Powell's legacy at the Fed to be shaped by his misjudging inflation and standing up to Trump

Federal Reserve Chairman Jerome Powell speaks at a news conference at the Federal Reserve, following the Federal Open Market Committee meeting, in Washington, Wednesday, April 29, 2026. (AP Photo/Cliff Owen)

WASHINGTON — When Jerome Powell was sworn in as chair of the Federal Reserve eight years ago, economists worried that inflation and interest rates were too low and that too few Americans had jobs.

Now, as Powell steps down from the post after eight tumultuous years, the U.S. economy is transformed: Inflation soared after the pandemic and has remained above the Fed’s two per cent target for more than five years, angering voters and making rents, cars, and groceries harder to afford. The Fed’s key short-term rate rose to a two-decade high in 2023, even as unemployment fell to a half-century low.

Along the way, Powell shrugged off relentless personal attacks from President Donald Trump that began just months after his appointment. But in January, he pushed back against an unprecedented legal investigation by the Justice Department, becoming one of the few top officials in Washington to stand up to the Trump White House.

Powell said he will continue serving on the governing board until he is confident the Fed’s independence is truly restored. His success at protecting the central bank from day-to-day politics will be a key part of his legacy.

“It is not an unblemished record, but in an extremely challenging context, he’s performed exceedingly well,” said David Wilcox, a senior fellow at the Peterson Institute for International Economics and director of research at Bloomberg Economics. “And my overall assessment is that the country has been lucky indeed to have him as chair.”

Unlike many of his predecessors, Powell, 73, is not a trained economist, but a lawyer who also worked in finance before joining the Fed’s board of governors in 2012. Unassuming in public and private, Powell often introduces himself as “Jay” and would display his guitar-playing skills, honed as a student busking through Europe, at the Fed’s holiday parties.

‘Transitory’ inflation proved persistent

An inescapable part of Powell’s legacy will be the post-pandemic inflation surge, when consumer prices rose by a four-decade high of 9.1% in June 2022.

Overall prices are now 27 per cent higher than just before the pandemic six years ago, a staggering change for a country that had experienced little inflation for generations. Prices rose just 10 per cent in the six years before the pandemic. Groceries are 30% more expensive than six years ago, after they rose just 3.6 per cent in the six years preceding COVID.

Powell and other Fed officials — and indeed most economists — initially said the inflationary surge was “transitory,” a result of supply chain snarls brought about by the pandemic, as COVID shut down factories and slowed ports around the world.

Their immediate priority was supporting the economy in a crisis.

In two moves in March 2020, they slashed their benchmark interest rate by 1.5 percentage points to near zero. The Fed also bought large amounts of Treasury debt and government-backed mortgage securities to reduce longer-term interest rates and took other steps to pour money into the financial system to keep credit markets functioning during pandemic chaos.

In April 2020, Powell said that the Fed would “continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.’’

Even as inflation zoomed past the Fed’s two per cent target in 2021, the central bank kept its key interest rate near zero until March 2022, when inflation hit 6.9 per cent, according to the Fed’s preferred measure.

The Fed’s delay in raising rates was largely informed by a traditional economic view that inflation, stemming from a supply shock, would be temporary and if a central bank cranked up borrowing costs to fight it, the higher rates would just harm the economy and lift unemployment even as the supply crunch faded.

Misreading tea leaves

Meanwhile, the Trump and Biden administrations pumped about $5 trillion in government spending into the economy, in the form of multiple stimulus checks, support for small businesses, and other aid. The flow of dollars fueled a spending spike just as supply chains were unable to deliver on the demand.

By keeping its key rate near zero for so long, Powell’s critics charge, the Fed contributed to that excess spending and worsened inflation.

“Even though there was all the evidence there in the data that aggregate demand was going through the roof, they still said it was a transitory supply shock,” said Mickey Levy, a former top economist at Bank of America and a visiting fellow at the Hoover Institution. “The Fed contributed to that inflation and completely misread the tea leaves.”

As inflation began to spread into items such as apartment rents and surveys showed Americans increasingly worried it would last, Powell pivoted and oversaw the sharpest increase in interest rates since the early 1980s to combat the price spike.

Still, many leading economists, including former Treasury Secretary Larry Summers, worried that defeating inflation would require a recession and a sharp increase in unemployment. Instead, inflation dropped to 2.3 per cent by September 2024, according to the Fed’s preferred measure, nearly reaching its two per cent target.

By reducing inflation without a sharp economic downturn, Powell largely achieved an elusive “soft landing.” Inflation then moved higher after Trump imposed sweeping tariffs last April.

Focusing on unemployment

Fighting inflation was a sharp shift for a Fed chair that began his term more focused on the Fed’s mandate to pursue maximum employment. Before the pandemic, Powell often lauded the benefits of a strong job market for disadvantaged workers, winning plaudits from many progressive economists.

Yet some economists argue the Fed’s focus on employment contributed to its delayed response to post-COVID inflation. In an August 2021 speech, Powell said the then-elevated unemployment rate of 5.4 per cent was a reason to avoid hiking rates too early.

Still, many analysts defend Powell’s support for the maximum employment mandate. Julia Coronado, president of MacroPolicy Perspectives and a former Fed economist, said Powell was right to keep rates low before the pandemic, even as unemployment steadily declined, because there were no signs inflation was worsening.

“If you can actually push a little harder for a little longer with no consequences for inflation, then you should damn well do it,” she said. “He was absolutely right about that. He’s still right about that.”

For his part, Powell said in late April that “overweighting the employment market” had nothing to do with the inflation spike.

“It was a global shock that happened essentially very, very similarly all over the world,” he said.

Fighting for Fed independence

Last July, in an image that will likely prove the most enduring of his time as Fed chair, Powell and Trump stood before cameras in hard hats at the site of the Fed’s extensive $2.5 billion building renovation, which Trump had criticized as excessive.

Trump claimed the project would cost even more -- US$3.1 billion — and showed Powell a paper listing the costs. Powell took out his reading glasses and corrected the president, on camera, by noting that he had included a third building that had already been renovated.

It was emblematic of Powell’s willingness to push back against Trump’s unprecedented attacks. Economists have long supported an independent Fed because it allows the central bank to take difficult steps — such as sharply raising interest rates to combat inflation — that politicians often oppose because they can be painful.

Powell benefited from strong relationship-building with Congress. Research by University of Maryland economist Thomas Drechsel has found that Powell met with senators more than twice as often as his two predecessors, with the meetings evenly split between both parties.

During one visit, Powell even endeared himself to North Carolina Republican Sen. Thom Tillis’ dog, a move that paid huge dividends. Tillis essentially blocked Senate approval of Kevin Warsh, Trump’s pick to replace Powell, until the investigation of the building project was dropped. The Justice Department eventually gave up on its probe.

Even those who fault Powell on some policy decisions credit him for defending the Fed.

“The big plus is the way he has protected central bank independence,” said Don Kohn, a former vice chair of the Fed. “That is the most important thing for the future of the Federal Reserve and for protecting the public interest in having an independent central bank.”

Powell hasn’t said when he may leave the Fed, though he could remain on the governing board until January 2028.

“You want people to ... set interest rates to benefit the general public,” Powell said at his last news conference, ”and focus only on that and ignore political considerations. This isn’t bipartisan, this is nonpartisan.”

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AP Economics Writer Paul Wiseman in Washington contributed to this story.

Christopher Rugaber, The Associated Press