Jerome Powell’s Thankless Rescue of Trump
When historians eventually study whom Donald Trump treated worse—his enemies or his friends and loyal servants—the sad case of Jerome Powell will weigh heavily on the scales.
Not only did Trump discharge the usual fusillade of schoolyard insults and infantile tantrums at the man he appointed chair of the Federal Reserve Board; as the world now knows, Trump’s Department of Justice has also opened a spurious criminal investigation of Powell for allegedly making false statements to Congress about a cost overrun in a construction project.
We have seen Trump’s particular style of gratitude before. John Bolton, his former national security adviser turned critic, is living under a politically hatched indictment, and Mike Pence, his first-term vice president, was exposed to a violent mob for executing his constitutionally mandated duties.
[Jonathan Chait: Banana republicanism]
Yet Powell’s case is distinct because he—more than any other top-level civil servant—helped secure the most significant policy triumph of Trump’s career. He even played a crucial part in Trump’s eventual reelection.
During the Obama years, after the mortgage bust, Ben Bernanke and the Fed kept the short-term interest rate close to zero, setting the stage for Powell’s role in the Trump economy. Free money was great for stock-market investors, but Main Street’s recovery was torpid.
In 2018, when Powell took office, a year into Trump’s first term, the federal funds rate was still only 1.5 percent. Under Powell, the Fed gradually hiked the rate to 2.5 percent and then pulled back. Trump squawked and mused about firing Powell.
Trump’s carping notwithstanding, economic growth spiked during Powell’s first year to 3 percent, the highest since the mid-2000s, and wages rose at the fastest rate since before the financial crisis. Growth remained a still-strong 2.6 percent in 2019. And thanks to Powell’s refusal to cave to the president, inflation remained muted. In other words, wage gains translated to real gains in living standards. Inequality, as measured by the Fed Survey of Consumer Finances, actually contracted. By any fair measure, economic performance during the first three years of Trump 1.0 was good, and the Fed chief deserved credit—which never emanated from the White House.
Powell’s record during Joe Biden’s presidency was far more mixed. When the pandemic shut down the economy during 2020, Powell cut the federal funds rate to effectively zero. And left it there.
Biden, inaugurated nine months after the COVID recession ended, enacted a massive deficit-spending program. He styled himself a second version of Franklin D. Roosevelt. Just as Trump had pursued a highly stimulative program (particularly with his tax cut), so did Biden. The purposes were different, but both added to inflationary pressures.
Under Biden, Powell did not experience overt pressure from the White House, but there was soft pressure on the Fed not to choke off the recovery, and to align with the executive during a crisis. Both Powell and the Biden White House misread the COVID recession as similar to the 2008 mortgage meltdown. In a financial crisis, recoveries are typically slow. People’s assets are underwater and stimulus is needed for a protracted period. During the COVID recession, once people exited the initial lockdown, the crisis was over.
When COVID struck, Powell kept the overnight interest rate at or below 1 percent for more than two years, until June 2022. By then, the annualized inflation rate had hit 9.1 percent, the highest in 40 years.
Powell then became serious about fighting inflation and eventually brought it under control, but the damage was done. In effect, Powell had saved Trump from his worst instincts but failed to do so for Biden.
The statistic known as “real median household income” vividly contrasts what happened to the typical family’s living standard during each presidential term, after adjusting for inflation. During Trump’s first term, it rose 10 percent before COVID and 8.2 percent overall. Under Biden, it rose 2.6 percent.
[David Axelrod: Trump is making the same mistake as Biden]
When Trump ran for reelection in 2020—before there was even a vaccine for COVID—the pandemic recession was on voters’ minds. But four years later, when voters told pollsters that the economy had been better under Trump than under Biden, median household income is what they were remembering, even if that’s not how they articulated it.
Inflation was probably the greatest factor in Trump’s defeat of Kamala Harris. Trump and Biden were both reckless deficit spenders, but thanks to Powell’s tougher stance against inflation, Trump’s economy performed better, and that secured his political comeback.
Trump’s response to this good fortune has been to attack the independence of the Fed and of the Bureau of Labor Statistics, the agency that collects much of the data on which the Fed relies. Toward Powell, he has been vindictive (for what, exactly?) and mean-spirited.
Trump wants Powell to lower rates, just as the Fed kept them low under Biden. This would risk repeating the Biden-era inflation that Trump campaigned against. Does this make sense? Not to me, either.