Fed Chair Powell in the Hot Seat

November 2, 2021

Fed Chair Powell in the Hot Seat Photo

Early in his term as Federal Reserve (Fed) chair, Jerome Powell decided to hold more frequent press conferences. The Federal Open Market Committee meeting press conferences started being held after every meeting, as opposed to every other meeting. 

Powell made the change to keep the central bank on the path toward enhanced communication and transparency. Chair Powell may be regretting that decision this week as he is likely to face his toughest press conference since assuming Fed leadership. Meanwhile, the Biden administration is closing in on a decision about whether to renominate Powell for another term.

Criticism of Powell has been mounting on both sides of the aisle in Washington. Republicans are concerned that prolonged easy money policies are creating a spike in inflation, which can no longer be considered transitory. Democrats are questioning Powell’s leadership and ties to Wall Street, especially following the recent controversy on stock trading activity by Fed officials. 

With the Biden administration struggling to gain favor with the progressive wing of the Democratic Party regarding the passage of a new infrastructure package, Sen. Elizabeth Warren’s reference to Powell as a “dangerous man” may take on more weight in Biden’s decision about whether to reappoint Powell for a second term. 

A bigger concern for Chair Powell and his ultra-accommodative monetary policy should be Fed research that suggests the recent inflation burst could signal trouble for the economy. Fed Senior Adviser Jeremy Rudd’s paper suggests Powell’s belief that long-term inflation expectations are “a key determinant of actual inflation …rests on extremely shaky foundations.”      

Rudd believes the Fed’s recent shift in inflation policy (so-called “average inflation targeting”) designed to push inflation above 2% for some time is likely to create more persistent pressures, especially among workers who demand higher wages to compensate for their lost purchasing power.

To steal a recent line from University of Mississippi football coach Lane Kiffin, investors may want to “get your popcorn ready” for Powell’s press conference tomorrow. A successful performance by him will be critical to help keep the economy and financial markets moving in the right direction.

Tags: Federal Reserve | Inflation | FOMC | Monetary policy

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