NEW HAVEN, Connecticut — In the long history of the United States central banking, Federal Reserve (Fed) Chairman Jerome Powell stands out as a hero. His speech at this year’s Jackson Hole Economic Policy Symposium was focused and disciplined, demonstrating solid command of analytics and well-reasoned judgment in shaping monetary policy. And he managed all of this while facing unprecedented political pressure from US President Donald Trump that has since metastasized into an attempted firing of Fed Governor Lisa Cook.
As a fierce defender of the Fed’s long-standing independence, Powell is worthy of joining Paul Volcker and Alan Greenspan in the pantheon of US central banking. Volcker earned his place through political courage: he tightened monetary policy to tame double-digit inflation, despite knowing that it would push the US economy into a severe recession. As I wrote in my endorsement of Joseph Treaster’s 2004 biography of Volcker, “His courage as a central banker in leading the assault on the Great Inflation of the 1970s was the single most important step on the road to economic renewal in the United States.”
Greenspan, for his part, took an expansive view of the challenges to sustaining disinflation in the post-Volcker period, introducing a risk-management approach to monetary policy that allowed the Fed to factor asset bubbles and productivity into its decision-making. From my perch at Morgan Stanley, I was critical of Greenspan for not staying true to the concerns he courageously raised in his famous “irrational exuberance” speech of December 1996. But he deserves enormous credit for having the mettle to challenge markets at a time of great froth.
Powell appears to have drawn inspiration from Volcker and Greenspan’s steely nerves and apolitical focus. Volcker faced widespread public criticism of high interest rates: farmers blockaded the headquarters of the Federal Reserve Board (where I worked at the time), and lawmakers were outraged. Greenspan’s concerns over irrational exuberance generated a strong backlash from Wall Street. Likewise, there was nothing subtle about the political pressure bearing down on the determined Powell as he ambled up to the podium at Jackson Hole on Aug. 22.
Financial markets roared their initial approval of Powell’s message that a shifting balance of risks “may warrant adjusting our policy stance.” With futures markets already pricing in an aggressive easing trajectory, the surprise was less in the implications of Powell’s words for the next few meetings of the Fed’s Open Market Committee. Markets reacted more to the rigorous framework that Powell provided as a guide for the future conduct of US monetary policy.
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He expounded on the complexities of Fed decision-making, identifying two basic issues: the factors affecting “mandate compliance,” and the considerations shaping the process that the Fed uses to achieve those objectives.
The dual mandate — price stability and full employment — has created a tough balancing act for the central bank. Powell methodically laid out the factors currently weighing on both, from tariffs and immigration policy (which are affecting supply, as well as demand) to the recent underlying loss of momentum in employment and gross domestic product growth. Powell drew comfort from a still-low unemployment rate, but emphasized a “curious kind of balance” in the labor market. That is Fedspeak for “precarious,” in that it could quickly give way to higher joblessness. I take this as a key factor in assessing the shifting balance of risks that will guide future policy actions.
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Powell’s discussion of policy-framework considerations was somewhat more academic and less of immediate relevance for interest rate setting than shifting labor-market considerations. But this is the area where an independent Fed can exercise the greatest discretion.
Contrary to conventional wisdom, the central bank does not set its own mandate. That comes directly from congressional authority — initially the Employment Act of 1946, with the so-called Humphrey-Hawkins Act of 1978 later adding inflation control. While the Fed has the authority to interpret the objectives of maximum employment and price stability, it enjoys the most freedom in setting the framework by which it aims to comply with legally mandated targets.
Powell put considerable effort into explaining the Fed’s updated thinking on framework considerations. No big surprises here. In the Fed’s earlier framework review in 2020, real or inflation-adjusted interest rates were assessed relative to two thresholds: the effective lower bound (ELB) on the downside and “neutrality” on the upside, the latter being an interest rate that neither restricts nor stimulates economic growth or inflation.
The current review removes the ELB as a primary consideration and abandons an average inflation-targeting strategy that allowed the Fed to make up for earlier downside surprises on inflation by permitting a period of offsetting overshoots. The updated framework also makes a similar adjustment to potential shortfalls from maximum employment and reaffirms an inflation target of 2 percent as “most consistent with dual-mandate goals.”
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Powell’s disciplined performance at this year’s Jackson Hole gathering was an extraordinary, Volcker-like act of political courage. By staying on mission in today’s toxic era of political interference, he is an inspiration for Cook and the rest of us. We witnessed nothing short of a truly valiant act of a great American public servant. Welcome to the pantheon, Jerome Powell.
Stephen S. Roach is a faculty member at Yale University and former chairman of Morgan Stanley Asia. He is also the author of “Unbalanced: The Codependency of America and China” (Yale University Press, 2014), and “Accidental Conflict: America, China, and the Clash of False Narratives” (Yale University Press, 2022).
Copyright: Project Syndicate, 2025
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