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Analysis: Jerome Powell is having a week from hell. And it's only Wednesday

Jerome Powell’s chances of getting another four-year term as head of the Federal Reserve took a hit Tuesday after Senator Elizabeth Warren called him a “dangerous man” for being too soft on Wall Street banks.
That blow came on the heels of two Fed officials stepping down amid a trading scandal that even Powell acknowledged is “obviously unacceptable.”
Jamie Dimon says JPMorgan has begun to prepare for potential US defaultJamie Dimon says JPMorgan has begun to prepare for potential US default
Meanwhile, the Treasury Department moved up the timeline for when it will run out of cash, raising the specter of a calamitous US default come October 18.
Home prices are still on fire, in part because of the Fed’s own policies. Inflation and energy crunch fears set off a temper tantrum on Wall Street.
And Powell himself seems to be changing his tune — ever so slightly — to acknowledge that inflation may not be as “transitory” as he thought.
And it’s only Wednesday.

‘Grave concern’

To be fair, most of these issues could resolve themselves soon enough. Many expect Congress will avoid a potentially catastrophic default by raising the debt ceiling — eventually.
Markets rebounded Wednesday from their worst day in months. And inflation worries may prove to be overdone.
It’s also worth noting that Powell in the past has been called much worse than a “dangerous man.” Recall the shocking moment in 2019 when President Donald Trump suggested his handpicked Fed chief could be a “bigger enemy” than Chinese President Xi Jinping.
Still, Warren’s dramatic announcement Tuesday that she will oppose Powell’s renomination narrows the chairman’s path to staying at the helm of the Fed.
Warren is the highest profile lawmaker yet to take a stand against Powell and it’s easy to see how some other progressive senators will follow suit.
What's behind the tech stock sell-off? Inflation!What's behind the tech stock sell-off? Inflation!
“Powell remains the favorite, but his chances have clearly gone from a sure-bet to a lower probability,” said Ed Mills, Washington policy analyst at Raymond James.
In her patented prosecutorial style, Warren slammed Powell’s track record on regulation, arguing he presided over a weakening of oversight on big banks.
“Your record gives me grave concern. 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,” Warren told Powell during a Senate Banking Committee hearing.

Trading scandal

Powell, a Republican and former investment banker, disputed Warren’s characterization of his regulatory track record and pointed out that banks had enough capital on hand to weather the Covid recession. No major banks failed. And it’s worth noting that the unprecedented sanctions imposed on Wells Fargo in 2018 by former Fed chief Janet Yellen remain intact nearly four years later.
Yet lifelong Republican Sheila Bair, herself a former banking regulator, shares Warren’s concerns about the Powell-led Fed’s efforts to weaken the rules of the road.
The Fed chief is also playing defense after stock trades made by two regional Fed presidents raised questions about the central bank’s ethics policies.
Powell himself conceded the rules are “not working” and must be revamped, adding that officials are “looking carefully” to make sure the trades in question complied with the law.
“This is a blow to the image of the central bank,” Democratic Senator Raphael Warnock told Powell.

Energy spike doesn’t help ease inflation worries

It’s not clear how much everyday Americans will care about these questionable stock trades, or the intricacies of big bank regulation. But they do care about inflation — and the sticker shock isn’t getting any better.
In recent days, attention has turned to energy price spikes.
Oil prices surged to their highest level in nearly three years. Goldman Sachs warns $90 per barrel oil is coming soon. Prices at the pump remain well above $3 per gallon. And US natural gas prices have skyrocketed over the past year, raising the risk of sharply higher home heating costs for Americans this fall and winter.
Here comes $90 oilHere comes $90 oil
Peter Boockvar, chief investment officer at Bleakley Advisory Group, agrees that Powell is “dangerous” — although not because of his approach to regulation.
“He instead is a dangerous man because [of] what he and his colleagues have done with monetary policy,” Boockvar wrote in a note to clients, pointing to “widespread inflation” and financial market “distortions” that the Fed’s zero interest rate policies and bond-buying programs helped create.

Didn’t Powell help save the economy?

To be sure, Powell’s guns-blazing response to the Covid crisis may have helped avert an even bigger disaster.
Many economists and lawmakers believe the Fed’s swift and extremely aggressive steps in March 2020 prevented the Covid recession from morphing into a depression or full scale financial meltdown.
“Powell deserves an incredible amount of credit. Most in Washington give him that credit. That’s why he has broad bipartisan support,” said Mills, the Raymond James analyst.
Yet the Fed’s continuation of those emergency programs has drawn bipartisan criticism.
In particular, there is concern the central bank’s purchase of $40 billion of mortgage bonds — each month — is propping up a sector that needs no support. Even though the housing market is on fire, the Fed keeps pouring gasoline.
Powell reiterated this week that it soon may be time to “taper” the Fed’s asset purchases — in no small part because of inflation concerns.

‘Is Powell transitory?’

While Powell has long insisted that these price spikes are likely “transitory,” he struck a more cautious tone Tuesday in regards to the elevated levels of inflation gripping America.
“The supply-side restrictions that are so much at the heart of the inflation we’re seeing have not only not gotten better, but in some cases they’ve gotten worse,” Powell told lawmakers. He pointed to crippling congestion at Los Angeles ports and computer chip shortages that have derailed auto manufacturing.
Republican Senator Pat Toomey warned that the US economy is facing a “more troubling kind of inflation” today than it has previously.
Home heating sticker shock: The cost of natural gas is up 180%Home heating sticker shock: The cost of natural gas is up 180%
Asked by Toomey if inflation now seems broader and more structural than earlier this year, Powell agreed, saying “It’s fair to say that it is.”
Powell reiterated that the Fed believes the supply bottlenecks will fade, which will allow inflation to ease. But he added, vaguely, that the Fed has “tools” to deal with inflation should it become more problematic.
“The only tool that we can think of is raising interest rates until they slow the economy or cause a recession,” Ed Yardeni, president of Yardeni Research, wrote Wednesday in a report titled, “Is Powell transitory?”
Powell may yet recover from this week and go on to manage a deft exit from the Fed’s Covid-era policies.
And if he doesn’t, the past few days will be remembered as a turning point.

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