Powell faces inflation risk, other economic threats

If you want a friend in Washington, get a dog, President Harry Truman once advised. Jerome Powell may want a dog if he doesn’t have one already.

Powell is chairman of the Federal Reserve. He has been a steady, confident and level-headed presence for American investors and the U.S economy during the public health upheaval of

COVID-19 and political turmoil that was the Trump administration.

He steered the Fed into uncharted territory during the pandemic’s early days. Unprecedented lending programs in unprecedented amounts by the agency helped steady the nerves of investors and stanched the economic collapse from gaining longer-lasting purchase.

But now he faces different foes — and the Fed’s tools to address these risks may be more limited.

One risk is inflation. This one is a well-known enemy for the bank. It has years of experience and reams of research to draw upon in its fight against it. Powell did not do himself any favors by anchoring expectations months ago when he predicted that inflation would be transitory.

The Fed’s preferred inflation gauge is rising at its fastest pace in 30 years. Powell has acknowledged pricing pressures will persist into next year, but he remains convinced the pressures will ease and higher-than-desired inflation will not take root in the broader economy.

The Fed knows how to fight inflation — raise interest rates to slow the velocity of money. It is reluctant to do so anytime soon before the pandemic economic recovery reaches into more corners of the economy. The Fed is expected to detail its plans on

Wednesday to wind down a massive bondbuying program put in place to stimulate the COVID economy. That’s been widely expected for months. Investors will be listening for how Powell works to manage expectations over inflation and future interest rate hikes.

Another risk Powell faces is the agency without his leadership. His term expires in February. President Joe Biden has not said if he will nominate Powell for another four years.

The central bank likes to position itself as an uberapolitical agency and, within its own walls, it is. But it exists within American politics, which are messy, contentious and divided. Progressive members of Biden’s party have groused about the Fed’s seemingly light-touch on bank regulation. That’s a criticism others, including Treasury Secretary Janet Yellen — herself a former Federal Reserve chair — dispute. And Powell’s reputation as an economic diplomat is intact even as the agency has had to deal with controversial disclosures of stock trading by

Federal Reserve Chairman Jerome Powell. senior officials.

The most significant risk that will test the Fed’s fortitude and independence may just be timing. If inflation doesn’t ease quickly, and the bank ends its bond-buying program by June as expected, whoever is chair would be left to raise interest rates during the midterm elections when control of Congress is at stake in the fall of 2022.

Before that, though, when the Fed meets this week it has to guide investors and the economy through the start of holding back COVID-induced stimulus. And Powell will work so his first inflation prediction won’t come back to bite.