Powell’s Approach to Recovery, Inflation Will Test Union Loyalty
Jerome Powell, chairman of the U.S. Federal Reserve, wears a protective mask while arranging his documents. (Photographer: Jim Lo Scalzo/EPA/Bloomberg)

Powell’s Approach to Recovery, Inflation Will Test Union Loyalty

Jerome Powell enters the final year of his term as Federal Reserve chair enjoying the support of labor unions with influence in Joe Biden’s White House, an advantage as the administration prepares to decide later this year whether to reappoint the central bank chief.

But Powell’s union support -- built in part through explicit outreach that the Fed chair has championed -- is likely to be tested as the rebound in growth strengthens and the jobless rate falls. The Fed is expected to hit a crossroad within months: Keep pumping cash into the economy to make sure the recovery benefits minority communities, or signal a pull-back to avoid inflation.

The crisis of the past year has highlighted long-standing disparities across the U.S. economy, a major focus for Biden and his top advisers. The unemployment rate for Blacks, who have a disproportionate share of lower-wage jobs and of union membership, was double that of Whites during much of the past 50 years, in part because the Fed historically tightened monetary policy just as the benefits of growth started reaching lower-income workers.

“His true test will be, once the economy starts to accelerate, whether he takes his foot off the gas prematurely,” said Steve Kreisberg of the American Federation of State, County and Municpal Employees, a union for government workers, referring to Powell. “That’s certainly what we saw out of the Fed 10 years ago. And it turned out to have real damaging consequences.”

Powell’s Approach to Recovery, Inflation Will Test Union Loyalty

That last tightening episode came long before the overhaul of Fed policy that Powell oversaw last year. The central bank said that it would now only raise interest rates after inflation had overshot a 2% target, and that it would let unemployment run lower than officials had previously tolerated.

“We will not tighten monetary policy solely in response to a strong labor market,” Powell said in explaining the new framework earlier this month.

Weekly data on unemployment claims Thursday showcased how far the country is from strength in jobs. Some 861,000 people filed for jobless benefits in regular state programs in the latest week, a figure well above the peak during the last recession.

Powell’s Approach to Recovery, Inflation Will Test Union Loyalty

Biden has the opportunity to put his own stamp on the Fed and its priorities. Decisions loom on four Fed board positions in the coming year, including the chairmanship. Powell’s first four-year term expires in February 2022, and he has indicated he’s open to reappointment.

Powell, 68, a former investment banker and a Republican, was appointed to the Fed board by President Barack Obama and elevated to chair by President Donald Trump. He is one of the richest individuals to lead the Fed, with a net worth upward of $20 million, according to his financial disclosures.

Biden is under pressure to diversify the Fed’s seven-member board of governors. No people of color and just two women currently hold seats on the panel. Biden is expected to at least consider nonwhite replacements for Powell.

Labor unions have already attained significant influence across Biden’s administration, finding themselves with a voice on many policy decisions, and their support could help Powell win reappointment. The unions have strong ties to Treasury Secretary Janet Yellen, a labor economist expected to be involved in interviewing Fed candidates, and to her deputy Wally Adeyemo, along with officials on the Council of Economic Advisers and others at the White House.

Powell’s Approach to Recovery, Inflation Will Test Union Loyalty

Biden has staked his presidency on bringing the coronavirus pandemic to heel and reinvigorating the U.S. economy, and as he campaigned to fight inequality using policy tools across the government, he suggested changes at the Fed could be needed in order to achieve that goal.

White House staff have already signaled that diversity will be a strong consideration for Fed appointments. Biden aides are supportive of naming economists Lisa Cook or William Spriggs, both Black, to fill the current vacancy on the board.

The White House hasn’t commented on Biden’s opinion of Powell, and the two men are not known to have yet met or spoken by phone.

Several major organized labor unions have all indicated they approve of Powell’s performance so far, but they are watching how he handles the economic recovery.

“It will take great fortitude on the part of the Fed to to stand up in the face of deficit hawks, Wall Street and the overwhelming criticism that will come from all different sides that it’s time to walk away,” said Spriggs, chief economist at the AFL-CIO.

For his part, Powell has so far signaled that he sees benefit in risking an overheating economy in order to ensure the recovery reaches deeper into labor markets. He has also highlighted the disproportionate effect the pandemic crisis has had on lower-wage workers.

The Fed chief highlighted this month that the drop in employment for Americans in the top quarter of the income scale has been just 4%, against a “staggering” 17% crash for workers in the bottom quarter.

He’s pledged to keep the monetary spigots open, brushing aside concerns that loose policy will spawn a stock market bubble and too-high inflation.

The U.S. economy is seen growing at an annualized pace of 6% in the third quarter of the year, while the overall unemployment rate is seen dropping to 5.7%, according to a Blooomberg survey of economists. The jobless rate peaked at 14.8% in April of last year.

Overheating Risk

Keeping rates lower for longer could also mean asset-price gains that give the wealthy an even greater leg up on poorer segments of society.

Spriggs says that most U.S. economists are predisposed to focus more on the potential damage from a hot economy -- a stock bubble or runaway inflation -- than on the suffering of low-wage workers.

Powell’s Approach to Recovery, Inflation Will Test Union Loyalty

“It’s baked into the DNA of the profession -- the care and service economy are not taken seriously by economists,” he said. “These are Black people and immigrants.”

Yellen, Powell’s immediate predecessor, was at the helm of the Fed when it appeared to overlook persistent Black unemployment in a rate decision little more than five years ago.

The central bank made its first rate hike following the financial crisis in December 2015 despite Black unemployment hitting 9.4% the month before. For White Americans, the rate was 4.4%.

The Fed has since had the chance to hear from diverse groups of representatives -- including labor unions -- about how monetary policy affected their lives. Powell championed a more-than-yearlong “Fed Listens” campaign in the run-up to its overhaul of long-term Fed strategy.

In Concert

Powell, in his remarks this month, underscored that monetary policy alone cannot do the job of ensuring the roughly 10 million Americans still out of a job since the Covid-19 crisis hit can get back to work.

“It will require a society-wide commitment, with contributions from across government and the private sector,” Powell said at a virtual conference on Feb. 10. “The potential benefits of investing in our nation’s workforce are immense.”

That message aligns well with the Biden administration: the president is pursuing a $1.9 trillion relief package and a longer-term recovery program to stoke job growth.

©2021 Bloomberg L.P.

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