run above 2% for a period - as its new approach of "average inflation targeting" says it's supposed to do - Biden can respond to Republican warnings about inflation by pointing out that Powell is a Republican, chosen by Trump, and widely supported by other Republican officials. (Just this week, the top Republican on the House Financial Services Committee, Patrick McHenry, urged Biden to renominate Powell.)

If Biden replaces Powell, he allows the Fed to become a partisan football. Anything the Fed does would become a "risky Democratic policy." A chair closely associated with the Democratic party would have less political space than Powell to tolerate some transitory inflation and would face more pressure to hike rates too early.

If Biden's potential replacement had significantly better ideas about monetary policy than Powell, then that political risk might be worth taking. But Powell is already aligned with his Democratic predecessor, Yellen, on monetary policy, and would likely be in line with a Democratic successor. Powell's critics from the left tend to be focused on a different policy area entirely - bank regulation.

Bank regulation is less important than monetary policy

Only the Fed can make monetary policy, while the Fed is one of many bank regulators. And while bank regulation errors were a driver of the 2008 recession, monetary policy errors tend to be a driver of most recessions, including the 2008 recession. There's just no contest about what the Fed's most important function is, and Powell has gotten that function right, putting the interests of workers first more than any chair in memory.

That said, bank regulation does matter, and some liberals object to the Fed's choices about bank capital requirements under Powell.

Brainard, the only Democratic appointee remaining on the Fed board (unless you count Powell, a Republican originally named to the board by Barack Obama) has dissented from a variety of Fed actions in recent years that have allowed banks to retain less capital than she believes is wise. This includes decisions during the pandemic about the extent to which banks could pay dividends and buy back shares during the period of economic turmoil; the Fed restricted these actions, but Brainard would have imposed more stringent restrictions for longer.

Reasonable people can disagree about this policy area, and a Democratic president picking a new Fed chair would probably look for someone with more hawkish views on bank regulation than Powell's. But overall, US banks are in a strong capital position under the Powell Fed - even having been allowed to make those payments to shareholders, their capital ratios are still about 50% higher than they were ahead of the 2008 crisis, and double what they were at the depths of that crisis.

As such, bank solvency is far down the list of risks to the US economy right now when compared to the risk that the Fed will hike interest rates too early, hinder job creation, and suppress wage growth - or, for that matter, the risk that markets will lack confidence in a replacement chair's commitment to hit the bank's inflation target in the long run, which could cause inflation expectations to become unanchored.

If Biden is concerned about bank regulation, he should nominate someone with more hawkish views about banks to the position of Fed Vice Chair for Supervision, which will become vacant in October. But overall, the Fed is on a good course that is serving the president well politically. He'd be nuts not to name Powell to another term as its chair.

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