On March 6, the House Financial Services Committee held a hearing entitled “The Federal Reserve’s Semi-Annual Monetary Policy Report.” The sole witness in the hearing was:
· The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve (Fed).
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways from both panels, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Today’s hearing focused on the Basel III proposal and general health of the economy in relation to inflation and the Fed’s interest rate goals. Members on both sides of the aisle expressed concerns with Basel III and urged the Fed to carefully consider negative feedback as they move through the rulemaking process.
- Chairman Powell emphasized his confidence that the Fed will reach broad consensus on Basel III. He said he expects there to be material changes to the proposal before any further discussion of its implementation. He declined to get into specifics on changes. Powell said the Fed is currently reviewing all comment letters but have not ruled out the potential to repropose Basel III.
- Representative Frank Lucas (R-OK) emphasized Basel III’s negative impact on ag and energy end-users and urged the Fed to work with the Commodity Futures Trading Commission (CFTC) to ensure the proposal does not limit access to risk management tools.
- Representative Bill Foster (D-IL) raised questions about the magnitude of the Basel III’s cumulative impact on end-users and its implications for banking regulations internationally. Representative Ritchie Torres (D-NY) raised concerns about the apparent contradiction between the Fed’s assurances of a well-capitalized banking system and the Basel III Proposal’s assumption of an undercapitalized banking system.
SUMMARY
Opening Statements and Testimony
Committee Chairman Patrick McHenry (R-NC)
- Vice Chairman Michael Barr’s so-called holistic review of capital requirements and the fatally flawed Basel III Endgame proposal represent a concerning trend of partisan proposals taking priority over traditional supervision requirements. We saw serious lapses in supervision by the Fed in recent bank failures, and yet the Fed is focused on making new proposals. Members on both sides of the aisle have made clear that Basel III would be catastrophic for families, communities, and small businesses. Regulators should withdraw it and start over.
Committee Ranking Member Maxine Waters (D-CA)
- I am pleased about the progress the Fed has made in bringing down inflation, but the U.S. is not out of the woods yet. Until we address the underlying housing supply shortage, Americans will continue to pay an increasing share of their income on housing, the affordability crisis will worsen, and inflation will remain too high.
Representative Andy Barr (R-KY)
- While I am pleased that the Fed is resolved in getting inflation back under control, I am not pleased by the numerous recent unjustified, politicized, and under analyzed regulatory proposals. The Fed needs to withdraw and re-propose the irredeemably flawed Basel III proposal, especially given that 97 percent of public comments across the ideological spectrum expressed disapproval.
Representative Foster (D-IL)
- The U.S. economy is in a healthy place and is recovering since COVID. Manufacturers alone have added nearly 800,000 jobs employing more workers now than any point since 2008. The fiscal response that the Fed engaged in was appropriately tailored, and the soft landing is within sight.
Jerome Powell, Chairman, Federal Reserve
- Economic activity expanded at a strong pace over the past year. For 2023, GDP increased 3.1 percent, bolstered by solid consumer demand, and improving supply conditions. Inflation has eased notably over the past year but remains above the Federal Open Market Committee’s (FOMC) longer-run goal of 2 percent. The FOMC does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.
Discussion
McHenry (R-NC): What is the status of the Basel III proposal, and is the Fed listening to the comments which have been overwhelmingly negative? Powell: The Fed is confident that the final Basel III proposal will have broad support and will have broad and material changes before its final form. We have not decided if it will be best to repropose Basel III, but the Fed has not ruled that out.
Hill (R-AR): If the Fed were to repropose the Basel III, would the Fed delay then the long-term debt proposal that is on the table? Powell: We are considering how these proposals would interact.
Lucas (R-OK): The SEC’s Treasury Market Structure Rule, which will increase the cost of clearing and liquidity, comes at a bad time as the Basel III proposal will make central clearing costs for derivatives increase by 80 percent. Will you work with the CFTC to address these issues for derivatives end-users? Powell: Yes, we are aware of how this will impact derivatives markets and are taking that under careful consideration.
Huizenga (R-MI): How are you evaluating the impact of the cumulative impact of Basel III with the Fed’s Annual Stress Tests? Powell: We are in the middle of deciding what to do about Basel III right now, and that is certainly an issue.
Wagner (R-MO): The overwhelming number of comments on the Basel III proposal were negative. Why is the Fed continuing to pursue this proposal? Powell: The Fed is looking at the comments and will adjust accordingly.
Barr (R-KY): Would a Basel III reproposal, implemented in a capital-neutral manner, avoid risking financial stability? Why did the comment period for Basel III end on the same day as the Fed’s data collection on the proposal? Powell: Yes. We are taking all comments into consideration.
Barr (R-KY): Do you think that Basel III would decrease market competition and increase systemic risk? Powell: I think it is a real concern.
Williams (R-TX): Can you elaborate on how the Fed is addressing Basel III? Powell: The comments were very detailed with analysis, which is what we wanted. We have not made any decisions, and we are in the process of examining the proposal.
Sherman (D-CA): Basel III will make it much harder to obtain loans from banks. Can you examine how Basel III treats clean energy tax credits much more harshly than Low Income Housing Tax Credits, for no ascertainable reason? Powell: Yes.
Loudermilk (R-GA): I have called for the withdrawal of the Basel III proposal entirely. Will you commit to an analysis of how bank capital proposals like Basel III affect small business credit access and small dollar lending before finalizing such proposals? Powell: The Fed will look at the issue.
Foster (D-IL): Have you collected enough data to estimate the magnitude of the effects of Basel III on end-users? Powell: It is difficult to examine the micro level as there would be multiple effects.
Davidson (R-OH): The Basel III proposal is harmful, and I hope the Fed withdraws it.
Rose (R-TN): Has the Fed discussed how Environmental, Social, and Governance (ESG) policies will play into capital requirements? Powell: No.
Steil (R-WI): Does the wide variety of industry groups concerned about Basel III concern you? Powell: Yes.
Torres (D-NY): How do you reconcile the Fed’s repeat assurances about a well-capitalized banking system with Basel III’s assumption of an undercapitalized banking system? Powell: Higher capital is always going to add to safety and soundness, and that is a fair question we are weighing.
Torres (D-NY): If the purpose of Basel III is to align U.S. banks with their banking peers elsewhere in the world, why is the Fed imposing requirements that are more stringent? Powell: The Fed would be exceeding the minimums with this proposal, and would be exceeding what other jurisdictions are imposing, so that is a fair question.