Federal Reserve Chair Jerome Powell sought to reassure lawmakers and investors on Tuesday that the central bank can pull off the tricky task of bringing down four-decade high inflation without damaging the U.S. economy.
In a 2-1/2 hour congressional confirmation hearing that was notably free of rancor, Powell said the Fed was on course to begin raising interest rates from near zero and reducing its mammoth $8.8 trillion balance sheet.
But he portrayed those steps as a move away from an ultra-expansionary emergency policy put in place to fight the pandemic, not as a shift to a restrictive stance aimed at cooling off an over-heating economy.
“We’re really just going to be moving over the course of this year to a policy that is closer to normal, but it’s a long road to normal from where we are now,” he told the Senate Banking Committee. “It really should not have negative effects on the employment rate.”
In making his case, Powell also argued that much of the inflationary pressures the U.S. is experiencing will ebb on their own as supply-chain snafus and labor force shortages associated with the pandemic ease.
“He is counting a lot on the supply side coming back,” said Jim O’Sullivan, chief U.S. macro strategist at TD Securities, which he noted is another version of saying inflation is transitory. That’s a term that Powell retired in December after price pressures proved to be more persistent and higher than he expected.
Powell’s comments were welcomed by investors. Stocks climbed on his assurance that the Fed will tackle inflation, with the S&P 500 halting a five-day slide to close with a 0.9% gain.
Fed critics such as former Treasury Secretary Lawrence Summers though are likely to take little comfort from Powell’s words. They argue that the Fed is too sanguine about the dangers of inflation and that it needs to take more forceful action than it is now contemplating to rein it in.
“There isn’t going to be a path to less inflation without a cooler labor market,” the Harvard University professor and paid Bloomberg contributor said last week.
Data due out on Wednesday will probably show that consumer prices rose 7% in December from a year earlier, according to the median forecast of economists surveyed by Bloomberg. That would top November’s 6.8% annual rise and be the largest increase since 1982.
Powell told the committee that the Fed’s focus is on fighting inflation as the U.S. is at or rapidly approaching what for now constitutes maximum employment. He depicted the Fed’s coming actions to roll back its emergency stimulus as a way of ensuring that the recovery stays on track and thus allows the labor market to make even further gains over time.
To that end, two regional Fed bank presidents on Tuesday backed raising interest rates as soon as March and a third urged that the central bank begin winding down its bloated balance sheet sooner rather than later.
Balance Sheet
Powell didn’t tip his hand on the timing of a lift-off in rates. He did though make clear that the Fed will begin winding down its balance sheet this year -- a move that will withdraw liquidity from the financial system -- and that it will do so at a faster clip than it did after the financial crisis.
While Powell, 68, was repeatedly questioned by lawmakers about the elevated level of inflation, he faced little in the way of overt opposition to his re-nomination at the hearing. Senate Banking Committee Chair Sherrod Brown told Bloomberg afterward that he didn’t expect much change from the January 2018 vote that confirmed Powell for his first term. That count was 84-13.
Powell may have more trouble reining inflation in without sparking a recession than he will in winning a second term.
“It is difficult to pull off in practice, partly because of the very unusual circumstances Covid has put on him,” said Derek Tang, an economist at L.H. Meyer/Monetary Policy Analytics in Washington.
The Fed chair, for his part, tacitly acknowledged as much as he and his colleagues grapple with the vagaries of an economy still living with a pandemic. “We’re going to have to be both humble and a bit nimble,” he said.
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