Bessent's Fed critique misses the big picture

Treasury Secretary Scott Bessent has found a scapegoat for every one of America’s economic shortcomings in the past two decades. In a pair of essays — one published in The International Economy and an abridged version in The Wall Street Journal — he blames the Fed for growing inequality; too much inflation in 2021 and 2022; the 2023 bank failures; the fiscal recklessness of the political class; and the ongoing housing affordability crisis, among other things. It’s quite a list!

As I see it, Bessent’s fundamental claim — encapsulated in the title of his piece, "The Fed’s ‘Gain of Function’ Monetary Policy" (in the version in The International Economy, the title is ever so slightly different: "The Fed’s New ‘Gain-of-Function’ Monetary Policy") — is that the Fed has mutated into some sort of unrecognizable monstrosity. An allusion to the controversial lab leak theory around COVID-19’s origins, the message is that the U.S. central bank, acting like a gang of mad scientists, built a new tool for itself (quantitative easing), released it into the world and then effectively lost control of its creation. In Bessent’s characterization, the Fed also took on too many responsibilities and, ultimately, strayed from its statutory mandate of stable prices and maximum employment. (Oh, and moderate interest rates. Bessent made sure to mention the oft-forgotten third leg of the statutory mandate: moderate interest rates. Evidently, that’s what he and his boss Donald Trump want most right now. But there’s a reason that policymakers tend to focus on the idea of a "dual mandate" instead of a trio of responsibilities. As former Federal Reserve Governor Frederic S. Mishkin put it, "long-term interest rates can remain low only in a stable macroeconomic environment." In other words, policymakers should focus on inflation and employment and the rest will take care of itself.)

Has it, though? Lost in Bessent’s cherry picking of crises small and large is the basic fact that the economy has done pretty well during the period in question; generally speaking, the quantitative easing era that began under former Chairman Ben Bernanke. Unemployment and inflation have been low more often than not, and the "misery index" — which folds both metrics into a single statistic — has averaged its lowest levels since the Federal Reserve Act was amended to create the dual mandate in 1977. By that simple yardstick, Janet Yellen was the best dual-mandate Fed chair, and Jerome Powell is a close second.

Notwithstanding the 2021-23 stain on the Fed’s record — which they made up for by helping rein in inflation without a recession — modern central bankers seem to be earning excellent marks by the standards set by Congress. None of this means that the Fed is beyond reproach, but we should be careful in calling for an institutional revolution, when reality suggests some surgical improvements.

Beyond that, most of Bessent’s specific grievances start from an inherent contradiction: On the one hand, he wants the Fed to return to its roots and focus on the aforementioned statutory mandate; on the other, he seems to blame the central bank for complex distributional issues such as inequality that are fundamentally outside its remit of monetary policy and its blunt tools. He ignores the possibility that global forces, U.S. presidents, antitrust bodies, lawmakers and structural changes beyond the Fed’s control may have played more primary roles in the big economic upheavals of our time. Rather, he casually insinuates that much of it is the Fed’s fault.

Consider the rise of inequality. In the financial crisis years, critics of quantitative easing worried that it would cause inflation. When the 2010s passed without the feared inflation, many pivoted to focus on asset prices and inequality, since quantitative easing tended to affect asset prices that are primarily owned by the wealthy. In his response to the criticism in 2015, former Chair Bernanke noted that inequality was primarily driven by globalization, technology, demographics and "institutional change in the labor market and elsewhere." By comparison, he said that monetary policy’s impacts on inequality were "almost certainly modest and transient." Bernanke clearly has his own dog in this fight, but it’s almost unfathomable that he could be totally wrong about the complexity of the issue: The rise in inequality long predates QE, and it undoubtedly comes from a variety of sources.

Then there are Bessent’s criticisms of the 2021 inflation and the economic distortions that followed. "Inflation — partially fueled by the Fed’s massive expansion of the monetary base through QE and the associated accommodation of record fiscal spending — disproportionately affected lower-income Americans, further exacerbating economic inequality," Bessent wrote, "and it put homeownership out of reach for a generation of young Americans." With the benefit of hindsight, most of us can now appreciate that the Fed kept policy too accommodative for too long in 2021 and 2022. Those criticisms have become easier to lob as the COVID-19 pandemic fades in our collective memories: It was a time of tremendous uncertainty for public health and the economy, and policymakers were doing their best to prevent the incipient labor market recovery from sputtering out.

Even still, the Fed didn’t cause the inflation, and prices probably wouldn’t have surged without a historically unique confluence of other forces: supply chain snarls, massive federal stimulus and the Russia-Ukraine war. In his own reflections on that time, Fed Chair Powell has mostly characterized it as a forecast error — one that most private sector economists made as well. That’s a lot different from Bessent’s characterization of an institution that had lost its moral compass. Bessent applies a similarly broad brush to bank failures, housing affordability and fiscal largess. He lays the bad outcomes at the feet of the Fed’s leadership instead of divvying up the blame. And he fails to consider the counterfactuals: Should our central bank have stood by when workers were languishing after the financial crisis? Should they have taken a hands-off approach to the COVID-19 pandemic?

Bessent has fair points about the Fed’s regulatory role. He argues that the Fed has taken on too much responsibility over the financial sector since the 2010 Dodd-Frank Act. As such, he argues that the central bank is spread too thin and is, to his mind, conflicted.

Those more nuanced critiques are lost in the hyperbolic metaphor of a central bank that’s mutated into a toxic force in the U.S. economy. The political context makes the essay even harder to take seriously: Bessent’s boss, President Donald Trump, has been publicly demanding lower interest rates and orchestrating a public smear campaign against Powell, all while fighting to fire Governor Lisa Cook, with whom he also disagrees on policy. With that backstory in mind, it’s hard to believe that Bessent’s primary motivation is something as specific and nuanced as bank regulation.

Instead, the Bessent essays mostly read like a post hoc rationalization of Trump’s misguided mudslinging — it’s a more polite version of what we regularly get from Trump on Truth Social. Given the important role that central bank credibility plays in economic outcomes, it’s a self-interested and dangerous campaign that could set the U.S. back several decades. Even if it briefly works in Trump’s favor politically, it will ultimately make it harder for the central bank to tackle the inflation of the future and deliver sustainably strong labor markets. And we will all suffer for it.

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Jonathan Levin is a columnist focused on U.S. markets and economics. Previously, he worked as a Bloomberg journalist in the U.S., Brazil and Mexico. He is a CFA charterholder.