Jerome Powell is expected to go through the verification process to run the Federal Reserve for another four years with broad bipartisan support, but that hasn’t stopped lawmakers from teasing the central banker on anything from soaring inflation to one Series of central bank trade scandals.
Powell, who testified to members of the Senate Banking Committee Tuesday after President Biden nominated him for a second term as Fed chairman, defended his record as the leader of the world’s most powerful central bank while going through a confusing one economically Outlook.
The U.S. economy is growing solidly, but faces challenges in the coming year from repeated COVID-19 outbreaks, the hottest inflation in nearly four decades, labor shortages and supply chain bottlenecks.
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“We are working hard to achieve our legal goals of maximum employment and price stability,” Powell said in his prepared testimony. “We will use our instruments to support the economy and a strong labor market, and to prevent higher inflation from settling in.”
But lawmakers persisted, urging Powell – who had already steered the economy through the worst recession in nearly a century – to explain why the Fed hadn’t tackled inflation earlier and how policymakers planned to withdraw support, without accidentally triggering another recession.
Republicans grilled Powell over his initial forecast that inflation would be temporary and resolve when the pandemic-induced disruptions in the supply chain subsided. Powell has since recognized that inflation has been staying higher and longer than the Fed expected, and has shown the central bank a more aggressive path to withdraw its support for the economy.
Senator Pat Toomey, the senior member of the Senate Banking Committee, argued that the Fed should have stopped its massive bond-buying program earlier and suggested that the central bank put mortgage-backed securities and government bonds worth $ 120 billion in inflation.
“We have been in record economic expansion for more than a year, with the unemployment rate near the all-time low, and yet the Fed is still buying government bonds,” Toomey said.
The Pennsylvania Republican also called it a “mistake” by the Fed to keep buying bonds once the economy recovered. The Labor Department said last month that inflation rose 6.8% in November from the same month last year, the fastest increase since June 1982.
“None of the Fed’s pandemic measures came at no cost,” Toomey said. “This negative real interest rate environment continues to distort markets, risk asset bubbles and punish savers.
The Fed started cutting its bond purchases by $ 15 billion a month in November and announced at its December meeting that it would double this to $ 30 billion from January. In that timeframe, the central bank stands ready to complete the program by March and allow Fed officials to raise interest rates and reduce total assets by $ 8.8 trillion.
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Powell said he expected inflation to ease by the middle of the year, but that the Fed must take all necessary measures to prevent higher prices from “locking in”. Minutes released from the central bank’s December meeting show officials are poised to hike rates “sooner and faster” than originally expected in an attempt to combat the surge in inflation.
“We have to be humble, but a little nimble,” he told the legislature.
Powell was also forced to reject leftist concerns that faster policy normalization would slow recruitment and potentially leave many workers, especially low-income Americans, unemployed. Interest rate hikes tend to lead to higher interest rates on consumer and business loans, which slows the economy by forcing it to cut spending.
Senator Sherrod Brown, chairman of the Senate Banking Committee, urged the Fed not to end its support for the economy prematurely, suggesting that corporations and supply chain shocks are the real driving force behind inflation. He urged Powell to put workers first.
“However, some are suggesting that the Fed withdraw its support to the wider economy and make it harder for people to find jobs,” said Brown, D-Ohio. “When people talk about the ‘cooling off’ of the economy, what they really mean is making it harder for people to get a job and keeping paychecks from growing.”
Brown also asked Powell if he planned to make climate risk stress testing a priority for banks in his second term.
“It is very likely that stress scenarios, as we like to call them, will be an important tool in the future,” said Powell. “Climate stress scenarios at this stage are really about ensuring that the big financial institutions understand all of the risks they are taking, including the risks that may be inherent in their climate change business model.”
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But Toomey, who was an outspoken critic of what he saw as the politicization of the top bank, warned that the Fed would have consequences if it exceeded its congressional mandate to stabilize prices and ensure maximum employment.
“Let me make that clear,” he said, “if this politicization continues unchecked, it won’t end well for either the Fed or the independently driven monetary policy.”
Despite the concerns they expressed, both Brown and Toomey have announced their support for Powell for a second term. Powell is expected to slide through the verification process with sufficient bipartisan support, though some lawmakers on both sides of the aisle – including Senator Elizabeth Warren, D-Mass – have said they will not support him.