By Randall W. Forsyth
Are you better off than when Jerome Powell assumed the chair of the Federal Reserve Board on Feb. 5, 2018? From the narrow viewpoint of investors, the answer would be yes.
Over those eight-plus years, the central bank and the markets experienced a once-in-a-century pandemic, a near-total shutdown of major economies, and nearly an acute seizure of financial markets, followed by the biggest surge in inflation in over four decades. After all that, Kevin Warsh is taking over the Fed after the S&P 500 index and the Nasdaq Composite notched record highs, again, this past Thursday.
To be precise, $10,000 put into the popular State Street SPDR S&P 500 exchange-traded fund on Powell's first day as Fed head would have more than tripled by this past week, to over $32,144, including reinvested dividends, according to data compiled by Barron's researcher Dan Lam. That attests to the appreciation in the megacap growth stocks that dominate the S&P 500, especially since the takeoff of artificial-intelligence-related enterprises in late 2022.
But the gains in that barbarous relic, gold, have surpassed the AI-powered stock bull run. The same $10,000 in the SPDR Gold Shares ETF would have grown to over $34,000. If one accepts gold as real money, as opposed to paper currencies, stocks have not gained in real terms over that span.
The rise in stocks and gold has paralleled the expansion of the Fed's balance sheet, which, in colloquial terms, is how the central bank prints money. The Fed's assets more than doubled from when Powell took the reins to their peak in March 2022; they are 50% bigger as he steps down. Asset prices have risen along with this liquidity expansion. You decide whether it's correlation or causality.
Fixed-income investors did not benefit, however. A $10,000 stake in the iShares Core U.S. Aggregate Bond ETF grew only to $11,616, including interest, while Powell presided over the Fed. Those who stuck with a near-cash, risk-free equivalent, the State Street SPDR Bloomberg 1-3 Month T-Bill ETF, would have wound up with $12,277 -- even after earning close to zero for two years starting in early 2020.
The other result of the massive monetary expansion was an upsurge in inflation, to a peak of over 9% in 2022 -- which the Fed infamously termed "transitory." That might have been Powell's last legacy, were it not for his staunch defense of the Fed's independence from the unprecedented attacks from the Trump administration.
A Department of Justice investigation was dropped in April, but Jeanine Pirro, the U.S. attorney for the District of Columbia, said she would "not hesitate" to reopen the inquiry if warranted. Powell opted to continue as a Fed governor after his chairmanship ended Friday for an "undetermined period" until the investigation is "well and truly over with transparency and finality." His 14-year term as governor ends in January 2028.
Yet what's affected most Americans hasn't been Powell's headline-grabbing fight with the administration but the affordability woes that have lowered consumer sentiment to record lows while the stock market hits record highs.
While inflation has receded from that pandemic peak, it has missed the Fed's 2% target since. And not just by just one-tenth of a percent, points out William Silber, the former Marcus Nadler professor of finance and economics at NYU's Stern School of Business. The core personal consumption expenditures index, which excludes food and energy, was up 3.2% in the latest 12-month reading.
The surge in inflation followed the massive balance-sheet expansion of nearly $3 trillion to fight the Covid-related crisis, and was facilitated by a fundamental change in the Fed's inflation-targeting practice. Policy would be geared to an average 2% inflation rate over the medium term. After a series of undershoots in the years following the 2008-09 financial crisis, policy would seek to exceed the 2% target -- which it did readily.
Vincent Reinhart, chief economist at BNY Investments, agrees that the shift paved the way for the Fed's mistake in thinking the inflation surge was merely the result of global supply chains breaking down. But he also gives credit to Powell for adjusting policy relatively quickly, increasing the federal-funds target from near zero starting in 2022 to over 5% by mid-2023. That helped bring inflation down from its pandemic peak without triggering a recession, he points out.
Against this inflationary backdrop, Komal Sri-Kumar, head of a global strategies firm bearing his name, says the Fed ought to be considering an increase in its fed-funds target. Futures markets, which earlier in the year were pricing in multiple cuts by year-end, have come around to his view. By Friday, fed-funds futures placed more than a 50% probability of at least a quarter-point increase by December from the current 3.50% to 3.75%, according to the CME FedWatch tool.
The Treasury market also sees higher yields ahead. The two-year note -- the coupon maturity most sensitive to Fed rate moves -- has risen above the fed-funds range to 4.09%. The rest of the yield curve is steepening, with longer-term interest rates rising above the short end anchored by the Fed, which Sri-Kumar says should continue.
The 30-year long bond this past week hit its highest yield since June 2007, at 5.12%. Perhaps more importantly, the benchmark 10-year note yield hit 4.6% this past Friday, exceeding the earnings yield of 4.53% on the S&P 500, based on 2026 estimated earnings. That means equities are no longer as cheap as bonds.
It seems new Fed chiefs get tested by the markets early in their tenure. Most memorably, the October 1987 crash came a few months into Alan Greenspan's first term as chair. Welcome, Mr. Warsh.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 15, 2026 15:40 ET (19:40 GMT)
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