Stakes high for Powell’s 2nd term
Inflation poses challenge for Fed chair
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 isn’t your garden-variety inflation spike,” said Sarah Binder, a political scientist at George Washington University who has studied the Fed. “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.
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. On Monday, while introducing Powell and his nominee for vice chair — Lael Brainard, a member of the Fed’s Board of Governors — Biden declared that the U.S. economy has “gone from an economy that was shut down to an economy that’s leading the world in economic growth.” He credited his own policies and the Fed’s as well.
“Things are getting better for American workers,” the president said. “Higher wages, better benefits, more flexible schedules. … Savings are up, home equity is up.”
Yet consumer prices also skyrocketed 6.2 percent in the 12 months that ended in October, the fastest year-over-year jump since 1990. Powell, after having previously describing high inflation as merely “transitory,” now acknowledges that it could persist well into next year.
Most analysts expect the Fed to raise rates at least twice in 2022 to try to rein in inflation, which the Fed wants to average 2 percent annually over time.