A decade ago, the Federal Reserve under Ben Bernanke responded to the global financial crisis by pushing interest rates aggressively downward. Such a policy creates a powerful disincentive for hoarding. If the rate of interest for low-risk investments is lower than the rate of inflation, that is, if the real rate is negative, then people and institutions find that they are being punished for not taking risks. They are slowly losing money.

More recently, the central banks in some countries have gone beyond merely instituting negative real interest rates. They have instituted negative nominal interest rates. That is, even given an inflation rate of zero, trying to keep one’s money in a safe savings account loses money in, for example, Sweden.

The point of an NIR policy is that it will, for example, increase stock market prices, as people fearing the effects of such low interest rates will look to equity instead. More generally, the hope is that it will boost values across a wide range of non-debt assets, encourage investment, and stimulate an economy.

The U.S. Federal Reserve has not gone so far as to make interest rates nominally negative. It raised the rate under its immediate control (with a predictable effect on other rates) three times in 2017. Its policy is a slow but steady one of increasing rates back toward pre-crisis normalcy.

It is in this context that the U.S. Senate has voted to confirm Jerome Powell, who accordingly will, early next month, succeed the incumbent, Janet Yellen.

The vote was not a close one. It was 85 to 12.

Right Wing View

The complete list of Senators who voted against the confirmation of Powell reads as follows: Jeff Merkley (D – OR), Richard Blumenthal (D – CT), Mike Lee (R – Utah), Bernard Sanders (I – VT), Marco Rubio (R – FL), Corey Booker (D – NJ), Kamala Harris (D – CA), Ed Markey (D – MA), Kirsten Gillibrand (D – NY), Rand Paul (R – KY), Elizabeth Warren (D – MA), Ted Cruz (R-TX). As Victoria Guida, who writes about economics for Politico, observed at once, there are “lots of 2020 hopefuls in there.”

On the right, the Senators who voted “no” included three of President Trump’s foes from the last Republican primary season: Rubio, Paul, and Cruz. What the three of them (especially Paul and Cruz) have in common is that they believe in a hawkish stand against inflation. The dollar must be steady in value over time, and it is immoral – in the hawkish view – for inflation to be treated as a convenient weapon for punishing hoarders. After all, one person’s hoarder is another person’s virtuous saver, sensibly putting money away for a rainy day, an ant-like activity that only a tyrant or a grasshopper would punish.

Indeed, Paul has indicated that if he had his ‘druthers he’d return to a gold standard, though he has not strictly committed himself to that proposition.

Left Wing View

A common view on the political left is that one of the problems faced by the U.S. economy is the absence of inflation. Leftists often believe that Yellen has failed to push for enough inflation, and they surely see the idea of supplanting her with Powell as a step in the wrong direction.  Inflation, this presumes,  can be a good thing, at least if it is kept within measure.  It is thought to be good in the sense that a working bankruptcy system is good – each is a way of relieving the burden of indebtedness. Inflation, of course, does this when and to the extent that the debts are stated in constant dollars.

On the above list one also sees the name of Bernie Sanders, the candidate who came close to derailing Hillary Clinton’s drive for the Democratic Party’s nomination.

Though Rand Paul voted against Powell out of a concern that Powell would not be hawkish enough on inflation, Sanders may safely be said to have voted against him out of a concern that he will be too hawkish, that what the economy needs is a more accommodative money supply.

Sanders has been saying for some time that increasing interest rates with the idea of normalizing the post-crisis economy is a recipe for disaster, sure to be punishing to Main Street businesses. Thus far he has been wrong about that as an empirical matter, but there is always the next interest rate hike to worry about.