Federal Reserve Chairman faces growing criticism for inflation missteps – Chicago Tribune

WASHINGTON — Federal Reserve Chairman Jerome Powell has received praise for his skillful leadership during the whirlwind of the pandemic recession. However, as threats to the US economy have grown, Powell has increasingly struck Fed watchers as far less sure of himself.

Inflation turned out to be higher and far more persistent than he or Fed economists had expected. And at a policy meeting last week, Powell announced an unusual last-minute shift to a larger interest rate hike than he had previously signaled – then followed up with a press conference that many economists have described it as confused and inconsistent.

It was a sharp turnaround for Powell, who is widely credited with preventing what could have been a much worse economic crisis during the pandemic and who last month won easy bipartisan Senate confirmation for a second four-year term.

Now, as he faces chronically high inflation, plummeting financial markets and the growing threat of a recession, Powell faces questions — and criticism — about his handling of the Fed at a when its challenges multiply.

Thanks to a once-in-a-century pandemic, Europe’s first war in decades, and soaring gas and food prices that the Fed has limited power to influence, Powell could become the first Fed chairman since Paul Volcker in the early 1980s to battle “stagflation,” a miserable combination of slow economic growth and high inflation.

Struggling to rein in the worst inflation spike in four decades, Powell last week engineered a three-quarter-point hike in the Fed’s short-term interest rate – the biggest single rate hike in a quarter century. . It was an unexpected aggressive move after Powell made it clear a month earlier that a more modest half-point rate hike was coming.

During his press conference, Powell defended the Fed’s decision, noting that the latest inflation readings had been even more worrisome than expected. The Fed hike will make borrowing more expensive for many consumers and businesses.

Still, Powell’s explanation has been criticized by many Fed watchers, with some complaining that he failed to articulate a cohesive and cohesive policy.

“The Fed has been ad-libbing, scrambling to catch up with painfully higher inflation,” said Mark Zandi, chief economist at Moody’s Analytics. “The Fed has no script and is making it up as it goes.”

William Dudley, who as a former head of the Federal Reserve Bank of New York served with Powell on the Fed’s board of governors, said in a think tank webcast last week that the head of the central bank was putting its credibility at risk.

“When the Fed changes its mind at the last minute like this,” Dudley said, “it has the potential to undermine the credibility” of its critically important communications with markets and the public.

As those criticisms resonate, Powell will travel to the Capitol this week to give his semiannual testimony to House and Senate committees, where he may face tougher questions than at any other time in his tenure as Speaker of the House. Fed. He will testify a year after emphasizing his confidence in Congress that inflation was temporary and would likely “decline”.

He does not have. In May, according to the government, consumer prices increased by 8.6% compared to the previous year. At his press conference last week, Powell said the Fed was surprised by the latest numbers, which were fueled by Russia’s invasion of Ukraine, still-obstructed global supply chains, labor shortages and the growing demand for services ranging from rent to airfare to dining. meal.

“We don’t see progress and we want to see progress and that’s really another reason why we did what we did today,” Powell said Wednesday.

The huge Fed rate hike and Powell’s comments have rekindled concerns among economists about the direction he has taken for the Fed. Most analysts sharply criticized the Fed Powell for waiting too long to tighten credit when inflation took off last year and warning that it must now raise rates so quickly it risks tipping the economy in recession.

“Our worst fears about the Fed have been confirmed,” Ethan Harris, global head of economics at Bank of America, said in a client note last week. “They’ve fallen way behind the curve and are now playing a dangerous catch-up game.”

A related concern is that Powell said the Fed will continue to raise rates until there is “clear and convincing” evidence that inflation is declining towards its annual target of 2%. But rate hikes usually take months to slow the economy. The Fed could end up raising rates more than necessary before acknowledging that inflation is falling, increasing the likelihood of a recession.

“A hard landing is probably quite likely,” Dudley said. “The risk of a hard landing has increased.”

Last week, Powell expressed some optimism about the economy’s sustainability, although his confidence was more subdued than in previous months. He continued to hope that the Fed could pull off a “soft landing,” meaning growth slow enough to bring inflation under control without causing a slowdown or widespread job losses.

Dudley suggested Powell should do more to prepare the public for the likelihood of real economic pain.

Last week, Fed policymakers updated their economic projections to show, for the first time since they started raising rates in mid-March, that they expect unemployment to rise. and a weaker economy over the next two years. Still, projected increases were small, with unemployment reaching 3.9% by the end of 2023, just three-tenths of a point above its current level.

Many outside economists are more pessimistic, raising the question of whether the Fed Powell is still underestimating the damage the economy could absorb.

“They went from terribly unrealistic to slightly plausible in their predictions,” Dudley said.

Other economists have noted what appears to be a central contradiction in Powell’s comments: He said the Fed was raising rates faster and likely higher than it had expected just ago. three months as gas and food prices, the most visible signs of inflation, continue to rise.

Still, “Powell openly admits the Fed has no control over” these supply shocks, said Krishna Guha, an economist at investment bank Evercore ISI. “Certain aspects of the press conference…didn’t seem entirely coherent or judicious.”

Powell can take some comfort from the fact that other central banks around the world also appear to be struggling to control inflation. On the same day the Fed raised its key rate by three-quarters of a point, the Swiss National Bank announced a surprise hike of half a point, its first hike of any magnitude in 15 years.

The Bank of England has been criticized for raising its key rate by a quarter point for five straight meetings, a pace some observers still say is too slow to counter inflation that could hit 11% this fall. The Reserve Bank of Australia has raised its benchmark rate twice in the past five weeks, after leaving it near zero for 11 years.

Some economists believe that in announcing last week’s surprisingly large rate hike, Powell intended to defy expectations by showing increased resolve on the part of the Fed, even to the point of risking a recession so necessary to defeat a deep recession.

“They’re taking overshoot risk, but I suspect that’s a deliberate risk, given the priority they have of bringing down inflation,” said Donald Kohn, a former Fed vice chairman, who is now a senior fellow at the Brookings Institution. .

At the same time, most Fed watchers agree that Powell’s tenure has been exceptionally difficult, starting with the constant public attacks by former President Donald Trump – who named him Fed Chairman – and more. later the pandemic recession and soaring inflation exacerbated by the Russian invasion of Ukraine.

“Over the past year, it seems like everything has gone wrong,” said Douglas Porter, chief economist at BMO Financial Group. “I think we are actually due for a bit of luck. The economy still has a way to go to get through this without a full recession. »

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