Jay Powell will be remembered for many things, not least for being the Federal Reserve chair who presided over the return of inflation. But his legacy may be defined by something else: becoming a sharp example of Donald Trump’s habit of tagging adversaries with pithy nicknames: “Jerome ‘Too Late’ Powell.” The president probably won’t amend that moniker, even as Powell announced last week an interest rate cut of a quarter percentage point.

The Fed’s role is to manage monetary policy: setting interest rates, regulating the supply of money and credit, and overseeing parts of the financial sector. These decisions ripple throughout daily life—shaping whether jobs are abundant, credit affordable, and inflation restrained. Yet the Fed’s independence, while shielding it from day-to-day politics, also leaves it unaccountable to voters. Balancing autonomy and effectiveness requires an elaborate dance with politicians and the public. When the Fed stumbles, the consequences are obvious: recessions, inflation, bubbles, and political blowback. Powell, faulted by Trump for raising rates too late during the inflation surge and now for cutting them too late as growth slows, is the latest Fed chair caught in this enduring tension.

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Fair or not, the situation leaves the Fed as an easy target for blame. Presidents have long faulted it for not cutting rates when they wanted. Trump is no different, but his relentless attacks on Powell have put the agency under unusual scrutiny. Powell, though, helped invite this criticism by politicizing the Fed and stretching its interpretation of its mandate. After several missteps, monetary policy seems overdue for a reset. Two shifts in the coming year will define the Powell Fed’s legacy and guide how the institution navigates what could be one of the most challenging periods in its history.

First, this fall, the Fed will complete its framework review, a reassessment of how best to pursue its dual mandate of maximum employment and stable prices. Second, next May, Powell will step down as chairman. Together, these shifts will shape monetary policy for years to come: how the Fed responds to the next recession or financial crisis, and how it manages an economy burdened by high debt.

Some Fed chairs have been more consequential than others, depending not only on the state of the economy during their tenure but also on their intellectual ambitions. Paul Volcker, appointed by President Jimmy Carter in 1979 and reappointed by Ronald Reagan, left a mark that lasted for decades. When Volcker’s tenure began, inflation had been high for nearly ten years, and volatile prices seemed permanent. Volcker hiked interest rates sharply and resisted intense political and popular pressure to ease as the economy plunged into a deep recession. But the strategy worked. Inflation broke, growth resumed, and price stability endured. His willingness to do whatever it took proved that monetary policy could control inflation and that the Fed would act decisively when needed. The credibility that Volcker built anchored expectations and helped keep interest rates low, long after his tenure ended.

Alan Greenspan, appointed by President Ronald Reagan in 1987 and serving until 2006, largely reaped the benefits of Volcker’s hard-won credibility. He presided over much of the Great Moderation, a period when the economy boomed, recessions were brief and shallow, and both unemployment and inflation remained low. Under Greenspan’s leadership, the Fed’s role evolved toward sustaining growth in the economy and stock market, rather than fighting inflation. Fed chairs faced little penalty for erring on the dovish side, since the agency could lower rates whenever growth faltered, buoy markets, and still keep inflation at bay. Greenspan also lent the office a peculiar glamour: he made every Fed decision seem weighty, opaque, and a bit unpredictable.

Though more low-key in demeanor, Ben Bernanke may have been the most consequential modern Fed chair. He was appointed by President George W. Bush in 2006 and served until 2014, and his tenure coincided with the financial crisis and Great Recession, which ended the Great Moderation. For the first time in decades, the U.S. economy suffered a long, major downturn with massive job losses. With a distinguished academic career, Bernanke was also more intellectually ambitious than his predecessors. He infused Fed strategy with scholarly influence—introducing greater transparency through explicit inflation targets, publishing economic projections more often, and instituting forward guidance, in which the Fed pre-commits to future policy actions.

“The pandemic handed Powell his first true test. He unleashed the central bank’s full force to combat a collapsing economy.”

Forward guidance aimed to resolve the classic trade-off in monetary policy. Central bankers can either commit to clear rules that preserve credibility or exercise discretion that offers short-term flexibility but erodes trust over time. Forward guidance tried to capture both benefits: anchoring long-term expectations, while allowing short-term maneuvering. The approach reflected Bernanke’s scholarly background and the prevailing academic fashion for greater transparency in monetary policy. It marked a step toward the rules-based discipline that Greenspan resisted, without locking the Fed into a formula like the Taylor Rule (named after Stanford economist John Taylor), which dictates policy rates based strictly on economic conditions.

Bernanke also expanded the Fed’s tool kit, introducing quantitative easing (QE)—buying long-term bonds and mortgage-backed securities rather than just short-term Treasuries—and paying interest on reserves. Strikingly, though his policies were highly accommodative, inflation remained subdued, often below the 2 percent target that he set.

Janet Yellen, appointed by President Barack Obama in 2014 and serving until 2018, carried this approach forward with continued transparency and forward guidance. Her tenure saw the long-awaited recovery from the Great Recession: she nudged rates up modestly, yet unemployment kept falling and inflation remained unusually low.

Jerome Powell, appointed by President Trump in 2018, is not a trained economist but a lawyer and former investment banker; he was chosen as a consensus figure. Once in office, he largely carried forward the Bernanke-Yellen legacy. He made forward guidance a central tool and leaned toward accommodation while using powerful stimulus measures in response to the pandemic lockdowns and market turmoil.

He also made subtler changes. Under Powell, the Fed ventured into areas beyond monetary policy. Roughly 10 percent of research at the Fed board and regional banks shifted toward more overtly political themes. Governors increasingly spoke on issues such as racial inequality, for example, even adopting “a promise to focus on diversity and inclusion in our workplace and to our work to ensure fair access to credit across the country.” And in 2021, the Fed created a committee to assess how climate change might threaten the financial system and pledged more resources for modeling those risks. The group was quietly disbanded this March.

Just before the pandemic, the Fed completed its most recent framework review. A major change came in its approach to unemployment: it would cut rates when unemployment was high but not raise them simply because it was low. The Fed also adopted Flexible Average Inflation Targeting (FAIT), allowing periods when inflation was above 2 percent to offset earlier periods below target. Under the old regime, brief deviations from the 2 percent target were tolerated; under FAIT, overshooting was explicitly allowed to compensate for earlier undershooting, as the economy had experienced a period of below-target inflation in 2019.

Both changes turned out to be significant. The Fed must balance inflation and employment; traditionally, higher employment also means more inflation. How much weight to give each defines a central bank. Many central banks focus mainly on inflation—not because employment is unimportant but because it is harder to control directly. The logic is that stable, low inflation creates the best conditions for strong employment. In the U.S., however, the Fed is expected to balance both objectives. The 2020 framework review tipped that balance by placing greater weight on employment than inflation.

The motivation for this shift was not entirely mysterious. It reflected decades of low inflation and years of near-zero real policy rates, which made the risk of too little inflation seem greater than the risk of overheating. Politics may also have played a role. At the time, the Fed described maximum employment as an “inclusive” goal. Influenced by arguments from think tanks and policymakers, it stressed that very low unemployment helped draw more people into the labor force—especially groups with historically lower participation rates, including workers with less education and black Americans.

The Fed’s political foray may have stemmed from hubris—or from the belief that monetary policy was uniquely powerful, what Mohamed El-Erian called “the only game in town.” With Congress seen as paralyzed, the Fed appeared able to move the economy and tackle big problems at no cost. After a decade of low inflation despite repeated rate cuts, shifting the mandate toward employment seemed risk-free—and potentially beneficial if it expanded the workforce.

It was perhaps inevitable that the traditional ring fence protecting the Fed’s independence and narrow mandate would erode, leading some to argue that it could tackle issues like climate change and racial inequality. But this was never realistic. Both are serious economic challenges that involve trade-offs better left to elected officials accountable to voters. They also require tools beyond the Fed’s reach—such as education policy and regulations that shape economic activity.

The pandemic handed Powell his first true test. He unleashed the central bank’s full force to combat a collapsing economy—cutting rates to zero and deploying QE on an unprecedented scale. By 2022, the Fed’s balance sheet had swelled to $8.95 trillion, nearly double its previous peak of $4.5 trillion in 2015. In March 2020, when mortgage and bond markets froze, such measures may have been necessary to keep credit flowing. But as the economy recovered, the Fed kept its foot on the accelerator.

Inflation took off in the fall of 2020; yet the Fed kept rates near zero and continued buying Treasuries and mortgage bonds until March 2022—more than a year after inflation had exceeded target. By May 2021, consumer prices were rising more than 5 percent year-over-year; and by June 2022, inflation had peaked above 9 percent. Policymakers initially hoped that the surge was supply-driven and would fade on its own. Critics pointed to FAIT, which tolerated overshooting and a hot labor market. But economists Christina and David Romer argue that the real culprit was the framework’s asymmetric response to employment: under it, the Fed would not consider raising rates until joblessness had fallen further, even if inflation was already high.

Vice Chairman Richard Clarida also argued that the problem was not FAIT itself but its implementation—specifically, the forward guidance that locked the Fed into waiting. As he explained, “Just a month after adopting FAIT, the FOMC [Federal Open Market Committee] introduced muscular forward guidance, stating it would not consider liftoff until labor market conditions reached maximum employment, inflation hit 2 percent, and was on track to ‘moderately exceed’ 2 percent for some time.”

The bigger mistake may have been continuing QE until 2022. The Fed did not begin tapering its bond and mortgage purchases until November 2021, though it should have started winding down by fall 2020. By then, markets were functioning normally and the housing sector was overheated, as Americans moved and refinanced at record-low rates. Yet the Fed kept buying mortgage-backed securities, at one point holding 40 percent of all agency MBS. This flood of purchases drove mortgage rates below 3 percent, leaving more than half of U.S. homeowners locked in to loans under 4 percent—and reluctant to move, constraining supply.

Clarida later explained the logic behind extending QE so far into the recovery, even after inflation had surged. “At the December 2020 FOMC meeting, the Committee indicated that QE would continue until ‘substantial further progress’ was made toward its dual mandate goals,” he noted. Powell and other officials also stressed a “taper–hike–shrink” sequence, Clarida observed, as in 2015–17: the Fed would not raise rates until QE ended, and QE would not end until tapering was completed. As Clarida added, this sequence was “not mandated by the FAIT framework” but was a discretionary choice that delayed normalization. Tapering did not begin until November 2021, and the first rate increase didn’t come until March 2022.

But Powell partly redeemed his record by holding firm on higher rates even as inflation fell below 3 percent. A recession was widely expected; yet so far, it has not arrived. Whether through skill or luck, Powell is credited with bringing inflation down without triggering a downturn—a rare achievement that bolsters his reputation as a capable central banker and helps overshadow earlier missteps. His resolve to stay the course and resist cutting rates under intense political pressure may also strengthen the Fed’s independence in the long run, stabilizing bond markets and inflation, as Volcker once did—even if Powell’s leadership first opened the Fed to greater political scrutiny.

To tame inflation in the early 1980s, Paul Volcker resisted intense pressure to reduce interest rates even as the economy sputtered. (Diana Walker/Getty Images)

Powell now faces the choice of remaining on the Fed board once his chairmanship ends. Even if he steps down entirely, he will still influence the debate in the next framework review, held every five years.

These reviews rarely attract much attention. The 2020 review became notable only after inflation returned and was blamed for delaying the Fed’s response. In general, central bankers are risk-averse and reluctant to give up tools. The 2025 review, however, could be far more significant—shaping the U.S. economy, the Fed’s future, and its independence. Powell could use it to refine the monetary philosophy begun under Bernanke, correct its failures, and better insulate policy from political pressure.

Ideally, the review should go big. As both Larry Summers and Treasury Secretary Scott Bessent have argued, it should include a full internal reckoning. With inflation now back in the range of 2.5 percent to 3 percent, it is tempting to move on, but the Fed’s mistakes still weigh on the economy: lingering inflation; a sluggish housing market, with many owners locked in to ultralow mortgages; and the credibility lost when the agency strayed into politics. By putting greater weight on employment over inflation, the Fed also made itself accountable for outcomes that it cannot control. Still, odds are that the 2025 review will not be so ambitious.

Powell offered a preview in his Jackson Hole speech this summer, hinting at a return to balancing inflation and employment and to flexible inflation targeting. Jan Hatzius of Goldman Sachs expects that the Fed will still keep the option of reviving FAIT if rates fall back to zero. This is characteristic of modern monetary policy—seeking the best of everything, while giving up nothing.

Instead, the Fed should take a hard look at how it implements forward guidance and move toward a more rules-based approach. Clarida has argued that guidance should be tied to observable variables like inflation, rather than to maximum employment, which cannot be precisely measured. This would impose greater discipline. The Fed could also improve transparency by expanding its dot plot—the chart showing each policymaker’s projected path for interest rates. Today’s dot plots have been poor predictors, failing to cover extreme outcomes and boxing policy into too narrow a range, undermining credibility. A better approach would pair them with multiple scenarios, showing how rates might move under different conditions. A strict Taylor Rule may be too rigid, but outlining a clearer reaction function would create a more credible framework than today’s guidance, which is both opaque and, at times, overly restrictive.

Had the Fed in 2021 considered a scenario where inflation proved persistent, it could have raised rates months sooner instead of sticking to “lower for longer” guidance and continuing QE even as prices surged. A clearer reaction function would also protect independence, since rate moves would appear tied to economic conditions rather than political pressure.

Equally important, the Fed must set strict limits on QE—or abandon it. In early 2020, bond and mortgage markets risked collapse, and asset purchases rightly prevented a crisis. But QE dragged on too long, morphing from a tool to stabilize markets into one used to boost demand and employment. There is little evidence that it works for that purpose, while the costs are clear: distorted financial and mortgage markets and losses to the Treasury, since the Fed borrows short to buy long-term debt. Rising rates have cost $192 billion over the past two years and could total $760 billion over the next decade. Having been used four times in 16 years, QE is not “extraordinary” any more, and it risks undermining independence as debt mounts and as policymakers are tempted to suppress rates through financial repression—a tactic that rarely works and often fuels inflation. Yet the central bank, in ending its program of quantitative tightening (QT), is effectively committing to QE indefinitely and still favoring the labor market over inflation.

The Fed should narrow its objectives to what monetary policy can achieve, reaffirming its focus on maximum employment, stable prices, and—secondarily—financial stability. Like other central banks, it should put greater weight on inflation than employment and avoid wading into political issues that require democratic debate and the attention of lawmakers. Research departments should retain flexibility to study topics relevant to the broader economy, but there should be no explicit mandates, working groups, or conferences devoted to political issues beyond monetary policy.

The other decision that will shape both monetary policy and Powell’s legacy is who succeeds him. The leading contenders—Kevin Warsh, Kevin Hassett, and Christopher Waller, among others—have echoed the Trump administration’s view that a rate cut, perhaps a large one, is overdue. How they would govern once in office is less clear. Warsh, for example, has been more hawkish on inflation. Pandering to Trump’s preference for lower rates may look like a blow to independence, but it would not be unprecedented: Powell himself did not begin preparing markets for higher rates until after Biden reappointed him, though inflation was already surging.

The likelihood of persistently higher inflation and interest rates means that the next Fed chair will face trade-offs that Greenspan, Bernanke, and Yellen largely avoided—and that Powell did not expect when he took office. Political pressure will intensify—not only from Trump but from future presidents, as rising debt makes monetary policy harder to conduct. Heavy debt service weakens the economy and drives inflation, forcing the Fed’s dual mandate of price stability and employment into conflict. The sheer volume of debt issuance will also complicate rate management. Future chairs will be pressed to keep rates low to ease borrowing costs—but yielding to that pressure risks stoking inflation and expectations, which, in turn, push long-term rates even higher.

If the framework review narrows QE, puts greater weight on inflation, and strengthens scenario analysis, Powell will leave his successor better able to preserve independence—anchoring policy to economic variables that the Fed can control rather than the whims of politicians. But if the review merely extends current practices, relying on guidance and other discretionary tools, the result will be a more political Fed: one that bends to presidential pressure and strays into areas beyond its mandate, such as using QE explicitly to lower mortgage rates.

Two of the Fed’s most powerful tools are independence and credibility. When markets trust that the central bank has both, they expect lower inflation—bringing down interest rates, supporting growth, and strengthening the labor market. Credibility makes the Fed’s job easier: when markets believe that it can control inflation, inflation itself tends to be lower, as we saw in the post-Volcker years.

Monetary policy stands at a crossroads. On the one hand, Powell can claim the rare feat of taming inflation without triggering a recession. On the other hand, that success was accompanied by years of politicization, discretionary policy, and an overemphasis on accommodation and “inclusive” employment. The problems that Powell faces today—a sluggish housing market and mounting political pressure—are partly of his own making. The surest way to strengthen his legacy is to confront those mistakes and reset the Fed’s tools and mandate. The path forward will be difficult, but the Fed’s best chance lies in what it has always relied on: credibility, a rules-based framework, a narrow mission—and the discipline to stick to it.

Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.

Top Photo: President Donald Trump has excoriated Fed chairman Jerome Powell for refusing to lower interest rates. (Drew Angerer/Getty Images)