He isn’t especially bothered by global warming. He doesn’t think monetary policy has very much, if anything, to contribute to combating racism, promoting gender equality, or making the world a fairer place. And he doesn’t want to go to war with Wall Street, or bring any billionaires to heel. By re-appointing Jay Powell, a Republican first chosen by Donald Trump, as chairman of the Federal Reserve, Joe Biden has finally stood up to the Democratic party’s left wing. And yet, perhaps without realising it, Biden is also setting up what will sooner or later turn into an epic fight with the central bank over economic policy. This is a battle that could make or break his presidency.
After all, there is no more important position in the global economy than the chair of the Federal Reserve. The person running the central bank of the United States controls what remains the world’s reserve currency. He or she can’t exactly dictate what will happen to interest rates, currencies, bond yields and stock markets around the world. But they have a heck of a lot more influence than anyone else. This is why the appointment of Powell matters.
With the post up for re-appointment, the left of the Democratic party – which has so far been in complete control of Joe Biden’s administration – was campaigning for someone who would radically reinvent the Fed, by focussing on issues such as climate change, racism, sexism and inclusiveness. Perhaps, most of all, they wanted a person who would enthusiastically finance the wild spending the administration plans with a flood of printed money.
They'll be sorely disappointed by Biden's choice: instead, they are getting a fairly traditional, cross-party, independent central banker who worries about stuff like the money supply and the stability of the banking system. For the first time since he took office, Biden had finally managed to stay awake for long enough to face down the left of his party, and make a consensual, centrist appointment.
The markets already like that. Powell is a familiar figure, and he is committed to stability. And yet, while Biden may not realise it, he is also setting up an epic fight with the Fed.
Inflation in the United States is starting to run out of control. It hit 6.2 per cent this month, its highest level since 1990, and it shows little sign of coming down any time soon. There is not any real mystery about the reason why. Biden’s coterie of radical economic advisers, egged on by cheerleaders such as Paul Krugman in the New York Times, have embarked on an epic spending spree, financed by printed money. Cash has been sprayed around as if he has no meaning, with little thought given to how it will all be paid for.
Not surprisingly, all those extra dollars have led – not to higher productivity, or a revival of manufacturing as Biden’s clique hoped – but to higher prices and soaring asset markets. As a result, at some point, Powell is going to have to hike interest rates, and sharply, to bring that under control. The Fed doesn’t have any magic wand to control inflation. In the words of one of the most famous holders of the office – William McChesney Martin, who ran the bank from 1951 to 1970 – it simply ‘takes away the punchbowl just as the party is getting started’. When that happens, the US will be pushed into a recession. The left will blame Powell – and eventually Biden will have to choose between backing the central bank or, once again, giving in to the left of his party.