At a congressional hearing in June, Jerome H. Powell briefly discussed his goals for his final year at the helm of the Federal Reserve.
“All I want to do in my remaining time at the Fed is ensure the economy is strong, inflation remains under control and there is a strong labor market,” Powell told members of the House Financial Services Committee. “I would like to hand it over to my successor in this condition.”
Six months later, Mr. Powell faces a host of economic threats, including resurgent price pressures and stagnant job growth. That has created a split within the central bank over which threat to focus on, destroying the consensus that Mr. Powell was able to cultivate around interest rate decisions in his eight years as chairman.
Mr. Powell is also under attack from people outside the central bank — most notably President Trump, who has intimidated the chairman for months over his failure to lower borrowing costs. Other broadsides came from contenders seeking to replace Mr. Powell when his term ends in May. That list, according to Trump, has been whittled down to a front-runner, widely believed to be Kevin A. Hassett, the White House's top economic adviser.
Against this backdrop, Mr Powell is expected to push the central bank to cut interest rates for a third straight time this week at the Fed's final meeting of the year. However, what appears at first glance to be a routine decision was anything but, underscoring the acute challenge Mr Powell faces in his remaining months as chairman.
“You can make a perfectly good case for a cut at this point, but you could also make a reasonable case not to,” said Jon Faust, a fellow at the Center for Financial Economics at Johns Hopkins University and a former senior adviser to Mr. Powell.
Such an unusually close decision suggests the Fed could struggle to provide much more relief to borrowers if the economy remains stable, an uncomfortable situation for the politically independent central bank.
“If there are no sequential cuts, the pressure from the president will ramp up again very quickly,” Faust said.
A broken Fed
Mr. Powell began sounding unsettled when Trump announced sky-high tariffs against nearly all of the country's trading partners in April. The Fed chairman had until then been relatively optimistic about the economic outlook, dismissing fears that stagflation – a combination of higher inflation and slower growth – was threatening to take hold.
Even after the president backed down on his first round of tariffs, Mr. Powell began to articulate how the Fed would address a situation in which its goals of low, stable prices and a healthy labor market were in tension. This would force the Fed to “undoubtedly make a very difficult judgment” about what its priority should be, he acknowledged.
The economy has so far avoided outright stagflation, but the Fed appears to be further away from its targets than it was at the start of the year. Inflation has risen slightly and it is unclear whether the full impact of Mr. Trump's tariffs on consumer prices has materialized. Monthly job growth has slowed sharply and the unemployment rate has risen, even as consumers continue to spend money.
This has sparked a heated debate among officials about where the greatest risk lies and how to set interest rates accordingly. For those more concerned about the labor market, a rate cut is necessary to avoid excessive economic stress. For those concerned about inflation, it is considered wiser to stand still to avoid inadvertently increasing price pressures and keeping inflation above the Fed's 2 percent target.
Once unanimous policy decisions have since been replaced by much more fragmented votes, with opposing disagreements. It is expected that the decision in December will be no different.
Officials appear to be more entrenched in their respective positions, in part because of the lack of government data caused by the government shutdown that has limited their ability to get a comprehensive view of the economic situation.
The balance recently tipped in favor of another quarter-point cut after John C. Williams, president of the Federal Reserve Bank of New York and a close ally of Mr. Powell, signaled support for it. Mr. Williams, who has a permanent voice on the policymaking committee, joined a powerful group of officials in favor of the cut, including several members of the Washington-based Board of Governors. These officials vote at every meeting.
In the other camp are many of the officials who run the 12 regional reserve banks across the country and take turns voting on policy decisions. One of them is Jeffrey K. Schmid, the president of the Kansas City Fed, who officially expressed opposition to the rate cut in October.
Disagreements in both directions can also be expected this week. While some officials want the Fed to take a break, Stephen I. Miran, Mr. Trump's nominee to join the Fed board, has consistently said he wants larger cuts of half a percentage point.
Opting for a quarter-point cut would likely prevent an even bigger fight from breaking out, said Ajay Rajadhyaksha, global head of research at Barclays, who warned that without a cut there was a risk of “even more heated disagreements.”
Such a level of division has raised some fears that Mr. Powell has lost control of the policy-setting committee. But Richard Clarida, a former Fed vice chairman who now works at investment giant Pimco, sees it differently.
“The split doesn’t really indicate any kind of discord,” he said. “It simply represents a difficult time for politics as the two sides of the mandate are in different places.”
Regardless, Mr. Powell will be under pressure to strike the right balance in his messaging about the Fed's next steps. Mr Clarida said he expected the chairman to make clear this week that further cuts were by no means guaranteed.
“It's important to send a signal that the committee is taking the price stability mandate seriously, and that's important to remind people that when inflation is around 3 percent, you cut interest rates,” he said.
Succession planning
Any suggestion that the Fed is done cutting interest rates will not be well received by the president, who said of Mr Powell just last month: “I'd like to fire his ass.”
It's a threat that Mr. Trump has made many times before, but one that is likely to become obsolete as the end of Mr. Powell's term approaches. The Supreme Court will also consider the president's ability to fire Fed officials next month when it hears a case brought by Lisa D. Cook, a governor whom Mr. Trump tried to fire in August. She has been allowed to remain in her role while the case is heard.
Mr Trump is expected to name Mr Powell's successor early next year. Mr. Hassett, a longtime supporter of the president, is widely seen as his preferred candidate. Since returning to the White House as director of the White House National Economic Council, Mr. Hassett has become a fixture on cable television, championing the need for significantly lower interest rates even as he forecasts strong growth next year.
Mr Hassett has also stepped up his criticism of the central bank, blaming staff and accusing officials of incorporating politics into their policy decisions. He also once questioned whether Mr. Powell should be fired over his conduct of renovations to the Fed's Washington headquarters after the costs drew the president's ire.
Whoever is elected to lead the Fed will inherit many of the challenges Mr. Powell faces. For one thing, given the division among voting members, it could be difficult for the next leader to push through the rate cuts that Mr. Trump so desperately wants.
Even Scott Bessent, the Treasury secretary who is also leading the search, recently acknowledged the limits of the chairman's influence.
“At the end of the day, he or she has a voice,” he said at the New York Times DealBook conference last week. Next year, many of the regional presidents most vocally opposed to further rate cuts will also be voting members of the policy committee, suggesting that the bar for further cuts in borrowing costs is likely to be raised.
Financial markets could also act as a counterweight if investors begin to question the Fed's willingness to control inflation, leading to the very higher borrowing costs that displease the president.
“If the data goes in a very clear direction under a new presidency, it won't be difficult for them to reach consensus,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “It becomes difficult when the chairman wants to do something that is clearly not supported by the data.”