In the next few weeks, President Joe Biden will make a decision that will have far-reaching consequences for all Americans – Biden will decide whether to nominate Jerome Powell for a second term as Federal Reserve chairman. No position in Washington has more independence from the political parties. It’s precisely this independence that keeps the dollar as the global reserve currency and keeps borrowing costs low for American taxpayers, small businesses and homeowners.
The decision to remove a Fed chair carries big political and economic risks. A new central bank leader must pass the bond market’s litmus test for independence from the executive branch or else the dollar could suffer deterioration and the U.S. could face a period of severe inflation.
The stakes are higher now. The U.S. is already facing inflationary pressures, and those pressures are accelerating. In addition, there have also been a dozen years of record-breaking peacetime federal fiscal deficits. These deficits will need to be financed with long-term and short-term debt and at low cost to taxpayers to keep interest payments from crowding out other spending priorities.
If Biden moves forward with the option to remove Powell, the longer-term consequences are likely to be a weaker dollar, a steeper yield curve and higher, less-manageable inflation due to the erosion in the market’s confidence in the Fed as an independent institution. This would reduce the flexibility of the public and private sectors to finance long-term projects. And it would make financing cars and homes more expensive and make starting small businesses that much more difficult. That’s a high price to pay to facilitate a political agenda.
Thomas Tzitzouris is director at New York City-based Strategas Research Partners. He lives in Rhode Island.
