Economist and New York Times columnist Paul Krugman took to the pages of the gray lady on August 13 to stress the importance of central bank independence. The piece was a response to recent comments from Republican presidential nominee Donald Trump and his running mate JD Vance, both of whom have argued that presidents should have a “say” in the Federal Reserve’s interest rate decisions.
Krugman acknowledged that situations could arise “in which even the executive branch should weigh in on monetary policy.” It would be appropriate, for instance, if “a rogue Fed chair, appointed by a president from the other party, engag[ed] in what amounts to economic sabotage.” Ironically, Krugman overlooked the extent to which his “rogue Fed chair” scenario is currently playing out under Jerome Powell.
On July 31, Powell—a Republican first chosen to lead the Fed by then-President Trump (and reappointed by President Joe Biden in 2022 against the advice of the Revolving Door Project and others)—announced that he was keeping the federal funds rate at a 23-year high for the twelfth consecutive month despite ample evidence of falling inflation coupled with rising unemployment. This is data that Powell is obviously aware of. He even admitted, at his semiannual testimony before Congress on July 9, that “this is no longer an overheated economy” and that “the labor market appears to be fully back in balance.”
Since then, fresh data showing a further increase in unemployment and decrease in inflation have prompted calls from progressive economists and lawmakers for Powell to convene an emergency meeting to cut the benchmark rate before the Federal Open Market Committee’s next scheduled meeting in mid-September. He has so far ignored those calls, and we are left to assume that Krugman approves of Biden’s silence in the face of what looks like economic sabotage from the Fed.
Powell’s intransigent hawkishness looks awfully suspicious, especially after Trump and other Republicans urged the Fed not to reduce rates before the November election lest it help Democrats. But Powell’s refusal to lower rates despite all economic indicators pointing to the need for an immediate cut is not the only time his actions have raised questions about the central bank’s independence. In February, Powell warned on 60 Minutes that the “U.S. federal government is on an unsustainable fiscal path.” As journalist Conor Smyth has observed, “Powell’s comments on the deficit certainly seem to cross the line from apolitical technocratic commentary to intervention in straightforwardly political matters.” It is “odd,” Smyth continued, “to believe the Fed as it currently exists is a model of independent technocracy.”
Financial regulation is another arena where we can question the political independence of Powell’s Fed. While testifying before Congress last month, Powell sneakily revised what it means for a financial regulation to have “broad support.” Powell was discussing Basel III Endgame, a long-suffering proposal to increase capital requirements for about three dozen of the biggest banks in the United States, but his argument presumably applies to other proposed reforms.
On July 10, Powell told the House Financial Services Committee that to satisfy his standard, a modified Basel III proposal must first receive a “good and solid vote” from the Fed’s seven-member board of governors. Apparently, the 4-2 majority vote with which the original proposal passed last summer (there was a vacancy on the board at the time) is not up to snuff. But Powell is not just seeking what sounds like unanimity from the board, which would be ridiculous enough in itself. He also said that for Basel to be finalized, it must receive “broad support among the broader community of commenters on all sides.”
Make no mistake: Powell’s insistence on the need to listen to “all sides” is a demand for deference to Wall Street. The FIRE (finance, insurance, and real estate) sector vociferously opposes stronger regulations and draws on its deep well of economic and political resources to neuter or kill proposed rules that pose real or perceived threats to its bottom line.
By instructing regulators to acquiesce to the big bank CEOs who have led a historically fierce campaign in opposition to the Basel framework, Powell is practically inviting financial industry executives to quash, through negative public feedback, any regulation they don’t like. In the words of former Fed attorney and current business law professor Jeremy Kress, Powell’s attempt to equate “broad support” with investor-class support is “absurd and dangerous.”
The Battle Over Basel
It’s been over a year since the Fed, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) jointly requested public comment on their interagency plan to strengthen capital requirements for large banks. If approved, the proposed rule would require banks with total assets of $100 billion or more to increase their capital reserves to shield themselves from potential losses. The goal is to force such institutions to be more self-reliant and less dependent on public bailouts.
The proposal marks the final step in implementing the Basel Committee on Banking Supervision’s framework for increasing the resilience of the financial system, an effort launched in the wake of the 2007-09 economic crisis. That task remains more crucial than ever. As Bloomberg reported recently, the OCC has privately warned that 11 of the 22 major banks it supervises are “insufficient” or “weak” when it comes to managing operational risk. The main architect of U.S. regulators’ draft rule is Fed Vice Chair for Supervision Michael Barr, a Democrat appointed by President Biden in 2022.
In July 2023, Powell joined Barr and the two other Democrats on the board in voting to publish the Basel proposal. Yet Powell also indicated his openness to diluting it. As The American Prospect’s Robert Kuttner explained earlier this year, the Fed chair’s statement “virtually coached industry critics on which holes to poke in the draft rule.”
The banking industry swiftly launched what Better Markets president Dennis Kelleher has called “probably” the most intense fight against a proposed financial rule since the Great Depression. Ironically, this attack began just months after the meltdown of Silicon Valley Bank, Signature Bank, and First Republic Bank—the second-, third-, and fourth-largest bank failures by assets in U.S. history—which was caused in large part by Powell-led deregulation and supervisory missteps.
As Kuttner noted, Basel opponents’ contention that higher capital levels “will reduce lending and be bad for small businesses” is designed to camouflage the fact that stronger requirements “would reduce bank speculative activities and modestly cut into exorbitant bank profits and executive bonuses.”
The American Bankers Association and the Bank Policy Institute—the industry’s most powerful lobbying groups—as well as congressional Republicans have led the offensive against Basel. But not all opposition to the proposal has come from Wall Street and the GOP. In addition to those right-wing forces, a handful of Democratic lawmakers, nonprofit groups aiming to expand access to mortgages, pension funds, and some renewable energy developers are worried about the potential for negative unintended consequences.
By contrast, Americans for Financial Reform (AFR), a progressive advocacy group that supports the proposal issued last year, has debunked pervasive myths about bank capital hikes. As AFR pointed out, the reason why capital cushions are so thin is because banks prefer to lavish their shareholders and executives with dividend bumps, stock buybacks, and bonuses while counting on the public to rescue them in cases of failure (“to privatize their gains and socialize any losses”).
Banks can easily afford to increase the amount of capital they have on hand (at the expense of their bigwigs), and studies show that higher capital levels lead to more—not less—lending. AFR lamented that bank-led fearmongering about the loss of affordable housing in low-income communities of color is one way that Wall Street has convinced some liberals to back its crusade against Basel.
In any case, AFR urged U.S. regulators to “make sure risk weights for home mortgages are appropriately weighted to address any genuine negative impacts.” For his part, Barr made clear that the Fed intended to do so, saying in January 2024: “We want to make sure that the rule supports a vibrant economy, that supports low- and moderate-income communities, that it gets the calibration right on things like mortgages.”
By that point, however, JPMorgan Chase CEO Jamie Dimon had already encouraged his fellow bank executives to go above Barr and appeal directly to Powell to sabotage the Biden administration’s bid to strengthen capital requirements. Following his initial expression of nominal support for the Basel proposal, Powell met with big bank CEOs more than a dozen times, including at least four meetings or calls with Dimon.
The pressure clearly worked. In March 2024, during his previous testimony before Congress, Powell advocated for “broad, material changes” to the current draft. He didn’t rule out a complete overhaul, telling lawmakers that re-proposing a watered-down framework and re-opening the public comment period is a “very plausible option.” Presaging language that he used last month, Powell arguedthat such a move may be required to achieve an outcome that has “broad support at the Fed and in the broader world” (emphasis added), portraying that impossible standard as equivalent to maintaining the U.S. central bank’s political independence.
Historian Peter Conti-Brown slammed Powell’s reasoning. “Throwing away regulatory reforms preferred by the party that won the last national election does not preserve Fed independence,” Conti-Brown wrote. “It makes a mockery of it.” By trying to push the proposed rulemaking into the next presidential administration, he added, Powell is “intervening in a way that Republicans and bankers prefer.” Five months ago, Powell called going back to the drawing board a likely next step. On July 9, he told the Senate Banking Committee that doing so is “essential”—further hindering the existing proposal and proving Conti-Brown’s point.
While the current draft calls for a 16% increase in bank capital, the Fed is reportedly seeking to reduce the planned hike to as low as 5%. According to Kress, that would free up approximately $115 billion for big banks to pay out to their executives and shareholders. No wonder Wall Street doesn’t support the original proposal!
Powell informed members of the Senate last month that the Fed board’s “strongly held view” is that regulators “need to put a revised proposal out for comment for some period” because “that has been our practice” whenever significant changes are made. (He amended his wording when addressing House lawmakers, referring to “the strong view of a number of board members”). The OCC and the FDIC—whose outgoing chair Martin Gruenberg played a key role in advocating for double-digit capital hikes—remain opposed to soliciting more feedback before finalizing a reworked proposal given how rapidly the window for action is closing.
It’s Not Just Basel At Risk
Far from an idiosyncratic effort to reshape the English language, Powell’s bid to recast “broad support” as “bank support” is really a calculated move to give economic elites veto power over new financial regulations—including but not limited to Basel III Endgame.
For one thing, as American Banker reported, Powell told Congress last month that “the Fed does not intend to pursue any other regulatory reform items—such as new long-term debt requirements and liquidity standards—until changes to the capital proposal are agreed upon and put forth to the public.” That’s an effective way to freeze ongoing efforts to improve oversight of the financial industry.
Meanwhile, Wall Street is using the drawn-out fight over bank capital hikes as an opportunity to push for weakening a related rule. At issue is the GSIB surcharge, an extra layer of capital the Fed requires eight global systemically important banks (GSIBs) based in the United States to keep on hand to improve their soundness. Even though the Fed’s 2015 vote adopting the rule was unanimous, it is now mulling potential modifications to how the surcharge is calculated, a move that could save megabanks billions of dollars each year.
Besides higher capital requirements, there are other rulemaking proposals that Powell has worked hard to obstruct. That includes an international bid to require lenders to disclose their plans for meeting greenhouse gas reduction commitments. What’s more, Powell’s Fed has refused to join other federal agencies in proposing long-delayed limits on incentive-based compensation for bank executives, a remuneration model that has historically encouraged excessive risk-taking.
Since becoming Fed chair, Powell has not hesitated to slow-walk many proposed financial regulations. Now, his alt-definition of “broad support” gives him license to postpone their finalization indefinitely.
The Fed Chair, Not The Vice Chair For Supervision, Sets The Regulatory Agenda
With his opposition to more robust financial regulation, Powell is further insulating capital from democratic oversight, as if the judicial dictators on the Supreme Court hadn’t already given the ruling class near-total authority to wreck the lives of working people.
It’s incumbent upon congressional Democrats to use the full extent of their authority to limit the high court’s jurisdiction, as Ryan Cooper has argued in The Prospect. That’s important for so many reasons, including if Basel supporters end up pursuing a public-interest litigation strategy to secure strong capital requirements, such as the one outlined by Kress. In addition, if Democratic presidential nominee Kamala Harris gets the chance to appoint a Fed chair in the future (Powell’s term expires in 2026), she ought to remember how Powell operated and tap someone willing—or better yet, eager—to rein in Wall Street.
Throughout 2021, the Revolving Door Project implored Biden not to reappoint Powell. As we warned, Powell’s time as a partner at the Carlyle Group—a union-busting, fossil fuel-investing private equity firm—signaled his sizable appetite for financial predation. We and other public interest watchdogs argued that whatever merits Powell may have regarding his purported commitment to the Fed’s full employment mandate (a commitment we were right to question in light of the sustained flurry of interest rate hikes he initiated in early 2022), his ethical shortcomings and propensity for deregulation should be disqualifying.
Alas, we were ignored. As a result, numerous proposals to check the power of financial oligarchs are on the cutting-room floor with three months to go before a presidential election that Trump and Vance—corporatists with no intentions of protecting the public from financial speculation or swindling—have a chance to win. If Harris can prevent that from happening, she must nominate a Fed chair who is dedicated to dovish monetary policy and robust financial regulatory policy. Ignoring the latter is a recipe for disaster.