Jerome Powell's Week of Upheaval
Jerome Powell's tenure as Federal Reserve chairman got rocky last Tuesday, with Senator Elizabeth Warren branding him a "risky character" for being overly lenient towards Wall Street banks. This critique followed the resignation of two Fed officials due to a high-profile trading scandal, which Powell acknowledged as "unacceptable."
Meanwhile, the Treasury Department sped up its currency reserve strategy, stoking fears of a catastrophic U.S. bankruptcy on October 18. Meanwhile, soaring real estate prices persist despite concerns over rising inflation and the energy crisis causing unrest on Wall Street.
Powell seems to be shifting his stance somewhat, acknowledging that inflation might not be as "short-lived" as he initially thought. However, Wednesday was a day of strife.
Underlying Developments
It's worth noting that many issues seem to resolve themselves naturatively. Most analysts assume that Congress will eventually boost the debt ceiling to avoid the threat of a devastating default.
On Wednesday, markets rebounded from their worst day in months. Inflation concerns may have been exaggerated, according to recent revelations.
Furthermore, Powell has faced harsher criticism in the past. Remember the shocking moment in 2019 when President Donald Trump suggested that Powell might be "a more formidable opponent" than Chinese President Xi Jinping.
Nonetheless, Warren's sensational accusation on Tuesday narrows Powell's path forward as the Federal Reserve's head.
Warren's Unwavering Opposition
A fierce critic, Warren accused Powell of weakening bank regulation and argued that he bears responsibility for the bank's inadequate oversight.
"Your record unsettles me profoundly. You've consistently put in place measures to weaken our financial system's security. That makes you a risky choice at the helm of the Federal Reserve," Warren scolded Powell during a Senate banking committee hearing.
Powell, a Republican and former investment banker, refuted Warren's characterization of his regulatory record and defended the banks' financial resilience during the COVID-19 pandemic. Notably, the significant penalties imposed on Wells Fargo by Janet Yellen, a former Fed chair, remain in place more than three years later.
Responses from the Financial Community
Sheila Bair, a long-time Republican and former banking regulator, shares Warren's concerns over the loosening of bank regulations by the Federal Reserve.
Two regional Fed chairs also defended themselves against allegations of unethical conduct related to their personal investments.
Powell acknowledged the regulations' failure and the need for revisions, stating that the officials had thoroughly reviewed the transactions to ensure they were within the law.
"This is a blow to the Federal Reserve's reputation," Senator Raphael Warnock told Powell.
Energy Prices Tame Inflation Concerns Slightly
Despite the trading rules controversy and the intricacies of bank regulations, inflation remains a significant concern for American citizens, and price shocks are unlikely to subside.
Recent focus has shifted towards rising energy prices. Oil prices hit their highest level in nearly three years, prompting Goldman Sachs to warn of oil potentially surpassing $90 a barrel. Gas prices in the United States have also increased significantly over the past year, increasing the risk of steep 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 "risky," albeit for reasons other than his regulatory approach.
"Instead, it's J.Powell's actions at the monetary policy level that have led to increased inflation and market distortions," Boockvar wrote in a client note. Boockvar also noted the Fed's zero interest rate policy and bond-buying program's contribution to inflation and market abnormalities.
Has Powell Helped Avert Disaster?
Powell's forceful reaction to the COVID-19 crisis may have prevented a crisis from becoming a depression or a full-fledged financial collapse.
Many economists and policymakers believe that the Federal Reserve's swift and highly aggressive actions in March 2020 prevented a coronavirus recession from transforming into a depression or a complete financial meltdown.
"Powell deserves 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 come under heavy criticism from both Democrats and Republicans."
In particular, concerns have been raised about the Fed's ongoing acquisition of mortgage-backed securities worth $40 billion a month, which some argue supports an industry that doesn't require assistance. Despite the booming real estate market, the Fed continues to fuel the flames.
Powell acknowledged this week that the Fed might soon slow its bond purchases – primarily due to concerns over inflation.
"Is Powell a short-term solution?"
While Powell has long maintained that these price increases are likely "temporary," he has become more reserved about the rising U.S. inflation rate.
"Supply-side constraints that are fueling inflation are not improving; instead, they are growing worse in certain cases," Powell told legislators, citing supply chain issues and a scarcity of computer chips, which have impaired auto production.
Senator Pat Toomey warned that the U.S. economy currently faces a "more troubling inflation" than before.
When asked if inflation had now become both broader and structural, Powell agreed and stated, "It can rightly be said that this is the case."
Powell acknowledged that supply bottlenecks would eventually disappear and thus reduce inflation. However, he subtly hinted that the Federal Reserve had the "tools" to manage inflation should the situation worsen.
Ed Yardney, President of Yardney Research, said on Wednesday, "The only solution we can think of is to raise interest rates until the economy slows down or enters a recession."
Powell may still be navigating the Fed's pandemic-era policy with deftness.
However, if he stumbles, these past few days will be remembered as a turning point.
