A faction of Democratic policy wonks and members of Congress have been calling on President Joe Biden to replace Federal Reserve Chair Jerome Powell when his term expires early next year. On Monday, Politico reported that this movement had gathered support from left-wing members of the House like Rep. Alexandria Ocasio-Cortez (D-NY).
“As news of the possible reappointment of Federal Reserve Chair Jerome Powell circulates, we urge President Biden to re-imagine a Federal Reserve focused on eliminating climate risk and advancing racial and economic justice,” the group stated to Politico. The group also faulted Powell for his light touch on banking regulation.
But replacing Powell would be a blunder for the president. Powell has been effective at a difficult and crucial component of Biden’s agenda: the pursuit of full employment. This goal is not only good in itself, but also helpful in making the rest of Biden’s agenda more affordable.
The recent anti-Powell campaign has obscured the work of an older left-of-center movement, one centered around the interests of labor, and one that is far more favorable to Powell. Dean Baker, for example, is a progressive economist who has long focused on full employment. He wrote a piece for the American Prospect titled “Reappoint Powell as Fed Chair: Biden’s presidency may depend on it.”
Why are some progressives so supportive of Powell, a Republican? It's complicated. While job creation is itself popular, the kinds of policies that produce full employment come with many critics. Powell has been unusually deft at deflecting that criticism and building diplomatic ties that might be severed—especially on the right—if the Federal Reserve was mobilized for controversial Democratic priorities.
Full employment is crucial to Biden’s agenda
Job creation is important to all politicians, but it’s especially so for Biden. The economic trajectory of 2020 laid out this priority for Biden quite clearly: the U.S. began with a historically good job market that fell apart after the COVID-19 pandemic began. Biden therefore inherited both a bad job market and a public that remembers a good one. His mission is clear: restore the good one as fast as possible. In short: “Build Back Better.”
He also has a larger vision for a full-employment economy that’s based on a long tradition of left-of-center labor research. Ordinary workers benefited from a booming economy under Powell’s tenure in 2019 and early 2020. Some of Biden’s team, like Ernie Tedeschi, a Senior Policy Economist at the Council of Economic Advisors (CEA) have previously described the virtues of that healthy labor market. Biden himself described this full employment vision in a speech in Cleveland in May.
We want to get something economists call “full employment.” Instead of workers competing with each other for jobs that are scarce… we want the companies to compete to attract workers.
That kind of competition in the market doesn’t just give workers more ability to earn a higher wage, it gives them the power to demand to be treated with dignity and respect in the workplace. And it helps ensure that when you walk into work, you don’t have to check your right to be treated with respect at the door.
“Full employment” also means more options and opportunities for workers — including Black, Hispanic workers, Asian American workers, women — who’ve been left behind in previous economic recoveries when the labor market never tightened up enough.
This outlook is further informed by the experience Democrats had when Biden was vice president. They began 2009 with a terrible job market, and engineered a slow, steady recovery. A growing number of Democratic policy specialists now think that recovery was too slow—and that more “expansionary” policies could have produced a faster recovery.
While it is difficult for Democratic insiders to critique a popular Democratic administration directly, some left-wing economists like J.W. Mason openly critiqued the slow pace of the recovery. Mason was especially critical of the rate hikes that began in 2015 under Fed Chair Janet Yellen, and the hawkish forward guidance in prior years that signaled those rate hikes were coming. While there are other potential causes to blame—fiscal hawkishness among Republicans, or even Democrats like Robert Rubin—the Federal Reserve could have been more expansionary than it was in practice.
Overall, the slow pace of the recovery left many people unemployed for quite some time. This was not just a bad deal for workers; it was bad for the economy as a whole. By employing a smaller fraction of people, the Obama administration effectively had a smaller “budget” of labor to direct towards its priorities than it could have.
Furthermore, this may have been a political problem for Democrats. While the incumbent president generally loses seats in the midterms, a good economy is thought to help them. Democrats lost the House of Representatives in the 2010 midterms, and Senate control in the 2014 midterms. Arguably, they might have kept these for longer with a faster recovery.
Hawkish policy like the Fed’s 2015 rate hikes may even have helped Donald Trump get elected. New York Times columnist Neil Irwin noted a “mini recession” in rust belt states in late 2015 and early 2016. He argued that this mini-recession “helps explain some of the economic discontent evident in manufacturing-heavy areas during the 2016 elections.” Donald Trump won the White House thanks to narrow victories in three manufacturing-heavy states: Wisconsin, Michigan, and Pennsylvania.
When President Trump took office, he was able to improve on Obama-era employment levels and take credit for the peak of the labor market boom. If that peak—81% of working-age people holding a job—had instead occurred earlier, then at a minimum, Trump would not have received as much credit for it.
All of this is to say that Democrats have limited time to engineer a quick economic recovery, and they are trying to make this one faster than its predecessor. If they succeed, that is likely to expand both their political and economic budget.
Powell has shepherded expansionary policy through difficult politics
Powell in recent years became a champion of full employment monetary policy:
- In 2019, he started to reverse the rate hikes that began in 2015.
- He took special note of lower-income and minority workers’ employment status in his speeches and outlook.
- He responded swiftly and robustly to the COVID-19 pandemic shock.
- He rallied the institution around a new framework that would be more accommodating to short-run inflation.
- He even arguably overstepped the bounds of his role to advocate a robust fiscal response, helping along Speaker Nancy Pelosi’s policy goals.
This was harder than it looks. While full employment is a popular goal, there is actually a lot of opposition to using expansionary monetary policy to get there. This often goes unnoticed in progressive policy circles, where experts tend to agree on the need for full-employment policies. But the institutional environment that the Federal Reserve operates in is not nearly as sold on expansionary policies as the median progressive is.
Three particular sources of opposition are noteworthy. The first are hawkish regional presidents; people like the Kansas City Fed president Esther George, who pushed back against Powell’s 2019 rate cuts. These regional bank presidents rotate through seats on the Federal Open Market Committee, so they wield significant power over monetary policy.
The second are hawkish Republican senators like the Senate Banking Committee’s Ranking Member, Pat Toomey, who is already antsy about inflation and “excessively accommodative monetary policy.” The third are hawkish dissenters among Democrats, such as former Treasury Secretary Lawrence Summers, who is increasingly sounding like Toomey in his criticism of the Fed.
These forces are not trivial to overcome; arguably, outside progressive circles, they actually have the upper hand. However, through a combination of a patient demeanor, Republican background, and diplomatic effort, Powell has built a large base of support, at least at the personal level.
Although he is a Republican, he was appointed to the Board of Governors in 2011 by Barack Obama, as part of a bipartisan compromise and in appreciation of his well-reviewed work on the debt ceiling. He is diligent in outreach, regularly talking with groups ranging from hawkish Republican senators to small business owners and labor leaders. Claudia Sahm, a former Fed Section Chief and full employment advocate, described the scale and the significance of these diplomatic skills in a New York Times op-ed “The Years of Work Behind Washington’s Best-Liked Man.”
Powell’s skills are also critical to people like Sam Bell, a progressive full-employment advocate and founder of Employ America. Full employment convictions are held by plenty of economists, including ones personally or politically closer to Biden, but Powell’s ability to herd wayward members of the flock back towards the full employment goal might be unparalleled.
“Powell has shown the ability not just to personally hold the full employment outlook, but also deliver it in the challenging institutional environment" Bell told me. "And if you don’t think it’s challenging you should look back to 2014 and 2015, when internal and external forces helped push Janet Yellen to raise rates while inflation remained below target.”
Little to gain, much to lose
The substantive reasons some progressives wish to replace Powell are twofold: regulation and climate change. Undoubtedly, on both issues, there are plausible candidates more progressive than Powell, such as his long-time Fed colleague Lael Brainard. However, in both cases, there is less to these ideas than meets the eye.
First, regulation: progressives disagree with deregulation measures taken under Powell’s term and that of Vice Chair for Supervision Randal Quarles, a Republican. More broadly, they also want to counteract the bipartisan 2018 rollback of Obama-era banking regulations.
But as progressive economist Dean Baker describes, there are other options for Democrats here: replace Quarles, whose term expires in October, and make use of other regulatory bodies like the Consumer Financial Protection Bureau.
Furthermore, when it comes to the big-picture mandate for the Fed—financial stability—it has succeeded. There was a stress test for the financial system in March 2020, when the COVID-19 pandemic arrived in the U.S., and the financial system passed it, thanks in part to a robust and rapid response from the New York Fed.
Second, climate change: climate activists, spurned by the failure of the Obama-era Democrats to even bring up the 2009 cap and trade bill in a 60-40 Democratic Senate, are increasingly looking to non-legislative paths to curb climate change.
But the Federal Reserve is not outfitted to do climate policy, either in terms of its mandate or its policy tools. The result is that even the best-thought-out proposals from policy veterans like Gregg Gelzinis have a sort of Rube Goldberg quality to them.
While the Federal Reserve’s traditional dual mandate concerns stable inflation and maximum employment, its role has also expanded to include financial stability. Theoretically, the Fed could interpret its financial stability mandate to include worrying that assets exposed to climate change might be correlated, much like mortgage products were in 2006, and pose the same sort of danger. This line of reasoning could then be used as a sort of can opener to justify the Federal Reserve’s entrance into climate policy.
However, even if you’re with this idea so far, the Fed’s tools are lacking. The role of the central bank is not to impose tax or spending policies of its own. Its primary function is to set the overall level of currency circulation and usage throughout the economy via open market operations: the purchase or sale of large, general asset classes that are already guaranteed by Congress, like Treasury bonds. It also has a role in regulating the banking system—but not much to do with, say, Exxon-Mobil or other companies in the energy sector.
So proposals for the Fed to tackle climate change end up complex and rather toothless: things like increasing risk weights for fossil fuel assets in the regulatory framework so that banks have to fund more climate-exposed lending with equity capital, not debt. The climate-exposed lending still gets funded in the end, it is just somewhat less convenient.
There are some larger proposals—like using regulatory authority to implement what would effectively be a carbon tax—but this is not a particularly politically realistic idea. Despite their merits, carbon taxes are unpopular and fail in elected bodies like Congress. Using the Federal Reserve to run around Congress on the issue is a surefire way to bring down the wrath of Republican senators, and quite a few Democrats as well. Senator Toomey, for example, views even current forays into climate as unacceptable; he would be louder—and joined by even more of his colleagues—if those forays became more aggressive.
Plenty of other parts of the federal government can have a more direct impact on climate change, from the Environmental Protection Agency to the Department of Energy to the Department of Transportation.
The bottom line: the potential gains for progressives from plausible Fed climate initiatives are fairly paltry. The larger climate initiatives are politically unrealistic. Tackling the issue would make the Fed’s main job—achieving full employment—much harder.
The path for Biden’s dovish policy plan has already been shaken up substantially, as fiscal policy and supply-side shortages have driven high inflation, opening the president up to criticism. Claudia Sahm’s op-ed on Powell’s diplomacy, though published in March, now seems downright prophetic:
Now comes the big test. Life will be more regular again soon. But not everyone who lost work will have their old jobs again or new jobs. Can he stand up for Main Street when Wall Street and many high priests of macroeconomics in the academic and think tank spheres freak out about inflation as the economy reopens? The hand wringing over the size of the $1.9 trillion relief bill passed two weeks ago was just the start.
If you think the hawks on television and Twitter are loud now, just wait until they see a temporary uptick in prices. They’ll be deafening. Some are inside the Fed itself and will be voting on its policies.
Powell’s personal skills—and the reservoir of goodwill he has earned with Republicans and moderate Democrats—may be all that is holding full-employment policy together against these pressures. Appointing a new chair with additional controversial priorities would make this task orders of magnitude more difficult.
The wisdom of the labor left
While Powell has a number of critics on the left, there is by no means left-wing unity on this issue. Some left-leaning economists, like Dean Baker or the AFL-CIO’s William Spriggs, have openly signaled their support for Powell’s reappointment. Among Democrats, support for Powell tends to be strongest among older policy hands, and often those with greater labor ties.
By contrast, much of the pressure to replace Powell comes from ambitious young Democrats focused on issues—like climate and Wall Street corruption—that are newer, flashier, and easier to market to progressives than dovish monetary policy.
But the old left has the far better end of the argument. They remember what it was like in the early 2010s when the Fed wasn’t sufficiently focused on achieving full employment—and Obama’s agenda suffered as a result. Economists especially close to lower-earning workers, like Spriggs, see that even more acutely, and worry that hard-won gains under Powell are fragile.
This faction of the old left saw prior Fed chairs get bogged down defending their policies against hawkish critiques from regional governors like the Dallas Fed’s Richard Fisher. They see in Powell a kind of political miracle, one that may not be so easily replaced. Spriggs and Baker have expressed this view publicly, and others have expressed it to me privately.
The Biden hand with the greatest ties to this faction is his long-time advisor Jared Bernstein, who is a current member of the Council of Economic Advisors and a long-time collaborator of Baker’s. They even wrote a book together called Getting Back to Full Employment. Constructing a high-pressure economy of the kind Biden described in Cleveland is a lifelong project of Bernstein’s, and he knows hawkish monetary policy is a threat to that project.
“It is said that economic expansions do not die of old age,” he wrote in 2018. “They are murdered by central banks. The Federal Reserve could raise interest rates too quickly, hitting the growth brakes harder than necessary and derailing the expansion.”
This political coalition makes for strange bedfellows: long-time labor leftists praising a wealthy Republican private equity executive in service of a full-employment economy. But Powell is a unique figure, and has earned a different reputation than superficial qualities might suggest. Especially in terms of his care for the most disadvantaged workers, he and the labor left’s economists have much in common.
Claudia Sahm pointed me to a story from the Washington Post earlier this year, about how Powell had responded to a growing homeless encampment close to the Eccles Building. He went on to mention the encampment three times in a week, expressing his desire to incorporate their welfare into policy decisions:
At 21st and E, one woman sat facing her tent and sipped a soda. She said she had two jobs as an usher at some of Washington’s most acclaimed performing arts spaces before the pandemic.
She used to sleep outside on the campus of George Washington University but was displaced when the pandemic closed the school. She came to the encampment near the Fed and moved into a spare tent next to Key’s.
When asked, she said she was surprised to learn that Powell — someone with so much authority over the world’s economy — had noticed her community’s plight.
With a bit of hope, and a bit of disbelief, she said: “Maybe we could invite him to visit.”