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Post: The Fed: Jerome Powell’s grade for his first term leading the Fed? An incomplete.

Asked recently in a television interview for his grade of Fed Chairman Jerome Powell’s first four years in office, Austan Goolsbee was quick to say “incomplete.”

It wasn’t that Goolsbee, an economics professor at the University of Chicago and veteran of inside-the-Washington-Beltway economic deliberations, was saying that Powell had skipped class and was throwing the frisbee across the campus green; it was just that Powell’s sternest test still lies ahead.

The manner in which the Fed brings down inflation over the next 18 months will be the test of his tenure.

“Ultimately, history is going to judge Powell by what he does now. I think he feels that the Fed’s credentials as an inflation-fighter are in question. He has to deliver a successful curb on prices,” said Carl Tannenbaum, chief economist at Northern Trust.

With the benefit of hindsight, it is clear to many economists that Powell and his colleagues stumbled last year. They failed to grasp that inflation was surging as a result of the government’s massive spending to keep the economy afloat during the COVID-19 pandemic.

“The Fed waited too long, they misread the signs and the signals and dug themselves into a hole,” said Nada Eissa, a professor of economics at Georgetown. “I am skeptical they can get us out of this without a recession.”

Powell and his inner circle viewed rising inflation in early 2021 as “transitory.” Powell admits that it took strong gains in inflation data last fall before he was alert to the danger.

As a result, the Fed only started to increase its benchmark interest rates in March and set in motion a plan to allow its massive $9 trillion portfolio of Treasurys and mortgage debt to shrink.

The goal is to cool inflation, now running above 8%, toward the central bank’s 2% target.

“We are in the situation where inflation is much beyond what the central bank would have desired. I do think it is a little behind the curve. It has to react, it has to raise rates. At the same time it has to convey a sense that it has things broadly under control and is not panicking,” said Raghuram Rajan, a former head of the central bank of India, who also teaches at the University of Chicago.

The Fed is now planning to get its benchmark rate up to “neutral” — somewhere around 3% by the end of the year. Policymakers have set on a plan to hike the benchmark rate to nearly 2% by August.

In June, it will start to allow its $9 trillion balance sheet to shrink at a steady pace.

Former Treasury Secretary Lawrence Summers has emerged as a major foil for Powell. He was one of the earliest and most prominent economists warning about higher inflation. And he has kept up his drumbeat of criticism, arguing that Fed actions and statements to date will not bring inflation under control.

Powell’s first term has been a roller coaster. He initially won sympathy and support during the first two years for quietly ignoring sharp criticism lobbed at him by President Donald Trump.

Trump had chosen Powell for the job, picking a Republican of the Fed board who was a relatively unknown former hedge-fund executive with a reputation of working across party lines.

Trump grew steadily unhappier with Powell after his signature tax cut was signed into law in late 2017. The Powell Fed continued to raise its benchmark interest rate — which led to a strong dollar
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But Trump wanted a weak dollar to compete with international trading partners.

At one point, Trump tweeted that Powell was like “a golfer who can’t putt.” Later, right before Powell’s closely watched Jackson Hole speech, Trump asked “who is America’s bigger enemy,” Powell or Chinese President Xi Jinping.

The Fed finally stopped raising interest rates and reversed course, and tensions between the Trump White House and the Powell Fed seemed to ebb.

Then COVID-19 struck. Powell engineered a forceful and rapid response after it became clear that the pandemic would shut down the U.S. economy.

Powell slashed interest rates, bought trillions of Treasurys
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and mortgage-backed securities to stabilize financial markets, and quickly set up lending programs to keep businesses and state and local governments afloat.

The recession that followed was severe but short, winning Powell praise.

“He led a very successful pandemic policy — in fact if anything it was too successful. But at the time the worry was doing too little,” said Tannenbaum of Northern Trust.

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