Senate confirms Powell for 2nd term as Fed battles inflation
The Senate on Thursday confirmed Jerome Powell for a second four-year term as Federal Reserve chairman, lending bipartisan support to Powell’s sweeping efforts to rein in the highest inflation in four decades.
The 80-19 vote reflected broad support in Congress for the Fed’s willingness to fight soaring prices with a series of steep interest rate hikes that could extend into next year. The Fed’s goal is to slow borrowing and spending enough to ease inflationary pressures.
Since February, when his first term expired, Powell had led the central bank on a temporary basis.
He faces a difficult and risky task in trying to rein in inflation without weakening the economy to the point of causing a recession. The labor market remains robust and has strengthened to a point that Powell says is “unsustainably hot” and contributing to an overheated economy.
Soaring prices across the economy have caused suffering for millions of Americans whose wages are not keeping up with the cost of basic necessities such as food, gas and rent. And the prospect of ever-higher interest rates has destabilized financial markets, with stock prices falling for weeks.
In an interview with NPR’s “Marketplace” later Thursday, Powell acknowledged that the Fed’s ability to successfully slow the economy and reduce inflation without causing a recession – a so-called “soft landing” – depends on “factors beyond our control,” such as Russia’s invasion of Ukraine and slowing growth in China.
This contrasts with previous more confident statements from Powell, including last week when he said, “We have a good chance of having a soft or soft landing.”
Powell’s support on Thursday in the Senate was roughly in line with what he received four years ago, after his first nomination for president by President Donald Trump. At that time, the Senate voted 84-13 to confirm it.
To some extent, Powell’s support in Congress reflects the blame most Republicans place on President Joe Biden’s $1.9 trillion COVID relief package — rather than the Fed’s ultra-low rates — for caused high inflation. Many economists, including those who 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 for waiting too long to react to worsening inflation, making its task more difficult and riskier.
Prices first climbed a year ago, after Americans increased spending once vaccines were administered and COVID restrictions began to ease. The surge in demand caught many businesses off guard and short of supply, driving up the prices of goods like cars, furniture and appliances – if consumers could even find them. High inflation has since spread to most of the rest of the economy, including rents and other services such as hotel rooms, restaurant meals and medical care.
For months, Powell repeated his view that inflation was only “transient” and would soon decline as supply bottlenecks were resolved. The Fed continued to buy Treasuries and mortgage bonds until March, when prices rose 8.5% from a year earlier. Bond purchases were aimed at keeping long-term loan rates low. Only two months ago, the central bank raised its key rate from near zero to a range of 0.25% to 0.5%.
“They could have started cutting (bond purchases) sooner, tightening monetary policy sooner, especially once these strong data started coming in,” said Kristin Forbes, an economist at the Sloan School of Management. of MIT and former member of the Monetary Policy Committee of the Bank of England.
Powell and other officials have since acknowledged that the Fed could have started cutting stimulus sooner. They suggest, however, that most economists outside the Fed also initially thought that high inflation would be short-lived.
“History shows that we should have acted sooner,” Powell admitted during a Senate hearing in early March.
The Fed’s view that inflation primarily reflected supply shocks that would soon fade “turned out to be wrong,” Powell conceded, “not perhaps conceptually wrong, but you have to just a lot longer for the supply to heal than we thought.”
Fed board member Christopher Waller said last week that the central bank had been partly puzzled by reports last August and September suggesting the labor market was weakening. Slower hiring would have made it more difficult for workers to secure significant wage increases and thus would have helped contain inflation.
But those hiring reports, and the three that followed, were later revised upward by a total of about 1.5 million jobs, Waller said, pointing to the extraordinarily high demand for labor. work which also greatly increased salaries.
“If we knew then what we know now, I think (Fed policymakers) would have accelerated the cut (of bond purchases) and raised rates sooner,” Waller said Friday. “But nobody knew that, and that’s the nature of real-time monetary policy.”
The Senate has already confirmed three of Biden’s other picks for the Fed Board of Governors: Lael Brainard, who is now vice chairman, and Lisa Cook and Philip Jefferson. All three will vote on central bank interest rate decisions and financial regulatory policies.
Both Cook and Jefferson are black, meaning 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 serve on the board.
Biden also named Michael Barr, a former Treasury Department official who helped draft the 2010 Dodd-Frank Financial Regulation Act, to be the Fed’s top banking regulator and fill the final vacancy on the board. seven members. Sen. Sherrod Brown, an Ohio Democrat and chairman of 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 opposed higher interest rates for fear that they will lead to job losses. The chronically high inflation of the 1970s has been attributed, in part, to political pressure that led the Fed to forgo large rate hikes under Presidents Lyndon Johnson and Richard Nixon.
Powell himself came under heavy criticism from Trump when the Fed raised rates in 2017 and 2018 after the unemployment rate hit a half-century low of 3.5%. Powell reversed some of those hikes in 2019, after the economy slowed following Trump’s tariffs on Chinese imports.
This week, Biden said that while he would respect the Fed’s independence, he supported its efforts to raise borrowing rates, which have already driven up the costs of mortgages, auto loans and business borrowing.