I’d like to talk about the Federal Reserve Board for a moment. Ok, Ok, before your eyes glaze over, this diary will be very NON-WONKY.
I just read this article at Politico about Biden’s nomination of the next Chair of the Federal Reserve. It was at once refreshing and worrisome — refreshing because the left rarely makes much noise about Federal Reserve appointments, and worrisome because there is a very real prospect that Biden re-nominates Jerome Powell.
If Biden can get his fiscal measures through Congress, it won’t matter all that much — Powell has been a steady steward during a period of remarkable unanimity at the Fed that extends back to the Yellen term as chair at the Fed. Even a slow retreat on expansionary monetary policy at the Fed, though unwelcome, will not endanger an economic recovery backed by trillions in COVID relief and infrastructure spending.
However, if Biden can’t get these measures through, the person in the Chair at the Fed becomes enormously consequential, for one simple reason: having torpedoed Biden’s sensible fiscal policy, republicans will next take aim at monetary policy, and someone at the Fed, preferably the Chair, will have to stand up and call “Bullshit” when the monetary policy equivalents of the Proud Boys figuratively storm the Fed screaming “inflation is killing us!”
We’re already seeing them gather. Suddenly, within the last few weeks, you can’t pick up a newspaper or turn on your computer or TV without seeing the word INFLATION, generally used in a context that evokes the Black Death. It’s being driven primarily by political forces. And it’s familiar to most of us, isn’t it? Didn’t we see the same hyperventilating about INFLATION!!! in 2009, just as Obama was taking office?
Make no mistake, the forces driving this inflation hysteria are political. Republicans see an opportunity to cripple the economy and retake power by blocking any fiscal OR monetary stimulus. It’s a replay of the Obama administration, where we suffered a relatively stagnant economy because of republican obstruction of sensible fiscal policy. The republicans tried, but failed, to create inflation hysteria as a means of stopping the Fed from taking necessary steps to keep the economy afloat.
Of course, republicans were just gaslighting when they screamed INFLATION then and they’re gaslighting now. Inflation is not a threat to the economy, nor will it be anytime in the foreseeable future. But if republicans can convince enough people that it is, and create political pressure on the Fed to back away from its longstanding expansionary monetary policy, the economy will quickly suffer, and with it the democrats’ chances of retaining control of Congress.
We have to send a very loud and clear message to the Biden Administration: a re-nomination of Powell is unacceptable. We are entitled to have our preferred candidate in the Chair at the Fed. No more republican or establishment “daddies”. No more conceding the top echelons at Defense and the FBI and the Fed to the right or the center. No more Democratic Presidents appointing the likes of Gates at Defense, or Mueller at the FBI, or Greenspan at the Fed.
Why is this so critical? Because the battle lines have already been drawn in the inflation wars. Republicans and the Fox/Wall Street Journal are already in battle gear and stoking inflation hysteria. Within the last few weeks the mainstream media — dependably witless when it comes to reporting on the economy - has jumped on the inflation hysteria bandwagon.
What evidence do they have of the looming specter of inflation? In the first quarter of 2021, inflation, fueled by a temporary demand/supply imbalance caused by the rapid distribution of COVID relief benefits through the economy and pandemic-driven impairment of the global supply chain, ran at an annual rate of 4.3%.
That’s it. One quarter of transitory, pandemic-related inflation at an annual rate of 4.3%, a figure that would have been completely unremarkable in the U.S. economy at any time other than the last 12 years. A rate of inflation comparable to what we experienced during the Reagan Boom, during the late 60’s boom, and periodically through the Bush II years.
On the basis of that, and nothing more, republicans are willing to stall the economic recovery solely for the purpose of bolstering their 2022 campaign to retake Congress, and their 2024 campaign to put another white nationalist in the White House.
Now here’s the problem. We can expect more inflation reports like the one we’ve just seen for the first quarter. Inflation may continue through 2021 at a rate of 4% or greater until this pandemic-related demand/supply imbalance resolves itself. And while Powell and the Fed have signaled they are willing to tolerate inflation in excess of the traditional 2% Fed target level while the economy is in recovery, inflation at 4% or more for another quarter or two will give republicans all they need to put enormous pressure on the Fed to start slowing the economy.
No joke, there’s good news and bad news.
First with the bad news. Historically, there has been an inherent institutional bias at the Fed in favor of fighting inflation even at the cost of slowing the economy and increasing unemployment. The Fed’s “dual mandate” — to foster economic conditions that achieve both stable prices and maximum sustainable employment — has in practice meant immediately crushing any sign of incipient inflation, but tolerating high unemployment rates until they get to recession-like levels.
We saw this in the years immediately following the 2008 collapse. The inflation rate was near zero, while unemployment rapidly shot up to 10%. The Fed responded sensibly, lowering short-term interest rates to near zero and injecting liquidity into the markets with a massive program of bond purchases called “quantitative easing.” The economy emerged from recession (i.e., the economy began growing again rather than contracting), but unemployment remained stubbornly high. At the end of 2010 the unemployment rate was still above 9%.
Here’s the good news. We know what has to be done. The Fed needs to make it clear that it’s not going to start chasing inflation ghosts while economic growth and the labor markets remain in peril. The Fed had the same problem following the Great Recession. The markets — stock, bond, labor, etc. — did not trust that the Fed would continue its stimulative policies as unemployment began to slowly decline from 10%. The key was for the Fed to assure the markets that stimulative policies, including near-zero interest rates, would remain in effect indefinitely until the unemployment rate had been reduced to a particular level.
Simple, right? Not at the Fed. We’re all familiar with pronouncements from the Fed. They are generally laughably ambiguous and hedged, and, in all fairness, there are valid reasons for the Fed to be circumspect about its future plans. The idea that the Fed would commit to a particular monetary policy indefinitely is anathema to the institution.
That began to change in September 2010 when the President of the Chicago Federal Reserve Bank made the following statement in a speech delivered in London.
"Imagine that inflation was running at 5 percent against our inflation objective of 2 percent. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn't any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.”
In the strange universe the Fed occupies, this was a shocking statement. It received widespread media attention at the time. Paul Krugman quickly wrote a column citing this speech and endorsing the idea that the Fed would be responding with greater urgency if the problem were inflation rather than massive unemployment.
The President of the Chicago Federal Reserve had a very specific plan in mind. The Fed should state, unambiguously, that interest rates would remain near zero until either the unemployment rate was reduced to 6.5% or the inflation rate increased to 2.5%. Again, this idea ran completely counter to the instincts of the Fed. It was something the Fed would never consider outside of an economic emergency, and an unemployment rate above 9% didn’t appear to qualify as an emergency. The Chicago Federal Reserve Bank took the position that if a 5% rate of inflation qualified as an emergency, then a 9% unemployment should damn well constitute an economic emergency.
The President of the Chicago Fed was Charles Evans. Evans began a months-long campaign to convince the Federal Reserve Board that persistently high unemployment was an emergency that warranted abandoning the Fed’s refusal to commit to specific future policies. The Federal Reserve Board finally agreed in December 2012. The commitment to keep interest rates near zero until there had been a substantial reduction in unemployment became known as “the Evans Rule.” This break from historical Fed policy was so dramatic that The Atlantic magazine published an article entitled “The Man Who Occupied the Fed: How Charles Evans Saved the Recovery.”
Again, I will not get wonky. But the Evans Rule had an immediate and positive impact, and precisely the impact Evans intended. Reassured by the Fed’s commitment, businesses immediately increased investments in production capacity, offsetting the negative economic consequences of the contractionary fiscal policy implemented by republicans following their 2010 takeover of the House, and the recovery continued.
If democrats were republicans, and if the left were the right, and if the Evans rule had succeeded in crushing inflation rather than bolstering business investment and employment, Charles Evans would have become a political celebrity and a perennial republican favorite for appointment as Chair of the Fed. But the left doesn’t do that, and I don’t know why.
Where is Evans now? He’s still President of the Chicago Federal Reserve Bank. If, as all indicators would suggest, we are about to have another battle over whether to chase inflation ghosts, even at great cost to the economic recovery and employment, it would be a shame if Evans were on the sidelines rather than at quarterback. He’s already fought this battle once and won it.
Tell your progressive friends. Write Krugman and/or your local columnist. Post at your favorite political blogs. We know the inflation hysterics are ready to attack. We can’t be sure what Powell will do or if he’s up to the task. We need someone who has already demonstrated an understanding of what keeps economic recoveries on track and what derails them. We need someone who won’t chase inflation ghosts while we lose our jobs.
The man’s name is Evans. He should be Chair of the Fed.