Jerome Powell

The Fed's man caught in the middle

Nomination Hearing Considering Jerome Powell To Be Federal Reserve Chairman
I swear not to upset the apple cart. Source: Bloomberg

Many American institutions are currently under attack as a result of an atmosphere of hate, partisanship and dishonesty. Some government agencies are now being led by people who had previously sought to abolish them. At the Supreme Court, Mr. Trump has appointed Neil Gorsuch, a man who is as brilliant as his predecessor, Antonin Scalia, but even more conservative. And in Congress, even the Republicans are notoriously split.

While US President Donald Trump did not create this atmosphere, it did make his election possible. It is therefore all the more gratifying that Mr. Trump did not pursue a populist policy in his choice of the new head of the Federal Reserve. Jerome Powell, at his Senate confirmation hearing, reinforced the existing impression that he is a moderate conservative. But moderate conservatives have almost become an endangered species in the US and in the deeply traditional Republican party. As one of Mr. Powell’s moderate predecessors, Ben Bernanke wrote: “I didn’t leave the Republican Party. I felt that the party left me.”

In a divided America, the Fed can be a voice of reason in economic matters and, for example, in the supervision of the financial system. That’s the good news. The other issue is whether the Fed will once again be forced into a role in which it is actually overextended. After the financial crisis, the central bank had largely been tasked with preventing the country from sliding into a deep recession. It is still a matter of debate as to how much of a role it played in restoring the US to economic strength more quickly than other regions.

It's not an easy job for the new boss, but he seems like a good choice.

However, because of the institution’s independence and non-partisanship, which Mr. Powell emphasized so clearly in front of the Senate, the Fed was able to pursue a consistent strategy even while fiscal policy was repeatedly blocked by quarrels, ideological abysses and tactical games, such as the squabbling over raising the limit for public debt.

Yet the unique role played by monetary policy in the US and soon afterwards in Europe was associated with excessive demands. Their expansive course of spending billions on securities created mistrust in the population and, as a detrimental side effect, increased inequality. Moreover, it is always problematic when independent institutions – those that are ultimately only indirectly legitimized – play too large a role in a democracy. In this sense, there is a parallel between central banks and overly influential, politically overburdened courts.

Under Mr. Powell, the Fed has the chance to continue to play a constructive role, even if Mr. Trump keeps getting bogged down in, and may even fail with, important projects such as his tax reform.

This could work very well at first, as long as the economy continues to function well even without interference from Mr. Trump, as is the case currently. But what happens when the next recession arrives? After the long economic boom, Mr. Powell, unlike his predecessor Janet Yellen, is likely to encounter such a phase, leading to an even more heated political climate. Then the public will be searching for scapegoats to blame for its plight, and central banks, whose activities are often difficult for the public to understand, offer the ideal punching bag.

Mr. Powell, as was evident in his Senate hearing, where individuals repeatedly tried to corner him or use him to further their own agendas, is politically versed and, with his calm manner, is adept at handling unpleasant situations. But the Fed may be adversely affected as an institution if, in a heated climate, it tries in vain to restore stability to the country with sage advice and a consistent strategy.

And even if the US continues to experience golden years, it won’t be easy for Mr. Powell. Even more than monetary policy, questions of financial supervision can become a bone of contention, as was made very clear in the Senate. Democrats, most notably the well-known senator Elizabeth Warren, tend to interpret any relief for banks as the seed of the next crisis. The Republicans, on the other hand, are acting as if strict supervision were preventing banks from financing even more growth.

Both sides are wrong, at least in their more extreme expressions of opinion. Mr. Powell is in the middle. If anything goes wrong in the banking system, the Democrats will crucify him. If everything goes well, the Republicans will try to erode financial supervision – and something will eventually go wrong. It’s not an easy job for the new boss, but he seems like a good choice.

To contact the author: wiebe@handelsblatt.com

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