Powell faces political pressure again as worries mount over economy

Federal Reserve Chairman Jerome Powell’s political questioning about the central bank’s policy moves intensifies, this time from across the aisle.

Accustomed to political pressure, the head of the Fed found himself at the center of concerns this week in a letter from Senator Sherrod Brown. The Ohio Democrat warned in the letter of potential job losses from Fed rate hikes he is using to fight inflation.

“It is your job to fight inflation, but at the same time you must not lose sight of your responsibility to ensure that we have full employment,” Brown wrote. He added that “potential job losses caused by excessive monetary tightening will only make these problems worse for the working class.”

The letter comes with the Fed less than a week away from its two-day policy meeting which is expected to conclude Nov. 2 with a fourth consecutive 0.75 percentage point interest rate hike. This would take the central bank’s benchmark funds rate to a range of 3.75% to 4%, its highest level since the start of 2008 and represents the fastest pace of policy tightening since the start of the years. 1980.

Without recommending a specific course of action, Brown asked Powell to remember that the Fed has a two-pronged mandate – low inflation and full employment – and asked that “the decisions you make at the next meeting of the FOMC reflect your commitment to the dual mandate”. .”

The last time the Fed raised interest rates, from 2016 to December 2018, Powell faced heavy criticism from former President Donald Trump, who once called central bankers ” morons” and seemed to compare Powell unfavorably to Chinese President Xi Jinping when he asked in a tweet, “Who is our greatest enemy?”

Democrats, including then-presidential hopeful Joe Biden, criticized Trump for his comments on the Fed, insisting the central bank would face no political pressure when formulating monetary policy.

Brown’s position was considerably more nuanced than Trump’s — though she is just as unlikely to move the monetary policy dial.

“Chair Powell has made it clear that the necessary conditions for the Fed to achieve its full employment goal are low and stable inflation. Without low and stable inflation, there is no way to achieve full employment,” he said. said Mark Zandi, chief economist at Moody’s. Analytic. “He’ll stick to his guns on this. I don’t see it materially impacting decision-making at the Fed.”

Admittedly, while this is most likely a reaction to the change in tone from some Fed officials and a slight shift in economic data, market expectations for monetary policy have shifted somewhat.

Traders made peace with the three-quarter point rise next week. But they now see just a 36% chance of another such move at December’s Federal Open Market Committee meeting, after previously pricing it at nearly 80% chance, according to data from the CME Group.

The shift in sentiment came on the back of warnings about overly aggressive policies from several Fed officials, including Vice Chairman Lael Brainard and San Francisco Regional Chair Mary Daly. In remarks late last week, Daly said she was looking for a “reduction” point where the Fed could slow the pace of its rate moves.

“The democratization of the Fed is the problem for the market, the power of other members versus the president. It’s hard to know,” said Quincy Krosby, chief equity strategist at LPL Financial. Regarding Brown’s letter, Krosby said, “I don’t think it’s going to affect him. … It’s not the pressure coming from politicians, which is to be expected.”

A Fed spokesperson acknowledged Powell received Brown’s letter and said it was normal policy to respond directly to such communication. In the past, Powell has generally been dismissive when asked if political pressure could factor into decision-making.

In addition to Brown’s nudge, Powell also faced criticism from others on Capitol Hill.

Senator Elizabeth Warren, an ultra-progressive Democrat from Massachusetts and a former presidential candidate, called Powell dangerous and recently warned of the impact rate hikes could have on jobs. Also, Sen. Joe Manchin, DW. Va., last year criticized Powell for what was seen as the Fed’s off-the-cuff response to the early rise in inflation.

“I don’t necessarily think Powell will give in to political pressure, but I wonder if some of his colleagues are starting to, some of the doves that have gone hawks,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. . “Employment is fine now, but as the months pass and growth continues to slow and layoffs start to increase at a more noticeable rate, I have to believe the level of pressure will increase.”

Payroll gains have been strong in all years, but a number of companies have said they are freezing hiring or cutting back as economic conditions soften. A slowing economy and stubbornly high inflation set the stage for the November election, where Democrats are expected to lose control of the House and possibly the Senate.

With the high stakes in mind, markets and lawmakers will be listening intently to Powell’s post-meeting press conference next Wednesday, which comes six days before the election.

“He knows the pressure. He knows politicians are getting more and more nervous about losing their seats,” Krosby said. “There’s very little he can do at this point, by the way, to help either side.”