By Howard Schneider

WASHINGTON, (Reuters) – A U.S. Senate Committee holds hearings for Jerome Powell, Federal Reserve Chair and Lael Brainard, the vice-chair nominee. These hearings could give new information about the U.S. central banking’s plans to tighten monetary policies but also open up for discussion in coming weeks regarding its role in addressing disparate issues such as climate change or racial inequalities.

The Senate Banking Committee will hear Powell’s request Tuesday to consider a second four-year term at the Fed. Brainard (currently a Fed Governor) will be asked by the panel Thursday to see if the Fed vice chairman position can be promoted. These positions must be approved by the Senate. The Senate is controlled narrowly by Democrats.

These jobs are the most critical in both the U.S. economy and the global one. The Fed will discuss its plans to raise interest rates, possibly reduce the $8 trillion of bond holdings and curb inflation which has exceeded the central bank’s target of 2%.

Biden is now facing political problems as price hikes have eroded wage gains and are cited as the result of Biden’s aggressive spending. Democrats also acknowledge the fact that this shows the economy has not been opening as smoothly as it should.

In December, Fed officials indicated plans to increase policy more quickly than was expected. A rate rise could be possible as early as March. It wasn’t until it was clear how quickly the Omicron coronavirus variant would spread that the Fed had made plans to tighten policy faster than expected. This week, Powell and Brainard will have the opportunity to discuss how this current outbreak and subsequent disruptions in school and commerce have affected their outlook.

If anything, economists have been more hawkish in their views and they are now more convinced that the Fed would act sooner and faster to curb rising prices that don’t seem to be slowing. A Reuters survey of economists found that the Consumer Price Index rose by about 7% to December, compared to a year ago. This is a new high since the inflation panics in the 1970s and 1980s. Data will be available on Wednesday.

Recent comments by Oxford Economics economists Nancy VandenHouten and Kathy Bostjancic stated that “The Fed’s growing discomfort at higher inflation is currently outweighing any worries about downside risks from Omicron variant,”

It is clear that financial markets want a Fed willing to act more aggressively in response to inflation.

The bond markets are quickly adjusting to a more favorable interest rate environment. Yields on Treasury securities have been rising and bondholders suffered severe losses during the first week in 2022. Stocks and cryptocurrencies, which are riskier assets with little experience in a tightening Fed cycle, have seen their prices drop as well.

FAMILIAR FACES

Biden made the decision to nominate two Washington policy and Fed policy experts to the top jobs at the central banks. It was also a vote to ensure continuity and bipartisanship during a critical time for U.S. recovery following the pandemic. Although it is incomplete, the U.S. economy has been hampered in several ways by rising prices and disruptions to its supply chain. Also, some employees are reluctant to work.

Both Powell (a Republican) and Brainard (a Democrat) are well-known Capitol Hill personalities who cleared previous votes. They worked closely with the Fed on its massive response to the coronavirus crises and, more recently, collaborated in plans to end those support programs when inflation rose.

The nominations signal that there is change. As a Fed Governor, Brainard was vocal about how the central bank must analyze and eventually address potential impacts climate change may have on financial institutions and equity values. These views align well with Biden’s and would make her a better vice-chair.

Biden will also be a nominee for the vice chair position in financial regulation. This appointment is expected to increase the central banks importance on climate issues and others like the effects of inequality on economic growth. It may even produce the first female majority Fed board.

Brainard may be asked questions by Republicans about her views on climate change. Powell could face difficult questions from Democrats like Senator Elizabeth Warren who already plans to challenge his nomination because of what she considers a lax approach to regulation big banks.