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What do we know about Powell's approach to economic policy and inflation?


Fed Chairman Jerome Powell is at the helm, navigating this moment. So what do we know about his approach to economic policy and inflation? Well, for one, we know that he's a student of Paul Volcker, who was Fed chair the last time we saw inflation at these levels back in the 1980s. Here to discuss, I'm joined by Sarah Binder, professor of political science at George Washington University. Professor, Volcker's approach to a monetary policy is credited with bringing inflation under control back then. It didn't come, though, without some economic pain. What did he do that was so successful?

SARAH BINDER: Well, Volcker did a number of things and had a number of things working for him, right? First, he did have the resolve to lead the Fed to raise rates so high, even at the cost of throwing the economy into a very deep recession, right? Second, how'd he do it, right? He succeeded in part - I think there was a very broad consensus at the time that two decades of rising inflation, it was really time for the Fed to act, right? The interest rates today set by the Fed are barely 1%. They were already over 10% at the time. Couple of things to keep in mind just quickly - right? - in 1979 when Volcker was appointed - right? - the Fed was far less transparent than Congress has forced it to be today. And Volcker, most importantly, he had political support, right? He had support from the White House, sometimes publicly, definitely behind the scenes. And that's what the Fed often really needs to make tough policy choices.

MARTÍNEZ: Back in 1980, though, Professor, there was no Twitter, no social media where people could really, you know, vent their frustration on inflation. Does Jerome Powell have the same resolve? Can he take some of that Volcker resolve to 2022?

BINDER: Well, we know he does have one thing going for him, which is that the White House, in fact, is, really, pretty strongly behind him, right? Biden gave a big press conference just last week or so where he basically was very clear, right? He said, Jay Powell, this is your job, Federal Reserve. And I'm not going to interfere - really almost something almost to the tee what Reagan had said to Volcker publicly. But there's no doubt - right? - Congress has forced the Fed to be far more transparent. And certainly, there's, you know, 24/7 watching and expectations, knowing what and anticipating what the Fed is going to do.

MARTÍNEZ: If Powell indeed moves to increase rates more now than was originally expected, would that surprise you, Professor, considering what we know about Volcker's approach?

BINDER: Well, I think what's surprising here is that the Fed works today unlike Volcker, right? In many ways, the Volcker Fed was sort of the man behind the curtain, right? Today, monetary policy, the Fed works by telegraphing what it's going to do - right? - no surprises - right? - communication, right? Bernanke, the last - two times ago Fed chair, he said, you know, when we - what monetary policy is, it's talk, 98% talk. And so if it's - if there's a surprise here - right? - the possibility that the Fed goes to three-quarters of a percent hike rather than a half a percent, that's a surprise. And maybe it works to the Fed's advantage. But it will also raise some concerns, right? Is the Fed so far behind the ball that it has to shock us? Is it really, really trying to catch up? And should we be more worried?

MARTÍNEZ: So if telegraphing, if being transparent about this is the play - or at least that's what we think - thought the play was going to be. If, as you said, these rates go up higher than expected. I mean, that sounds like it would spook everyone.

BINDER: Well, I think that's probably why we saw what seems to have been sort of a very careful leak, perhaps, to The Wall Street Journal, which surmised this week that, you know, a three-quarter point increase was possibly on the table. There's at least some speculation around town and around the Fed that that could happen. And that does suggest, just as you said, look; if the play is to forecast and predict where we're going, no surprises, then that suggests they're finding themselves at a much worse point economically than they thought they were the last time they met.

MARTÍNEZ: You said President Biden is fully behind Jerome Powell, is just going to stay out of things. But how much power does Powell have as far as navigating this crisis?

BINDER: Well, I think the way we should think about the power of the Fed and the ability of the Fed is the degree to which it sustains public support, right? The public has to think and markets and financial participants and businesses and households, they have to think the Fed is going to do what it says it's going to do, which in this case is to tame inflation. But - and that's why political support matters, right? And that's what Powell really needs to keep, right? You know, a couple of times ago, he started out his press conference - right? - just speaking. I want to speak to the American people, right? Does he do that again? He needs to keep public support thinking and knowing that the Fed has the credibility to slay inflation.

MARTÍNEZ: Sarah Binder, professor of political science at George Washington University and co-author of "The Myth Of Independence: How Congress Governs The Federal Reserve." Professor, thanks.

BINDER: Sure. Thanks for having me. Transcript provided by NPR, Copyright NPR.