By Kirk Lesh
The question of whether Federal Reserve Chairman Jerome Powell’s term should be extended has received a lot of attention recently. It seems like The Washington Post, The New York Times or The Wall Street Journal has an article on this topic every week. In a similar vein, it seems someone from the Senate or House of Representatives opines on this matter just as frequently.
Of particular note, on Aug. 30, three progressive Democrats issued a joint statement to Politico in which they urged President Joe Biden “to appoint a new Federal Reserve Chair.” In the statement, the Democrats pressed “Biden to re-imagine a Federal Reserve focused on eliminating climate risk and advancing racial and economic justice.” Among their complaints, Politico’s article said, “they cited moves by the Fed under Powell to reduce regulations on big banks.”
To sure, eliminating climate risk and advancing racial and economic justice are challenges that our society should tackle. However, they are not in the purview of the Fed. The Fed has two mandates: First, maintain stable prices. In other words, the Fed is tasked with keeping the rise in prices stable. Second, the Fed is charged with the goal of maximum employment, or keeping the unemployment rate low.
Essentially, what these Democrats are requesting of the Fed is like asking an economics professor to teach biology. It is not going to end well.
Further diminishing their argument was the fact that none of the Democrats offered how the Fed should go about eliminating climate risk and advancing racial and economic justice. I point this out because the tools the Fed uses to conduct economic policy cannot be directed at a particular group of people or a particular industry.
For example, when the Fed increases the interest rate, it is has to do it for the entire nation. It cannot increase the interest rate just for the wealthy. Similarly, the Fed cannot increase the interest rate just for industries that are deemed to increase the risk of climate change.
If we want the Fed to eliminate climate risk and advance racial and economic justice, then Congress needs to write a new charter for the Fed and give it some new tools to fight these ills. To say that the Fed needs to address these issues without giving it the power or the tools to do so is wrong and shameful.
I do think this nation needs to address climate risk and advance racial and economic justice. However, that is something Congress, not the Fed, should do.
As to the point raised by the lawmakers about the Fed weakening financial regulations, I agree. For the record, I do not think the Fed or Congress should be reducing regulations on the big banks. The pain of the financial crisis is still being felt. The harm and damage the recession caused is still with us. I do not think this is the time to reduce the regulations put in place after the financial crisis. In fact, I do not believe those regulations should ever be weakened.
The big banks are profitable. Some have increased their dividends and begun to buy back shares. What point is there to reducing the regulations? I sincerely hope we never revert back to a situation where there are no-documentation loans or no-income-verification loans.
According to a Bloomberg News article from Feb. 28, 2020, it cost the U.S. taxpayers $191 billion to bail out Fannie Mae and Freddie Mac after the financial crisis. The good news is that all that money plus “almost $100 billion more” has been repaid.
The point is we don’t want to bail out quasi-government agencies in the future. Why tempt another financial crisis? Let’s learn from our mistake and move forward, not backward.
Overall, though, in my opinion, Powell has done a good job overseeing the Fed. I think President Joe Biden should nominate him for another term.
• Kirk Lesh is an assistant professor of economics in California Lutheran University’s School of Management.