Powell faces tough road maintaining independent Federal Reserve

From 1979 to 2009, annual increases in the consumer price index averaged 4%, as opposed to 1.8% in the 2010s, and we may be reverting back to that prior norm.

Supply bottlenecks for products as diverse as electric vehicles and concrete will prove expensive to resolve, and labor markets will remain tight.

Apart from the war in Ukraine, climate change is instigating droughts and floods that reduce agricultural productivity and impair transportation systems and is necessitating expensive investments in green energy, batteries and electric vehicles, and for fortifying coastal areas.

Declining birth rates, the pandemic and changing social attitudes about work are creating structural shortages of workers. Congress remains gridlocked on immigration reforms that could prioritize needed skills and an ample supply of less-skilled workers for agriculture and public-facing services.

Whether the economy is headed for a shallow recession or we dodge the bullet, these trends will yield, at best, only 2% economic growth. That’s on par with the George W. Bush and Barack Obama economic expansions and much less than the Reagan, George H.W. Bush and Clinton eras.

Tax revenue will grow slowly, and Moody’s Analytics estimates interest payments on the federal debt could exceed defense spending by 2026. And that estimate includes a substantial bump to military spending, reflecting the bipartisan consensus about the threats posed by China’s buildup in the Pacific.

Seen in this context, former President Donald Trump berating Mr. Powell for raising interest rates — which interfered with the deficits his tax cuts required — and progressive politicians such as Sen. Elizabeth Warren hectoring him about high-interest rates are really two sides of the same coin.

Both political parties, less the Freedom Caucus, like to spend more than the country can afford. It’s either big deficits to finance low taxes or big spending.

Although President Biden nominally supports Mr. Powell, the Fed’s sovereignty over the money supply is a grant from Congress that could be compromised.

Congress could revise its mandate to favor low unemployment over price stability, or the president could appoint more left-leaning governors to the board, like Lisa D. Cook, to appease Congress.

Progressives expect strict adherence to their orthodoxy of race and gender essentialism. Ms. Cook’s appointment owes much to Mr. Biden's genuflecting to the movement, and she exhibits a strong intolerance for ideas that challenge the left’s catechism.

She advocated firing the editor of the Journal of Political Economy for opposing defunding the police even though that publication has little interest in matters relating to law and order.

The left appears to be adding the idea that raising interest rates will not curb inflation, and higher inflation is beneficial to its litmus tests of fidelity. A few more appointments like Ms. Cook and the consensus among Fed policymakers could easily shift to Latin American-style easy money.

Mr. Biden’s proposed student loan reforms would permit students to borrow prodigiously, pay only 5% of incomes above 225% above the poverty line for 10 years and then have their loans forgiven. Those loans would become additions to the national debt that the Fed would have to monetarize lest it accepts higher interest rates than it targets.

Effectively, this empowers universities to raise tuition as they like by printing money.

The potential impact is significant, and other pressures are building to compromise the Fed’s control of monetary policy.

When the economy slows, states run into fiscal difficulties. California is in the soup again. In 2009, Gov. Arnold Schwarzenegger sought federal guarantees of its debt, but President Barack Obama resisted. With affluent populations fleeing progressive states for low tax Florida and Texas, the pressure on Mr. Biden to federally guarantee state debt will grow.

That would effectively grant states the power to print money, much as Mr. Biden is proposing for universities.

For Mr. Powell, financial markets are making his job tougher. The yield on longer-term debt has not risen as we would expect given his big push on the overnight bank lending rate, but his past actions and words have given markets good reason to doubt his resolve.

When Mr. Biden pushed through his $1.9 trillion American Recovery Act in March 2021, economists across the spectrum blasted the measure as excessive and inflationary. The Fed did not have to expand its balance sheet to enable it. Instead, it could have let the new borrowing push up yields on treasuries.

Last year, Mr. Powell pronounced that such printing of money has few consequences of inflation, thereby embracing the sophistry of modern monetary theory.

Now that Mr. Powell has come to the Tabernacle to declare his conversion to orthodox economics, you can’t blame players in financial markets for wondering how soon he will again succumb to the temptations of sin.

• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.