Fed Watch: Central Bank Facing A Sea Of Troubles | Investing.com

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The U.S. Federal Reserve is in a bad place. There is considerable debate about its monetary policy, real questions about its regulatory enforcement, some concern about the ethics of top officials, and growing disagreement about whether Fed Chairman Jerome Powell is the right person to continue in the job.

The monetary policy debate has been focused on inflation, as the rate of price increases remains high and the insistence of Fed officials that the spike is temporary is ringing hollow. The consumer price inflation data for August is due to be released today (Tuesday).

Pressure Building For Speedier Tapering Timeline

Consensus forecasts are for CPI to register 5.3% , and 0.4% on the , but it could well come in higher and put pressure on policymakers to speed up their tapering of bond purchases. The , which generally is a forward indicator for consumer prices, spiked 8.3% on the year in August amid supply-chain constraints.

Another impetus for the Fed to accelerate the reduction of bond purchases is a growing controversy over the effect of this untested policy tool on inequality. Karen Petrou, a widely respected analyst of bank policy, is the latest to blame the Fed for feeding inequality with a policy that hurts savers and rewards the wealthy.

In an opinion column for Barron’s, Petrou compares the Fed’s stubborn insistence on asset purchases to the policy quagmire that led to U.S. losses in Vietnam, Iraq, and Afghanistan.

“The problem with policy quagmires isn’t knowing you should get out; it’s getting out. …Each way out seems blocked so it gets in ever deeper, but ever deeper is ever more dangerous. The more the Fed perpetuates markets that depend only on central-bank largesse, not price discovery and disciplinary correction, the greater the risk that inescapable retreat leads to costly casualties.”

Relaxed Rules, Questionable Ethics; Second Powell Term In Danger?

Meanwhile, some Democrats on the Senate Banking Committee are criticizing the Fed under Powell for relaxing rules that were put in place following the 2008-09 financial crisis to make banks more resilient, largely by requiring bigger capital buffers to absorb losses. Committee chairman Sherrod Brown belongs to this group, as does Elizabeth Warren.

Some Democrats in Congress—though the House has no official voice in selecting or confirming the Fed chair—also want the Fed to be more assertive in fighting climate change, especially via bank lending to fossil-fuel industries.

When it emerged last week that two of the Fed’s regional bank chiefs have been actively trading individual stocks even while Fed policies were supporting equity investors, there was an uproar about questionable ethics.

Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren quickly pledged to sell all their individual stocks by the end of this month and invest only in passive funds, though they maintain their investments were in line with Fed guidelines.

All these issues come to a head in the question of whether to nominate Powell to a second term as Fed chairman. The White House has been moving toward a compromise that would keep Powell in office while promoting regulatory hawk Lael Brainard to vice chairman for supervision and naming one or two new liberal members to the board of governors.

Powell’s term as chairman doesn’t run out until the end of January, but President Joe Biden should be nominating someone very soon.

However, the Biden administration is also in a bad place. The debacle of the U.S. withdrawal from Afghanistan has plunged the president’s approval rating well below 50% and looms over every action the government might take.

The ambitious $3.5 trillion spending bill that Biden wants to push through Congress is running into resistance even from Democrats, which could torpedo the administration’s plan to pass it on strictly partisan lines.

Biden is hardly on the ropes, but he has been weakened politically, and is likely to face pushback from one direction or another for his Fed pick.





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