Raised in a white-collar Washington suburb, a product of prep schools, elite colleges and the 1% world of private equity, Jerome Powell is an unlikely candidate to tilt U.S. monetary policy toward the working class.
But just as former Federal Reserve chair Paul Volcker changed U.S. central banking to fight inflation in service of the larger economy, so Powell, the current Fed chair, has seized the moment to ease up on that battle and, if a new Fed approach works as expected, register economic gains for a broader set of Americans through more jobs and better wages.
If it sounds more humanist than “central bank,” the underpinnings nonetheless are deeply practical.
They rest on a decade’s recognition that inflation is much less of a threat than in Volcker’s day, on changes in Powell’s own perspective from his first years as a Fed governor, and on research about how persistent inequality can cause larger economic damage. In the background, workers and labor groups scarred by the 2007 to 2009 financial crisis pressed for a different approach from the central bank.
“The Fed has come to its common senses,” recognizing that higher employment should be recognized as a good thing not treated as a risk, said William Spriggs, a Howard University professor and chief economist for the AFL-CIO. A frequent participant in Fed events, Spriggs made the case for the central bank to let labor markets “run hot” so the benefits of economic growth would be more broadly spread.
“It’s clear. The days where the Fed Chair’s primary role is to pull away the punchbowl from the labor market just as things start going well should be seen as decisively over,” said L. Josh Bivens, research director at the labor-focused Economic Policy Institute, referring to a metaphor coined by a former Fed chair, William McChesney Martin, to describe how the central bank acts to contain inflation. “It is a very welcome acknowledgment about how much more room they have to probe the absolute limits of full employment,” Bivens said.
In acknowledging those arguments Powell echoed the language now more frequently heard that racial, ethnic and other economic disparities are more than just morally suspect. Indeed, as Powell said Thursday, they “weigh on the whole economy.”
“I WOULD HAVE BEEN SURPRISED”
The change comes at an opportune time. Thriving stock markets amid massive, pandemic-related unemployment and a national debate about racial justice have drawn attention to Fed policies as possible drivers of inequality.
The Democratic party platform for the November presidential election suggests, for example, making the Fed take explicit account that the unemployment rate for blacks is historically about twice that of whites. That divide began to narrow as the unemployment rate dropped to historic lows last year, and the new Fed framework now downplays the notion that unemployment could get too low.
If the framework change was driven by the low risk of inflation, it is also “an incredibly pragmatic approach,” said Adam Posen, president of the Peterson Institute for International Economics. Under the Fed’s prior framework, centered around an almost ironclad trade-off between employment and inflation, “they were leaving employment gains on the table,” Posen said. “This is a move away from fancy rules, abstract concepts, and it is absolutely justified.”
It was no spur-of-the-moment shift.
Since he was appointed to the Fed board in 2012, in fact, Powell has steadily moved from centrist Republican concerns about government debt and inflation to embrace the view that there was more “slack” in the economy – the Fed’s euphemism for people not working – than generally recognized.
A graduate of elite schools – Georgetown Prep, Princeton University and Georgetown University Law School – Powell was a well-known figure in Washington for his prior work in the government, at the Carlyle Group private equity firm and at the Bipartisan Policy Center think tank. He made clear early in his tenure that he would challenge some of the standard thinking at the central bank – bringing a lawyer’s critical thought, a deal maker’s practicality, and a non-economist’s skepticism into the room.
In a speech two years ago at the Fed’s Jackson Hole summit, he laid out why he felt some of the core concepts relied on by the economists at the central bank weren’t much help in setting policy. It was a step toward the new framework announced on Thursday, at this year’s virtual version of the same annual symposium.
His partner in devising it: Vice Chair Richard Clarida, a former managing director of the global bond giant PIMCO.
“If you had told me who would have made the biggest, let’s just call it progressive step, in changing monetary policy, and told me the background of these two, I would have been surprised,” Bivens said.