James Bullard, who concluded his 15-year tenure as president of the St. Louis Fed in 2023, acknowledged to CNN that criticism of the Fed’s characterization of inflation as transitory in 2021, leading to delayed action, was warranted. However, Bullard, a member of the Fed’s policy committee responsible for interest rate decisions, highlighted the Fed’s adept management under Powell’s leadership in achieving a balanced approach for a controlled economic slowdown to curb inflation without triggering a recession. The looming threat of escalating global trade tensions due to President Trump’s proposed steep tariffs poses a risk to the world’s largest economy.
Key to the Fed’s strategy is the adjustment of its primary tool, the key interest rate, to influence borrowing costs and guide the economy towards the dual objectives of price stability and maximum employment. The central bank adjusts its focus based on the priority between these two goals. For instance, during the pandemic-induced job losses, the Fed concentrated on bolstering the labor market through stimulus measures. In response to surging inflation in 2022, the Fed tightened monetary policy by raising rates to curb demand.
However, the situation became more complex as Powell’s expectation of a swift return to normal inflation post-2021 did not materialize, leading to persistent inflationary pressures. Despite initiating rate hikes in March 2022, inflation continued to rise, exacerbated by soaring gasoline prices and declining consumer sentiment. The Fed embarked on an aggressive rate-hiking campaign, reaching a two-decade high in July 2023, maintaining rates at that level for over a year, drawing criticism from both within and outside the central bank.
As concerns mounted, Powell faced challenges in navigating the economic landscape, with calls for rate cuts conflicting with the need to contain inflation. Eventually, the Fed lowered rates in September, over a year after the last rate hike, followed by additional cuts later in the year. The uncertainty surrounding inflation’s trajectory, particularly in light of President-elect Trump’s policies, remains a pressing issue.
The upcoming term will test Powell’s leadership as he navigates through potential economic disruptions resulting from Trump’s proposed tariffs and other policy shifts. Economists expressed confidence in Powell’s adaptability and decision-making abilities, noting his agility in responding to evolving circumstances.
The dean of the Mitch Daniels School of Business at the university acknowledged this month that there are numerous uncertainties preventing the Federal Reserve from assessing the potential impact of President Trump’s tariff threats. “We don’t know how significant they will be, their timing, duration, which goods will be subject to tariffs, the countries affected, and the implications for prices,” Powell stated during an event in New York. “This is just a partial list of what remains unknown.”
Despite the prevailing uncertainties, Powell is no stranger to navigating through such challenges. The potential for price hikes looms if President-elect Donald Trump follows through on his promise to impose tariffs.
Describing Chair Powell as ‘nimble,’ Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, commended his ability to guide the Federal Reserve through uncertain times. “To be nimble, one must rely on data,” she added.
Although appointed by President Trump, the relationship between the two turned sour shortly after Powell assumed office. In late 2018, Trump criticized Powell’s decision to raise interest rates, stating that the Federal Reserve had acted recklessly. The President has since suggested that he should have influence over interest rate policy, despite the long-standing tradition of the Federal Reserve’s independence. This independence is crucial in reassuring investors that monetary decisions are made based on economic data, rather than short-term political agendas.
Powell’s steadfast commitment to maintaining the Federal Reserve’s independence has been a defining characteristic of his tenure, especially in the face of pressure from the President to deviate from the institution’s core principles of data-driven policy-making. “Our mandate is to achieve maximum employment, ensure price stability, and operate free from political interference for the benefit of all Americans,” Powell emphasized during the New York event. “There is broad bipartisan support for this principle in Congress, across party lines, and within both chambers.”
