On June 22nd, the Senate Banking Committee held a hearing entitled “The Semiannual Monetary Policy Report to Congress”. The sole witness in the hearing was Chairman of the Board of Governors of the Federal Reserve System (Fed) Jerome Powell.
Below is a summary of the hearing prepared by Delta Strategy Group. It contains several high-level takeaways from the hearing, followed by opening statements and witness testimony and a summary of the Q&A portion.
Key Takeaways
The following is a summary of some of the topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Chairman Sherrod Brown (D-OH) said that inflation is largely due to the war in Ukraine and price gouging and consolidation in the oil and gas industries.
- Senator Thom Tillis (R-NC) said that interest rates remain too low to meaningfully impact inflation and said that the Fed should be taking more aggressive steps in this direction
- Chairman Powell explained that although higher interest rates will not directly bring down food or energy costs, it is the mission of the Fed to use interest rates to bring inflation to 2 percent in the long run while maximizing employment.
SUMMARY
Opening Statements and Testimony
Chairman Sherrod Brown (D-OH)
Consumer costs are up because corporations are deliberately increasing them to increase profits. Corporate power concentration has created unfair markets, keeping prices high and wages low. We must pass the Supply Chain Resiliency Act and the Protect the Right to Organize Act. We cannot allow corporate executives to make decisions for everyday Americans. There must be better oversight of big banks to ensure they do not abuse small companies and poorer citizens. The Fed has a crucial job to ensure the economy works for everyone.
Stablecoins and digital assets are not backed by the full credit and faith of the United States. The Fed must ensure the security of these assets.
Senator Thom Tillis (R-NC)
Americans are crippled under current inflation. The Congressional Budget Office (CBO) predicted that the U.S. economy would return to its pre-COVID situation by middle of 2021. However, the Biden administration was aware of the upcoming supply chain issues, and they still supported a partisan $1.9 trillion in federal spending. Economists show that this spending increased consumption and skyrocketed inflation.
I am pleased the Fed is taking action to fix the US economy, but these actions have not been enough. The federal fund rate should be around 6 percent. The Fed has only taken reactive measures, and it has not done enough to proactively combat market conditions. Presidents of regional Fed banks should be appointed by the President and confirmed by Congress.
Jerome Powell, Chairman, Board of Governors of the Federal Reserve
The Fed’s long-term goal of inflation remains at 2 percent. Core Personal Consumption Expenditures (PCE) has risen 4.9 percent. The surge in prices of crude oil and other commodities are largely due to Russia’s invasion of Ukraine. COVID-19 related lockdowns in China will continue to increase supply chain issues.
The labor market has remained extremely tight with unemployment at a 50-year low and wages increasing. Labor demand is strong and labor supply is subdued. The Fed is highly attentive to the risks inflation poses to both maximum unemployment and stable prices. Ongoing increases in the target range of inflation will continue. We will be looking for compelling evidence that inflation is going down, and we anticipate interest rate hikes will continue to be appropriate.
Discussion
Monetary Policy
Brown (D-OH): Are there indications that inflation is coming down? Is the economy at the point of a recession? Powell: Overall, the consumer sector is doing well. Consumer spending is holding up relatively well amid interest rate hikes. I do not see indicators of a recession right now. Monetary policy is a blunt tool, and there is always risk that it could trigger a recession, but we will do what we can do avoid one.
Shelby (R-AL): What can we expect in the future from the Federal Reserve? What will you use to bring inflation under control? How important is price stability? Powell: Financial conditions have tightened and have led to a series of interest rate increases. Market conditions have priced in our rate increases. Markets have received our reaction well, and we will see continued progress toward higher rates. Price stability is the bedrock of the economy.
Menendez (D-NJ): How is raising interest rates on the underlying causes of the inflation going to change inflation? Powell: There are major parts of the economy where demand exceeds supply, and raising interest rates can help address this.
Tester (D-MT): Is the Fed doing anything in particular to rein in inflation in rural areas? What is the Fed doing to make sure these interest rate increases do not cause a recession? Powell: We understand there are very serious issues with agricultural input costs in rural areas. When times get difficult, we will work carefully with borrowers in the farm belt, but we are not there yet. Right now, we have a low short-term interest rate. We raised the rate by 75 basis points, but, in reality, our policy rate is still at a very low level. We think it will be appropriate to raise rates to a moderately restrictive level at some point to get inflation back down.
Rounds (R-SD): Monetary policy tools are meant to impact the demand side of inflation. Do you risk hurting the economy when you use interest rate increases to fix issues of the supply side? Powell: We know our tools cannot impact certain areas of inflation, such as energy or food inflation. Our statutory goal is headline inflation, and core inflation is a better indication of headline inflation that headline inflation itself. We look at core inflation to determine the real inflation of our economy. We are focused on areas where demand exceeds supply.
Warren (D-MA): When you raise interest rates, does it mean there is less money to invest? Does this risk costing workers their jobs? Powell: The purpose is to moderate demand. Part of this is to get the labor market back into balance.
Tillis (R-NC): As the Fed reviews monetary policy, will it commit to using a rules-based strategy? Could you explain why the interest rate is at 1.6 percent when rules-based decision making says it should be at 6 percent? Will the Fed push the inflation goal to below 2 percent, so that it equals out to 2 percent overtime? Powell: We do use various policy rules in all our analysis. The Fed has never used them in a prominent way to set policy in real time. We consult them on an on-going basis. We will continue to signal policy changes going forward. A lot of interest rate increases are already priced in. We will not push inflation temporarily below 2 percent. Our job is to find price stability and maximum employment in this new economy.
Kennedy (R-LA): Is our inflation due to demand being greater than supply? Are you trying to lower demand? Are you trying to slow down the economy? What could Congress do to increase supply while the Fed lowers demand? Powell: Demand is greater than supply in some parts of the economy. It is our job to lower demand growth without rushing the process. We are focused on growth. Congress’s actions will really matter in the medium- and long-run, but there is little to be done in the short-term. We should invest in workers, so they can remain in the labor market. We would need investments in infrastructure.
Hagerty (R-TN): Do unrealized losses limit the Fed’s ability to executive its monetary policy objectives? Will the Fed sell mortgage-backed securities and realize a loss? Powell: Unrealized losses play no role in our decision making. We have contributed $1 trillion in profits to the Treasury. We don’t have capital because we give our revenue to the Treasury.
Hagerty (R-TN): Is the war in Ukraine the biggest driver of inflation? How do you balance the Fed’s dual mandate of maximum unemployment and price stability? Powell: The war is not the largest inflation driver. Right now, the labor market is tight and unsustainably hot. On the inflation side, we are far from our inflation target. We have to restore price stability to put the economy back to a place where we could have maximum employment in the medium- and long-term.
Sinema (D-AZ): What are the Fed’s current thoughts on high index prices? Powell: We use personal consumption expenditure (PCE) instead of the consumer price index. We believe PCE does a better job measuring inflation in people’s daily lives.
Ossoff (R-GA): What mechanisms are most sensitive to the change in monetary policy? What forms of consumption will be most sensitive to it? What do you anticipate being the parts of capital markets that present the greatest risk to financial stability? Powell: The banking system is very strong and understands the risks it runs and how to sustain them. Capital markets showed real periods of illiquidity. The Treasury market became illiquid when people wanted cash, but the Treasury market has been functioning well all throughout this period.
Smith (D-MN): What is the basis for the argument that wages are too high and that they need to come down in order to rein in inflation? Powell: It is not that they are too high, but it is that they are increasing at a rate that is inconsistent with 2 percent inflation over the long term. Right now, wages are increasing at too high of a rate, which will cause companies to drastically increase prices.
Supply Chains
Warner (D-VA): Can you speak to how China’s zero-COVID policy is impacting supply chain issues in the US? Would investment in a semi-conductor chip supply chains help keep inflation down in the long term? Powell: Inflation is a global phenomenon, but there are characteristic differences between the inflation being experienced in different countries. Our inflation is more a result of high demand than most. We do think we have seen the fully impact of the lockdowns in China. However, advanced indicators show their economy may be returning to growth. I think we are learning about how we can improve resiliency and independence our supply chains.
Daines (R-MT): Will we need several years of greater than 5 percent unemployment to contain inflation? Powell: My assessment is it will depend on factors like the length of the war in Ukraine and supply chain recovery. There are paths to get inflation back to 2 percent without the disastrous consequences you mention. We need progress on the supply side, but the Fed’s job is to get demand down.
Energy/Commodity Prices
Brown (D-OH): What factors go into the price of gas in the U.S., and who has the power to bring it down? Powell: The price of oil is set globally, and then the cost of refining impacts the price of gas. The Fed’s monetary policy does not impact gas prices.
Reed (D-RI): Are the issues of gas price inflation and higher food costs global? Powell: Global events have a major impact on inflation in the US right now. There are also lingering issues of certain markets opening up following the pandemic.
Warren (D-MA): Will gas and food prices go down as a result of raised interest rates? How can increases in interest rates can moderate demand? Powell: I would not think so. These are largely supply issues.
Tillis (R-NC): Could you talk about the commodities that are impacted by rising interest rates and rising energy prices besides oil and gas? Powell: Energy prices go into many areas of the economy, namely manufacturing and ag production input prices.
Cortez Masto (D-NV): When considering the main factors in inflation, how much does the Fed consider consolidation in an industry such as the energy industry? Powell: Those are questions are for industry authorities. There are large cartels internationally that set the gas and oil prices. For the future price of oil, the best thing you can look at are oil futures. Ultimately, the question for us is whether we should lower or raise interest rates. We do not make judgments on industry structure. There is not much we can do about oil prices, as they are largely set at the global level.
Moran (R-KS): How can you assure Americans and farmers that their future will be better following the Fed’s actions? Powell: I see the issues on farms right now as a direct result of high inflation. The Fed’s job is to get inflation back down to 2 percent over time. There are factors we do not control, like commodity prices, that will not continue to increase forever. We understand higher interest rates are painful, but this is the tool we have.
Cryptocurrency
Brown (D-OH): Cryptocurrency values are collapsing. Can you talk about the financial stability and monetary policy risks of digital assets? How are stablecoins different from the US dollar? What is the Fed’s authority overregulating digital currencies? Powell: A stablecoin is an instrument that is backed up by assets that are meant the ensure the stable value of the token. It is a lot like a money market fund. However, there are many requirements for transparency in money markets. There is not a proper regulatory scheme for stablecoins yet. We need regulation of digital assets and stablecoins. That regulation is ultimately up to Congress, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC). We have authority over what federal reserve banks do with crypto assets on their balance sheets.
Lummis (R-WY): The SEC staff has said that it requires publicly traded companies to hold digital assets in custody as an on-balance sheet liability. Will these accounting standards be applied by the Fed to banks and bank holding companies? Powell: The SEC has authority over accounting roles, but now it is the Fed’s job to work through this. We do not have an answer yet.
Sinema (D-AZ): Is the Fed tracking cryptocurrency markets and the implications they have on broader monetary policy? Powell: These markets are being tracked very carefully, but we are not seeing macroeconomic implications yet. In this innovative, new space, there is a need for a better regulatory framework. Cryptocurrency markets should be subject to the same regulations as any other similar market. A lot of digital asset products are like the products in the banking systems or capital markets, and they are not regulated in the same ways.
Climate Change
Reed (D-RI): Is the Fed looking at companies decreasing their investment in oil or other typical energy sources as there is a move toward clean energy? Powell: There are certainly companies making the economic choice to slow their investment in oil.
Banking Policy
Lummis (R-WY): Since master accounts have public benefits, does the public have a right to know which banks have a master account and which have applied but not received them? For transparency, could you make this information publicly available? Powell: I would be glad to look into it. We set rules, but reserve banks make decisions regarding granting those accounts to specific banks.