High-stakes musical chairs at the Federal Reserve
Most people know about the game of musical chairs. Musical chairs at the Federal Reserve is similar, except the loser is the one occupying the chair when the music stops. I believed that Ben Bernanke would win this game back when the economy collapsed. However, Mr. Bernanke kept the music playing, but only at the expense of future Fed chairs. Window dressing papered over the problems, making them more difficult to resolve in the future.
We are at another crisis, and Jerome Powell is in the chair. Inflation is at 40-year highs. People are losing homes, cutting back on food, etc.
Mr. Powell's options are few. The probability of escape is lower than any prior Fed chair since the Great Depression. It is easy to feel sorry for Mr. Powell because many of his options are not possible because of his predecessors and the current political class.
Should we feel sorry for Mr. Powell? In the sense that his actions as chair did not cause these problems, the answer is "Yes." In another sense, probably not. Mr. Powell was not some rookie new to the workings of the Federal Reserve, the political forces operating on it, or the financial conditions of the country. He joined the Fed in 2012:
Jerome H. Powell first took office as Chair of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term. He was reappointed to the office and sworn in for a second four-year term on May 23, 2022. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028.
Chris Leonard pointed out the following in an interview with Matt Taibbi:
You'd look at the arguments that Jay Powell was making[.] ... [I]n 2012, 2013, 2014. He was planning out that if the Fed didn't restrain itself, if it didn't stop trying to juice the market so much, if it would just raise interest rates a little bit, it would give itself more room to maneuver when trouble inevitably arose, when the rainy day eventually came, when there was economic slowdown or when there was inflation. But, he was ignored at that time. And then, as you know, he changed his tune and shifted over to the easy money theory.
The Fed is now in a vise. Inflation is rising faster than the Fed believed it would even a few months ago, with higher prices for gas, goods and automobiles being fueled by the Fed's unprecedented money printing programs. This comes after years of the Fed steadily pumping up the price of assets like stocks and bonds through its zero-percent interest rates and quantitative easing during and after Hoenig's time on the FOMC. To respond to rising inflation, the Fed has signaled that it will start hiking interest rates next year. But if that happens, there is every reason to expect that it will cause stock and bond markets to fall, perhaps precipitously, or even cause a recession.
I believe Mr. Leonard may be optimistic about his forecast.
Powell knew the condition of the banking system and the economic prospects when he accepted the chair position in 2018. Did he believe he could apply his magic to fend off the inflation, which was inevitable? Was he co-opted by the political class? These valid questions are unanswerable unless Mr. Powell reveals them in his memoirs.
As an excuse, Mr. Powell could not have foreseen the COVID crisis. Even if he could, there was no way to foresee "government gone wild" in its spending to fight the crisis and to expand the government. In this panic (real or engineered), he was the only one keeping the government solvent.
However, the "victim of circumstances" condition loses credibility when Powell sought a second term as chair. President Biden re-nominated him in late November 2021 over the preferred Democrat candidate, Lael Brainard. Two questions, again without answers, are obvious:
- Why did Biden choose Powell over Brainard?
- Why did Powell accept Biden's renomination?
Only speculation is possible regarding either. However, the most interesting aspect of this situation is that the re-nomination came after Powell knew that the Biden administration and its full-out commitment to spending would increase deficits. Clearly, as a trained economist with much experience at the Federal Reserve, he had to know what he was committing to.
Did he sell out? Did he believe he could temper the deficit spending? Or was something else in play?
Regarding the above questions, I have no answers, but I know neither the re-appointment nor the acceptance makes sense, given the history of the man.
Joe Biden doesn't mind succeeding Herbert Hoover as presiding over the next Great Depression. Chalk that up to "ignorance is bliss." But why would Powell risk being seen as the engineer for the second Herbert Hoover express?
Monty Pelerin blogs at EconomicNoise.com.
Image via Pixabay.