The Fed will conclude its last policy meeting of 2024 on Thursday, and next year could be the last full year of Powell's tenure as Fed Chair, with his four-year term set to expire in May 2026.
Powell has served as Chair of the Federal Reserve for more than six years, but new challenges may arise in the coming months, as well as opportunities to end some unfinished business.
If he has a wish list for 2025, it might include these:
Clear 'stop' signals
Former Fed Vice Chairman and current Brookings Institution senior fellow Donald Kohn said, 'Powell's main task right now is to complete a soft landing, keeping inflation at 2%, and achieving full employment, which could be more challenging in a complex environment where tax, tariff, and immigration policies may make economic conditions unpredictable.'
Even though the Fed under Powell was criticized for not raising rates faster after inflation accelerated in 2021, the rapid interest rate hikes that were ultimately implemented, along with the global economy returning to a more normal state after the COVID-19 pandemic, have brought inflation rates close to the Fed's 2% target.
But the work is not done. Over the next 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 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 has promised broad reforms to tax, trade, immigration, and regulatory policies, which may make the Fed's task of maintaining price stability and full employment even more challenging.
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; large-scale deportations of immigrants could limit labor supply and put upward pressure on wages and prices; tariffs could raise the cost of imported goods.
But the impacts are not one-sided; for example, rising prices of imported goods may weaken demand or push consumers towards local alternatives, and the Fed'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—inflation rates and unemployment rates—may be one of the main challenges in the final phase of Powell's leadership at the Fed.
Smoothly ending quantitative tightening
During the COVID-19 pandemic, as part of its efforts to maintain market stability and support economic recovery, the Fed's holdings of U.S. Treasuries and mortgage-backed securities surged.
Now, with the maturity of these securities, the Fed is shrinking its balance sheet, a process known as quantitative tightening.
Before the balance sheet is reduced to a certain extent, it may lead to insufficient reserves in the financial system. Other things 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 like in 2019.
Finding the right stopping point and deciding how to manage the future balance sheet is one unfinished business from Powell's COVID-19-related financial rescue efforts 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 Fed in 2019 and approved in 2020 (when the COVID-19 pandemic had shifted the Fed's focus to addressing the massive unemployment issue at the time). Against the backdrop of low inflation over the past decade, they adopted a new operating framework that placed greater emphasis on employment recovery and committed to using periods of high inflation to make up for previous inflation gaps.
This approach quickly became disconnected from the economy, with the labor market in the economy rapidly recovering and showing signs of increased 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 Fed's two goals.
Ed Al-Hussainy, a senior global interest rate strategist at Columbia Threadneedle, said, 'If the Fed's focus on employment diminishes relative to inflation after going through this event, we may 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 completely overhaul bank regulation, with the Federal Reserve having both direct regulatory responsibility in this area and broader interests in financial stability and monetary policy, serving as the 'lender of last resort' to assist other creditworthy financial institutions under market pressure.
As Chair of the Federal Reserve, Powell has invested significant effort in building relationships with lawmakers, and these relationships may be very important as legislators debate possible changes in bank regulation and the regulatory structure used to enforce these regulations.
David Beckworth, a senior researcher at the Mercatus Center at George Mason University, said, 'I suspect the Trump administration will push hard to change the way the federal government implements monetary policy, and there may be calls for a massive reform of the Federal Reserve. I hope Powell can keep the Fed in the best shape possible to respond to any significant changes that may occur.'
Article reposted from: Jin Shi Data