Powell's defense: how the Fed is changing policy

US President Donald Trump has cultivated a powerful domestic non-political adversary. Since the beginning of his second term, he has consistently criticized the head of the Federal Reserve Jerome Powell for the high discount rate, which reduced the availability of mortgages, and for failing to bring inflation down to below 2%. The criticism has done nothing: the Fed sees the U.S. economy slowing down and has not cut the rate so far. The Fed chief remains a rare U.S. official who is not intimidated by the White House host's outbursts.

The U.S. economy remains resilient, but the balance of risks is changing, Fed Chairman Jerome Powell said at a forum in Jackson Hole on Friday, August 22. In his speech, he did not announce a decision to cut the rate, although the market took his words as a signal of its possible reduction in September.

The Fed chief illustrated the state of the economy with the following figures:

- Employment: 3-month average new job growth is 35k, worse than past performance (168k in 2024);

- Unemployment: 4.2%, stable and remains at historically low levels;

- GDP: 1.2% annualized growth in H1 2025 (vs. 2.5% in 2024);

- Consumer inflation - 2.6% year-on-year as of July, core inflation - 2.9%

Powell made it clear that the Fed assumes that Trump's import tariffs are already having a one-time, but "time-lagged" negative effect on prices. As higher-priced imports pass through the supply chain, the price level in the US will rise and stabilize at a new level. Such an impulse is not in itself equal to sustained inflation - it is a one-time upward shift in prices (where import duties contribute to prices).

To prevent this one-time shift from becoming a long-term inflationary problem, the Fed will keep a close eye on two indicators: wage levels - whether a wage-price spiral is kicking in, with workers forking out higher wages in response to rising prices and businesses shifting costs into new prices for goods and services - and inflation expectations of households and industries. So far, the Fed is not registering any warning signs.

The Fed declares the flexibility of future policy: if there are signs of worsening employment and no signs of tariff effect consolidation, it is ready to move to a cautious easing of monetary policy. If there are signs of accelerating core inflation, the regulator will not lower the rate.

If the US President is asked to explain the Fed's logic in simple words, the regulator's current position can be interpreted as follows. The Fed is moving away from a narrow focus on "zero rates" as in the 2010s, the rate will always be in line with data and expectations, meaning it can rise. Targeting inflation remains on the table, but there will be no work to keep it below 2%.

The regulator will act if it sees overheating in the labor market (rapid growth of wages). And when the underlying targets start to diverge - for example, inflation goes above forecasts and employment declines (or vice versa) - the Fed promises to act "prudently".

Despite Trump's demands to "help" the economy, the Fed will adjust the overall "framework" of its policy no earlier than once every five years. Of course, provided that the situation in the economy does not require more rapid decisions.

In 2025, Trump and his administration launched a major campaign against Fed Chairman Jerome Powell, demanding an acceleration of the monetary easing cycle and a rethinking of the regulator's own governance.

The campaign has several clear directions.

First, rates: the White House has been publicly pushing for quick and deep cuts, attributing them to a cooling housing market, rising mortgage payments and the need to support economic activity.

Second, criticism of the Fed's governance: the regulator's asset and property management decisions are criticized, most notably the multi-billion dollar renovation of buildings in Washington, D.C. (the Fed has already defended the construction budget and there are no de facto claims).

Third, an attempt to change key personnel: the administration is seeking to influence the composition of the Board of Governors - there are calls for the resignation of individual members of the Board of Governors (the Justice Department called on Powell to remove Governor Lisa Cook from her post, allegedly she understated the number of personal properties when applying for new mortgages). But the procedure of withdrawal of members of the Board of Governors is possible only in the presence of specific offenses, not recriminations.

Powell's experience at the helm of the regulator and his ability to make unpopular decisions allow him to hold his ground. In seven years, he has earned a reputation as a smart and decisive leader who can find a way out of various crisis situations.

He took over the Fed in 2018, in an era when inflation was low, markets were "confident" and the regulator was carefully raising rates. One clarification dominated Powell's debut rhetoric: "don't overvalue the stars" - theoretical benchmarks like a neutral rate - and stick to the facts. It was a conservative central banker's strategy.

In the spring of 2020, predictability was replaced by the COVID-19 pandemic. The Fed acted without delay: the rate went to zero, and emergency tools were used, from maintaining corporate borrowing to programs for states and small businesses. This was the moment when the regulator shifted from the role of adjuster to that of firefighter.

During the pandemic, the Fed developed a new strategy: the regulator was willing to tolerate a "moderate increase" in inflation after periods of low inflation, and the focus was on employment. A year later, due to the effects of support measures in the pandemic, the Fed had to deal with rising inflation.

The Fed chief began his second term (from 2022) with the sharpest rate hike cycle in a decade. In a speech three years ago, Powell said that "some pain" was inevitable (that's how he explained rate hikes).

In the spring of 2023, several banks (first Silicon Valley Bank, then Signature and later First Republic) burst in the US. Due to a sharp rise in interest rates, they incurred losses on long bonds, depositors got scared and started taking money out en masse - a classic bank raid. To prevent this from turning into a systemic crisis, the Fed opened a temporary, targeted liquidity channel - the Bank Term Funding Program (BTFP). It gave banks loans secured by government bonds and mortgage-backed securities at par, so that they would not have to sell assets at a loss and would be able to pay their depositors in peace.

At the same time, the Fed did not change its course to fight inflation: the rate continued to rise. By the end of 2024, inflation cooled down, and the Fed took the first measured steps towards easing monetary policy.

But the main story of Powell's second term is the revision of the roadmap the regulator is following. On August 22, 2025, the Fed updated its "constitution" - the Statement on Longer-Run Goals and Monetary Policy Strategy. The focus on the effective lower bound of the rate is gone from the document: the framework is no longer written "under the world of zero percent". Now the main thing is to target inflation (but not to fight it for the sake of principle) and to monitor the risk of overheating of different sectors of the economy.

This article was AI-translated and verified by a human editor