Amna Nawaz:
Jerome Powell’s eight-year role as chair of the Federal Reserve ends today. His term will be remembered as one of the most turbulent and politically charged in the Central Bank’s history. Kevin Warsh will take the helm in the coming days.
William Brangham looks at Powell’s impact.
William Brangham:
Amna, it is hard to think of a Fed chair who has been more maligned by the president who nominated him. Jerome Powell has been routinely insulted, threatened repeatedly that he be fired, and was the target of a federal investigation seemingly ordered by the president.
But Jay Powell steered the Federal Reserve and the U.S. economy through major events, most recently the war in Iran. During the pandemic, he helped prevent a financial crisis.
But Powell’s critics argue some of his interventions were too costly and that he didn’t respond quickly enough to inflation and may have even helped fuel it.
So, for more on Powell’s legacy, we are joined by Jason Furman. He teaches economic policy at the Harvard Kennedy School and was former chairman of the Council of Economic Advisers in the Obama administration.
Jason, thank you so much for being back on the “News Hour.”
Today’s Jerome Powell’s last day as Fed chair, though he will stay on at the board. You recently wrote a piece in The New York Times lauding his tenure, largely. How should history judge his tenure?
Jason Furman:
First of all, for any normal Fed chair history is mostly going to remember, to the degree they remember anything, what happened to variables like inflation and unemployment.
In Powell’s case, that’s an important part of it and we can talk more about it. But the main thing that’s going to be in the history book is that he is the person who stood up to the most intense bullying the Fed has ever experienced and left the Fed even stronger and more independent and more credible than it was when he walked in the building eight years ago because it survived that test.
William Brangham:
Yes, Jay Powell has endured an incredible barrage of insults from the president, including being called an enemy of the United States.
Does that — so that independence, in your view, stands above all else in his record?
Jason Furman:
Yes, absolutely.
You should understand, economists have studied independent central banks for decades, and they’re the closest thing macro economists have to a free lunch, where you can get lower unemployment without any tradeoff in the long run in terms of higher inflation or anything else. You get better unemployment, better inflation, better outcomes.
It’s the closest thing we have to a free lunch. Countries that have violated the independence of their central bank have seen some really terrible outcomes. We have seen it all around the world.
And so, for me as an economist, that is the most important thing, not any day-to-day decision, but are you protecting the institution? And he’s done a superb job of that.
William Brangham:
During the pandemic, as I mentioned, he aggressively slashed interest rates. He cut bank regulations. He supported the PPP loan program.
And then, post-pandemic, he raised rates to avoid a very deep recession. Some do argue that he really was too slow responding to inflation.
I’m going to play a little bit of sound from Michael Strain, who’s an economist at the conservative AEI. And he admires a lot of Powell’s tenure for what you said, but he says this on inflation:
Michael Strain, American Enterprise Institute:
The $1.9 trillion Biden stimulus package was signed into law in March of 2021. That led to a pretty immediate increase in the rate of inflation. The Fed waited for 12 months to raise rates, 12 months of inflation coming in above target.
And the Fed only acted to raise rates when CPI inflation hit 8 percent. And so I think the Fed was too slow. The Fed misunderstood the nature of inflation. The Fed misunderstood the strength in the economy.
William Brangham:
Too slow, misunderstood the rate of the economy. What’s your reaction to that?
Jason Furman:
Let me react to that. But let me just first go off of the first part of your question.
We forget that we didn’t have a financial crisis after COVID. We almost take that for granted. That took enormous amounts of effort, creativity, and being ahead of the curve. And it was so effective that we didn’t have a problem, so we almost forget to thank the people, of which Jay Powell was a very important one who made that possible.
Then, absolutely, I do agree with Michael Strain that the Fed was too late in raising rates. They spent too long talking about how inflation was transitory. And that was sort of a — to my mind, a black-and-white error. They were completely wrong.
I’m not sure how important it was how wrong they were. Most of the inflation came from other sources, both the fiscal expansion and the supply shocks. If they’d raised rates six months earlier, we would have had most of that inflation anyway. So it was definitely a bright line error, just not necessarily a quantitatively large one.
And then there’s the third part of the story, which is how quickly they corrected that error. And part of why I appreciate that so much is, I was out there saying, you need to raise rates, maybe even raise them by 50 basis points over the course of this year, half-a-percentage point. They ended up doing 75 basis points per meeting for four meetings in a row.
They did an enormous aggressive effort to clean up their mistake that was actually more aggressive than what any other critics, including me, and I think even including Michael Strain, had recommended.
William Brangham:
Now, Kevin Warsh takes over the job of Fed chair. He will have the same issue, certainly, that — of President Trump wanting him to do his bidding with regards to interest rates. How do you see that playing out?
Jason Furman:
Kevin Warsh has a hard job ahead of him. Economically, it’s a hard job because, with the Iran war, we have surging inflation, but we also have more concerns about slowing economic growth. And then compounding that, you have a president who will continue to put his pressure on the Fed.
I’m cautiously optimistic that Warsh has both the economic and the political skills to navigate this minefield, that he correctly understands that the Fed needs to make its operational decisions independently, that he does not want history thinking he’s the person who gave into pressure, nor does he want the whole committee voting against him because the committee thinks that he’s just doing the bidding of Donald Trump, rather than what the economy needs.
So, cautiously, I’m hopeful about what will happen under Warsh, but I will be watching closely because the things he needed to do to get the job are not something that you ever really want to see happen in this process.
William Brangham:
Jason Furman of the Harvard Kennedy School, thank you so much for being here.
Jason Furman:
Thanks for having me.
