The Federal Reserve has faced a steady drumbeat of economy-shaking events since Jerome Powell became chairman in 2018: the COVID-19 pandemic; wars in Ukraine, Gaza and Iran; global tariffs; the AI boom. In crafting U.S. fiscal policy and guidance, the central bank can’t avoid the effects of those events, Powell said at Harvard on Monday. But it can mitigate them.
“We’re in the levy-building business, not the hurricane-preventing business,” Powell told students during a meeting of Aetna professor of the practice of economic policy Jason Furman’s Ec 10b“Principles of Economics” class in Sanders Theatre. “We have a hugely resilient system—the financial sector is always evolving rapidly, and vigilance is what you need. We shouldn’t be trying to regulate risk out of existence.”
Speaking to a large group of undergraduates, Powell and Furman, a former chair of the U.S. Council of Economic Advisers under President Barack Obama, discussed how that approach—data-driven and apolitical—has shaped the Fed’s response at key moments. Right now, Powell pointed out, surging gas prices due to war in the Middle East, are driving up inflation, but not necessarily for the long run.
“Energy shocks tend to come and go quickly,” Powell said. “Monetary policy works in the long term and lags. The tendency is to look through any type of supply shock, but you have to carefully monitor inflation expectations.”
Deploying tools at the Fed’s disposal to influence U.S. monetary policy — by raising or lowering key interest rates, injecting or removing cash from the financial system, or communicating future policy plans, among others—should be considered in the broadest context, rather than in response to singular events, he said. During COVID-19, for example, the Federal Reserve made major moves to stimulate the economy because of the sheer level of global uncertainty. “We were looking at the possibility of another Great Depression,” Powell said.
“The broad consensus is that the Fed needs to be fully independent and not react to political things at all,” added Powell, who was nominated as Fed Chair in 2018 by President Donald Trump and renominated in 2021 by President Joe Biden. “We stick to our data.”
Powell, whose term as Fed Chairman will end in May, then briefly defended the vital nature of the Federal Reserve’s independent political ground. “We’re never looking to get on the turf of the national security people or the State Department or things like that,” he said. “That would make us less effective.”
“The Fed is not a perfect system,” he allowed. “It’s very challenging, but it’s a great American institution. It’s very hard to build great democratic institutions, but much easier to bring them down.”
The discussion also touched on the economy’s future, and how it might impact the students in the audience poised to enter a rapidly shifting job market.
“It’s a period of very low job creation,” Powell noted. “The unemployment rate is low but that doesn’t help you in that kind of market. Getting hired is a bit of a challenge.”
The rise of AI, he added, is transforming business operations and company structures. “Whatever the effects are, certainly in the next few years we will start to feel them,” he said. “Companies can take out a lot of jobs that will be automated by a very smart large language model. And they will. But it’s going to create new jobs, too.”
Powell expressed optimism that, like innovations throughout history, the large-scale effects of AI would be positive in the long run.
“This has been going on for a couple of hundred years—since the loom put weavers out of business,” he said. “In all cases, it has wound up raising productivity and raising living standards. That will be the case here, but there will be a period that is challenging.”
“You’re at a time when you really need to master the use of these new technologies,” he counseled students. “These technologies are going to give you great new opportunities, and just be optimistic about that.”
