Jay Powell excels at his top job: punching bag

Sticks and stones. Anxious politicians don’t get to decide U.S. interest rate moves, for a reason. The Federal Reserve’s monetary policy squad, led by Chair Jerome Powell, stands insulated from the electoral process. Politicians, current and aspiring, can therefore play to their base by slamming his decisions without leading to wild volatility. Everyone benefits, because when politicians rule at the Fed, disaster ensues. Powell, whose term ends in 2026, may be an atypical bulwark.

Reeling stock markets tend to revive Washington’s Fed bashing. For nearly five decades, the central bank has had two sometimes-divergent jobs: promoting stable prices and employment. It decides how to use its primary tool, shifting the path of interest rates, largely at regularly scheduled meetings of its Federal Open Market Committee, leaving onlookers to tut over whether it is moving too quickly, too slowly, or in the wrong direction.

Consternation began with the Fed’s July decision to leave rates where they are. A gloomy jobs report and a giant sell-off in global stock markets followed, attracting unsolicited advice from the likes of Democratic Senator Elizabeth Warren, who called on the chair to “cancel his summer vacation” and cut the price of money. Republican presidential candidate Donald Trump has urged against a cut, on the other hand, saying it would boost Democrats’ chances in November’s election – even though he has promised to pursue lower rates if he wins.

Both sides ought to be rational enough to see that it’s better if the Fed ignores their entreaties. The central bank’s mandate was born after the tumultuous 1970s, when President Richard Nixon pushed for loose monetary policy while imposing price controls, as a way of taming the era’s brutal stagflation – a toxic combination of inflation and sluggish growth. It didn’t work. A National Bureau of Economic Research paper claims that if a U.S. administration managed to increase pressure on the Fed for six months just half as much as Nixon did on then-Fed Chair Arthur Burns, prices could spike 8%.

Powell isn’t Burns. For one, he has a clearer mandate. Unlike other recent appointees, he also has bipartisan support: selected by Trump, extended by President Joe Biden, and confirmed overwhelmingly in the Senate both times. He can be relaxed about brickbats from jockeying politicians. That shouldn’t be taken for granted: Powell’s replacement may have less bipartisan backing, a different temperament, or helm a Fed handed different rules by Congress. For now, though, the U.S. economy’s punching bag is working just fine.

Context News

The Federal Reserve kept interest rates steady at its meeting on July 31. Unemployment figures released on Aug. 2 showed an increase in the joblessness rate to 4.3%. Stock markets fell on Aug. 5, with the S&P 500 Index down 3%. Both Democratic and Republican politicians have weighed in the possibility of a September rate cut, or an emergency one sooner, while Fed Chair Jerome Powell has said the Fed does not make political considerations in setting monetary policy.