Jerome Powell: Navigating a New Course?

Abstract

In February 2018, Jerome Powell had taken over as chair of the FOMC. At first glance, the macroeconomic conditions inherited by Powell appeared favorable for continued stability: unemployment and inflation were low, and the economy had been steadily growing for nearly a decade. Yet despite the appearance of stability, the economy faced significant risks that required the Federal Reserve's attention. Was an uptick in inflation imminent, and if so, should Powell raise rates to limit any inflationary pressure? Or was the economy still operating below capacity, and if so, should the Federal Reserve take a more accommodative stance? To gain perspective, Powell needed to look back at the past fifty years of monetary policy in the United States. Excerpt UVA-GEM-0165 Rev. Nov. 11, 2019 Jerome Powell: Navigating a New Course? In March 2019, Jerome Powell was preparing for the upcoming meeting of the Federal Open Market Committee (FOMC) of the Federal Reserve System (the Fed). Powell had been appointed the chair of the FOMC only a year ago to replace Janet Yellen, who had presided over a four-year period of economic growth and relative macroeconomic stability. Powell's comments following the FOMC meeting would be heavily scrutinized by many who were gauging whether Powell would continue the gradual increase in interest rates that began under Yellen or whether he would reverse course to help stimulate the economy. At first glance, the macroeconomic conditions inherited by Powell appeared favorable for continued stability: unemployment was near historic lows (Exhibit 1), inflation was below the Fed's target of 2% (Exhibit 2), and the economy had grown steadily for nearly a decade (Exhibit 3). Yet despite the appearance of stability, the economy faced significant risks that required the Fed's attention. Following the Great Recession, the Fed had embarked on an unprecedented increase in the monetary base, which contributed to fears of lurking inflation. Marty Feldstein, chair of the Council of Economic Advisors under President Ronald Reagan, articulated these concerns: Inflation is a risk, even if it is not inevitable. The large volume of reserves...makes that risk greater. It will take skill—as well as political courage—for the Fed to avoid the rise in inflation that the existing liquidity has created. . . .