Federal Reserve Chair Jerome Powell is attempting to bring the U.S. economy in for a rare soft landing on a runway littered with partisan potholes.
The central bank appears likely to avert a recession and pull off a remarkable feat of economic policymaking. The Fed last month signaled the end of a historic spate of rate hikes that have contributed to curbing inflation to 3.1 percent annually in November 2023 from its 9.1 percent peak in June 2022.
But the job isn’t done yet, and Powell faces several political obstacles — including former President Trump.
The 2024 presidential election will be in full swing as the Fed decides whether and how deeply it will cut interest rates. That will put Powell and the Fed in the middle of the partisan battle over President Biden’s handling of the economy.
“Jerome Powell’s position as the Federal Reserve chair places him at a strategic juncture between economic policy and its political implications,” Republican strategist Charlie Kolean, the chief strategist of RED PAC, told The Hill.
“His decisions on interest rates are not just economic tools but also carry significant political weight, especially in an election year. Given his history of being a target of political criticism, his decisions will be closely watched for their economic and political repercussions.”
Trump, the GOP presidential front-runner, is unlikely to tolerate a series of Fed rate cuts that stimulate the U.S. economy as he attempts to win back the White House. The former president berated Powell throughout his presidency for refusing to cut rates in line with his political objectives and has already vowed not to reappoint the Fed chair.
The Fed could also take heat from Democrats if it holds off on rate cuts, and some progressive lawmakers are already laying blame for another Trump presidency at Powell’s feet.
Rep. Ro Khanna (D-Calif.) said last month that the Fed “should cut interest rates” or be “most responsible” for Trump’s reelection.
Powell, however, has already shot down any attempt to sway the Fed.
“We don’t think about political events; we don’t think about politics. We think about what’s the right thing to do for the economy,” Powell said in December.
Powell, a Republican, has faced unprecedented public political pressure since becoming Fed chair in 2018.
A former investment banker and Treasury Department official, Powell joined the Fed board in 2012 after former President Obama nominated him to break a partisan stalemate.
Trump tapped Powell five years later to replace former Fed chair and current Treasury Secretary Janet Yellen, touting his combination of experience on Wall Street and Washington.
Trump, however, turned on Powell soon after appointing him. As the Fed ignored the president’s demands to boost the stock market and his leverage in trade talks, Trump threatened to fire Powell and questioned whether Chinese President Xi Jinping was kinder to the U.S.
Powell brushed off Trump’s remarks until the onset COVID-19 pandemic forced the Fed into crisis mode and the former president lost his reelection bid in 2020. His leadership of the Fed amid crisis and his bipartisan credibility prompted Biden to renominate Powell over the objections of progressives.
The independence of the central bank is crucial to U.S. economic health, Martha Gimbel, a research scholar at Yale Law School and a former senior adviser to Biden’s Council of Economic Advisors, told The Hill.
“People obviously are talking about monetary policy in a political context, and I think one thing that’s really really important about the United States is we have an independent central bank,” Gimbel said.
“I think it is incredibly important that administrations respect that. I think you’ve seen that really clearly from the Biden administration, and I think it’s really important that that continue.”
Optimistic markets expect approximately six rate cuts starting as early as the March meeting of the Fed panel tasked with setting monetary policy. But the Fed will be wary of moving too fast on rate cuts if inflation remains elevated.
“The Fed also in its heart of hearts wants to remain credible as an independent institution. Well, that also makes you a little more risk averse on cutting too soon,” Claudia Sahm, founder of Sahm Consulting and a former Fed researcher who developed the recession indicator the “Sahm Rule,” told The Hill.
Holding off on a March rate cut would give the Fed three more meetings to cut or not cut before election day. Either choice could trigger political blowback.
“Talk about a tightrope to walk in a contentious election year,” Sahm said. “[Powell] is totally in the most impossible situations, and that’s been true from the moment the pandemic showed up.”
U.S. government officials including the Fed were criticized for initially describing inflation as “transitory” in 2021, as the pandemic eased but high prices did not.
From March 2022 to July 2023, the central bank hiked interest rates from near zero to a range of 5.25 percent to 5.5 percent, their highest level in decades, to try to cool stimulus-padded demand contributing to higher prices.
Wall Street was predicting a recession at this time last year because of the rate hike crusade, and at a Senate Banking Committee hearing last March, Sen. Elizabeth Warren (D-Mass.) laid into Powell for interest rate hikes she said were “designed to slow the economy and throw people out of work.”
But as inflation has slowed, the economy has proven remarkably resilient, with strong gross domestic product growth and the longest run of an unemployment rate under 4 percent since the 1960s.
Following a surprisingly robust jobs report Friday, Yellen said the U.S. economy was seeing a soft landing.
“As crazy as last year was, it was all about the Fed. We had all these geopolitical developments, you know, Ukraine and Hamas, and they didn’t even move the needle to any significant extent, at least this past year,” Nick Sargen, a former Fed and Treasury official now affiliated with the University of Virginia’s Darden School of Business, told The Hill.
While Sargen said “nobody is really sure” how much credit the central bank’s rate hikes should get in easing high prices, he gives the Fed credit because it “took the heat to make sure that people didn’t think the run up in inflation was going to be a mini replay of the ’70s.”
With what will surely be a heated election ahead, the central bank will also want to avoid another cautionary tale from the 1970s: the legacy of then-Fed Chair Arthur Burns.
“I would expect [the Fed] to be more cautious than usual and I don’t think it has to do about Trump versus Biden or the current environment. Where the extra caution could come from is the history,” Sahm said.
Despite high inflation, Burns cut interest rates in 1971 after President Nixon privately pressed him to help him win reelection. Nixon won a second term, but inflation soared to double digits by 1974.
Gimbel likened compromising the central bank’s independence to eating “a ton of sugar.”
“It feels great, and then the next day, you feel like hell,” she said. “The political independence of the Federal Reserve allows them to stay away from sugar binges.”
Sylvan Lane contributed.