Powell Faces Senate Questions Over Fed Plans to Contain Inflation

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The Fed chief’s confirmation hearing on Tuesday could highlight the rationale for the central bank’s projected interest rate hike

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Powell and his colleagues had set for three quarter-point rate hikes this year, after several months of rising inflation, until the Fed’s December policy meeting. And over the past week, they have indicated that they may start moving forward in March.

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While Mr. Powell’s final confirmation is not in doubt, members of the Senate Banking Committee at the hearing want him to explain why the Fed has shifted course and how it plans to control inflation, Andrew Olm said. who was the deputy director of the White House. National Economic Council under President Trump.

“This nomination hearing is coming at one of the most complex times in recent Fed history, with a significant policy shift, while there is still a fair amount of uncertainty about the future path of the pandemic” and the economy, Mr. Olm Said, a former senior Senate aide who is now a partner at the law firm Mayer Brown.

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Of the 84 lawmakers who voted to confirm Mr Powell, a Republican, four years ago, 68 are still in office, with the two party caucuses split evenly. Several lawmakers from both parties expressed support for Mr. Powell when President Biden announced his reappointment in November, with sans Sherrod Brown (Ohio) and Pat Tommy (Pa.), the top Democrat and Republican respectively, on the committee. .

Mr. Powell led his colleagues at their meeting last month to call off its bond-buying stimulus program in March, opening the door to a rate hike. Over the past week they have indicated that they may begin reducing their asset portfolios soon after that point, which would be another form of toughening policy.

Mr. Powell has been trying to balance two risks over the past year – raising rates prematurely and risking a longer, longer period of increased unemployment or leaving them too low and complicating high inflation, the latter. Forcing rapid adjustments.

If supply-chain bottlenecks were a primary driver of inflation and were expected to reverse themselves over time, officials were wary last year for outright price increases by raising rates and cooling the labor market.

If inflation remains too high or begins to seep into consumers and businesses’ expectations of future inflation, which may be self-fulfilling, the Fed will change course, he said. “There may come a time when the risks may reverse,” Mr. Powell said.

The downside risk was reduced as evidence mounted that demand was stronger than expected and could fuel widespread and sustained price pressures, even if the latter were foolishly driven by supply problems.

“There is a real risk now, I believe, that inflation could be more stable and … the risk of higher inflation is increased,” Mr. Powell explained at a news conference last month.

Officials are now indicating they do not want to react less in the form of wage increases, which could fuel a more traditional inflationary cycle. They are overestimating the possibility that aggressive fiscal and monetary-policy responses to the pandemic over the past two years may have changed traditional recession dynamics, with a surge in wage growth that typically takes longer to recover after a recession. takes time.

Sharp rises in home values, stocks and other assets have boosted wealth for many Americans, fueling strong demand and potentially allowing some to retire earlier than they expected, tightening the labor market. Is done. If the pandemic subsides, spending on services rises and more Americans are moved to look for jobs, demand could still rise.

President Biden’s political fate may be tied to Mr. Powell’s response. If the Fed does too little or is too late, Americans could face years of high inflation or force the central bank to aggressively raise rates, confusing financial markets and plunging the economy into recession. can be done. If it runs too fast or too quickly, it slows down premature hiring.

Strong demand for goods, disrupted supply chains and various shortages pushed 12-month inflation to its highest level in decades. Core consumer prices, which exclude volatile food and energy categories, were up 4.7% in November from a year earlier, according to the Fed’s preferred gauge. Both are well above the Fed’s 2% target.

But it has been developments in the labor market, not just higher inflation readings, that have provided fuel for the Fed’s shift in recent weeks toward tightening policy much faster than last summer.

The unemployment rate, which fell to 3.9% in December, is now lower than it was four years ago, when Mr. Powell became Fed chairman. This is despite the turmoil created by the pandemic, which sent unemployment in April 2020 to a post-World War II record of 14.7%.

Michael Gapen, chief US economist at Barclays, said he still thinks inflation is likely to decline this year because he believes the rise in prices is primarily driven by the pandemic and not because the Fed has slowed down the economy. invested more money in “The main reason for higher inflation is relative demand and constraints, which are a pandemic story. The policy stance is secondary,” he said.

Others are concerned that higher home prices and rents will keep inflation well above the Fed’s target this year. “Even if some temporary elements disappear, it will be very difficult to bring inflation below 4%,” said Kenneth Rosen, housing economist at the University of California, Berkeley.

What could be a potentially tough question if inflation doesn’t decline this year, as most forecasters and Fed officials expect. “If inflation continues, how high will interest rates have to go to reverse it?” Adam Posen, president of the Peterson Institute for International Economics, said.

At an economics conference last week, some economists on both sides of the aisle warned that the Fed may have waited too long to raise rates, especially given the $1.9 trillion in fiscal stimulus last March by congressional Democrats and the White House. After approval.

Engineering a so-called soft landing in which the Fed slows the job market to quell inflation, but not so much that triggering a recession “will require the Fed to be both lucky and smart,” said Glenn Hubbard, a Senior Economic Adviser to President George W. Bush.

Mr Posen said the Fed was right to contain its fire despite the difficult balancing act last year, which could go further. “I still think they can get it under control without a major slowdown. I don’t mind that there has been some overshooting,” he said.

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