SENATE COMMITTEE ON BANKING, HOUSING, & URBAN AFFAIRS
COMMITTEE HEARING
For questions on the note below, please contact the Delta Strategy Group team.
On July 15, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “The Federal Reserve’s Semi-Annual Monetary Policy Report.” The witness in the hearing was Federal Reserve (Fed) 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
- Senator Hagerty (R-TN) emphasized the importance of Fed engagement on Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act rulemaking.
- Senator Lummis (R-WY) asked about the Fed’s proposed skinny master account rule. Chairman Warsh said payment rails should remain available to qualifying intermediaries rather than directly to consumers and committed to providing a clearer timeline for potential finalization.
- Senator Moreno (R-OH) noted that concerns about stablecoins causing deposit flight have not materialized, stating that bank deposits have continued to increase since last August. Chairman Warsh agreed that deposits have generally moved positively over that period.
Basel III & Bank Capital
- Multiple Republican members, led by Chairman Scott (R-SC), asked Chairman Warsh about the Basel III Endgame reproposal, bank capital requirements, and tailoring reforms, raising concerns that overly burdensome capital rules could restrict lending and economic growth.
- Chairman Warsh reiterated that “Basel Endgame is not America’s endgame,” said regulators should speak with one voice, committed to reviewing public comments before finalizing a rule, and expressed openness to reforming stress testing and tailoring requirements.
Fed Independence & Governance
- Chairman Warsh maintained that he and the Fed remain independent of political influence, stating the president has never tried to influence monetary policy and that he was chosen to do an independent job.
- Senator Hagerty discussed how Fed independence should primarily apply to monetary policy.
Economy, Inflation, & Labor Market
- Discussions covered the effects of tariffs, geopolitical conflicts, labor force participation, and immigration on inflation and economic growth.
- Chairman Warsh reiterated that inflation is determined over the medium term by monetary policy, while emphasizing that productivity growth and labor force participation remain important drivers of long-term economic growth.
Artificial Intelligence (AI)
- Chairman Warsh repeatedly described AI as the most consequential economic change of his adult lifetime, saying that AI-driven investment is already contributing significantly to productivity and economic growth while acknowledging potential labor market disruption during the transition.
- Multiple members from both parties questioned the Fed’s approach to AI, including its effect on inflation, employment, cybersecurity, financial stability, and the composition of the Fed’s AI task force.
Fed Reform
- Multiple members discussed Chairman Warsh’s five Fed task forces, communications framework, and balance sheet strategy. Chairman Warsh said he supports a leaner balance sheet, expects preliminary task force findings as early as September with final recommendations by year-end, and said the reforms are intended to improve the Fed’s monetary policymaking framework.
Bank Supervision & Regional Reserve Bank Structure
- Chairman Warsh said the regional reserve banks should become centers of excellence while remaining subject to Board of Governors oversight and emphasized modernizing the Fed’s supervisory framework.
OPENING STATEMENTS
Chairman Scott (R-SC)
The Fed has a mandate to pursue and promote a strong labor market through maximum employment and stable prices. That requires understanding the forces shaping our economy, including AI’s impact on jobs, wages, productivity, and prices. Independence is a responsibility, and the best way for the Fed to protect its independence is to stay focused on its mission. For too many years, the Fed drifted into issues outside of its core responsibilities. Moving away from overly detailed predictions about where interest rates might be going in the next several months is a helpful step to make sure the Fed is able to adapt when conditions change. Less guessing and more discipline will help the Fed stay flexible, credible, and focused. The five independent task forces send an important signal that the Fed is willing to start from its core principles and pursue thoughtful reforms to deliver on its statutory mandate. Unwinding a balance sheet the size that we have today is going to take a deliberate effort that will have to be paced properly so as not to create instability and volatility in our markets. As AI reshapes the economy, the Fed should understand its impact on job productivity and prices, and the financial system, without using technological change to expand its mandate. That same discipline should guide the Fed’s approach to bank regulation. Preserving that strength requires regulation and supervision that are clear, appropriately tailored, and focused on real risks. As the Fed finalizes Basel III Endgame and other capital rules, it should pursue better calibrated requirements that preserve resilience without unnecessarily restricting lending.
Ranking Member Warren (D-MA)
High interest rates are making mortgages, auto loans, and credit cards more expensive, and more and more people are falling behind on their bills. Lower interest rates would provide some relief to families, but the Fed has not lowered interest rates, and it may be forced to raise rates even more because of President Trump. The fight for control is a fight over interest rates, but it is also about corruption. President Trump’s family crypto company, World Liberty Financial (WLF), is currently applying for a bank charter. After that charter is granted by Trump’s own bank regulator, WLF could seek special privileges from the Fed to juice its own profits, like a master account that would give Trump’s own company direct access to the Fed’s core payment rails. If he can control the Fed, Trump could threaten to revoke banks’ access to Fed services if they refused to do his bidding. President Trump will turbocharge the Wall Street deregulation that is already underway, knowing that U.S. taxpayers will be on the hook if there is another financial crash.
Fed Chairman Kevin 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 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
Senator Moreno (R-OH): Has the rise of stablecoins reduced bank deposits, as bank CEOs previously warned? Warsh: Bank deposits have generally continued to increase since last August.
Senator Lummis (R-WY): What is your view of the Fed’s proposed skinny master account rule, and do you expect it to be finalized? Warsh: The Fed’s payment rails are a public good that should be available to intermediaries complying with Fed requirements rather than directly to consumers. Chairman Warsh said he owes a better timeline on finalizing the rule and committed to providing a clearer timeline for potential finalization.
Basel III & Bank Capital
Chairman Scott (R-SC), Senators Rounds (R-SD), Britt (R-AL), and Banks (R-IN): With the Basel III Endgame reproposal comment period closed, what feedback is the Fed evaluating, when will a final rule be issued, how will tailoring thresholds be updated, and will regulators coordinate implementation? Warsh: The Basel Endgame is not America’s endgame. He said the Fed will review public comments before finalizing a rule, pursue reforms that strengthen the banking system while maintaining competitiveness, coordinate with other regulators to provide greater consistency, and remain open to reforming stress testing and tailoring requirements. He did not provide a timeline for a final rule.
Independence & Governance
Ranking Member Warren (D-MA), Senators Van Hollen (D-MD), and Alsobrooks (D-MD): Can the Fed remain independent from political influence, and will Chairman Warsh disclose communications with President Trump? Warsh: He said President Trump has never attempted to influence monetary policy, declined to discuss private conversations with the President, and committed to complying with applicable disclosure requirements and Freedom of Information Act (FOIA) obligations.
Senator Hagerty (R-TN): Should Fed independence extend beyond monetary policy to bank regulation? Warsh: He reaffirmed that Fed independence is strongest in the conduct of monetary policy while supporting coordination with other bank regulators on supervisory matters.
Economy, Inflation, & Labor Market
Senators Van Hollen and Kennedy (R-LA): What is driving inflation, and how should the Fed distinguish temporary price increases from sustained inflation? Warsh: Military conflicts and tariffs can create supply shocks and increase prices in individual sectors, but inflation over the medium term is determined by monetary policy. A one-time price increase becomes inflationary when it spreads across the broader economy.
Senators Moreno (R-OH) and Tillis (R-NC): How do labor force participation, work incentives, immigration, and productivity affect the Fed’s employment mandate? Warsh: Potential GDP depends on hours worked and productivity. Chairman Warsh said stronger labor force participation supports economic growth while declining work incentives make the Fed’s job more difficult but avoided commenting directly on immigration or tax policy.
Artifical Intelligence
Chairman Scott, Senators Warner (D-VA), Reed (D-RI), Kim (D-NJ), Warnock (D-GA), Banks (R-IN), and Moreno: How is AI affecting productivity, inflation, employment, capital investment, manufacturing, cybersecurity, and the broader economy? Warsh: AI is the most consequential economic change of my adult lifetime and is contributing significantly to business investment and productivity growth. He expects AI to strengthen long-term productivity, wages, and economic growth, while acknowledging it may create near-term labor market disruption and affect measured prices during the investment phase.
Senators Smith (D-MN), Warnock, and Blunt Rochester (D-DE): How will the Fed ensure its AI task force reflects worker perspectives? Warsh: The task force members serve in an advisory capacity and do not make policy decisions. He committed to ensuring affected workers, employers, and community stakeholders are represented throughout the process.
Reed (D-RI): Should financial institutions have broader access to AI cybersecurity tools like Mythos? Warsh: He said he has advocated for broader institutional access to AI tools that strengthen cybersecurity across the financial system.
Fed Reform
Chairman Scott, Senators Ricketts (R-NE), Cortez Masto (D-NV), and Tillis: What are the goals and timeline for the Fed’s reform initiatives, including its balance sheet review and five policy task forces? Warsh: He supports a leaner balance sheet with interest rates serving as the primary monetary policy tool and said balance sheet changes should be gradual and well communicated. He said the five task forces have a six-month timeline, with preliminary findings expected as early as September and final recommendations by year end and committed to sharing project management materials with Congress.
Bank Supervision & Regional Reserve Bank Structure
Senators Warner, Tillis, Alsobrooks, and Lummis: What is your vision for the twelve regional Fed Banks, should Congress receive greater supervisory transparency following Silicon Valley Bank’s (SVB) failure, and how will the Fed approach supervision going forward? Warsh: The regional reserve banks remain responsible for day-to-day operations under Board of Governors oversight, and his long-term vision is for each reserve bank to become a center of excellence. Chairman Warsh emphasized the importance of cooperating with supervisory investigations and modernizing the Fed’s supervisory framework.