The Senate on Thursday reaffirmed Jerome Powell’s second four-year term as chair of the Federal Reserve, giving bilateral support to Powell’s high-level efforts to curb the highest inflation in four decades.
The 80-19 vote reflects widespread support in Congress for the Fed’s drive to combat rising prices through a series of interest rate hikes that could well extend into next year. The Fed’s goal is to borrow and reduce spending to reduce inflationary pressures.
From February, when his first term ended, Powell led the central bank into temporary power.
He faces a difficult and risky task of trying to contain inflation without weakening the economy. The job market remains strong and has strengthened at a point that Powell says is contributing to a “volatile heat” and an overheated economy.
Rising prices across the economy have caused pain for millions of Americans whose wages are not commensurate with the cost of basic necessities such as food, gas and rent. And the prospect of uninterrupted high interest rates has destabilized financial markets, with stock prices plummeting for weeks.
Later in an interview with NPR’s “Marketplace” on 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 the factors we control. No, such as Russia’s invasion of Ukraine and slowing growth in China.
This is in contrast to Powell’s earlier, more confident statements, in which he said last week, “We have a good chance of landing a soft or soft-ish.”
Powell’s support in the Senate on Thursday was roughly consistent with what he received four years ago, when he was nominated for the first chair by President Donald Trump. At the time, the Senate voted 84-13 to confirm him.
To some extent, Powell’s support in Congress reflects the guilt that most Republicans are allocating to President Joe Biden’s $ 1.9 trillion Covid relief package – instead of the Fed’s extremely low rate – to drive up inflation. Many economists, including those who have worked in previous democratic administrations, agree that Biden’s law played a role in accelerating prices.
Powell’s confirmation comes as many economists have sharply criticized the Fed for making it too difficult and risky to wait too long to respond to rising inflation.
Prices first rose a year ago after Americans began administering vaccines and increasing their spending after COVID restrictions began to ease. Rising demand has left many businesses unprepared and under-supplied, leading to higher prices for items such as cars, furniture and appliances – if consumers could find them. High inflation has since spread to the rest of the economy, including rent and other services such as hotel rooms, restaurant meals and medical services.
For months, Powell reiterated his view that inflation was only “transient” and that it would soon be easier if supply disruptions were addressed. The Fed continued to buy Treasury and mortgage bonds until March, when prices rose 8.5% from a year earlier. The purpose of buying bonds was to keep the long-term debt rate low. Just two months ago, the central bank raised its benchmark rate from near zero to 0.25% to 0.5%.
“They could have started shutting down earlier (bond purchases) sooner rather than later, tightening monetary policy, especially once this strong data starts to come in,” said Christine Forbes, an economist and former member of MIT’s Sloan School of Management. Monetary Policy Committee of the Bank of England.
Powell and other officials have since acknowledged that the Fed could have started dialing his stimulus earlier. They suggest, however, that most economists outside the Fed also initially thought high inflation would prove short-lived.
“Hindsite says we should have moved earlier,” Powell admitted during a Senate hearing in early March.
The Fed’s view that inflation largely reflects supply shocks that soon “went wrong,” Powell admits, “is probably not conceptually wrong, but the supply side is taking longer to heal than we thought.”
Christopher Waller, a member of the Fed’s board, said last week that the central bank was partially thrown out by reports last August and September that suggested the job market was weakening. Slower recruitment would make it harder for workers to secure huge wage increases and would therefore help keep inflation in check.
But those recruitment reports, and the next three, were later revised higher by a total of about 1.5 million jobs, Waller said, emphasizing the extraordinarily high demand for labor that increased wages.
“If we had known what we know now, I believe (Fed policymakers) would have accelerated (bond purchases) and raised rates sooner,” Waller said Friday. “But no one knew, and that’s the nature of real-time monetary policymaking.”
The Senate has already approved Biden’s other three choices for the Fed’s Board of Governors: Lel Brainard, who is now vice chairman, and Lisa Cook and Philip Jefferson. All three will vote on the central bank’s interest rate decision and monetary policy.
Cook and Jefferson are both black, meaning for the first time in the Fed’s 108-year history, there are two black members. Cook, a professor of economics and international relations at Michigan State, will be the first black woman to serve on the board.
Biden also nominated Michael Barr, a former Treasury official who helped draft the 2010 Dodd-Frank Financial Control Act, to become the Fed’s top banking regulator and to fill the last open space on the seven-member board. Sen. Sheridan Brown, an Ohio Democrat who chairs the Senate Banking Committee, said Thursday that his committee will hear the bar’s nomination next week.
In the past, politicians often objected to high interest rates for fear of losing their jobs. The long-term high inflation of the 1970s has been blamed, in part, on the political pressure that led Fed President Lyndon Johnson and Richard Nixon to abandon steep rate hikes.
Powell himself endured harsh criticism of Trump when the Fed reached its half-century low of 3.5% in 2017 and 2018. Powell reversed some of that growth in 2019 after Trump’s imposition of tariffs on Chinese imports slowed the economy.
This week, Biden said that while he respects the Fed’s independence, he has backed efforts to raise debt rates, which have already pushed up the cost of mortgages, auto loans and business loans.