By Howard Schneider
WASHINGTON, April 29 (Reuters) – On a chilly spring day in 2017, Jerome Powell made a six-hour round trip by car through heavy mountain fog from Washington to West Virginia University for an evening talk with students about Federal Reserve history and the political balance of its structure, topics that can be ponderous even for close watchers of the U.S. central bank.
At the time a Fed governor who had been appointed by President Barack Obama in late 2011, the points he made that night would before long move from the abstraction of a college lecture hall to the center of the monetary policy debate. Eight months later, Powell was nominated for the Fed’s top job by President Donald Trump, only to quickly fall out with him in a battle over the independence of the central bank that rumbles on today.
Wednesday may mark Powell’s last policy meeting as Fed chief, and from the feud with Trump to the central bank’s aggressive response to the economic fallout of the COVID-19 pandemic, the debate over his legacy will likely be spirited.
EARLY MISSTEPS AND AN ANGRY PRESIDENT
Powell succeeded Janet Yellen as Fed chief in February 2018, inheriting an economy with inflation below the central bank’s 2% target, a healthy 4.1% unemployment rate, and signs that economic growth was gaining steam after years of middling performance. With Trump’s tax cuts providing a fiscal boost and new import tariffs risking higher prices, Powell continued Yellen’s policy of gradually raising interest rates from still-low levels.
Trump took offense, saying on CNBC about five months into Powell’s tenure that, “I don’t like all of this work that we’re putting into the economy and then I see rates going up.”
Powell ignored him, but rattled the market that fall when he said in a PBS interview that the Fed was “a long way” from a neutral stopping point with its rate hikes, and triggered another market backlash in December when he said its balance sheet reductions were “on automatic pilot” – comments at odds with investor expectations of a flexible central bank sensitive to data. Trump contemplated firing him, not for the last time, and Powell came away with a better understanding of the force of his words as Fed chief.
COVID COLLAPSE AND ‘RED LINES’
Any discussion of Powell’s record inevitably centers on the pandemic. The Fed’s response, beginning in early 2020, could be seen as both recklessly adventurous and a historic success in avoiding what many thought could be a second Great Depression.
Powell saw it as a moment to take risks in hopes of avoiding the worst. He endorsed congressional and Trump administration efforts to support a teetering economy with floods of money, brought the Fed’s benchmark overnight interest rate quickly to the near-zero level, backed the central bank’s purchases of trillions of dollars worth of bonds, and, in consultation with the Treasury Department, launched an array of Fed lending programs that he acknowledged went beyond conventional central banking.
“We crossed a lot of red lines,” Powell said during an event at Princeton University in May of 2020. “This is that situation in which you do that, and you figure it out afterward.”
The “figure-it-out” stage has included Kevin Warsh, nominated by Trump in late January to be the next Fed chief, blaming Powell’s expansive balance sheet policies and encouragement of government spending as the reason for the high inflation that followed and as political overreach.
SURGING INFLATION, HIGH RATES, LOW UNEMPLOYMENT
In the depths of the pandemic, the Fed under Powell retooled Fed strategy based on what seemed solid insight from the previous decade: Low unemployment rates could help workers boost their wages and wealth without triggering inflation. “A robust job market can be sustained without causing an outbreak of inflation,” Powell said in August 2020 in announcing the Fed would not, as it had in the past, preempt inflation just because the job market looked “tight.”
When inflation accelerated in 2021, Powell and others first dismissed it as “transitory” – a word he came to regret – then sprinted to raise rates in 2022 as inflation hit a 40-year high.
The rate hikes Powell engineered came with a newly sober emphasis. Two years after overseeing that jobs-first change in policy, he used the same forum at the Fed’s annual research conference in Jackson Hole, Wyoming, to warn that rate hikes would “bring some pain” through slower growth and weaker employment.
Economists and Fed policymakers still disagree on many of the basics of that era. The central bank eventually undid the 2020 strategy changes, but whether they figured into inflation remains up for debate. The reshaped monetary policy framework certainly slowed the Fed’s response to inflation, but the rate hikes that eventually followed may have more than compensated as Powell channeled former Fed Chair Paul Volcker’s willingness in the early 1980s to risk recession to break an extended period of high inflation.
Powell managed to skirt an economic downturn, and indeed his era as Fed chief has seen the lowest average monthly unemployment rate, at 4.6%, of his immediate predecessors.
On the other side, inflation has been on average higher, at 3.09%, more than a percentage point above the Fed’s target.
As a point of comparison, that’s a full percentage point less average unemployment and about six-tenths of a percentage point more average inflation than seen under Fed Chair Alan Greenspan.
A TRUMP CODA
Nominated for a second term as Fed chief by President Joe Biden in late 2021, Powell ends his term again under Trump’s disapproving glare, which this time has included an effort to fire Fed Governor Lisa Cook and a criminal investigation of Powell that was opened by the Department of Justice late last year, and closed last week.
Powell may yet have the final word.
After largely ignoring the president’s words and actions, the criminal probe, which centered on the cost of a renovation of the Fed’s headquarters in Washington, prompted a rebuttal from Powell in January when he released a video calling it “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.” His comments rallied support from Congress to his side, letting him end his tenure as head of the central bank on his own terms.
(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)
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