Rewarding and Promoting Failure at the Federal Reserve

The champion of the printing press and advocate of progressive orthodoxy went to Capitol Hill recently to testify before the Senate Banking Committee. Let’s just say that Federal Reserve Chair Jerome Powell, who is being nominated for a second term, and Lael Brainard, tapped to serve as the second-in-command at the world’s most powerful institution, did not provide much information. Indeed, it was comparable to watching CNBC as it was more of the same information that Main Street and Wall Street have been given since the central bank conceded it was wrong about inflation. As the great philosopher, Homer Simpson would say, “Boring!”

Jerome Powell Losing Sleep Over Inflation

Powell revealed to policymakers that he anticipates multiple interest rates hikes this year to help combat swelling price inflation. He also reiterated the central bank's position on accelerating the tapering of the pandemic-era quantitative easing program. But Powell made one comment that turned some heads: The Fed could begin to unwind the approximately $8 trillion in assets listed on the balance sheet. He told the committee:

“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. 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.”

With inflation at its highest level since 1982 and the nation near full employment, Powell acknowledged that the U.S. economy does not need the Eccles Building's "very highly accommodative policies that we've had in place to deal with the pandemic and its aftermath." Powell added that the organization could pull the trigger on additional rate hikes if inflation remains stubbornly high, although he forecasts that it will subside later this year.

“If inflation does become persistent, if these high levels of inflation get entrenched in our economy and people’s thinking, then inevitably that will lead to much higher monetary policy from this,” he added. “That could lead to a recession and that will be bad for workers.”

The head of the Fed revealed that the central bank would be publishing rules that would ban similar activities without 45 days' note, calling the previous system "insufficient." Fed Vice Chair Richard Clarida announced that he would be stepping down a few weeks ahead of schedule after fresh disclosures exposed buying and selling equity funds that benefited from the Fed’s multi-trillion-dollar stimulus and relief efforts. Dallas Fed Bank President Robert Kaplan and Boston Fed Bank President Eric Rosengren resigned late last year because of similar investing conduct.

Overall, it appears that Powell will have most of the support from the Senate, including Committee Chair Sherrod Brown (D-OH) and Sen. Patrick Toomey (R-PA). However, Sen. Elizabeth Warren (D-MA) confirmed that she would oppose his nomination because of how loose he has been with the financial sector, labeling him a “danger” last year.

Picking Her Brainard

Fed Governor Lael Brainard appeared before the same committee on Jan. 13, answering a series of policy-related questions. The main focus was on interest rates and inflation. Brainard averred that getting four-decade high inflation under control is the "most important task" for the Fed, especially now that the economy is on the rebound and the labor market has recovered.

Despite initially dismissing a soaring consumer price index (CPI) and producer price index (PPI), Brainard noted that "working people around the country are concerned about how far their paychecks will go." She believes that inflation will remain high for the next couple of quarters. Although rate hikes are the go-to solution for the monetary policy body, Brainard explained that additional measures could be employed once the asset purchases are finished.

"Of course we will be in a position to do that I think as soon as our purchases are terminated, and we’ll simply have to see what the data requires over the course of the year, and you know we started to discuss shrinking our balance sheet,” she said in testimony.

Meanwhile, Brainard, who some say is being groomed to become the next Fed Chair in the coming years, assured Congress that the Fed is "committed to the independent and non-partisan status" of the central bank. However, when pressed on a $2,700 donation to Hillary Clinton's presidential campaign in 2016, Brainard noted that the "appearances issue" was not great for a central bank wrestling with, as the Financial Times calls it, a "reputational crisis” over several bad calls.

Market analysts purport that Brainard is likely to be nominated to the No. 2 position at the Fed. But there have been critics, including Club for Growth, that criticized her positions, such as integrating climate change into monetary policy. Whatever the case, it is evident Brainard will be extended more sway moving forward, be it on the environment or cryptocurrency regulation.

More of the Same Nonsense

Only in Washington can you get everything wrong and be re-hired and promoted. Powell, Brainard, and the rest of the individuals inside the central bank were wrong about everything, making several pivots to try to save face. The only person who may have been ahead of his peers was Atlanta Fed Bank President Raphael Bostic, who called the transitory term a “swear word.” Powell will finish the job and likely hand the keys over to Brainard in 2026, who could perhaps transform the Federal Reserve System into some modern-day Frankenstein’s Monster, comprised of the worst elements of progressivism, the European Central Bank (ECB), and modern monetary theory (MMT). In the Swamp, it's nice work if you can get it.

~ Read more from Andrew Moran.