The Adam Smith Award is an annual recognition by the National Association for Business Economics (NABE) for leadership in the field of business economics. Recipients are selected by the NABE president for demonstrated excellence in applied economic policy.

Despite former Federal Reserve chairs Janet Yellen and Ben Bernanke receiving the award in years past, this year’s awardee, Jerome Powell, described his nomination as an “unexpected honor” in keynote remarks delivered at a luncheon held in his honor Tuesday in Philadelphia.

“On a more personal note, I have greatly enjoyed my regular visits to your annual meeting and your conferences,” began the current Fed chairman’s address to a room of the most “lovable group of econ-nerds anywhere” that he can think of, besides his fellow central bank colleagues.

“It’s a place where we can talk about economic issues and not worry that someone’s eyes might glaze over,” he continued, before launching into prepared remarks on — plot twist — the Fed’s balance sheet.

Described by Powell as “one of the more arcane and technical aspects of monetary policy,” management of the Fed’s balance sheet is nevertheless one of his teams’ most essential policy functions. That ledger of central bank-owned assets and liabilities is the money supply that liquifies the U.S. financial system and a global financial network through which U.S. dollars have been piped as reserve assets since the Bretton Woods agreement in 1944, when Fed Chair Marriner Eccles led the U.S. delegation to replace the gold standard with U.S. dollars.

“When the Treasury makes or receives payments,” Powell noted, “those flows affect dollar for dollar the supply of reserves or other liabilities in the system.”

Keeping Fed independence

Domestically, the context surrounding Powell’s speech is extraordinary if not unprecedented, which may be the tenor of central bank leadership, no matter one’s opinion of Powell’s policy tenure or any chairman’s mark on history.

It was only April, following a speech by Powell at the Economic Club of Chicago, that President Donald Trump vented his frustration about perceived delays in lowering interest rates by posting on social media, “Powell’s termination cannot come fast enough!”

A divisive rate-cut pressure campaign that the White House and cabinet-level leadership have waged against Powell over the course of 2025 left just 4% of the 159 economists surveyed by NABE in August to report confidence in the Fed staying “fully independent.” Likely some of those respondents were in attendance at Tuesday’s luncheon.

Now mid-October, two weeks into a U.S. government shutdown that commenced on Oct. 1, Powell finds himself stewarding a split coalition of central bank policymakers. After lowering the overnight lending rate for banks by 25 basis points during the Fed’s two-day policy meeting last month, minutes from the meeting revealed a range of views on future cuts.

“A few participants stated there was merit in keeping the federal funds rate unchanged at this meeting or that they could have supported such a decision,” the minutes read. Most agreed that further cuts in 2025 would be warranted, though opinions on the pace varied.

With government data collection operations suspended on account of the shutdown, monthly updates on employment and inflation trends relied on by the Fed’s rate-setting committee to make policy decisions have not been published.

The next two-day Fed policy meeting, and ensuing rate-cut decision, is scheduled for Oct. 28 and 29. Months of nominal job creation and reaccelerating inflation have put policymakers’ dual mandate of maximum employment and stable prices in tension.

The minutes underscored divisions between Fed policymakers who feel that as each side of the dual mandate moves further from target baselines, the bluntness of the Fed’s key policy tool — raise rates, lower rates or keep rates steady — widens the margin of error on any shift in policy stance.

Past policy mistakes

Powell discussed in Tuesday’s discursion on the recent dalliances of the Fed’s balance sheet that extravagant loosening of monetary and fiscal policy during the COVID-19 pandemic have amplified historically unique challenges facing Fed policymakers today.

“Faced with unprecedented market dysfunction, the Fed purchased Treasury and agency securities at an extraordinary pace in March and April of 2020,” Powell said, before slowing the pace of balance sheet expansion to $120 billion a month by June. That expansion was necessitated by dropping the fed funds rate to a range of 0% to 0.25% in March 2020.

Powell explained that balance sheet expansion continued in 2021 “to avoid a sharp unwelcome tightening of financial conditions at a time when the economy still appeared to be highly vulnerable,” reflecting policymakers’ expectation that bond markets could throw a “taper tantrum” like they did when the Fed proposed balance sheet reductions in 2013 and 2018.

“If our ability to pay interest on reserves and other liabilities were eliminated, the Fed would lose control over rates.”

Totaling roughly $6.5 trillion as of Oct. 8, Fed liabilities include: Federal Reserve notes, or physical currency ($2.4 trillion); reserves, or funds held by depository institutions at Federal Reserve Home Loan Banks ($3 trillion); and the Treasury General Account, which functions as a checking account for the federal government and totals roughly $800 billion.

For assets, the Fed manages approximately $4.2 trillion of U.S. Treasury securities and $2.1 trillion of government-guaranteed agency mortgage-backed securities (MBS). The Fed transforms publicly held Treasury securities into reserves by purchasing Treasurys in the open market and crediting banks involved in the transactions, liabilities left unchanged.

“With the clarity of hindsight, we could have and perhaps should have stopped asset purchases sooner,” Powell confessed. “Our real-time decisions were intended to serve as insurance against downside risks.”

When policymakers thought runaway consumer prices would prove “transitory” in 2021, pandemic-era inflation instead rose 9.1% over the year ending June 2022, prompting a punishing rate-hike campaign that brought inflation (mostly) home by 2025. Powell’s term as chairman ends in May 2026 and his “soft landing” legacy hangs in the balance of risks that are shifting again.

“Stopping sooner could have made some difference, but not likely enough to fundamentally alter the trajectory of the economy,” he continued, noting that policymakers could be “more nimble” in their use of the balance sheet and “more confident” in their communication with financial markets given their “growing experience with these tools.”

Balance sheet strategy

Since June 2022, the Fed has reduced its balance sheet by $2.2 trillion, from 35% to nearly 22% of U.S. gross domestic product, but does not seek to reconstitute its pre-pandemic balance sheet or balance sheet strategy, Powell suggested.

“In the longer run, the size of our balance sheet is determined by the public’s demand for our liabilities rather than by our pandemic-related asset purchases,” he advised.

With non-reserve liabilities (agency MBS and U.S. dollars) approximately $1.1 trillion higher than the period immediately before the pandemic, Treasury security holdings must be as elevated.

The Fed balance sheet is overweight longer-term securities and underweight shorter-term securities “relative to the outstanding universe of Treasury securities,” Powell said before an understated acknowledgement of why he was awarded the Adam Smith Award anyway.

The “ample reserves” regime informally replaced the “limited reserves” framework when the Fed first began balance sheet expansion in response to the 2008 financial crisis. It was formally adopted by the Federal Open Market Committee, its rate-setting body, in 2019, a little less than a year into Powell’s first year as chairman.

“If our ability to pay interest on reserves and other liabilities were eliminated, the Fed would lose control over rates,” Powell explained. “To restore rate control, large sales of securities over a short period of time would be needed to shrink our balance sheet and the quantity of reserves in the system. The volume and speed of these sales could strain Treasury market functioning and compromise financial stability.”

The ensuing Treasury and agency MBS supply shock would put upward pressure on the entire yield curve as the private market attempted to absorb that paper, raising borrowing costs for the Treasury, businesses and consumers across the U.S. and around the world.

“Our ample reserves regime has proven remarkably effective for implementing monetary policy and supporting economic and financial stability,” he said, stressing that there is “no risk-free path for policy” moving forward as the Fed navigates employment and inflation policy goals.

“We’ll set policy based on the evolution of the economic outlook and the balance of risks rather than following a predetermined path,” concluded the leader of the central bank, ever data-dependent as markets and consumers await a breakthrough on the funding lapse holding his data hostage.