Powell is widely credited with taking swift and sweeping action to keep the economy afloat during severe pandemic disruptions, so his confirmation is not in jeopardy. But Americans’ heightened frustration with soaring prices is fueling pressure from Congress on the Fed chief – a Republican who was first elevated to president by President Donald Trump – over how the Fed will respond.
“He’s going to be asked about inflation by everyone, moderate to right,” said Claudia Sahm, a former Fed economist who worked under Powell. “Republicans are just going to grill it on inflation. The Democrats – Sherrod Brown, Maxine Waters, the team – they’re going to totally take him to task on the maximum job. So he’s going to get it from both sides.
For his part, Powell argues that the central bank has positioned itself in such a way that it can react more easily regardless of the development of the economy, expressing his confidence that the central bank would be able to withdraw some of its support. without unduly hampering the recovery.
“We are now in a position to take the steps that we will need to take thoughtfully to solve all the problems, including that of too high inflation,” he told reporters last month.
The Fed chief will face the Senate Banking Committee on Tuesday, where Republicans will continue to beat the drums against increased inflation, which they have used as a stick to criticize Biden’s large spending plans. Brown, an Ohio Democrat who chairs the committee, did not explicitly object to the prospect of a rate hike, but recently urged Powell to “continue to help steer our economic recovery in the right direction – towards full employment and an economy that empowers workers and their families. . “
In testimony prepared for his hearing, Powell highlighted the strength of the economy, which he said “is growing at its fastest pace in many years and the job market is strong.”
He added: “The economy has strengthened rapidly despite the ongoing pandemic, giving rise to persistent supply and demand imbalances and bottlenecks, and hence high inflation. “
Powell’s first term was not without challenges, including a rate hike campaign designed to finally remove economic support that had persisted since the Great Recession, followed by relentless public denigration of Trump and ultimately the global pandemic. . But the potential for the Fed to error is perhaps even greater than before, as well as the political danger for Powell in his second term.
The White House is not putting up political obstacles to the Fed’s intentions to do more to fight inflation, at least for now.
“I want to be clear: I am convinced that the Federal Reserve will act to achieve its dual objective of full employment and stable prices and will ensure that price increases do not take hold over the long term, with the independence of which they need, ”Biden said Friday.
Among the uncertainties facing central bank policymakers: the surprising persistence of the virus and its variants; persistent supply chain disruptions that have driven up commodity prices; and a workforce disruption that has led to millions of Americans quitting their jobs, creating a tight job market that can lead to rising inflation.
The Fed has forecast three rate hikes this year, and the first could take place as early as March. But the pandemic in general, and the Omicron variant in particular, remains a confounding factor that could either fuel inflation by extending production and shipping times, or cool it by tempering spending and hiring.
“They can either give the impression that they are trying to control inflation or they can give the impression that they are trying to support the economy and financial markets,” said Jim Bianco, director of the analysis firm. financial Bianco Research. “They can’t do both at the same time.
Bianco argued that part of the problem is with the Fed, as it failed to act sooner to start suppressing its massive efforts to keep rates low, allowing inflationary pressures to build up. This means that the central bank will have to act faster to increase borrowing costs now, which could cause turmoil in financial markets, he said.
“East [half a percentage point increase in rates] will hurt the economy? No, it is not, ”he said. “But it’s going to be felt on Wall Street, and if Wall Street ends up making fun of it, then it’s a policy error.”
Adam Ozimek, chief economist for the independent platform Upwork, said the Fed misjudged the magnitude of the inflation spike, although he still thinks – as the Fed has previously argued – that the increases prices will eventually cool down on their own. Rather, he said the danger is that the Fed will overreact to inflation levels that ultimately prove to be temporary, hurting the millions who still have not returned to the workforce.
“Inflation is extremely high in all respects, but the labor shortage is also significant and we are far from full employment,” he said. “The policy challenge is far more complicated than in 2018, when Powell faced uncertainty over the downturn in the workforce, but without the added pressure of high inflation.”
Still, others have praised the Fed’s restraint amid price spikes, keeping rates low and allowing the labor market to recover faster. They argue that inflation is largely fueled by supply chain problems the central bank is not equipped to solve.
Former Fed Chairman William McChesney Martin once said that the job of the central bank was to “pull out the bowl of punch when the party starts.” But Sahm argued that a few rate hikes shouldn’t spoil anything.
“Things are improving,” she said. “We need to put a little less punch in the punch bowl. “