The Washington PostDemocracy Dies in Darkness

Opinion If Powell’s Fed tenure is a success, what would failure look like?

Federal Reserve Chair Jerome H. Powell testifies on Capitol Hill on June 22, 2021. (Graeme Jennings/Pool/Reuters)
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Just 36 months ago, Federal Reserve Chair Jerome H. Powell said low inflation — it had averaged just 1.7 percent for a decade — was the nation’s foremost economic challenge. That challenge has been surmounted. Inflation has nullified nominal wage gains; real wages have fallen, hurting most those the Fed most wants to help.

Kevin Warsh, a former member of the Fed’s board, wrote that the risk of inflation rises “when policy makers first dismiss the problem and then cast blame elsewhere.” Although greed has stained the human story since Eve ate the apple, President Biden and other progressives blame the sudden appearance of greed as the serpent in America’s otherwise lush economic garden. Biden says that because the oil market is global, his crusade to save the planet from fossil fuels is not to blame for Americans’ novel experience of spending $100 to fill their gas tanks. But he simultaneously blames greedy U.S. oil companies for restricted supplies.

About five weeks ago, inflation was at a 40-year high and the Fed had stopped describing it as “transitory” when the Senate confirmed Powell to a second term, 80 to 19. The Wall Street Journal called this a “vote for the inflation status quo.” It raised a question: If Powell’s stewardship of monetary policy is a success, what would failure look like?

After World War II, the Fed became increasingly ambitious about managing aggregate demand, and then its ambitions metastasized. Although it has much to be modest about concerning its performance of its central responsibility — preventing inflation — the Fed seems to think monetary policy is suited to solving non-monetary problems. The Economist recently deplored “an insidious change among central bankers globally,” the desire “to take on more glamorous tasks” than managing the business cycle, tasks such as reducing social inequalities by engineering “equitable” income distribution through growth that is “inclusive.” And “sustainable,” meaning fine-tuning the Earth’s climate. (The Securities and Exchange Commission, too, wants in on the trendy action: It has devised “climate-related” disclosure requirements for registrants.)

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Last year, approximately 15 percent of Fed research papers concerned inequality. Inequality is, however, a social outcome influenced by fiscal as well as monetary policy, and by many political choices, and by complex multigenerational social processes that government only marginally influences. The Fed’s prolonged low interest rates predictably — so, it is fair to say, intentionally — expanded wealth inequality. Low rates serve financial sophisticates: Such rates send torrents of money in search of higher yields into the stock market. Most stocks are owned by the affluent.

The Hoover Institution’s John Cochrane, who blogs as the Grumpy Economist, wrote: From March 2020 to early 2021, the Treasury and Fed created $3 trillion and sent checks to people, then borrowed an additional $2 trillion and mailed more checks. This “stimulus” — $3,200 per adult, $2,500 per child, $659 billion to small businesses, etc. — pumped up aggregate demand. But the pandemic recession was not the result of insufficient demand. Cochrane:

“In a pandemic, you can send people all the money in the world and they still won’t go out to dinner or book a flight, especially if those services are suspended by government fiat. To the economy, a pandemic is like a blizzard. If you send people a lot of money when the snow is falling, you do not get activity in the snowdrifts, but you will get inflation once the snow has cleared.”

So, there was promiscuous stimulation of an economy whose already strong recovery was powered by consumers spending down the savings they had piled up during the pandemic. People at the Fed who are paid to know better were surprised that inflation ensued.

The Fed’s main job, Cochrane wrote, is “to understand the economy’s supply capacity and fill — but not overfill — the cup of demand.” Blaming disrupted supply chains for inflation is akin to an army blaming a lost war on the fact that the enemy attacked. “If the Fed is surprised that containers can’t get through ports,” Cochrane asked, “why does it not have any of its thousands of economists calculating how many containers can get through ports?” Perhaps because the Fed’s attention is spread too thin, on “sustainability,” “inclusive” growth and all that.

Some epistemic humility from the Fed would be welcome. Epistemology is the field of philosophy concerned with the nature and limits of human knowledge. Concerning inflation, the Fed has much to learn about that nature and those limits, without indulging vaulting ambitions for administering social betterment.