On June 21, the House Financial Services Committee held a hearing on “The Federal Reserve’s Semi-Annual Monetary Policy Report.” The sole witness in the hearing was Federal Reserve Chairman Jerome Powell
Below is a summary of the hearing prepared by Delta Strategy Group. It includes high-level takeaways 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.
- Members of the Committee pushed Fed Chair Powell to better explain why the Federal Open Markets Committee (FOMC) last week held interest rates steady but still predict two more rate hikes this year. Powell explained that the only path to reduce inflation is by raising interest rates, and, while that can be painful, it gradually slows down demand so that supply and demand can be aligned. He assured the Committee that the Fed is committed to maintain a balance between maximum employment and price stability to ultimately achieve the Fed’s inflation goal of 2 percent. Powell highlighted that 16 out of 18 members of the FOMC said they believe it will be appropriate to raise rates, and it will happen if the economy performs as expected.
- Powell was asked to opine on talks of increased bank capital requirements and the impact this might have on the price and availability of credit. Powell said that he will offer his views on proposals to increase capital requirements once they have been presented to him but emphasized that these would only be for the largest banks, not local and small regional banks. He also said that increased capital requirements would not have an immediate impact on credit availability.
SUMMARY
Opening Statements and Testimony
Committee Chairman Patrick McHenry (R-NC)
We will mark up the digital asset market structure bill and the stablecoin bill in the second week after returning from the July 4 break.
Inflation remains a constant concern for Americans. Though the FFOMC did not recommend a rate hike last week, it is clear that rate hikes will still be necessary going into the future. Despite pressure from the Left, the Fed must remain focused on eliminating inflation through these rate hikes. The Fiscal Responsibility Act is a first step to combat the massive spending spree Democrats are set on continuing.
The Fed kept rates too low for too long to address the problem caused by this spending. Then, it carried out the fastest spike in interest rate in modern history. This introduced accelerated interest rate risks that impacted banks and consumers alike. Uncertainty from the Fed regarding supervision is the last thing our markets need, and the Fed’s Vice Chair for Supervision should not inject politics into policy.
Committee Ranking Member Maxine Waters (D-CA)
The Inflation Reduction Act (IRA) has effectively halved consumer price inflation. The only way that we will be able to fully address inflation is to address its number one cause: soaring housing costs. Congress must invest more in fair and affordable housing. The Biden administration has led to historic lows in unemployment, but Republicans cannot get their house in order to aid in this work. We must advance sensible reforms to strengthen our nation’s banking system.
Jerome Powell, Chairman, Federal Reserve (Fed)
As economic activity has continued to expand at a modest rate, the labor market has remained tight, and unemployment has remained low. Inflation remains well above long-run goals, but it has moderated somewhat since the middle of last year. As 2 percent inflation remains our goal, we have raised interest rates by five percentage points since early last year and have continued to reduce Fed securities holdings. While the FOMC decided to maintain the target range for the federal funds rate last week, we expect it will be appropriate to raise interest rates somewhat further by the end of the year.
The banking sector is sound and resilient. Recent bank failures and the resulting market stresses highlighted the importance of ensuring we have the appropriate rules and supervisory practices for banks of moderate to large size.
Subcommittee Chair, Financial Institutions and Monetary Policy, Andy Barr (R-KY)
We expect proposals from the Fed’s vice chairman for supervision that could increase capital requirements for financial institutions as much as 20 percent. Now is not the time to be engineering massive new regulatory changes or hindering regional banks which have already been under stress.
Subcommittee Chair, Financial Institutions and Monetary Policy, Bill Foster (D-IL)
The Fed and Congress have done a reasonable job given the circumstances they have been dealing with. We are seeing low unemployment, and inflation is starting to come down. However, I recognize the necessary policies put forth to combat inflation have not been without stress
Discussion
Monetary Policy
McHenry (R-NC): Will the FOMC continue to raise rates later this year? What is your thinking on the soundness of our banking system and the wholistic review of banking capital? Powell: Although we decided to maintain the current federal funds rate, it is important to note that the level to which we raise rates is a separate question to the speed at which we move. Given how far we have come, it may make sense to move rates higher but at a more moderate pace. Changes to capital requirements should be consistent, transparent, and not too volatile. We benefit from having banks of all different shapes and sizes, so we want to be careful not to regulate the smaller banks to the point where their business model is unfitting and challenged.
Velazquez (D-NY): Is the FOMC willing to trigger a recession to get inflation to 2 percent? Powell: Our statutory goals are price stability and maximum employment, we which are dedicated to achieving. We’re very far from our inflation target of 2 percent.
Torres (D-NY): Will the Fed continue to raise interest rates to reach 2 percent inflation even if it comes at the expense of maximum employment and financial stability? Do you think the Silicon Valley Bank (SVB) failure revealed deeper tension between the safety and soundness mandate of the Fed as a bank regulator and the mandate of the Fed as an administrator of monetary policy? Powell: The Fed is committed to maintain a balance between employment and inflation as the two work together to achieve equilibrium. Interest rate risk is one of the most basic banking risks, and ultimately it was SVB management that failed to hedge those losses and failed to hold appropriate liquidity.
Wagner (R-MO): Why do FOMC participants continue to make the same inflation forecasts, and what data are they reviewing to make these forecasts? What conditions indicate that we are moving in the right direction? Powell: The data resourced for our forecasts is public, and private forecasters have made similar predictions because both the private sector and the Fed expected the causes of inflation such as supply chain problems would be more transitory. Inflation has surprised us as well as all other forecasters by being more persistent than expected. The conditions for a rate hike pause would need to be, first, that economic growth must be modest. Secondly, we need supply chain bottle necks to go away. Thirdly, we need the mismatch between demand and supply in the labor market to diminish. 16 out of 18 members of the FOMC wrote down that they do believe it will be appropriate to raise rates, and it will happen if the economy performs as expected.
Foster (D-IL): Is the 2 percent inflation target a realistic and appropriate goal considering the impact of the Ukraine War? How do you balance the dual mandate of the Fed? Powell: The war is not playing a particularly significant role in inflation today, although it certainly did on some commodities when it began. Both sides of the Fed’s dual mandate are calling for tighter monetary policy now.
Flood (R-NE): How can we avoid an environment where any effort to unwind the Fed’s balance sheet is undone during periods of economic shock? Powell: This is a concern which is why we are unwinding our balance sheet more quickly. The balance sheet should not grow with every cycle.
Bank Capital Requirements
Hill (R-AR): Would you say that American banks are better capitalized than European banks? Powell: We are at or near the top of the league table, but there are a couple of other jurisdictions that have broadly similar levels of capital strength.
Garbarino (R-NY): Would any of the recent bank failures have been prevented with increased capital requirements? Do you find an increase to be necessary currently? Powell: I think it might have helped, but that is an unknown as I think the main issue there was a failure of management to manage interest rate risks. We need stronger liquidity regulation and stronger regulation around uninsured deposits. I will react to any capital requirement proposals as they come and give my best assessment.
Lawler (R-NY): Do you agree that excessively high capital requirements will constrain bank’s lending capacity leading to spillover effects on jobs? Could an increase in capital requirements jeopardize the Fed’s effort to rein in inflation? Powell: Any increase in the capital requirements for large banks would need to be justified, and this is something we plan to review as the proposals come forward. With any capital requirements, there would be a ninety-day period open for comments which we would review and reevaluate to assure they are conducive to a robust economy.
Donalds (R-FL): What is your view on the implementation of Basel III capital requirements? What position does the Fed take on the decrease of community banks? Powell: The BASEL III standards are an international capital standard that we should adhere to, but we are currently considering what the appropriate capital requirements are. U.S. banks have competed successfully in the past few years despite significant capital requirements. Community banks have been consolidating for thirty years now, but the Fed does not intend to speed up that process.
Nunn (R-IA): Will business face a more difficult and expensive credit environment with increased capital requirements? Do you think our banks will adjust as soon as the proposal is released? Powell: The phase-in process of capital for the largest banks will not have an effect in the near-term. The earlier the banks start to adjust to increased capital requirements, the more gradual the path will be.
Ogles (R-TN): Did a failure to hedge cause the banking losses? Powell: Many banks managed the interest rate risk that came along through that technique, but some did not. We manage maximum employment and price stability, and we are using our tools to achieve that. We do not think of ourselves as trying to attain a fiscal goal necessarily.
Lucas (R-OK): I have heard concerns that the Fed’s Basel III capital requirement revisions could increase costs for derivatives end users. The SEC is also imposing changes that could impact banks. Are you coordinating with the SEC to ensure that these rules do not create undue problems? Powell: I am not personally, but I understand that we are coordinating on these issues.
Kim (R-CA): Do you think it’s appropriate for the Fed to increase capital requirements at this time? What specific analysis has the Fed conducted to determine how this regulation will impact small businesses and other marginal borrowers? Powell: We are determining a balance between capital and liquidity that will benefit small businesses and borrowers. Raising capital requirements will not have an immediate impact on credit availability
Digital Assets
Waters (D-CA): Do you agree that it is important for the Fed to have a chance to approve or decline any state-licensed nonbank entity before it starts issuing payment stablecoins nationwide? Powell: We do see payment stablecoins as a form of money. In all advanced economies, the ultimate source of credibility in money is the central bank, so we see it necessary to have a federal role in the use of stablecoins going forward. Leaving the Fed with a weak role in allowing private money creation at the state level would be a mistake.
Nunn (R-IA): How will the Fed balance user privacy if they were to offer a direct individual account to citizens through a retail CBDC? Powell: We do not support any individuals holding accounts at the Fed.
Global Reserve Currency
Gonzales (D-TX): How have our recent tightened monetary policies impacted the strength of the U.S. dollar and how it is valued globally? Powell: The dollar’s status as the world’s reserve currency is dictated by America’s economic excellence and price stability. Viewing the role of the dollar globally is the purview of Treasury.
Beatty (D-OH): What is the current status of dollar dominance as it stands today? Powell: There is not another economy that could take over our spot as the dominant currency on a global scale. The best thing we can do is maintain price stability and reduce inflation.
Climate Change
Casten (D-IL): Does the Fed agree that climate change presents a risk to the global economy? With the future of climate change well on the horizon, would the Fed ever step in and use their tools to address it? Powell: Yes, but our role in climate change is a very small and limited one. We do not plan to change our inflation goal because of climate change or the need to deal with it.