Federal Reserve Chair Jerome Powell told lawmakers on Tuesday during his confirmation hearing that it is time to wind down the central bank's aggressive pandemic-era policies.
"I would expect that this year, 2022, will be a year in which we take steps towards normalization," said Powell before the Senate Banking Committee. "That will involve raising the federal funds rate. That will involve ending asset purchases in March."
It could also mean winding down the Fed's $9 trillion balance sheet later in the year, he added.
The comments give credence to a growing consensus among Fed officials that near-zero interest rates and monthly asset purchases are no longer necessary to the economy, and indeed could be hurting it by fueling some of the highest inflation gains in decades.
Powell tempered these remarks by noting that the Fed should remain "nimble" as the pandemic continues to impact the economy. "It's a long road to normal from where we are," he said.
The chair also stuck to his guns on the ultimate cause of inflation during the pandemic. While Powell is no longer using the word "transitory" to describe the phenomenon, he maintained that COVID-related supply chain constraints are still the primary reason inflation is surging.
"We can affect the demand side. We can't affect the supply side, but this really is a combination of the two," he said.
In other words, the Fed can potentially reduce overall demand in the economy by hiking interest rates, but it can't relieve shortages of semiconductors or add capacity to backed-up ports.
With this in mind, Powell pointed out that neither of the Fed's main policy objectives — price stability and full employment — take precedence over the other, which are often placed in tension with one another.
Powell, for instance, has been a vocal advocate for tightening labor markets and increasing job gains among minorities that tend to experience more severe unemployment.
But making these more inclusive job gains requires a "long expansion" of the economy, he said, which could butt up against the Fed's price stability goals over time.
"To get a long expansion, we're going to need price stability," he said. "In a way, high inflation is a severe threat to the achievement of maximum employment and to achieving a long expansion to give us that.
Climate and Ethics
Macroeconomics wasn't the only topic under discussion at the hearing.
Lawmakers, particularly Republicans, also pushed Powell to address what they saw as the Fed overstepping its mandate by wading into highly politicized issues such as climate change and racial justice.
Sen. Pat Toomey (R-Pa.) criticized the Fed's efforts to incorporate climate change risk into its role as banking regulator. He even threatened Powell with legislative action if the Fed didn't change course.
"Let me be clear. If this politicization continues unchecked, it will not end well for the Fed or for independently driven monetary policy," he said. "As the Fed's leader, I hope you take this seriously and reign it in to protect the Fed's legitimacy and independence."
Powell nonetheless stood by plans to begin looking at how climate change could impact the banking system.
"We are looking at climate stress tests," he said. "Climate stress scenarios at this stage are really about ensuring that the large financial institutions understand all of the risks that they're taking, including the risk that may be inherent to their business model regarding climate change over time."
Democrats also pushed Powell on the recent ethics scandal at the Fed over conflicts of interest around personal investment decisions, which has led to sevel high-profile officials stepping down over the past year, including Vice Chair Richard Clarida this week.
"Recent revelations about the Fed’s ethics scandal have confirmed a lot of people’s worst suspicions about government officials," said Sen. Sherrod Brown (D-Ohio), head of the committee. "As Chair of the Fed, Mr. Powell has a responsibility to restore that trust."
Powell said the Fed's new ethical guidelines are nearly complete and will be among the most stringent in the world.