Jerome Powell's Week of Turmoil
Jerome Powell's future as Federal Reserve chair took a hit on Tuesday, as Senator Elizabeth Warren labeled him a "dangerous individual" for being too soft on Wall Street banks. This criticism followed the departure of two Fed officials due to a controversial trading scandal, which Powell admitted was "unacceptable."
Meanwhile, the US Treasury Department hastened its currency reserve plan, fueling fears of a catastrophic US bankruptcy on October 18. Meanwhile, sky-high real estate prices persist, despite concerns over inflation and the energy crisis stirring anxiety on Wall Street.
Powell appears to shift his stance somewhat, conceding that inflation may not be as "short-lived" as he previously thought. However, Wednesday remained a day of struggle.
Concerning Developments
It's worth noting that many issues seem to resolve themselves naturally. Most observers presume that Congress will eventually increase the debt ceiling to avoid the possibility of a disastrous default.
On Wednesday, markets recovered from their worst day in months. Inflation concerns may have been overstated, as revealed.
Furthermore, Powell has faced harsher criticism in the past. Recall the shocking moment in 2019 when President Donald Trump hinted that Powell might be a "bigger enemy" than Chinese President Xi Jinping.
Nonetheless, Warren's dramatic announcement on Tuesday effectively narrows the path for Powell to remain atop the Federal Reserve.
Warren's Resolute Opposition
Warren, an outspoken critic, accused Powell of weakening bank regulation and argued that he is responsible for the bank's poor oversight.
"Your record unsettles me deeply. You've repeatedly enacted measures to make our financial system less secure. That makes you a dangerous person at the helm of the Federal Reserve," Warren told Powell during a Senate banking committee hearing.
Powell, a Republican and former investment banker, challenged Warren's characterization of his regulatory record and argued that banks were sufficiently capitalized to weather the economic setbacks caused by the COVID-19 pandemic. Notably, the landmark penalties imposed on Wells Fargo by Janet Yellen, a former Fed chair, remain in effect more than three years later.
Responses from the Financial Community
Sheila Bair, a longtime Republican and former banking regulator, shares Warren's concern over the Federal Reserve's efforts to weaken regulations.
Two regional Fed chairs also defended themselves against allegations of unethical conduct related to their individual investments.
Powell acknowledged that the regulations had failed and needed to be revised, stating that the officials had carefully reviewed the transactions to ensure that they were in compliance with the law.
"This is a blow to the Fed's reputation," Senator Raphael Warnock said to Powell.
Energy Prices Offset Inflation Concerns Slightly
Despite the controversy surrounding questionable trading practices and the complexity of banking regulations, inflation remains a significant concern for the American public, and price shocks are unlikely to abate.
Recent focus has shifted towards the rising energy prices. Oil prices reached their highest level in nearly three years, prompting Goldman Sachs to warn of oil potentially hitting $90 a barrel. Fuel prices in the USA have also increased markedly over the past year, raising the risk of a significant increase in heating costs for American households this fall and winter.
Even Peter Boockvar, Chief Investment Officer of Bleakley Advisory Group, shares Warner's view of Powell as "dangerous," albeit for reasons other than his regulatory approach.
"Instead, it's due to what he and his colleagues have done at the monetary policy front, which has led to a general inflation and distortions on financial markets," Boockvar wrote in a client note. Boockvar also pointed out that the Federal Reserve's zero interest policy and bond-buying program contributed to the inflation and market distortions.
Has Powell Helped Save the Economy?
Powell's aggressive response to the COVID-19 crisis may have helped prevent a crisis from turning into depression or a full-blown financial collapse.
Many economists and policymakers believe that the rapid and extremely aggressive actions taken by the Federal Reserve in March 2020 prevented a coronavirus recession from evolving into a depression or a complete financial collapse.
"Powell deserves immense praise. Most people in Washington support him," said Raymond-James analyst Ed Mills. "However, the continued implementation of these emergency programs by the Fed has drawn widespread criticism from both Democrats and Republicans."
In particular, concerns have been raised over the Fed's ongoing purchasing of mortgage-backed securities worth $40 billion a month, which some argue supports an industry that doesn't require aid. Despite the booming real estate market, the Fed continues to pump gas.
Powell acknowledged this week that the Fed may soon slow its bond purchases – primarily due to concerns over inflation.
"Is Powell a temporary fix?"
While Powell has long maintained that these price increases are likely "temporary," he has taken a more cautious tone regarding the rising US inflation rate.
"Supply-side constraints that underlie inflation are not improving, rather they are getting worse in some cases," Powell said to legislators, referencing logjams at the Port of Los Angeles and a shortage of computer chips, which have disrupted auto production.
Senator Pat Toomey warned that the US economy currently faces a "more worrying inflation than before."
When asked if inflation had now become both broader and structural, Powell agreed and said, "It can be rightly said that this is the case."
Powell acknowledged that supply bottlenecks would eventually dissipate and thus reduce inflation. However, he vaguely hinted that the Federal Reserve had the "tools" to address inflation should the situation worsen.
Ed Yardney, President of Yardney Research, said on Wednesday in a note entitled "Is Powell a Flash in the Pan?" "The only solution we can think of is to raise interest rates until the economy slows down or enters recession."
Powell may still be recovering from this tumultuous week and continuing to navigate the Fed's pandemic-era policy with finesse.
However, if he fails to do so, these past few days will be remembered as a turning point.
