The Federal Reserve will conclude its final interest rate meeting of 2024 on Thursday, and next year may be the last full year of Powell's leadership, as his four-year term will expire in May 2026.
Powell has served as the Chairman of the Federal Reserve for more than 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' signals
Former Federal Reserve Vice Chairman 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 achieving full employment, which may be trickier in a complex environment where tax, tariff, and immigration policies could make economic conditions unpredictable."
Although the Federal Reserve under Powell has been criticized for not raising interest rates faster after inflation accelerated in 2021, the rapid rate hikes that were eventually implemented, along with the return of the global economy to a more normal state post-COVID, have brought inflation close to the Federal Reserve's 2% target.
But the work is not yet complete. In the coming year, Powell will have to guide policymakers in the debate over when to stop cutting interest rates, avoiding excessive cuts that could lead to a rebound in inflation, or cuts that are too slow leading to a decline in the job market, while also considering the policies of the new Trump administration.
A stable fiscal environment
President-elect Trump has promised extensive reforms in tax, trade, immigration, and regulatory policies, which could make the Federal Reserve's task of maintaining price stability and full employment more challenging.
Since 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 could limit labor supply and put upward pressure on wages and prices; tariffs could raise the cost of imported goods.
But the effects are not one-sided; for example, rising prices for imported goods may weaken demand or prompt consumers to turn to local alternatives. The Federal Reserve's task is to try to understand the full impact of these policies, which may take time to formulate and implement.
Determining the net impact of all these factors on the issues of concern to the Federal Reserve—namely, inflation and unemployment rates—may be one of the main challenges in the final stages of Powell's leadership of the Federal Reserve.
Smooth conclusion of 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 in a process known as quantitative tightening.
Before the balance sheet is reduced to a certain extent, it may lead to a shortage of reserves in the financial system. All else being equal, Powell and his colleagues hope to reduce for as long as possible, but they also want to avoid disrupting the overnight funding market as happened in 2019.
Finding the right stopping point and deciding how to manage the future balance sheet is one of the unfinished pieces of business Powell needs to complete in the financial relief related to COVID-19 to bring monetary policy back to 'normal.'
A more robust framework
Part of Powell's legacy will relate to the changes in monetary policy strategy discussed by the Federal Reserve in 2019 and approved in 2020 (when the COVID-19 pandemic had shifted the Fed's focus to addressing the massive unemployment crisis at that time). Against the backdrop of low inflation rates over the past decade, they adopted a new operating framework that placed greater emphasis on employment recovery and committed to using periods of elevated inflation to make up for previous inflation shortfalls.
This approach quickly became disconnected from the economy, which saw a rapid recovery in the labor market and showed signs of increasing inflation in 2021.
Powell acknowledged that the reforms he oversaw in 2020 were too focused on what may be a series of unique circumstances, and this year's review will determine whether the framework should be modified again.
One challenge is: how to ensure that operational guidelines avoid overcommitting to either of the Federal Reserve's two goals.
Ed Al-Hussainy, a senior global interest rate strategist at Columbia Threadneedle, said, "If the Federal Reserve's focus on employment weakens relative to inflation after experiencing this event, we may 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 fundamentally reform the way bank regulation is conducted. The Federal Reserve has direct regulatory responsibilities in this area and broader interests in financial stability and monetary policy, acting as the 'lender of last resort' to help other reputable financial institutions facing market pressures.
As Chairman of the Federal Reserve, Powell has devoted significant energy to building relationships with congressional members, and as lawmakers debate potential changes in bank regulation and the regulatory structures used to enforce these regulations, these relationships may be very important.
David Beckworth, a senior researcher at the Mercatus Center at George Mason University, said, "I doubt the Trump administration will push hard for changes in how the federal government implements monetary policy, and there may be calls for large-scale reforms of the Federal Reserve. I hope Powell can keep the Federal Reserve in the best possible shape to deal with major changes that may occur."
Article forwarded from: Jinshi Data
