Poof! And suddenly they’re gone.
Two members of the Federal Open Market Committee (FOMC) who were in good standing at the meeting less than two weeks ago won’t be taking part when the policy-setting panel meets in November. This doesn’t happen every day.
Robert Kaplan, head of the Federal Reserve Bank of Dallas, said he is resigning after disclosure that he made multiple million-dollar stock trades while the Fed was inflating stock markets with its asset purchases. Boston Fed chief Eric Rosengren also stepped down after much more modest trades were revealed, citing health issues.
Both men were nearing retirement anyway, but the burgeoning scandal has already tarnished the Fed’s reputation and may cost Chairman Jerome Powell a second term.
Escalating Controversy; Sticky Inflationary Risks
And it’s not over. Over the weekend it emerged that Fed Vice Chairman Richard Clarida shifted anywhere from $1 million to $5 million from bonds to stocks in February 2020, the day before Powell announced the onset of COVID-19 could lead to massive monetary stimulus from the central bank.
Just a coincidence, says the Fed. A remarkably well-timed coincidence.
None of this bodes well for Powell being renominated, even as allies have marshaled support for him. The Wall Street Journal editors even suggested that President Joe Biden’s nomination of Cornell professor Saule Omarova to head the Office of the Comptroller of the Currency—the most important bank regulator after the Fed itself—was to appease progressives so that he could reappoint Powell.
Omarova, who grew up in the Soviet Union, recently went on the record calling for an end to banking as we know it by centralizing deposits in the Fed. Critics are saying her nomination—which took the administration nine months to settle on—faces what is mildly called a rocky path to confirmation in a 50-50 Senate. Progressives may end up being disappointed and demand Powell’s head.
During a hearing last week, Senator Elizabeth Warren, the scourge of banks, called Powell “a dangerous man to head up the Fed” and pledged to vote against his re-nomination. Her critique is that Powell has moved too far toward deregulation of banks. She worried that he will “drive this economy over a financial cliff again.”
Somewhat lost in the controversies over personnel is the growing feeling that inflation is not transitory. Powell himself acknowledged in a panel discussion last week that the rate of price increases is lasting longer than he anticipated and will continue into next year.
Harvard economist Larry Summers, perhaps feeling that a prophet is without honor in his own country, took his warnings on inflation to a more receptive audience in the German financial daily Handelsblatt. He reiterated in a weekend interview that inflation risks in the US and globally are being underestimated. He compared the risks now to those that built up in the US toward the end of 1960s, leading to the stagflation of the 1970s.
The personal consumption expenditures price index rose 0.4% on the month in August, and 4.3% on the year, the biggest gain since 1991, according to data released on Friday. The core PCE index, which excludes food and energy costs and is the Fed’s preferred measure for inflation, was up 0.3% on the month and 3.6% on the year.
But the main issue, it being Washington, DC, is politics. Powell’s renomination, as the Warren rebuke demonstrates, has been caught up in the political divide among Democrats, with progressives battling moderates for the soul of the party.
As economist Ed Yardeni quipped, it may be Powell’s tenure, not inflation, that turns out to be transitory.