Fed Chair Jerome Powell’s 2025 Wish List: Navigating Uncharted Economic Waters
As the Federal Reserve concludes its final meeting of 2024, all eyes are on Fed Chair Jerome Powell, who is likely to enter his last full year at the helm of the U.S. central bank. With his four-year term set to expire in May 2026, Powell’s focus will shift to addressing the unfinished business of his tenure.
Completing the Soft Landing
Powell’s top priority is to achieve a “soft landing” with inflation at 2% and full employment. This task will become increasingly challenging as the economic landscape is influenced by tax, tariff, and immigration policies. According to Donald Kohn, a former Fed vice chair, the Fed must navigate “trickier weather” to reach its target.
Maintaining a Stable Fiscal Environment
The new administration’s policies will significantly impact the Fed’s ability to maintain stable prices and full employment. Lower taxes or looser regulation could spark higher inflation, while widespread deportation of immigrants could constrain labor supply and drive up wages and prices. Tariffs, on the other hand, could increase the cost of imported goods. The Fed must carefully consider the effects of these policies on inflation and unemployment.
A Quiet End to Quantitative Tightening
The Fed’s balance sheet, which expanded during the pandemic, is now shrinking as maturing securities expire. However, there is a limit to how far the balance sheet can shrink before it disrupts overnight funding markets. Powell must find the right stopping point and decide how to manage the balance sheet moving forward.
Strengthening the Monetary Policy Framework
Part of Powell’s legacy will be tied to the changes in monetary policy strategy adopted in 2020. With a review scheduled for this year, the Fed must determine if the framework should be amended again to avoid over-committing to either of its two mandates: inflation and employment.
Avoiding a Regulatory War
The Trump administration may attempt to overhaul bank regulations, an area where the Fed has direct responsibility as a supervisor. Powell’s relationships with members of Congress will be crucial in navigating potential changes in bank regulations and the supervisory structure.
As Powell enters the final phase of his leadership, he faces a complex set of challenges that will require careful navigation to ensure the continued stability of the U.S. economy.
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