Category Archives: Federal Reserve

Should President Biden keep Jay Powell? Americans have cause to worry who leads the Fed

Because of its outsized impact on the economy the choice of Fed leadership is enormously consequential. If the Fed were less powerful, if it exercised less discretion in monetary, fiscal, regulatory, and operating policies, it would matter less, much less.

President Biden’s upcoming Fed appointments should concern every American. It’s up to him whether to replace Chairman Jerome Powell, Vice Chairman of Supervision Randal Quarles, and Vice Chairman Richard Clarida, and to fill an open governorship. The decision to reappoint or replace Powell in February will be the most consequential at least since President Carter replaced Bill Miller with the legendary inflation fighter Paul Volcker.

The looming dangers of inflation, deficit monetization, and accelerated pollicization of regulation and credit allocation, underscore its importance.

The Left wants the Fed to continue the gusher of easy money and monetization of the mushrooming Federal deficit, use regulation to starve the fossil-fuel industry of capital, further racialize banking, and, as a totem of progressive piety, flail banks. Centrist Democrats and many Republicans have accommodated themselves to forever-easy money, if not to hyper-politicized regulation.

The Senate should reject nominees who it suspects aren’t serious about crushing inflation, want to expand the Fed’s fiscal footprint, or intend to politicize credit allocation and banking. In the movie ‘Ronin’ Vincent, played by Jean Reno, asks Robert DeNiro’s character Sam how he knew they would be ambushed. Sam replied “When there’s doubt, there’s no doubt.” That’s the test senators should apply to Biden’s Fed nominees.

Ideally the central bank would narrowly hew to its mandate: to pursue stable prices, maximum employment, and moderate long-term interest rates. A stable price regime is the sine qua non of maximum long-term employment and wealth creation. Clinton appointed former Vice Chair Roger Ferguson observed “a stable level of prices appears to be the condition most conducive to maximum sustained output and employment, and to moderate long-term interest rates.” Dovish former Fed Chair Ben Bernanke wrote “In the long run, the central bank can affect only inflation, not real variables such as output.” Stable prices send the clearest signals, facilitate optimal decision-making to consume, save or invest, enabling maximum sustainable wealth and job creation.

Republican Powell was originally appointed to the Fed board by President Obama. President Trump elevated him to Chairman. Powell has tried to maintain the Fed’s assiduously-cultivated – and not entirely deserved, reputation for apolitical, technocratic competence. To Powell’s credit he’s resisted efforts to politicize regulation.

While Powell wasn’t dovish enough for Trump’s taste, he’s a dove. He’s repeatedly promised the administration and markets easy money for the foreseeable future, and been stubbornly blind to inflation’s danger.  Paraphrasing Upton Sinclair, it is difficult to get a man to understand something when keeping his position depends upon him not understanding it.

There are eminent and more hawkish alternatives to Powell who would stick narrowly to the Fed’s statutory mandate. Stanford economist John Taylor, former Philadelphia President Charles Plosser, former Fed governor Kevin Warsh, and former House Financial Services Committee Chairman Jeb Hensarling, would be superb Fed chairs. Biden, however, isn’t going to nominate any of them.


Democrat eminence grises and eponymous sponsors of Dodd-Frank, Barney Frank and Chris Dodd, and Senator Jon Tester have called on Biden to renominate Powell. He is likely the least-bad politically-viable option.

If Biden instead decides to replace Powell, woke Fed Governor Lael Brainard would be the odds-on favorite. While Powell and Brainard have been of one mind on monetary policy, Brainard’s urged a harder line regulating banks, endearing herself to progressive heartthrob Senator Elizabeth Warren. Warren’s blasted Powell for putting the economy at risk by being too protective of big banks. But banks aren’t underregulated. Thanks to Dodd-Frank, quite the contrary. And under Powell no major bank has failed. They’ve increased their capital. The point seems to be, one must ritualistically bash banks, to attest to one’s progressive virtue.

Brainard wants to advance policies progressives have been unable to legislate, by regulatory diktat. She’s urged the Fed to weigh anthropogenic-climate-change risks in bank regulation. Banks have been pricing the risk of hurricanes, floods, and droughts for centuries. By making energy more expensive Fed climate-change regulation would genuinely put the economy at risk. Powell rightly holds that whatever one believes about the climate-change bogeyman, it’s a matter for Congress, not the Fed on its own prerogative.

Brainard is also keen for a retail Fed digital dollar.  The US payments system is already largely digital and works well. A Fed digital currency would compete with commercial banks and stifle private-sector innovation in money and payments. Quarles and Governor Waller have suggested there’s no compelling case for one. Powell has remained neutral and insisted it would require Congressional authorization.

While since its 1913 creation the Fed’s been a masterful political actor, it’s avoided appearing political. If progressives score a quadfecta of appointees, the Fed will become a brazenly political and more dangerous actor.

The Senate can and should reject any nominee inclined to act beyond the Fed’s statutory mandate.

China fires a shot across the bow of King Dollar

China’s pilot of a digital yuan is a shot across the bow of King Dollar. Domestically it will displace anonymous physical cash and compete with China’s card-network monopoly China UnionPay, and its PayPal analogues Alipay and WeChat Pay. Abroad it will help it bypass the dollar-dominated global financial system, facilitating China’s Belt and Road Initiative, which is being used to ensnare vast swaths of the world in its economic dominion.

Hopefully, it’s a wakeup call for U.S. policymakers.

It’s high time for digital dollars, dollars that could be carried by consumers in digital wallets and used online and in-person at casinos, bars, cafes, and barbershops, worldwide.

Digital greenbacks could be public, private, or both.

The Fed issues physical dollars to banks in exchange for reserves. It could do the same with digital dollars.

Former CFTC Chairman and Director of the Digital Dollar Project Chris Giancarlo shared his vision for modernizing the dollar’s architecture in the  Senate Banking Committee’s June 30th hearing “The Digitization of Money and Payments.” He envisions Fed e-dollars distributed through banks and regulated money transmitters. The central bank would issue e-dollars to banks against reserves, that would in turn issue them to consumers and businesses.  The Fed would serve rather than compete with banks.

Distributing digital greenbacks through banks is politically practical as they‘re a powerful interest group. It also preserves the dynamicism and accountability of competitive private-sector banking and payment systems.

Fed e-dollars would be supported by a permissioned distributed digital ledger, hopefully, unlike China’s digital yuan, with U.S. values like privacy designed in.

They wouldn’t be the first digital greenback. In 2015 Ecuador’s central bank launched an account-based digital dollar. It failed, not because Ecuadorans don’t like dollars – they do, but because of distrust of the central bank and the state MNO having a monopoly providing mobile payment services.

Competition between Fed and private-sector e-dollars would be healthy.

Facebook’s Libra stablecoin – “the Zuck buck,” will be a de facto digital dollar, used with its wallet Novi within Facebook and WhatsApp, and via third-party e-wallets.

Chase’s JPMCoin and Signature Bank’s Signet are electronic dollar-backed tokens, facilitating payments between their domestic business clients.

And, the world’s largest payment network Visa has applied for a digital fiat currency patent. It could deliver digital dollars through its bank licensees.

In the U.S. digital dollars will help the un- and underbanked more fully participate in the economy, displace dirty physical cash, and compete with credit and debit cards, PayPal, and money-transfer systems like MoneyGram and Western Union.

But digital dollars’ impact will be felt worldwide.

The dollar is the world’s preeminent currency, enjoys trust and powerful network effects. It dominates foreign-exchange reserves, foreign-currency-denominated debt, foreign-exchange turnover, and cross-border interbank payments.

The dollar accounted for 61% of the world’s foreign-exchange currency reserves as of the fourth quarter of last year, far surpassing the euro’s 21% share and the Chinese renminbi’s paltry 2%. An enormous 74% of the $16 trillion in foreign-currency debt is denominated in dollars, and most international trade, including oil, is invoiced in dollars.

While Beijing resents its dominance, foreigners planetwide love dollars. They circulate widely outside the U.S., for licit and illicit purposes. About 60% of U.S, currency and 75% of $100 bills are held abroad. Dollars are used officially in Ecuador, El Salvador, Panama, the Turks and Caicos Islands, and Zimbabwe. In Costa Rica, the greenback circulates in parallel with national currency. Hong Kong, for the moment, pegs its currency to the dollar.

In November, 2019 Zimbabwe’s central bank introduced a new Zimdollar, attempting to displace the U.S. dollar. However, it’s quickly returning to binge money-printing. In May, 2020 inflation hit 786%, though that’s still a far cry from Zimbabwe’ November, 2008 peak monthly inflation rate of 79,600,000,000%. Civil servants have started demanding to be paid in dollars.

Since its 1913 creation the Fed’s massively debased the dollar. Nonetheless today, relative to most fiat currencies, the dollar is a Rock of Gibraltar and trusted as a store of value, unit of account, and means of exchange.

Zimbabweans, people the world over, prefer currencies they can trust. Electronic greenbacks they can access from mobile phones will make it easier for them to dollarize and avoid debased domestic currencies.

Digitizing King Dollar will make it more attractive at home and abroad, and fortify its global dominance.