FEDERAL RESERVE CHAIRMAN Jerome “Jay” Powell stood at a podium at the Fed’s headquarters in Washington, D.C., sending a stern message to the global investment community: The central bank was going to tighten the money supply, even if it hurt.
The Fed had been maintaining rock-bottom interest rates and pumping trillions of dollars into the banking system through an extraordinary program called “quantitative easing.” But now it was time to withdraw that stimulus, to keep the economy growing and inflation low. The process, Powell proclaimed, was on “automatic pilot”: It would not be slowed or hindered, even if stock prices plunged or the bond market panicked. The Fed was created to do hard things like this, insulated from political pressure, and Powell was determined to do them. Taking a more hawkish stance “has been a good decision,” Powell said. “And I don’t see us changing that.”
It was a scene that could have played out any number of times in 2022, as Powell and the Fed stepped up to fight an unprecedented surge in consumer prices. But this speech took place on Dec. 19, 2018. Powell was still in his first year as Fed chair. The Fed had been pursuing “QE” for nearly a decade, to combat the effects of the Great Recession—and worries over how its actions could distort the economy were growing in Washington and on Wall Street alike.
So Powell assumed the role of financial disciplinarian—and the markets rebelled. Prices for stocks, bonds, and commodities fell in a frighteningly synchronized way, stunning analysts who thought such a coordinated downturn was unthinkable. Over just a three-week span, the S&P 500 fell into correction territory, dropping nearly 16%. On Christmas Eve, normally a quiet trading day, the Dow Jones industrial average fell 3%. Even President Trump, who had appointed Powell a year earlier, began hectoring him to stop tightening, accusing him
