Powell still faces several tricky challenges ahead.
The Federal Reserve will conclude its last interest rate meeting of 2024 on Thursday, which could mark the last full year of Fed Chair Powell's tenure, as his four-year term will expire in May 2026.
Powell has served as the Federal Reserve Chair for over six years, but new challenges may arise in the coming months, as well as opportunities to conclude some unfinished business.
If he had a wish list for 2025, it might include these:
Clear 'stop' signal
Former Federal Reserve Vice Chair and current Brookings Institution Senior Fellow Donald Kohn said, "Powell's main task right now is to achieve a soft landing, keeping inflation at 2% and ensuring full employment, which could be more challenging in a complex environment where taxes, tariffs, and immigration policies might make the economic situation unpredictable."
Although the Federal Reserve under Powell was criticized for not raising rates faster after inflation accelerated in 2021, the rapid rate hikes ultimately implemented, along with the global economy returning to a more normal state post-COVID, have brought inflation rates close to the Fed's 2% target.
But the work is not finished. In the coming year, Powell will have to guide policymakers in the debate over when to stop cutting rates, avoiding excessive cuts that could lead to a rebound in inflation or cuts that are too slow, leading to a downturn in the job market, while also considering the policies of the new Trump administration.
Stable fiscal environment
President-elect Trump promised extensive reforms in taxes, trade, immigration, and regulatory policies, which could make the Federal Reserve's task of maintaining price stability and full employment more difficult.
As the economy may be operating at or above its potential level, tax cuts or deregulation could trigger higher inflation by further stimulating demand and growth; mass deportations of immigrants could limit labor supply and put upward pressure on wages and prices; tariffs might increase the costs of imported goods.
But the impacts are not one-sided; for example, rising prices for imported goods might weaken demand or prompt consumers to turn to local alternatives, and the Fed's task is to try to understand the full effects of these policies that may take time to formulate and implement.
Determining the net impact of all these factors on the issues that the Federal Reserve cares about—inflation rates and unemployment rates—could be one of the main challenges of Powell's final stages of leading the Fed.
Smooth end to quantitative tightening
During the COVID-19 pandemic, as part of its efforts to maintain market stability and support economic recovery, the Federal Reserve's holdings of U.S. Treasuries and mortgage-backed securities surged.
Now, as these securities mature, the Federal Reserve is shrinking its balance sheet, a process known as quantitative tightening.
Before the balance sheet reduction reaches a certain level, it may lead to a shortage of reserves in the financial system. Under otherwise identical conditions, Powell and his colleagues hope to shrink it for as long as possible, but they also want to avoid disrupting the overnight funding market like in 2019.
Finding the right stopping point and deciding how to manage the future balance sheet is an unfinished business related to the COVID-19 financial relief that Powell needs to complete in order to return monetary policy to 'normal.'
A more solid framework
Part of Powell's legacy will be related to the changes in monetary policy strategy discussed by the Federal Reserve in 2019 and approved in 2020 (when the pandemic shifted the Fed's focus to addressing the massive unemployment issue at the time). In the context of low inflation over the past decade, they adopted a new operational framework that placed greater emphasis on employment recovery and committed to using times of high inflation to make up for previous inflation gaps.
This approach quickly became disconnected from the economy, with the labor market recovering rapidly and showing signs of increasing inflation in 2021.
Powell acknowledges that the reforms he oversaw in 2020 were too focused on what might be a unique set of circumstances, and this year's review will determine whether the framework should be revised again.
One challenge is: how to ensure operational guidelines avoid overcommitting to either of the Fed's two goals.
Colombia Threadneedle's Senior Global Rates Strategist Ed Al-Hussainy said, "If the Federal Reserve's focus on employment weakens relative to inflation after this event, we could return to an environment where inflation is below target, and the recovery time for employment after a recession is longer than necessary."
Avoid regulatory conflicts
Like fiscal policy, the Trump administration may also attempt to overhaul bank regulatory methods, where the Federal Reserve has both direct regulatory responsibilities and broader interests in financial stability and monetary policy, acting as the 'lender of last resort' to help other sound financial institutions facing market pressures.
As the Federal Reserve Chair, Powell has invested considerable energy in building relationships with lawmakers, which may be very important as legislators debate potential changes in bank regulation and the regulatory framework for enforcing these regulations.
David Beckworth, a senior researcher at the Mercatus Center at George Mason University, said, "I doubt the Trump administration will push hard for changing the way the federal government implements monetary policy, and there may also be calls for significant reforms of the Federal Reserve. I hope Powell can keep the Fed in the best possible shape to respond to major changes that may occur."