The Federal Reserve must fight its own battles
Getting involved in other political fights will undermine the credibility of America's central bank – and that could affect us all, says Matthew Lynn.
With inflation at its highest level in 30 years, the global economy struggling to recover from the pandemic, and now with a conflict in Ukraine threatening to send commodity prices spiralling upwards, you might think that the Federal Reserve, still the most important player in global finance, had enough on its plate already.
Yet US president Joe Biden is busily appointing a series of woke warriors to its board to see that it is also tackling climate change, promoting inclusion, diversity and gender awareness, and sorting out reparations for slavery. By politicising the Fed, Biden risks destroying its credibility – and that matters for the whole of the global economy.
The Fed goes woke
The Fed, like other independent central banks, was always meant to be beyond politics. Its role was to maintain the stability of the banking and financial system, and keep employment high and the economy expanding, so long as those objectives didn’t undermine the key priority of price stability. It was a narrow, technocratic remit. Indeed, staying out of politics is part of the reason for its success. It is precisely because individuals, companies and investors believe in the Fed’s neutrality that they have confidence in it.
Biden and his advisers are now intent on undermining that. True, he reappointed Jay Powell, a Republican, as chairman to lead the bank. But the rest of his appointments are proving more controversial.
Sarah Bloom Raskin, for example, has been nominated to the key post of Fed banking regulator, making her one of the most powerful figures in global finance. And yet Raskin is best known for her radical views on central banking and climate change, arguing that financial institutions should distance themselves from any form of financing of fossil fuel and that, if they don’t move quickly enough, the Fed should punish them. “Raskin’s views would have devastating consequences” for the energy industry, a Republican senator said at her confirmation hearings.
Biden has also nominated Lisa Cook to the board of the Fed, an economist who has campaigned for slavery reparations, among other trendy causes.
One needn’t disagree with the politics to see the problems. First, the issues are a distraction from the main task. Running a central bank is never an easy task, even at the best of times. The history books are littered with policy blunders that often had catastrophic consequences, from the Great Recession of the 1930s, to the inflation of the 1970s, to the financial crash of 2007 and its aftermath.
Plotting the right path between monetary policy that is too tight and too loose is far from easy. Nor is keeping on top of a complex financial system, with liabilities that may crop up anywhere, a simple task, no matter how many experts are on the team. These are especially trying times right now. The Fed should focus its mind and leave dealing with climate change to others.
Why neutrality matters
Second, the politics may well undermine the Fed’s credibility. A central bank often has to make unpopular decisions. It might have to raise interest rates sharply even if stockmarkets are tumbling, or unemployment is rising, or homes are being repossessed and companies are going bankrupt. It can probably manage that so long as everyone accepts that it is a neutral institution doing its best to manage the economy. If people start to see it as the agent of a particular brand of politics, then that is not going to work any more. The legitimacy of the Fed will start to ebb away, and once that starts to happen it is in big trouble.
A central bank is meant to be a neutral custodian of the financial system and the economy, keeping inflation under control and supervising the banks. None is more important than the Federal Reserve. It is the custodian of what remains the world’s reserve currency and the anchor of a financial system that takes in most of the world. This is no time to undermine its credibility – and weaken the dollar as the lynchpin of global financial markets.