Fed Chairman Speaks Before Congress, Labor Department Releases Inflation Data

Federal Reserve Chairman Jerome Powell sat down with a Congressional committee on Tuesday to discuss his plans for the central bank if he's confirmed to a second term. Meanwhile, the Labor Department released another inflation report on Wednesday that shows things are getting worse in the economy.

Federal Reserve Chairman Jerome Powell spoke before Congress on Tuesday during his confirmation hearing. He hopes to secure a second term in his role. He addressed the ongoing inflation crisis directly, noting that the US economy is healthy but needs a tighter fiscal policy.

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“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,” Powell explained to Congress. “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.”

The Fed will likely allow level proceeds to run off each month to shrink the balance sheet. The central bank could also sell its assets outright. In addition, the Fed is planning to taper its bond purchasing program, which keeps the economy flush with liquid capital. Such purchases aren’t necessary when the Fed wants to curtail inflation.

Lawmakers mostly focused on inflation, which is at its highest rate since the 1980s. The Labor Department released data on Wednesday that suggests that inflation surged to a 7% annual jump in December 2021. The Federal Reserve characterized this price action as “transitory” for most of 2021, frustrating economists who saw the trend worsening.

Powell’s Confirmation Hearing

Senator Elizabeth Warren
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During the confirmation hearing, lawmakers seemed satisfied with Powell’s performance so far in his role as Fed chairman. One notable exception came from Senator Elizabeth Warren, who stated she would oppose Powell’s confirmation to a second term as chairman. She called Powell “dangerous” during a hearing last year.

“Your record gives me grave concerns. Over and over, you have acted to make our banking system less safe, and that makes you a dangerous man to head up the Fed, and it’s why I will oppose your renomination,” said Warren in September 2021. Warren has cited concerns that Powell’s leadership could lead to another financial meltdown like the 2008 housing crisis.

“So far you’ve been lucky. But the 2008 crash shows what happens when the luck runs out,” Warren continued. “The seeds of the 2008 crash were planted years in advance by major regulators like the Federal Reserve that refused to rein in big banks. I came to Washington after the 2008 crash to make sure nothing like that would ever happen again.”

Aside from Warren, Powell met with friendly faces during his Congressional hearing. Lawmakers will probably confirm him to a second term as Fed Chairman, which is encouraging for investors. Sudden leadership changes in the middle of unprecedented inflation could send the markets into a panic.

Inflation Rate Hits 7%

Inflation Concept
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On Wednesday, the Department of Labor published data that shows the US inflation rate jumped to 7% in December. According to economic historians, that’s the highest US inflation rate since 1982, offsetting recent wage gains in the tight labor market. This rapid monetary devaluation requires swift, decisive policy changes from the White House and Federal Reserve.

Economists believe the runaway inflation rate is due to several factors stemming from the global medical situation. Americans deferred their spending in 2020 and went on an unprecedented online shopping spree in 2021. That high demand slammed global logistics and supply lines in 2021, complicating things in an industry struggling to hire laborers.

The high volume of orders and the low availability of logistics professionals led to unprecedented shipping bottlenecks at ports worldwide. Those bottlenecks, in turn, led to soaring shipping prices for American retailers. Businesses rolled these higher costs into their products’ prices and passed the hikes to consumers.

The complicating factor in 2021 was American customers mostly ignoring the price hikes and buying consumer goods anyway. After all, most customers padded out their savings accounts in 2020 by skipping vacations and pocketing stimulus checks from the federal government. By accepting these price hikes, Americans normalized a runaway inflation rate and signaled their willingness to pay more money for the same goods.

Political Storm Brewing

The inflation rate is a serious concern for the White House. Midterm elections are looming later this year, and public polling suggests that the average American considers rising prices a threat to their livelihood. If the current administration fails to bring prices back in check, it could face retribution from frustrated voters in November.

President Joe Biden told reporters his infrastructure plan could help alleviate some market pressure. The president explained that his plan would overhaul roads and ports across the country, potentially easing the shipping bottleneck and dropping consumer prices.

However, economists disagree with this characterization. American retailers won’t drop their prices even if their overhead costs fall. Customers have already normalized higher prices by paying them throughout 2021. These sky-high costs are here to stay. The question now is whether they’ll be even higher next year.

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