Make no mistake: I oppose President Trump’s attempts to oust Jerome Powell as Federal Reserve Chairman as well as his insistence on lower interest rates.
That said I don’t think we should lose sight of something. Mr. Powell has been a terrible chairman. Compare his record with that of his two predecessors. Under his tenure inflation was at its highest level in 40 years and longer still if we calculated CPI as it was prior to 1990. And that could have been prevented had the FOMC responded in 2020–2021 to clear monetary expansion signals instead of clinging to a politically fashionable view of “transitory” inflation.F5h34p4ofie3w
Furthermore, he gives “technocracy” a bad name. He is a lawyer by training not an economist or a banker. He worked for an investment bank which is quite a different creature despite the name. That provides him with an entirely different conceptual underpinning and habits of thought. That shows in the way he defers to consensus narratives rather than leading with analysis. He should never have been appointed as Federal Reserve Chairman. That was one of President Trump’s mistakes in his first term.
He behaves more like an ordinary politician than a technocrat, calibrating decisions to institutional optics and elite approval rather than to empirical rigor.
The Fed needs structural reform not to politicize it but to make it more empirical and less narrative-driven. It is now a late 19th century structure in a 21st century economy, radically different from the one for which it was devised.
What should happen at this point is that the White House should leave Mr. Powell where he is and let him serve out the balance of his term.
Dave Schuler: And that could have been prevented had the FOMC responded in 2020–2021 to clear monetary expansion signals instead of clinging to a politically fashionable view of “transitory” inflation.
It was largely transitory, related to the pandemic recovery with pent-up demand and broken supply chains. The recovery from inflation was faster in the U.S. compared to peer countries, even as the U.S. economy continued to grow.
Pretty much every first world country had significant inflation around covid even though their policies differed quite a bit. To me that would suggest at least some of what happened was not under our control. Also, while people obsess over inflation we recovered from inflation faster than almost everyone else and we also maintained GDP better than almost everyone else.
For my money, the effects of the banking crisis were both more severe and much longer lasting consequences. Our output gap from the banking crisis was much more severe and unemployment lasted longer. Also, allowing the banking crisis to occur has been contributory to our long term housing shortage. The combo of Greenspan and Bernanke avoided inflation but at the cost of significant economic losses for the country and long term loss of jobs for more people than seen with the covid response.
https://www.brookings.edu/articles/the-us-recovery-from-covid-19-in-international-comparison/
Steve
Zachriel:
The terse response is that you’re wrong. See this report at Brookings. More than five years later inflation is still higher than 2% which was the prior Fed target. Claiming that since you’ve raised the target and hit the new target you’ve licked inflation is sophistry.
The longer response is that everything is transitory. I am transitory. You are transitory. The United States is transitory. The Earth is transitory. That doesn’t absolve the Fed from its role in producing outrageous inflation. Steve’s response that other countries experienced inflation, too, is also not exculpatory. That everyone else jumped off the same cliff does not mean you should do so, too.
What makes it worse is that the Taylor Rule was pointing in the opposite direction. In other words, they knew it was the wrong policy and did it anyway.
Dave Schuler: See this report at Brookings.
The graph already provided shows that inflation was largely transitory. That doesn’t mean it didn’t cause economic damage. A spurt of inflation like that will cause serious dislocations (eta: for instance, property owners gain value, while currency holders lose value; fixed-rate mortgagors gain, variable-rate borrowers lose).
But reading the Brookings report posted by Steve: “The U.S. is significantly outperforming its peers in investment and GDP per capita”, and “This recovery has been possible even as inflation has fallen back substantially, as the impact from supply chain disruptions at the height of COVID-19 has faded.”
“Overall, this makes the recovery—and fiscal stimulus behind it—a success.”
Dave Schuler: See this report at Brookings.
Your original link didn’t come through initially, so we thought you were referring to the report linked by Steve.
As for Eggertsson & Kohn, the report doesn’t contradict what we posted either. They are saying the response wasn’t perfect and that lessons can be learned {emphasis added}.
Continuing:
They continue with the “benefit of hindsight”. This is exactly the right response. The modern economy went through an unprecedented event. That allows a better understanding of how the system works. And that allows for development of better policies.
Of course, all this is academic in the Age of Trump. As Kohn recently said, “the Trump administration will stop at nothing to gain much firmer control over the Federal Reserve. So I’m very worried.”
If everyone jumped off the same cliff but the methods were different than does the responsibility lie entirely on Powell or were other factors influential.
Also, your case that Powell is worse than Bernanke and Greenspan is completely wrong. The banking crisis caused much more severe and longer lasting problems.
Steve
@steve
I agree. Like the COVID shutdown, the 2007 financial collapse is still being felt. The effects from these events take longer to subside than thought possible, and the solutions have prolonged the issues.
QE has caused distortions in the financial industry, and the COVID shutdown UBI scheme caused distortions in the economy.
(I supported the COVID shutdown scheme because government intervention caused the problem.)