How Jerome Powell navigated pandemic, inflation and Trump
· Axios
In his eight years at the helm of America's central bank, Jerome Hayden Powell has guided the U.S. economy through extreme tumult and fought off unprecedented presidential efforts to undermine the Federal Reserve's independence.
- But that's not what I'll tell my now-young children about Powell once they're old enough to care about central bankers.
The big picture: It is Powell's approach to duty and public service that is his ultimate legacy as a leader and that will shape his place in history.
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- The specific highs and lows of his chairmanship, which ends Friday, flow from an underlying sensibility that seems almost from another time.
- In an era when attention, outrage, and spectacle are the currency of the realm, he put his head down and did the work.
Zoom out: For the better part of the last decade, I've either watched on a screen or been physically present for pretty much everything Powell has said in public. Two sentences stick most in my memory.
- April 2020: The world was on lockdown, the unemployment rate was nearly 15%, GDP was in free fall, and the future appeared bleak.
- "None of us has the luxury of choosing our challenges; fate and history provide them for us," Powell said. "Our job is to meet the tests we are presented."
- What follows is an assessment of how Powell attempted to do just that — and the successes and failures along the way.
The accidental Fed chair
Just weeks before President Trump nominated him to the chair in 2017, I surveyed a group of astute Fed watchers on who would get the nod — and their consensus put Powell at a whopping 5%.
- Powell has no advanced training as an economist and was not a close adviser to any of the three presidents who appointed him to the Fed.
- His ascent to the top ranks of global economic policy is, instead, a story of hard work and being ready when the moment called upon him.
Zoom in: Powell, a career Wall Street lawyer and dealmaker, was semi-retired when President Obama named him a governor in 2011.
- Powell was also a Republican, albeit of a different era; he had served in President George H.W. Bush's Treasury Department.
- He became a workhorse on the Fed Board of Governors under chair Janet Yellen, helping run the central bank's payment systems and other under-the-radar nitty-gritty.
In Powell, Treasury Secretary Steven Mnuchin found a Fed chair candidate who knew how the Fed worked, would largely continue the stimulative monetary policies of the Yellen era, and fit Trump's desire for appointments out of "central casting."
- Trump would soon sour on Powell as the Fed pushed toward raising interest rates over the course of 2018.
- But presidential attacks notwithstanding, the Powell Fed played a major role in both the remarkable prosperity of the circa-2019 Trump economy and in preventing a much more devastating economic collapse from the pandemic.
Guided by the stars
At the Kansas City Fed's annual symposium in Jackson Hole, Wyo., in August 2018, Powell laid out a shift in how Fed leadership thought about America's economic potential.
- The official name was "Monetary Policy in a Changing Economy," but eight years later, it is known in central banking circles as the "guided by the stars speech."
- In it, he argued that in their dependence on theoretical models for concepts like the "neutral interest rate" and "natural unemployment rate," the Fed had taken their relationships as overly certain.
- Maybe, for example, unemployment could go lower than once assumed without causing prices to spike.
The upshot of this was that the Fed should take care to allow the economy of the late 2010s to keep growing and the labor market to keep improving until there was clear evidence in the data that inflation or other downsides were materializing.
- A year later, Powell and the Fed were doing a "mid-cycle adjustment," cutting interest rates three times even though the unemployment rate was at two-decade lows and GDP growth kept powering along.
- The reason? The growth outlook had become bumpier and inflation remained subdued.
Flashback: It's easy to forget just how spectacular the 2019 economy was. The unemployment rate averaged 3.7%. Inflation was 1.8%. Wages rose 3.3%. And mortgage rates were under 4%.
- That's a pretty much perfect mix of economic conditions. If only it could have lasted.
Yes, but: Did the "guided by the stars" mindset and success of 2018-2019 make the Powell Fed too slow to intervene when inflation emerged as the predominant economic problem in 2021? Let's put a pin in that.
Data: Federal Reserve; Chart: Neil Irwin/AxiosMoney printer goes brrr
When the COVID-19 pandemic brought the global economy into a shutdown early in 2020, Powell and the Fed stood up.
- They dusted off the playbook of the 2008 financial crisis, when the Fed deployed a slew of emergency authorities and novel tools to prop up various corners of the financial system.
- But this time it was at comparative lightning speed and with the added logistical hurdle of all the officials involved working from home in quarantine.
State of play: The unemployment rate at that time reached a new post-Great Depression high, and prices for many goods collapsed so severely that oil futures briefly traded in negative numbers.
- The Fed used its limitless ability to create money out of thin air to support the markets for Treasury securities, corporate bonds, money market mutual funds, mortgage-backed securities, small-business lending and more.
- The Fed's balance sheet swelled to $7.2 trillion from $4.2 trillion between March and June 2020.
A popular meme at the time had a cartoonish version of Powell shooting endless cash out from his press conference podium; "Money Printer Go Brrr."
- Even as the immediate financial crisis faded, however, Powell was focused on ensuring that there was a robust recovery once public health considerations allowed a reopening of the economy.
- To that end, Powell stressed that the Fed would use its "full range of tools" — including keeping its interest rate target near zero, buying vast sums of securities and issuing guidance about its future easy-money plans — to try to achieve a labor market recovery.
- In August 2020, Powell codified the ideas he had started developing in the "guided by the stars" speech in a new framework for monetary policy.
The framework essentially promised the world that the Fed would not act pre-emptively to slow the economy out of fear of inflation — that it viewed "maximum employment is a broad-based and inclusive goal" and that "a robust job market can be sustained without causing an outbreak of inflation."
Data: Bureau of Labor Statistics; Chart: Neil Irwin/AxiosNot-so-transitory
By 2021, the economy was resurgent, and with it the frictions that come from jump-starting an economy that had partially shut down.
- The unemployment rate remained high, but by that summer, evidence abounded that the labor market was rapidly becoming tight — that employers wanted to hire, but couldn't find enough willing workers.
- Financial markets were booming, GDP was booming — and with all that money coursing through the economy and global supply chains still impaired by the pandemic shutdowns, prices began surging as well.
- Inflation surpassed 5% in the summer of 2021, on its way to 9% in mid-2022.
The intrigue: Powell and the Fed initially viewed it as a transitory phenomenon — a one-time adjustment that reflected "base effects," the rebound from depressed pandemic pricing, and a one-time result of supply disruptions.
- As such, and consistent with the framework issued just months earlier, the Fed tried to look through the price surge, viewing it as "transitory."
- The result is that the central bank was not just keeping interest rates near zero but pumping $120 billion a month into the financial system through quantitative easing even as the economy was rapidly healing and the worst inflation in decades was taking hold.
There's also a more subtle way the Fed's policies in this era may have fueled the outburst of inflation — one that Powell's successor, Kevin Warsh, has articulated.
- With its massive QE program, the Fed essentially put a lid on the federal government's borrowing costs.
- To the extent fiscal action — including a $900 billion rescue package near the end of Trump's term and another $1.9 trillion early in the Biden administration — was excessive and contributed to the inflation surge, Congress may have felt that Powell and the Fed had written lawmakers a blank check.
By late 2021, right as Biden decided to reappoint Powell to a second four-year term, it was becoming evident that the Fed had misjudged how sustained and deep-seated the inflation problem was turning out to be.
- As for "transitory" inflation, "I think it's probably a good time to retire that word," Powell told Congress in November 2021.
Keeping at it
The Powell Fed was late to its policy pivot — it wouldn't raise interest rates until March 2022 — but was unrelenting in its focus to do whatever it might take to get inflation back under control.
- That included historically large rate hikes of three-quarters of a percentage point at a time starting in June.
- And it included accepting the risk of triggering a recession.
Between the lines: Monetary policy works not just through the mechanics of adjusting interest rates, but through setting expectations, which can be self-fulfilling.
- Powell was worried that an inflationary psychology was setting in that could have built on itself, and was willing to promise the possibility of pain to prevent that from happening.
- He held out hope that inflation could be brought down without a recession, but needed to signal to the world that the Fed would tolerate pain in order to achieve price stability.
The ultimate manifestation of that came at the Jackson Hole conference in August 2022.
What they're saying: "Today, my remarks will be shorter, my focus narrower, and my message more direct," Powell said that Friday morning.
- Higher interest rates, he acknowledged, will "bring some pain to households and businesses. These are unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."
- "We will keep at it until we are confident the job is done," he said, a subtle invocation of Paul Volcker, the revered Fed chair who broke the back of 1970s inflation.
As it turned out, the aggressive rate hikes of 2022 and 2023 caused some pain, but not a recession.
- By September 2024, when the Fed reversed course and cut rates, inflation was down to 2.4%, and the jobless rate was a healthy 4.1%.
Under pressure
In the first Trump term, as the president became more vocally dissatisfied with the Fed chair he had appointed, Powell's response was stoicism.
- When, for example, Trump asked on Twitter in 2019 "who is our bigger enemy, Jay Powell or Chairman Xi," Powell's reaction was to not react at all.
- He often warned associates in that era that while it was important they not bend to presidential pressure on interest rate decisions, they must also avoid the opposite mistake, of making a policy error out of a desire to show their independence.
That has all changed in the second Trump term. The president isn't merely attacking Powell and the Fed with tough talk, but rather through active legal maneuvers.
- That came to a head on a Sunday evening this January, when — faced with Justice Department subpoenas over the Fed's over-budget renovation project — Powell released a video calling out the effort.
- "The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president," Powell said.
- His purpose was to cast attention on the administration's tactics and rally believers in central bank independence — including in Congress — to his side.
So far, it has worked. The Justice Department has backed off on its investigation in order to clear a blockade to Warsh's confirmation. Powell is remaining at the Fed as a governor, contrary to recent precedent, seeking greater assurance that the threat to independence has ended.
What they're saying: "I want to note here that this has nothing whatever to do with verbal criticism by elected officials," he said at a press conference two weeks ago.
- "But these legal actions by the administration are. unprecedented in our 113-year history, and there are ongoing threats of additional such actions," he said.
- "I worry that these attacks are battering the institution and putting at risk the thing that really matters to the public — which is the ability to conduct monetary policy without taking into consideration political factors."
The bottom line: Powell's stewardship of the Federal Reserve and the U.S. economy is hardly above criticism. His mistakes contributed to the painful inflation of the early 2020s.
- But he has led a crucial American institution for eight long years with a deep sense of public purpose — seeking at every turn to make sure Americans can get a job, rely on the value of a dollar, and count on their central bank to make its decisions for the right reasons.