What to expect from the Fed meeting, in which Powell faces a defining moment for his legacy

() — The Federal Reserve and its chairman, Jerome Powell, face a defining moment in their legacy on Wednesday, when they wrap up their two-day policy meeting.

The mission? Slaying the inflation dragon without singeing the banking system.

Among the options, the Fed could continue with its aggressive campaign of interest rate hikes to cool inflation that triples the central bank’s target of 2%. You could take some time to assess how this campaign has affected the banking system. Or you could split the difference and raise rates 0.25% to show your commitment to both fighting inflation and the stability of the financial system. Instead of raising rates for longer, some economists even forecast cuts later in the year if the banking crisis triggers a recession.

For Powell and company, the stakes are high.

The role of Jerome Powell

“I don’t think I should be chair of the Federal Reserve,” Democratic Sen. Elizabeth Warren said on NBC’s Meet The Press this weekend.

Warren, already critical of the Federal Reserve’s fight against inflation, took a harsher shot at the Republican Fed chief. Powell has failed on both monetary policy and banking supervision, he said. Appointed by then-President Donald Trump, Powell was reappointed by President Joe Biden in November 2021 for a term ending in 2026.

“In terms of the Powell legacy, the damage has already been done,” said John Leer, chief economist at Morning Consult. In addition to achieving price stability and financial stability, the Fed’s broader mandate includes oversight of individual financial institutions, Leer says, and “that’s where the failure lies.” “The SVB fiasco provided the first real opportunity to test the supervisory framework established by Dodd-Frank a little over 10 years ago, and the results are dismal,” he added.

Mohammed El-Erian, an economist at Allianz, also gives the Federal Reserve a low mark in its fight against inflation. It turns out that inflation was not transitory, as Powell (and, to be fair, many others) predicted at the outset.

“The Fed needs to ensure both price stability and financial stability, something it has failed to do recently,” he told . “Having already stuck itself and the US economy in a big hole with its long-standing mischaracterization of inflation and political swings, it cannot afford another slip into what is proving to be the biggest policy mistake of the last four decades.” opined.

For any Federal Reserve chief, there are more challenges than there are tools to deal with them. And this Fed chief inherited an unprecedented economy.

“Powell has been stuck between a rock and a hard place from the moment he became president,” said Ann Berry, founder of Threadneedle Ventures. He was dealt “two administrations without fiscal discipline” plus “a global pandemic and a Twitter-fuelled bank run.”

“You’ve read correctly the ability of the labor market to maintain full employment in the face of necessary interest rate hikes,” she said, “but while I’ve been an apologist for the Fed up until now—because decision-making in the face of conflicting data is excruciatingly difficult—the History will not take kindly to the late start of Fed tightening and the failure to spot the SVB’s obviously flawed risk management.”

What decisions can the Fed make?

The crystal ball is cloudy.

It’s only been two weeks since Powell opened the door to higher interest rates and perhaps faster, in response to a strong economy and inflation that continues to triple its target.

Since then, three US banks have collapsed and tens of billions of dollars in customer deposits have flown out of small and midsize banks into the perceived safety of big banks. Ailing Credit Suisse has been taken over by rival UBS. And the US Treasury, the Federal Deposit Insurance Corporation and the world’s central banks have taken steps to protect their own banks and their liquidity.

“Taken in isolation, the economy is looking very, very good right now. And the Fed would probably be raising rates without what’s happening right now,” said Jay Bryson, chief economist at Wells Fargo. “That being said, what is happening now is very disturbing and makes the future very uncertain. And we have seen a tightening in financial markets. So the Fed may decide to pause here just to see how things settle out.” .

Goldman Sachs economists also expect the Fed to pause. In a note to clients this week they wrote that “stress in the banking system remains the most immediate concern at this time.”

The Fed is scheduled to announce its policy decision on Wednesday at 2 pm Miami time. Powell’s lecture is scheduled for 2:30 p.m.