This hearing will be "overly focused" on former President Trump, and Powell will be interrogated on multiple fronts, with investors looking for clues about monetary policy.

Author: Xiao Yanyan

Source: JinShi Data

Federal Reserve Chair Powell will face a series of tough hearings on Capitol Hill this week, with Democrats and Republicans likely to question him about Trump's policies, including bank regulation and efforts to undo the diversity, equity and inclusion initiatives that have swept the Fed.

At 11:00 PM Beijing time on Tuesday, Powell will appear before the Senate Banking, Housing and Urban Affairs Committee and deliver his semi-annual monetary policy testimony.

At 11:00 PM Beijing time on Wednesday, Powell will deliver his semi-annual monetary policy testimony before the House Financial Services Committee.

As Powell delivers his semi-annual testimony, Trump's proposals on trade, taxes, immigration and regulation have also introduced uncertainty into the U.S. economic outlook, complicating the Fed's efforts to lower inflation and maintain a healthy labor market.

Pressure from Republicans has already led to changes at the Fed. Federal Reserve Vice Chair for Supervision Michael Barr said last month that he would step down from his role as the Fed's top banking regulator, paving the way for Trump to appoint his own regulators from among the other six governors.

The Fed has also sought to comply with Trump's executive order to rescind federal government DEI (Diversity, Equity, and Inclusion) policies, taking down a webpage on its website.

The Fed has failed to achieve its 2% inflation target since 2021, and lawmakers may push to raise that target. Inflation continues to make daily life unaffordable for many Americans, a decisive issue in the 2024 presidential election that concerns both parties.

House Financial Services Committee Chair French Hill said in an interview, "Many of our members have concerns about the Fed's policies in the post-pandemic period."

Sarah Binder, a senior fellow at the Brookings Institution in Washington, said the hearings would be "highly contentious." She said that while the Fed tends to avoid partisan debates, "it can't insulate itself" because it needs public support for its monetary and regulatory policies.

Powell has long sought to build good relationships on Capitol Hill, and with Trump potentially returning to the White House, he is particularly keen to maintain good relations with many Republican lawmakers.

As for Trump, he criticized the Fed after its recent decision to hold rates steady, but later said he might not intervene. On February 2, he said keeping rates stable was the "right thing to do." Treasury Secretary Janet Yellen said in an interview last week about Powell, "I believe he will do the right thing, so there will be no criticism."

Here are some of the key issues Powell may face at the hearings.

Monetary Policy

After cutting the benchmark rate a total of one percentage point last year, Fed officials have said they want to take a breather and assess the economy. Powell has no reason to deviate from this message.

The January jobs report was robust, with the unemployment rate falling to 4%, and inflation remains well above the Fed's target, rising 6.4% last year.

However, some Democrats may question Powell about Trump's tariff threats against Canada and Mexico and their potential impact on economic growth and inflation. Powell has been guarded in his comments on Trump's policies, but may face pressure to articulate them more clearly.

Derek Tang, an economist at LH Meyer, a policy analysis firm in Washington, said, "The silence strategy becomes increasingly fragile when we now have real policies to assess."

If Powell does comment on the tariff issue, it could prompt questions from Republicans about why he did not speak out about the inflation risks posed by the pandemic relief spending under President Biden.

House Financial Services Committee Chair Hill said "many" committee members believe Powell "should have publicly opposed the significant increase in spending."

The Arkansas Republican also said the Fed is set to review the monetary policy framework it introduced in 2020, which is an issue he is focused on.

Hill said, "The Fed's assessment of its inflation target, and its inflation analysis and planning, whether it's at the Eccles Building or up here on Capitol Hill, is what people are most concerned about. So I think that will be a key point."

Diversity, Equity and Inclusion

Democrats may press Powell on the Fed's apparent steps to comply with Trump's executive order aimed at rescinding federal government DEI policies.

Under the Dodd-Frank Act, the Fed and several other financial institutions have diversity and inclusion obligations. Powell has said the Fed is working to align its practices with the "appropriate and legally applicable" DEI executive order.

Maxine Waters, the top Democrat on the House Financial Services Committee, played a key role in supporting the diversity-related requirements in the Dodd-Frank Act.

She wrote to the Justice Department and other agencies last month, saying Trump's executive order "cannot supersede the requirements of the Dodd-Frank Act, federal anti-discrimination laws, or the constitutional rights of employees."

According to congressional aides, Democrats may question Powell about his views on the Fed's independence given the DEI-related actions, Barr's resignation, and the Fed's withdrawal from a climate research group.

Bank Regulation

Trump unleashed a deregulatory push at federal agencies, including those that regulate banks.

Travis Hill, the acting FDIC chair appointed by Trump, issued a statement in January that included "a comprehensive review of regulations, guidance, and manuals" to ensure they promote economic growth.

Republicans in the House and Senate may probe Powell to see if he endorses certain aspects. Tim Scott, the Republican Senate Banking Committee chair from South Carolina, has said his staff will emphasize the compliance costs that burden small banks.

According to the spokesperson, Scott is also interested in other topics, including unfinished bank capital proposals and so-called "de-banking," the practice of denying banking services to some individuals and businesses.

Powell may temporarily avoid discussing new regulatory initiatives, saying he is waiting for the White House to appoint a new vice chair for supervision. The Fed has said it will not make major rules until Barr's successor is confirmed. However, lawmakers are expected to seek Powell's views.

FDIC acting chair Hill said, "The responsibility for bank regulatory decisions rests with the entire board, and he is the chair of that board."