The Federal Reserve will conclude its last monetary policy meeting of 2024 on Thursday, which may be the last full year of Powell's leadership at the Fed before his four-year term expires in May 2026.
Powell has served as Chair of the Federal Reserve for over six years, but new challenges may arise in the coming months, as well as opportunities to complete some unfinished business.
If he has a wish list for 2025, it might include these:
A clear 'stop' signal.
Former Federal Reserve Vice Chair and current Senior Fellow at the Brookings Institution, Donald Kohn, said, "Powell's main task now is to achieve a soft landing, keeping the inflation rate at 2% and ensuring full employment. This may be more challenging in a complex environment where tax, tariff, and immigration policies could make the economic situation unpredictable."
Although the Fed under Powell has faced criticism for not raising interest rates faster after inflation accelerated in 2021, the rapid rate hikes that were 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 debating when to stop lowering interest rates, avoiding excessive cuts that could lead to a rebound in inflation, or a slow pace of cuts that could cause the job market to start to decline while also considering the policies of the new Trump administration.
A stable fiscal environment.
President-elect Trump pledged to undertake extensive reforms of tax, trade, immigration, and regulatory policies, which could make the Fed's task of maintaining price stability and full employment more daunting.
Since the economy may be operating at or above its potential, tax cuts or deregulation might trigger higher inflation by further stimulating demand and growth; mass deportations of immigrants could limit labor supply and exert upward pressure on wages and prices; tariffs could increase the costs of imported goods.
But the impacts are not one-sided; for example, rising prices of imported goods may weaken demand or prompt consumers to turn to local alternatives, and the Fed's task is to try to understand the full impact of these policies that may take time to formulate and implement.
Determining the net impact of all these factors on the issues the Fed cares about—inflation rates and unemployment rates—may be one of the main challenges in the final phase of Powell's leadership of the Federal Reserve.
Smoothly ending 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. Treasury bonds and mortgage-backed securities surged.
Now, as these securities mature, the Fed is reducing its balance sheet in a process known as quantitative tightening.
Before the balance sheet is reduced to a certain level, it could lead to a shortage of reserves in the financial system. Under other equal conditions, Powell and his colleagues hope to shrink 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 an unfinished business related to COVID-19 financial relief that Powell needs to complete to bring monetary policy back 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 COVID-19 pandemic shifted the Fed's focus to addressing the massive unemployment at that time). In the context of low inflation over the past decade, they adopted a new operational framework that places greater emphasis on employment recovery and commits to using periods of high inflation to make up for previous inflation shortfalls.
This approach quickly became disconnected from the economy, as the labor market recovered rapidly and inflation began to show signs of intensification in 2021.
Powell acknowledged that the reforms he oversaw in 2020 were too focused on what may have been 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 the operational guidelines avoid overcommitting to either of the Fed's two goals.
Ed Al-Hussainy, Senior Global Rates Strategist at Columbia Threadneedle, said, "If the Fed's focus on employment weakens relative to inflation after experiencing this event, we could find ourselves back in an environment where inflation is below target, and the recovery time for employment after a recession is longer than necessary."
Avoiding regulatory conflicts.
Like fiscal policy, the Trump administration may also attempt to reform bank regulation extensively. 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 assist other reputable financial institutions facing market pressures.
As the Chair of the Federal Reserve, Powell has invested considerable energy in building relationships with lawmakers, which may become very important as legislators debate possible changes to 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 suspect the Trump administration will push hard for changes in the way the federal government implements monetary policy, and there may also be calls for significant reform of the Federal Reserve. I hope Powell can keep the Fed in the best possible shape to respond to potential significant changes."
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