Mr. Powell and Dr. Brainard are ready for this moment. Among the six members of the Fed’s Board of Governors, who now oversee the nation’s financial system and monetary policy, they are the only two who were there in 2015, when the Fed first raised interest rates after the Great Recession. They both voted in favor of that increase and subsequent ones.
Later, however, both said that the Fed had been too aggressive, needlessly slowing the recovery. In 2019, Dr. Brainard admitted that it “would have been a better alternative to delay liftoff.” Likewise, Mr. Powell testified before Congress that the Fed had “learned that the economy can sustain much lower unemployment than we originally thought without troubling levels of inflation.”
To avoid slowing the next recovery, the Fed conducted an intensive review starting in 2019 of its policy approach and tools, including a listening tour with people across the country. Mr. Powell publicly unveiled a new policy framework in the summer of 2020. Under that new plan, the Fed decided that unlike in the past, it would tolerate periods of inflation somewhat above its longstanding target of 2 percent to address the employment shortfall and to achieve a goal of “broad-based” and “inclusive” employment.
Now that the Fed’s new framework is being put to the test, it is time to clearly define what it means by broad-based and inclusive employment. So far, the Fed has punted. When asked this month, Mr. Powell said that maximum employment is “not directly measurable” and “changes over time due to various factors.” That is not going to be good enough next year, when the Fed is thinking about raising interest rates.
The Fed must also decide exactly how much inflation it will tolerate to achieve that employment goal. Dr. Brainard, as vice chair, will be a key player in answering those difficult questions.
Of course, they have not always agreed on policy; Senator Elizabeth Warren and other progressives favored Dr. Brainard for chair because she is seen as tougher on banks. Here again, the line between them is less sharp than outsiders think. I watched them work together to save the Community Reinvestment Act, which ensures that banks serve low- and moderate-income families, from attempts by other regulators to weaken it.
Next year will be the big test. It’s a new Fed — one that says it will support all workers — but it’s still the Fed, where fears of inflation have always loomed large. More than ever, sound policymaking at the Fed is not about being dovish or hawkish. It’s about being grounded in reality.