Update 413: Far from New Hampshire,
The Fate of the Fed Board and Policy Debated
I suppose we should count ourselves lucky. When it came time to nominate a Chair of the Fed, Trump, in a moment of defiance, decided to fire Janet Yellen in 2017 in favor of… Jerome Powell, an Obama-appointed Fed Governor who embraced the Yellen doctrine. Since then, the luck has held. Trump’s Fed nominations have been heterodox and extreme. But unlike his rubber-stamped judicial nominations, they have been routinely rejected by the Senate.
Below, we cover this week’s Humphrey-Hawkins hearings in Senate Banking and House Financial Services with incumbent Fed Chair Powell as well as the confirmation hearing of his putatively prospective replacement, Fed Board nominee Judy Shelton, whose confirmation hearing in Senate Banking will make news today.
Happy Presidents’ Day long weekend…
Today, the Senate Banking Committee held a nomination hearing for President Trump’s two nominees, Judy Shelton and Christopher Waller, for the Federal Reserve Board of Governors. In a recent update, we summarized how these nominees will likely follow Trump’s demands to keep interest rates low. Both Republicans and Democrats are skeptical of Shelton for her controversial stances on monetary policy and central banking independence. At the moment, the Committee has not yet scheduled a vote for the nominees.
The nominations come on the heels of the semi-annual Humphrey-Hawkins hearings held in the House Financial Services and Senate Banking Committees on Tuesday and Wednesday, respectively. Last Friday, the Fed released its Monetary Policy Report detailing the overall state of the economy.
Unemployment remains low, GDP growth is moderate, and the Fed forecasts that it will not change interest rates this year. Fed Chairman Jerome Powell testified before the Committees and fielded questions on the report. Democrats’ questions covered a myriad of topics, many of which were only tangentially related to monetary policy. Congressional Democrats appeared to lack a clear vision for central bank policy but implored Powell to serve as a partner in carrying out policies across their economic agenda.
Fed’s Role and Inequality
In Tuesday’s HFSC hearing, Powell faced questions from Rep. Gregory Meeks on why the economic growth of the last decade has largely failed to materialize for both rural and minority communities. Powell noted that low- and moderate-income workers have begun to see their wages rise, which he attributed primarily to low unemployment and a strong labor market. While he avoided taking a stance on minimum wage policy, Powell said state-level minimum wage increases contributed to this development.
When Rep. William Lacy Clay asked about the role that the Fed can play in mitigating deep-seated economic inequality, Powell again acknowledged the problem but emphasized the need for the Fed to stay in its lane: using monetary policy to maximize employment and stabilize prices.
On Wednesday in the Senate Banking Committee, Ranking Member Sherrod Brown pressed Powell on the misleading nature of aggregate statistics, contrasting low unemployment figures with historically-high household debt and alarmingly-low personal savings. Ranking Member Brown cited the Fed’s own research which found that 40 percent of Americans don’t have the cash to cover a $400 emergency expense.
Sen. Jack Reed asked what policy tools the Fed can use to combat the rise in economic inequality. Powell responded that the Fed’s primary policy tool is the interest rate but highlighted two inequality-related issues that policymakers should address:
- A lack of economic mobility (especially when compared to other developed countries).
- Wage and income stagnation for low- and moderate-income workers.
Powell traced both issues to insufficient education and workforce development policy. He noted that while the Fed is doing what it can with its current tools, it’s incumbent upon Congress to use fiscal policy to make long-run changes.
Fed Mandates: Necessary but Sufficient?
When Congressional Democrats pushed Powell during the hearings to expand the Fed’s policy portfolio, he often stated that the Fed must focus on fulfilling its dual mandate. Democratic advocates for lower interest rates have argued that the Fed has traditionally erred on the side of trying to achieve price stability at the expense of maximum employment.
Rep. Ayanna Pressley addressed this issue directly in the House hearing, noting that the Fed raised rates from 2015 to 2018 while inflation was still below the Fed’s two percent target. She pointed out that these rate hikes came at a time when black unemployment was still double that of white unemployment.
Powell acknowledged during the hearing that inflation has consistently fallen below the two percent target even with interest rates at historic lows. In response to Rep. Pressley, Powell argued that the rate hikes were necessary to bring interest rates in-line with an expanding economy.
During Powell’s hearing in the House, Trump tweeted that Powell’s testimony led to a drop in the Dow. Unsurprisingly, Fed independence emerged as an inescapable issue. Since his first year as Chairman, Powell has endured consistent criticism from the President despite lowering interest rates three times. The issue got more attention in the Senate where both Republicans and Democrats stressed the importance of Powell maintaining the Fed’s independence over monetary policy.
The Senate’s bipartisan focus on independence may be a signal for how some Senators are thinking about Trump’s two nominees to the Fed Board. Senators might be particularly worried about Shelton’s ability to remain independent given her willingness to shift her long-held hawkish stance on interest rates to now align with President Trump’s dovish position.
No Stone Left Unturned
Beyond the three issues outlined above, Democrats touched on a litany of other topics related to their policy priorities.
- Community Reinvestment Act (CRA): In December, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) proposed changes to the CRA which in part would change the metric that determines if banks have met their CRA obligations. Democrats fear that the proposed rule changes will lead to less direct investment in low- and moderate-income communities. Notably, the Fed decided not to join the OCC and FDIC’s proposals. Powell refrained from making any direct critiques of the other regulators, instead stating that they will carefully review the public’s responses during the comment period.
- The Fed’s Plan for LIBOR: LIBOR, the long-used interbank interest rate, will no longer be published after 2021. This prompted the Fed in 2017 to spearhead the creation of the Secured Overnight Financing Rate (SOFR) as a new reference rate. Powell stated that U.S. banks are planning to transition off of LIBOR by the end of 2021. House Democrats expressed concern that the Fed is operating on a tight timeline and is behind British regulators who are planning to transition off of LIBOR later this year.
- Climate Change as a Systemic Risk: While policies related to climate change are far from the Fed’s purview, Powell admitted that climate risk has begun to factor into the central bank’s regulatory agenda. In both hearings, Powell mentioned climate-related stress tests being performed by the Bank of England and stated that the Fed is monitoring these processes very closely.
Congressional Democrats should consider expanding the Fed’s mandate if they want the central bank to be more active in addressing issues like economic inequality. Powell consistently explained that the dual mandate constrained his ability to act in other areas. Shelton’s nomination poses the risk that we may have a more active Fed in the future that only seeks to fulfill President Trump’s agenda. If she’s confirmed, one has to expect Shelton will be at the top of Trump’s list to replace Powell as the Fed Chair.