Did Fed Chair Powell Succeed or Fail?

Kevin Warsh has succeeded Jerome Powell as the Chair of the Federal Reserve Board. Hopefully, Warsh will learn from the records of past Fed chairs, starting with Powell. What are the pros and cons of Powell’s record as Fed chair?

Some people give Powell credit for his handling of the Covid Crisis, but fault him for his handling of the inflation of 2021-23. This opinion of Powell's record is incoherent. People reacted to the Covid crisis by holding on to their money. The reduction of our money velocity at this time was unprecedented. The recovery of both the economy and velocity from this crisis was also unprecedented. Hence, there was no need for Powell to cut short-term rates and increase bank reserves- all he needed to do was to sit back and watch as money velocity restored private spending. The combination of a faster moving and enlarged money supply triggered inflation in 2021. This problem was both easily foreseen, and easy to prevent.

To his credit, Powell started to fight inflation in March of 2021. Powell then created a public relations problem, by stating (in August) that inflation would be “transitory”. The Powell inflation episode built up and wound down over a period of three years. The previous wave of inflation in the United States began to build in the late 1960s, reached its peak in the early 1980s, and wasn't fully dealt with until the early 1990s- a period of thirty years. A three year inflation is transitory, and Powell did move to control inflation pretty quickly, in March of 2021.

Powell was correct in his characterization of inflation, but still responsible for the costs associated with his inflation. Fed chairs control neither the velocity of money circulation nor growth of monetary aggregates in the banking system. Powell's efforts to control his inflation were confounded by increases in both money velocity and the money multiplier (See the graphs below). We must also remember that Fed chairs can in fact influence both money velocity and the money multiplier. Inflation devalues all money held by the public, and also idle bank reserves. Thus, inflation nudges people to spend and loan out any idle money, so inflation can beget more inflation. Powell took a risk that the inflation that he set into motion could end up being hard to control, at least in the short-run.

Powell did preside over a stable period of both low inflation and low unemployment, just prior to the Covid shutdown. Powell’s finest moment was when he stood against President Trump's attempts to influence Fed policy. Federal Reserve independence is crucial to controlling inflation.

Overall, Powell ranks as an average Fed chair, better than Miller or Burns, but clearly inferior to Greenspan or Volcker. Hopefully Kevin Wash will do better.