HOUSE FINANCIAL SERVICES COMMITTEE
COMMITTEE HEARING
For questions on the note below, please contact the Delta Strategy Group team.
On July 14, the House Committee on Financial Services held a hearing entitled, “The Federal Reserve’s Semi-Annual Monetary Policy Report.” The witness in the hearing was Federal Reserve (Fed) Board Chairman Kevin Warsh, with his testimony here.
Below is a summary of the hearing prepared by Delta Strategy Group, which includes several high-level takeaways, followed by summaries of opening statements and discussion.
KEY TAKEAWAYS
Digital Assets & Cryptocurrency
- Representative Steil (R-WI) noted the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act rulemaking deadline and questioned Chairman Warsh on whether the Fed would meet it. Chairman Warsh stated the Fed is working to meet the GENIUS Act rulemaking deadline.
- Representative Kim (R-CA) framed her Payments Access and Consumer Efficiency (PACE) Act proposal as a response to the President’s Executive Order on payment modernization, noting the U.S. is the only G7 country without a system allowing fintech or non-bank companies direct access to traditional payment networks.
Prediction Markets & Insider Trading
- Ranking Member Waters (D-CA) raised concern about a pattern of administration insiders profiting from material nonpublic information in prediction markets.
- Representative Gottheimer (D-NJ) discussed data showing thirty-six percent of Americans aged 11 to 17 have gambled on prediction market or sports betting apps in the past year and asked about insider trading risk and child protection.
- Chairman Warsh pointed to a Fed-wide ethics and integrity letter issued in his first week as the primary safeguard against employee misuse of material nonpublic information and said oversight of prediction markets and youth gambling falls almost entirely outside the Fed’s jurisdiction.
Price Stability & Inflation Commitment
- Chairman Warsh committed to delivering price stability and the two percent inflation goal, framing inflation as a choice, and said the Federal Open Market Committee (FOMC) was unanimous on that commitment at his first meeting.
2020 Inflation Framework Reversal & Task Forces
- Chairman Hill (R-AR) called the 2020 decision to adopt flexible average inflation targeting a policy error, noting it was praised at the time but proved alarming in hindsight.
- Chairman Warsh stated that the Fed abandoned that framework and has created five task forces covering communications, the balance sheet, data, productivity and jobs, and inflation frameworks, operating in discovery mode, with public findings expected by year-end.
Fed Independence
- Chairman Warsh stated repeatedly that the Fed is independent and will follow the law and the data regardless of political pressure or public criticism.
Conflicts of Interest
- Chairman Warsh affirmed the statutory prohibition in Section 10 of the Federal Reserve Act is the law and will be followed but declined to state whether executive branch officials should be held to a similar standard, saying that is not his place to opine on.
AI & the Economy
- Chairman Warsh described AI-driven investment as a significant economic development and said the Fed is studying its effects on productivity, employment, and inflation. He added that AI has so far made workers more productive rather than displaced them, though its longer-term effects remain uncertain.
Balance Sheet Policy, Quantitative Easing (QE), & Treasury Markets
- Representative Davidson (R-OH) said the Fed’s role as a large Treasury purchaser can distort market price signals, making it hard to know the real ten-year or thirty-year rate.
- Chairman Warsh said the balance sheet is part of monetary policy rather than merely a market plumbing tool, that the Fed should be a price taker rather than a price maker in Treasury markets during normal times, and that QE is not inherently inflationary, particularly when used to provide crisis liquidity.
Bank Regulation, Capital Requirements, & Mission Creep
- Chairman Hill discussed past mission creep at the Fed, citing digital asset enforcement and climate-related regulation as examples of the Fed exceeding its statutory boundaries.
- Representatives Loudermilk (R-GA) and Rose (R-TN) raised Operation Chokepoint, describing it as the use of reputation risk by partisan actors at the Fed to debank digital asset firms, energy companies, and others without statutory authority to do so.
- Representative Timmons (R-SC) stated that mission creep carries real institutional costs, including legal uncertainty and erosion of the Fed’s credibility as an agency that draws authority from Congress rather than evolving policy preferences.
- Multiple Republican members asked Chairman Warsh to commit to carrying out only the authority Congress has given the Fed, without expanding into areas beyond its statutory remit. Chairman Warsh committed to keeping the Fed within its statutory authority.
Economic Outlook: Housing, Labor, & Agriculture
- Chairman Warsh described the labor market as remarkably resilient, said price stability and full employment are complementary goals, and noted the Fed does not target individual sectors like housing or agriculture but recognizes their importance.
Payments Modernization & Payment Systems
- Representative Meeks (D-NY) raised concern that expanding fintech and digital asset access to payment infrastructure could be driven by political priorities rather than safety and soundness standards.
- Chairman Warsh said payment rail access decisions will remain free from political influence and be based on a benefit-cost standard. He stated the Fed’s dollar liquidity swap lines are part of its independent monetary policy authority and distinct from the Treasury’s Exchange Stabilization Fund (ESF).
OPENING STATEMENTS
Chairman Hill (R-AR)
Annual inflation is still running above the Fed’s two percent target. There is no more punishing tax on U.S. industry, or on the citizens of our nation, than inflation. In its first statement under your leadership, the FOMC said that it “will deliver price stability.” Though perhaps QE was justified in its first round during the immediate onset of the 2008 global financial crisis, long past that crisis the Fed repeatedly expanded QE, with the cost of each successive round higher and the benefits lower. While the emergency facilities and QE were resurrected in early 2020 in response to the unknown economic and social ramifications of the COVID-19 pandemic, once a clear V-shaped recovery was well underway, those facilities and policies were not ended and promptly phased out. The result of these decisions was a Fed that held a quarter of the federal debt in 2022, and though that share has decreased, it still creates incentives for fiscal policymakers to avoid tough decisions on debt and deficits today. For years, Congress has chosen unrestrained deficits and out-of-control debt and has repeatedly drafted the Fed into being an enabler. In the recent past, the Fed has engaged in mission creep resulting from political capture by certain partisan actors attempting to accomplish policies through the Fed on which they cannot build a consensus and pass through Congress. These decisions took the Fed far beyond the boundaries Congress has authorized in statute.
Ranking Member Waters (D-CA)
Congress designed the Fed to stand apart from politics, so that it can support stable prices, maximum employment, financial stability, and the long-term interest of the American people. President Trump’s policies and actions have made the economy and the concerns of the American people much worse. His tariffs have driven up costs for consumers and businesses. His attacks on independent financial regulators have undermined confidence in the mission of institutions that have protected the public. His war in the Middle East continues to hurt gas and grocery prices. The Supreme Court vastly expanded presidential authority over independent agencies, and it is likely to still come for other functions of the Fed, like bank supervision, next.
Chairman of the Task Force on Monetary Policy, Treasury Market Resilience, & Economic Prosperity Lucas (R-OK)
A review of the Fed’s communication tools is long overdue. It is vital that the Fed gets the composition and size of its balance sheet right.
Ranking Member of the Task Force on Monetary Policy, Treasury Market Resilience, & Economic Prosperity Vargas (D-CA)
The Fed’s independence is one of the essential pieces that maintains the strength and reliability of the U.S. monetary policy.
Fed Chairman Warsh
The FOMC recognizes that high inflation has been an undue burden on U.S. households and businesses. While monthly price volatilities and variations are inevitable, especially in an unsettled world, underlying inflation over longer time horizons is determined largely by monetary policy. Inflation is a choice. FOMC members have no tolerance for persistently elevated inflation, and we share a resolute commitment to ensure price stability. Economic activity grew at a solid pace, showing resilience in the face of recent developments. Household consumption was moderate. Manufacturing output increased steadily this past year. The housing sector continues to lag. The rapid pace reflects in part the construction of data centers and other infrastructure, and the immense demand for AI-related equipment and software. Investment in equipment overall increased about eight percent for the year in the first quarter. Within that category, high-tech spending logged a growth rate of nearly twenty-five percent. It seems inevitable that what we are now calling “AI investment” will soon just be called “investment.” New opportunities for the economy introduce new challenges for central bankers, and we are monitoring the implications for employment and inflation. Productivity growth has been strong, predating gains from AI adoption. The U.S. labor force appears stable. Job creation has kept pace with the workforce. The unemployment rate is low and has changed little over the last year, and we have seen relatively few layoffs. We have a duty to point this institution forward; take a fresh look at current practices to make sure we are serving the objectives Congress gave us, and we are going about it systematically. I have appointed task forces in five key areas to improve the broad conduct of monetary policy: Fed communications; balance sheet policy; use of existing data sources; productivity and jobs in an era of remarkable transformation; and the Fed’s inflation framework.
DISCUSSION
Digital Assets & Cryptocurrency
Representative Steil (R-WI): Will the Fed meet the GENIUS Act deadline for promulgating rules? Warsh: The Fed is racing to meet the GENIUS Act deadline.
Representative Kim (R-CA): How does the Fed plan to work with the Office of the Comptroller of the Currency (OCC) and Congress on the PACE Act’s framework for payment company access to Fed rails? Warsh: On the PACE Act specifically, he said he will work through the details without picking sides, but draws a line between resilient, neutral payment infrastructure, which is the Fed’s business, and direct retail payment competition, which is a private sector matter.
Representative Sherman (D-CA): Would the Fed bail out stablecoins or cryptocurrency in a crisis the way it backstopped money market funds in the past? Warsh: The Fed does not want to be in the bailout business, including for crypto. Chairman Warsh stopped short of an unconditional guarantee under a hypothetical crisis.
Prediction Markets & Insider Trading
Ranking Member Waters (D-CA) and Representative Gottheimer (D-NJ): What oversight does the Fed conduct over its own employees regarding insider trading and material nonpublic information, including on prediction markets? Does the Fed see insider trading or consumer protection risks associated with youth participation in prediction markets and sports betting apps? Warsh: An ethics and integrity letter was sent to all 23,000 Fed employees in my first week and serves as the primary safeguard on employee conduct. Questions about youth gambling and consumer protection on these platforms fall almost entirely outside the Fed’s jurisdiction and are matters for Congress and the executive branch.
Price Stability & Inflation Commitment
Chairman Hill (R-AR), Representative Timmons (R-SC), Williams (R-TX), Rose (R-TN), and Meuser (R-PA): What is the Fed doing, and what tools will it use, to restore and maintain price stability and prevent a resurgence of inflation? Warsh: The Fed is committed to the two percent inflation goal. Three things are underway: reaffirming that commitment, taking ownership rather than blaming outside factors, and using the Fed’s tools, interest rates and the balance sheet, to deliver. The FOMC was unanimous on this at my first meeting, and short-term price increases will not be allowed to broaden into sustained inflation.
2020 Inflation Framework Reversal & Fed Task Forces
Chairman Hill, Representatives Lucas (R-OK), and Meuser: Do you agree with the FOMC’s decision to abandon the 2020 flexible average inflation targeting framework, and what is the purpose and expected output of the five task forces you created? Warsh: The 2020 framework was a mistake that did not achieve its objectives, and I was critical of it even before joining the Fed. The five task forces, covering communications, the balance sheet, data, productivity and jobs, and inflation frameworks, are in discovery mode, will draw on outside input while keeping decisions inside the Fed, and will produce public findings periodically through year end.
Fed Independence
Representatives Velazquez (D-NY), Sherman (D-CA), Flood (R-NE), and Meeks (D-NY): Will the Fed remain independent from political pressure, and follow the data even under public criticism? Warsh: The Fed will remain independent. The Supreme Court has affirmed that the conduct of monetary policy is independent, and my commitment is to follow the law, the data, and the Fed’s best judgment regardless of political pressure.
Conflicts of Interest
Ranking Member Waters: Is it sensible that Fed governors are barred from holding bank stock or directorships, and should executive branch officials, including the president, be held to a similar standard given reported crypto-related earnings? Warsh: The statutory prohibition on Fed governors is the law and will be followed. Conflict of interest standards for officials outside the Fed are not my place to opine on.
AI & the Economy
Representatives Steil, Meuser, Lynch (D-MA), Cleaver (D-MO), and Gottheimer: How does the Fed view AI’s effect on the economy, productivity, and jobs? Warsh: AI-driven investment is the most significant economic development of my adult lifetime, and the U.S. is well positioned to benefit, though real risks exist if the technology reaches adversaries. The technology has so far made workers more productive rather than displacing them; a task force is examining the connection to the Fed’s employment mandate, and the picture over the next 12 to 18 months remains uncertain.
Balance Sheet Policy, QE, & Treasury Markets
Representatives Lucas, Loudermilk (R-GA), Meuser, Davidson (R-OH), and Torres (D-NY): How and when does the Fed plan to communicate about and reduce its balance sheet? Do the Fed’s Treasury holdings distort market price signals? Is QE inherently inflationary? Warsh: The balance sheet is part of monetary policy, not merely plumbing, and in normal times the Fed should be a price taker rather than a price maker in Treasury markets. Any changes will be previewed and debated well in advance. Chairman Warsh declined to prejudge the balance sheet task force conclusions. QE is not inherently inflationary, particularly for crisis liquidity since interest rates remain the dominant policy tool.
Bank Regulation, Capital Requirements, & Mission Creep
Representatives Loudermilk, Rose, Timmons, and Davidson: Will the Fed commit to staying within its statutory lane given Operation Chokepoint and past use of reputation risk to debank disfavored firms? Will future capital rules respect Administrative Procedure Act (APA) guardrails? Warsh: Reputational risk has been removed from supervisory guidance; the underlying episode was a case of mission creep. Chairman Warsh committed to staying within the Fed’s statutory authority going forward. On capital requirements, he declined to prejudge the pending rule, which is out for public comment, and said strong capital, liquidity, supervision, and market discipline must be balanced against the risk of constraining growth.
Economic Outlook: Housing, Labor, & Agriculture
Representative Sessions (R-TX): What is the Fed’s view of housing, agriculture, and labor market conditions? Warsh: The labor market has been remarkably resilient, and price stability and full employment are complementary goals rather than competing ones. Mortgage rates remain elevated in part due to above-target inflation, and the Fed does not target individual sectors like agriculture but recognizes the importance of the U.S. economy’s diversity.
Payments Modernization & Payment Systems
Representatives Meeks and Beatty (D-OH): Will payment rail access decisions be based solely on safety and soundness rather than political priorities? What role should the Fed play in coordinating on fraud and scams? Warsh: Politics will be kept out of payment rail decisions in favor of a benefit-cost standard. The Financial Stability Oversight Council (FSOC) is the coordinating body where the Fed has a role on fraud.