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Steering the Fed

Why central banking needs a broader mandate for change

On January 11, the Senate Banking Committee began hearings to reappoint Jerome Powell as Chair of the Federal Reserve. Centrist commentators praised President Biden for sticking with Powell, since it showed a commitment to bipartisanship, skill at not spooking financial markets, and savvy in avoiding an ugly confirmation fight. The Financial Times praised Powell for being strong-willed but undogmatic. Not all was calm in pundit world, though, especially among the wing of Clintonite economists. J. Bradford DeLong warned that re-appointing Powell would be a “historic mistake,” while Joseph Stiglitz called Powell a “Wall Street-minded lawyer” with “a history of misjudgments in tightening monetary policy.”

The stakes for the next Fed term are high. One way or another, the Fed is almost certainly going to scale back the gargantuan lending programs it used to prop up the economy when the Covid-19 pandemic hit in the spring of 2020. Whether that is soon, as a result of the much-debated current burst of inflation, or later, to restore some policy space to respond to future crises, it is very likely that the next years will see monetary policy tightening. Corporations and developing countries both have used the spigot of cheap capital to borrow heavily, raising the possibility that rapid rises in interest rates will precipitate either a private sector financial crisis or a developing country debt crisis akin to that of the 1980s. As Powell said in his confirmation hearing, it is a long road back to normal. Depending on how that road is taken, and what the results are, the consequent levels of inflation and unemployment will certainly have direct consequences for the 2024 presidential election. Anyone already worried about that election might also worry that Powell’s confirmation is a “historic mistake” and ask: Why don’t I get to vote on this?

Well, what were the choices? The favored alternative to Powell was Lael Brainard, currently serving on the Fed’s Board of Governors. The contrast between her CV and Powell’s is instructive of the different factions of the American ruling class. Powell went from Princeton to Georgetown Law to corporate law practice to investment banking, including at the Carlyle Group, which used to turn up a lot in documentaries about the second Bush administration. Brainard, by contrast, charts a trajectory from an Economics PhD at Harvard to McKinsey consultancy to teaching at MIT to service in both Clinton and Obama administrations. In this way does the standard political spectrum of central bankers run all the way from A to B.

But Biden is also seeking to bring more diversity to the seven-member Board of Governors of the Federal Reserve system. He has nominated two African Americans, neither bearing their PhDs from the usual Ivy League departments. Lisa Cook, an economics professor at Michigan State University, is an exceptional economist who has produced powerful and urgent research on segregation and racial violence. Philip Jefferson teaches economics at Davidson College and is affiliated with the Institute for Research on Poverty at the University of Wisconsin-Madison. Fed observers take these potential additions as a heartening indication that Fed officials are becoming less homogenous, less sutured into the community of bankers. But the Federal Reserve is the most powerful economic institution in the world, so the question of who leads it can only ever be a question that is about more than itself. A few personnel changes on the board are unlikely to seriously alter the governing ideology of the Federal Reserve system, and yet the prospect of a new direction in Fed power is more alive than it has been in many decades.  Since at least the 1970s, the Fed has represented a remarkably stable political coalition. The ideas, preferences, and legitimacy of that coalition have all become unstable. A new coalition is nowhere near emerging, but the reappointment of Powell may represent a transitional interregnum more than obvious continuity.

The Fed responded to the unprecedented economic disruptions of the Covid-19 pandemic with equally unprecedented measures. Even after the dust settled and the initial financial crisis was averted, the Fed kept on with its quantitative easing program—increasing the money supply by purchasing about $80 billion of Treasury securities and $40 billion of mortgage-backed securities every month—until it announced in November 2021 it would begin to taper that off. Since March of 2020, the total assets held by the Fed have increased by about $4.6 trillion—which, mind you, is after some $4.4 trillion in three rounds of quantitative easing that followed the 2008 crisis.

The velocity and scale of the Fed’s response to the pandemic is a sign that something tectonic has shifted: the rules of austerity that governed after 2008 are broken; the “unconventional monetary policy” of the Ben Bernanke era became conventional and has now been superseded by something even more experimental. There was no reason to expect the unprecedented intervention from this very conventional Fed chair: Jerome Powell may be a Wall Street-minded corporate lawyer, but not every Wall Street-minded corporate lawyer would have managed the pandemic crisis as well as Powell did. Rightly, the breakdown of the old orthodoxy has opened up a new horizon of questions, demands, and possibilities. If a conventional Fed chair can do such unconventional things, why stop there? Anyone who has experienced unemployment, medical debt, student loan debt, stagnant wages, budget cuts, or who has merely witnessed the gruesome spectacle of the Senate gouging out social spending for children, might well look at the Fed and its $8,873,211,000,000 balance sheet and ask: Why don’t I get to vote on this? Why aren’t children in poverty at least as much of an emergency as repo liquidity? Why don’t they get a bailout?

For years the answer has been the same: central banks are independent and “insulated from politics” because they are supposed to take a long-term view of the economy, and they need to be protected from short-term political meddling. Politicians are only focused on the next election cycle, so they are likely to pressure central banks to raise wages and bring down unemployment before an election, or to fund rapid and generous social spending, which might win them another term, but could lead to inflation and instability further in the future. Central banking is a technical subject for technical experts, and we delegate all sorts of aspects of public life to technical experts, from pandemic response to city planning. Almost nothing in contemporary society is decided through direct democracy, and, as I have conclusively proven at many dinner parties, most people are unwilling to learn what “tri-party general collateral repos” might be. What distinguishes monetary policy is not just its insulation from democratic control, but its immense scale.

The velocity and scale of the Fed’s response to the pandemic is a sign that something tectonic has shifted. The rules of austerity that governed after 2008 are broken.

Yet, real world central bank independence as we know it today was never as permanent as it looked. It was the product of the 1970s, happening somewhere between when Richard Nixon successfully pressured Fed Chair Arthur Burns to keep monetary policy loose before the 1972 election and Fed Chair Paul Volcker precipitating a ruthless recession to tame inflation right before the 1980 election. (Among the people who lost their jobs was Jimmy Carter, who had appointed Volcker to the Fed.) The scholarly verdict (at least among non-economists) is now settled: central bank independence in general, and the Volcker recession in particular, were crucial parts of the historic defeat of labor by capital in the 1970s, and therefore at the core of the decades of inequality and instability that followed, commonly called the era of neoliberalism. The political scientist Juliet Johnson has shown how the model of politically independent technocratic central bankers was exported around the world in the 1990s. Indeed, many central banks only gained formal independence in the 1990s: for example, the Bank of England was granted independence in 1997 by Tony Blair’s government—having been nationalized by a previous Labour government in 1946. The result is that today most central bankers went to the same schools, started their careers at the same universities and banks, have gone through the same professional training, and go to the same conferences. They are a coherent community, with a politics that you’d expect from the Carlyle Group and McKinsey & Company.

So the answer to why you don’t get to vote on any of this is that in the 1970s capital defeated labor and remade the world in its own image. Central banks are just one facet of a decades-long shift from democratic control into constitutionally legitimate but anti-majoritarian institutions like the Supreme Court, the Senate, or in another context, the European Union. And now that shift is producing its own instability. The claim of necessary central bank independence is in crisis. Last spring, the eminent economic historian Adam Tooze surveyed the reality of central bank activity and declared that it departed so much in breadth and scale from the theory that the “myth” of central bank independence was exploded. He called for a new monetary constitution.

Like other constitutions, this one has been slow in arriving, and the delay reveals rather than solves the underlying problems of politics and collective action. Democratic control is most appealing if you are in a majority; depoliticization is most annoying when it is keeping out your politics. But it was a very good thing that Donald Trump was not able to pack the Federal Reserve with lackeys and weeping, shouting beer enthusiasts the way he was able to do with the courts. And, as far as insulated, technocratic institutions go, the Fed does care about how it is perceived. The Fed produces a lot of speeches, press releases, research, and testimony. Indeed, one of the main tools that the Fed uses to accomplish its goals is communication. It is constantly trying to communicate its plans, because it knows that banks, firms, households, and consumers will adjust their own plans and expectations accordingly. There is by now a fascinating body of scholarly work on the Fed as a discursive and communicative actor, but when it asks who the Fed is talking to, and what language it uses, it mostly recapitulates the same point about the community of bankers. But that too has shown some small signs of change: in 2019-2020, the Fed held a series of “community listening sessions” around the country. As Powell said in his opening remarks in January’s confirmation hearing, as a result the Fed “updated [their] monetary policy framework, drawing on insights from people and communities across the country, to reflect the challenges of conducting policy in an era of persistently low interest rates.”

Even the community of bankers has started to worry about inequality and climate change. Before 2009, almost no central bank speeches referenced inequality in any way. In 2021, about 9 percent of central bank speeches mentioned inequality. In spring 2021 the European Central Bank established a Climate Change Centre to “steer its climate agenda,” and has been touting its policy of buying green bonds. The ECB and the Sveriges Riksbank continue to generate research and speeches on inequality, persuading other central bankers that inequality is not only a problem in itself, but also an obstacle to the successful implementation of monetary policy. The rare criticism of Powell at the confirmation hearing came from Pennsylvania Republican Senator Pat Toomey (himself a former Wall Street banker), who was distressed that several regional Fed banks were doing research and events on “so-called racial justice.” The Boston Fed, for example, had hosted speakers who called for defunding the police. The Boston, Atlanta, and Minneapolis Feds in particular have been producing a steady stream of studies, blog posts, and conferences on the ubiquity of racism in the American economy.

Talk though they might about inequality and climate change, the past decades of central bank activity have made the two problems immeasurably worse.

These changes are surprising, encouraging, small, tentative, and late. They are also usually framed as second order: it is necessary to address inequality and climate change because those processes have consequences for financial stability and growth, which are the mandates of central banks. Central banks are not responding to the calamitous challenges of our time with anything like the urgency and resources they dedicate to saving the financial system from itself—especially now that all public discussion is absorbed by inflation panic. The Fed’s worldview is shifting, and it is much better to have a Fed that employs Lisa Cook, worries about inequality, and discomforts Pat Toomey than not, but it would take a lot of community listening sessions to equal the effects of $8.8 trillion in asset purchases.

And talk though they might about inequality and climate change, the past decades of central bank activity have made the two problems immeasurably worse. All those trillions in quantitative easing have been directed at supporting asset prices, which means inflating the value of capital. Owners of capital have done very well by that policy. Cheap money has kept extractive and destructive industries afloat even as prices have collapsed or supply chains have abruptly deliquesced. Over the course of 2013 through 2019, halting efforts to slow down the frantic gush of capital were met with all manner of bizarre and petulant market responses, from the “taper tantrum” to the “inverted yield curve,” now mostly forgotten thanks to the spectacular crisis of early 2020. But the point remains: it has now been more than a decade since the global financial system functioned without continual injections of tens of billions of dollars every month. If that is “normal,” the long road should lead somewhere else.

In 2014, the economist Christina Romer wrote an account of the three times in the twentieth century that central banks were confronted with persistent zero-interest rate environments: the United States in the 1930s, Japan in the 1990s, and the developed world after 2008. She concluded that the only successful case was in the United States during the Depression, because it took a “regime shift” to “to turn our ocean liner of an economy on a dime.” The Powell Fed is not the Bernanke Fed, let alone the Greenspan or the Volcker Fed. But the horizons of a politically thinkable “regime shift” need to be wider. What would need to happen in order to have a Fed represents a different, wider, more equitable political coalition?

Maybe the answer is to fight the war of ideas. Perhaps the recognition of inequality is thanks to the impact of Thomas Piketty’s Capital in the Twenty-First Century and the subsequent wave of research on tax havens, wealth concentration, and income disparities. Economists in general are more willing now to recognize market failures, environmental externalities, and distributional inequalities. Unlike in 2009, today there is a deep reservoir of critical political economy thinking about central banks. But although we are closer to an idea of what the egalitarian policies of the People’s Fed might look like, we are not much closer to knowing how to get there.

Short of a constitutional convention or a proletarian revolution, the easiest way to change how the Fed uses its enormous power is through passing a law to change its mandate, not just by changing the personnel. Congress ostensibly controls the Fed, so according to this line of thinking, the changes we have seen at the Fed have something to do with the rise of Bernie Sanders, Elizabeth Warren, and other left-wing Democrats in Congress. There is precedent: in 1978, Congress passed the Humphrey-Hawkins Act, which added full employment to the Fed’s mandate. Augustus Hawkins was one of the authors of the Civil Rights Act and a founder of the Congressional Black Caucus; Hubert Humphrey had been vice president and lost to Richard Nixon in 1968. One of the Act’s primary drivers was Coretta Scott King, and the point of the Act was that Black unemployment has remained persistently higher than white, meaning that any given level of overall unemployment has unequal racial consequences. Only full employment for everyone would guarantee full employment for Black people.

As precedents go, the Humphrey-Hawkins Act is not promising. The next year Volcker was appointed to the Fed and instigated the fastest spike in unemployment the U.S. experienced between the Great Depression and the spring of 2020. The question of what constituted “full” employment in practice and the inability to discipline the Fed for not achieving it has meant that Black unemployment remains roughly double the level of white unemployment. In July and August 2020, candidate Biden announced his support for adding a third mandate to the Fed, asking it to target “persistent racial gaps in jobs, wages, and wealth.” (He has not repeated this call since becoming president.) In August 2020, nine Senate Democrats introduced the Federal Reserve Racial and Economic Equity Act, which has not come up for a vote. There are other reasons to be skeptical of attributing changes in central banking to elected officials, mainly because central banks around the world have (slowly) been making similar changes. A better version would recognize the left flank of the Democratic Party and the Powell Fed together as consequences of a broader political shift: a decade of anti-austerity activism, the hard work of Black Lives Matter, and the international politics of left populism are to thank for pushing climate concerns and inequality to the fore. Maybe political pressure leads to personnel changes, which leads to new policies, and activists should spend their time trying to “salt” the Fed with radicals.

The Fed is about more than itself not only because of its immense resources and the tantalizing possibility of enlisting its power to remake the world. It is also one of the few remaining examples of successful, intentional agency in a world of such complexity and paralysis that almost nobody seems able to really accomplish anything. Our contemporary moment is characterized by the continual confrontation of people against anti-democratic institutions, but on a sharply uneven playing field that is structured by four previous decades that systematically undermined the institutions, practices, and cultural importance of collective action. We want the Fed to address inequality and racism and climate change because it seems clear that nobody else is going to do it. Action on those crises is even consistent with the Fed’s independence and long-term time horizon: no politician now wants to bear the electoral costs of seriously dealing with inequality or climate change, but they are going to need to be dealt with eventually, and with the scale and speed that only central banks can muster.

The reappointment of Jerome Powell is not a regime shift, but it is an opportunity to ask how one might happen, and what needs to change to make one possible. Power without hegemony is insufficient, but hegemony is slow to build and unpredictable to extend. Perhaps the students of today’s radical political economists will spend the next decades repeating the same long march through the institutions and the war of ideas that the acolytes of Milton Friedman did after the 1960s. It’s difficult to believe we have that long. Perhaps the structures limiting the capacity for collective action will abruptly collapse. One lesson we have learned again this century is that there is no direct relation between intolerable crisis and abrupt regime shift. Either way, as the anthropologist Alexei Yurchak wrote of the late Soviet Union: everything is forever, until it is no more.