Powell Faces 'High-Difficulty Task' to Curb Inflation and Defend Against Economic Downturn

Powell-led Fed Entering Second Term Expected to Determine Biden Administration's Fate

[Image source=EPA Yonhap News]

[Asia Economy New York=Special Correspondent Baek Jong-min, Reporter Jo Yoo-jin] U.S. President Joe Biden's decision to reappoint Jerome Powell as Chair of the Federal Reserve (Fed) is analyzed as a decision focused on controlling inflation.

Although there was a 'dark horse' in the form of Lael Brainard, a Fed governor supported by the progressive camp, President Biden's choice was not unexpected.

In a situation where his support base is shaken by soaring inflation, rather than appointing a dovish progressive figure who might stimulate inflation, the assessment is that Biden chose to maintain the Powell chairmanship system, hoping to curb inflation through normalization of monetary policy.

At a press conference held at the White House on the 22nd (local time), Chair Powell responded to President Biden's choice by pledging to fulfill his mission as an "inflation fighter."

Powell began by saying, "I have been given the opportunity to serve the American people again during this extraordinary time," and added, "I understand that rising inflation especially harms households struggling with price increases."

He continued, "The Fed will use all tools to support the economy and labor market and to prevent inflation from becoming entrenched."

The tools Powell referred to are understood by U.S. media and financial experts to mean interest rate hikes. The U.S. Consumer Price Index (CPI) for October soared 6.2% compared to the same period last year. The Fed's stance, including Powell's, that inflation was temporary, is also changing.

The Fed has already decided to reduce asset purchases (tapering). In this situation, choosing Governor Brainard, who could potentially fuel inflation, would be a self-defeating move for President Biden. The plummeting approval ratings of President Biden amid soaring inflation cannot be ignored either.

The Washington Post explained that Powell's reappointment reflects the views of President Biden and senior aides that he supported the economy well during the COVID-19 situation and entrusted him with the mission to navigate the challenges caused by rising prices.

At the press conference, President Biden affectionately called Powell "Jay" and said, "Our economy needs the Fed's stability and independence due to its tremendous potential and uncertainty," adding, "Jay helped stabilize the market and put the economy on a solid recovery path last year with steady and resolute leadership during the COVID-19 crisis."

Another challenge left for Chair Powell is the simultaneous achievement of maximum employment and inflation control, which is a difficult task. Early interest rate hikes to curb inflation could become an obstacle to economic recovery.

The New York Times (NYT) also anticipated side effects if the Fed starts raising interest rates quickly. The NYT recalled that after the 2015 rate hikes, there was a sharp economic downturn in heavy industry and agriculture. It also predicted that if the Fed leans toward tightening, risk asset sectors such as the stock market would shrink significantly. The diagnosis is that a delicate strategy is needed to manage this situation while bringing down inflation.

Chair Powell must also find solutions to expand the central bank's response to climate change, as demanded by the progressive camp.

Powell faces the extreme job of lowering inflation without collapsing the economy. President Biden is confident in Powell's success and has "bet" on him. The fate of the Biden administration depends on whether Powell completes his mission.