- - Tuesday, February 15, 2022

President Biden wants to radically change the Federal Reserve to be more pro-inflation and a sandbox for woke industrial policies with his four choices for the Board of Governors.

The Fed has a mandate to maintain stable prices and maximize employment. Until Chair Jerome Powell, whom Mr. Biden has nominated for reappointment, managing the tradeoff between those goals was accomplished by pulling back on credit as inflation approached 2%.

Mr. Powell shifted the focus to tolerating more inflation to promote a hot labor market, and we need only look outside to see where that gets us. Inflation is ripping at 7%, workers getting clobbered as more wages lag inflation and bankers reaping huge paydays in a hot asset market.  

Now the Fed faces a “Sophie’s Choice” — high interest rates in the manner of Paul Volcker and a tough recession to bring inflation down to 2% or half measures, in the manner of Arthur Burns and William Miller, which culminated in 12% inflation.

Mr. Powell’s easy money was in part compelled by the pandemic and $5 trillion in stimulus spending. However, when economists warned Mr. Biden’s $1.9 trillion American Rescue Plan was overkill, Mr. Powell did not have to continue purchasing so many U.S. Treasuries and mortgage-backed securities with printing press money.

The Fed could have forced the Treasury to finance more of that spending through sustained borrowing, instigating higher interest rates on 10-year Treasuries and other long bonds. That would have curbed excess private demand from colliding with COVID-induced supply chain problems and stocking inflation.

Board nominees Philip Jefferson and Lisa Cook — renowned economists but whose academic work focuses more on social justice and race than accomplishing the Fed’s mandate — can be expected to add to the pro-inflation wing at the Fed.

Along with four more years of Mr. Powell that would institutionalize easy money, enable asset bubbles, poor investment choices and slower long-term economic growth — and undermine the credibility of the dollar as an international standard of value. 

Central banks, private financial institutions and businesses around the world hold reserves in U.S. treasuries and conduct business in dollars because of the stability of our currency. A high inflation American economy would lead to adoption of some other asset like Facebook’s stillborn Libre.

It could provide a digital asset anchored in a basket of currencies and serves as an international standard of value and inexpensive means for cross board trade and investment. That would undermine the commercial and foreign policy advantages the reserve currency status of the dollar affords the United States.

For too long now, the Fed has been creeping toward becoming a piggy bank for advocates of industrial policy — potentially subverting the market allocation of capital.

Since the 2008 Financial Crisis the Fed has radically expanded its purchases of mortgage-backed securities, propping up housing prices, rents and inflation. In 2010, Congress raided the Fed’s profits to establish the Consumer Financial Protection Board and, in 2015, to help fund a highway bill. Members of Congress have advocated expanding that abuse to using Fed profits to fund public transit and the arts.

Now, Mr. Powell is poised to impose climate change stress tests in evaluating bank risk exposure. That’s better left to insurance companies and stock analysts than the apparatchiks in the bowels of the Fed.

Mr. Biden’s nominee Sarah Bloom Raskin for vice chair for regulation recently advocated steering lending to promote green industries. She criticized the Fed for opening its lending window to all investment grade businesses during the pandemic and asserted it should have excluded the petroleum industry.

Such policies would limit gasoline and natural gas production before solar powered electrical generation and electric vehicles can meet the demand — creating shortages and high prices.

Similarly, pressures will mount for the Fed to use its lending powers to accomplish progressive social policies that the Biden administration can’t push through congress. And with the Fed’s chief bank regulator and several board members expressing preferences for environmental and social justice over sound monetary policy, banks and pension funds will steer credit.

On another front, a digital dollar is coming and those should move household checkbook balances to the Fed from banks — greatly reducing the transactions costs we bear from using Visa and Mastercard. To protect banks — much like a man trying to outlaw automobiles to protect the horse — Mr. Powell’s Federal Reserve is saying that is not possible.

The Fed may need more diversity but other than the very wise choice of Lael Brainard, Mr. Biden’s nominees don’t measure up. He could find women and minorities to serve with solid monetary policy credentials and lacking harmful prejudices.

• Peter Morici is an economist, emeritus business professor at the University of Maryland and national columnist.

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