Smart Talk Success

Political questioning of Federal Reserve Chair Jerome Powell about the central bank’s policy moves is intensifying, this time from the other side of the aisle.

No stranger to political pressure, the Fed chief this week found himself the focus of concern in a letter from Sen. Sherrod Brown. The Ohio Democrat warned in the letter about potential job losses from the Fed’s rate hikes that it is using to combat inflation.

“It is your job to combat 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 brought about by monetary over-tightening will only worsen these matters for the working class.”

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

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

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

Democrats, including then-presidential hopeful Joe Biden, criticized Trump for his Fed comments, insisting the central bank be free of political pressure when formulating monetary policy.

Brown’s stance was considerably more nuanced than Trump’s — though equally unlikely to move the dial on monetary policy.

“Chair Powell has made it pretty clear that the necessary conditions for the Fed to achieve its full employment objective is low and stable inflation. Without low and stable inflation, there’s no way to achieve full employment,” said Mark Zandi, chief economist for Moody’s Analytics. “He’ll stick to his guns on this. I don’t see this as having any material impact on decision making at the Fed.”

To be sure, while it’s most likely a reaction to a changing tone from some Fed officials and a slight shift in the economic data, market expectations for monetary policy have altered a bit.

Traders have made peace with the three-quarter point hike next week. But they now see just a 36% chance for another such move at December’s Federal Open Market Committee meeting, after earlier rating it a near 80% probability, according to CME Group data.

That change in sentiment has come following cautionary remarks about overly aggressive policies from several Fed officials, including Vice Chairman Lael Brainard and San Francisco regional President Mary Daly. In remarks late last week, Daly said she’s looking for a “step-down” point where the Fed can slow the pace of its rate moves.

“The democratization of the Fed is the issue for the market, how much power the other members have versus the chairman. It’s difficult 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 the politicians, which is to be expected.”

A Fed spokesman acknowledged that Powell received the Brown letter and said normal policy is to respond to such communication directly. In the past, Powell has been generally dismissive when asked if political pressure can factor into decision making.

Along with the nudging from Brown, Powell also has faced criticism from others on Capitol Hill.

Sen. Elizabeth Warren, the ultra-progressive Massachusetts Democrat and former presidential contender, has called Powell dangerous and recently also warned about the impact rate hikes could have on employment. Also, Sen. Joe Manchin, D-W. Va., last year criticized Powell for what was seen as the Fed’s flat-footed response to the early rise of inflation.

“I don’t necessarily think that Powell will buckle to the political pressure, but I’m wondering whether some of his colleagues start to, some of the doves who have become hawkish,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Employment’s fine now, but as months go on and growth continues to slow and layoffs begin to increase at a more notable pace, I have to believe that the level of pressure is going to grow.”

Payroll gains have been strong all years, but a number of companies have said they are either putting a freeze on hiring or cutting back as economic conditions soften. A slowing economy and stubbornly high inflation is making the backdrop difficult for the November elections, where Democrats are expected to lose control of the House and possibly the Senate.

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

“He knows the pressure. He knows that the politicians are increasingly nervous about losing their seats,” Krosby said. “There’s very little he could do at this point, by the way, to help either party.”

Goldman Sachs CEO David Solomon and JPMorgan CEO Jamie Dimon both expect a U.S. recession as a tight labor market keeps the Federal Reserve on an aggressive monetary policy tightening trajectory.

Speaking on a panel at the Future Initiative Investment conference in Riyadh, Saudi Arabia on Tuesday, Solomon said he expects economic conditions to “tighten meaningfully from here,” and predicted that the Fed would continue raising interest rates until they reached 4.5%-4.75% before pausing.

“But if they don’t see real changes — labor is still very, very tight, they are obviously just playing with the demand side by tightening — but if they don’t see real changes in behavior, my guess is they will go further,” he said.

“And I think generally when you find yourself in an economic scenario like this where inflation is embedded, it is very hard to get out of it without a real economic slowdown.”

The Fed funds rate is currently targeted between 3%-3.25%, but Federal Open Market Committee policymakers have signaled that further hikes will be needed, with U.S. inflation still running at an annual 8.2% in September.

Philadelphia Fed President Patrick Harker said last week that the central bank’s policy tightening to date had resulted in a “frankly disappointing lack of progress on curtailing inflation,” projecting that rates would need to rise “well above 4%” by the end of the year.

Meanwhile, the U.S. Department of Labor reported 10.1 million job openings in August, signaling that employers’ demand for workers, though falling sharply, remains historically high.

Central bank policymakers hope that a cooling labor market will translate to lower wage growth, which has been running at its highest rate in decades and signals that inflation has become embedded in the economy.

“So I too am in the camp that we likely have a recession in the U.S. … I think most likely we might be in a recession in Europe, and so until you get to that point where you see a change — whether it’s in labor, the demand side — you are going to see central banks continue to move on that trajectory,” Solomon added.

U.S. GDP contracted by 0.9% in the second quarter of 2022, its second consecutive quarterly decline and a strong signal that the economy is in recession.

Fellow Wall Street titan Dimon agreed that the Fed would likely continue hiking rates aggressively before pausing to allow the data to begin reflecting its efforts to rein in inflation, but struck a similarly pessimistic tone on the outlook for economic growth.

“But American consumers, eventually the excess money they have is running out. That will probably happen sometime mid-year next year, and then we will know more about what is going on with oil and gas prices and that kind of thing, so we will find out,” Dimon said.