HOUSE FINANCIAL SERVICES & SENATE BANKING COMMITTEE HEARINGS WITH FEDERAL RESERVE CHAIR POWELL
On June 24, the House Financial Services Committee (HFSC) held a hearing, entitled “The Federal Reserve’s Semi-Annual Monetary Policy Report,” with Federal Reserve (Fed) Chair Jerome Powell as the witness. Fed Chair Powell’s testimony is available here, with HFSC Chairman Hill’s (R-AR) opening statement available here.
On June 25, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing, entitled “The Semiannual Monetary Policy Report to the Congress,” with Fed Chair Jerome Powell again as the witness. Fed Chair Powell’s testimony is available here, with Senate Banking Chairman Scott’s (R-SC) opening statement available here.
Key Takeaways
- Fed Chair Powell highlighted that most measures of longer-term expectations remain consistent with two percent inflation beyond the next year. He said that once price stability is soundly restored, it gives the Fed the ability to react more strongly to downturns in the economy without having to worry about inflation. He discussed how the Fed could pivot to reducing rates if the tariff-related inflation many economists expect to arrive this summer is muted, or if the labor market softens.
- Chair Powell acknowledged ongoing uncertainty about policy effects and noted that tariff increases are likely to raise prices and weigh on economic activity. He cited the reported decline in consumer and business sentiment over recent months and elevated uncertainty about the economic outlook as largely reflective of trade policy concerns, but that remains to be seen how these developments might affect future spending and investment. He discussed how GDP edged down in the first quarter due to tariff-driven swings in net exports, though underlying demand remained solid, with private domestic final purchases rising 2.5 percent and investment rebounding despite moderating consumer spending.
- Chair Powell discussed that while the inflationary impact may be temporary, it could also prove persistent depending on tariff size and duration, alongside longer-term inflation expectations. He emphasized that the Federal Open Market Committee’s (FOMC) focus is to keep long-term inflation expectations well-anchored and prevent a temporary price level increase from developing into sustained inflation, balancing both elements of its dual mandate to support strong labor market conditions. He raised how FOMC maintained the federal funds rate at 4.25 to 4.5 percent and continued reducing Treasury and agency mortgage-backed securities (MBS) holdings, with a slower pace of runoff beginning in April to ensure a smooth transition to ample reserves.
- Chairman Hill (R-AR) emphasized that the Fed has deemed economic growth to be solid and dismissed rhetoric that a recession is near, criticizing the Biden administration for the highest inflation rates in decades driven by reckless spending and misguided policy decisions. He outlined how Governor Waller’s balanced approach, combining potential rate cuts with targeted tariffs, could still foster strong economic growth.
- HFSC Republicans, along with Banking Committee Chairman Scott (R-SC), commended the Fed’s removal of reputational risk as a factor in bank examinations and supervision. Banking Chairman Scott highlighted its removal as a necessary first step toward ending the politicization of bank supervision.
- Several Republicans questioned Chair Powell on potential reforms to the Supplementary Leverage Ratio (SLR) and Enhanced SLR (ESLR), including the treatment of Treasuries and reserves. Chair Powell confirmed that changes are under consideration and noted how the leverage ratio has raised the capital cost of intermediation, including in the Treasury market. He reiterated his longstanding support for leverage ratio reform and referenced a proposal to be released for public comment, which includes both a specific approach and an alternative considering the exclusion of Treasuries. He cited his agreement with Treasury Secretary Bessent that a binding leverage ratio discourages banks from low-margin, low-risk activities like Treasury intermediation and that reform should encourage more of it.
- In response to questions from Senators Lummis (R-WY) and Tillis (R-NC) regarding Fed policymaking and the Senate’s passage of the GENIUS Act, Chair Powell stated that it is great the Act is moving forward and cited the need for a stablecoin framework. Senator Lummis questioned Chair Powell on whether the Board plans to withdraw its January 2023 statement on Section 913, asking what changes have occurred around the risks of stablecoins since that adoption. Chair Powell responded noting how the industry has matured and become more mainstream, with the Fed revisiting and withdrawing many pieces of crypto guidance from that period.
HOUSE FINANCIAL SERVICES COMMITTEE DISCUSSION
Chairman Hill (R-AR): Given testimony that Q1 GDP growth was partly due to front-end loading of imports to avoid tariffs, does the Atlanta Fed’s GDPNow model forecast of nearly four percent GDP growth and two percent core GDP in Q2, suggest a recession to you? Powell: No, I do not, and no, it does not.
Chairman Hill (R-AR): Do you concur with Governor Waller on a pathway for positive economic outcomes, including potential rate cuts, if average effective tariff rates remain near or below ten percent, especially given that recent studies showing only modest price impacts from tariffs and long-term inflation expectations remain anchored near two percent? Powell: A range of paths are possible, and the one you mentioned is certainly among them. If inflation becomes weaker than expected or the labor market weakens, that suggests cutting sooner. Conversely, if inflation is higher or the labor market remains strong, that would suggest cutting later.
Chairman Hill (R-AR): Do you believe tariffs fall within your lane, but major fiscal spending proposals, like the 2021 American Rescue Plan, do not? Why did you choose to stay silent then but are speaking out now? Powell: We have not commented, and it would be inappropriate for us to comment on tariff policy. We would not do that just as we would not on the reconciliation package. Our job is keeping inflation under control and also keeping maximum employment. When policies have what appear to be short- and medium-term implications for that, then inflation, not policy, becomes our job.
Ranking Member Waters (D-CA): How may it take some time for tariffs to work their way through the supply chain, and when is it that we can see negative impacts to inflation from tariff policy? Powell: What is being sold at retail now might have been put into inventory before the tariffs in February or March. We should start to see this over the summer in the June and July numbers. If we do not, we are still learning. If we see less pass-through, with no real historical experiences to consult, it may turn out that the pass-through is less or more than we think. As we go through the summer, we should start seeing this. If we do not, we are perfectly open to the idea that the pass-through will be less than we think.
Representative Lucas (R-OK): Are you considering changes to the SLR and ESLR, including exempting Treasuries and reserves from these ratios? Powell: Yes, that is the idea. We have effectively raised the capital tax on all kinds of intermediation activities, and that includes Treasury market activity. I have long favored leverage ratio reform, and we are putting out a document for comment, which will seek comments on one particular proposal and an alternative to that proposal.
Representative Lucas (R-OK): Would allowing netting mechanisms for derivatives on Treasuries encourage market participation, and would you consider discussing this with your prudential counterparts? Powell: My first phone call on that would be to Vice Chair Bowman to ask her what she is planning, but I am certainly open to that conversation.
Representative Lucas (R-OK): What is the justification for why the FOMC decided against the first difference rule? Powell: There are five rules that we talk about there, and the first difference rule is the one that calls for a rate hike. The other four say that we are in the right place. The Taylor rules are generally very supportive of where we are. The first difference rule is a very interesting concept which has appeal, but it can be a little bit volatile too. Right now, it is calling for a rate hike. The other four are calling for us to hold our policy where it is.
Representative Velaquez (D-NY): Are two rate cuts by year-end still on the table, and what incoming data would FOMC need to see this quarter to support that consideration? Powell: What will happen with rates is going to depend on the path of the economy, and that is highly uncertain. A significant majority of FOMC feels it will be appropriate to reduce rates later this year, but there is also a significant minority that does not agree. Each of those persons who wrote down a cut in rates later this year thinks that there is some state of the world where inflation does not prove to be as high or the labor market weakens and that where some combination of those two things, it will turn out to be more likely than not appropriate to reduce policy rates, subject to great uncertainty.
Representative Huizenga (R-MI): Would it not make more sense for all forecasters to use the same fiscal policy assumptions, or at minimum disclose the assumptions used? Powell: When the Summary Economic Projection was originally designed and implemented, individuals were free to make whatever assumptions they wanted, and they do disclose them in speeches and similar settings. There will be situations where some incorporate something, and others do not. We try to be transparent, but that is how it works. When I say we do not take something into account, I am referring to policy at the FOMC level, where we will not take things into account until we know for certain.
Representative Huizenga (R-MI): Do you believe the Fed should lower interest rates to align with global central banks? If not, what specific factors, like full employment, tariffs, or prices, are holding that decision back? Powell: You are right that if you just look in the rearview mirror and at the existing data, you can make a good argument that it would call for us to be at a neutral level, which would be a couple of cuts or maybe more. The reason we are not are professional outside and Fed forecasts showing an expectation of a meaningful increase in inflation over the course of this year.
Representative Steil (R-WI): Did any new information or developments lead the Fed to remove reputational risk from bank exams yesterday rather than before? Powell: I am not aware of any new information; we just think it is the right thing to do. This is a problem that we came to understand over the course of the last couple of years and began considering. With reports of debanking and that sort of thing over the course of 2024, we came to the view that this was a serious problem that we need to address and said that publicly. Now we are doing this, as are the other agencies.
Representative Steil (R-WI): Have you observed any identifiable shift in how banks or other regulated entities are engaging with the digital asset space, particularly considering ongoing stablecoin legislation and its potential to expand global dollar use and Treasury demand? Powell: I do see there is a very significant change in the tone, and it really does reflect evolving thinking and the evolving status of the crypto industry. I would expect over time we will see more activity.
Representative Steil (R-WI): How is the Fed evaluating and overseeing banks or other regulated entities operating in the digital asset or crypto space? Powell: Our view is that banks get to decide who their customers are. That is not our decision. Banks are free to provide banking services to the crypto industry, and are free to conduct crypto activities, as long as they do so in a way that is protective of safety and soundness.
Representative Liccardo (D-CA): Can increasing tariffs on price inelastic goods, such as necessities, lead to broader price increases, even on items not directly subject to the tariffs? Powell: That is something that companies say they do. If they cannot cover the losses on the thing that is being tariffed, they will find other ways. We do not have prominent examples of that yet, but it is certainly a possibility and did happen in the last tariff episode.
Representative Fitzgerald (R-WI): Can you revisit the Fed’s rationale for the full half-point rate cut in September 2024? Are we in a position where it would be appropriate to cut by half-point again? Powell: If you just look at the basic data and not the forecast, we would continue cutting. Inflation and employment readings were similar then to now, but the key difference is that now all forecasters expect inflation to rise, particularly from tariffs, and we cannot just ignore that. This is about being prudent and careful as we wait and see. We are not overreacting but adapting as the data evolves. If inflation does not rise as forecast or if the labor market weakened, that would matter. For now, the economy is strong, and we can take a break. We do what we think is right when we think it is right. We do not consider political factors. Once you start doing that, where does it stop?
Representative Fitzgerald (R-WI): Is supply chain data part of the information the Fed reviews when making decisions about the future path of monetary policy? Powell: Very much so. It is a great lesson to be taken from the last episode that supply chains really matter. We are watching that carefully. It is too soon to say as we are not seeing it yet.
Representative Gottheimer (D-NJ): Should the SEC or other regulators consider treating fully reserved, dollar-backed stablecoins as cash equivalents for accounting or financial reporting purposes? Powell: It is a great thing that bills are moving. We need a stablecoin framework. On that particular issue, I do not have a view for you but can come back to you.
Representative Gottheimer (D-NJ): How do you assess the sustainability of U.S. debt as interest payments are projected to reach $1 trillion by FY2026 and nearly $1.8 trillion by FY2035? As borrowing continues and major foreign buyers like Japan reduce bond purchases, how does this influence your decision to hold or cut rates, and are you concerned about the broader global implications? Powell: Fiscal policy is not our job, and it is not something we take into consideration in making monetary policy. That is really elected people’s jobs. For some time now, U.S. federal fiscal policy has been on an unsustainable path, and I will limit myself to that.
Representative Flood (R-NE): Do you agree with the Treasury Secretary’s view that SLR reform could positively impact the Treasury market? What is the rationale for not excluding Treasuries from the SLR calculation in the proposed rule? Powell: I agree that when the leverage ratio is binding, it discourages banks from undertaking low-margin, safe activities such as intermediation in the Treasury markets. This should encourage more intermediation. I do not have a numerical estimate of how much that would matter but think it would matter. I have supported the leverage ratio reform for a very long time and since before 2021. We are seeking comment on a particular proposal that does not involve exclusion, but we are also asking a question about exclusion.
Representative Flood (R-NE): Did any safety and soundness or financial stability issues result from the temporary exclusion of Treasuries from the SLR, and if not, why was that relief ended in 2021? Powell: That was an emergency measure from the beginning and end. My long-held view is that we should have permanent measures, and now we are going to.
Representative Lawler (R-NY): Do you believe that we are in a position where we may be able to cut rates in July? Powell: If it turns out that inflation remains contained, then we will get to a place where we cut rates sooner rather than later. I would not want to point to a particular meeting. I do not think we need to be in any rush because the economy and labor market are still strong, and the labor market is strong.
Representative Lawler (R-NY): Would you agree that the September 2018 Teal Book assessment of seeing through tariffs’ inflationary effects is appropriate so long as inflation expectations are anchored and pass-through costs are short-lived still applies today? Powell: Those are the exact factors that we cite when we talk about this situation, plus the size of the tariffs.
Representative Lawler (R-NY): If these conditions hold, is it not unreasonable to think that underlying inflation trends should continue toward two percent? Powell: That is certainly a very defensible position. This is a question we need to be careful with because the difference is that in 2018, we had not had inflation as high as two percent for a decade. This is a different situation. We have not fully restored price stability, and if there is a meaningfully large and sustained inflation shock, we have to be careful about that. We are just trying to be careful and cautious, and if that happens, we need to be there for it. We are in a difficult situation in deciding exactly when to move. If we continue to see inflation come in and not prove up to the higher levels than we expect, then that would matter for our decision making.
Representative Lawler (R-NY): Do you agree that, similar to an oil shock, a one-time price increase from tariffs should not be met with higher interest rates? Powell: Yes, I generally do.
Representative Lawler (R-NY): Given that FOMC believes current rates are moderately restrictive and inflation expectations firmly anchored per the Monetary Policy Report, what is the reason not to cut rates? Powell: It is uncertainty about the size and potential persistence of the potential but highly uncertain inflation from tariffs. We have five Taylor rules in the Monetary Policy Report. More of them say that the policy rate is in the right range, and the other one also allows for a hike.
Representative Moore (R-NC): Do you agree that the U.S. should only implement international standards, such as those from the Basel Committee on Banking Supervision, in ways consistent with our domestic legal and regulatory framework to avoid disadvantaging U.S. firms globally? Powell: I do.
Representative Moore (R-NC): Does the recent data showing foreign holdings of U.S. Treasuries near a record high in April suggest that Treasuries remain a haven and the dollar retains its global reserve currency status, even amid trade negotiations? Powell: I would say yes. We need to be careful about these narratives that pop up quickly. We are the world’s reserve currency and the world’s greatest democracy.
Representative Sherman (D-CA): Do you or your successors have the legal authority to use Fed assets to buy bitcoin? Powell: No, we do not, and we do not seek such authority.
Representative Sherman (D-CA): How will the Fed sequence upcoming capital requirement reforms, including Basel III, risk-weighted capital, leverage ratio, stress testing, and the GCP surcharge, given their interactive effects? Powell: Vice Chair Bowan will decide the sequencing.
Representative Nunn (R-IA): Would you agree that the agricultural sector is particularly vulnerable to both interest rates and international market risks? How does the Fed evaluate unintended consequences of its policies on commodity-dependent economies? Powell: We understand it is challenging right now in the agricultural sector, and we take that into account. Ultimately, we are responsible for the aggregate level of the economy and for keeping inflation under control and achieving maximum employment. We do take that into consideration as we evaluate unemployment and long-term trade negotiations.
Representative McClain (R-MI): Do you think the Fed is on the right track in managing its balance sheet? Powell: Yes, I do think it is on the right track, but do not think so on returning to the $4 trillion. We are in an ample reserves regime, which is a good thing and means there is going to be a lot of liquidity. We have some shrinking left to do on the balance sheet, but we are not going to go down as far. It is quite a gradual trajectory now, which is going to enable us to find a level that is ample and not scarce. The ample reserves framework is a good one that serves the U.S. well.
Representative Gonzales (R-TX): What risks does a weakening dollar pose to the U.S. economy, particularly regarding borrowing costs, inflation, and financial stability, as China and BRIC nations expand efforts to challenge the dollar’s global dominance? Powell: Treasury has responsibility for the dollar and dollar stewardship. We also are involved in payments policy, and we and the other major economy central banks are very aware of other payment developments and are working on ideas to make sure payment systems support the dollar and that other democracies are well supported by infrastructure.
Representative Barr (R-KY): Does the Fed take into account disinflationary fiscal policies, such as supply-side tax cuts, deregulation, and increased energy production, that counter-weigh a one-time price increases resulting from tariffs? Powell: We look at aggregate inflation, not any particular kind. I am very gratified at the performance of services inflation, which has come down, as that was the very sticky inflation. Overall, the inflation picture is pretty positive.
Representative Barr (R-KY): How are banks constrained from holding U.S. Treasuries and other low-risk assets on their balance sheets due to restricted leverage ratios? Powell: When banks are bound by the leverage ratio as the binding capital constraint, it is going to make low-risk, low-return assets something you do not want to hold. Lots of fairly low-risk intermediation, including Treasury market intermediation, gets taxed to the point with capital requirements that you see less of it. I have always thought that it would be better if we had a leverage ratio that was a backstop rather than binding.
Representative Torres (D-NY): To what extent was elevated uncertainty a factor in the Fed’s decision to delay cutting interest rates? Powell: That is part of it. We were cutting rates but paused in January and have not cut rates since. We, like other forecasters, do expect a substantial wave of price increases to come through to the consumer and then to measure inflation. The timing, amount, and persistence are highly uncertain. We had not expected to see it until now and now it is time for us to see that.
SENATE BANKING COMMITTEE DISCUSSION
Senator Rounds (R-SD): How will you ensure the change regarding reputational risk is fully implemented at the examiner level? What other regulatory updates can we expect? Powell: Vice Chair Bowman speaks the language of examiners. If anyone can have an effective relationship with them and work with them successfully, it would be her. I am confident about that as we think about things in the pipeline. I would point to Basel III endgame, the ratings system, and SLR comment put out.
Senator Rounds (R-SD): How feasible would it be for the Fed to return to a scarcity-based framework? What impact would eliminating interest on reserves have on the Fed’s ability to unwind its balance sheet and manage policy rates? Powell: Going back to a scarce reserves regime would be a long, bumpy, and volatile road I would not recommend. It would not save any money or make credit more available. There is an illusion that it would be, but that is not the case. Having a lot of liquidity in the system, which accompanies ample reserves, ensures that banks are able to continue lending. Unwinding is a policy choice that could be executed, but it would take years, be challenging, and quite volatile.
Ranking Member Warren (D-MA): What has changed in the last six months that caused the Fed to forecast substantially higher inflation, somewhat higher unemployment, and lower economic growth than in December? Powell: Some of it is taking signals from the data reports that we have seen, or the possible short-term effects of tariffs.
Ranking Member Warren (D-MA): Is the rate at which federal debt grows relative to economic growth a factor influencing the trajectory of interest rates? Powell: Not directly, no. We do not look at federal financial policy and deficits as something that affects our month-to-month monetary policy decisions.
Ranking Member Warren (D-MA): If certain policies materially increase the national debt and the debt-to-GDP ratio over time, could that make inflation more likely? Powell: Theoretically, fiscal policy can add to inflation but is not something we comment on.
Chairman Scott (R-SC): How are you ensuring the Fed’s capital framework works together effectively and holistically without stifling economic growth or reviewing in isolation? Powell: The two big pieces now are Basel III and the leverage ratio. I am pretty confident we will move on both of those in the relatively near future. The leverage ratio was always supposed to be a backstop rather than a binding requirement. We want risk-based capital to be the binding capital requirement, which is how those two pieces work together.
Chairman Scott (R-SC): With Basel III hopefully being reintroduced rather than just recalibrated, what do you forecast? Powell: We very much look forward to working with OCC and FDIC on Basel III. We are going to take a fresh start. The last proposal was well above Basel minimums, and that is the issue. It was the ways in which it was gold-plated, rather than the Basel requirements themselves, which were very significantly exceeded.
Senator Kennedy (R-LA): Why have we seen weakness in the dollar in the last few months? Powell: Treasury is responsible for the role of the dollar. Markets have been digesting an unusually challenging set of circumstances and reacting accordingly. The dollar has stabilized and moved back up over the last couple of weeks. While some argue the dollar remains overvalued, we do not take a view on that.
Senator Kennedy (R-LA): What does history tell us about tariffs’ impact on inflation or deflation? Powell: There is not much modern learning. Tariffs during the President’s first term were about one-sixth the size of what is currently being estimated, and while some effects on inflation were found, that period was very different. Part of the challenge is that there is no modern precedent. We must be humble about our estimates. We are very open to the possibility that transmission into inflation could be less, or more, than we think. The size of the tariffs makes a difference, and we do not know them yet.
Senator Kennedy (R-LA): Would it matter how much businesses pass on price increases versus absorb them, assuming there is upward price pressure? Powell: Yes, that matters. The question is who is going to pay for the tariffs. The ultimate question is how much of it shows up in inflation, and it is very hard to predict that in advance. We are watching to see what shows up in measured inflation.
Senator Kennedy (R-LA): If the President’s trade negotiators pursue reciprocity, meaning both sides reduce tariffs and trade barriers as much as possible or ideally to zero, would that be inflationary? Powell: No, not at all.
Senator Ricketts (R-NE): Would a price increase from tariffs be a one-time event? Powell: It might well be a one-time event, but we would want to make sure. The current situation differs from 2018 when we had earlier tariffs and cut rates. It could be a process of many years. We are not saying we are not reacting, it is just a risk we feel we need to manage. We are not deciding what to do yet. A majority of FOMC has said that they do expect to cut rates between now and the end of the year in the remaining four meetings. It is not that we are taking a strong view that it will be inflation and not a one-time cost increase, but a careful approach.
Senator Lummis (R-WY): Given the Board’s January 27, 2023, policy statement on Section 913 warning that issuing tokens on open or decentralized networks is likely inconsistent with safe and sound banking practices, what changes have occurred on the risks of stablecoins since that adoption? Since the Senate passed the GENIUS Act, does the Board plan to withdraw the policy statement on Section 913? Powell: What has changed is that going back a couple of years, it was a period of high-profile failures and fraud. Since then, the industry is maturing, our understanding is improving, and it is becoming much more mainstream. The current view is that it has always been appropriate for banks to choose their customers and to undertake activities as long as they are safe and sound. As for 913, I will have to get back to you. I believe it is a broader issue that is not specific to crypto, though that was a part of it. We are revisiting policy from that era and withdrawing many of our pieces of crypto guidance from that period.
Senator Lummis (R-WY): Alongside removing guidance documents and policy statements, is it important for bank supervisors to be clearly directed that they must no longer apply subjective biases? Powell: I completely agree. Vice Chair Bowman is well-placed to make that happen.
Senator Smith (D-MN): Do you still agree that the U.S. federal budget is on an unsustainable path? Powell: Yes, it is essentially the only thing we say about fiscal policy.
Senator Warnock (D-GA): How does the size and trajectory of the national debt affect the Fed’s ability to manage inflation during good economic times and to spur investment and hiring during slower ones? Powell: Today, those things do not affect our ability to do our job. The concern is that if we do not do something, there will come a time at which it will be a problem, not for us, but for the country. At this time, it does not interfere in any way with our ability.
Senator Hagerty (R-TN): How do you incorporate or counterbalance disinflationary trends in decision-making? Powell: We look at the overall picture, and services inflation has been coming down, which has offset the small increases in goods inflation seen so far. Regulation also could be disinflationary over time. It is the broad sweep of policies and the broader economy that matter for inflation. Tariffs are an area where all forecasters are expecting a significant increase between now and the end of this year. We do not know how big it is going to be or when it will come, but we are watching for more information to make a better decision.
Senator Hagerty (R-TN): If Ambassador Greer is successful in bringing trade deals together soon and alleviating uncertainty, would that put you in a position to think more aggressively about lowering rates? Powell: Yes, potentially it would. It is about reducing uncertainty, which would help, and also about determining what the final tariff rate will be and getting that settled. I think that is the path we are on.
Senator Hagerty (R-TN): What impact would the new demand for bills from stablecoins under the GENIUS Act have on the yield curve, particularly on short-term rates? Powell: More demand is going to have a tendency to drive down rates, but I do not have a sense of how big that effect would be. It is a great thing that we are making progress toward a stablecoin framework.
Senator Britt (R-AL): Will you commit to ensuring that the perspectives of and impacts on the smallest U.S. banks and non-financial industries like the agriculture sector are considered in rulemaking reviews? Powell: I am happy to make that commitment.
Senator Britt (R-AL): Do you agree that components of our economy remain quite strong? How does the Fed factor strong auction performance into market expectations and monetary policy discussions? Powell: The Treasury market is working fine at present. Liquidity is adequate, bond prices are responding to economic events, and the bond market is in good shape. The labor market is in a solid place, with the economy growing, and inflation having come much closer to two percent. It remains a very solid economy.
Senator Banks (R-IN): How do U.S. interest rates compare to other first-class countries around the world, and what are the effects? Powell: At the higher end. The U.S. economy has outperformed and been stronger than others. That implies somewhat higher interest rates. Many of them began cutting rates since the pandemic, and we were as well. At some point, we will resume that, but we are already about 100 basis points lower than we were. If you look at the EU and the BoE, they have both cut somewhat more than that recently, and they are either at or close to the end of their cutting cycles.
Senator Banks (R-IN): What does the data tell us about how trade deficits with China, the EU, Canada, and Mexico have all significantly dropped recently, and how would that affect inflation? Powell: I do not know if it has implications for inflation, but it obviously reflects the tariffs. Recently, Chinese imports have come down quite a bit.
Senator Tillis (R-NC): Do you expect central banks to hold higher levels of reserves than in previous years? Powell: I do not think we will get all the way back to where we were, but we are still shrinking.
Senator Tillis (R-NC): Should the SLR be updated to reflect evolving preferences? Powell: Yes.
Senator Alsobrooks (D-MD): Are you concerned the SLR proposed rulemaking could lead to a deterioration in the resilience of the banking sector? Powell: We want risk-based capital to be the binding capital requirement. The leverage ratio is not risk sensitive and treats every asset as equally risky, so if it is the binding requirement, it distorts banks’ incentives and discourages low-risk activity. We have always wanted the leverage ratio to serve as a backstop, and the proposal out for comment restores that function without diminishing the safety and soundness of the financial system while enabling banks to engage in lower-risk activities.