For much of the past 17 years, the Federal Reserve (Fed) has been the central player in U.S. economic policy. The central bank has been responsible for throwing multi-trillion-dollar safety nets under the financial system, offering nearly a decade of ultra-cheap money, and stepping into uncharted territory during the COVID-19 pandemic. But the days of dramatic Fed interventions seem to be over, as the role of the central bank shrinks, and some critics argue that Jerome Powell, Fed Chair, may be remembered not only for steering the U.S. economy through the pandemic crisis but also for making central banking, well, boring again.
James Bullard, former President of the St. Louis Fed, who was part of the policymaking team during the 2007-2009 financial crisis, sees the Fed’s expansive role shrinking. He believes that after years of fighting inflation in unorthodox ways, the central bank is now returning to the traditional and mundane job of inflation fighting.
“We had to go back to kind of heavy-duty inflation fighting, which is reminiscent of the old days when you didn’t worry about the zero lower bound,” Bullard said. “It’s kind of plain vanilla in that respect. Times have changed.” Bullard, now dean of the Mitch Daniels School of Business at Purdue University, will give the opening address at a conference this week on the Fed’s monetary policy framework and its strategy to promote price stability and maximum employment.
As inflation subsides, the U.S. economy is growing, and interest rates are approaching their long-term historic range. These developments are shifting the focus of monetary policy away from crisis-driven actions and into the background, with inflation management becoming the main focus. This transition could signal the Fed’s exit from the limelight, potentially leaving the job of sustaining the economic recovery to the incoming administration.
Amidst this shift, some are expecting changes in the Fed’s leadership. Governor Christopher Waller, appointed by Donald Trump, is one of the key figures shaping monetary policy alongside Powell. Waller’s approach, alongside Powell’s, has been to steer the Fed away from non-monetary issues, such as climate change, which had previously raised tensions with Republicans in Congress. Waller is also likely to have a strong voice in reforming the Fed’s policy framework, which, since its adoption in 2020, aimed to address issues like weak inflation and slow employment recovery after the pandemic.
The pandemic exposed critical issues in the U.S. economy, prompting the Fed to create a new framework that focused on inclusive employment and weak inflation. However, the strategy led to the worst inflation in 40 years, forcing the Fed to adopt aggressive interest rate hikes in 2022 and 2023. This move, though controversial, seems to have reignited economic activity, and fiscal and trade policies are now taking the lead.
David Russell, global head of market strategy for TradeStation, argues, “The economy and stock market simply don’t require super-low rates anymore. Trade and tax policy will probably matter more than monetary policy going forward.”
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As inflation pressures ease and interest rates climb, the Fed is returning to more traditional monetary policy tools. The central bank is expected to raise and lower interest rates in the same way it did before the 2007-2009 crisis, signalling that the days of unconventional monetary interventions are over.
Still, some economists are concerned that the changes in the Fed’s framework may be too tailored to the unique conditions of the post-2007 financial crisis period and the pandemic. Powell himself seems to anticipate the need for a shift. He recently noted that the Fed’s framework should reflect the higher interest rates of the present environment. “Shouldn’t we change the framework to reflect interest rates are higher now, so that some of the changes we made… shouldn’t be the base case anymore?” Powell said in a recent speech.
For many, Powell’s approach could mark a return to simpler, more predictable economic policies that focus on inflation control and employment stability. The era of extraordinary interventions seems to be drawing to a close, and the Fed appears set to return to its role as a central bank focused on the fundamentals of price stability.
As the U.S. economic landscape stabilises, it seems Powell will be remembered not just as the man who helped the U.S. weather a storm, but as the one who brought the once-booming, drama-filled world of central banking back to a place of stability and predictability.
