On June 22, the Senate Banking Committee held a hearing entitled “The Semiannual Monetary Policy Report to the Congress”. The sole witness in the hearing was Federal Reserve (Fed) Chairman 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.
- Members of the Committee pushed Fed Chair Jerome 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 if the economy exhibits continued modest growth, a gradual decrease in labor market demand, and improvements in the inflation rate, the FOMC believes it will be appropriate to raise interest rates once or twice more this year.
- Powell explained that the only path to reduce inflation and ensure price stability is by raising interest rates, and, while that can be painful, it gradually slows down demand so that supply and demand can be aligned.
- Powel assured the Committee that increased capital requirements would largely skew towards the largest banks, not regional and community banks, and any increase in requirements would require a strong justification from the Fed’s perspective.
SUMMARY
Opening Statements and Testimony
Chairman Sherrod Brown (D-OH)
For the largest multinational corporations, inflation has been a perfect excuse to increase profits by raising prices far beyond the costs of their inputs. Hiking interest rates can do little to solve that problem. The Fed has made progress as inflation is at the lowest level it has been in the past two years, the country added 339,000 new jobs in May, and unemployment for minority communities remains near historic lows. Increasing interest rates is not the only tool the Fed has to fight inflation. Ultimately, it is crucial for the Fed to protect American workers, fight against inflations, and promote an economy with a strong and growing middle class.
Ranking Member Tim Scott (R-SC)
The Fed, specifically Vice Chair Barr, did not take supervisory action to hold the bank executives accountable for the failure of Silicon Valley Bank and Signature Bank. The recent bank failures have been a failure in three parts. First, the bank executives were neglectful. Second, the Fed failed to uphold their supervisory duties and keep bank executives accountable. Third, the ten rate increases over the past year due to high inflation added pressure to the banking environment. Addressing these issues should be at the forefront of the Fed’s agenda as we examine how rising interest rates contributed to the bank failures today. Increasing capital standards is not in the best interest of small businesses and people looking for loans.
Jerome Powell, Chairman, Federal Reserve
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.
Discussion
Monetary Policy
Brown (D-OH): How does the Fed plan to protect jobs by raising interest rates? How will job losses disproportionately impact marginalized communities? Powell: If the economy performs as expected, it will be appropriate to raise interest rates as we are committed to getting inflation back to its target goal. We decided to maintain interest rates in the last meeting to stretch out time for making these decisions. There has not been a meaningful increase in unemployment. We have persistently had a much higher demand for workers than supply available, and it is working families who suffer most from the effects of high inflation.
Scott (R-SC): What are your views on American spending practices? Powell: The Fed is not charged with supervising fiscal policy in any way. The U.S. Federal budget is on an unsustainable path, but it is only our job to address monetary policy, not fiscal policy.
Menendez (D-NJ): What economic progress does the Fed expect to see in the future? Powell: Inflation is coming down, but we have a long way to go as it is still at four to five percent.
Tester (D-MT): What factors does the Fed consider when deciding to raise interest rates? Powell: If the economy shows the signs we expect, we believe it will be appropriate to raise interest rates one to two more times this year. We expect continued modest growth, we expect the labor market demand to gradually cool off, and we expect inflation to improve.
Warner (D-VA): What are your concerns regarding the shrinkage of the Fed’s balance sheet? Powell: We have a high level of cash reserves in the system, and we do not expect they will be scarce anytime soon. The refilling of the Treasury general account is going well, and we are watching that very carefully.
Van Hollen (D-MD): Can you explain how real wages have grown in recent months? Powell: Overall, we have seen real wages going up on a 12-month basis.
Kennedy (R-LA): How would continuing to increase the budget impact inflation? Powell: At the margin, deficit spending stimulates the economy and would have a small effect on inflation.
Cortez Masto (D-NV): Do you think that the credit tightening we see from regional banks is acting as a substitute to an additional rate hike? What are some risks of FOMC raising interest rates? How do you plan to balance price stability with unemployment rates? Powell: We do not see a lot of evidence of additional credit tightening on top of what has happened as a result of interest rate increases. We are trying to avoid the mistake of going too fast on our interest rate hikes. Overwhelmingly, FOMC believes it will be appropriate to raise hikes once or twice in the near future. We have a high level of job openings compared to the number of unemployed people, which means there is tremendous demand for workers. We must mitigate this demand.
Smith (D-MN): What is the relationship between wage growth and inflation? Do you see a path for inflation to slow without us seeing job losses? Powell: Overall, wages are moving up faster than inflation. The means by which supply and demand get back into alignment will involve the job openings rate going down as opposed to the unemployment rate going up. We do expect the unemployment rate will go up a little further as it has been at historically low levels.
Daines (R-MT): What is your outlook on inflation for the rest of the year? Powell: The Fed is committed to reaching our two percent inflation goal as soon as we can. If the economy performs as expected, we believe it will be appropriate to raise interest rate hikes once or twice this year.
Fetterman (D-PA): How will you restore price stability and simultaneously ensure unemployment does not skyrocket for lower-income areas? Powell: Inflation hurts those who are living on low fixed incomes the most. The way we ensure price stability is by raising interest rates and lowering demand. It our goal to get supply and demand back into alignment with as little effect on the labor market as we can.
Van Hollen (D-MD): To what extent did the bank failures impact decisions the Fed will make about interest rates? Powell: We are going to move rate hikes at a slower pace which will allow us to make informed decision.
Bank Capital Requirements
Scott (R-SC): How much is the Fed planning to raise bank capital requirements? Powell: With bank capital, it is going to be a tradeoff between the availability and cost of credit and how much of a safety net we can install in the sector. We plan to assess this tradeoff and make the right decision.
Britt (R-AL): How is the Fed planning to manage the downstream impact of increased capital requirements on smaller community banks? Powell: The proposals under consideration do not apply to banks under $100 billion. We are helping small banks profit by not adopting a one-size-fits-all approach to these capital requirements. Community banks are valuable as they fill the role of relationship lenders.
Vance (R-OH): How will increased capital requirements impact small banks? Powell: The Fed are very supportive of a variety of bank sizes. We try hard not to take a one-size-fits-all approach to capital requirements.
Kennedy (R-LA): How will an increase in capital requirements affect community banks? Powell: The capital requirements will have a skewed impact on large banks.
Hagerty (R-TN): How is the Fed planning to address how a capital increase will impact banks’ lending power? Powell: Our proposal is constantly evolving. We will have a discussion and comment period after we receive a final proposal.
Cramer (R-ND): How does the Fed plan to balance capital requirements with the potential for a credit crunch? Powell: The big capital increases would be for big banks and not small banks, and they would have to be justified if enacted.
Daines (R-MT): If banks are so strong now, why would the Fed increase capital requirements? How will this impact small businesses? What is your outlook on inflation for the rest of the year? Powell: We are talking about the big banks much more than the regional and community banks. Once we have a proposal, we will be addressing whether it is appropriate to significantly raise capital requirements and if so, how much to raise it by. Stronger capital means that banks will be able to land on their feet during harder times, although we are aware this is a tradeoff.
Tillis (R-NC): How much time does the voting process allow for Fed Governors to review the Basel III proposals? How will this impact capital requirements? Powell: I will ensure they have enough time to review and discuss the documents, so they do not have to solely rely on Vice Chair Barr’s opinion. We are going to discuss and justify any changes that are to be made to the Basel III capital requirements.
Bank Failures
Brown (D-OH): How will the Fed ensure bank failures will not happen again? Powell: The Fed has learned lessons from recent bank failures, and we are going to respond appropriately to ensure that does not happen again in the same manner.
Warren (D-MA): Does the Fed share responsibility for the failure of SVB? Powell: The Fed was not forceful enough in its oversight in hindsight.
Menendez (D-NJ): Will we see banks fail as mortgages come due? Powell: It depends on which banks have high concentration of real estate and we see that most with smaller banks. We have a supervisory toolkit to work with those small banks and address those issues.