Jeremy Powell's week from hell took a turn for the worse on Tuesday, as Senator Elizabeth Warren labeled him a "dangerous person" due to his perceived softness towards Wall Street banks. This criticism came in response to the handlingskandal, a scandal that saw two Fed officials resign and had Powell admit that their actions were "unacceptable."
Meanwhile, the Treasury Department has accelerated its timeline for addressing cash shortages, fueling fears of a potential catastrophic US bankruptcy on October 18th. Real estate prices remain high, despite concerns over inflation and the energy crisis, which has caused unease on Wall Street.
Powell himself seems to be changing his tune slightly, acknowledging that inflation may not be as temporary as he previously believed.
With only three days into the week, tensions are running high.
Deep Concerns
Fortunately, many of the problems seem to be resolving themselves naturally. Many expect that, eventually, Congress will raise the debt ceiling to avoid a potentially catastrophic default.
Wednesday saw the markets rebound from their worst day in months, as inflation concerns seemed to be overblown.
It's worth noting that Powell has faced harsher criticism in the past. Think back to 2019, when President Donald Trump hinted that Jerome Powell could be a "greater enemy" than Chinese President Xi Jinping.
Warren's dramatic announcement on Tuesday, that she would oppose Powell's re-election, narrows the path for him to remain at the helm of the Fed.
As the most prominent critic to date, Warren's stance against Powell could encourage other progressive senators to follow suit.
"Powell remains the favorite, but his chances have significantly increased from a narrow bet to a middle bet," said Ed Mills, Washington analyst at Raymond James.
Warren's criticism of Powell's regulatory record in her characteristic prosecutorial style argued that he had weakened financial oversight.
"Your record deeply concerns me. You've repeatedly taken actions to make our banking system less secure, making you a dangerous person at the helm of the Federal Reserve," Warren said to Powell in a Senate Banking Committee hearing.
Handelsskandal
Powell, a Republican and former investment banker, challenged Warren's characterization of his regulatory record, stating that banks had ample capital to weather the economic downturn caused by the Coronavirus pandemic. No major bank had failed. It's worth noting that the unprecedented sanctions imposed on Wells Fargo by former Fed chair Janet Yellen in 2018 – which remain in effect to this day - also serve as an example.
However, Sheila Bair, a long-time Republican and former bank regulatory watchdog, shares Warren's concerns about the Fed's efforts to weaken regulatory measures.
Additionally, two regional Fed heads defended themselves against allegations of ethical lapses in their trading activities.
Powell admitted that the rules "didn't work" and needed to be reformed, adding that officials had thoroughly reviewed transactions to ensure they adhered to the law.
"This is a blow to the reputation of the Fed," Democratic Senator Raphael Warnock told Powell.
Rising Energy Costs Add to Inflation Woes
It remains unclear how many Americans closely follow the dubious business practices or regulatory complexities of major banks. However, inflation is important to them, and the price shocks aren't showing signs of abating.
Recent focus has turned to energy prices, with oil prices reaching their highest levels since 2019. Goldman Sachs has warned of oil prices reaching $90 per barrel. While gas prices at the pump in the US have yet to surpass $3 per gallon, the sharp increase in natural gas prices over the past year increases the risk of significant heating bill increases this fall and winter.
Peter Boockvar, Chief Investment Officer of Bleakley Advisory Group, considers Powell a "dangerous" figure – though not due to his regulatory approach. Boockvar argued that the Fed's Zero Interest Policy has contributed to "general inflation" and "distortions" on financial markets, as well as the Fed's Anleihekaufprogramm, which he sees as contributing to the inflation problem.
Has Powell helped save the economy?
Certainly, Powell's swift response to the Coronavirus crisis may have helped prevent a worse disaster. Many economists and legislators believe that the Fed's aggressive actions in March 2020 prevented a recession from turning into a depression or complete financial collapse.
"Powell deserves incredible recognition. Most people in Washington back him. Therefore, he enjoys widespread bipartisan support," said Raymond-James analyst Mills. "The continued implementation of these emergency programs by the Fed has, however, attracted bipartisan criticism."
There are concerns, in particular, that the Fed's monthly mortgage-backed security purchases of $40 billion are propping up an industry that doesn't need the support. Despite the red-hot housing market, the Fed continues to pump gasoline.
Powell confirmed this week that the Fed may soon scale back its bond-buying activities – primarily due to inflation concerns.
"Is Powell only a temporary solution?"
Though Powell maintains that these price increases are likely temporary, he sounded more cautious on Tuesday regarding the United States' inflation rate. "The supply-side constraints contributing to inflation show no signs of improving, let alone worsening," Powell told legislators and pointed to port congestion in Los Angeles and a chip shortage hampering auto production as examples of an out-of-control industrial sector.
The Republican Senator Pat Toomey warned that the US economy is now facing a "more worrying inflation" than before.
As Toomey questioned if inflation was now broader and more structural, Powell agreed and said, "It's fair to say that this is the case."
Powell affirmed that the Fed expects supply chain disruptions to resolve, ultimately reducing inflation. However, he vaguely added that the Fed has the necessary tools to address inflation, should the situation worsen.
Ed Yardney, President of Yardney Research, said on Wednesday in a note titled "Is Powell a temporary solution?" "The only solution we can think of is to raise interest rates until the economy slows down or falls into a recession."
Should Powell fail to steer clear of this week's volatile political waters, these past few days could be seen as a turning point in his tenure.
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Powell's reputation has taken a hit due to the handelsskandal, leading to calls for tighter regulation of the Fed's oversight of the financial sector.
The handelsskandal involved two Fed officials resigning over the scandal, with Powell acknowledging that their actions were unacceptable.
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**Integrated Enrichment Data:**
Upon further research, it appears that the handelsskandal in question refers to trading activities by several regional Fed officials that raised concerns about conflicts of interest and potential ethical lapses. The scandal led to public scrutiny and calls for increased transparency and accountability from the Federal Reserve.
