MIT professor Kristin Forbes says Jay Powell successfully dealt with four extraordinary events during his eight years heading the Federal Reserve. Fed independence, she said, was tested more than at any time in 50 years, US tariffs went to a 90-year high, a global pandemic was the worst in 100 years, and inflation, she told a Washington audience, spiked to a 40-year high.
Another speaker at the Brookings Institution conference, Princeton economics professor Alan Blinder, praised Powell for doing “a fantastic job. In 50 years,” he said, “Powell will mainly be remembered for standing up to the president who attacked the Fed in ways that had never happened before.”
Despite having selected Powell to head the Fed in 2018, President Trump in his second term repeatedly threatened the chairman, saying he was “too late” to cut interest rates, was a moron, a numbskull, a fool, a jerk, and someone he wanted to fire. In response, Powell—a 73-year-old former investment banker, politely but firmly held his ground, refusing to engage in verbal jousting with the president.
Powell agrees that Federal Reserve independence faces an unprecedented challenge. He says the president’s attacks could erode the rule of law and destroy public trust. Unlike most outgoing chairmen, he is choosing to remain as a Federal Reserve governor until his term expires in 2028. Powell says he is staying on until the president “well and truly” abandons a dormant but still possible legal challenge against the central bank.
Central banks exist to assure financial stability. The Swedish Riksbank is the oldest, founded in 1668 after the collapse of a bank that was the first in Europe to issue banknotes. The Bank of England was founded in 1694.
Historically America has been hostile to a central bank. The first Bank of the United States was abolished in 1811 and a second was shuttered in 1841. Presidents Thomas Jefferson and Andrew Jackson adamantly believed that a government bank benefited a rich elite at the expense of ordinary people. Enduring opposition to financial power prompted President Woodrow Wilson to avoid even using the word ‘bank’ when he and Congress created the Federal Reserve in 1913. By then a string of financial panics had demonstrated a need for a central monetary authority.
The Fed as an institution didn’t come into its own until after the second world war when the United States emerged as a dominant financial power with its currency becoming more ubiquitous than gold or the British pound in global trade.
The vital policy tool of a central bank is the interest rate, the price of money or credit. Jim Grant, the publisher of Grant’s Interest Rate Monitor, calls the interest rate the most important price in a capitalist economy.
When Powell arrived at the Fed interest rates had been gradually rising to slow an expanding US economy. But when the Covid pandemic triggered a virtual shutdown of business activity in 2020, the Fed slammed on the brakes, dropping its short-term interest rate to just above zero. That monetary stimulus combined with supply chain disruptions and heavy spending by government revived inflation, which soared to nearly 5% in 2021 and 6.5% in 2022.
And this is where Powell may have come up short. He argued in 2022 that the inflation surge was transitory and as a result the Fed was slow to raise interest rates. The Fed did boost rates steadily in late 2022 and all of 2023. Altogether there were 11 consecutive interest rate increases during that period.
The Federal Reserve is a decentralized institution with 12 regional reserve banks located in various parts of the country. Policies are set by the open market committee comprised of four reserve bank presidents and seven members of a board of governors appointed by the president with the consent of the Senate. The committee meets eight times a year. Stressing a need for more transparency, Powell held a press conference after each committee meeting.
Concerning the dollar, the Fed typically defers to the treasury secretary. Like other globally significant currencies the dollar’s exchange rate is largely determined by market forces of supply and demand.
The early readings on Powell’s tenure is mostly positive, although President Trump and his supporters complain that Powell failed because he held interest rates at too high a level.
After eight years, Jerome Powell in late May handed over the chairmanship to 56-year-old former investment banker Kevin Warsh.
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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