“There is a new world order,” Vice President JD Vance recently declared. “There is a new world order in trade; there is a new world order in globalization.” 

The shift away from the old US-led order is visible in tariff schedules, export controls, energy contracts, investment screening, and trade agreements being built outside the old free-trade consensus. For decades, globalization was sold as a system of American hegemony, open supply chains, and the belief that economic integration would soften political rivalry. China was the ultimate test of that theory. China became richer without becoming Western. Washington’s answer has not been a return to free trade, but the construction of controlled commerce. 

Goods still move, firms still seek markets, and governments still negotiate agreements. What is dying is the idea that trade should be governed primarily by consumers, producers, and prices rather than ministries, security agencies, and negotiated quotas. Free trade is becoming ever more rigidly controlled: managed by states, shaped by security concerns, and increasingly organized through political blocs rather than universal rules of open exchange. 

The Bipartisan Turn Against Free Trade 

The bipartisan turn away from free trade has been a public-policy blunder that favors politically protected industries while neglecting consumers. That is the snowball effect of government intervention: tariffs generate retaliation, retaliation justifies subsidies, subsidies create managed purchase agreements, and managed agreements necessitate new boards, exemptions, and political bargaining. 

The US–China trade war began under Trump in 2018, remained largely intact under Biden, and has escalated further in Trump’s second term. The contrast is striking: while China lowered its average tariffs on the rest of the world from 8.0 percent in early 2018 to about 6.5 percent by early 2022, the United States raised its average tariffs on the rest of the world from 2.2 percent in January 2018 to 18.4 percent today. 

According to PIIE, average US tariffs on Chinese goods stand at 47.5 percent and cover all imports from China, while China’s average tariffs on US goods stand at 31.9 percent. This is no longer temporary leverage. It is structural protectionism. 

The stated justification for tariffs was that they would revive domestic manufacturing. The manufacturing numbers tell a different story. FRED reports that US manufacturing employment stood at 12.596 million in April 2026. That figure remains far below the old industrial-employment base invoked by “Made in America” rhetoric. Tariffs can make industrial revival sound muscular, but they cannot recreate the manufacturing economy of the late twentieth century. Consumers, meanwhile, pay the costs long before the promised factories arrive, if at all.

Roughly a year after Trump’s so-called “Liberation Day” tariff push, the results remain underwhelming: more federal involvement, more uncertainty, and no return to the industrial employment base politicians promised. The contradiction becomes clearest in Washington’s latest China policy. 

Managed Rivalry, Not Free Trade 

The current US-China arrangement shows controlled commerce in practice. The White House presented President Trump’s China summit as a historic breakthrough. China agreed to purchase 200 Boeing jets, with Trump suggesting the order could eventually rise to 750 aircraft. Treasury Secretary Scott Bessent stated, “We’re going to talk about a ‘Board of Investment’ that will be responsible for investment in non-sensitive areas.” 

A second joint organization is in the making, with the White House Fact Sheet stating, “The Board of Trade will allow the United States Government and the Government of China to manage bilateral trade across non-sensitive goods.” On its face, this looks like a diplomatic victory for American manufacturing and global stability. Beneath the triumphal language, however, sits a more revealing reality. This is not free trade, and it is not market competition. It is state-managed bargaining between rival great powers, a cartel logic applied to global commerce. 

Nor was Boeing alone in revealing how corporate access now depends on state diplomacy. Aircraft sales are not being left to open markets alone. They are being negotiated by heads of state, bundled into a broader geopolitical relationship, and tied to questions of supply chains and bilateral stability. The visit, the first by a sitting US president to China in nearly a decade, brought a large corporate delegation to Beijing, including executives from Apple, Tesla, Goldman Sachs, Boeing, Cargill, Visa, Citigroup, Nvidia, BlackRock, and Blackstone. The presence of these firms reveals the contradiction that tariffs promised to bring production home — but the summit was organized around preserving corporate access to China. 

Agriculture shows the same absurdity. In the early trade war, China turned soybeans into a political weapon: after Washington imposed tariffs in 2018, Beijing responded with a 25 percent retaliatory tariff on US soybeans, and US soybean exports to China fell by $9.1 billion that year. A partial recovery in the same sector is being repackaged as a diplomatic victory. US Trade Representative Jamieson Greer has since said he expects “double-digit billion” annual purchases of American agricultural goods over the next three years — roughly restoring the pre-2018 norm. 

The deeper lesson is that farmers are increasingly dependent on diplomatic bargaining rather than open markets, powered by political favor rather than productive capacity or entrepreneurial initiative. China can punish, purchase, or redirect demand depending on relations with Washington. That makes domestic subsidies unavoidable. 

According to the Government Accountability Office, USDA’s Market Facilitation Program provided $23 billion in 2018 and 2019, including $14.4 billion to about 644,000 operations, comprising more than 800,000 individuals. If Chinese purchases resume while subsidies remain, the result is not a restored free market but a but a narrower, more politicized one, with tariffs, subsidies, and politicians deciding who gets rescued.

The Multipolar Response

America’s turn toward managed rivalry forces other powers to insure themselves. As Washington redirects its attention toward China and the Indo-Pacific, Brussels can no longer assume that the old US-led order will organize global trade on its behalf. The result is not isolation, but bloc-building, with the EU–Mercosur and EU-India trade agreements leading the way. 

The EU–Mercosur agreement began provisional application on May 1, 2026, linking the EU with Argentina, Brazil, Paraguay, and Uruguay, creating a trading zone of roughly 700 million people. The agreement supports European exporters by saving firms an estimated €4 billion in customs duties on goods such as car parts, machinery, chemicals, and pharmaceuticals, while also deepening EU access to Latin America’s agricultural products, minerals, and critical raw materials. This is why the European Commission has framed the Mercosur relationship not only as a trade deal, but as part of Europe’s strategy to secure resilient supply chains and reduce strategic dependence.

India offers Europe something Mercosur cannot: scale, services, manufacturing diversification, and Indo-Pacific leverage. After more than a decade of stop-start negotiations, the EU–India agreement is expected to double EU goods exports to India by 2032 and eliminate or reduce tariffs on 96.6 percent of EU goods exports. It is the EU’s most economically significant bilateral trade agreement ever, giving European firms deeper access to the world’s most populous country and one of the fastest-growing major economies. 

Both agreements should be read as geopolitical insurance policies. Europe is not just lowering tariffs; it is securing supply chains, diversifying partners, and building leverage as the United States turns inward and toward Asia. These machinations are not “free trade.” They are negotiated corridors of access, hedged by rules, exceptions, quotas, and strategic objectives. Decades of negotiation, rules of origin, tariff schedules, environmental clauses, quotas, and ratification procedures show that the world is moving away from free trade. 

French President Macron captured the logic clearly: “In the world we live in — with American tariffs and Chinese overcapacity — we must protect our production capacities.” He added that the objective is, “not to be the vessels of two hegemonic powers.” That is the language of bloc strategy. The “secondary” powers are fully aware of the changing status quo. 

The Rise of Managed Globalization in a Multipolar World

Free trade has lost its innocence. The old promise was that open markets would soften rivalry and discipline governments. Instead, the United States tried to liberalize China through trade and found itself managing a powerful rival through tariffs, export controls, aircraft deals, farm purchases, investment boards, and subsidies. Brussels, seeing Washington turn inward and toward Asia, is building its own corridors with Mercosur and India.

This is not the end of globalization, but the end of globalization as a neutral, American-led project. Government intervention, introduced via tariffs, does not stop. Tariffs invite retaliation; retaliation invites subsidies; subsidies invite managed deals; and managed deals invite more bureaucracy. That is controlled commerce: trade still moves, but increasingly through political management rather than open exchange. The world is still trading. It has simply stopped pretending that trade is free from coercive power.

Introduction

This explainer expands upon the earlier AIER explainer “A Brief History of Federal Transfers” by examining the relationship between federal, state, and local governments shaped by transfers and the incentives they create. Transfers enable the federal government to exert influence over state and local policy beyond what direct legislation — or indeed the Constitution — allows.

It outlines the dangers of centralization created by transfers, provides an overview of federal transfers to state and local governments today, and offers solutions for states to minimize their dependence on federal transfers.

Tocqueville’s Evergreen Warning

In his seminal book Democracy in America, Alexis de Tocqueville distinguishes between two types of state centralization. The first type, governmental centralization, occurs when a national government creates “general laws” and deals with foreign affairs. This form reflects a minimal state, protecting person, property, and promises as well as national security. The second type, administrative centralization, occurs when the national government gains power to “regulate the ordinary affairs of society, to rule the diverse parts of the State in the direction of their special affairs, and to be in charge of the daily details of their existence.”

Administrative centralization always fails, Tocqueville argued, because the task “exceeds human power.” No single person has the necessary knowledge to properly manage these affairs, which leads to “incomplete result or exhausts itself in useless efforts.” Furthermore, while it might produce some “great men of history,” administrative centralization is incapable of securing “the lasting prosperity of a people.” Tocqueville writes that in such planning we see “an element of despotism, but not of lasting national strength.” This unique despotism, which he calls “democratic despotism,” destroys a nation’s character by leaving its citizens “irrevocably in childhood; it likes the citizens to enjoy themselves, provided that they think only about enjoying themselves.”

Nearly two centuries later, his warnings are as salient as ever. The federal government involves itself in myriad state affairs and local minutiae, thanks largely to the growing number of federal grants to state and local governments.

Ideally, the relationship between the federal government and the states would be close to what legal scholar Michael Greve calls “Competitive Federalism.” Greve summarizes Stanford Economist Barry R. Weingast’s parameters of “competitive, ‘market preserving’ federalism,” which emphasize:

1. State governments underneath a central government have sufficient authority and independence to compete with other states over “some range” of political and economic policies.
   
2. States control what happens within their borders, but the central government ensures people and goods can move freely between states to avoid “excessive externalities.”
   
3. Transfer payments from the central government to the states are extremely limited.

Today, the US falls short of this model. It suffers from what Greve calls “cartel federalism,” in which the federal and state governments act as “partners in a collective enterprise.” This partnership gives the federal government influence over state and local affairs by using “the production and distribution of rents among politicians, bureaucrats, and concentrated industry sectors.” In return, it softens state and local budget constraints with infusions of federal funds. The result is more centralization and less accountability. Additionally, Greve warns that some forms of decentralization could be pernicious. One such example is the Supreme Court upholding state government interference in national commerce, such as in South Dakota v. Wayfair, Inc. (2018), which permits states to require e-commerce sellers to collect sales tax even if these sellers do not have a physical presence in the state.

In all such cases, the focus is on spending and regulations, rather than solving the problems for which these grants are created in the first place. Despite the clear failings of federal aid, federal policymakers are eager to dole it out and state and local policymakers are eager to accept. The feedback loop reinforces administrative centralization and detracts from individual liberty.

The Constitutional Issues at Stake

The debate over federal transfers reflects a deeper constitutional debate going back to the founding era over the meaning of “promoting the general welfare.” James Madison argued that the meaning of “general welfare” in the preamble must be limited to the Constitution’s enumerated powers. Alexander Hamilton, by contrast, argued for a broader interpretation, claiming that “power ought to be coextensive with all the possible combinations of [the infinite circumstances that endanger the safety of nations].” These two perspectives inevitably carried over into spending and the relationship between federal and state governments.

This same debate entered the discussion of federal transfers in the Supreme Court case South Dakota v. Dole (1987), in which the Supreme Court ruled that Congress may attach conditions to federal funds to influence state policy so long as these conditions promote the “general welfare,” are clearly stated, and are not coercive. In this case, the Court upheld a reduction in highway funding for states that refused to raise the drinking age, calling it “relatively mild encouragement.”

In practice, the Dole framework grants Congress broad latitude to shape state policy indirectly through funding. This issue was revisited in NFIB v. Sebelius (2012), where the Court ruled that threatening states with the loss of all Medicaid funding crossed into coercion. This ruling was narrow and preserved the broader logic of Dole, leaving most conditional funding programs intact.

What appears cooperative is often a system of negotiated dependence, where constitutional doctrine and fiscal incentives work together to shift authority toward the federal government and away from the states.

Why Give Transfers? Why Take Them?

At the federal level, these transfers encourage states to increase spending on issues DC deems important. If state lawmakers were not going to fund something, however, it’s likely because that issue is addressed by the private sector or the costs of such spending exceed any potential benefits.

The “flypaper effect” refers to a phenomenon of states using federal aid for its targeted purpose (i.e., education), only partially reallocating funds to tax cuts or other spending. Evidence is mixed, but the flypaper effect appears strongest wherever interest groups are highly active at the state level and/or where federal grants require matching state funds.

From a political economy perspective, this outcome is predictable. Policymakers respond to incentives embedded in institutional rules. Conditional funding allows Congress to expand influence without a direct mandate, while states adjust policies to secure federal dollars.

Federal transfers also create a transactional form of governance. “There’s a very great danger,” Philip Hamburger comments, “that all institutions will end up being aligned under centralized control” due to the influence of federal transfers with conditional funding.

When federal aid comes into the picture, decision-making becomes distorted. Federal transfers allow states to export some of their burden of funding their own budgets to taxpayers across the country. The cost of spending a dollar is now much less than a dollar for state taxpayers. As a result, states will overspend on federally subsidized activities (especially those that support interest groups) and underspend on other budget priorities, regardless of how state residents value that spending.

The goal of increasing spending to maximize federal dollars also invites a lapse in program security, inviting fraud and abuse. At the beginning of 2026, the federal Department of Health and Human Services froze childcare and family assistance in five states over fraud concerns. Additionally, when federal transfers to the states discourage states from auditing programs for waste, fraud, and abuse, taxpayer dollars get wasted while dependence on the federal government increases. This scenario occurred while the federal COVID-19 stimulus packages were passed, particularly with unemployment insurance and Medicaid. This gave the federal government greater control over these programs and their respective sectors of the economy (i.e., healthcare) while taxpayers must sacrifice additional income to cover the losses these programs incurred.

It also encourages state policymakers to shift costs from their own budgets onto federal balance sheets. This results in many states having the appearance of strong fiscal health while being propped up by federal funds. If federal transfers decrease, many states and cities are likely to experience budget crises.

Jonathan Rodden’s analysis of fiscal federalism finds that this is a predictable outcome of institutional design. Rodden finds that when subnational governments depend on transfers while retaining borrowing and spending autonomy, they can expand programs without fully bearing the cost, also known as a “soft budget constraint.”

Political incentives reinforce this behavior. Policymakers respond to the fiscal rules they operate under as actors that want to maximize resources and avoid hard tradeoffs. When spending decisions are made locally but financed nationally, each state will try to draw as much as possible from federal funds while spreading the costs across the national tax base.

The result is a system that quietly builds fiscal distress beneath a veneer of stability.

The Twenty-First Century: An Era of Federal Dependence

“A Brief History of Federal Transfers to the States” covered the history of federal transfers from the Founding to 1980, but the story continues after the Great Society. A brief respite from ratcheting federal transfers, known as the “Devolution Revolution,” consolidated 77 categorical grants and two block grants into 9 block grants under the Omnibus Budget Reconciliation Act of 1981. Despite this consolidation, federal transfers, particularly for entitlements, continued relatively unabated.

In 1995, the Unfunded Mandate Reform Act brought hope to limiting federal unfunded mandates on state and local governments and the private sector, but its scope was extremely limited, excluding most federal grant conditions and preemptions. By 2000, 653 aid programs to the states existed. Throughout the presidencies of George W. Bush, Barack Obama, and Donald Trump, these programs and their spending steadily increased in the years leading up to the pandemic in 2020.

In 2020 and the years following, state dependence on federal funds increased 63 percent from 2019 to 2021 (the peak of federal transfers during the COVID-19 economic contraction). Even after these programs were reduced, federal spending on state and local governments in 2023 is still $200 billion (constant 2017 dollars) greater than in 2019. Projections from the Congressional Budget Office also anticipate federal transfers to state and local governments to resume a steady increase from 2026-2036. Increased strains on the federal budget, however, will inevitably lead to cuts to state transfer payments (as is being heavily debated in discussions of Medicaid reform) resulting in state governments scrambling to cover billion-dollar funding shortfalls. State policymakers will then likely finance those budget shortfalls with debt to avoid political backlash. Figure 1 shows the average state expenditures as a percentage of total spending since Fiscal Year 1991.

Figure 1: State Expenditures by Type as a
Percentage of Total State Expenditures (50 State Average)

Note: These totals include capital spending. Shaded areas indicate periods of recession.

Source: National Association of State Budget Officers (NASBO) State Expenditure Report Historical Data, FRED Database (for inflation indicator), and Author’s Calculations

Hopes of reducing federal influence over states were dashed as both FY 2023 and 2024 state budgets saw a severe decline in revenues. This has meant prolonged dependency on federal taxpayer dollars, which federal policymakers are happy to provide in exchange for submission. While federal funding returned to second place in 2023, nearly one third of the average state spending comes from federal transfers. This gives the federal government a large influence over state policy and softens budget constraints for state policymakers.

Such demands for state submission may occur at unexpected times. In late 2025, Indiana legislators discussed redistricting efforts, with many rejecting a plan proposed by President Trump. In response, a rumor spread of a federal funding freeze (originating from a non-profit outside of the government) if Indiana failed to pass the redistricting map. The mere rumor of such a threat stoked fierce debate in the Indiana legislature. The redistricting map was rejected, and the rumored threat never materialized. The clear lesson, though, is that states are so dependent on federal funding that they can be scared into compliance.

Breaking the Addiction to Federal Transfers

Fiscal discipline will be the best means for states to prepare for the coming cuts. One successful example is the Financial Ready Utah plan. Implemented in 2013, the plan created the state Federal Funds Commission to monitor the effects of federal grants on the state and required state agencies to develop emergency action plans in anticipation of a 5- to 25-percent cut in federal funding.

Additionally, state policymakers can begin tracking the number and type of federal transfers coming into the state. Recently, Indiana Comptroller Elise Nieshalla began a campaign highlighting how excessive national debt comes from overspending, which has drawn many state legislators and organizations to rally to the cause. Comptroller Nieshalla has also highlighted the dangers in her own state with a data transparency portal, noting that 43.48 percent of Indiana state expenses were paid from federal transfers.

Making the extent of state federal dependence on federal funds clear to the public, and the dangers of such dependence, can help states break free from federal funds.

Conclusion

The growth of federal transfers pushes America further from the ideal federalism rooted in competition and autonomy and emboldens a federalism defined by dependence and centralized control. What began as limited fiscal assistance evolved into a powerful mechanism through which the federal government shapes state and local policy, distorts local priorities, and weakens accountability. As fiscal pressures mount in DC, states face a critical choice: continue down the path of dependency or restore their fiscal independence. Reclaiming autonomy and preserving the decentralized system Tocqueville admired starts with ending the dependence on the federal government.

Bandar Abbas, April 2026. The tanker captain knows this route well. He has sailed it a hundred times — through the Strait of Hormuz, into the Gulf of Oman, west toward the refineries. This month, he cannot sail it at all. Conflict has choked the world’s most important oil corridor. Roughly nine million barrels per day, nearly a tenth of global supply, disappeared almost overnight.

In earlier decades, a disruption like this would have been painful but manageable. Strategic reserves, spare production capacity, and diversified supply chains would have softened the blow. This time, Brent crude surged above $100 per barrel, diesel approached $6 per gallon, and inventories fell below their five-year average. The cushion was gone.

What happened in the Strait of Hormuz is not terribly unusual. Geopolitical shocks to supply are as old as oil markets themselves. But why, this time, did the global energy system have so little capacity left to absorb one? The answer lies not in the Persian Gulf, but in two decades of policy that steadily dismantled the capital structure of the fuels the world still depends on, while simultaneously obstructing the only scalable alternative capable of replacing them.

The International Energy Agency’s investment data clearly tells the story. A decade ago, fossil fuel investment exceeded spending on electricity generation, grids, and storage by roughly 30 percent. By 2025, the relationship had completely reversed. Electricity investment now runs roughly 50 percent above the combined total for oil, natural gas, and coal. Solar investment alone attracts more capital annually than the entire upstream oil and gas sector.

This shift did not occur because markets concluded fossil fuels were no longer necessary. It occurred because governments decided they should become less important. Subsidies, mandates, ESG pressure on institutional lenders, and regulatory hostility toward new fossil fuel infrastructure all pushed capital in the same direction.

Imagine a farmer told he may only plant one crop in the future — a promising new variety, but one not yet tested in every season or climate. At the same time, the grain silos storing the old harvest are quietly dismantled. If the new crop performs perfectly, the transition succeeds. But if the harvest disappoints, or arrives late, or fails during a drought, there is nowhere left to turn. The silos are gone. That precarity reflects the position of the modern energy system.

When governments distort the price signals that coordinate investment in capital-intensive industries, capital flows somewhere other than where it is most urgently needed. The consequences do not appear immediately. They accumulate slowly, in the form of deferred maintenance, abandoned projects, shrinking spare capacity, and reduced resilience. The system appears stable until a shock arrives that it can no longer absorb.

The IEA reports that nearly 90 percent of upstream oil and gas investment since 2019 has gone not toward expanding production but merely toward offsetting natural field decline. The industry is running faster to stand still, and doing so with a shrinking capital base. The supply pipeline for the late 2020s is being shaped right now, and the investment decisions of 2020 and 2021 have already made it thinner than the world can comfortably afford.

Exactly one technology is capable of generating reliable, large-scale, zero-carbon electricity regardless of weather, season, or time of day. It is not solar. It is not wind. Both are intermittent by nature. The technology is nuclear power, and the same regulatory culture that pushed fossil fuels out of the energy mix spent decades ensuring nuclear power could not replace them.

Between 1954 and 1978, the United States authorized the construction of 133 nuclear reactors. Since 1978, only two have entered commercial operation. The permitting and construction timeline for a new nuclear facility now frequently exceeds twenty years. Regulatory costs alone can reach tens of millions of dollars annually before a single kilowatt-hour is generated.

Nuclear power did not become uneconomic because consumers stopped wanting reliable electricity. It became uneconomic because regulators made it so — layer by layer, decade by decade, requirement by requirement — until the economics no longer worked. The same political impulse that declared fossil fuels incompatible with a sustainable future also prevented its only scalable replacement from being built on the necessary timeline and budget.

One critical miscalculation is at the centre of the present crisis: activists planned to move away from fossil fuels without ensuring a destination existed first. Part of the old capital structure was dismantled before the replacement was ready. In the gap between the two, the system’s resilience quietly disappeared.

Into this increasingly fragile system has arrived a demand shock few policymakers anticipated. Artificial intelligence and data centers are driving the fastest growth in global electricity demand in more than a decade. Large data centers consume as much electricity as small cities do, continuously and without interruption. This is precisely the kind of demand profile that reliable baseload generation was designed to meet — and precisely the kind that intermittent renewables cannot reliably satisfy alone.

It might sound like a degrowth conspiracy, but it’s simply structural pressure. Suppressing reliable baseload investment created a system with steadily shrinking resilience. The AI-driven surge in demand merely exposed the weakness. Had fossil fuel investment been allowed to follow market price signals toward market-supported expansion, and had nuclear power remained economically viable to construct, the system would likely have retained enough margin to absorb both rising demand and geopolitical disruption. Instead, the margin disappeared.

Grid infrastructure tells a similar story. Investment in transmission networks has lagged far behind investment in generation capacity. The infrastructure needed to connect newly generated supply to new areas of demand remains trapped inside the same permitting bottlenecks that crippled nuclear development. The same regulatory instinct that created the fragility is now obstructing market attempts to repair it.

Ludwig von Mises identified the central logic of interventionism long ago: one intervention creates distortions that appear to require additional interventions to correct, until the system itself becomes dependent on political management rather than economic coordination. The modern energy system has drifted deep into that logic. Fossil fuel investment was redirected politically. The resulting fragility was temporarily hidden by weak demand growth. Nuclear power, the natural corrective, was regulated into stagnation. The AI-driven surge in electricity removed the remaining slack. Then a geopolitical shock in the Strait of Hormuz exposed what years of distorted investment signals had quietly created.

Every barrel of oil above $100 is the energy system presenting the invoice for years of suppressed price signals and redirected capital allocation. The hundreds of billions of dollars in upstream investment that never materialized do not vanish harmlessly. They return later as supply shortages, higher prices, and reduced resilience — precisely when geopolitical instability removes the last remaining buffer.

A genuinely market-driven energy system would not have produced perfection. But it likely would have produced resilience. Absent intervention, price signals encourage additional baseload investment before shortages become acute. Capital flows toward nuclear generation before regulatory costs make construction prohibitively slow and expensive. The energy transition would have proceeded at the pace the underlying capital structure could realistically support.

The tanker captain still cannot sail his route. Consumers see the consequences in every electricity bill and every trip to the gas station. These are not merely the costs of a geopolitical crisis. They are the delayed costs of the policies that made the energy system unable to withstand one.

Jerome Powell’s term as Federal Reserve chair ended Friday, and assessments of his legacy are already rolling in. 

At Bloomberg, Amara Omeokwe and Catarina Saraiva describe Powell as “The Fed Chair Who Fought Back.” At Forbes, Danielle Chemtobe says he “leaves behind a legacy of navigating inflation and defending the independence of the central bank under pressure from the president of the United States.” Greg Robb, at MarketWatch, says “Powell’s legacy as Fed chair is fighting inflation and Trump.” Jamie McGeever, at Reuters, describes him as the “Defender-in-Chief.” Squawk on the Street’s Sara Eisen recounts Powell’s legacy as “a champion for Fed independence, saving the world economy from a deep depression during the COVID shutdown, and fighting 41-year high inflation without wrecking the economy or jobs, achieving the rare soft landing.”

If these early accounts hold up, Powell will be remembered as a fighter — and a successful fighter, at that. He is widely believed to have protected the economy in the pandemic and shielded the Fed from political pressure. But his record, on both counts, is somewhat mixed.

Powell and the Pandemic

When the economy contracted in early 2020, Powell vowed to do whatever it would take to facilitate a speedy recovery. The Fed, under his leadership, moved quickly to increase the monetary base, cut the interest rate it paid on reserves, and open a host of emergency lending facilities. The Fed’s efforts, Powell told the Senate Banking Committee in May 2020, were intended “to facilitate more directly the flow of credit to households, businesses, and state and local governments” to prevent them from failing during the pandemic.

At least in hindsight, however, Powell’s Fed appears to have done too much. 

As the economy reopened and real output recovered, the additional liquidity pushed prices higher. The Personal Consumption Expenditures Price Index, which is the Fed’s preferred measure of inflation, grew 13.9 percent from January 2020 to January 2023 — or, roughly 4.3 percent per year. The excess inflation left prices around 7.8 percent higher than they would have been had the Fed hit its two-percent inflation target over the period. The recovery was speedy. But the cost was higher inflation.

No doubt some will try to absolve Powell of the high inflation in 2021 and 2022. Many initially attributed the higher prices to pandemic-related supply disruptions and, later, Russia’s invasion of Ukraine. And some still believe constrained supplies — not Fed policy — are largely to blame.

As I explained at the time, however, temporary supply disruptions cannot account for the permanent rise in prices:

Temporary supply disturbances are temporary. The pandemic and corresponding restrictions reduced our ability to produce. But they will not reduce our ability to produce forever. The lifting of restrictions, vaccine rollout, and gradual acceptance that a mild version of the virus is endemic will eventually permit production to return to normal, even if it has not done so already. […] When production returns to normal, so too do prices. But that is not what the Fed is projecting. Instead, the Fed is projecting that prices will remain permanently elevated. Why would a temporary supply disturbance cause a permanent increase in the level of prices?

Production had mostly returned to its pre-pandemic growth path by 2021:Q3. But prices remained elevated. Indeed, they were growing more rapidly. The implication, as I said then and would repeat in the months that followed, was clear: much of the inflation — and certainly the lasting component — was demand-driven. 

Although Powell initially thought inflation was supply-driven, he eventually came to accept that there was a demand-side problem, as well. He famously abandoned the term “transitory” in November 2021. And, as Bill Bergman and I have shown, the Federal Open Market Committee (FOMC) revised its statement in December 2021 to acknowledge “Supply and demand imbalances […] continued to contribute to elevated levels of inflation” (emphasis added). I think Powell — and others at the FOMC — should have recognized the demand-side problem by September 2021. But he did ultimately recognize it.

One might give Powell a pass for only belatedly seeing the demand-side problem and the corresponding need to tighten monetary policy. But should he get credit for bringing down inflation once the problem was understood?

Powell seems to think so. “We looked at the inflation as transitory,” he told journalists in January 2025.  “And when the data turned against that in late [20]21, we changed our view, and we raised rates a lot. And here we are at 4.1 percent unemployment and inflation way down.” The Fed, in Powell’s telling, acted “quite vigorously […] once we decided that that’s what we should do.”

In fact, the Powell Fed was rather slow to tighten monetary policy even after it realized there was a demand-side problem. 

Bryan Cutsinger and I have described the policy response:

Although the FOMC clearly acknowledged the increase in aggregate demand by December 2021, it did not immediately raise its policy rate. Instead, the FOMC began tapering its asset purchases and indicated it would likely begin raising its policy rate in March 2022. According to the December 2021 Summary of Economic Projections, the median FOMC member thought the midpoint of the federal funds rate would rise to 0.9 percent in 2022, consistent with a 0.75 to 1.0 percent target range.

[…]

To make matters worse, the FOMC was slow to revise the pace of its policy rate hikes once it realized the problem was much worse than it had previously thought. And it realized the problem was much worse pretty quickly.

The FOMC would begin raising its federal funds rate target in March 2022, as it had indicated it would. But the real federal funds rate remained negative through June 2022. “The Fed had eased off the accelerator,” we write, “but had not yet hit the brakes.”

Why didn’t the FOMC raise rates at its December 2021 or January 2022 meetings? Why did it only raise rates by 25 basis points in March? Why did it leave real rates negative through June 2022? Under Powell’s leadership, the FOMC was not merely late to recognize the demand-side problem. It was also slow to tighten monetary policy once the problem was realized. 

Indeed, it is still trying to get inflation back down to 2 percent. Powell cites a “series of shocks,” including President Trump’s tariffs and the more recent conflict in the Middle East, for the lack of progress. But the problem now, as in late 2021, is excess nominal spending growth.

Powell and Political Pressure

Whereas some assessments of Powell’s legacy acknowledge his mixed record on inflation, the claim that he is a champion of central bank independence usually goes unchallenged. In March 2026, the American Society for Public Administration awarded him the Paul A. Volcker Public Integrity Award for “​​upholding a standard of faithful service impermeable to political pressure.” But here, too, Powell’s record is mixed: he allowed the Fed to drift into politically-charged areas and appears to have yielded to political pressure from the Biden administration.

Until very recently, Powell appears to have done little to abate the Fed’s mission creep into social justice topics. Louis Rouanet and Alex Salter document the “growing interest by Fed officials in ‘social justice’ topics, as opposed to topics strictly related to the goals set forth by Congress,” in the years just prior to the pandemic. Then, in 2020, the Fed revised its Statement on Longer-Run Goals and Monetary Policy Strategy to describe its employment objective as a “broad-based and inclusive goal,” which seemed to suggest the Fed was considering racial employment gaps. “While such gaps clearly exist,” Rouanet and Salter write,

they are structural: They persist regardless of short-run aggregate demand fluctuations. This means the Fed has adopted a goal that it cannot achieve without further embracing direct resource allocation, which is de facto fiscal policy, at the expense of liquidity provision. It also pulls the Fed further into the political arena by making central bankers allocators of scarce resources according to political, and perhaps partisan, criteria. Such actions are, at minimum, in tension with democratic governance.

The Fed dropped the phrase from its 2025 revision, despite Powell having explicitly affirmed it in prior years. 

Powell also permitted the Fed to drift into climate policy. The Fed joined the Network of Central Banks and Supervisors for Greening the Financial System in 2020 and began pressuring banks to disclose climate risks and develop regulatory tools for climate stress testing thereafter. In 2023, Powell said the Fed has “narrow, but important, responsibilities regarding climate-related financial risks” and that the “public reasonably expects supervisors to require that banks understand, and appropriately manage, their material risks, including the financial risks of climate change.” The Fed withdrew from the Network of Central Banks and Supervisors for Greening the Financial System in 2025 — just three days before President Trump’s inauguration.

Regardless of what one thinks about social justice or climate policy, these topics clearly fall beyond the Fed’s mandate. Allowing the Fed to dabble in these politically-charged areas did not bolster its independence. It eroded it. And, although the Fed has since stepped back in both areas under Powell’s leadership, the damage to its independence has already been done.

Some have also claimed political factors are responsible for the delayed response to rising inflation in late 2021 and early 2022, as Gregg Robb reports:

Billionaire macro-trading legend Paul Tudor Jones suggested that Powell held off on raising interest rates — which were stuck close to zero for all of 2021 — because he wanted then-President Joe Biden to reappoint him. Biden was hoping a strong economy fueled by lower rates would help him get re-elected.

After Biden nominated Powell for a second term, ‘it was go time’ for rate hikes, Jones said in a podcast interview last month. 

The timing is certainly curious. The Fed clearly acknowledged the demand-side problem in December 2021. But it did not raise its federal funds rate target until March 2022, and only by 25 basis points then. When the Fed raised its target by 50 basis points in May 2022, Powell said “a 75-basis-point increase is not something the Committee is actively considering.” Then he was confirmed and the tenor changed. The Fed raised its federal funds rate target by 75 basis points at each of the four meetings that followed Powell’s confirmation. 

Further evidence that Powell relented to political pressure under the Biden administration comes from his visit to the White House in May 2022. While it is not unusual for a Fed chair to visit the White House, the meetings typically take place behind closed doors. They do not usually involve a press gaggle in the Oval Office. Many viewed the event as an opportunity for the president to “deflect blame back to the Fed” or “passing the buck” to the Fed chair ahead of the election, and Powell appeared to serve as a willing political tool.

Inflation, Independence, and Powell’s Legacy

There is no denying the difficulties the Fed has faced under Powell’s leadership, and he deserves credit for building consensus and instilling confidence in uncertain times. He has a remarkably cool demeanor and has managed to keep his cool despite ongoing pressure from politicians on both sides of the aisle. But one should not let affection for Powell — or, disaffection for President Trump — cloud one’s judgment. 

A sober assessment of the actual decisions made and outcomes realized reveals a mixed record for Powell. His legacy is not great, but it could have been much worse.