In the background, the Fed is contending with a surge in coronavirus cases and its heavier than expected economic fallout, which has exacerbated worker shortages, supply chain problems and inflation. Fed policymakers last week downgraded their year-end expectations for the labor market and economic growth, while also raising their estimates for inflation. All the while, central bankers must decide whether the economy will continue making progress and put the Fed in position to start easing, or “tapering,” its vast support for the markets.

“The Fed is clearly in damage-control mode given the issues around Rosengren and Kaplan’s resignations,” said Joe Brusuelas, chief economist at RSM. “Adding to that degree of difficulty is that Powell has to navigate the onset of tapering and his own renomination challenge that was vividly on display during today’s hearing.”

The series of events also risks damaging the public’s perception of the Federal Reserve. On Tuesday, Powell fielded questions from lawmakers on the Fed’s ethics and transparency in the wake of the revelations about Rosengren and Kaplan’s financial activities. Powell told members of the Senate Banking Committee that while trades by Rosengren and Kaplan fell in line with Fed guidelines, “the appearance is just obviously unacceptable.”

“That just tells you that the problem is that the rules, the practices and the disclosure needs to be improved,” he said. “We will rise to this moment.”

When it comes to inflation, prices for cars, food and other everyday goods are still rising, straining pocketbooks for households nationwide. The Fed has maintained that such high inflation is a temporary feature of the economic recovery and is largely tied to supply chains that need more time to clear.

But at Tuesday’s hearing, Powell said inflation is both broader and more structural than it appeared earlier in the year. He said the bottlenecks “have not only not gotten better, they’ve actually gotten worse,” pointing to traffic at the Port of Los Angeles.

A shortage of workers continues to weigh on some sectors, especially restaurants and other jobs with a lot of person-to-person contact, even though Fed officials and other economists previously said they expected the recovery would speed up this fall, with kids back in school and the expiration of enhanced federal unemployment benefits drawing more workers to the labor force. But rising coronavirus cases drastically slowed job growth in August, with the retail and restaurant sectors shedding workers. Fears of the virus also shook consumer confidence.

At their September policy meeting, Fed leaders tempered their expectations for the unemployment rate, projecting it to fall to 4.8 percent by the end of 2021, compared with a previous estimate of 4.5 percent. Officials also lowered estimates for the economy’s overall growth, projecting it at 5.9 percent by the end of the year, following a June forecast of 7 percent.

“What happened was, delta happened,” Powell said last week.

Many Fed officials say prices won’t fall significantly until supply chains clear up. Lael Brainard, a Fed governor, pointed in a Monday speech to builders who can’t get enough construction materials and to North American auto production, which was paused by shutdowns in Malaysia and Vietnam.

“One clear lesson is that we need to be humble about our ability to correctly anticipate future economic conditions given the unpredictability of the virus,” Brainard said. “We had expected a smooth rotation from goods spending to services spending during a complete reopening this fall, but delta has slowed this process.”

That reality contrasts with the way Fed leaders described their impressions of the delta variant in the summer. In his August speech in Jackson Hole, Wyo., Powell said that “while the delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment.”

In July, Powell said the delta variant could have fewer implications for the economy if it followed the pattern of previous COVID surges. He said that with much of the country vaccinated and less of a likelihood for shutdowns, “it seems like a good, going-in estimate would be that the effects will probably be less.”

“We’ve kind of learned to live with it,” Powell said at the time.

Granted, Fed watchers and economists say delta’s toll – for public health and the economy – is still coming into full view. Earlier this month, as the variant led to a surge of more than 150,000 new cases a day, mostly among unvaccinated Americans, the Biden administration announced new vaccine and testing rules for businesses with more than 100 employees.

Claudia Sahm, a former Fed economist and now a senior fellow at the Jain Family Institute, said that even if the delta variant is having a larger economic effect than initially expected, “what Powell said earlier is still true: The recovery is still happening.”

“It is entirely appropriate for them to be emphasizing risks now that weren’t getting the same degree of emphasis in the summer,” Sahm said. “The Fed is data driven. And so if the world changes, they need to change their narrative.”

Meanwhile, the Fed is also facing questions about its leadership. Powell’s term is up in February, and the White House has not signaled whether it will nominate him for a second term as chair. The Biden administration can fill up to four openings at the Fed in the coming months, and there is a growing expectation that the White House will unveil a slate of nominations at the same time.

During Tuesday’s Senate hearing, Warren became the first senator to oppose Powell’s nomination, pointing to the Fed’s moves to ease rules on the banking system put in place after the Great Recession. It’s not clear whether her remarks will have much sway over the White House’s decision-making. Treasury Secretary Janet Yellen has indicated she would support Powell’s nomination.

Warren did not specifically endorse other candidates. But she has praised Brainard, the Fed board’s lone Democrat who consistently voted against its moves to soften banking regulation, and has warned that less oversight of Wall Street, even in a healthy economy, is perilous.

“Your record gives me grave concern,” Warren told Powell. “And that makes you a dangerous man to head up the Fed, and it’s why I will oppose your renomination.”


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