Who is he?
Born 1953 in Washington DC, prior to working as an assistant secretary of the Treasury under the presidency of George H.W. Bush, Mr. Powell embarked on a career as an investment banker at Dillon, Read & Co and as a lawyer within New York City [1]. He attended Princeton and Georgetown universities where he obtained both Politics and Law degrees respectively [2]. However, in 2018 Jerome Powell was appointed as chairman of the US federal reserve by President Donald Trump, tasking him with one of the most important roles within the US economy [3].
What does he do?
Initially, the US federal reserve (Fed) was bought into existence through the Federal Reserve Act 1913, passed by President Woodrow Wilson. Originally, due to the economic uncertainty and financial crisis at the time the Fed was responsible for acting as a lender of the last resort [4]. However, now it is responsible for [5] :
- Management of US Monetary Policy,
- Auditing bank holding companies
- Assessing systematic risk in the economy
The two goals of the Fed are to maintain stable prices of goods and services as well as to lower unemployment to approximately 4-5% [6]. Mr. Powell can achieve this through the manipulation of the base interest rate at which banks lend money in order to indirectly influence the inflation rate [7]. By doing this, the Fed assures the economy runs smoothly and that economic growth targets are maintained at a healthy rate.
Viewpoints
Having taken control of the Fed, Mr. Powell implemented a very similar strategy to former chair of the Fed, Janet Yellen. He incrementally increased interest rates in line with predicted economic growth by stating in June 2017 (prior to taking his role as chairman of the Federal Reserve) “I would view it as appropriate to continue to gradually raise rates” [8].
He is also in favour of reducing the Federal reserves $4.5 trillion portfolio in assets and conservatively investing only if the economy requires a stimulus package for further growth. Whilst he is also against the notion of relying on the Taylor rule to direct monetary policy explaining “simple policy rules are widely thought to be both interesting and useful, but to represent only a small part of the analysis needed to assess the appropriate path for policy… I am unable to think of any critical, complex human activity that could be safely reduced to a simple summary equation” [9].
Timeline of Events
June 2020: Due to the Coronavirus pandemic, it was announced ‘low income households’ within the US alongside ethnic minorities have experienced the greatest decline in employment. With fears that this would ‘widen inequality’ in the long term. Mr. Powell stated that until the pandemic was ‘contained’, economic recovery was unlikely. Small business were highlighted being at ‘acute risk’ [10].
March 2020: In order to curb economic collapse due to the effects of the pandemic it is announced the federal reserve will cut interest rates to ‘near zero’ and inject $700 billion in Treasury and mortgage backed securities [11].
July 2019: Mr. Powell announced the US Federal Reserve would cut interest rates by 0.25% in response to a slowing economy and to counter the effect the US trade war has had globally [12].
January 2019: Global uncertainty, warrants the Fed implementing a “wait and see” approach to changes in interest rates [13]
November 2018: Believes that the Fed’s benchmark interest rate is “just below” neutral [14]
October 2018: States the US interest rates are “a long way from neutral” [15].
June 2018: Unemployment in the US is at its lowest since the 1960s. It can be argued that continually low inflation (see Figure 2) is the justification of the surprising strategy implemented by Mr. Powell [16].
Inflation and unemployment: What’s the link?
In 2019, with unemployment on a steady incline (see Figure 1) and the US engaged in a trade war with China, Mr. Powell decreased the interest rate by a quarter point. The shift “let us down” according to President Trump who would have liked the interest rate to be decreased more drastically.
However, since the outbreak of the pandemic, it was announced the interest rate would be cut to near zero as the Fed ‘saw a risk to the economy and chose to act’ in order to stimulate economic growth. Due to historic data and findings associated with the Phillips curve, which indicates an inverse relationship between inflation and unemployment, it could be argued that in order to tackle predicted increases in unemployment because of the pandemic, Mr. Powell ordered a reduction of the interest rate to stimulate economic growth and thus increase inflation. This also came with firms being encouraged to increase work forces to tackle increased demand on businesses.
