Jerome Powell gets grilled in his bid for 4 more years

Federal Reserve Chairman Jerome Powell sought to explain to lawmakers how the central bank got caught off guard by the current bout of historic inflation. 

During his confirmation hearing, Powell blamed the Fed’s inflation call on two central issues: lingering supply chain problems and a slow return of workers to the jobs market. 

“We and other forecasters, we believed based on our analysis and discussions with people in industry that the supply side issues would be alleviated more quickly than now appears to be the case,” Powell said. “Substantially more quickly.”

The Fed chief added that officials expected a “much more significant return to the workforce than has turned out to be the case.”

“While that is not what is causing current inflation,” Powell said, “labor supply can be an issue going forward for inflation, probably more than the supply side issues.”

Powell said supply side challenges have been “more persistent and more substantial” than expected. 

Of course, it wasn’t just the Fed that inflation wrong. Very few forecasters on Wall Street anticipated inflation would be this high for this long. 

Looking ahead, Powell said his expectation is there will be “some relief” on the supply front this year and global supply chains “will loosen up.”

If that doesn’t happen and inflation proves to be “even more persistent and higher,” Powell said that would increase the risk of it “becoming entrenched in the psychology” of businesses and households.

“That would indicate that we would respond,” he added. 

Federal Reserve Chairman Jerome Powell conceded trades by senior officials showed the central bank’s ethics rules needed to be strengthened.

“The old system was in place for decades and then suddenly it was revealed as insufficient,” Powell told lawmakers. “We do take the need to protect our credibility with the public very seriously. And I think our new system is the toughest in government, the toughest I’ve seen anywhere.”

Last year, the Fed announced new ethics rules following criticism about pandemic-era trades made by multiple senior officials. 

Powell explained that under the new rules, policymakers and senior staffers will no longer be able to buy individual stocks and can only sell after giving 45 days’ notice and getting approval from officials. 

“There will be no ability to time the market and no kind of appearance issues that we’ve had,” Powell said. 

Powell did not specifically address the early resignation announced Monday by Richard Clarida, the Fed’s vice chairman. Clarida is stepping down about two weeks early following criticism about new disclosures of his early 2020 trading activity.

Federal Reserve Chairman Jerome Powell told lawmakers the central bank plans to roll out and implement new ethics rules very soon.

The Fed announced the outlines of the ethics rules, including a ban on trading individual stocks, in October following a scandal over transactions made by senior officials.  

Senator Sherrod Brown, the chairman of the Senate Banking Committee, pointed out during Powell’s confirmation hearing that lawmakers have not seen the specific rules and they have not yet taken effect.

Powell said the rules will be announced and implemented “imminently,” adding that he believes it would be in the “very near future.”

“We’ve tried to take care and write them correctly. They are complex,” he said.

Powell said the new rules required the central bank to hire employees and build systems.

While Powell is getting grilled, the mood is lifting on Wall Street.

Stocks started the day in the red but turned green in the late morning. The S&P 500, the market's broadest gauge, was up 0.4%, while the Nasdaq Composite rose 1.2% at midday. The Dow was the laggard and traded flat.

But don't get any big ideas. The Federal Reserve's willingness to end asset purchases, raise interest rates and start working off the massive pile that is its balance sheet isn't exactly what Wall Street wants to hear.

In fact, last week's minutes from the Fed's December meeting, which showed proof of first discussions of the balance sheet, spooked investors on the day.

Federal Reserve Chairman Jerome Powell said the central bank will move to shrink its $9 trillion balance sheet faster than in the past.

Powell told lawmakers that the Fed has not made any final decisions on the so-called runoff of its balance sheet. However, the Fed chief noted the economy is in a “completely different place” than the last time central bankers faced this question.

“The period of time between stopping purchases and beginning runoff will be shorter. And the balance sheet is much bigger, so the runoff can be faster,” Powell said. “I would say sooner and faster. That much is clear.”

The Fed’s balance sheet ballooned during Covid as the central bank gobbled up assets in a bid to revive the economy. Those purchases came on top of ones made during the Great Recession and years that followed.

Minutes released last week from the Fed’s December policy meeting spooked investors by showing some officials thought the central bank should start shrinking its portfolio of bonds and other assets relatively soon after beginning to raise interest rates.

“We’re mindful the balance sheet is $9 trillion. It’s far above where it needs to be,” Powell said.

Republican Senator Richard Shelby argued the Federal Reserve’s response to inflation has tarnished the central bank’s reputation.

“I’m concerned the Fed missed the boat on addressing inflation sooner. A lot of us are,” Shelby told Fed Chairman Jerome Powell during his confirmation hearing. “As a result of that, the Fed has lost a lot of credibility.”

Powell responded by saying price stability and maximum employment are equal goals of the Fed, though there are times when they must focus more on one or the other.

“At different times one of them is further away from the goal and that’s the one we need to focus on a little more. Sometimes that’s maximum employment, sometimes that’s inflation. I would say now it’s inflation,” Powell said.

Powell defended his since-abandoned call that inflation would be “transitory,” pointing out that the Fed had little experience dealing with a pandemic shock followed by a rapid reopening.

“The supply side constraints have been very persistent and very durable. We’re not seeing a lot of progress,” Powell said, pointing to very elevated levels of ships at anchor outside the busiest US ports.

Yet the Fed chief expressed confidence that eventually the central bank will achieve price stability, especially as interest rates rise. 

Federal Reserve Chairman Jerome Powell acknowledged that high inflation poses a significant threat to the jobs market and promised to get price spikes under control.

“If we have to raise interest rates more over time, we will,” Powell said in response to a question during his confirmation hearing on Tuesday. “We will use our tools to get inflation back.”

Powell said one of the reasons the Fed must cool off inflation is because it complicates the central bank’s goal of maximum employment.

“To get the kind of very strong labor market we want with high participation, it is going to take a long expansion,” Powell said. “We can see participation is only moving very slowly. And to get a long expansion, we will need price stability.”

Powell added, “In a way, high inflation is a severe threat to the achievement of maximum employment and to achieving a long expansion that could give us that.”

Republican Senator Pat Toomey, ranking member of the Senate Banking Committee, expressed concern Tuesday that the Federal Reserve is late to addressing historic inflation.

“We’re more than a year into record economic expansion, with unemployment at near all-time lows, and yet the Fed is still buying government and agency securities,” Toomey said during his opening remarks at Fed Chairman Jerome Powell’s confirmation hearing.

The Pennsylvania Republican argued it was a “mistake” to continue buying bonds, known as quantitative easing, throughout the recovery.

“It has contributed to asset bubbles, distorted markets and a suboptimal allocation of capital, credit and resources, ultimately leading to lower economic growth,” Toomey said.

Toomey added he worries the Fed’s new monetary policy framework, where the central bank tolerates inflation running above targets for a period of time, “has caused it to be behind the curve.”

Beyond inflation, Toomey said he’s concerned about a “troubling politicization of the Fed,” including efforts to address social justice and climate change.

Despite his concerns about the Powell-led Fed’s policies, Toomey said he plans to vote to renominate Powell.

Senator Sherrod Brown, the chairman of the Senate Banking Committee, urged the Federal Reserve on Tuesday not to prematurely end support for the economy.

“Some are suggesting though that the Fed pull back on its support of the broader economy, and make it harder for people to get jobs,” Brown, a Democrat from Ohio, said during his opening statement for Fed Chairman Jerome Powell’s confirmation hearing. “When people talk about ‘cooling off’ the economy, what they really mean is making it harder for people to find jobs and stopping paychecks from growing.”

In a bid to fight surging inflation, the Fed has signaled plans to end its bond-buying stimulus program in the coming months. Fed officials have also penciled in three interest rate hikes.

“We know how this goes – the ‘cooling off’ never seems to extend to corporate profits or executives’ pay,” Brown said. “The Fed must not allow only Wall Street to recover, while working Americans are left behind. We’ve seen that story unfold too many times before.”