Jerome Powell heads for US Senate review, punctuated by inflationary urgency

While the 68-year-old Fed chairman enjoys widespread support from both Democrats and Republicans — and hopes to win easy confirmation — members of the Senate Banking Committee certainly want to pressurize their views on everything to start increasing interest. Rates for adoption of bank capital standards tied to climate risks. The hearing will begin at 10 a.m. in Washington.

“It will focus heavily on the state of policy and where it thinks it is going,” said Tom Porcelli, chief US economist at RBC Capital Markets in New York. The off-year state election held two months ago “really went home to the people that inflation matters,” Porcelli said – highlighting the sensitivity of lawmakers to the cost of living ahead of this November’s midterm congressional elections. .

Several key issues are likely to come up during the Powell hearing:

Rate of interest

Investors are betting that the Fed will begin raising its benchmark federal funds rate in March 2020, two years after cutting it to nearly zero at the start of the pandemic. A Labor Department report Friday showed the US unemployment rate fell to 3.9% in December. Those expectations — closing at a pre-pandemic low of 3.5% — buoyed, and saw some economists change their forecasts to include a more aggressive pace of stimulus withdrawal.

Amid the change in the call, Goldman Sachs Group Inc. Now sees the Fed raising rates four times this year. William Dudley, former chairman of the New York Fed, expects policymakers to go further than that.

“My best guess is they may need to do at least four or five rate hikes this year,” Dudley, a senior adviser at Bloomberg Economics, said on Bloomberg television on Monday. Every meeting kind of cycles at some point.”

The last time Powell appeared before Congress, in late November, he was pressured by Republicans and Democrats alike over the Fed’s response to inflation. Consumer prices increased by 6.8% over the past 12 months, the highest in nearly 40 years.

Amid widespread concerns in Washington about inflation, the minutes of the Fed’s December 14-15 policy meeting, published on January 5, revealed that “many” officials had “examined labor market conditions already largely maximizing”. Seen in line with employment” – the final condition to proceed with the rate hike.

ohmron wave

While the prospect of a March rate hike is rising, Tuesday will probably still be too early for Powell to give clear guidance to that effect. According to Anita Markoska, chief financial economist at Jefferies in New York, this is especially true that the Omicron version of COVID-19 is causing disruption as it spreads across the country.

Still, Richmond Fed Chairman Thomas Barkin told the Dow Jones in an interview on January 7 that the central bank’s March 15-16 meeting was “definitely” an conceivable time for him to raise rates.

Minutes from the December meeting indicated that policymakers were concerned with the risk that it could exacerbate supply-chain tensions that have contributed to sharply rising prices in recent months, something Powell is likely to inquire.

The analysis is complicated because Omicron’s effect may be different from the earlier delta version, Markowska said. The new version has caused more widespread labor-market disruption due to faster transmission than was the case with Delta. Plus, it’s coming under price pressure during a seasonal downturn — unlike Delta, which took a hit when the US was increasing imports ahead of the holiday shopping season.

balance sheet

Another potential area of ​​questions concerns policymakers’ discussion of when and how to shrink the Fed’s $8.8 trillion balance sheet. San Francisco Fed Chair Mary Daly said on Friday that the central bank may choose to start the process after one or two rate hikes.

This time frame will be significantly different from the tighter 2015-2018 cycle, when Fed officials waited nearly two years after the first rate hike to shrink the balance sheet.

Porcelli said the urgency reflects growing concerns “maybe they have really slipped behind the curve”, over overcoming inflation.

trading issues

Ethics issues regarding financial trading by Fed officials are likely to be raised by at least one member of the banking panel – Elizabeth Warren, a liberal Democrat from Massachusetts. In a letter to Powell on Monday, she asked for details on the trade by Fed officials to be released within a week.

Warren wrote the letter after further details emerged on a transaction of at least $1 million executed by Fed Vice Chairman Richard Clarida in February 2020 – which is set to leave the central bank at the end of the month. Powell late last year unveiled restrictions on top executives on limits on active trading as well as buying individual stocks and bonds, in a move praised by Treasury Secretary Janet Yellen.

financial regulation

President Joe Biden announced Powell’s support for a second term in November, saying the Republican former Carlyle Group partner had made clear to him that climate change poses risks to the financial system and that an active Fed role for financial regulation underlines the importance of – Key items for progressive Democrats.

Senate Democrats and Republicans differ significantly on those topics. In a recent congressional testimony, the Fed chairman was cried by Warren, who told him in September that he was a “dangerous man” running the central bank, citing the Fed’s relaxation of some regulatory requirements for banks under his supervision. Were were

Powell may also be asked about oversight of cryptocurrencies – he has supported the regulation of stablecoins – and the possible introduction of a digital version of the dollar.

Biden has yet to announce his nomination for the Fed’s vice president of supervision, the central bank’s point person when it comes to regulatory matters, although former Fed governor Sarah Bloom Ruskin is seen as a leading contender. Is. More detailed questions are likely to be raised at the hearing for that nominee.

climate risk

The central bank has taken initiatives in recent years aimed at promoting climate risk as a financial stability issue, which Democrats strongly support and Republicans see as a potential threat to credit access for oil and gas companies. Huh.

In October Powell supported a ruling that climate change was an “emerging threat” to financial stability, but did not accept the idea of ​​tying such risks to capital standards for lenders.

This story has been published without modification in text from a wire agency feed. Only the title has been changed.