Powell's legacy tested by inflation, bank crisis, new Fed dynamics
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[May 16, 2023] By
Howard Schneider
WASHINGTON (Reuters) - Federal Reserve Chair Jerome Powell, who
navigated a combative White House and a pandemic in his first years as
head of the U.S. central bank, is facing a critical chapter in his
leadership with a battle against inflation still unresolved, worries
about recession widespread, and developing criticism of the Fed's
oversight of the financial industry.
On one level, President Joe Biden's nomination last week of a relatively
new member of the Fed's board of governors to become vice chair of the
central bank seems a vote of confidence in Powell, who was elevated to
the top job by former President Donald Trump, given a second term by
Biden, and is now a senior figure with more than a decade-long tenure at
the Fed.
Yet it also poses a test of the 70-year-old central banker's stewardship
as he faces difficult decisions about the direction of interest rates,
the lowest public approval ratings of any recent Fed chief, and an
unusual call from within for an external review of Fed supervision.
It's a period that will shape whether Powell is remembered as the Fed
leader who tamed inflation without a recession and kept a stressed
financial system intact, or as the one who lost control of prices and
resorted to punishing rate hikes to regain it.
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"Powell and his colleagues are currently in a policy space with enormous
implications for 2024," as they try to curb inflation without causing a
recession and increased unemployment heading into a presidential
election, said Peter Conti-Brown, a Fed historian and associate
professor at the University of Pennsylvania's Wharton School.
The mood towards the central bank among U.S. lawmakers will be tested
this week when Fed Vice Chair for Supervision Michael Barr appears
before congressional committees on Tuesday and Thursday. The Fed's
inspector general faces a separate hearing on Wednesday on
"Strengthening accountability at the Federal Reserve." Powell will give
remarks at a Fed conference on Friday.
LOW RATINGS
The public opinion of Powell, meanwhile, appears to have soured.
When he took over the Fed in 2018 he pledged a plain-spoken approach and
made changes that tried to elevate the interests of workers. A Wall
Street lawyer and private equity executive for much of his career,
Powell routinely opens press conferences bysaying he wants Fed policies
"that benefit all."
Following the worst inflation surge in 40 years, the skyrocketing rate
hikes that followed, and a string of high-profile bank failures, a
recent Gallup poll found confidence in Powell at the lowest mark of any
Fed chief since the question was first asked in 2001.
There have been bipartisan calls for tougher outside oversight of the
Fed, and mounting across-the-board criticism: that it was Powell's
acquiescence to deregulation during the Trump administration that
allowed bank problems to fester or that he is now likely to react in a
way that hurts smaller banks; that he hasn't raised rates enough to
control inflation or that he has already gone too far and put the
economy at risk.
Some of that criticism has come from inside the Fed, unusual for an
institution that works through consensus and guards its independence.
Fed Governor Michelle Bowman on Friday called a recent Fed review of
Silicon Valley Bank's failure "limited," and argued the central bank
needed "an independent third party ... to fully understand" why the
Santa Clara, California-based bank collapsed.
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Fed historians said the call by a sitting policymaker for an outside
review was rare if not unprecedented, and suggests the debate over bank
supervision could be lengthy.
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![](../images/051623pix/busine76.jpg)
Federal Reserve Chair Jerome Powell
holds a press conference in Washington, U.S, May 3, 2023.
REUTERS/Kevin Lamarque/File Photo
![](http://archives.lincolndailynews.com/2015/May/02/images/ads/current/guzzardo_lda022609.png)
"An external review would certainly prolong and potentially
complicate the Fed's next steps in addressing its regulatory and
supervisory performance," said Sarah Binder, a Fed historian and
professor at George Washington University in the U.S. capital.
INFLATION MISDIAGNOSIS
Powell arguably secured his second term with a do-anything-it-takes
handling of the COVID-19 pandemic that sped the recovery and
supercharged the impact of federal fiscal stimulus as Biden took
office in 2021.
But the initial misdiagnosis that same year of rising inflation as
being "transitory" forced a rapid series of rate increases whose
effects on the economy and labor market are still building.
Inflation is slowing, but remains high. After revising Fed strategy
to project jobs, policymakers - and Powell - now say they will
accept higher unemployment if that's a consequence of returning
inflation to the Fed's 2% target.
In deciding the next policy steps, Powell will have a new
second-in-command if the U.S. Senate confirms Biden's recent
nomination of Fed Governor Philip Jefferson as vice chair.
Jefferson would help steer a policy debate that could become
particularly pointed as the Fed begins a meeting-by-meeting,
data-focused set of decisions on whether to raise rates further or
hold them steady. The risk on one side is that high inflation
becomes embedded, on the other of a deeper-than-needed economic
downturn.
'WIDEN YOUR LENS'
Jefferson, who has a PhD in economics and worked briefly at the Fed
in the 1990s, joined its board a year ago after a career in teaching
and college administration.
His appointment is a departure from recent vice chairs who have
been drawn from among top central bankers and included people with
long track records at the Fed, like Janet Yellen, who led the
central bank from 2014 to 2018 and is currently head of the Treasury
Department, or were steeped in monetary policy, like Stanley
Fischer, a mentor to many global officials.
But the choice allowed Biden to solve a separate political problem
by leaving a seat open for the nomination of labor economist Adriana
Kugler as the first Latina member of the Fed board.
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After a relatively soft-spoken first year, Jefferson has few
"strongly articulated priors on monetary policy" to judge his
approach, Krishna Guha, vice chairman at Evercore ISI and a former
New York Fed official, wrote last week.
But Jefferson on Friday showed what is perhaps the key attribute
for a vice chair. In a previously scheduled address on the day of
his nomination, he made a pointed defense of where the Powell-led
Fed stands during a conference typically stacked with critics of the
U.S. central bank at Stanford University's Hoover Institution.
Anyone arguing the Fed is not "on track," Jefferson said, should be
"willing to widen your lens" and consider how much the economy might
have shifted during the pandemic.
(Reporting by Howard Schneider; Additional reporting by Ann Saphir;
Editing by Dan Burns and Paul Simao)
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