Fed Chair Wm. Powell is the most important and most watched figure in the world regarding the economy. He makes no huge purchases, investments, or sales in the private sector and makes no decisions regarding government expenditures. So how does he become the world’s most important economic actor?

In one sense, it’s basically by default. Let’s explain.

The U.S. economy is the largest, strongest, and most influential economy in the world, by far — no other nation’s economy is even close. Sure, it has its flaws, chief of which is a discouraging inequality of income and wealth. But that’s a matter of policy choices that are fixable. This economy is capable of producing affordable health care, education, and all the rest of it for all its people. Failure to achieve these goals is more a political failure than economic failure or lack of economic capacity

The strength and performance of any economy depends on many factors. These include its natural resource base that includes land, water, minerals and timber, which we have in abundance. Arguably even more important is our human resources that includes our stock of scientific knowledge, medical capabilities, technical expertise, hands-on skills such as plumbing, carpentry, and construction, and much else. And the Pandemic should have reminded us that it surely includes the often neglected importance of low-paid workers in child care and elder care; the backbreaking work of production, harvesting, and processing of fruits and vegetables; and the often dangerous work of staffing our slaughter houses and meat packing plants. Without the abundant labor generally classified as “unskilled,” our food costs would surely be much higher than they are now.

Government and public policy at all levels play a role in each of these factors. But this is basically structural and long run stuff. Fed Chair Powell has little or nothing to do with these. Even the strongest economy is subject to cyclical fluctuations. Citizens hold the federal government responsible for economic stabilization — full employment and affordable prices. Enter the two major tools of the federal government to stabilize shorter run fluctuations; fiscal policy and monetary policy.

Fiscal policy, government expenditures and taxation to expand or contract the economy, is the more powerful of the two. However, taxes and government expenditures are politically controversial topics apart from economic stabilization. Except for emergencies as during the recent Pandemic, fiscal policy has been abandoned for purposes of economic stabilization.

That leaves monetary policy, by default, as the major tool to stabilize business cycles. That’s where Powell, as chair of the Fed, intended by design to be politically independent, comes to be so important.

Coming out of the Pandemic, the Fed faced the vexing problem of curbing inflation that was largely the result of supply chain constraints, augmented by labor shortages due to retirements of the huge Baby Boom generation. The major available Fed tool to curb inflation is to increase interest rates, thereby discouraging spending and investing to reduce demand, hence prices. Critics logically feared that raising interest rates sufficient to curb inflation would bring on recession and unemployment. And since the historically low interest rates were credited with the high-flying financial markets, raising interest rates were feared to tank the markets. A “soft landing,” bringing the inflation rate down while avoiding recession, was seen as impossible, or, at least, unlikely.

So, what happened, and where are we now? As expected, the Fed raised interest rates dramatically. The rate of inflation has come down significantly, as hoped. But so far, no recession. Those high interest rates undoubtedly had some effect on discouraging spending. But what critics, including some economists, missed was that this was not your “ordinary” type of inflation caused by too much spending. It was in large measure caused by the unusual constraints in supply related to the Pandemic. The recovery of supply chains increased flow of supplies, thereby easing prices. This did much of the Fed’s work for it. 

Federal legislation that provided aid to businesses and consumers to get them through the Pandemic was unjustifiably blamed as sole cause of the inflation. As consumers used those cash reserves to relieve pent-up demand caused by the Pandemic, this spending was instrumental in keeping the economy from recession. Consumer and business spending kept corporate profits high, contributing to these record financial markets.

Although the rate of inflation is down, prices of some goods and services, including restaurant meals and some highly noticeable grocery items, remain higher than pre-Pandemic prices. This gives critics of the administration ammunition to claim that this economy is “the worst in history,” which it definitely is not. Even real wages at the lower end of the scale are rising, although not enough to seriously address income inequality. For the working poor to have a brighter future will require more than lower grocery prices. That’s a tough hill to climb, requiring serious legislative action for which there appears no serious political appetite.

Although not yet at the Fed’s two percent target, with declining inflation investors are anxiously awaiting the Fed to reduce interest rates that would presumably boost financial markets, likely propelling markets to new highs. The still-stubborn above two percent inflation rate has cooled earlier expectations of two or three interest rate reductions in 2024 from possibly three, to two or, even more likely, just one.

In recent remarks to Congress, Powell suggested that the U.S. is “no longer an overheated economy” with a job market that has cooled from its pandemic-era extremes and in many ways is back where it was before the health crisis. He told Congress that he did not want to send any signals about future actions, a stance consistent with the Fed’s attention to data.

Although the Fed is technically politically independent, it is not immune from persuasion, or “advice.” Democrats quizzed Powell about risks of not cutting rates soon. Republican Senator Cramer cautioned Powell that cutting rates before November would be badly perceived.

So, will he or won’t he? As Powell stated, it depends on future data.

As Yogi Berra reminded us, “It’s tough to predict stuff, especially in the future.” Neither politicians nor investors can predict that data, nor can Powell himself.

— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears monthly in the Monroe Times.