Jerome Powell’s latest press conference as Federal Reserve Chair was among the most combative of his tenure, marked by a barrage of pointed questions and growing external pressure to begin cutting interest rates. The Federal Open Market Committee's decision to hold rates steady drew notable dissent from two governors (something not seen since 1993) and came amid increasing criticism from President Trump, Powell’s appointing authority. Reporters, sensing Powell’s political vulnerability, took aim at everything from his long-term viability as Fed Chair to the role the Fed is playing in keeping mortgage rates elevated. Powell, who once presided over an era of (overly?) accommodative policy and ultra-low rates, now finds himself cast in a much less flattering light: seen by many as the central figure standing between a sluggish housing market and more affordable financing. Despite the flak, Powell’s resolve has a clear foundation. Holding rates steady aligns closely with the logic of Keynesian economics, especially when the economy is operating near full employment. Let's not be so quick to call the Fed's actions a policy misstep.
Critics have framed the Fed’s decision as a potential “policy error,” arguing that persistently elevated rates risk tipping the economy into recession. But the core issue lies in how one defines a policy error. Monetary policy isn’t just about inflation; it also has to account for employment, financial stability, and long-term credibility. Powell made it clear that he sees today’s 4.1 percent unemployment rate as evidence the labor market remains strong and near what economists call “maximum employment.” This concept is inherently nebulous, as economists can’t define it with exact precision, but the broader point remains: when labor markets are tight, additional monetary stimulus is less likely to create jobs and more likely to fuel inflation.
From a Keynesian perspective, Powell’s restraint is entirely appropriate. John Maynard Keynes, often associated with aggressive fiscal and monetary interventions, argued that once an economy is at or near full employment, additional stimulus would simply drive prices higher without improving output. In such cases, the marginal benefit of looser policy vanishes, while the inflationary risks mount. Powell’s stance fits squarely within this framework. In fact, while many interpret Keynesianism as a license to spend and stimulate at all times, the more nuanced view recognizes that there are limits, especially when labor markets are saturated and the economy shows few signs of slack. Cutting rates now might offer short-term political benefits or market relief, but it could undermine the Fed’s credibility and erode the hard-won progress on inflation.
Interestingly, the press conference featured no mention of household savings. I view that as an omission that further underscores how deeply American economic discourse has become fixated on consumption. Keynes warned about this tendency in his General Theory, where he viewed excess saving as a potential drag on demand and employment. Today’s economic narrative often mirrors that view, with policymakers and pundits alike treating any pullback in consumer spending as a sign of economic weakness. Powell, too, leaned heavily on demand-side indicators (e.g., consumer confidence and spending) but avoided acknowledging the role that savings or balance-sheet rebuilding could play in a healthy, sustainable expansion. The implicit message was clear: keep spending, keep the engine running, and avoid any meaningful slowdown at all costs.
Powell also addressed the inflationary implications of recent tariffs, which he said were only beginning to filter through to consumer prices. While the full impact of these trade measures remains to be seen, Powell acknowledged that businesses are signaling their intention to pass higher costs onto consumers; a factor that could complicate inflation control efforts in the months ahead. In this light, his reluctance to cut rates looks even more prudent. Introducing more liquidity into an economy already grappling with supply-side price pressures would risk reigniting inflation just as the Fed begins to gain control. Powell stressed that it’s still “early days” for the tariff effects, but his messaging suggested a clear awareness that further easing could make the situation worse. And keep in mind that before we heap all the blame (or praise) on the Fed Chair, there are 11 voting members on the fed funds rate range at each meeting, and majority rules.
At a time when many are clamoring for the Fed to rescue markets and stimulate growth, Powell is charting a more disciplined course: one rooted not in politics or popularity, but in a deeper understanding of how economies function at full capacity. While he may lack widespread support, and while the pressure from both Wall Street and Washington will only intensify, Powell’s approach reflects a commitment to long-term stability over short-term appeasement. In a sense, he is standing not just with central bank orthodoxy, but with Keynes himself, whose theories (when fully understood, something I'm not purporting) offer a compelling defense of Powell’s steady-handed policy. The irony is that in refusing to be the central banker everyone wants, Powell may be fulfilling the role the economy actually needs.