The Senate confirms Powell for the second term while the Fed fights inflation

WASHINGTON (AP) – The Senate on Thursday confirmed Jerome Powell for another four-year term as head of the Federal Reserve, and provided bipartisan support for Powell’s efforts to curb the highest inflation in four decades.

The 80-19 vote reflected broad support in Congress for the Fed’s efforts to fight rising prices through a series of sharp rate hikes which could extend far into next year. The Fed’s goal is to slow down loans and consumption enough to ease inflationary pressures.

Since February, when his first term expired, Powell had headed the central bank in a temporary capacity.

He faces a difficult and risky task in trying to curb inflation without weakening the economy so much that it causes a recession. The labor market remains robust and has strengthened to a point that Powell has said is “unbearably hot”[ads1]; and contributes to an overheating economy.

High prices across the economy have caused pain to millions of Americans if wages do not keep pace with the cost of such necessities as food, gas and rent. And the outlook for rising interest rates has troubled financial markets, with stock prices falling for weeks.

In an interview with NPR’s “Marketplace” later Thursday, Powell acknowledged that the Fed’s ability Succeeding in slowing the economy and reducing inflation without causing a recession – a so-called “soft landing” – depends on “factors we do not control”, such as Russia’s invasion of Ukraine and slowing growth in China.

This is in contrast to earlier, more confident statements from Powell, including just last week when he said, “we have a good chance of having a soft or soft landing.”

Powell’s support in the Senate on Thursday was roughly in line with what he received four years ago, after he was first nominated as chairman of President Donald Trump. At the time, the Senate voted 84-13 to confirm him.

To a certain extent, Powell’s support in Congress reflects the blame that most Republicans attribute to President Joe Biden’s $ 1.9 trillion COVID aid package – rather than at the Fed’s ultra-low prices – for causing high inflation. Many economists, including those who have served in previous Democratic administrations, agree that Biden’s legislation played a role in accelerating prices.

Powell’s confirmation comes as many economists have sharply criticized the Fed to wait too long to react to worsening inflation, making the task more difficult and riskier.

Prices did not rise until a year ago, after Americans increased their spending when vaccines were administered and COVID restrictions began to ease. The increase in demand caught many companies unprepared and with a shortage of supplies, which led to higher prices for goods such as cars, furniture and appliances – if consumers could find them at all. High inflation has since spread to most of the rest of the economy, including rent and such other services as hotel rooms, restaurant meals and medical treatment.

For several months, Powell reiterated his view that inflation was only “temporary” and would soon ease as supply bottlenecks were resolved. The Fed continued to buy government bonds and mortgages until March, when prices had risen 8.5% compared to a year earlier. The bond purchases were intended to keep long-term borrowing rates down. It was only two months ago that the central bank raised its reference rate from close to zero to a range of 0.25% to 0.5%.

“They could have started liquidating (bond purchases) earlier, starting to tighten monetary policy sooner, especially when this strong data started coming in,” said Kristin Forbes, an economist at MIT’s Sloan School of Management and a former member of the Bank of England’s Monetary Policy Committee. .

Powell and other officials have since acknowledged that the Fed could have started calling back its stimulus earlier. However, they suggest that most economists outside the Fed also initially believed that high inflation would prove to be short-lived.

“Afterthought says we should have moved earlier,” Powell acknowledged during a Senate hearing in early March.

The Fed’s view that inflation mostly reflected supply shocks that would soon subside, “turned out to be wrong,” Powell admitted, “may not be conceptually incorrect, but it only takes so much longer for the supply side to heal than we thought.”

Christopher Waller, a member of the Fed’s board, said last week that the central bank was partially thrown out by reports in August and September that indicated that the labor market was weakening. Slower employment would have made it more difficult for workers to secure significant wage increases, and would therefore have helped to keep inflation in check.

But these employment reports, and the three that followed, were later revised higher with a total of around 1.5 million jobs, Waller said, emphasizing the extraordinarily high demand for labor that has also greatly increased wages.

“If we knew what we know now, I think (Fed politicians) would have accelerated the slowdown (of bond purchases) and raised interest rates earlier,” Waller said Friday. “But no one knew, and that is the nature of making monetary policy in real time.”

The Senate has already confirmed three of Biden’s other choices for the Fed’s board: Lael Brainardwho is now deputy chair, and Lisa Cook and Philip Jefferson. All three must vote on the central bank’s interest rate decisions and financial regulation policy.

Cook and Jefferson are both black, which means that the Fed’s board now has two black members for the first time in its 108-year history. Cook, a professor of economics and international relations at Michigan State, will be the first black woman to sit on the board.

Biden has also nominated Michael Barr, a former Treasury official who helped draft the 2010 Dodd-Frank Financial Regulation Act, to be the Fed’s top bank governor and fill the last open seat on the board with seven members. Sen. Sherrod Brown, the Ohio Democrat who chairs the Senate Banking Committee, said Thursday that his committee would hold a hearing on Barr’s nomination next week.

In the past, politicians have often protested against higher interest rates for fear that they would lead to job losses. The chronically high inflation of the 1970s has been partly attributed to political pressure that led the Fed to give up on sharp interest rate hikes under Presidents Lyndon Johnson and Richard Nixon.

Powell himself endured harsh criticism from Trump when the Fed raised interest rates in 2017 and 2018 after unemployment had reached a low level in half a century of 3.5%. Powell reversed some of these increases in 2019, after the economy slowed in the wake of Trump’s tariffs on Chinese imports.

This week, Biden said that while he wanted to respect the Fed’s independence, he supported its efforts to raise interest rates, which has already increased the cost of mortgages, car loans and corporate loans.

Source link

Back to top button