How Elizabeth Warren became a thorn in Jay Powell’s side

Jay Powell, chair of the Federal Reserve, has earned plaudits from US president Joe Biden and others across the political spectrum as he heads into his second term in office.

But there is one figure whose criticism he cannot seem to shake off: Elizabeth Warren, the liberal Democratic senator from Massachusetts, former presidential candidate, and ardent critic of big banks and light-touch financial regulators.

During his confirmation hearing before the Senate banking committee on Tuesday, Powell was once again grilled by Warren, who has consistently been a thorn in his side since he took the helm at the Fed in early 2018.

As part of her failed campaign to deny Powell a second term in office last September, Warren went as far as telling the Fed chair he was “a dangerous man” because of his unwillingness to police Wall Street more aggressively.

And on Tuesday, Warren pressed Powell again over his handling of a trading scandal that has engulfed the Fed in recent months, calling on the central bank chair to provide “all available information” about personal financial transactions made by officials by January 17.

That demand was also made in a letter on Monday, sent by Warren in the wake of amended disclosures by Richard Clarida, the outgoing vice-chair, which came to light last week and suggested that he was much more active in financial markets than he had initially divulged.

The Fed announced on Monday that Clarida would be stepping down two weeks earlier than planned, and Warren suggested that under Powell’s watch, the central bank was still concealing key details about the scandal.

“I am deeply concerned that your continued refusal to release information about Fed officials’ trading is at odds with your stated commitment to address the scandal ‘forthrightly and transparently’,” Warren wrote. “It raises suspicions that the Fed may be failing to disclose the full scope of the scandal to the public.”

The fact that Powell was tapped for another term by Biden — and is widely expected to sail through the Senate confirmation process with widespread bipartisan support — marks a defeat for Warren.

“Warren had a very specific vision about much tighter government regulation of Wall Street generally . . . and she sees the recent track record of the Fed as not tough enough,” said Sarah Binder, political science professor at George Washington University.

It stands in contrast to her successful effort in 2013 to persuade Barack Obama not to choose Lawrence Summers, the former Treasury secretary and Harvard University economist, to head the Fed.

Whereas back then Warren was able to shape the president’s decision by enlisting other influential members of the banking committee to the cause, including Sherrod Brown, the Ohio senator who now chairs the panel, hers was mostly a lone effort against Powell this time around.

Brown has accepted Biden’s choice. The only other public dissenters among Senate Democrats have been Sheldon Whitehouse of Rhode Island and Jeff Merkley of Oregon, who said they could not support Powell because of his weakness on climate issues.

Policy analysts say that Warren was unable to overcome Powell’s astute political skills in retaining support on Capitol Hill, and divisions among Democrats about what they wanted from the Fed in the first place.

“The liberals, they wanted an expansive monetary policy and that is what they got, where the focus is on full employment during the pandemic,” said Ben Koltun, an analyst at Beacon Policy Advisors.

“That was not necessarily enough for the people who were looking to change the window of what the Fed can do in terms of racial inequality or in terms of banking regulations . . . and that is where the Warren progressive archetype leans forward,” he added.

But even if Powell is comfortably seated for another term as Fed chair starting early next month, Warren’s pressure has not been for nothing. Biden spoke to the senator as he deliberated on the top Fed roles, and is widely expected to tap Sarah Bloom Raskin, the former deputy US Treasury secretary, to be Fed vice-chair for supervision.

Raskin has been the preferred choice of the progressive left for the role, which is the top financial regulatory post at the US central bank.

Meanwhile, the top ranks of the Biden administration, including key economic and regulatory jobs, are peppered with Warren allies and former aides, so her influence remains strong.

Warren’s criticism of the Fed has also been evolving — and may continue to do so. For most of last year, it was almost solely focused on financial regulation, and starting in the autumn she began training her sights on the trading scandal.

In October, Warren urged the Securities and Exchange Commission to open an investigation into what she deemed “ethically questionable” transactions by Fed officials that reflected “atrocious judgment”, and whether they “violated insider trading rules”.

On the monetary front, many Democrats have been comfortable with Powell’s pivot towards tighter policy to fight inflation, but if he steers the Fed rapidly towards higher interest rates, that could also turn into a new source of tension — and public clashes — with Warren and the left.

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