Does Fed Chair Jerome Powell Deserve All the Criticism He's Getting?

The Chairman of the Federal Reserve, Jerome Powell, is powerful, smart, wealthy, and certainly not immune from criticism in terms of his actions as Fed Chair. However, right now, I find myself actually feeling sorry for him. It seems he made the mistake that many have made before: underestimating the capacity of politicians for finger-pointing and blame-placing when things go wrong.

Not long after he was appointed by Donald Trump he was attacked by his “benefactor” for not cutting rates quickly enough, which, given the current state of the Republican party, meant that every Republican turned on him, regardless of how they really thought about his performance. He won kudos from Democrats for that, and he was reappointed by Joe Biden. Now they too have soured on him, and he has Senator Elizabeth Warren publicly calling for his ouster. I am tempted to say that anyone who is being attacked from the Left and the Right is doing something right and just leave it at that, but the political bickering here risks causing a real problem.

As I have pointed out before, bank crises are about confidence. We seem to be on the edge of an actual crisis now, but the actions of the Fed and the Treasury, along with major banks, have reportedly avoided big runs on banks outside of the few that have already failed. That will, given time, stabilize things, but it will not be the case if the critics win, and Powell is sacked or forced to resign soon.

Politicians, both on the left and the right, inevitably feel that they must blame someone now that there are problems in the banking sector to go along with declining growth as the Fed raises rates in a so far unsuccessful attempt to fight inflation. Whether their criticism is of him for keeping interest rates too low for too long, or being too slow to cut in the first place, or going too far with deregulation, or not far enough with deregulation, or failing to stop QE quickly, or stopping it too quickly, it is clear to everyone in Congress right now that it is all Jay Powell’s fault.

It is not, but there is plenty of blame to go around. Gutting Dodd-Frank just ten years after the global financial system came so close to a meltdown, one that was made worse if not caused by lax regulation of banks, was a classic case of not learning from previous mistakes; or maybe it was about deliberately ignoring the obvious in the pursuit of an ideology. Whatever the reason, Powell was complicit in that deregulation. He was also guilty of maintaining policies of easy money for what now looks like too long, and thus facilitating big chunks of spending and a massive increase in the national debt, so the criticisms from both sides truly do have some validity.

However, leveling them at him now and calling for his head in order to score some imaginary points in the game of politics is irresponsible and dangerous. Lord knows, I have been critical of Powell in the past and in many ways, I am loathe to defend him. But right now, he needs our support if we are to avoid chaos. What was basically some predictable problems caused by bad risk management and over-speculation at a couple of small banks is in danger becoming a full-on banking crisis. What is holding it together is confidence in the Fed. As it stands, the world seems prepared to believe that they have this under control, but harping on about old grudges against the Chair right now risks undermining that belief. And if confidence in the Fed collapses, so does the banking system.

Once we are out the other side of this, there will be plenty of time to apportion blame, and there will be plenty of blame to go around. For now, though, let's just accept that Powell and the Board are doing a difficult, unpopular job to the best of their abilities. It may be their past mistakes that made that job more difficult than it needed to be, or it may be the fault of politicians pushing a failed ideology or trying to buy votes. Whoever is to blame, though, throwing stones right now is not a risk we should be taking in pursuit of any kind of political advantage.

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