Jerome Powell is Unqualified to be Fed Chair

     Jerome Powell has been nominated by Trump to be Chairperson of the Federal Reserve. Now for Trump, who is an ignorant dim-wit on a good day, Powell is not horrible. But he is nevertheless unqualified for the position. His most relevant experience is the fact that he is currently a member of the Board of Governors of the Fed, a job that he was, at the time, even more unqualified for. Powell doesn’t have any economics degrees. He has a BA in political science and a JD, so nothing relevant.

     Some may argue that his experience in Wall Street banks is relevant and qualifies him for the job. But that’s like saying my experience in economics qualifies me to be an investment banker; it just isn’t so. Business and economics are not the same, just as finance and monetary economics are not the same. The job of the Federal Reserve is to stabilize the macroeconomy. Banks only matter in this because they expand the broad money supply through lending and fractional reserve banking. If the banks all crash at once the money supply shrinks and so does the economy. But if the Fed cancels out the monetary effect of a banking collapse through expansionary policy, the banks are irrelevant in a macro sense. The ins and outs of finance don’t matter here just as the retail sector doesn’t, but the ins and outs of monetary economics do.

     Ben Bernanke is one of the world’s leading monetary economists, and indeed made similar arguments before he was Fed chair (while he was Fed chair he adopted the Board’s views as his own to minimize panic rather than admit the other idiots on the Board (many of whom were appointed by Obama) were keeping him from doing what he would have preferred). Paul Krugman said the same thing before he turned pop. You may think finance matters because the Fed manipulates interest rates. But interest rates are merely a symptom as well as a communication tool so that all the chumps, such as bankers, who would otherwise be hopelessly lost vaguely know what the Fed is saying. When the Fed says it is going to increase interest rates, it really means it is going to tighten monetary policy such that nominal interest rates rise to x level in the short run, and vice versa.

     Here’s an example of why Powell is unqualified: earlier this year Powell said below target / low inflation was a “kind of mystery” given low unemployment. Any economist should know that there is not a stable relationship between unemployment and inflation over time (see graph). In the 1930s there was high unemployment and inflation, same with the 1970s. 

     Here’s why it isn’t a mystery. There is what economists call the “natural rate” of unemployment. The labor market will tend towards this rate in the long run. Say you have a massive recession and tight monetary policy, or that monetary policy doesn’t loosen past a certain point because of a mistaken belief in the “zero lower bound”. Unemployment won’t stay above the natural rate forever, people will be willing to work for less rather than make nothing. The economy will add jobs and inflation will stay low because monetary policy isn’t expansionary enough for it to increase. That is the Great Recession recovery in a nutshell. It certainly isn’t a mystery that inflation has been slow to increase while the Fed has been tightening monetary policy, which it’s been doing ever since it started tapering QE3. This isn’t a mystery to me because I’ve studied economics. How should one run a bank? I have no idea, beyond lend at a higher rate than you pay depositors and supply a level of output such that MC=MR. 

     You know who is qualified to be Fed Chair? Janet Yellen. She's a PhD economist[1],and has one of the most successful records of a Fed Chair. Inflation is about at the Fed’s target, unemployment is low, and this expansion is almost the longest in US history. And she has, so far, succeeded where all other rich world central banks have failed: tightening monetary policy after the Great Recession. The Euro Zone central bank tried to and had to backtrack, as did Sweden's central bank. I know we would disagree on theory here and there, but you can’t argue with results. That she was not re-appointed is a break with recent tradition among presidents, since Reagan, of keeping the prior appointee for another term[2].

     In arguing that Powell is a safe pick, pundits point out how similar his voting record has been to Yellen [3]. So why replace her? In addition to Trump despising powerful women and having no qualms about politicizing independent institutions, Powell is a Republican former Wall Street banker seen as softer on bank regulation, which Trump’s Wall Street patrons like. What could go wrong? Powell’s lack of relevant knowledge won’t matter much in “normal” times, but he may be lost in a crisis, at the mercy of whoever he believes is making the strongest argument about a subject he is ignorant of.

     That being said, he is the least worrisome of the speculated contenders (besides Yellen), and certainly not the worst appointment Obama made to the Board.






1. Not that it matters to her qualifications but she is also married to a Nobel Laureate economist, the famous (to economists) George Akerlof.

2. In fact, the last president to replace a Fed chair in their first term was Jimmy Carter. He replaced the incompetent G. William Miller because of his poor record in handling the high inflation and unemployment of the 1970s. Miller was also the last chair to have not been an economist. Again, what could go wrong?

3. In fact he hasn't dissented from a single majority decision at the Board.