By James Pethokoukis
Although President Biden’s nomination of Jay Powell to a second term as Federal Reserve chair may irk some on the far left, the selection has plenty of bipartisan support and Powell is expected to easily win confirmation with bipartisan backing. Wall Street also seems basically fine with the Powell pick. Investors see him as a known quantity and think they have a pretty good handle on his views. As JPMorgan told clients Monday morning, “Today’s news implies policy continuity, of course, and removes a source of uncertainty.” A similar message from Goldman Sachs: “The continuity in Fed leadership likely signals continuity in the current monetary policy stance, and we continue to expect liftoff shortly after tapering ends, with the first hike in July 2022, the second in November, and a pace of two hikes per year thereafter.”
That the Powell pick was expected doesn’t detract from its importance. The Fed is the most important central bank on the planet. And that makes Powell one of the most important economic policymakers on the planet. It’s a big job, although in the past some have suggested it would be best performed by a computer. And not just the top job. Perhaps a computer program should be the one raising and lowering interest rates, not a group of Fed governors and regional Fed bank bosses.
Perhaps the most well known proponent of this idea was Nobel laureate economist Milton Friedman. He favored the Fed increasing the money at a constant rate — “same number, month after month, week after week, year after year,” he once said — which is a job for machines rather than people. An updated version of this idea has been proposed by economists who want the Fed to target nominal GDP via a futures market. Again, with such a straightforward target, a computer could do the job.
But the Fed’s job seems to be getting more complicated, not less. In addition to the current statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates, there are calls for the central bank to take into account economic inequality, climate change, and racial equity. And I suppose some AI program could make an attempt to run a monetary policy that hews closely to such expansive, all-of-the-above goals. Indeed, it may require a silicon-based lifeform to do so given the carbon-based ones have historically had a difficult time managing the existing approach. And if that’s the case this time around — Powell, if confirmed, may also have a historically difficult task ahead given the strange economic circumstances of a post-pandemic environment — maybe the wisdom of a narrower Fed focus will be reaffirmed.