Weekly Economic Commentary

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• Powell’s Legacy • Resolving The Trade Emergency • Japan Steps In on the Yen “Thank you very much, everyone. I won’t see you next time.”

Reserve Chair. Powell’s eight years at the helm have been anything but simple, however.

leadership. Powell’s appointment in 2018 was not universally applauded. This was no offense to him;

term. Powell was the first Fed leader in more than 30 years to assume the role without a Ph.D. in economics, leading some to question his understanding of the business cycle. Over time, however, he demonstrated command of the key issues facing the institution. Degrees don’t always confer competence.

below the Fed’s 2% target for a good portion of the 2010s. This led some members of the Federal Open Market Committee (FOMC) to conclude that monetary policy was unnecessarily restrictive. During a regional listening tour in 2019, Powell was moved by messages that job creation doesn’t often reach underprivileged communities until labor market conditions get sufficiently tight. These impressions informed the update to the Fed’s operating framework, which advanced the concept of a “flexible average,” allowing inflation to run a little above the targeted level to compensate for periods where it was below that target. That meant somewhat lower interest rates in many environments.

50 South La Salle Street

northerntrust.com Carl R. Tannenbaum

312-557-8820 ct92@ntrs.com

Chief U.S. Economist 312-444-3843 rjb13@ntrs.com

630-276-2498 vt141@ntrs.com 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 20122014201620182020202220242026 U.S.: Inflation and Overnight Rates Inflation (Core PCE)Fed Funds Target Rate 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 20122014201620182020202220242026 U.S. Unemployment Rate

2 The new outline was released in August 2020, during the depths of COVID-19. At the time, the pandemic presented significant humanitarian and economic challenges. Economic dashboards expanded to include infection and mortality rates. The needs to safeguard public health placed a series of businesses at risk of failure; employment fell by 20 million people in a single month; and U.S. equity markets lost a quarter of their value in the space of four days. The Fed’s reaction was swift and substantial. Interest rates were reduced to zero in less than two weeks, and quantitative easing was initiated at an unprecedented scale. Support programs for credit markets, drawing on designs developed during the 2008 financial crisis, were rolled out quickly. The result was the shortest recession in American history, covering just two months. Some have suggested that the Fed went too far, but it didn’t seem that way at the time. Given the stakes and uncertainties facing the country in 2020, the monetary response had to be powerful. Powell and his colleagues moved decisively, and deserve praise for doing so. The most notable achievement of the Powell Fed was followed by its biggest miscalculation. The Fed’s insistence that post-pandemic inflation was transitory, along with its commitment to its new operating framework, led to policy that was too easy for too long. Conditions were tightened starting in 2022, but four years later, inflation has yet to return to its 2% target. The Fed’s balance sheet remains immense, something that incoming Chair Kevin Warsh has promised to have a look at. Warsh, if confirmed, will need to manage differences of opinion within the FOMC. Dissents have been more numerous of late, the product of diverging ideologies and inconsistent data. Chair Powell has been very effective at forging consensus; perhaps that is something he can still help with as he steps away from leadership. Powell’s decisions have been challenged persistently by the President who had nominated him. It started early, but mildly, with a late 2018 observation that the Fed Chair was a golfer who could not putt. Since then, the President has called Powell a “bonehead,” a “loser,” a “moron,” and other indignities. Earlier this week, Donald Trump posted an image of the Fed Chair being deposited into a dumpster. Pressure from the White House on Fed leaders is hardly new. But the style and public nature of recent criticism is unprecedented. Powell was frequently questioned about the invective at his press conferences, but always took the high road. Last week, he asserted that the name-calling wasn’t troubling to him. $3.0 $4.0 $5.0 $6.0 $7.0 $8.0 $9.0 $10.0 20192020202120222023202420252026