Powell is widely credited with taking quick and extensive measures to keep the economy afloat during the severe pandemic disruption that his affirmation is not in jeopardy. But the heightened frustration among Americans over rising prices is adding to the pressure from Congress on the Fed chief – a Republican first named by President Donald Trump – over how the Fed will react.
“He will be asked about inflation by everyone, from moderate to right-wing,” said Claudia Sahm, a former Fed economist who worked under Powell. “The Republicans will only grill him for inflation. Democrats – Sherrod Brown, Maxine Waters, the Squad – they’re going to confront him for maximum occupation. So he’ll get it from both sides. “
For his part, Powell argues that the central bank has positioned itself to be more responsive to economic developments, and expresses confidence that the central bank will be able to remove some of its support without unduly dampening the recovery .
“We are now actually able to take the steps we need to be thoughtfully taken to address any issues, including excessive inflation,” he told reporters last month.
The Fed chief will face the Senate Banking Committee on Tuesday, where Republicans will continue the drumbeat on the increased inflation they have used as a stick to criticize Biden’s grand spending plans. Brown, an Ohio Democrat who chairs the committee, has not specifically spoken out against the prospect of rate hikes, but recently urged Powell to “continue to help steer our economic recovery in the right direction – toward full employment and an economy strengthens workers and their families ”. . “
Powell’s first term was not lacking in troubles, including a campaign of rate hikes aimed at finally eradicating economic support since the Great Recession, followed by a relentless public brawl against Trump and, ultimately, the global pandemic. But the potential for Fed failure is perhaps even greater now than it was before, along with the political danger for Powell in his second term.
The White House is not putting any political obstacles in the way of the Fed’s intentions to do more to fight inflation, at least for now.
“Let me be clear: I am confident that the Federal Reserve will achieve its dual goals of full employment and price stability, and ensure that price increases do not become long-term, with the necessary independence,” Biden said Friday.
Some of the uncertainties facing central bank policymakers include: the surprising persistence of the virus and its variants; persistent disruptions in the supply chain that have driven up commodity prices; and a change in the workforce that has resulted in millions of Americans quitting their jobs, creating a tight labor market that can lead to more inflation.
The Fed has announced three rate hikes this year, and the first could happen as early as March. But the pandemic in general, and the Omicron variant in particular, remains a disruptive factor that could either fuel inflation by extending production and shipping delays or weakening it by curbing spending and attitudes.
“They can either look like they’re trying to contain inflation or they can look like they’re trying to support the economy and financial markets,” said Jim Bianco, director of financial analyst Bianco Research. “You can’t do both at the same time.”
Bianco argued that the problem was partly caused by the Fed itself because it did not respond sooner to halt its extensive efforts to keep interest rates low, which led to a surge in inflationary pressures. That means the central bank must act faster now to increase the cost of borrowing, which could cause turmoil in financial markets, he said.
“Is [half a percentage point increase in rates] harms the economy? No, it isn’t, ”he said. “But it will be felt on Wall Street, and if Wall Street has any idea about it in the end, then that is a political mistake.”
Adam Ozimek, chief economist at freelance platform Upwork, said the Fed had misjudged the size of the rise in inflation, although he still believes – as the Fed previously argued – that price increases will eventually fade on their own. Instead, he said the danger is that the Fed will overreact to inflation levels that ultimately prove temporary and hurt the millions who have still not returned to work.
“Inflation is extremely high in any case, but labor shortages remain significant and we are far from full employment,” he said. “The political challenge is much more complicated than it was in 2018, when Powell faced uncertainty about labor shortages, but without the added pressure of high inflation.”
Still, others have praised the Fed’s restraint amid price spikes, keeping interest rates low and allowing the labor market to recover more quickly. They argue that inflation is largely fueled by supply chain problems that the central bank is not equipped to solve.
Former Fed chairman William McChesney Martin once said the central bank’s job was “to remove the punch once the party gets going”. But Sahm argued that a couple of rate hikes don’t have to ruin anything.
“Things are getting better,” she said. “We have to pour a little less punch into the punch bowl.”