Powell is right to seek clarity on Fed

ANOTHER VIEW

Federal Reserve Chair Jerome Powell said recently he intends to remain on the central bank’s board after his term as chairman ends on May 15 — unless the Justice Department ends "with finality and transparency" its criminal investigation into the Fed’s renovations of its headquarters.

Powell’s decision is unusual and, as he doubtless appreciates, not without cost to the institution. It’s also entirely justified.

Powell’s successor as chair is more or less decided, following the Senate Banking Committee’s vote to advance the nomination of Kevin Warsh. But Powell’s term as one of the Fed’s seven governors is separate and runs until 2028. Ordinarily, a departing chair steps down from both positions, as Powell says he’d intended. By remaining on the board, he blocks the appointment of a new governor, which gives the White House an incentive to clarify that it has abandoned, as opposed to merely paused, the inquiry.

Given that the investigation was bogus from the start, that’s exactly what should happen. Rather than a good-faith probe into impropriety, it was widely viewed as an effort to bully Powell and his colleagues into cutting interest rates as the administration had demanded. It was a frontal assault on central bank independence, as Powell has said. The threat has since been softened but not eliminated. The Department of Justice has said that it plans to drop its investigation in favor of scrutiny by the Fed’s inspector general, but this administration has not exactly earned a reputation for sticking to its word.

Fed independence is essential for sound monetary policy — a point on which Powell, Warsh and every other competent central banker agree. Once political calculations are thought to influence the policy rate, the risk of higher inflation increases. Higher expected inflation in turn raises longer-term interest rates, which makes loans more expensive, neuters the effort to stimulate demand and in due course calls for more inflation.

Subordinating monetary policy to politics is a tried-and-tested formula for failure.

Admittedly, there’s a cost to Powell’s remaining on the board.

As long as he’s there, investors and analysts will look for signs of dissension and disagreement.

They’ll worry that a struggle over who’s really in charge will distract the Fed’s policymakers from their proper role — as indeed it might.

Warsh’s task in taking the lead and guiding his colleagues as chairman will be more difficult.

A cleaner break would be better — but entrenching the commitment to central bank independence matters more. Granted, even if the administration gives way now to speed Powell’s departure, it might resume its efforts to intimidate the central bank at some point. There’s only so much the Fed’s policymakers can do to resist such pressure.

But Powell is right to seek a clearer resolution while he can. If the administration were wise, it would see that such an outcome serves its own purposes by avoiding financial instability and making it easier for the Fed to cut the policy rate as soon as economic conditions allow.

In using what leverage he has to persuade the Justice Department to back off, Powell is serving the public interest. Warsh will soon be in place. The White House should declare victory and retreat.

— Bloomberg Opinion