(Bloomberg) - Jerome Powell is set to be grilled on the Federal Reserve’s sharpest shift toward monetary tightening in decades at a hearing Tuesday on his nomination for another four years at the central bank’s helm.
While the 68-year-old Fed chair enjoys widespread support from both Democrats and Republicans -- and is expected to win easy confirmation -- members of the Senate Banking Committee are sure to press him on his views on everything from when to start raising interest rates to whether to adopt bank capital standards tied to climate risks. The hearing begins at 10 a.m. in Washington.
“It will be a lot of focus on the state of policy and where he thinks it’s going,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York. The off-year state elections held two months ago “really drove home for people that inflation matters,” Porcelli said -- highlighting the sensitivity of lawmakers to living costs ahead of this November’s midterm congressional elections.
Following are a number of key issues likely to come up during the hearing:
Interest Rates
Investors are betting the Fed will begin raising its benchmark federal funds rate in March, two years after cutting it to nearly zero at the onset of the pandemic in March 2020. A Labor Department report Friday showing the U.S. unemployment rate fell to 3.9% in December -- closing in on the 3.5% pre-pandemic low -- bolstered those expectations, and saw some economists change their forecasts to a March liftoff.
The last time Powell appeared before Congress, in late November, he was pressed by Republicans and Democrats alike on the Fed’s response to inflation. Consumer prices had risen 6.8% over the preceding 12 months, the most in nearly 40 years.
Amid widespread concerns in Washington about inflation, minutes of the Fed’s Dec. 14-15 policy meeting, published Jan. 5, revealed that “several” officials also “viewed labor market conditions as already largely consistent with maximum employment” -- the final prerequisite for moving forward with rate hikes.
Omicron Wave
While a March rates liftoff is looking increasingly likely, Tuesday will probably still be too soon for Powell to give explicit guidance to that effect. That’s especially true given the disruptions the omicron variant of Covid-19 is causing as it sweeps across the country, according to Aneta Markowska, the chief financial economist at Jefferies in New York.
The December meeting minutes indicated policy makers were concerned with the risk that it could prolong supply-chain strains that have contributed to fast-rising prices in recent months, something Powell is likely to be quizzed on.
The analysis is complicated because the impact of omicron could be different from that of the delta variant that preceded it, Markowska said. The new variant has led to more widespread labor-market disruptions due to faster transmission than was the case with delta. At the same time, it’s coming during a seasonal slowdown in price pressures -- unlike delta, which hit just as the U.S. was ramping up imports ahead of the holiday shopping season.
Balance Sheet
Another potential area of questions is tied to policy makers’ discussions on when and how to downsize the Fed’s $8.8 trillion balance sheet. San Francisco Fed President Mary Daly on Friday said that the central bank could opt to start the process after one or two rate increases.
That timeline would be quite different from the one it followed in the 2015-2018 tightening cycle, when Fed officials waited nearly two years after the first rate hike to begin reducing the balance sheet.
The urgency reflects growing worries “that maybe they actually have slipped behind the curve” on taming inflation, Porcelli said.
Trading Issues
Ethics issues with regard to financial trading by Fed officials are likely to be raised by at least one member of the banking panel -- Elizabeth Warren, a liberal Democrat from Massachusetts. In a letter to Powell dated Monday, she called for details on trading by Fed officials to be released within a week.
Warren wrote the letter after further details emerged on transactions of at least $1 million executed in February 2020 by Fed Vice Chair Richard Clarida -- who is set to leave the central bank at month-end. Powell late last year unveiled a ban on top officials buying individual stocks and bonds, as well as limits on active trading, in a move praised by Treasury Secretary Janet Yellen.
Financial Regulation
President Joe Biden, when announcing his backing of Powell for a second term in November, said the Republican former Carlyle Group partner had made clear to him that climate change poses risks to the financial system and underscored the importance of a proactive Fed role for financial regulation -- key items for progressive Democrats.
Senate Democrats and Republicans diverge significantly on those topics. The Fed chair in recent congressional testimonies has been decried by Warren, who in September told him he was a “dangerous man” to be running the central bank, citing the Fed’s relaxation of some regulatory requirements for banks on his watch.
Powell could also be asked about the supervision of cryptocurrencies -- he has backed regulation of stablecoins -- and the potential introduction of a digital version of the dollar.
Biden has yet to announce his nomination for the Fed’s vice chair of supervision, the central bank’s point person when it comes to regulatory matters, though former Fed Governor Sarah Bloom Raskin is seen as a leading contender. More detailed questions would likely be raised at the hearing for that nominee.
Climate Risks
The central bank has in recent years moved forward with initiatives aimed at promoting climate risk as a financial stability issue, which Democrats strongly support and Republicans see as a potential threat to credit access for oil and gas companies.
Powell in October backed a judgment that climate change was an “emerging threat” to financial stability, but hasn’t embraced the idea of tying such risks to capital standards for lenders.
By Matthew Boesler
