Jay Powell: The Political Central Banker We Need

Powell does not consider himself a politician. We are lucky in this critical moment that he is wrong.

Jay Powell is the least expected Fed Chair in its history.

His immediate predecessors were Janet Yellen, an economist whose tour of duty as Fed Chair was the fourth iteration of her service on the Federal Open Market Committee, perhaps the most experienced central banker in US history; Ben Bernanke, a Nobel-prize winning economist who served as one of his political sponsors’ chief economic advisers; Alan Greenspan, an economist regarded as one of the most influential forecasters in the history of the profession who had served at the center of Republican power politics for two decades prior to appointment; and Paul Volcker, a Treasury and Fed lifer who helped design the transition off gold and wrote his senior undergraduate thesis on inflation. Even the less illustrious predecessors, such as Thomas McCabe and G. William Miller, were prominent citizens deeply connected to their political sponsors.

Nothing is certain in politics as in life, but each of these Fed chairs arguably spent a lifetime building toward the culmination of their appointments.

Not so Jay Powell. His appointment as a Governor of the Federal Reserve by Barack Obama was borne of the persistence of the filibuster, as a Republican sympathetic to Democrats who could be paired with Jeremy Stein, a Democrat sympathetic to Republicans.  There he toiled as a “C-list celebrity,” to quote Bob Woodward’s evocative description of Fed Governors, until Donald Trump decided that he wanted a central banker that looked the part (Janet Yellen was apparently too short). That Joe Biden reappointed him was more a function of Biden’s attempt to restore nonpartisan norms to the Fed. I doubt very much that a Democrat will reappoint a Republican again.

The sheer improbability of it all is what makes the following sentence even more remarkable.

I think Jay Powell may well be the most effective Fed Chair in its history.

Some will balk at this characterization immediately. Powell, after all, presided over the largest burst of inflation in forty years. He sidelined Democratic regulatory priorities during the Biden Administration in the face of banker resistance, hardly a badge of honor for someone who fiercely protests that he does not play politics in the role he occupies. And he brought the Fed sprinting into the waiting arms of the US Treasury during the pandemic, a move that may pose significant problems for the Fed in a future crisis.

Even so I stand by the tentative conclusion. Powell is an extraordinary central banker. What’s more, his most important act is now upon us.

What makes Powell so remarkable is the depth of his political talent. Powell wore out the carpet on Capitol Hill in the early years of his chairmanship to win politicians to his views and learn better their own. He has built incredible good will among many Republicans and many Democrats at a time when that good will is hard to find. He needed that good will during the pandemic, when the Fed launched a barrage of emergency programs meant to support the record-breaking fiscal stimulus that first President Trump and then President Biden promoted to stave off the potential crushing effects of an economy shut down by pandemic.

He will need all those talents and powers to navigate the headwinds that are upon him. Elon Musk—the world’s most famous instantiation of the part of Dunning-Kruger that does not permit an expert in one domain to realize his amateurishness in most other domains—has decided that the Federal Reserve is another institution that he and President-elect Donald Trump should stampede in their efforts to…do whatever it is they are trying to do (I genuinely do not have a great grasp of their utility functions). Musk even posed a “poll” to his 200 million X followers asking whether a Magic 8 Ball would do better than the Fed at setting interest rates; that 80% bet on the Magic 8 Ball tells you more about Musk and his followers than it does about the question at hand.

The institutions of Federal Reserve independence are mostly informal. There is very little that legally protects the Fed from presidential meddling. A lesser central banker could find him- or herself negotiating away their freedom of movement in the face of this kind of outside pressure.

In the fight between the Trump Administration and the Powell Federal Reserve, however, I do not bet against the central bank. As I have said before, in these exchanges, historically, the Fed is not the underdog. With Powell at the helm, I am even more certain that the Fed will preserve its ability to pursue monetary policy separate from the Administration.

This is a Nixon-in-China moment for me in a sense. My 2016 book on the Fed is essentially a critique of the reification of this flimsy concept of central bank independence in ways and places that make no good sense. I would like to see much more democratic accountability for the Fed, especially with respect to its governance and in supervision.

But I am also a Burkean in an important institutional sense. I have no doubt that the Fed is an imperfect institution in need of reform. I also have no doubt we could make it much worse. I view the imperfect institutions of technocratic governance at the Fed in a way that conservative philosopher Sir Roger Scruton viewed conservatism in general: “Conservatism starts from a sentiment that all mature people can readily share: the sentiment that good things are easily destroyed, but not easily created.”

The Federal Reserve, its many warts and all, is very good at the thing it was designed to do: separating itself from the day-to-day tumult of partisan winners and losers in the development and implementation of monetary policy. That it struggles along so many other dimensions as a technocratic institution, with so many of the same blind spots as technocratic institutions everywhere, does not eliminate that basic thrust of the political achievement that it represents.

The Musk-Trump attack on the Fed will fail, but not for lack of trying. Their attack will fail because Jay Powell is an institutionalist who knows how to protect the institution, precisely as the American people through Congress has instructed him to do.

He is also the man of the hour. I am confident that he will navigate the coming years, through the end of his term, not simply with an eye toward maximum employment, price stability, and moderate long-term interest rates.

He will succeed because he is the best politician the Federal Reserve has ever seen.

I mean that as a compliment.