This past week, in the midst of many competing events, the nation’s news-aware and money-savvy cohorts gave their undivided attention to a professorial-looking fellow calmly reading from a piece of paper.
The bespectacled reader was Jerome Powell, who bears a weighty title as chairman of the Board of Governors of the Federal Reserve Bank. While he is unknown to most Americans, his economic power is sometimes said to rival that of the president himself.
And while few voters may be thinking of Powell as they go to the polls in November, all will be coping with economic conditions strongly influenced by Powell’s little-known institution.
The Fed is the latest Washington power center trying to smile for its closeup — caught in the bright glare of contemporary media attention. Like the Supreme Court, which has been barricaded behind new fencing since it overturned the federal protection for abortion rights, the Fed governors have preferred to exercise their extraordinary authority quietly in near anonymity.
The same could be said for top decisionmakers at the Food and Drug Administration, the Centers for Disease Control and others responsible for fighting the COVID and monkeypox viruses. Scientists such as Dr. Anthony Fauci have become household names and symbols, praised as saviors and condemned as tyrants.
The curtain has even been drawn back on the Constitution-based oddity known as the Electoral College, an assembly of 535 actual persons who meet at a specified interval every four years and elect the president. Normally a routine exercise noticed by few, the Electoral College has become another focal point in the current congressional investigation of former President Trump’s efforts to stay in office after losing the 2020 election.
That particular investigation has even pierced some of the murkiness of the Secret Service, which cannot account for the loss of critical text messages during the Jan. 6 attack on the Capitol.
All these institutions are usually run by individuals who operate with little public notice and speak in the code of their own professional expertise. Each agency has its unwritten protocols — which have minimal oversight and scant public knowledge.
And they have an extraordinary level of authority. While their top officials have been appointed by a president at some point, they all operate with remarkable independence thereafter.
The special case of the Fed
Secretive as many parts of the government may be, there are moments when any may be subject to exposure. This past week, it was showtime for the Fed.
Powell was on TV to read out a number set by an internal committee of the Board, a committee he also chairs. It is called the Federal Open Market Committee, and it votes on the “federal funds rate” which governs the cost of loans between financial institutions.
The FOMC consists of the seven presidentially appointed governors of the Federal Reserve and five from among the 12 presidents of the regional Federal Reserve Banks (New York, Boston, Philadelphia, Richmond, Cleveland, Atlanta, Chicago, St. Louis, Minneapolis, Dallas, Kansas City, and San Francisco).
The image has long been that of a crusty collection of aging white males who tend to be conservative financiers. The current board, however, has come to look a good deal more like the country.
The seven presidentially appointed members include the recently confirmed Vice Chair Lael Brainard and two other women. Two of the seven are African Americans, both appointed by President Biden. In partisan terms, three are Republicans, including Powell, and four are Democrats. Three were appointed (or re-appointed) by Trump, four by Biden.
This week, the change in the federal funds rate — the number the nation was waiting to hear — came in at 75, as in 75 basis points (or three-quarters of one-percent). It was instantly fed into countless computer programs and repeated endlessly in the media all over the world.
It moved the financial markets globally in real time, and the remarks Powell read from his notes on old-fashioned paper this week actually cheered some investors and helped the stock market indices to their best 3-day rally in months and the S&P 500 to its best month since 2020.
The federal funds rate can also determine the fate of individual businesses and the direction of entire industries. Not to mention the trajectories of presidents and their political parties.
Powell made clear the FOMC’s intent was to restrain the effects of inflation, which last month came in at an annualized rate of more than 9%. As has been widely noted, that was the highest in four decades. This week another number, the “personal consumption expenditures” price index (PCE), came in “hotter” than expected, pointing to the likelihood our current inflation is already in double-digit territory.
The other number, which got far more attention, was this week’s Gross Domestic Product reading for June. It showed the economy grew in nominal dollars in the first six months of the year but actually shrank by a little less than a percentage point when the numbers are adjusted for inflation.
That made for the second three-month period in a row with such a reading (the shrinkage for the first quarter of the year had been 1.6 percent). That met one common definition for a recession (although not the one preferred by most economists).
The moment vs. the momentum
After his announcement this week, Powell also read comments suggesting more rate hikes would be likely but not automatic. He noted that the latest increase, the fourth this year, brought the benchmark as high as 2.5% – a hefty move considering that the Fed’s rate had been, in effect, zero — an extreme reached twice in recent history. The first was in 2009 in the so-called “Great Recession,” the second in the recession of 2020-2021 the followed the onset of COVID.
Powell stuck around onstage answering reporters’ questions about recession. The chairman made it clear he did not see a recession at the moment, due to strong production and sales numbers and the continuing strength of hiring in the job market. The unemployment rate is a strikingly low 3.6% as of June.
Powell may well be right about the moment, but he knows that’s not the same as the momentum. His own policies contemplate pushing the economy toward, if not into, a recession. That is how those policies seek to break the inflationary cycle.
Politically, the obvious takeaway from such a moment would be that people struggling with higher prices might soon be working fewer hours or losing their jobs entirely. And the consequences of that have been pretty clear in midterm elections for generations.
Still, in the complex economic and political environment of our post-COVID world, it is possible that past experiences are less than perfect predictors.
The performance of equity markets such as the S&P 500 late in the week was taken as evidence the economic picture might be brighter than imagined.
The hope is that the fastest rate hikes since Fed Chairman Paul Volcker’s reign of terror began in 1979 can have the desired effect without anything approaching the same degree of collateral damage.
There may be no such thing as a perfect “soft landing,” but Powell at this point can at least hope for what he calls “softish.”
A storied past
The Fed is now 109 years old, a creation of the Federal Reserve Act of 1913 during what we now call the Progressive Era. President Woodrow Wilson and his first session of Congress had the rather idealistic notion of removing certain key economic decisions from the pressures of politics and the markets.
Its initial purpose was to manage the money supply, maintain value and prevent the kind of panics that had periodically plagued the economy in the 1800s. Since World War II, however, it has become increasingly imperative for the Fed to also mind levels of unemployment in making its calculations. This “dual mandate” has complicated Fed operations ever since, and Powell alluded to it this week.
Powell is the 16th person to chair the Fed and the latest to struggle with those decisions and pressures. While some have been more successful than others, all have been caught in the crossfire of criticism while in the job and especially after leaving it. Some who were hailed as heroes in their tenure have subsequently borne blame for bad things that happened later.
Alan Greenspan was dubbed an economic “Maestro” by some journalists (and one biographer) for his 18 years as charman (1987-2006), a period when even sharp increases in the federal funds rate often had relatively manageable consequences. But after he retired, Greenspan was faulted by some for the rapid rise in home valuations and alternative debt instruments that led to the crash of 2008 and the “Great Recession” that followed.
Reagan stuck with the medicine and its medicine man
Volcker, who chaired the Fed from the fateful summer of 1979 until Greenspan took over has been lionized as the man who beat double-digit inflation. Appointed by President Jimmy Carter at a point when inflation had reached nearly 14%, Volcker immediately set about persuading the Board of his day that drastic measures were mandatory
“At the time, the resulting inflationary psychology was so deeply embedded that almost everyone despaired at purging it,” wrote financial journalist Robert Samuelson in his book The Great Inflation and its Aftermath in 2008. “Only the unexpectedly savage recession of 1981-82, when unemployment peaked at nearly 11 percent, succeeded in doing so.”
That “savage” recession had already begun by the summer of 1981, when Volcker and his board continued raising the federal funds rate past 20%. Volcker was not cooling the economy so much as strangling it.
Even before that recession struck with full force, the “stagflation” of the 1970s had proved too much for Carter. While other issues mattered in Carter’s loss to Republican Ronald Reagan in the 1980 election, economics had set the stage.
Reagan stuck by the medicine and the medicine man. Volcker and his board raised the federal funds rate as high as 20% in 1981. Srre enough, Republicans suffered losses around the country in the midterms of 1982, especially in governorships. But Reagan’s working majority of Republicans and conservative Democrats in Congress survived largely intact. He reappointed Volcker the following year, as the medicine continued to prove effective against the underlying disease.
Widely vilified as the man who brought on double-digit joblessness in the early 1980s, Volcker had the satisfaction of seeing both the unemployment number and the inflation rate beaten back down into low-single digits during his second term as chairman. He retired but returned to advise the policymakers dealing with the Wall Street crisis in 2008.