Fed’s Powell is popular. His war on inflation could change that

His consciousness of how the Fed’s moves are being received has at times prompted Powell to adjust course. He pivoted toward a gentler policy stance in early 2019 after markets reacted sharply to his December 19, 2018, news conference, at which the Fed forecast that it would keep removing its support from the economy. And his awareness has shaped his communication style: Powell has tried to reach ordinary Americans, delivering plain-spoken remarks that acknowledge how economic developments shape their lives.

Powell’s responsiveness has often been viewed as one of his strengths — but it is now prompting some economists and investors to question whether he will be able to stick by the central bank’s plan to wrangle inflation.

‘We’re not at the point of maximum pain yet. The pressure will intensify on Powell and his colleagues.’

David Wilcox, former director of the Fed’s research and statistics division.

Once today’s rate increases translate into palpable financial or economic pain, criticism is likely to come in hard and fast as recession risks intensify and as everyday Americans find their jobs at risk and their wage growth slowing. Already, some politicians and progressive economists are urging Powell to stop his rate campaign for the good of the American worker.

Fed policy is made by committee, but the chair is the central bank’s most visible and powerful policymaker, and complaints are likely to be lobbed at Powell personally. As markets and the public react, some Fed watchers think he will back off before inflation is well and truly stamped out of the system.

“Despite Jerome Powell repeatedly putting on the Paul Volcker mantle, he is not Paul Volcker,” said Komal Sri-Kumar, the president of his own macroeconomic consulting firm, explaining that he holds that view based on Powell’s track record.

He expects the Fed to pull back as financial market pain materialises or unemployment spikes.

Loading

The Fed has already lifted borrowing costs from near zero to 3.1 per cent this year. But the impact most likely has yet to be fully felt. It will play out over months as people stop taking out loans to fund big purchases and business expansions, weakening growth. The job market remains strong for now, but unemployment is forecast to rise next year, thanks to the Fed-induced chain reaction.

“We’re not at the point of maximum pain yet,” said David Wilcox, a Bloomberg economist and former director of the Fed’s research and statistics division, including during Powell’s tenure. “The pressure will intensify on Powell and his colleagues.”

Fed officials have clearly broadcast the broad outline of their plan to get inflation under control. After raising rates this week, they could potentially slow down to a half-point increase as early as December. How much more they raise rates in 2023 will hinge on incoming data.

Yet it is the next phase of the plan that is key, and that could pose the biggest challenge. Once officials stop raising rates, they intend to keep them high until they are sure inflation is coming back under control.

The question is whether central bankers will stick with that commitment if the nation’s sentiment starts to turn as unemployment rises.

For now, public opinion is mostly behind the inflation-fighting campaign. Americans hate rising prices, and the Biden administration talks regularly about the need to curb inflation.

But already, some critics fear that the Fed has tightened policy so quickly that it is not giving itself time to understand how its moves are reverberating throughout the economy. Central bankers may end up costing more jobs and chipping away at more livelihoods than they need to in order to bring inflation back under control — especially as supply chains begin to heal and consumer spending growth slows.

‘Take a beat’

Rakeen Mabud, the chief economist at the left-leaning advocacy group Groundwork Collaborative, thinks the Fed needs to “take a beat” to see the policy changes it has already made play out. A colleague of Mabud’s recently made what she thought was an apt analogy: “Jerome Powell needs to get a glass of water before he goes back to the bar.”

But past experience illustrates the risk of backing off prematurely. When Arthur Burns was the Fed chair in the 1970s, the central bank raised rates but relented before inflation was vanquished — allowing rapid price increases to linger. People began to expect steadily faster inflation, making it even harder for Volcker to stamp it out once in office. His Fed sent interest rates skyrocketing to nearly 20 per cent to quash price increases, which have been relatively tame ever since.

In interviews with 10 people who know Powell personally, including some who have been critical of him, a consistent prediction emerged: He does not want to go down in history as the man who squandered 40 years of price stability.

“When he has made up his mind that this is the course to take, he tends to not let a lot of distractions get in the way,” said Shai Akabas, who worked alongside Powell in 2011 when he was at the Bipartisan Policy Center trying to persuade Republican lawmakers to lift the debt ceiling.

To be sure, Powell’s central bank is hopeful that it will not have to inflict Volcker-like economic pain. Inflation has been high for just a year and a half, and does not yet seem to be deeply entrenched in US economic behaviour. That could allow officials to slow the economy less drastically — and central bankers have taken a much gentler policy path than in the 1980s so far.

Loading

“This is not the Volcker inflation,” said Alan Blinder, a former Fed vice chair who is now at Princeton University. “It’s a big problem, but not the kind of colossally big problem that Paul Volcker was facing.”

But while 2022 is not 1982, price increases are proving more stubborn and broad-based than expected. That could make it harder to contain them with only a gradual slowdown. The Personal Consumption Expenditures price index climbed by 6.2 per cent in the year through September, far higher than the Fed’s 2 per cent goal.

Monetary decision-making may become trickier in the months ahead. For now, officials appear united in the push to crush inflation. Keeping that consensus intact if real-world conditions take a turn for the worse could prove more difficult, especially if price gains are slowing.

In fact, making policy that is more Volcker than Burns is likely to require tough judgment calls. How much must inflation ease before the Fed can safely begin to cut rates? If the economy contracts sharply, can the Fed assume that price increases will stall?

As the possibility of having to inflict at least some economic pain looms, the 1980s experience is front of mind at the Fed. In late August, Powell concluded his most closely watched speech of the year with a declarative line: “We will keep at it until we are confident the job is done.” It was a clear reference to Volcker’s autobiography, which was titled “Keeping at It.”

This article originally appeared in The New York Times.

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.