Inflation is scourging the land. In January it hit 7.5%, a forty-year high. The Fed is failing in its mandate to maintain “stable prices” and suffers the dangerous conceit enlightened central bankers can direct the economy better than the market. President Biden’s Fed appointees aren’t the cavalry, far from it.
Many Americans are too young to have experienced the scourge of inflation that roiled the country in the seventies. Inflation is too much money chasing too few goods. Thanks to Washington’s binge of money-printing and spending, suffocating regulation suppressing production, and Fed complacency, inflation is back. It’s a stealth tax punishing saving, creditors, and the working poor, and rewarding debtors, the biggest of whom is Uncle Sam.
Congress and the administration look to the Fed to bail them out of destructive fiscal and regulatory policies. Many at the Fed believe they can and should manage the economy. That’s beyond its ken. The Fed does, however, have tools to rein in inflation. That’s what it should focus on. The FOMC needs to find its inner Paul Volcker. If it hikes interest rates and reduces its bloated balance sheet sufficiently, it will curb inflation.
But Biden’s Fed appointees won’t bring a hawkish voice or narrow its focus. They’ll expand and further politicize the central bank and paramount financial-system regulator’s role, raise the fossil-fuel industry’s cost of capital, and racialize credit.
Biden renominated Jay Powell Chairman and nominated Governor Lael Brainard Vice Chairman, law professor and former governor Sarah Bloom Raskin Vice Chair of Supervision, and economists Lisa Cook and Philip Jefferson governors.
Powell has been a dove’s dove and willfully blind to the looming threat of inflation, which were preconditions to Biden reappointing him. On his watch, gorging on Treasuries and mortgage-backed securities, the Fed’s balance sheet doubled, and the money supply increased 403%. When the Fed buys assets it creates money, suppresses interest rates, and, thereby, fuels inflation.
In January yoy gas was up 40% and used cars 40.5%. In 2021 the median existing-home price rose 15.8%. As inflation picked up a head of steam, the Fed played make-believe, stubbornly maintaining it was “transitory.” Joe and Sally Sixpack are paying dearly for the Fed’s dereliction of duty.
Brainard is just as dovish as Powell, supports more punitive bank regulation endearing her to progressive heartthrob and financial-industry foe Senator Elizabeth Warren, and is socializing introducing climate-change considerations into the Fed’s prudential regulation, setting the stage to punish banks financing oil, gas, and coal producers.
Raskin is a climate-change fundamentalist. In “Why Is the Fed Spending So Much Money on a Dying Industry?” she trumpeted her Green faith and desire to preference credit for job-intensive – i.e. less productive, renewables over fossil fuels, decried “surging carbon dioxide,” and warned of the looming “catastrophe of an unlivably hot planet.”
Fossil fuels provide 79% of America’s energy. If the Biden Fed starves the fossil-fuel industry of capital, it will increase energy costs, making consumers poorer and businesses less competitive. Even if it wasn’t horrendous policy, it isn’t the Fed’s place to decide to engage in a Green holy war against fossil fuels. That folly is the politically-accountable Congress’s prerogative.
Cook served in the Obama White House, has a NYT guest column, contributes to CNBC, MSNBC, and NPR, served on the Biden-Harris financial-regulator-agency-review-transition team, and supports “reparations” for black Americans. Cook was nominated not because she’s an estimable monetary economist but rather because she’s a she, she’s black, and she’s a brass-collar Democrat, none of which is a good reason.
By reputation economist Philip Anderson is apolitical. Preternaturally sunny Hoover economist, National Review contributor, and former Trump adviser Kevin Hassett sings his laurels declaring he’s the kind of economist he would’ve been happy with and President Trump could’ve appointed. That may be naïve. Anderson’s commentaries in PBS NewsHour, NPR, CNBC, and Bloomberg Radio suggest comfort in the establishment left. The Biden administration wouldn’t knowingly nominate a man Hassett would be comfortable with.
The Fed’s statutory monetary mandate is stable prices, i.e. zero inflation, maximum employment, and moderate long-term interest rates. Stable prices support maximum sustainable long-term employment and wealth creation.
The central bank takes an expansive view of its remit. In 2012 the Fed on its own prerogative declared it would target 2% inflation, prices doubling every 35 years. While lawless, there was nary a peep of protest from Congress. In 2020 the Fed went a step further, announcing it would inflation-average,” allow inflation higher than 2% to catch up for prior inflation below its target.
Interest rates are the economy’s most important price, the price of present versus future consumption and investment. The Fed influences them. Its real benchmark interest rate is now a mind-boggling negative 7.5%. Keeping interest rates artificially low causes systemic malinvestment and risk.
Milton Friedman warned concentrated power, no matter how well-intentioned, is dangerous. The Fed embodies unchecked concentrated power at the heart of the financial system.
Who’s on the Fed board matters so much because of the enormous power it wields and license it takes. Until Congress circumscribes its mission, the Senate must be extra-vigilant ensuring hawks with a narrow view of its role, run the central bank, rather than partisans keen to use the Fed’s monetary, regulatory, and operating powers to try to manage the economy, preference credit for favored sectors, and advance a political agenda.
