Date: 2024-04-20 Page is: DBtxt003.php txt00021310
US Economy
Fed Policy
Biden's best decision this week ... President Biden is reappointing Jerome “Jay” Powell as chair of the Federal Reserve.
Original article:
Burgess COMMENTARY
Broadly speak, I agree with Dylan Matthews in the endorsement of Biden's appointment of Jerome 'Jay' Powell for a further term as Chairman of the Fed. The Fed decision in March 2020 to give unprecedented support to the financial sector as the economy stalled in the early days of the Covid pandemic was incredibly important.
I think the decision at the Fed was made on a Thursday. A couple of days before on Tuesday I heard Neel Kashkari who is head of Federal Reserve Bank of Minneapolis describe the economic situation in the USA and what he thought should be the Fed actions. Kashkari had been a key player in the Obama response to the 2008/2009 financial crisis and did not want to see the same mistakes made ... specifically a minimalist action that would be ineffective. The Fed action announced by Powell were almost 100% what Kashkari had talked about a couple of days earlier.
While this move by Biden is positive, good Fed policies are essential but not sufficient to support a healthy socio-enviro-economyc system. The whole of this complex system needs to have ALL the key actors working towards the same end and not at cross purposes. As a conservative but progressive observer I see very few of the people in positions of power, whether in business or banking or politics who seem to understand that the policies and practices of the past 40 years have been good for only a very few, but very bad for most of the population, not only in the USA, but around the world as well.
President Biden may not be perfect ... but compared to most of the other politicians In Washington, he is very good!
Peter Burgess
Dylan Matthews, Vox.com
Nov 23, 2021, 3:58 PM
Hey readers,
I woke up Monday morning to some of the best news for the US and global economy all year: President Biden is reappointing Jerome “Jay” Powell as chair of the Federal Reserve.
Powell is expected to breeze through the Senate confirmation process, with both the top Democrat and top Republican on the Senate Banking Committee praising the pick.
I’ve said it before in this newsletter, but it’s worth repeating: I, like many observers, genuinely don’t think it’s possible to get a Fed chair who is more committed to fighting for full employment than Powell.
As the economics writer Alan Cole laid out in his case for Powell, the chair’s first term has seen an epochal shift in monetary policy, away from a singular focus on preventing inflation and toward aggressively attempting to get unemployment as low as possible.
That focus is, of course, being tested as inflation is spiking, and Powell’s second term may require a more aggressive stance toward price increases. But the very fact that this is the dilemma we find ourselves in is a testament to the fact that Powell helped cut the US unemployment rate by more than two-thirds since it peaked last April.
In general, low rates increase employment but risk faster price increases, while high rates cut employment and in the process can control inflation.
Powell’s innovation as Fed chair was to really care much more about employment, relative to inflation, than his recent predecessors had.
In 2019, he began lowering interest rates during an economic expansion, a genuinely unprecedented action that conceded rate hikes he introduced the previous year were a mistake.
He repeatedly invoked homelessness and high Black unemployment as reasons to keep pushing rates lower, saying the job wasn't done until it was done for everyone.
In 2020, he issued a new formal framework explicitly pushing the Fed away from worrying about inflation and toward worrying about employment.
How Powell saved the day in 2020
And Powell was absolutely masterful in his response to Covid-19, stabilizing global markets vastly more effectively than policymakers did during the 2008 economic crisis and aggressively lobbying for fiscal stimulus from Congress.
Just to give one example that’s often unheralded: In March 2020, as the pandemic set in, the world saw a massive exodus of investments from low- and middle-income countries, a phenomenon known as “flight to safety.”
By March 24, 2020, foreign investors had pulled $78 billion from emerging market economies, a greater amount than they had put in in all of 2019 put together. It was the worst outflow on record, worse than during the 2008 financial crisis.
Left unchecked, this could have led to a much, much worse economic crash across the world than actually happened.
But Powell worked closely with counterparts at other central banks, especially the People’s Bank of China, to establish what are known as “swap lines,” which let poor countries trade assets denominated in their own currencies for US treasuries.
A Federal Reserve Bank of St. Louis analysis found that while non-dollar currencies were largely in free fall before the swap lines were announced, the Fed action stabilized them very rapidly.
Put simply, Powell’s actions likely helped prevent the 2020 economic crash in the US from becoming a global crisis akin to 2008.
Biden can’t stop here
Powell is, I think, the best person to lead the Fed through the next year, which will likely feature the largest-scale inflation the US has experienced in three decades.
A chair less committed to full employment, like Powell’s rumored rival for the position Raphael Bostic, might take rising inflation as a reason to hike rates immediately. And a skeptic might fairly wonder if Powell is to blame for that inflation in the first place, making him the wrong person to control it.
That’s a fair perspective, but I also fear that raising rates could be a mistake at this point. As Skanda Amarnath and Alex Williams, two sharp economic analysts at the group Employ America, recently noted, our current inflation is the result of businesses not being able to keep up with the higher-than-expected incomes and spending of Americans coming out of the 2020 downturn.
That is, in a sense, Powell’s fault, but in another sense he’s the victim of his own success. Our inflation problem is a direct result of Powell and other leaders causing employment and spending to recover much, much faster than anyone anticipated.
There are two possible answers to that problem. One is to raise interest rates in an attempt to increase unemployment and/or reduce Americans’ incomes, so their level of spending better matches what corporations are able to produce.
That sounds cruel, but inflation can be cruel too, and has been high enough that many people have seen their incomes fall after you adjust for price increases. That effect has been unequal — people at the bottom of the income scale have seen their incomes go up a lot — but if millions of Americans are seeing their real incomes decline, that’s a problem. It’s not crazy to think about rate hikes in that environment.
But there’s another path: to keep spending high so that businesses are pushed to expand their capacity and produce enough to meet demand. The second road entails enduring some short-run inflation but promises a richer, more abundant America at the end. There’s a risk that short-run inflation becomes long-run inflation, but overall I find this path more fruitful.
Powell has the track record needed to resist the inflation hawks and keep the economy on course to prioritize full employment. Yes, inflation is a concern, but we’re still 6 million jobs short relative to where we should be. Powell is likely to keep his focus on that problem, and that’s a good sign for the US economy, and the world’s.
—Dylan Matthews, @dylanmatt
P.S. We’ll be skipping this Friday’s newsletter for the Thanksgiving break. See you all again next Tuesday. Happy Thanksgiving!