Jerome Powell, the head of the Federal Reserve, is doing something that no other central banker has done in years: he’s wrecking the economy and threatening a recession just before a contentious election.
Just five weeks before the midterm elections, Powell’s plan to reduce rising inflation with swift interest rate increases is causing stock markets to crash, shocking bond market movements, and concerns about global economic contagion in both developed and developing economies.
A Fed chair setting aside all political considerations and ignoring anxious investors is a rare occurrence. Powell is attempting to stop further suffering in the upcoming months as he deals with the worst inflation spike since the Reagan administration, an issue that Fed opponents claim he contributed to by downplaying price increases last year. He desperately wants to avoid leaving behind a legacy of failure, thus he must succeed in doing that.
According to Megan Greene, global chief economist at the Kroll Institute, “He’s the head of the world’s largest central bank at a crucial time, so he’s the focus of the story right now even if he doesn’t want to be.” “And certainly, there is a possibility that the Fed may become more hawkish in order to show everyone that they are serious about battling inflation because they were extensively chastised for being out of step with society.”
For Powell, being at the centre of the narrative is an exceptional position. Because of his aversion to politics, Powell silently withstood months of vicious public criticism from former President Donald Trump for hiking interest rates. He has hundreds of meetings and phone calls with politicians, constantly speaking to both sides of the aisle, and he often rejects partisan attempts to convince him to back legislation.
Even though he has worked hard to keep the White House and both parties on his side, he now runs the risk of upsetting everyone: Republicans if he baulks at an aggressive rate-hiking campaign after waiting so long to address inflation, and Democrats if an economic downturn costs them control of Washington. But whether he likes it or not, Powell is now forced to play the tough guy determined to defeat inflation.
According to Simona Mocuta, chief economist at State Street Global Advisors, “normally, the Fed would not want to involve themselves into the story so close to an election if actually there was any evident need to do so.” The need to do it in this case is extremely evident, which is the difference.
The picture is clouded by an economy that is sending decidedly mixed signals: Wages are up and businesses are vigorously hiring workers, keeping employment levels close to half-century lows. And while the Fed chief has faced little public opposition thus far to his campaign to tighten government spending, Sen. Elizabeth Warren is a notable exception. Consumer spending is still high, and manufacturing is doing well. But most of that has been overshadowed by once-in-a-generation inflation, which has driven up the price of everything from rent to food to health care, eliminated the majority of wage growth, and dampened consumer confidence.
People who know Powell say that no matter what he does, he will face criticism, and that he is ready for it. This criticism will likely come from Democrats who are concerned that the rate hikes and recession talk will harm their chances of winning the midterm elections and possibly the 2024 presidential election.
However, these individuals assert that Powell won’t mind suffering a decline in public favour today if it means going down in history for controlling inflation without precipitating several recessions, as former Fed Chair Paul Volcker did forty years ago to the chagrin of President Ronald Reagan.
Powell is stated to be aware of the high likelihood of making a mistake, but believes that failing to act sufficiently poses a greater risk than acting excessively. Additionally, he is claimed to think that while making decisions, he and his colleagues must disregard the political calendar.
The Democratic Party’s midterm campaign rhetoric that the economy is fundamentally sound and that they have plans to make it even stronger is at odds with the decision-making at this time. Inflation, according to Powell, poses an existential threat.
“We must put inflation in the past. I wish there was an easy method to accomplish that. There isn’t,” he declared at his most recent press conference following the central bank’s further three-quarter point increase in its benchmark borrowing rate.
Due to the Fed’s actions, the Dow Jones Industrial Average entered a bear market after falling by 20% from its recent peak. As a result, other central banks are now tightening their own policies. Due to this, the currency is rising, making international markets very volatile and burdening American exporters. Powell and his colleagues run the risk of harming both the credibility of the Fed and the global economy if they make any significant errors in either direction.
The tough man Fed chief position is one that the 6’7″ Volcker played with ease as chair the previous time inflation spiked, in the late 1970s and early 1980s, despite Powell’s appearance of determination.
Volcker remained unfazed and eventually succeeded in containing the price rises, which infuriated Reagan and contributed to GOP losses in the 1982 midterm elections.
He has conducted nearly 500 meetings and phone calls with members of Congress since taking over in 2018, evenly split between Republicans and Democrats, according to calendars released by the Fed. That role is less natural for the soft-spoken Powell, who made it a point when he took over as chair in 2018 to hold regular meetings with senators and representatives from both parties and listen to voices from across the ideological spectrum.
As rate hikes continue to ripple through the economy, Powell’s relationship with the president and his friendship with Janet Yellen, who took over as Treasury secretary when Trump fired her in 2018, may now be put to the test.
They already have a negative impact on the property market and will eventually have the desired effect of reducing consumer expenditure and company investment.
In keeping with the practise of letting the central bank work free from political pressure, Biden has refrained from publicly criticising Powell.