Fed Chair Jay Powell Failed His Main Test: Keeping US Inflation Low

With Jay Powell’s term as Federal Reserve chair ending, commentary on America’s central banker has already descended into ridiculous hagiography. One former regional Fed president even graded Powell’s tenure an “A” on television, citing President Trump’s pressure on Powell to cut interest rates, plus the shameful lawfare directed against him.

But since when is resisting politicians the litmus test for a central banker? Grading Powell chiefly for defending Fed independence is like naming a goalkeeper man of the match because he defied the manager’s tactics and organised his defence better, while omitting the three soft goals he conceded. Independence matters because it helps undergird price stability. Yet on that ultimate test of keeping inflation low, Powell failed.

He certainly faced testing circumstances, including a once-in-a-century pandemic, America’s lurch to protectionism, and conflicts in Ukraine and Iran pushing up energy prices. All were supply-side shocks, squeezing output and raising prices to force difficult macroeconomic trade-offs.

He deserves praise, too, for the eventual course correction. Once Powell’s federal open market committee (FOMC) accepted it had misread the post-pandemic inflation, it squeezed broad money growth and lifted rates by 5.25 percentage points in 16 months. Inflation fell gradually to 2.3 per cent by spring 2025 without an unemployment spike. It might have drifted toward the Fed’s 2 per cent target but for Trump’s tariffs and foreign-policy adventurism.

But in truth, this was cleaning up a mess the Fed itself had made. Policy tightened meaningfully only in spring 2022, when the Fed’s preferred inflation gauge was already at 7 per cent. The worst inflation in four decades squeezed real wages, redistributed wealth arbitrarily and confused households confronting a permanently higher price level. It also fed the ignorance and anger now spawning misguided price-control proposals.

The Fed had mistaken clogged ports and labour disruptions for “supply shocks” it couldn’t affect, when industry was really hitting capacity constraints amid rampant demand fuelled by monetary excess. Powell’s Fed famously thought inflation was “transitory” and would quickly dissipate. In reality, total nominal spending was soaring, underpinned by loose money.

Yes, the US Congress’s vast borrowing didn’t help. But an independent central bank targeting inflation should, in theory, set monetary policy accounting for this. The truth is that, while genuine supply shocks exacerbated inflation’s peak, it was monetary policy accommodating Congress’s fiscal incontinence that drove almost all excess US inflation since 2021. This is very different from the UK, where our economy’s supply-side weakness has played a comparable role to macroeconomic largesse.

Worse, the Fed’s own framework rationalised the delayed response. Its 2020 review, overseen by Powell, was an artefact of the post-2008 world of low inflation, falling neutral rates, near-zero policy rates and endless fretting that monetary policy had been insufficiently expansionary. The Fed embraced “flexible average inflation targeting”, saying that after periods of below-target inflation it would likely aim for inflation “moderately above” 2 per cent for some time, while focusing on employment “shortfalls” from maximum employment.

In effect, the Fed made the inflation target more discretionary. It had no specified averaging period, no numerical definition of “moderately above”, and no binding rule compelling the FOMC to tighten when nominal spending surged. The Fed was fighting the last war, cheered on by policymakers who believed the post-Great Recession lesson was to “run the economy hot”. As late as November 2021, it was still treating inflation as largely transitory, expecting supply constraints to ease and inflation to fall back as the pandemic economy normalised.

So, yes, Powell clearly deserves praise for resisting Trump’s pressure and defending the Fed’s policymaking authority. But his job wasn’t just to preserve central bank independence, nor firefight high inflation. He helped write the fire code, allowed the fuel to ignite, and arrived far too late with the hose. Judging him just by the actions of a president who deemed him an enemy lets Powell off too easily.