Fed chief’s uncertain future casts shadow over Senate hearing

Federal Reserve Chairman Jerome Powell’s uncertain future cast a shadow over his appearance before a Senate panel Thursday as senators raised concerns about his leadership of the central bank.

While Powell’s testimony focused on challenges facing the U.S. economy, questions from both sides of the dais reflected the growing intrigue over whether President Biden will renominate him to lead the Fed for another term.

Powell, a Republican, has enjoyed broad bipartisan support during his nearly four years chairing the Fed board and would likely coast through another Senate confirmation vote. Both Republicans and Democrats credit Powell for defending the Fed’s independence from former President Trump and leading a successful effort to stabilize financial markets during the onset of the pandemic.

Even so, progressives are urging Biden to take advantage of a generational opportunity to reshape the Fed and nominate a left-leaning regime to tighten bank regulations loosened or streamlined under Powell.

“During your tenure, the Fed has rolled back important safeguards,” said Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking Committee and a fierce critic of the financial sector.

“It’s time to try something different. We need a banking system that works for everyone.”

Democrats have griped for years about several actions taken by the Fed during Powell’s chairmanship that they say weakened key regulations created through the 2010 Dodd-Frank financial reform law.

Under Powell, the Fed finalized a ban on banks investing their own money in certain risky products that liberal critics called too weak, recalibrated bank capital requirements and reduced the frequency with which certain banks needed to submit “living wills” to the Fed.

While Democrats criticized Powell for supporting those actions, their frustrations fell largely by the wayside due to his positions on monetary policy.

Powell led the Fed to cement a new approach to its mandate that discourages raising interest rates before the bank sees clear signs of inflation heating up. Those efforts won him enduring praise from Democratic lawmakers and liberal activists who have long called on the Fed to avoid slamming on the brakes quickly.

Powell’s unabashed support for a massive monetary and fiscal response to the coronavirus pandemic also endeared him to Democrats as they pushed for trillions in relief in sometimes volatile negotiations with Trump.

But with Democrats now in control of the White House and Congress, some progressives have argued that Powell’s monetary stances are not enough to justify another four-year term as Fed chairman.

Powell is one of four potential vacancies on the Fed board Biden can fill by February. Fed Vice Chair of Supervision Randal Quarles’s term expires in October, Vice Chair Richard Clarida’s term expires in January, and there is already a vacant seat on the Fed board left unfilled by Trump.

While several of those sports are set to open before Powell’s term ends in February, the complicated nature of Fed appointments means Biden will likely need to decide Powell’s fate before the others.

The White House has declined to say what action Biden will take on Powell, and no Democratic senator has explicitly called on Biden to pick a new Fed chief. Yet Brown and another prominent progressive, Sen. Elizabeth Warren (D-Mass.), indicated Thursday that Powell can’t take their support for granted.

“The Fed’s record over the past four years — I see one move after another to weaken regulation over Wall Street banks, and that worries me,” Warren said at the Senate Banking Committee hearing.

“There’s no doubt that the banks are stronger today than they were when they crashed the economy in 2008. But that’s the wrong standard. The question is whether or not they are strong enough to withstand the next crisis and whether the Fed is tough enough to protect the American economy and the American taxpayer,” she continued.

Powell countered that the regulatory actions taken by the Fed were intended to bolster big bank capital and make rules easier to follow. He also noted his opposition to loosening capital standards, tacitly distancing himself from Quarles, who has been more critical of higher capital requirements.

“I actively resisted any move in that direction,” Powell said. “We raised capital standards on the largest banks. Full stop.”

Powell’s defenders on the left argue that his work to refocus the Fed on full employment should not be taken for granted and that Biden could dilute his regulatory stances with three other choices more aligned with Democrats. His supporters have also touted the benefit of having a Republican in charge of the Fed as GOP lawmakers grow increasingly alarmed about inflation.

Republicans and a handful of Democrats peppered Powell with questions Thursday about the Fed’s handle on rising inflation, the forces behind rapid price increases and at what point the bank may need to intervene. His testimony came two days after data from the Labor Department showed annual inflation rising to 5.4 percent in June after a 0.9 percent increase in consumer prices from the previous month.

“The Fed’s current monetary approach seems based on the misguided premise that it must prioritize maximum employment over controlling inflation,” said Sen. Pat Toomey (Pa.), the top Republican on the Banking panel.

“Employment policies enacted by Congress are inhibiting our ability to get back to maximum employment. But it’s not the Fed’s job to attempt to offset flawed policies at the expense of its price stability mandate.” 

Powell ceded Thursday that inflation has reached levels well above the Fed’s comfort zone, but reiterated his confidence that it would soon settle down. He and many other economists have pointed to short-term factors driven by the reopening of the economy that are unlikely to persist for much longer.

“This is a shock, going through the system associated with reopening of the economy, and it’s driven inflation well above 2 percent, and of course we’re not comfortable with that,” Powell said, referring to the Fed’s target for average annual inflation.

“This particular inflation is just unique in history. We don’t have another example of the last time we reopened a $20 trillion economy with lots of fiscal monetary support,” he added. “So we’re just trying to be humble about what we understand.”

Republicans expressed concerns about the Fed’s commitment to maintaining interest rates near zero and maintaining monthly bond purchases, but were largely complimentary of Powell. Most praised Powell for his response to the crisis and blamed Biden primarily for rising inflation, sparing the Fed chief most of their grief.

“We all remember well the spring of 2020, when the world economy almost melted down. It didn’t, in substantial part because of the actions that you and your colleagues took,” said Sen. John Kennedy (R-La.).

“You kept this thing in the middle of the road. Now, some days you had to do it with spirit and happy thoughts, but you kept it in the middle of the road.”