The Economic and Political Genius of Jay Powell. By Matthew Yglesias

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Federal Reserve Chair Jerome Powell is too good of a politician to declare victory over inflation right now. After all, the 3.2% year-over-year growth in the Consumer Price Index announced last week is still above the Fed’s official target of 2%. Besides which, any triumphalism from him would play as an endorsement of “Bidenomics” and read as partisan.

But 3 is a lot closer to 2 than it is to 9 (the annual inflation rate just more than a year ago). Most of the inflation-fighting is over — and it happened without the recession that many observers feared would be necessary. Not only is that a tremendous achievement for Powell himself, but it is also affirmation of the notion that monetary policy is too important to be left to economists.

Which is not to say that Powell is not conversant in economic policy. It was his Flexible Average Inflation Targeting program, put in place shortly below the pandemic, that allowed the Fed to let inflation rise above 2% in order to restore full employment, and it worked. If it had turned out that the only way to bring down inflation was a recession, that gamble would have proved to be a disaster. But it worked out, and millions of gainfully employed Americans have Powell — among others — to thank.

It’s an impressive result for a man who reached one of the most important jobs in the world through unlikely means.

Both of Powell’s immediate predecessors, Ben Bernanke and Janet Yellen, were distinguished academic economists before being tapped to run the Fed. Alan Greenspan was a businessman rather than a professor before going into policy, but he had graduate training and a PhD. Powell is a lawyer by training and an investment banker by trade. He is a throwback to an earlier era of the Fed, when economists in general were not held in such high regard and central banking was viewed as essentially a form of banking. It was a job for practical people rather than scholars.

And he fell into the Fed role almost by accident rather than by design.

Then-President Donald Trump didn’t trust Yellen and wanted to put his own person in place, and was quietly nudged to select the pragmatic Powell rather than an ideologically motivated hard-money type. Powell was already on the Fed’s board of governors, appointed by former President Barack Obama. He had that position only because Obama had multiple vacancies to fill, and Powell’s appointment was part of a compromise with Senate Republicans.

Powell was an undersecretary of Treasury in George H.W. Bush’s administration, but under Obama he became go-to person for explaining the perils of breaching the debt ceiling. His credibility as a Republican was seen as particularly important to his work on Capitol Hill, and he gained the White House’s respect.

How to win the respect and support of Senate Republicans, Barack Obama, Donald Trump and Joe Biden isn’t the kind of thing they teach in economics PhD programs. But if the semi-accidental Fed chair has taught us anything, it’s that this really is a political job.

Much of the Fed’s work to support the economy during the pandemic was made possible by the small initiatives authorized by Congress as part of the CARES Act. Powell’s practical experience with markets helped him design those programs and, more important, sell them on Capitol Hill — where an unusual blend of fiscal and monetary policy programs was not an obvious winner.

Meanwhile, his coaxing of the economy toward a soft landing has been in part about interest rates and economic models — but it has also been a difficult task of mass communication.

To successfully slow the growth of prices, Powell needed the Fed to slow down Americans’ spending. To do that, it raised interest rates. But Powell himself also put a bit of a scare into the country — the “vibecession” from the beginning of the year — sending the message that the Fed was prepared to do what it took to bring inflation down, even if that meant real economic pain.

As it turns out, very little pain has been necessary — so far. And part of the reason is Powell’s credibility. If the general perception had been that he was a Biden administration hack who wouldn’t dare derail the job market, it wouldn’t have worked. He also had to calm markets and soothe nerves when interest rate hikes blew up Silicon Valley Bank and threatened other large regional banks.

There’s no textbook model for exactly how you’re supposed to do this.

If you reassure people too much that nothing bad will happen from your efforts to reduce their spending, then they might not reduce their spending. At the same time, you need to prevent panic or the economy will crash. It’s not a coincidence that many economists believed a soft landing was impossible; someone too committed to abstract economic theory might not have been able to pull off what Powell did.

The problem for Powell now is that he’s raised expectations for himself. If the hiking cycle had led immediately to recession, that would have been a tragedy — but one a lot of observers would have seen as the inevitable cost of the earlier inflation. Now that the Fed has managed to bring down inflation from 9% to 3%, the bar for success has been raised. Sticking the landing, softly, will be his toughest job yet.

It will be difficult, to say the least, to navigate the tensions between those worried that inflation isn’t falling fast enough, and those worried that it will fall too low. But the past five years have shown Powell to be a smart, broadly informed pragmatist and practitioner rather than an academic or ideologue. In other words, he’s the right person for the job.

Elsewhere in Bloomberg Opinion:

• Here’s What Jay Powell Should Do: Mohamed A. El-Erian

• Avoiding Stagflation Will Require Brave Central Banks: Editorial

• Jay Powell’s Cunning Plan to Fight Inflation: John Authers

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matthew Yglesias is a columnist for Bloomberg Opinion. A co-founder of and former columnist for Vox, he writes the Slow Boring blog and newsletter. He is author, most recently, of “One Billion Americans.”

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