Fed's Jerome Powell rapped on inflation, regulations in US Senate hearing

Jerome Powell testifies before the Senate Banking, Housing and Urban Affairs Committee on July 15, 2021, in Washington, DC.
Jerome Powell testifies before the Senate Banking, Housing and Urban Affairs Committee on July 15, 2021, in Washington, DC.PHOTO: AFP

WASHINGTON (REUTERS) - US Federal Reserve chairman Jerome Powell faced sharp questions about inflation and banking regulation in a hearing before the Senate Banking Committee on Thursday (July 15), issues likely to be at the forefront in his possible renomination to the top Fed post.

Powell delivered the same pledge of "powerful support" to complete the US economic recovery as he did on Wednesday before the House Financial Services Committee, an indication he sees no need to rush the withdrawal of support from the economy because of a recent jump in inflation.

Republicans on the panel, however, picked up where their House colleagues left off, challenging Powell on whether the sharp acceleration in inflation will, as the Fed expects, prove temporary or not.

"The Fed's current paradigm almost guarantees the Fed will be behind the curve," in keeping inflation anchored at the central bank's 2 per cent average target, said Pennsylvania Republican Pat Toomey.

The central bank's ongoing bond purchases, particularly of mortgage-backed securities, "is puzzling," he added, at a time when house prices are rocketing higher.

The panel's Democratic chair, Sherrod Brown of Ohio, in his opening statement and in questions to Powell argued the central bank had weakened the regulation of big banks, allowing them to boost dividends and stock buybacks.

"The Fed has rolled back important safeguards making it easier for the banks to pump up the price of their stock," Brown said.

Powell pushed back, saying that the Fed was closely watching the path of inflation but considers it "unique in history," an offshoot of the pandemic reopening and not likely to persist.

The level of capital banks are currently required to set aside, unavailable for dividend or other payments, is "about right," he said.

Those issues - Powell's oversight of a possibly overheating economy, and his supervision of Wall Street - will be core to the Biden administration's decision of whether to renominate him to a second four-year term when his current one expires early next year.

The Senate Banking Committee would be the first stop in his confirmation.

Powell has made a point of building relationships on Capitol Hill - and particularly with the banking panel, which provides direct oversight in the form of twice-yearly monetary policy hearings.

A Reuters analysis of Powell's meeting calendar shows that in his three and a half years as Fed chair he has met personally with every current member of the banking committee, splitting the meetings evenly between Democrats and Republicans. He has spent eight hours just with Brown.

That may have paid off in some good will.

Republican Senator John Kennedy of Louisiana thanked Powell for keeping the economy "in the middle of the road" through the pandemic, even if it was sometimes done with "spit and happy thoughts."