It is this inconsistency that can lead to a credibility issue for the Fed. Unfortunately, we have seen this play out before. In the 1970s, Richard Nixon placed undue pressure on then Fed Chair Arthur Burns to pursue an expansionary monetary policy in an effort to bring the unemployment rate down and secure his reelection. The outcome was nearly a decade of double-digit inflation with high interest rates and high unemployment.
This presents a dangerous scenario for the economy, especially in the deregulatory environment of the current administration. Powell, a lawyer who comes from the world of investment banking, has echoed President Trump’s desire to ease or remove financial regulations put in place in the aftermath of the financial crisis. Doing so while keeping interest rates low is what caused the excessive risk taking by large banks and financial collapse. Before her departure, Janet Yellen warned of the consequences of forgetting the lessons of the financial crisis that led to the Great Recession.
Navigating the perils of the economic and political headwinds will require strong leadership from Powell and an independent Federal Reserve. Although Powell’s appointment is seen as offering continuity to the policies of Janet Yellen, he will be the first non-economist at the helm of the most important economic policymaking institution in nearly forty years. As such, he must leverage the expertise of the professional economists on the FOMC and ground his decisions on sound economic principles to achieve the objectives of sustained economic growth and low inflation consistent with the Fed’s mandates.
—By Victor Li, associate professor of economics at the Villanova School of Business. Li previously worked with former Fed Chairman Ben Bernanke at Princeton University, and also worked as a visiting scholar at the Federal Reserve Bank of St. Louis, and a senior economist at the Federal Reserve Bank of Atlanta.