A steady hand: Jerome Powell could be America’s swing voter

If it comes, it would likely mark the beginning of a series of cuts in the coming months, bringing rates down following the rapid and unprecedented hikes since March 2022, after Russia invaded Ukraine.

If he chose to wield his influence and abandon his independence, Powell's actions could sway the election, so it stands to reason that his financial and monetary decisions are carefully scrutinised.

Falling back on logic

Powell has proven his prudence and independence in decision-making, most recently after significant disruptions rocked global markets in early August, stoked by a US jobs report that sparked panic about a coming recession.

At that time, Powell was criticised for failing to cut interest rates like other major central banks, hence allowing the US unemployment rate to rise, a key indicator of the health of the US economy. In the event, he did not respond as the markets had expected, which was to rush to lower interest rates. Instead, he stayed calm, offering logical and objective analysis and respecting the scheduled timelines for rate decisions.

The first is this September, as he indicated during the annual summer meeting at Jackson Hole, where he signalled the start of the interest rate reduction process. In the days that followed, analysis confirmed his skilful handling of the market turmoil, particularly his objective explanation of the slight rise in the unemployment rate and his calming of recession fears.

According to Tara Sinclair, director of the George Washington University's Centre for Economic Research, the labour market "still looks healthy," and the unemployment rate is still low. The percentage of the population aged 25-54 with jobs is at an all-time high.

The Fed's independence

Powell neither compromises nor allows the national economy to be held hostage to any political will, regardless of party. Trump appointed him as Fed chair in 2018, but he owes no debt of loyalty to the former president and will not fulfil Trump's desire to keep rates steady. Likewise, even though Harris opposed his reappointment, he would not duck a rate cut just to disadvantage her. Powell's actions during his two terms indicate that he responds to data and adopts policy based on that, not on populism or political interests.

Still, if someone in Powell's position indulged in politics, they would undoubtedly be the most influential voter in the United States today. This shows just how important central bank governors are. 

Powell knows that the Fed's decisions in the run-up to the presidential election face pressure, but he is sanguine. "We're at peace over it," he said. "We know that we'll do what we think is the right thing, when we think it's the right thing."

The real challenge lies in determining what is appropriate for the economy. Until a few months ago, Powell's focus was inflation, but in March he expressed concern about a dual risk.

"If we loosen policy too late or too little, we could hurt economic activity," he said. "If we loosen it too much or too soon, we could undermine progress on inflation." This caution reflects his prudence, one of a central banker's most important qualities.

Trump criticisms

Donald Trump has sought to politicise Powell's decisions, warning against pre-election interest rate cuts, saying: "This is something that they know they shouldn't be doing." But his criticism has earned Democrats points, with President Joe Biden calling for the White House to respect the Fed's independence.

Trump may believe that Powell owes him a debt of loyalty, but that is not how progressive nations function, particularly the United States, where the system's checks and balances are sacrosanct. A state's success is measured in no small part by the resilience and health of its economies and the living standards of its people. Both are linked, and this is something central banks can play a key role in, if they are allowed to function independently.

While the US Congress sets the goals of monetary policy (such as maximum employment, price stability, or long-term interest rates), it grants the central bank full independence in achieving these goals.

Politicians will always pose a danger to Fed independence. Indeed, according to reports in The Wall Street Journal, Trump and his advisers sought to play a larger role in determining future interest rates as recently as April.

Trump is by no means the first contender to do so. In the lead-up to the 1972 presidential election, President Richard Nixon directed then-Fed chair Arthur Burns to implement accommodative interest rates in the hope that it would help him get re-elected. While today's economic situation is far from the stagflation of the 1970s and 1980s, any erosion of the Fed's independence would be of concern, posing a direct threat to financial stability and economic growth.

So far, Powell has handled matters with composure, and while the Fed has been slower than others to ease monetary policy, its decisions are unlikely to have a major impact on the economy in the period before the election.

Results on 5 November could have a significant impact on the economy and the direction of monetary policy, according to a recent report by UK-based forecasting analysts at Oxford Economics.

If Trump wins, it seems highly unlikely that he will reappoint Powell for a third term, after his second term ends in 2026. By then, Powell may be ready for a break.