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The Fed Must Resist Repeating Past Mistakes
Markets have been trained to expect lower rates amid volatility. The Fed’ s chairman must not be tempted.
By Mohamed A. El-Erian
IT’ S EASY TO THINK THAT THE JEROME POWELLled Federal Reserve has been one of the unluckiest on record. From the 2020 pandemic and its messy aftermath to the current tariffinduced economic and financial volatility, it has faced one big external shock after the other. Powell has had repeated run-ins with President Donald Trump, lost key officials over insider trading allegations, seen the institution’ s credibility eroded by the misguided 2021 transitory inflation judgment, and more.
Yet what has made this bad luck worse and more consequential for overall economic well-being is that it has interacted with self-created weaknesses. Unlike other Feds, those have extended to analysis, forecasts, communication and policy responses, repeated missteps that were aggravated by a distinct lack of humility and learning. The result is a Fed whose political independence and market credibility are as shaky as they have been since the late 1970s and early 1980s. And that is bad news for a central bank that, in the next few months, will face difficult policy judgments. It’ s also bad news for the world’ s largest economy that has lost other anchors and is suffering its own period of instability at the center of the global economic and financial order.
The Fed’ s latest stroke of bad luck is highlighted by the recent rush of major Wall Street firms to revise U. S. economic forecasts. One after the other has lowered its growth projections, hiked up inflation, and warned that the balance of risks to the economy remains unfavorable even after these revisions. The policy dilemma for the Fed’ s pursuit of its dual mandate was made vivid by JPMorgan Chase & Co.’ s upward revisions in unemployment to 5.3 % and inflation all the way up to 4.4 %, an adverse move of 1.4 percentage points.
While the Fed navigated under the first Trump administration the main driver of these revisions— the effects of higher tariffs on America’ s trading partners— this round is significantly more challenging. It involves much more extensive surcharges, can trigger a range of possible reactions from trading partners, and it confronts companies with a spaghetti bowl of dynamic supply and demand uncertainties to deal with.
Also, whereas the required Fed policy response was obvious when the pandemic imposed a sudden stop on the economy, and unlike the aftermath when the central bank’ s initial mischaracterization of inflation left no doubt as to what needed to follow interest-rate-wise, the Fed’ s current policy formulation is fraught with uncertainties and danger. Managing the challenges got off to a troubling start when, in his March press conference,
38 | FINANCIAL ADVISOR MAGAZINE | MAY 2025 WWW. FA-MAG. COM