Democrats press Powell on jobs; GOP wants inflation fix

Despite criticism, Senate confirmation to second term likely

Fed Chairman Jerome Powell arrives for his Senate Banking, Housing and Urban Affairs Committee confirmation hearing for a second term Tuesday. (Tom Williams/CQ Roll Call)
Fed Chairman Jerome Powell arrives for his Senate Banking, Housing and Urban Affairs Committee confirmation hearing for a second term Tuesday. (Tom Williams/CQ Roll Call)
Posted January 11, 2022 at 11:42am

Federal Reserve Chairman Jerome Powell told senators Tuesday that the central bank will align its policy to a post-pandemic economy that will look different than the pre-pandemic one, as Democrats pressured him to prioritize employment while Republicans said inflation was the top concern. 

Appearing before the Senate Banking Committee for a confirmation hearing on his nomination for a second term as chairman, Powell, a Republican, faced GOP criticism over rising inflation. Some Senate Democrats had opposed his confirmation for a new term, criticizing his support for easing rules on Wall Street. But with bipartisan support, his confirmation is expected. 

“We can begin to see that the post-pandemic economy is likely to be different in some respects," Powell said in his opening statement. "The pursuit of our goals will need to take these differences into account. To that end, monetary policy must take a broad and forward-looking view, keeping pace with an ever-evolving economy.” 

Powell said he was committed to maximum employment and stable prices. The unemployment rate was below 4 percent in December, but the labor market remains volatile as the omicron variant of the coronavirus races through the country. 

Sen. Patrick J. Toomey of Pennsylvania, the panel’s top Republican, said he would vote to confirm Powell, despite misgivings about the Fed’s approach to rising prices. The Labor Department last month said the consumer price index rose 6.8 percent in November from the same month a year earlier.

“None of the Fed’s pandemic actions came without a cost,” Toomey said. “This negative-real interest rate environment continues to distort markets, risk asset bubbles and punish savers. And the Fed has dramatically expanded its balance sheet with trillions in government bonds, effectively monetizing a lot of debt, facilitating profligate government spending.”

In the last 18 months, the Fed had been distracted by the virus when it should have been focused on the “new enemy,” inflation, Toomey said, adding that further government spending championed by Democrats would further drive up prices. 

“The crisis we face now is inflation complicated by policymakers who unwisely behave as if it’s still March 2020,” he said. 

Powell late last year told senators that he no longer considered heightened inflation “transitory.” Since November, the Fed has started to taper monthly bond purchases it has used to bring stability to the economy during the pandemic, and markets have begun to speculate about a rate increase as early as March. 

“We know that high inflation exacts a toll, particularly for those less able to meet the higher costs of essentials like food, housing and transportation. We are strongly committed to achieving our statutory goals of maximum employment and price stability,” Powell said at the hearing.

The Fed will use its tools to ensure that higher inflation doesn’t become “entrenched,” he said.

Getting inflation under control is integral to President Joe Biden’s policy agenda. Sen. Joe Manchin III, D-W.Va., a key vote in the 50-50 Senate, previously cited inflation as a reason he opposed his party’s $2 trillion social spending and climate package.

Senate Banking Chairman Sherrod Brown, D-Ohio, blamed corporations and supply chain shocks for inflation, and urged Powell to put workers first. 

“Some are already suggesting the Fed pull back on its support of the broader economy and make it harder for people to get jobs,” Brown said. “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.”

Climate risk

Brown also pressed Powell on whether he would make implementing climate risk stress tests for banks a priority during his second term.

“It’s very likely stress scenarios, as we like to call them, will be a key tool going forward,” Powell said, noting they would be different from regular stress tests that determine capital requirements. “Climate stress scenarios at this stage are really about ensuring that the large financial institutions understand all the risks that they're taking, including the risks that may be inherent in their business model regarding climate change,” Powell said.

Toomey said the Fed’s climate risk activity goes beyond its monetary policy mandate into a “politically-charged” area, and there would be consequences. 

“There’s a kind of bargain here: the Fed is given independence on the assumption it will only engage in areas in which it has a mandate,” Toomey said. “Let me be clear — if this politicization continues unchecked — it will not end well for the Fed or for independently driven monetary policy.”

Opposition

Powell is likely to be confirmed with bipartisan support, though committee members Elizabeth Warren, D-Mass., on the left and Cynthia Lummis, R-Wyo., on the right previously voiced opposition. 

Lummis said last month in a Wall Street Journal op-ed that she would oppose Powell’s confirmation because of the Fed’s inaction regarding two Wyoming-chartered digital asset banks seeking master accounts with the Federal Reserve Bank of Kansas City. The accounts allow banks to earn interest on their reserve balances and use the Fed’s payment services. 

“I have been stonewalled for well over a year. My state has been stonewalled for well over a year,” Lummis said. “Throw me a lifeline and help me support your nomination.”

Kraken and Avanti, cryptocurrency banks chartered as special purpose depository institutions, or SPDI, by the state, applied for master accounts in 2020 without a response from the Fed. The Fed is required by law to respond to applications within a year, Lummis said in the op-ed. 

Powell said the Fed was still examining the applications because of the strong precedent that granting master accounts to the state-chartered cryptocurrency banks would establish. 

“I would say there are good arguments for viewing SPDIs as depository institutions for this purpose,” Powell said. “If we start granting these, there will be a couple hundred of them pretty quickly. We have to think about the broader safety and soundness implications. It’s just hugely precedential. That’s really why we’ve taken our time with it.”

“My disappointment is profound. My frustration is profound,” Lummis said. “For now, I’ll just leave it at that.”

Warren previously said she would vote against Powell because the loosening of bank regulations during his first term made him a “dangerous man” to lead the central bank. 

But Warren refrained from lobbing additional criticism at Powell during the hearing, instead focusing her time on questions about the role of corporations in rising prices, climate change and on the Fed’s ethics policies. 

Powell said the Fed has proposed an overhaul of its ethics policies regarding stock trading after Fed Vice Chair Richard Clarida and regional Fed bank presidents came under fire for trades in the lead-up to and during the pandemic. Clarida said Monday he would resign weeks ahead of his term’s expiration at the end of this month. Presidents at the Federal Reserve banks of Dallas and Boston resigned in September. 

Board members, policymakers and senior staff would be barred from buying individual stocks and would have to give a 45-day notice of sales, Powell said. 

“There will be no ability to time the market,” Powell said. “Our new system is easily the toughest in government, and the toughest I’ve seen anywhere.” 

The Fed will likely implement the rules in the “near, near future,” Powell said. "We have to hire people, we have to build systems and we have to write rules. We’ve been hard at work on that since October. We’re ready to move ahead with that.”