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The Fed's Powell will have to play politics to keep his job

The Federal Reserve has always been a political entity. And Fed Chairman Jerome Powell knows if he wants to keep his job he will have to play politics this election year.

It’s time to put to rest the naïve belief that the Federal Reserve under Chairman Jerome Powell is apolitical or data-dependent. It’s neither, and its behavior proves it. The political pressure on the Fed has turned it into just another arrow in the quiver of the big spenders in Washington. 

When Powell was up for renomination, he dutifully kept interest rates below 1% percent and exploded the Fed’s balance sheet, barely keeping it below $9 trillion in an unprecedented act of money creation. When asked about raising interest rates three-quarters of a percent in the face of 40-year-high inflation, Powell said such a move was off the table and called inflation "transitory." 

Once the Senate confirmed him for a second term as chairman, however, Powell promptly delivered four of those three-quarter-percent interest rate hikes in a row and began reducing the Fed’s balance sheet to belatedly fight runaway inflation. 


Why wait until after he was reconfirmed to raise rates aggressively and reduce the money supply? It’s because the short-term effect of such moves by the Fed tends to be a slowdown in economic growth, including a rise in unemployment. 

Shutting off the spigot of printed money also tends to pop asset bubbles and expose problems caused by artificially low interest rates. That’s precisely what happened in March 2023 with a series of bank collapses. 

Such an emergency might have derailed Powell’s confirmation. 

Likewise, if he had allowed interest rates to rise to their natural level in the face of multi-trillion-dollar federal deficits, the economy likely would’ve ground to a halt as government spending crowded out the private sector. The cost of servicing the federal debt would have quickly reached stratospheric levels even beyond today’s $1 trillion annualized rate. 

Keeping interest rates too low for too long allowed government and consumers alike to engorge their debt balances. That fueled spending, but it also set up an eventual collapse. 

Powell even warned about this exact phenomenon in October 2012 when he warned that artificially low interest rates were "actually at a point of encouraging risk-taking, and that should give us pause" as the Fed was creating a "bubble … that will result in big losses when rates come up down the road." 

Clearly, Powell knew what he was doing, but his choice was as clear then, as it is now. 

Former President Donald Trump, whose nomination seems a fait accompli, has publicly pledged to replace Powell. Thus, Powell’s future at the Fed depends on Biden’s reelection. 


Returning to low interest rates and money creation will provide a short-term boost to economic growth and likely stave off the exposure of deeper problems in the banking sector. Of course, this will also have the delayed effect of reigniting inflation, but likely not until 2025, after the election. 

The late economist Milton Friedman compared money creation’s devil-angel nature to alcoholism, with the hangover arriving well after the initial buzz. Likewise, the pain of sobering up comes before the benefits of sobriety. 

Powell should help America detox from the easy-money binge, but his incentive is to give her the hair of the dog in the form of low interest rates and freshly created money. 

Some may think this scandalous and novel, but we often forget that bureaucrats are people, susceptible to incentives like everyone else. And America has been here before. Today’s Fed is likely repeating the catastrophic mistakes of the 1970s. 


When it had nearly vanquished inflation, the Fed returned to creating money. That brought even worse inflation, and necessitated Fed Chair Paul Volker’s shock treatment, which made the back-to-back recessions of 1980 and 1981-82 ones for the record books. 

It was as if Volker was trying to atone for his mortal sin of persuading President Richard Nixon to end the gold standard almost eight years to the day before he took the helm at the Fed. For the eight years thereafter, while the Stars and Stripes hung over the Eccles building, Volker might as well have flown the Jolly Roger – he took no prisoners. 

That was likely why even President Ronald Reagan couldn’t stomach Volker and replaced him with Alan Greenspan in 1987, a man whose easy-money policies eventually created the first too-big-to-fail bailout by the Fed (Long Term Capital Management) and housing bubble with the subsequent financial crisis. 

People like Powell are the rule; even Volker was only the exception later in his career. Perhaps that’s the best argument why institutions like the Fed should have as little power as possible. 


E.J. Antoni is a public finance economist at The Heritage Foundation and a senior fellow at the Committee to Unleash Prosperity.

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