Fed's Powell heads to Hill for hearing with inflation in focus

© Reuters. FILE PHOTO: Federal Reserve Chair Jerome Powell testifies during a Senate Banking, Housing and Urban Affairs Committee hearing at the Hart Senate Office Building in Washington, DC, U.S., September 28, 2021. Kevin Dietsch/Pool via REUTERS

(Reuters) - Federal Reserve Chair Jerome Powell will pledge to fight inflation when he testifies on Tuesday at a congressional hearing during which fast-rising U.S. prices will likely spark plenty of lawmaker questions and criticism.

Powell appears before the Senate Banking Committee at 10 a.m ET for consideration for a second four-year term as head of the Fed. Lael Brainard, currently a Fed governor, will be questioned by the same panel on Thursday for promotion to a four-year term as Fed vice chair.

The positions require majority approval by the full Senate, which is narrowly controlled by President Joe Biden's Democrats.

In prepared remarks for delivery at the hearing, Powell noted the economy's fast-paced recovery "despite the ongoing pandemic, giving rise to persistent supply and demand imbalances and bottlenecks, and thus to elevated inflation."

"We know that high inflation exacts a toll," he added, pledging to use the central bank's full suite of policy tools "to prevent higher inflation from becoming entrenched."

In December, the Fed decided to end its purchases of Treasuries and mortgage-backed securities - a legacy of its nearly two-year battle with the economic fallout of the pandemic - by March, and signaled it could raise rates three times this year.

Since then COVID-19 infections have surged to daily records, with hospitalizations rising and quarantining employees sapping an already stretched labor supply, and some observers expect the mismatch between supply and demand that is putting upward pressure on prices to intensify further.

Tuesday's hearing will be Powell's first chance to say how he sees those disruptions influencing his outlook for both the economy and monetary policy.

Investors and traders will be listening for new clues on when the Fed may begin raising interest rates https://www.reuters.com/markets/us/feds-bullard-says-first-interest-rate-hike-could-be-march-2022-01-06 and possibly reduce its more than $8 trillion in bond holdings to bring down inflation, now running more than twice the Fed's 2% target.

Financial markets are pricing in an aggressive response, with interest rate futures traders betting on four interest rate hikes this year.

Powell may face tough questions both from some Democrats, including Senator Elizabeth Warren who has said she opposes his renomination because she sees him as too easy on Wall Street, and from some Republicans who have publicly worried the Fed is responding too late to rising prices.