On March 7, the Senate Banking Committee held a hearing entitled “The Semiannual Monetary Policy Report to the Congress.” The sole witness of the hearing was Federal Reserve (Fed) Chairman Jerome H. 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.
- Today’s hearing was largely focused on Basel III, bank failures, and the state of inflation, and briefly touched on the Fed’s issuance of a Central Bank Digital Currency (CBDC).
- On Basel III, Chairman Powell said that the Fed has not made any decisions on changes to the current rule yet as they work through comments, but the public should expect a final proposal to be released this year. He reiterated his statements from yesterday that the Fed will repropose Basel III if they find it necessary. Powell discussed measures to strengthen oversight and hold bank executives accountable for trading rule violations. Powell also said the Fed will not issue a CBDC without Congressional approval first.
- Most Republicans shared concerns with Basel III’s impact on credit and lending availability. Senator Rounds (R-SD) and Senator Tillis (R-NC) suggested the Fed should repropose Basel III, while Senator Fetterman (D-PA) and Senator Warren (D-MA) said the Fed should not lower capital requirements. Most Democrats were concerned about bank failures and accountability, with questions on how the Fed is addressing these issues.
SUMMARY
Opening Statements and Testimony
Chairman Sherrod Brown (D-OH)
- High interest rates are raising housing costs, hindering wage growth, and stifling small businesses. Now is the time for the Fed to decide if it is going to make good on its commitments to workers and their families by lowering interest rates and protecting our financial system from Wall Street executives who have used their wealth and their power to influence economic policy. Basel III will ensure that Wall Street does not succeed in this. I urge the Fed to finalize Basel III and remain committed to protecting the public despite the massive amount of money big banks and their lobbyists are spending trying to kill these protections.
Ranking Member Tim Scott (R-SC)
- The American economy has suffered from Bidenomics. The tsunami of regulatory red tape coming from our financial regulators further threatens economic opportunity. For months, we have heard bipartisan criticism of Basel III, which will restrict lending and access to credit for those who need it the most. 97 percent of the comments that the Fed received on the proposal are negative, which is good news for the American consumer. Opposition to Basel III comes from a diverse array of interests from farmers to housing groups.
Federal Reserve Chairman Jerome Powell
- Economic activity expanded at a strong pace over the past year. For 2023, GDP increased 3.1 percent, bolstered by solid consumer demand, and improving supply conditions. Inflation has eased notably over the past year, but it remains above the Federal Open Market Committee’s (FOMC) longer-run goal of 2 percent. The FOMC does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.
Discussion
Basel III
Rounds (R-SD): Do you think there is a consensus on Basel III? Will you call a vote on the proposal before there is a consensus? Powell: I do believe we will have a consensus before we move forward. We will not call a vote until there is consensus, and we are in the process of digesting comments currently.
Rounds (R-SD): I am concerned about Basel III’s impact on mortgage lending. Are you willing to withdraw or repropose Basel III? Powell: On the issue of mortgage lending, we have not decided what to do about those issues. If the Fed finds it is appropriate to repropose Basel III, we will not hesitate to do so. We expect there will be material and broad changes to the proposal before it is given final consideration.
Tillis (R-NC): There is a diverse group of industry participants, who are not usually aligned, aligned against Basel III. Basel III should be reproposed. I have no issue with higher capital requirements, but we should reduce the cost of regulatory burdens. When can we expect a decision from the Fed? Powell: The Fed will work through the proposal quickly. It is more important for to get it right, and we are not in a hurry, the public should expect a decision within the year.
Kennedy (R-LA): It is inappropriate for the Federal Deposit Insurance Corporation (FDIC) to lead the charge on Basel III. Powell: The Fed is not looking to the FDIC to lead this. The Fed will do what we determine is right.
Vance (R-OH): What was the original intent of who Basel III would apply to? Has the Fed decided on a threshold of who Basel III will impact? Powell: Basel III will apply to the 37 largest banks. It will impact banks with holdings of $100 billion and over. A diverse banking sector is something that needs to be preserved.
Vance (R-OH): Would you be willing to commit to saying that, in the process of amending Basel III, the Fed will remove the regional bank drawdown and limit Basel III’s application directly to the Global Systemically Important Banks (GSIBS) or $700 billion or above? Powell: I cannot get that specific at this time.
Warren (D-MA): Is the Fed committed to finalizing the strongest version of the Basel III capital requirements for the 37 largest banks in the wake of bank failures last year? Powell: Basel III is not intended to directly address failures like Silicon Valley Bank. The Fed is concerned about the supervision of banks. We expect to make material and broad changes and the Fed is discussing what that will mean.
Daines (R-MT): I am concerned that Basel III will impact credit and lending availability for small businesses.
Lummis (R-WY): How will lending work under Basel III? Powell: If anything were to constrict credit, there would be fewer loans made, but there would probably be more nonbanks willing to loan.
Fetterman (D-PA): I am concerned that Basel III will change from the great place it is in right now. Powell: U.S. banks are well-capitalized, and we are not talking about reducing current capital levels at all.
Bank Failures
Brown (D-OH): Last year’s bank failures illustrate the need for strong banking oversight. How has the Fed addressed that? Powell: This is a very broad area of work, and we have put careful study and thought into meeting goals to be quicker and more effective in bank oversight.
Brown (D-OH): How is the Fed holding bank executives accountable for any violations of trading rules? Powell: The Fed is looking at rules submitted by the inspector general and plans to implement all of them within the next six months.
Daines (R-MT): How is the Fed examining liquidity requirements for banks? Powell: The Fed is looking into liquidity requirements.
Digital Assets
Cramer (R-ND): What is the Fed’s position on CBDC and what is the difference between CBDC and bitcoin? Powell: The Fed is nowhere near adopting CBDC in any form. The Fed would not move forward with anything that would present privacy concerns.
Lummis (R-WY): Do you still agree that the Fed cannot introduce a CBDC without Congressional authorization? Powell: Yes.
Climate Regulation
Cramer (R-ND): What is the Fed’s role, if any, in climate regulation? Powell: The Fed is not a climate regulator.
Daines (R-MT): I applaud the Fed for not taking a position on climate regulation.