WASHINGTON — As soon as the Federal Reserve chairman, Jerome H. Powell, finished speaking at his December news conference, it was clear, even to him, that he had blown it. Stocks were tumbling. Analysts worried that the Fed was steering the economy into recession.
And President Trump was furious.
Four months later, Mr. Powell and the Fed have mostly repaired the damage, ending a steady march of interest rate increases and signaling that their next policy move may well be a rate cut if the economy continues to soften. Markets have rallied and recession fears have cooled. But one challenge has only worsened for Mr. Powell: Mr. Trump and his escalating anger at the Fed.
The president’s relentless attacks on the central bank, which he blames for slowing United States economic growth, are putting Mr. Powell in a bind as he tries to bolster the economy without feeding fears that he is buckling under political pressure and damaging the integrity of an independent Fed.
Publicly and privately, Mr. Powell rejects any suggestion that Mr. Trump has influenced his, or the Fed’s, actions. Mr. Powell said this year that he would not resign if the president asked him to. Associates say he is prepared to fight any attempt by Mr. Trump to try to fire him.
Yet while Mr. Powell repeatedly denies that Mr. Trump is changing the Fed’s course, the central bank has largely moved in the direction that the president wants. For now, there is little distinction between Mr. Trump’s view that rates should stay low because the economy is strong and the Fed’s view that rates should remain low because the economy is fragile.
How Mr. Powell handles the next few months will be a critical test of his leadership skills. A year into his chairmanship, Mr. Powell is trying to guide the Fed through a highly uncertain moment in the global economy, with slowing growth in Europe and China as well as in the United States, which is feeling the waning effects of Mr. Trump’s $1.5 trillion tax cut and pain from his trade war.
After four consecutive interest rate increases last year on the back of an accelerating economy, Mr. Powell is now executing an abrupt shift in the Fed’s efforts to balance growth and inflation concerns, while under assault from the president who appointed him to the job — and now regrets it.
“Well, I personally think the Fed should drop rates,” Mr. Trump told reporters this month. He has said he intends to nominate political allies like Herman Cain and Stephen Moore to the Fed’s seven-member board — two partisan candidates whose appointments would be a departure from the tradition of Fed leaders, who are more insulated from politics.
Mr. Powell is a lawyer, financier and Fed veteran, chosen by Mr. Trump in part because he fit the president’s “central casting” image of a central banker. According to interviews with colleagues, friends and lawmakers, Mr. Powell has spent the past several months pushing the Fed toward more growth-oriented policies, not because Mr. Trump is demanding it, but because he believes economic data have given the Fed no other choice.
“One thing that has served him well, and has served the committee well, is to always take a fresh look at what’s happening,” said John C. Williams, the president of the Federal Reserve Bank of New York and vice chairman of the Federal Open Market Committee. “Not get caught up in ‘We said this in September,’ or, ‘We said this in November,’ but really to say, ‘What do we think is right?’ He’s focused on, ‘Let’s get it right, and then let’s do our best to explain it, in terms of why we’ve shifted our views.’”
Mr. Powell’s difficulties festered for much of last year, as the economy soared with stimulus from Mr. Trump’s tax cuts, more government spending and increased business confidence. Unemployment fell below 4 percent — approaching five-decade lows — wages began to climb and economic growth was heading toward 3 percent.
The Fed, convinced the economy could withstand higher borrowing costs, raised rates three times. But in the weeks leading to the Fed’s final meeting of 2018, ominous signs began to emerge, suggesting that China’s economy, and the global economy as a whole, was slowing. A key indicator based on bond prices was flashing warnings of a possible recession. Yet the Fed raised rates a fourth time at that December meeting, a move that even some Democratic economists called unnecessary.
Mr. Powell tried to pull off what Fed insiders call a “dovish hike” — raising rates while conveying to markets that the end of such increases was in sight. But in Fed forecasts released that day, it appeared that officials intended two rate increases in 2019.
Markets, already spooked, plunged during a news conference after the meeting, as investors interpreted Mr. Powell’s comments as suggesting more rate increases were coming soon, even if the economy slowed. Perhaps most worrisome to investors was his suggestion that another tool it had been deploying to remove stimulus from the economy — the shrinking of its giant portfolio of bonds — would continue on “autopilot.”
In the days that followed, Mr. Trump and his allies called for Mr. Powell to resign or be fired.
“If only the Fed would loosen up a bit so that we don’t have a recession,” Mr. Moore, the conservative economic commentator whom Mr. Trump intends to nominate to the Fed board, said in a radio interview in December. He argued that the president could fire Mr. Powell for “cause,” saying the Fed chairman was “wrecking our economy.”
Mr. Powell spent the holidays holed up at a family gathering in South Florida watching financial market swings, negative corporate news and shaky economic data — and plotted a way to correct the mistakes. He scratched out bullet points on a notepad and waited for an opportunity to publicly pivot.
In early January, armed with his handwritten bullet points and arrows signifying the sequence in which he intended to deliver them, Mr. Powell provided an update on the Fed’s outlook at an American Economic Association panel in Atlanta.
This time, Mr. Powell left no chances. He made clear that the Fed would react accordingly if the economy showed signs of weakness and “wouldn’t hesitate” to change its approach to winnowing its giant portfolio of government-backed bonds.
The Standard & Poor’s 500-stock index soared 3.4 percent.
On this occasion, Mr. Powell was driving the policy shift himself. While the Fed makes policy through a committee of representatives from reserve banks around the United States, he had not had time to make phone calls to most of the other 16 officials before changing the tone.
Several weeks later, the Fed released a unanimous statement saying it would “be patient” as it determined the path of interest rates.
In March, the Fed left rates unchanged in a range of 2.25 percent to 2.5 percent and downgraded the 2019 growth forecast, citing global slowdowns. In his news conference, Mr. Powell left open the possibility that the Fed’s next move on interest rates could be a cut. He also said that the Fed planned to stop shrinking its portfolio of government bonds, known as quantitative tightening, later this year.
While economists and investors applauded the move, Mr. Trump seethed, blaming Mr. Powell for slowing what he believed would have been even stronger growth in 2018 and putting the economy at a disadvantage.
“Had the Fed not mistakenly raised interest rates, especially since there is very little inflation, and had they not done the ridiculously timed quantitative tightening, the 3.0% GDP, & Stock Market, would have both been much higher & World Markets would be in a better place!” Mr. Trump tweeted.
This month, the president called on the Fed to cut rates and to resume efforts to pump up the economy by buying bonds, a tool it previously used to help lift the economy out of recession.
Among colleagues, Mr. Powell has emphasized the importance of not letting political considerations cause the central bank to err in either of two directions. One risk would be to bend toward the will of elected officials, which could put the economy’s long-term stability at risk.
He has also mentioned a more subtle risk: stubbornly insisting on doing the opposite of what a president seeks to prove independence, and in that way doing the wrong thing. That, too, could be viewed as political interference.
“He’s in a world where there is inevitably going to be speculation about a political motive,” said Janet L. Yellen, Mr. Powell’s predecessor as Fed chief. “You can’t avoid that. The only reasonable thing you can do is get it all out of your head and make decisions based on facts and analysis, and that’s what Jay is doing.”
Some Democrats, particularly in the Senate, have praised Mr. Powell for standing firm against Mr. Trump, while criticizing him and the Fed for a string of recent actions to loosen banking regulations imposed after the 2008 financial crisis.
Other lawmakers who have spoken with Mr. Powell in recent months say they have not agreed with his decisions but view him as doing the best he can.
Senator Tim Scott, Republican of South Carolina and a member of the Banking Committee, gave Mr. Powell a “B, B-plus” grade, while contending that the pressure from Mr. Trump reflects a president’s typical desire to build a “thriving economy.”
Mr. Powell “has done a good job trying to find a balance and equilibrium between trying to allow an economy that is really hot not overheat,” Mr. Scott said, “while also not throwing a wet blanket over it.”
Another committee member, Senator Tina Smith, Democrat of Minnesota, called the possible nominations of Mr. Moore and Mr. Cain “an attack on Fed independence” but said she was confident Mr. Powell would not be affected by them.
“I think that he is walking a very fine and difficult line,” Ms. Smith said. “He should be motivated by what he thinks is the right thing to do, and not political pressure. Having talked to him, I think he’s keenly aware of that — of not becoming somebody’s political tool.”
Even some White House officials say Mr. Powell has impressed them with his poise — and his pivot.
A senior administration official, who spoke on the condition of anonymity to publicly discuss the Fed, said Mr. Powell handled the criticism “gracefully.” Asked what Mr. Trump thinks of Mr. Powell now, the official paused before finally answering.
The president would “like to see lower rates,” he said.