Federal Open Market Committee (FOMC) Chair Jerome Powell was re-nominated by President Joe Biden a few weeks ago. During his re-confirmation hearings, most of his comments and testimony centered around his belief that the economy is in a substantially stronger position than a year ago and that it was time to pursue a tighter monetary policy given inflation risks.
Powell's confirmation seems assured given favorable and supportive comments by Senators on both sides of the aisle, praising him for his handling of the pandemic and recent pivot to focusing on inflation. Maybe the biggest headline was that Powell said that if the economy continues to improve at the same pace then a series of rate hikes are likely in 2022 in addition to an end of asset purchases, and a shrinking of the balance sheet.
Powell's opening statement set the tone for his testimony: "As we move through this year, if things develop as expected, we'll be normalizing policy, meaning we're going to end our asset purchases in March, meaning we'll be raising rates over the course of the year. At some point perhaps later this year we will start to allow the balance sheet to run off, and that's just the road to normalizing policy."
While most of the testimony centered around the economy and inflation, there also pointed criticism over unethical trading activities by Federal Reserve board members. This has resulted in the resignation of 3 officials including recently, Richard Clarida, the VP of financial regulation. Powell agreed with these concerns and said the Fed has instituted much tougher guidelines on ownership and disclosure.
Powell also received votes of confidence from Ohio's Sherrod Brown and Pennsylvania's Patrick Toomey which all but guarantees his confirmation. However, there remain some holdouts like Senator Elizabeth Warren who has been critical of Powell's handling of the economy and lack of focus on consumer financial protection.
Most questions directed to Powell were focused on inflation which recently came in at the highest level since 1982 following a 7% print in the CPI. This is in contrast to Powell's labeling of inflation as "transitory" for much of 2021. However, Powell did retire this label and is clearly taking the matter seriously based on Fed fund futures and chatter from recent FOMC meetings.
Powell also laid out the main tools at the Fed's disposal to bring prices under control. These include the tapering of its asset purchases which has resulted in the Fed balance sheet growing by nearly $5 trillion since the start of the pandemic. Another option is to start selling assets in the open market through quantitative tightening (QT) which would decrease liquidity in the system.
Powell believes this change in the Fed's response is appropriate given the strong economy, 3.9% unemployment, and high inflation. Upon hearing criticism from Senators about how the Fed got it wrong on inflation, he pointed to the pandemic and supply chain issues which have continued for longer than expected given the numerous waves. Additionally, it seems that these issues may have been exacerbated during the recent wave as well.