Reviews | If Powell’s tenure at the Fed is a success, what would a failure look like?

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Just 36 months ago, Federal Reserve Chairman Jerome H. Powell said low inflation — it had averaged just 1.7% for a decade — was the biggest economic challenge. from the country. This challenge has been met. Inflation wiped out nominal wage gains; real wages have fallen, hurting most those the Fed wants to help the most.

Kevin Warsh, a former Fed board member, wrote that inflation risk rises “when policymakers first dismiss the problem and then shift the blame elsewhere.” Although greed has tainted human history since Eve ate the apple, President Biden and other progressives blame the sudden appearance of snake greed 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’ new experience of spending $100 to fill up their gas tanks. But he simultaneously blames greedy American oil companies for the limited supplies.

About five weeks ago, inflation was at a 40-year high and the Fed had stopped calling it “transitional” when the Senate confirmed Powell for a second term, 80 to 19. The Wall Street Journal called it a “vote for inflation”. Status Quo.” This raised a question: If Powell’s handling of monetary policy is a success, what would a failure look like?

After World War II, the Fed became increasingly ambitious about managing aggregate demand, and then its ambitions metastasized. While it has a lot to be modest about performing its core responsibility – preventing inflation – the Fed seems to think that monetary policy is suited to solving non-monetary problems. The Economist recently lamented “an insidious shift among central bankers globally”, a desire “to take on more glamorous tasks” than managing the economic cycle, tasks such as reducing social inequality by designing a “equitable” distribution of income through “inclusive” growth. ” And “sustainable”, i.e. fine-tuning the Earth’s climate (the Securities and Exchange Commission, too, wants to get in on the hype action: it has designed disclosure requirements “related to the climate” for registrants).

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Last year, about 15% of Fed research papers were about inequality. Inequality is, however, a social outcome influenced by fiscal and 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’s fair to say, intentionally — have increased wealth inequality. Low rates serve sophisticated financiers: such rates send torrents of money in search of higher returns on the stock market. Most stocks are owned by the wealthy.

John Cochrane of the Hoover Institution, who blogs as the Grumpy Economist, wrote: From March 2020 to early 2021, the Treasury and the Fed created $3 trillion and sent checks to people, then borrowed 2 Trillion more dollars and sent more checks. This “stimulus” – $3,200 per adult, $2,500 per child, $659 billion for small businesses, etc. – boosted 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 for dinner or book a flight, especially if those services are suspended by government decree. For the economy, a pandemic is like If you send lots of money to people when the snow is falling, you won’t get activity in the snowdrifts, but you will get inflation once the snow clears.

Thus, there was a promiscuous stimulation of an economy whose already strong recovery was fueled by consumers spending the savings they had accumulated during the pandemic. The people at the Fed who are paid to know more were surprised that inflation ensued.

The Fed’s primary job, Cochrane wrote, is “to understand the supply capacity of the economy and to fill – but not too much – the demand cup.” Blaming disrupted supply chains for inflation is akin to an army blaming a lost war on the enemy attacking. “If the Fed is surprised that containers can’t pass through ports,” Cochrane asked, “why aren’t any of its thousands of economists calculating how many containers can pass through ports?” Perhaps because the Fed’s focus is too scattered, on “sustainability”, “inclusive” growth and all that.

A certain epistemic humility on the part of the Fed would be welcome. Epistemology is the field of philosophy concerned with the nature and limits of human knowledge. Regarding inflation, the Fed has a lot to learn about its nature and its limits, without indulging in excessive ambitions to administer social well-being.

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