Macro Matters

Fed's Powell faces heated questions on trading, regulation and diversity

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Federal Reserve Chairman Jerome Powell takes his seat to testify before a Senate Banking, Housing and Urban Affairs Committee hearing on “The Semiannual Monetary Policy Report to the Congress” on Capitol Hill in Washington, U.S., July 15, 2021. REUTERS/Kevin Lamarque/File Photo

Sept 28 (Reuters) - U.S. Federal Reserve Chair Jerome Powell faced an uncharacteristically hostile congressional hearing on Tuesday in which lawmakers demanded more action in response to perceived lapses over everything from ethics and diversity to inflation and financial regulation, and a prominent Democrat said she would not back him for another term.

The most pointed moment came when Senator Elizabeth Warren of Massachusetts, a vocal critic of the Fed's oversight of Wall Street under Powell, called him a "dangerous man" to head the central bank.

"Renominating you means gambling that ... a Republican chair who has regularly voted to deregulate Wall Street won't drive this economy over a financial cliff again," Warren said during a hearing by the Senate Banking Committee. "I just don't think that's a risk worth taking."

For Powell his appearance before the committee - notionally to discuss the Fed's response to the coronavirus pandemic - was the latest chapter in one of the choppier stretches he has endured as the central bank's chief, just as the White House weighs whether to retain him in the role.

On Monday, two of the Fed's 12 regional reserve bank presidents announced their departures, weeks after they were revealed to have been active investors. Powell has launched a sweeping review of the rules governing Fed officials' financial dealings as a result, but it has not stopped the drumbeat of critics who say he should have acted more forcefully.

Senator Sherrod Brown of Ohio, the committee's Democratic chairman, said he would introduce legislation barring Fed officials from owning individual stocks.

Another Democratic Senator, Raphael Warnock from Georgia, said: "This is a blow to the image of the central bank." He asked Powell about what steps he is taking to protect the "impartiality" of the Fed.

And Republican Senator Steve Daines of Montana asked if Powell would agree to subjecting the heads of the quasi-private regional reserve banks to the Freedom of Information Act to allow for greater public scrutiny of their activities, something Powell said he would like to "reflect on."

Powell said the central bank is also examining the trades done by regional Fed presidents to make sure they were legal and in compliance with current ethics guidelines.

"Even if it appears to be the case that these trades were in compliance with existing rules, that just tells you the problem is the rules and the practices and the disclosure needs to be improved," Powell said in response to Warnock's question. "We will rise to this moment and address this."

COOL RECEPTION

Tuesday's hearing was a decidedly chillier environment than Powell has typically faced on Capitol Hill since taking over as Fed chair in early 2018. Powell has gone to greater lengths than his predecessors to cultivate relationships with Congress, an effort that insulated him early on when he faced the wrath of the man who appointed him, former President Donald Trump.

In addition to the ordeal over trading by Fed officials, lawmakers questioned Powell's rationale that inflation - running at roughly twice its targeted 2% pace - was "transitory" and pressed him on the Fed's "dismal failure" to improve diversity in its ranks.

The number of minorities in management positions had "barely budged" during Powell's tenure, Democratic Senator Robert Menendez of New Jersey said.

Powell said diversity was a "high priority" and, in response to a question from committee Chairman Brown, said he would welcome the appointment of a Black woman for the first time to the Fed's seven-member Board of Governors.

The next chapter of the leadership of the Fed remained in focus during the entire proceeding.

"You know Chair Powell, the elephant in the room is whether you are going to be renominated for a second term as Fed chair," Warren said before announcing she would vote against him if he were reappointed by President Joe Biden.

The Biden administration has not announced a decision on whether to reappoint Powell, whose term expires in February, nor on a slate of other vacancies and pending openings on the Fed board. One board seat is currently empty and both vice chair positions - for financial regulation and monetary policy - will come open between October and January.

The White House would not comment on Warren's remark that Powell was a "dangerous man" to run the Fed, but some outside observers lowered their expectations that Powell will be renominated.

"Confidence in the likelihood of reappointment ebbed a bit as time passed with no action from the White House, weakened some further when the controversy over trading by Dallas Fed President Kaplan and Boston Fed President Rosengren threatened to contaminate Powell, and took a dive today as Senator Warren went for the jugular, describing him as a 'dangerous man,' Evercore ISI Vice Chairman Krishna Guha wrote.

Reporting by Jonnelle Marte; Editing by Andrea Ricci, Dan Burns and Richard Pullin

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