President Joe Biden’s decision to reappoint Jerome Powell to another four-year term as chairman of the Federal Reserve Board reflects sound political judgment, and sound economic judgment, too.
The political calculus isn’t complicated. President Joe Biden’s presidency is going through a bad spell. Biden’s approval ratings have been falling since late August and now stand, according to FiveThirtyEight, at 42.7 percent, which is about where President Donald Trump was during the second half of his presidency.
The decline began around the time of the messy late-August U.S. withdrawal from Afghanistan, but its likelier cause is Covid-19, because that’s also when the delta wave of new cases peaked. Covid drove Biden’s approval numbers down. From the second half of September through October, the delta wave receded. Why didn’t that bring Biden’s approval ratings back up? Because by then inflation was taking off. That’s about Covid-19, too. The inflation spike is a lagging Covid indicator, and inflation is poison for Democrats.
Some might argue that Biden’s low approval ratings make this an ideal time to swing for the fences and appoint the progressive wing’s favored Fed candidate, Lael Brainard, who as a Fed governor has pushed for stiffer financial regulation and policies to counter climate change. But Biden was wiser to nominate Brainard for vice chair instead, elevating her from board governor, and to keep Powell where he was. The reason is Senator Joe Manchin.
Yes, I know, it’s annoying. But persuading Manchin to support the reconciliation bill is the most important consideration for Biden right now by far, and giving the West Virginia Democrat occasion to throw another fit about inflation wouldn’t help. Manchin never opposed Brainard publicly, but there’s ample reason to suspect he might. (Senator Kyrsten Sinema, the Democrats’ other problem child, is crazier than Manchin, but at least she’s more predictable.) The reconciliation bill is the prize, and Democrats must keep their eye on it.
Senator Elizabeth Warren of Massachusetts, who is Powell’s leading foe among the Democrats, said she won’t vote to confirm him. Were the Republicans to oppose Powell as a bloc, that could pose a serious obstacle. But Powell was elevated to Fed chair by Trump (never mind that Trump subsequently attacked him routinely on Twitter), so even if Warren is joined in opposition by fellow Powell critics Senators Sheldon Whitehouse and Jeff Merkley, Powell can probably secure enough Republican votes to win confirmation.
I don’t mean to dismiss out of hand Warren’s criticism that Powell allowed financial regulation to deteriorate on his watch. At a hearing in September, she pointed out that the Fed had, under Powell, weakened the stress tests it imposed on banks under the Dodd-Frank financial reform law. It also weakened Dodd-Frank’s “Volcker rule” separating commercial banks from risky private equity and hedge funds. “The Volcker rule as implemented,” Powell answered, “was complex and not workable.” That was not reassuring.
But macroeconomic policies are the Fed’s main business, and Powell’s have been sound. In August 2020, he formally ended the Fed’s long-standing practice of raising interest rates preemptively to head off inflation increases. He rightly put economic recovery from the Covid recession well ahead of inflation worries, and waited until this month to start ratcheting down the Fed’s $120-billion-per-month bond-purchase stimulus program. The result, combined with the Covid stimulus bills passed under Trump and Biden, has been a rapid recovery from the worst of the pandemic’s economic effects. Unemployment is still elevated, at 4.6 percent, compared to the pre-pandemic level of 3.5 percent, but with people quitting their jobs at a historic rate, there’s a limit to how worried we should be about that. People like, ahem, me, who thought the tight labor market would vanish by September, turned out to be wrong.
“We have a Fed chair in Jerome Powell who has openly embraced full employment, one of the most important items on progressives’ agenda for many decades,” the economist Dean Baker wrote in June in The American Prospect. “It is hard to imagine that we would not want to keep him there.” That case is even stronger five months later.