It is easy these days to break your mouth over the leading economic actors in the United States. There is President Joe Biden, who has fueled the economy, but above all inflation, with his billion dollar aid and reform packages. There is Treasury Secretary Janet Yellen, who was a willing helper to him, even though, as ex-head of the Fed, she should have seen the disaster coming. And there is Jerome Powell, Yellen’s successor in the office of central bank governor, who has now made a breathtaking turnaround in the key interest rate because he happily underestimated the wave of inflation even when prices reached four, five and finally six percent cracked.
With an average age of exactly 74 years, you can say that, all three politicians are among the most experienced economic experts in the country. And yet one would like to join the chorus of Republican critics and call out to them: Six, sit down!
As is so often the case in life, however, a second, closer look turns out to be far less clear. Biden, for example, had good reasons to do what he did. He is a child of the financial and economic crisis of 2008 and 2009, which in the USA is called the “Great Recession” based on the “Great Depression” of the 1930s. At the time, Biden was Vice President under the new President Barack Obama and saw how Democrats and Republicans engaged in political skirmishes instead of resolutely supporting citizens and companies. Government aid was therefore far too low and far too short-lived, the result being a decade of anemic growth and a slow-motion labor market recovery.
Social issues play a bigger role for the central bank today
Biden avoided this mistake in the corona pandemic, yes, one could even say that, given the failures at the time, he did too much of a good thing this time. Aid for people who lost their jobs in the crisis was sometimes so high that it not only fueled consumption and prices, but also deprived those affected of the incentive to look for a new job. However, it is easy to talk here, too, if you look at things from the perspective of Germany: Those who are laid off in the USA do not fall into the social network, but often into the abyss. The fact that the President – unlike some cynical Republicans – does not care, speaks not against, but for him.
This social dimension is also one of the reasons Powell hesitated for so long to end the zero interest rate phase. The US Federal Reserve is required by law to ensure not only stable prices but also maximum employment. The best way to do the latter is to keep interest rates low or to support the economy in some other way. It can now be argued that the US, with an unemployment rate of 4.2 percent, is no longer too far removed from the goal of full employment. It is to Powell’s credit, however, that the Fed no longer only pays attention to the actual quota, but also to whether and how the recovery will affect those groups who are disadvantaged in the labor market because of their gender or skin color. Here the numbers look much worse. Anyone who thinks they can ignore this has spoken out for a monetary policy of the 20th century.
It is true that Powell underestimated the dynamics of inflation. That he had hoped for too long that the global delivery bottlenecks would resolve quickly. That he withdrew from the academic thought that even the highest key interest rates cannot help unload the containers that are piled up in the ports of Shanghai and Los Angeles. For that one can very well criticize him. But one can also show him respect for having admitted his misjudgment and now clearly acknowledging possible interest rate hikes while the European Central Bank continues to doze off. It is quite conceivable that the American path of lavish crisis aid and subsequent slight braking by the Fed will ultimately prove to be successful – perhaps more successful than the European one.