Jerome Powell ’75, the chair of the Federal Reserve, has come under an unprecedented amount of scrutiny in the past month as recession fears and trade tensions intensify in the midst of the country’s longest economic expansion. Although Powell has previously clashed with President Donald Trump, the chair has recently been subject to an avalanche of pressure and commentary that threaten to derail the Federal Reserve’s strongly held political independence.
On July 31, Powell announced that the Federal Open Market Committee, which sets U.S. monetary policy, had voted to lower the central bank’s federal funds rate for the first time since the 2008 financial crisis. While those rate cuts were employed to stimulate an economy in the throes of the worst national downturn since World War II, Powell justified the recent quarter-point rate cut as a move “intended to ensure against downside risks from weak global growth and trade tensions.”
The decrease in the target federal funds rate to a range of 2–2.25 percent lowered the cost of borrowing money, an attempt to encourage economic activity and increase the inflation rate to the Fed’s target of 2 percent. Noting the strength of the U.S. economy and near historically low unemployment levels, two Fed officials voted to keep rates unchanged.
During the news conference after the announcement, Powell stressed that this “insurance cut” was a “midcycle adjustment” and “not the beginning of a long series of rate cuts” typical in times of recession, defined as two consecutive quarters of decline in gross domestic product (GDP).
At a time when President Trump is eager for even lower interest rates to further boost the economy and thus aid his changes of being re-elected, Powell’s declaration went in direct conflict with his ambition. The president has long heavily criticized what he sees as his own 2017 appointee’s overly conservative approach, repeatedly lambasting him through Twitter posts and media interviews.
Following the July 31 decision, Trump tweeted that “what the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle … As usual, Powell let us down.”
Powell indirectly responded to Trump in an Aug. 23 speech at the Federal Reserve Bank of Kansas City’s annual Economic Symposium in Jackson Hole, WY. “Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States,” Powell said, a reference to Trump’s long-standing trade war with China.
He further explained that while monetary policy is an important tool for supporting consumer spending, business investment, and public confidence, it cannot provide a “settled rulebook for international trade.”
The president interpreted these statements as a direct rebuke of his tariff policies, likening him to the Chinese president in a Tweet: “… My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”
In a statement to The Daily Princetonian, University economics professor and former Federal Reserve vice-chairman Alan Blinder ’67 wrote of the president’s tweet, “I think ‘unfortunate’ is an understatement” and called his criticisms “dead wrong.”
“Both his words and his recent nominees strongly suggest a desire to undermine the Federal Reserve, which was designed to be independent of politics — and is (at least so far),” he continued. “I can tell you who the biggest enemy of the United States is: Donald Trump.” Blinder also noted his personal relationship with Powell — “we’re definitely friends.”
In a February interview with the ‘Prince’, Blinder stressed that this presidential politicization of the Fed is unprecedented in recent memory.
“Presidents since Bill Clinton have understood and respected the independence of the Fed,” Blinder said. “And even if they privately fumed about the Fed raising interest rates, as I saw Bill Clinton do, they didn’t go public with it. They respected the independence of the Fed.”
Trump is not the only public figure to weigh in on Powell and the Fed recently. The previous four Fed chairs penned an Aug. 5 Wall Street Journal opinion piece arguing for the necessity of an independent central bank.
“We are united in the conviction that the Fed and its chair must be permitted to act independently and in the best interests of the economy, free of short-term political pressures and, in particular, without the threat of removal or demotion of Fed leaders for political reasons,” affirmed the piece, signed by Paul Volcker ’49, Alan Greenspan, Ben Bernanke and Janet Yellen.
University senior research scholar and former Federal Reserve Bank of New York president William Dudley took a different approach to the matter of Fed politicization in an Aug. 27 Bloomberg opinion piece. The Fed should refuse to mitigate the negative economic effects of Trump’s trade war through further rate cuts, Dudley argued, writing that “if the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.”
Dudley’s piece received nearly universal criticism from experts who feared it could fuel conspiracy theories that the Fed was working to undermine Trump, as well as a rare statement from the Fed that “political considerations play absolutely no role” in its decisions.
Dudley declined an interview request from the ‘Prince.’
Although U.S. inflation has increased since the July cut, trade tensions with China and worries of a “no deal” Brexit continue to negatively impact markets. As global economic growth appears to slow, many international central banks have cut rates, and the Fed is widely anticipated to follow in this trend.
Federal fund rate futures markets and many economists expect two more quarter-point rate cuts in 2019, the first of which is expected to be announced after the Fed’s Sept. 17 and 18 meeting. An additional assumption can be made: Powell will try to avoid additional time in the spotlight.
Described by Blinder as someone who thinks before he speaks, the media-averse Powell is likely not relishing the recent attention he has received. When asked for career counsel by a business school student, Powell reportedly recommended that he “keep his head down and work hard,” noting that “many otherwise competent people self-sabotage with poor behavior.”
A politics major at the University, Powell wrote his thesis on forces for political change in South Africa, then under apartheid. On June 26, he hosted University students and alumni at the Federal Reserve headquarters through the Princeton in Washington (PIW) program.
Elizabeth Bailey ’21, the student coordinator for PIW, said the visit was an unforgettable experience.
“It was exciting to get such a peek behind the curtain,” she said. “Chair Powell was happy to answer questions about everything from monetary policy to his time at Princeton. He came across as genuine, compassionate, and incredibly intelligent.”