This month saw the Dow Jones Industrial Average, S&P 500, and the NASDAQ Composite post their worst weekly losses since 2020 — when the pandemic began. This has many Americans concerned, while recent sentiment on Wall Street has seemed to be optimistic.
According to MarketWatch, questions about market crashes are trending on Google as people begin to wonder what the future holds as stocks continue to decline. The equity market was not alone in taking a hit, as the value of Bitcoin declined 50% on Jan 22.
After two years of easy money policies, the Federal Reserve confirmed Wednesday that interest rates would soon be on the rise, fueling a major market decline this week.
Stocks and cryptocurrency aren't the only topics that have Americans worried, as the effects of the Omicron variant are bringing into question the recovery of the U.S. economy.
Economists expect employment in January to drop for the first time in over a year, worsening an ongoing labor shortage. Inflation continues to rise, with the Consumer Price Index increasing 7% year-over-year and could get worse if new variants continue to cause supply chain issues.
With a growing list of economic concerns, members of the U.S. government are looking to the Federal Reserve (Fed) — which manages monetary policy — for solutions.
Chairman Powell questioned on inflation
However, the Fed’s ability to provide solutions has come into question this week.
On Nov. 22, President Joe Biden renominated Jerome Powell to continue in his position as chairman of the Federal Reserve. While U.S. presidents traditionally don’t change the Fed chair, renominating Powell drew criticism from some. Progressive Democrats called for a new Fed chair, saying that Powell has watered down Wall Street regulations. During his confirmation hearing, members of Congress questioned how the policy of the Fed would change in the face of rising inflation and new coronavirus variants.
Powell said that inflation will remain at elevated levels through most of 2022 and that the most efficient way to combat inflation is to solve supply chain issues, not necessarily change monetary policy. He also said that the other primary cause of inflation was a slow return to the workforce, even though the unemployment rate has fallen 2.8% year-over-year and has dropped well below its high of 14.7% during the pandemic.
These answers weren’tgood enough for some members of Congress, such as Republican Senator Richard Shelby who said he was “concerned that the Fed missed the boat on addressing inflation sooner,” and that “as a result of that, the Fed has lost a lot of credibility.” Powell stood firm on his stance that the current rise in prices is transitory and that most of the current problems are due to the economy quickly re-opening from the pandemic.
Democrat Senator Elizabeth Warren (Mass.) also questioned Chairman Powell’s leadership of the Fed. During Powell’s renomination hearing she not only asked why the Fed had not acted on inflation but also on the consolidation of wealth in the U.S. and why it’s “important for the Fed to assess risks related to climate change.”
At the end of her questioning, Warren stated that neither Powell nor anybody from the Fed responded to her request for more information about what actions they were taking after the Fed’s recent insider trading scandal.
This isn’t the first time Warren has been at odds with Powell. Late last year, Warren called Powell a “dangerous man” over his willingness to deregulate Wall Street and said that she wouldn’t approve his nomination to continue leading the Fed.
Change coming to the Fed
Despite his rhetoric that inflation is transitory, Powell said during his renomination hearing that the Fed will move to shrink its balance sheet “sooner and faster.”
During the height of the pandemic, the Fed was purchasing assets in order to inject money into the economy. Currently the Fed has a balance sheet of over $9 trillion which, in Powell’s words, is “far above where it needs to be.” During Wednesday’s Federal Open Market Committee (FOMC) meeting, Powell stated that asset purchases will end in early March and assets will be sold off when appropriate.
During his statements at the FOMC meeting, Powell also indicated a willingness to raise the federal funds rate in order to lower inflation. Still, Powell gave no exact guidance on when interest rates would be changed, and by how much.
This continued lack of guidance has some on Wall Street worried, as high-growth stocks, such as technology stocks, perform better in lower-rate environments. A slowdown of liquidity could also negatively affect other assets such as cryptocurrency and Special Purpose Acquisition Companies (SPACs).
Special purpose acquisition companies have recently overtaken traditional IPOs as the more popular investment route. Despite their rise, questions about their reliability remain.
Investors aren’t the only ones concerned, however, as an increase in rates would affect the everyday consumer as well. A hike in interest rates would raise the monthly payments on loans and other debts, hurting those already struggling with rising prices for commodities such as food. Though the Fed is providing no clear guidance on how much they’ll be raising the federal funds rate, Jan Hatzius, the chief economist at Goldman Sachs, predicts four quarter-point increases in 2022.
Changes will also be coming to the Fed’s leadership. President Biden has announced two new nominees to the Fed’s Board of Governors — Lisa Cook and Philip Jefferson. Both have expressed a desire to combat inflation and ensure that workers benefit from economic growth.
If both are approved by the Senate, they’d be two of only five African American members of the board of governors to serve in the Fed’s history. Biden also nominated former Federal Reserve Governor Sarah Bloom Raskin for the position of vice chair for supervision. All three will have nomination hearings Feb 3.
Whether in the form of policy or personnel, it seems that change is coming to the Fed, and investors and consumers alike are eagerly awaiting to hear what exactly those changes will be as inflation climbs.
Jabril Al-Hamdy is a sophomore finance major. Contact Jabril at: alhamdjk@dukes.jmu.edu