Powell faces partisan potholes as Fed nears soft landing

Federal Reserve Chairman Jerome Powell is trying to give the U.S. economy a rare soft landing on a partisan runway.

Central banks seem likely to avoid recession and achieve remarkable feats of economic policymaking. The Fed last month signaled an end to its historic flurry of interest rate hikes that have helped keep inflation in check from a peak of 9.1% in June 2022 to an annual rate of 3.1% in November 2023.

But the job is not done yet, and Powell faces several political obstacles, including from former President Trump.

The 2024 presidential election will begin in earnest to determine whether and how deep the Fed will cut interest rates. This puts Mr. Powell and the Fed in the middle of a partisan battle over President Biden's economic response.

“Jerome Powell's position as Federal Reserve Chairman places him at a strategic crossroads between economic policy and its political impact,” said Republican strategist and chief strategist at RED PAC. Charlie Corean told The Hill.

“His decisions on interest rates are not only economic instruments, but also carry significant political weight, especially in an election year.Given his history of being the subject of political criticism, It will be interesting to see what the economic and political impact of the decision will be.”

Trump, the Republican presidential front-runner, is unlikely to accept a series of Fed rate cuts to stimulate the U.S. economy as he seeks to retake the White House. The former president has criticized Powell throughout his term for refusing to cut interest rates in line with his political goals, and he has already vowed not to reelect him as Fed chairman.

If the Fed postpones rate cuts, it could steal heat from Democrats, and some progressive lawmakers are already blaming Powell for another Trump presidency.

Rep. Ro Khanna (D-Calif.) said last month that the Fed “should lower interest rates” and that it would be “most responsible” for Trump's re-election if it doesn't.

But Mr. Powell has already fought off any attempts to destabilize the Fed.

“We don't think about political events. We don't think about politics. We think about what's right for the economy,” Powell said in December.

Powell, a Republican, has been under unprecedented public political pressure since becoming Fed chairman in 2018.

Powell, a former investment banker and Treasury official, joined the Fed board in 2012 after being nominated by former President Barack Obama to break partisan deadlock.

Five years later, President Trump nominated Powell to replace former Fed Chair and current Treasury Secretary Janet Yellen, touting her combination of Wall Street and Washington experience.

However, President Trump criticized Powell shortly after appointing him. President Trump threatened to fire Powell and questioned whether Chinese President Xi Jinping was being kind to the U.S. after the Fed ignored the president's demands to boost the stock market and influence him in trade talks. .

Mr. Powell ignored Mr. Trump's comments until the onset of the coronavirus pandemic sent the Fed into crisis mode and the former president lost his reelection bid in 2020. Mr. Biden nominated Mr. Powell over the objections of progressives because of his leadership at the Fed during the crisis and his bipartisan credibility. .

Central bank independence is critical to the health of the U.S. economy, Martha Gimbel, a Yale Law School scholar and former senior adviser on Biden's Council of Economic Advisers, told The Hill.

“People are obviously talking about monetary policy in a political context. I think one of the things that's really important for the United States is to have an independent central bank,” Gimbel said.

“I think it's very important that the administration respects that. I think we've seen that clearly from the Biden administration, and I think it's very important that we continue to do that.”

The optimistic market is about As early as the March meeting of the Fed committee tasked with setting monetary policy, interest rates had been cut as early as six times. But if inflation remains high, the Fed will be wary of cutting interest rates too quickly.

“Deep down, the Fed also wants to continue to be trusted as an independent institution. That also protects against the risk of cutting interest rates too soon,” says the founder of Therm Consulting and the leader of the recession index Therm. Claudia Sahm, a former Fed researcher who developed the “Rules,'' told The Hill.

If the March rate cut is postponed, the Fed will have three more meetings before Election Day to decide whether to cut rates or not. Either choice could provoke a political backlash.

“Let's talk about walking a tightrope during a contentious election year,” Sahm said. “[Powell] We are in an absolutely impossible situation, but that has been the case from the moment the pandemic began. ”

U.S. government officials, including the Federal Reserve, were initially criticized for describing 2021's inflation as “transitory” as the pandemic eased but high prices did not.

From March 2022 to July 2023, the central bank will raise interest rates from near zero to 5.25 to 5.5, the highest level in decades, in order to cool demand that has increased due to economic stimulus measures, which is contributing to rising prices. % range.

This time last year, Wall Street was predicting a recession due to the rate hike campaign, and during a Senate Banking Committee hearing last March, Sen. Elizabeth Warren (D-Mass.) criticized Powell about raising interest rates. “It was planned,” he said. This is to slow down the economy and put people out of work. ”

But the economy has proven surprisingly resilient as inflation has slowed, gross domestic product (GDP) growth has remained strong and the unemployment rate has remained below 4%, the longest period since the 1960s.

Following Friday's surprisingly strong jobs report, Yellen said the U.S. economy is on a soft landing.

“Last year was crazy too, but it was all about the Fed. You know, with Ukraine and Hamas, there were all these geopolitical developments, but for at least this past year, they didn’t even make a big pivot. '' said Nick Sargen, a former Federal Reserve and Treasury official now at New York University. Darden School of Business in Virginia told The Hill.

“Nobody knows for sure” how much the central bank's interest rate hikes will help ease price rises, he said, but added: “I'm very keen to make sure people don't think the rise in inflation is serious. He credits the Fed for its efforts. It's going to be a mini-replay of the '70s. ”

The election is sure to be intense, and central banks will also want to avoid another cautionary tale from the 1970s: the legacy of then-Fed Chairman Arthur Burns.

“I'm hoping [the Fed] We need to be more cautious than usual, and I don't think that has anything to do with Trump vs. Biden or the current environment. History tells us where the extra vigilance comes from,” Sahm said.

Mr. Burns lowered interest rates in 1971 despite high inflation as President Nixon privately pressured him to support his re-election bid. Although Nixon won a second term, inflation soared to double digits by 1974.

Gimbel likened undermining central bank independence to eating “a ton of sugar.”

“It feels great and then the next day it feels like hell,” she says. “The Federal Reserve’s political independence allows it to stay away from sugar overload.”

Contributed by Sylvain Lane.