Political storm over the Federal Reserve

The current chairman of the Federal Reserve, Jerome Powell, was asked at a press conference in 2022 why he so admired Paul Volcker, his predecessor between 1979 and 1987. He summed it up in one sentence: “He had the courage to do what he thought was the right thing.” Powell has the challenge of imitating his role model this year, but whatever he does, he will be the target of criticism. In the first monetary policy meeting of the year, Democrats and Republicans have already placed him in the eye of the political storm. In the middle of an election year, Democrats want to lower interest rates as soon as possible. Standing opposite them, the probable Republican candidate, Donald Trump, has accused Powell of seeking the re-election of the current president, Joe Biden, and has warned that, if he returns to the White House, he will not renew his term.

Powell took over as chairman of the Federal Reserve in 2018 after being appointed by Trump. Then, in 2022, under the Biden administration, he was sworn in for a second term, which expires in May 2026. Despite having chosen him personally, Trump attacked Powell as early as 2019 because he did not lower rates as much as Trump wanted. He was by no means the first resident of the White House to confront the president of the Federal Reserve — there is a whole tradition in this regard — but he was the first to do so that openly in several decades.

With the outbreak of the Covid pandemic, Powell came to the rescue of the economy, flooding the market with liquidity and lowering interest rates to zero. When inflation began to rise sharply in 2021, with Biden in the White House, the Federal Reserve was wrong in its diagnosis by thinking that it would be transitory. It was then forced to undertake the most aggressive rate increase in four decades, leaving the price of money at the highest level in almost 23 years.

Biden not only renewed Powell’s mandate, but also expressly recognized that the central bank is the main character in the fight against inflation. He solemnly proclaimed this in May 2022 in an article in The Wall Street Journal: “My predecessor demeaned the Fed, and past presidents have sought to influence its decisions inappropriately during periods of elevated inflation. I won’t do it,” he wrote. And then he conveyed that same message to Powell in person.

Biden has kept his word, but his party has not. Last week, before the monetary policy meeting, several Democratic congressmen wrote to Powell to pressure him. Massachusetts Senator Elizabeth Warren and three other Democratic colleagues (John Hickenlooper of Colorado; Jacky Rosen of Nevada and Sheldon Whitehouse of Rhode Island) urged him to lower rates to make mortgages cheaper. “As the Fed weighs its next steps in the new year, we urge you to consider the effects of your interest rate decisions on the housing market and to reverse the troubling rate hikes that have put affordable housing out of reach for too many,” the senators wrote in a letter dated January 28. The chairman of the Senate Committee on Banking, the Democrat Sherrod Brown, wrote another letter to the same effect.

The Federal Reserve not only did not lower rates on Wednesday, but it almost ruled out doing so at the next meeting, scheduled for March. Powell said that he needs more assurances that inflation is heading towards 2% on a sustainable basis. Monetary policy is at an inflection point. After interest rates rose by more than five points in two years, to 5.25-5.50%, the price of money is expected to fall by 0.75 points this year.

Part of the market was betting on a possible reduction in March, precisely to anticipate it sufficiently with a view to the presidential elections on November 5. Now, Bank of America expects three quarterly reductions of 0.25 points, in June, September and December. The monetary and electoral calendars seem on a collision course and Trump doesn’t like it.

A “political” president

In an interview broadcast this Sunday on Fox Business, the former president was asked if he believed that Powell was going to achieve a soft landing for the economy: “I think he’s going to do something to probably help the Democrats, I think, if he lowers interest rates,” Trump replied. “It looks to me like he’s trying to lower interest rates for the sake of maybe getting people elected,” he then attacked without any basis. “I think it’s political,” he said later. “Would you name Jay Powell again?” asked the interviewer. “No, I wouldn’t do that,” Trump responded.

The former president maintains that if the stock market is at historic highs it is because the market expects him to return. The Federal Reserve’s narrative clashes squarely with Trump’s apocalyptic messages that the United States would not survive another Biden term. “We’ve had just about two years now of unemployment under 4 percent. That hasn’t happened in 50 years. So, it’s a good labor market. And we’ve seen inflation come down. We’ve talked about that. So, we’ve got six months of good inflation data and an expectation that there’s more to come. So this is a good situation. Let’s be honest. This is a good economy,” said Powell at last Wednesday’s news conference.

At that event Powell was reminded about remarks that other Republicans had made against his renewal and was asked if he wanted another term. The chair of the Federal Reserve, who turned 71 on Sunday and will be 73 when his current term expires, replied: “I don’t have a stance on that. It’s not something I’m focused on. We’re focused on doing our jobs. This year is going to be a highly consequential year for the Fed and for monetary policy, and we’re all of us very buckled down, focused on doing our jobs.”

At the December news conference he was already forced to answer the question of what weight political factors would have in his decisions: “We don’t think about politics. We think about what’s the right thing to do for the economy. The minute we start thinking about those things — you know, we just can’t do that. We have to think, what’s the right thing? We’ll do the things that we think are right for the economy when we think is the right time. That’s what we’ll always do.” Just like Paul Volcker did, he could have easily added.

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