Jerome Powell engineered a humbling about-face in U.S. interest-rate policy in 2019, steering a group of reluctant colleagues at the Federal Reserve toward rate cuts to ensure a cooling U.S. economy didn’t slip into recession.
The moves have worked so far. The expansion recently entered its second decade, unemployment held at a 50-year low and stocks neared all-time highs.
Now as Mr. Powell, the Fed chairman, looks toward 2020, he is on a new mission: Keep the U.S. out of the kind of economic anemia plaguing Europe and Japan.
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After the Fed failed to get inflation up to its 2% goal for much of this expansion, Mr. Powell is increasingly determined to meet—or even exceed—that level. Such a shift marks an important change in thinking at the Fed about how it manages the inflation target that is at the core of its mission.
Officials are likely to hold rates steady at their final meeting of the year this Tuesday and Wednesday. They lowered their benchmark rate three times since July, to a range between 1.5% and 1.75%, to cushion the U.S. economy against ebbing global growth and trade tensions after raising it four times last year.
Mr. Powell is eager to build a broad consensus among his colleagues and synthesize a range of views when making policy, but key turning points this year made him more willing to press ahead when unanimity wasn’t possible, according to interviews with current and former Fed officials and a review of Mr. Powell’s public calendars.
Fed officials were more divided this summer over Mr. Powell’s push to cut rates than at any other time in his nearly two years at the helm.
“This is not a my-way-or-the-highway approach to monetary policy. That said…we’ve had some tough decisions to make,” said Fed Vice Chairman Richard Clarida, a close ally of Mr. Powell, in an October interview.
To an unusual degree among Washington institutions, the Fed operates by consensus. Many decisions are unanimous, and while official dissents are common, the chairman rarely loses votes.
Absent a crisis, Fed officials make big policy moves with caution. It takes time to build agreement among the 17 officials who participate in policy discussions, including the 10 who cast votes on rate changes.
When Mr. Powell presented his recommendation for a quarter-percentage-point rate cut before the July 30-31 meeting, around half of the 12 Fed reserve bank presidents resisted.
Economic data hadn’t deteriorated, but long-term bond yields had tumbled, which happens when investors grow risk-averse or pessimistic on growth, after repeated tariff threats by President Trump.
The internal split reflected uncertainty over the economic outlook and the requisite tactics. Some Fed officials were hearing from business executives that trade uncertainty—not high borrowing costs—was holding back investment. Others wanted to wait for more evidence of a global manufacturing downturn infecting the broader economy.
Mr. Powell and his lieutenants argued the global slowdown meant that keeping rates unchanged would leave them too high, provoking a market backlash that could spread the weakness to the broader economy.
Two Fed bank presidents voted against the July cut because they preferred to hold rates steady. At least three others without a vote also thought a cut wasn’t warranted. When the Fed approved another quarter-point cut in September, a third official dissented in favor of a bolder half-point action.
Committee divisions persisted into October, when the Fed lowered rates for a third consecutive time and Mr. Powell signaled he didn’t expect more cuts.
Well before 2019, Mr. Powell had played a key, behind-the-scenes role shaping the group of officials whose support he needed this year. Last year, he pressed the White House to make Mr. Clarida, a macroeconomist who worked at bond giant Pimco, the Fed’s vice chairman.
The Trump administration had looked at John Williams, a monetary theorist who was then president of the San Francisco Fed, for the vice-chairman job. After Mr. Trump was lukewarm on Mr. Williams, Mr. Powell steered the New York Fed to select him to lead the bank last year instead of two central-bank outsiders.
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Messrs. Powell, Clarida and Williams form the so-called troika at the Fed. Policy decisions are the product of a large committee, but the troika plays the key role molding that consensus. The three men meet or speak by phone several times a week, shaping Mr. Powell’s policy recommendations that they later defend in public speeches and private deliberations.
Mr. Powell had also built support among the Fed reserve bank presidents, several of whom owed their jobs to him.
In 2013, one year after Mr. Powell joined the Fed board of governors, he took on the unglamorous job of running the Fed committee that serves as the go-between with the reserve banks. The post put Mr. Powell, a 66-year-old former lawyer and financier, at the center of the search processes that the reserve banks in Philadelphia, Dallas, Minneapolis, Atlanta and Richmond conducted to select their current presidents.
“He has shown a level of trust by supporting their candidacy for president. Trust tends to be mutual,” said Vincent Reinhart, a former senior Fed economist.
Most of the selections look like Mr. Powell—non-economists with executive experience in finance, business or academia.
Mr. Powell, the first Fed chairman without a Ph.D. in economics in three decades, doesn’t always come to big issues with a firm view but instead waits to hear what everyone says first. Some staffers have traced certain intellectual curiosities to economic debates he has been following on Twitter. He doesn’t tweet.
When Dallas Fed President Robert Kaplan joined the central bank in 2015, Mr. Powell, then a governor, advised him that to gain credibility within the system, he should spend lots of time with Ph.D. economists “working your tail off to learn economic theory,” Mr. Kaplan recalled in an interview last year.
Mr. Powell blocks out the Thursday and Friday before every policy meeting to speak by phone with all 12 reserve bank presidents and to meet individually with the four other Fed governors. He gauges where his colleagues stand while previewing his arguments for the meeting.
“He’s a very good listener,” said Mr. Kaplan. “He’s not looking…for people to agree with him just because it’s his view.”
Mr. Trump’s repeated attacks on Mr. Powell have drawn the other officials closer to their chairman. The president has called Mr. Powell naive, clueless and a “terrible communicator” for not moving more aggressively to cut rates.
Mr. Powell has avoided provocation. “We serve all Americans in a nonpartisan, nonpolitical way,” he said last month. “We’ll make mistakes. We’re human. But we will not make mistakes of character.”
Even if they couldn’t support Mr. Powell’s policy recommendations, his colleagues respected his quiet vigilance to safeguard the central bank’s apolitical culture. “He is navigating that as skillfully as anybody could, and we all see that,” said Minneapolis Fed President Neel Kashkari, who favored a larger rate cut this summer, in an interview last month.
Mr. Powell’s approach has also earned accolades outside the Fed. He received a standing ovation from 750 attendees before a speech at a Chamber of Commerce dinner in Providence, R.I., last month, after Sen. Jack Reed (D., R.I.) praised his demeanor and “steady hand.”
Mr. Powell will come out of this era “strengthened in his committee standing” if the economy steadies next year, predicted David Wilcox, a former Fed economist who from 2011 to 2018 led its forecasting division. “I was a little skeptical of the case for cutting interest rates. In hindsight, as inflation has continued to lag, they’ve been proven much more right than wrong.”
Write to Nick Timiraos at nick.timiraos@wsj.com
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2019-12-10 10:30:00Z
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