Introduction
As Jerome Powell nears the end of his term as Chair of the Federal Reserve (Fed) in May 2026, the prestige of the US central bank is at its lowest point in decades. The institution faces significant challenges, including threats to its political independence and its dual mandate of price stability and maximum employment.
Criticism from Within
Scott Bessent, the US Treasury Secretary and a close ally of Powell during the Trump administration, has publicly criticized the Fed for numerous missteps. Bessent calls for a comprehensive, independent, and nonpartisan review of the institution, including monetary policy, regulation, communication, staffing, and research. This criticism is echoed by an increasing number of politicians and officials, including potential successors to Powell.
Current Economic Challenges
While Powell may not be able to address the recent policy blunders, he can still tackle other pressing issues affecting the economy. The Fed has struggled to meet its dual mandate, with inflation persistently above the 2% target for five consecutive years. Additionally, employment indicators suggest a weakening labor market, which could worsen rapidly.
Powell also faces the challenge of mitigating excessive risk-taking in financial markets. Recent trends, such as soaring stock prices and gold values alongside low credit spreads and a bullish bond market, signal potential structural changes that could undermine the global allure of US financial markets.
Urgent Need for Reforms
The Fed is currently revising its monetary policy framework, and the proposed changes risk becoming as irrelevant as last year’s revision. Powell should seize this opportunity to implement necessary reforms, drawing inspiration from successful central banks and proposed strategies by experts.
For instance, a G30 working group, composed of respected former policymakers, recently published a comprehensive roadmap for recommended reforms. Although I previously suggested a strategy to Powell to prevent escalating political attacks on the Fed, he did not act, and criticism has only intensified. With the Fed at risk of failing to meet all aspects of its mandate, Powell’s continued inaction will further damage the institution.
Conclusion
Key Questions and Answers
- Q: What challenges does the Fed currently face? A: The Fed struggles with maintaining political independence, meeting its dual mandate of price stability and employment, and addressing excessive risk-taking in financial markets.
- Q: Why are reforms necessary for the Fed? A: Reforms are crucial to improve the Fed’s effectiveness and credibility, as current challenges threaten to undermine global confidence in US financial markets.
- Q: What specific reforms have been proposed? A: Proposals include comprehensive reviews, drawing inspiration from successful central banks and expert-led strategies such as the G30 working group’s roadmap.
Author: Mohamed A. El-Erian, President of Queens’ College at the University of Cambridge, Wharton School Professor, Allianz advisor, and Gramercy Fund Management President. He is the author of “The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse” (Random House, 2016) and coauthor of “Permacrisis: A Plan to Fix a Fractured World” (Simon & Schuster, 2023).
Copyright: Project Syndicate, 1995 – 2025
www.project- syndicate.org
