Why Jerome Powell will be quietly fuming at President Trump

A lot of people are frustrated with US President Donald Trump, but there’s one who has a more genuine case than most.

That’s Federal Reserve Chair Jerome Powell, and it’s not just because Trump wants to fire him.

Until recently it looked like Powell and the Fed might’ve done the impossible, or at least the very rare, and orchestrated a “soft landing” for the US economy.

A soft landing is always the goal when a central bank embarks on an interest rate hiking cycle to knock inflation on the head.

There’s no official definition, but that generally means getting price increases under control without causing a recession or major economic slowdown in the process.

It’s a difficult needle to thread, and central banks have a poor track record of success.

There were the hiking cycles of 1984 and 1995, as well as the one leading up to 2020, just before COVID-19 hit.

That last one is debatable, but if we give the Fed the benefit of the doubt that’s three times a soft landing has been achieved in 50 years.

In contrast, I can think of six examples where the Fed hiked interest rates in the hope of taming inflation, but recessions followed soon after.

History and the odds were very much against it, but the Fed looked to be there this time around.

In response to the highest inflation since Ronald Reagan was president in 1981, the central bank cranked interest rates up to the highest level since 2001.

There was no recession and last month the headline CPI inflation rate in the US fell to 2.4 per cent, well down from 9.1 per cent three years ago.

You’d have to be happy with that if you were Powell.

Monetary policy had successfully curtailed the biggest spike in more than 40 years, while keeping the economy in good shape.

Unemployment had increased slightly, but only to 4.2 per cent which is well below the average since 1980 of six per cent.

Corporate earnings growth remained strong, and the independent NBER hadn’t declared a recession at any point.

With inflation under control, interest rates were headed lower and although the Fed was moving slowly, that was only because economic activity was still very solid.

Nobody thought he could do it, with plenty of economists predicting a US recession in 2022 as the impact of higher interest rates were felt, then pushing those forecasts out to 2023 and then 2024.

The recession never arrived and the US economy took it in stride.

The Fed had succeeded, and Powell’s legacy was set to be one of him having achieved what few others could – the elusive soft landing.

For investors, the path looked clear and this was set to make for a much more attractive backdrop.

Then came Trump and his tariffs, putting all of that at risk.

Tariffs will dent economic growth and put upward pressure on prices, pushing inflation higher.

We don’t yet know how things will play out, or where the import levies will end up in the course of time.

However, the negative effect on confidence could be substantial if businesses, consumers and investors delay decisions or actions while the backdrop is so uncertain.

If that leads to a sustained hiatus in activity, a recession could become self-fulfilling.

That would disappoint a lot of people, although Jerome Powell might just have the right to feel more aggrieved than most.

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