Powell faces high-stakes challenge in his 2nd term

Fed chair must tame inflation while achieving more inclusive employment

WASHINGTON — Federal Reserve Chair Jerome Powell gambled last year that his ultra-low rate policies would help revive an economy that had sunk deep into a pandemic-induced recession.

So far, his bet has mostly paid off. Growth and hiring have rebounded faster than anyone expected. President Joe Biden, citing his commitment to lowering unemployment, on Monday picked him for another four-year term.

Yet Powell’s challenge is hardly over. Inflation has jumped to a three-decade high, and Powell’s efforts to contain it will constitute the stiffest test of his next term. In doing so, he will also have to grapple with additional complications, from the unusual nature of the pandemic recovery to the risk of getting ahead of other central banks around the world.

Getting inflation under control will be particularly difficult because the Fed isn’t facing a traditionally overheating economy. Normally, the central bank can cool runaway growth, and the threat of high inflation, by raising its benchmark interest rate, which affects other loan rates throughout the economy. Doing so tends to slow borrowing and spending.

This time, huge government stimulus spending, the release of pent-up demand as the economy reopened and the Fed’s own policies — it’s kept its short-term rate near zero since March 2020 — has supercharged consumer demand.

The spending surge has mostly been funneled into goods like cars, furniture and electronics. The jump in demand has clogged ports and railways and collided with labor and supply shortages. That combination of factors isn’t something the Fed can fix.

“This isn’t your garden-variety inflation spike,” said Sarah Binder, a political scientist at George Washington University.

“This pandemic economy is different. There’s really no playbook for: How do you get the soft landing the Fed is always aiming for?”

At the same time, the economy still has 4 million fewer jobs than it did before the pandemic. Under a new policy framework the Fed adopted last year, it has placed a renewed emphasis on reaching maximum employment.

Should the Fed miscalculate and keep rates too low for too long to try to spur further job growth, price increases could accelerate.

The central bank would then have to resort to sharper rate hikes to bring inflation back down. That, in turn, would risk causing another recession.

“2022, without question, is going to be one of the hardest years that the Fed has had to navigate,” said Claudia Sahm, a senior fellow at the Jain Family Institute and former Federal Reserve economist. “They have a very complicated task ahead of them.”

By most measures, the economy has fared quite well this year, even though high prices have undercut Americans’ confidence in it and made it harder for many households to afford food, fuel and other necessities.