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Musical Chairs Federal Reserve Style

Most people know about the game of musical chairs. The aim is to occupy a seat each time the music stops. Each round begins with N people and N-1 chairs. Music plays and then randomly stops. Each player attempts to be seated. Each turn, one person (the one unseated) leaves the game. So does a chair. The person in the last remaining chair is the winner.

Musical chairs at the Federal Reserve is similar except, except the loser occupies the chair when the music stops. I believed Ben Bernanke would win this game back when the economy collapsed. However, Mr. Bernanke kept the music playing, but only at the expense of future Fed Chairs. Nothing was solved; matters were merely papered over (electronically these days).

We are at another crisis with Jerome Powell in the chair. Inflation is at 40-year highs and his options are few. His odds of escape are lower than any prior Chair, arguably not because of his doing but as a result mostly of his predecessors.

Should we feel sorry for Mr. Powell? In the sense that his actions as Chair did not cause these problems, the answer is “Yes.” In another sense, probably not. Mr. Powell was not some rookie new to the workings of the Federal Reserve or the financial conditions of the country. He joined the Fed in 2012:

Jerome H. Powell first took office as Chair of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term. He was reappointed to the office and sworn in for a second four-year term on May 23, 2022. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System’s principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028. [source]

Chris Leonard pointed out the following in an interview with Matt Taibbi:

You’d look at the arguments that Jay Powell was making, … in 2012, 2013, 2014. He was planning out that if the Fed didn’t restrain itself, if it didn’t stop trying to juice the market so much, if it would just raise interest rates a little bit, it would give itself more room to maneuver when trouble inevitably arose, when the rainy day eventually came, when there was economic slowdown or when there was inflation. But, he was ignored at that time. And then, as you know, he changed his tune and shifted over to the easy money theory.

Powell in the early days was not a lone voice. Thomas Hoenig routinely disagreed with Fed policy and does so to this day. Mr. Leonard summarizes the current problem for the Fed:

The Fed is now in a vise. Inflation is rising faster than the Fed believed it would even a few months ago, with higher prices for gas, goods and automobiles being fueled by the Fed’s unprecedented money printing programs. This comes after years of the Fed steadily pumping up the price of assets like stocks and bonds through its zero-percent interest rates and quantitative easing during and after Hoenig’s time on the FOMC. To respond to rising inflation, the Fed has signaled that it will start hiking interest rates next year. But if that happens, there is every reason to expect that it will cause stock and bond markets to fall, perhaps precipitously, or even cause a recession.

I believe Mr. Leonard may be too optimistic in the above forecast.

Powell’s Change

Powell knew the condition of the banking system and the economic prospects his appointment as Chair in 2018. Did he believe he could apply his magic to fend off the inflation which was inevitable? Was he co-opted by the political class? These valid questions are unanswerable unless Mr. Powell decides to reveal them in his memoirs.

Clearly, he did not foresee the Covid crisis and the willingness for government to spend monies it did not have in amounts never before seen. In this  panic (real or engineered) he was the only one keeping the government solvent.

However, this “victim of circumstances” condition loses credibility when Powell sought a second term as Chair. President Biden re-nominated him in late November 2021 over the preferred Democrat candidate Lael Brainard. Two questions, without answers, are obvious:

  • Why did Biden choose Powell over Brainard?
  • Why did Powell accept Biden’s re-nomination?

Only speculation is possible regarding either of these. However, the most interesting aspect of this situation is that the re-nomination came after Powell knew the Biden Administration and its commitment to spending well in excess of tax revenues. Clearly as a trained economist with much experience at the Federal Reserve, he knew what he was being asked to do.

Did he sell out? Did he believe he could temper the deficit spending? Or was something else in play?

I have no idea, but I do know neither the re-appointment nor the acceptance of same make no sense given the history of the man.

I can understand why Joe Biden doesn’t mind replacing Herbert Hoover as presiding over the next Great Depression. Chalk that one up to “ignorance is bliss.” But why would Powell risk becoming the Herbert Hoover of the Federal Reserve?

A version of this article appeared on American Thinker.