Jerome Powell was supposed to retire quietly. The way our colleague Nick Timrose tells it, Powell's life after eight years leading the Fed was supposed to be simple. Friends will tell you the picture, golf, guitar, philanthropy, time with grandkids, maybe a memoir somewhere down the line. Everybody has their way, really. Stress and Powell's is to play the guitar. Hank Williams' ballads. Less monetary policy, more Hank Williams. That was the exit plan. And tomorrow was set to be Powell's last day, as a newly confirmed Fed chair takes the reins. From people I've talked to, he was genuinely looking forward to it. He was counting down the days. But just weeks before that exit. This is my last press conference as chair, and I will close with a few thoughts. Powell had an announcement. He would step down as chair, but in a break from more than 75 years of Fed tradition, he would not leave the Fed. After my term as chair ends on May 15, I will continue to serve as a governor for a period of time, and I will continue to serve as a governor for a period of time. To be determined. Almost immediately, critics pounced. This is a violation of all Federal Reserve norms. If you believe in the independence of the Fed, then Jay Powell himself needs to leave. But Powell said he saw no other option. I had a long plan to be retiring. And the things that have happened in the last three months have, I think, let me no choice but to stay until I see them for a while. He said he felt like he had no choice. And I read that as this is really the last card he could play, and he doesn't think that he can walk away from the job while the relationship between the Federal Reserve and the executive branch is in as bad a state as it is. This is about protecting the institution. Welcome to the Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Thursday, May 14th. Coming up on the show, why Jerome Powell just can't quit the Fed.哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎哎 That's given Nick a sense of how Powell thinks. One thing that's always stuck with Nick, an unusual talent that actually tells us a lot about Powell's leadership style. I asked Nick about it. I think you're referring to this knack he has for repeating sentences backwards. So if you say something, he can just take it and tell you what you just said in reverse order. How do you ever done that with you? I have not seen him do it. It's kind of an awkward thing to do in the moment. I think it speaks to how his superpower has been his listening. Whether it's meeting with his colleagues, meeting with politicians on Capitol Hill, he's in listen mode. And he used that skill to build relationships. Here he is in an interview from 2018. I'm going to wear the carpets of Capitol Hill out by walking those halls and meeting with members. Never mind that there really aren't carpets on Capitol Hill. But the point stands, he knew that whatever was coming, those relationships were going to matter. You know something's going to happen and it's good to have allies. And Powell may have been right. Because while his term as Fed Chair can be seen through a series of economic crises, it can be told another way, as the story of a relationship that broke down between Powell and the president who hired him, Donald Trump. The strain between Trump and Powell started to show up just months after Trump appointed him in his first term. In 2018, the Fed was worried the economy might get overheated. So it raised interest rates slowly throughout the year. Four interest rate increases. By the end of the year, Trump hated it. And in December amid a market sell-off, Trump was talking about firing him. But he couldn't just do that, right? The law says you can only remove a Fed governor for cause. You can't just fire them because you don't like how they're voting on interest rates. The Fed did eventually cut rates and markets calmed down for a while. But the tension never really went away. And then of course came March of 2020. The pandemic hits and the Fed was thrust into this role as a first responder. Our job is to meet the tests we are presented. Lawmakers backed Powell as the Fed slashed interest rates to zero and pumped money into the financial system. The Fed started lending directly to mid-sized businesses and bought corporate debt. Things the central bank hadn't done before. Our emergency measures are reserved for truly rare circumstances, such as those we face today. A lot of people in markets will tell you that was really the high point of the Powell Fed. He was widely credited with not just saving the economy, but avoiding much worse outcomes. For a moment, Powell was widely praised, including by Trump. I've been critical, but in many ways I call him my MIP. You know what an MIP is? Most improved player. After President Joe Biden won the White House, he reappointed Powell in 2021. But the damage from the pandemic wasn't over. Supply chains were snarled. People still wanted stuff, but there was less stuff to buy, which led to higher prices. And when the Fed saw this inflation, Nick says, it made a big miscalculation. It kept rates too low for too long. 2021 is where the mistakes start to compound. The Fed keeps saying this is transitory. Remember, inflation being transitory. But as these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal. The idea there is that these bottlenecks will sort themselves out. But they didn't. They did not. And by the end of 2021, they realized they've gotten it wrong. And what was the course correction? They raise rates rapidly. Fastest increases in four decades. The Fed is expecting to raise interest rates three times in 2022. Raising its benchmark interest rate for the fifth time this year. It was the 11th rate hike in the last 12 meetings. These aggressive measures helped bring inflation down, but they came at a cost. Borrowing got more expensive for mortgages, car loans, and credit cards. And the Fed's misread would have political fallout. It made the institution more vulnerable. It left the Fed politically exposed. Politically exposed. What do you mean by that? Inflation is the job of the Fed. And so if you've had a big inflation problem, it's fair to say, well, what's the central bank doing? Over the next few years, the Fed kept trying to catch up. It raised interest rates again and again, sometimes by unusually large jumps. Eventually, inflation started to cool. And by the fall of 2024, the Fed finally started cutting rates. But the timing of those rate cuts angered Republicans, who accused the Fed of making the Biden administration look good just before the presidential election. And so Trump comes back to office in 2025. He is not happy with Powell from his first term. And he picks up where he left off. But then in 2025 takes it to a completely different register. The first move is going after Powell directly. The president threatens to fire Powell. When that doesn't work, he then goes after other people on the board, namely in August. He attempts to fire Lisa Cook, who is a Biden-appointed governor, using kind of unproven mortgage fraud allegations. The case about the president's ability to fire Fed governors for cause is now before the Supreme Court. And then the Justice Department launched a criminal investigation into Powell over his handling of renovations at the Federal Reserve Building. And that's a line that crosses beyond anything we've seen up until then. Now, in a statement, Powell says, quote, this unprecedented action should be seen in the broader context of the administration's threats and ongoing pressure. And all of this is being done in an effort to get the Fed to lower interest rates. Is that ultimately the goal here, according to the Trump administration? It could be that. It could be putting pressure on Powell to resign. It could be just, look, we can do this the easy way or the hard way. One way or another, we are going to make life very difficult for the central bank of the United States if it does not give us what we want. A White House spokeswoman said that Trump didn't direct the investigation. Lawmakers in both parties pushed back against the probe, saying it looked like political pressure. Some key Republican senators defended Powell as an honest broker. I don't think Jay Powell is a criminal. We have got to end this investigation. I don't share Powell very well. I will be stunned. I will be shocked if he has done anything wrong. The Justice Department has since dropped the investigation and parked to move forward with the Senate confirmation of Kevin Warsh, Powell's successor. But Nick says the probe itself was what made Powell think twice about retiring. The criminal probe changes the calculation. If Trump had backed off, it seems likely that Powell would have done what every Fed chair since 1970 has done, which is to leave when his or her term ends. That's the modern norm. I talked to somebody who said this was strategically inept for anybody who knows Jay Powell. It did the opposite of what it may have been intended to do if it was trying to push him out. It told him, there's a storm outside the building right now. You cannot, in good conscience, leave now. And so Powell has decided to keep his place in one of the most powerful rooms in American monetary policy. This is about occupying a seat. It all comes down to the Fed's Board of Governors. That's after the break. Jerome Powell's term is up as Fed chair. But he still technically holds a seat on the Fed's Board of Governors for two more years. His decision to stay makes him one of seven people who sit at the center of the system that decides interest rates. But Powell's presence could make things weird. You know, Powell said he wants to have a low profile, and there was this funny moment where Powell was asked one of my colleagues. You mentioned that staying on as a governor, you intend to keep a low profile. I'm just wondering if you could give us a little more detail on that. And Powell did this sort of physical comedy. He lowered his body to lower his physical profile. Take a look at what that looks like and how you can... Touche. Kind of like a turtle, like sinking into his shell. Exactly. And everybody laughed. But it speaks to how almost impossible it would be for Powell to have a low profile. Because after eight years as Fed chair, Powell casts a long shadow. That's part of why Fed chairs don't normally stick around like this. They give the new boss a clear runway to build consensus and run the place their own way. It is going to be awkward. It is going to be an awkward setup because Kevin Warsh got the job after a fairly pointed public campaign, highlighting all the ways he believed the Fed had screwed up under Powell. And now the person he criticized is going to be sitting at the same table while he leads them through these discussions. You know, the math on the Fed board is there are seven governors. Currently, those seven seats are evenly split. Three are held by Obama and Biden appointees, and three are held by Trump appointees. And then there's Jay Powell. If Powell leaves, that seventh seat opens up. Which means Powell's decision to stay denies Trump a key appointment on the board. You've got an administration that has shown it will use the courts, the Justice Department, any other levers it can to try to control who sits in those seats, because those are the people who set interest rates. And so for Powell, he's not staying to secure a particular policy for interest rates or bank regulation. I don't think this is about what he will do. It's about what his presence prevents. One of the concerns that we've written a little bit about over the past few months is a clear erosion of what we call Fed independence, their ability to set interest rates without political dictates. Trump has pushed the Fed to lower interest rates to stimulate the economy. And he's criticized Powell for not doing so. Powell says that he's trying to maintain the Fed's ability to make rate decisions regardless of who is in the White House. Here's Powell last month. I worry that these attacks are battering the institution and putting at risk the thing that really matters to the public, which is the ability to conduct monetary policy without taking into consideration political factors. So by staying up, Powell is taking that seat off the table and really becoming a firewall. And so for Powell, this is about protecting the institution or at least making sure that when he does go, it doesn't lead to even a bigger fracture. But doesn't the very act of staying, isn't that a political move? It certainly could be read that way. People will say, look at what he's doing now. He just won't leave. He won't let Kevin Warsh, the new Senate-confirmed Fed chair, come in and run the Fed the way he thinks it should be run. Powell has said he doesn't plan to interfere with the new chair's ability to build consensus. For his part, Warsh has called for messier Fed meetings and in his words, a good family fight. He might just get his wish. At the last Fed meeting, four members dissented, the most since 1992. That's unusual, Nick says, and it's a sign that the committee is no longer of one mind. And while that can be a good thing, leading to less groupthink and more debate, it could also mean confusion and confusion has a cost. I'll put it this way. In the last 20 years, when you wanted to know where the Fed was heading, you really only had to listen to one voice, which was the chair. If that's not the Fed that we're going to have, if you have a committee that's openly split regional bank presidents who are publicly pushing back, that means that instead of one signal, you're going to have a chorus, potentially of competing signals and volatility around what people expect the Fed to do can bake in a risk premium into long-term interest rates, meaning that uncertainty about the path of policy itself becomes a cost. And now, as this more uncertain Fed is taking shape, the economy is shifting again. New data this week shows inflation picking back up to its highest level in years, driven in part by rising energy prices after the war with Iran. For the future of the Fed, Nick says that makes one thing clear. Rate cuts are off the table for now. Inflation is moving in the wrong direction, and that puts the Fed in a tough spot. Which means the very thing the White House wants from the Fed, lower interest rates, may not happen. And Kevin Warsh might find himself in the same place Powell did, as the person who says no. And we've all seen how the president responds to a Fed chair who says no. Nick, Jerome Powell was supposed to ride off into the sunset, right? But when you take a step back, you know, you're looking at Powell's pandemic response, the big mistake on inflation, and then now his decision to stay, what do you think ultimately defines Powell's legacy? That's a great question. When his professional obituary is eventually written, the people I talk to are saying he will be remembered as the chair who challenged a president's attempt to control monetary policy, and he repelled it. So if Fed independence survives, holds, his legacy could look quite favorable. If it doesn't, he will be able to say he did everything the law allowed him to do. That's all for today, Thursday, May 14th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.
