As policymakers kicked off their latest Federal Open Market Committee meeting, US Senator Rick Scott, a Republican and possible 2024 presidential candidate, demanded in a letter to Powell that the Fed chief address the failures and malfeasance behind the collapse of SVB and other US lenders, and name the individual s being fired. Democratic US Senator Elizabeth Warren, a longtime Powell opponent, said she had lost confidence in San Francisco Fed President Mary Daly, whose bank was responsible for supervising SVB.
The Fed has said it will finish its review of SVB supervision by May 1 and that it will be released to the public.
The US central bank will release its policy statement and new economic projections from Fed officials at 6 pm GMT on Tuesday, as well as turbulence in the financial markets and banking system.
Banking stocks that lost 20 per cent of their value over the past two turbulent weeks appeared to have found some footing in the wake of the Fed's latest manoeuvre on a Sunday evening to restore confidence in the financial system.
The yields on Treasury securities that had plummeted in a flight-to- safety flight-to- safety by investors have also clawed back some of that ground. Powell has said everything - and how he says it - could determine if that nascent calm holds.
Market expectations are tilted heavily towards the Fed approving another quarter-of-a-percentage rate increase, which would lift its benchmark overnight interest rate -- the federal funds rate -- to the 4.75 to 5.00 per cent range. The rate increases are meant to slow spending on goods and services and lower inflation back to its annual 2 per cent target from a level more than double that.
A policy statement is less clear, but more important, is how a policy statement assesses the risks to the economy posed by the recent troubles in banking markets, how it characterizes the need for more rate increases, and how high officials think the target interest rate will rise by the end of the year.
As of December, Fed policymakers thought the fed funds rate might stop between 5.00 per cent and 5.25 per cent, but higher than expected inflation had led Powell to indicate that the stopping point might be even higher.
The SVB - implosion puts that scenario in doubt, and it will fall to Powell to explain how the pieces of a complicated puzzle fit together.
Economic data points toward one outcome while financial markets favor the opposite communication will be a challenge, as the Fed tries to explain what seems to be a no-win policy choice, said Ryan Sweet, chief US economist at Oxford Economics.
Raising rates might keep the focus on inflation but add to bank stress; pausing rate hikes until financial markets are settled may seem prudent, but it could also weaken the Fed's commitment to taming high inflation and make it appear as if the situation in the banking sector is worse than it is.
Former Fed policymakers have been weighing in from the sidelines, differing themselves over whether continued rate hikes or sudden pause poses the greatest risk.
Powell will have to navigate the amplified politics of the moment - and could get worse over time, according to Brian Gardner, chief Washington policy strategist for wealth management firm Stifel.
Gardner said that calls to break up the Fed or audit the Fed could be reemerge due to a high-profile bank failure and the memory of the Fed trading scandal. A bipartisan group of anti-Fed lawmakers could emerge on Capitol Hill because of the rise of populism among Republican lawmakers and the increased influence of progressives among Democrats.