Commentary: Steady, Chairman Powell

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In 1980, newly elected President Ronald Reagan faced a serious problem. From the early 1970s the nation had been experiencing an upward spiral of inflation. Rates that were at 1% in 1965 had hit 14% by 1980.

If you ask any economist what problem is worse for a nation — depression or inflation — they will tell you inflation every single time. First, depression cripple's nations, but inflation topples them. Second, you cure a depression by making it easier for people to work, but you cure inflation by making it harder. It is the difference between inviting everyone to a party and telling them that things have gotten out of hand and everyone has to go home.

Busy solving Reagan's inflation was the chair of the Federal Reserve, a tall, athletic, cigar-smoking man named Paul Volcker. He switched the Fed's focus from the ineffectual targeting of interest rates and, instead, attacked the money supply. Credit became expensive. The brakes came on, recession ensued, and inflation collapsed.

Politicians hate recession. The folks back home love the party but hate the clean-up. (The 21st century version of this is a nation wanting government assistance during the COVID shutdown, but being shocked and offended by the ensuing inflation after the world started spinning again.)

Reagan, in the midst of his first term and hoping for more, called Volcker into the Oval Office with the hope to charm (or coerce) the Fed chairman into letting loose of the reins on credit. Paul listened politely and then declined to do what his president suggested.

He wasn't necessarily being brave; the Fed answers to the Congress, not the president, and Volcker knew it. But Volcker was also carrying the authority of one who knows what he knows, is defended by the facts and has a fair amount of both power and respect.

The rest is history. Paul was right, the economy recovered stronger than ever, Reagan reappointed Volcker. The good guys won. Hi-ho-Silver!

Fast forward to the 21st century.

I finally have some reason to sleep well. During his first term, President Donald Trump nominated Jerome H. Powell as chair of the Federal Reserve. He began a new term last year and is expected to serve at least until 2026.

This is a safe, steady, intellectually and philosophically laudable selection. Powell was an excellent choice for chairman of the Federal Reserve and the person who occupies this seat matters.

When I think of the enduring accomplishments of this republic, beyond the genius of the Constitution, you must look at two milestones of human thought: One is the Northwest Ordinance and the other is the creation of the Federal Reserve system.

The Fed is the central bank of the United States. It is divided into 12 districts (Boston, New York, Philadelphia, Richmond, Atlanta, Minneapolis, St. Louis, Cleveland, Dallas, Kansas City, San Francisco and Chicago), each with its own bank. The Fed sets the nation's monetary policy, supervises and regulates banks, and helps to maintain the stability of our financial system.

It does not set the interest rate at which you or I borrow money. That includes the interest you pay on your credit cards, which is also a way to borrow money. When the Fed changes its interest rates it only changes the rate at which banks are charged interest on loans (usually overnight loans) they ask for from the Fed. The banks do not have to borrow from the Fed. They do not have to change the rate they ask of their customers.

You need only look at the difference between the financial stability of our country and those without an independent central bank to see the value of the Fed. The calm, measured and intelligent work of the Fed is conducted by the seven-man governing board. These people serve 14-year terms. These long and staggered terms make them impervious to political manipulation or expediency. (Powel was appointed to the governing board by the Obama administration.) The Fed's chair (arguably one of the 10 most powerful humans on the planet) is appointed to a 4-year term. Together, the chair and governing board are spectacularly independent of political perversion and work for only one thing — a strong American economy.

Powell (like Volcker) will keep a steady hand on the tiller of this ship. He is smarter than Trump, harder working than Trump and more honorable than Trump.

The Fed helps us all keep the faith.

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Louise Butler is a retired educator and published author who lives in Edinburg. She writes for our Board of Contributors.

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