HFSC Powell Hearing

House Financial Services Committee

Monetary Policy and the State of the Economy

Wednesday, March 2, 2022

Topline

• The hearing focused on inflation, the SWIFT ban on Russia, and digital assets (CBDC and stablecoin).
• There was also noticeable and vocalized tension on the issue of Fed nominations even though the topic did not receive many direct questions.

Witnesses

• Jerome Powell, Chairman, Federal Reserve Board of Governors

Opening Statements
Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters expressed support for Ukraine and described a strong economy under the Biden Administration. She also explained the issue of Russia using a central bank digital currency (CBDC) to evade sanctions and the Federal Reserve (Fed) Board nominees’ confirmation vote being blocked in the Senate Banking Committee.

Ranking Member Patrick McHenry (R-N.C.)

In his opening statement, McHenry said the Committee should focus on the Russia issue instead of the Senate Banking Committee Federal Reserve nomination vote. He then discussed reckless spending by Democrats and rising inflation. He expressed approval for the Fed’s refusal to freeze bank accounts.

Rep. Jim Himes (D-Conn.)

In his opening statement, Himes emphasized the U.S. dollar’s position as the world’s reserve currency and the need to regulate cryptocurrency to prevent money-laundering and sanctions evasion.

Rep. Andy Barr (D-Ky.)

In his opening statement, Barr highlighted inflation and criticized the American Rescue Plan and the Fed’s monetary policy.

Testimony
Jerome Powell, Chairman, Federal Reserve Board of Governors

In his testimony, Powell discussed Russia’s attack on Ukraine. He outlined that the implications of the Russian attack on Ukraine for the U.S. economy are highly uncertain but that the Fed will be monitoring the situation closely. He also expects inflation to decline over the course of the year as supply constraints ease and demand moderates because of the waning effects of fiscal support and the removal of monetary policy accommodation. He then stated that the Fed has phased out its net asset purchases. With inflation well above two percent and a strong labor market, Powell said he expects it will be appropriate to raise the target range for the federal funds rate at the Fed’s meeting later this month. He also explained that reducing the Fed’s balance sheet will commence after the process of raising interest rates has begun and that it will proceed in a predictable manner primarily through adjustments to reinvestments. Powell concluded that the Federal Reserve finalized a comprehensive set of new ethics rules to substantially strengthen the investment restrictions for senior Federal Reserve officials.

Question & Answer

March Federal Open Market Committee (FOMC) Meeting

Reps. Ann Wagner (R-Mo.) and McHenry asked for Powell’s thoughts on the upcoming FOMC meeting. Powell said it will be appropriate to raise the target range for the federal funds rate at the meeting and that the Fed will write down their new Summer economic projection of the path forward on the economy and with rates. Powell also expects that at the Fed will create a plan and come to an agreement on how to shrink the balance sheet, but the plan will not be finalized at the meeting. He added that finalization of the plan will be completed when the Fed believes the time is right at a future meeting. Regarding the Ukraine war, Powell said the Fed wants to avoid adding uncertainty to what is already a challenging and uncertain moment. He added that he does not know yet whether the situation in Ukraine significantly alters the Fed’s expectation for the upcoming rate increase.

Inflation

Reps. Pete Sessions (R-Texas), Bill Posey (R-Fla.), Roger Williams (R-Texas), and Waters asked about the Fed’s response to inflation. Powell said Fed policies cannot affect supply side conditions but can affect demand, adding that it is important for the Fed to move away from very highly stimulative monetary policy settings to more normal rate levels. He added that getting inflation under control requires raising interest rates and shrinking the Fed’s balance sheet with care.

Rep. Michael San Nicolas (D-Guam) asked about the Fed’s change in tenor on transitory inflation, the credibility of the Fed on inflation, and the Fed’s responsiveness to inflation. Powell said the Fed was expecting relief in the fall with vaccinations, higher labor supply, etc., but that did not happen, adding that the theory was not wrong but that the supply side restraints were more durable than expected. He also said that markets are acting appropriately to the Fed’s assessment and that the Fed is working toward price stability.

Rep. Jesus “Chuy” Garcia (D-Ill.) asked how raising interest rates will lower prices. Powell said demand will moderate over time as interest rates get into the economy and that price increases will then moderate as well. Rep. Al Lawson (D-Fla.) asked if we are in a better position to deal with inflation now than in the past. Powell said it is important that the Fed gets on top of current inflation but that the U.S. is in a good place to get inflation under control, ensuring workers can still get good jobs and pay increases. Rep. Madeleine Dean (D-Pa.) asked why the strength of the U.S. economy makes our inflation worse relative to other economies. Powell said other strong economies are also having high inflation and that the U.S. is also having a stronger economic recovery than other countries.

Rep. David Scott (D-Ga.) asked if rising prices on commodities and food will destabilize global markets and what the Fed can do about it. Powell said the Fed does not have the tools to address this. Rep. Alma Adams (D-N.C.) asked about rate hikes and the freeze on Russian assets as they pertain to the price of certain commodities. Powell said the price of commodities is set by supply and demand in the world market but that the Fed intends to be careful and believes that inflation will go back down.

Reps. Barry Loudermilk (R-Ga.) and Bill Huizenga (R-Mich.) asked if U.S. reckless spending is a contributing factor to inflation. Powell said that with the withdrawing policy accommodation and the fiscal spending that has happened, the Fed believes there will be some relief on inflation.

SWIFT and Russia Sanctions

Reps. Juan Vargas (D-Calif.), Frank Lucas (R-Okla.), and Wagner asked about the Fed and Russia sanctions and what effect Russian sanctions and the Society for Worldwide Interbank Financial Telecommunication (SWIFT) ban will have on Russia. Powell said the Fed does not impose sanctions, which are up to Treasury, adding that the effects of sanctions so far appear to be significant. Rep. Nydia Velazquez (D-N.Y.) asked how the SWIFT ban for Russia might necessitate central bank intervention on liquidity. Powell said that risk scenario is unlikely. Rep. Ritchie Torres (D-N.Y.) asked how easily Russia could build a competing system with SWIFT. Powell said that a long term question because that cannot be done overnight.

Digital Assets

Vargas asked if crypto would allow Russia to evade sanctions. Powell said that issue underscores the need for congressional action on a regulatory framework for digital finance, including crypto currencies. Reps. Stephen Lynch (D-Mass.) and Vargas asked for comment on central bank digital currency (CBDC). Powell referenced the Fed CBDC paper and said the Fed is looking forward to reading comments on the paper, will be working on the project in coming years, will make recommendations on the appropriate structure, but still needs authorizing legislation from Congress. Torres asked if dollar stablecoins can play a role in out-competing China. Powell said there may well be a role for well-regulated stablecoins and that they could be popular among consumers and could help the U.S. compete with China.

Bank Mergers

Garcia asked if it is appropriate to issue a moratorium on bank mergers while the Fed updates its framework for their review. Powell said there are statutory guidelines for merger evaluations and that any changes would come through legislation or new personnel at the Fed, which the agency currently does not have.

Fed Diversity

Garcia asked if the Fed would commit to adding bank workers to its advisory councils. Powell touted diversity on the Fed’s councils and said the Fed always seeks out representation from labor and those representing the interests of low-income communities.

Labor Force Participation

Rep. Carolyn Maloney (D-N.Y.) asked what the drop in labor force participation means for the economy and workers. Powell said the lower rate reflects retirements and means that our labor force is smaller but that some workers want to come back but cannot because of COVID or other factors.

Supremacy of the Dollar

Maloney asked what would happen to the economy if China and Russia stopped using the U.S. dollar. Powell said the impact would not be felt right away, but over time and that a new economic ecosystem would need to develop with a new currency, adding that it is possible to have more than one large reserve currency. Rep. Warren Davidson (R-Ohio) asked about threats to the supremacy of the dollar. Powell stated that the U.S. dollar is sound money.

Monetary Policy

Lawson and Velazquez asked how the Fed is coordinating with other central banks on interest rates and what plans are for interest rates. Powell said the Fed is in ongoing contact with its central bank colleagues, highlighting a meeting set for this upcoming Monday. He also said the Fed expects to raise rates this year to a more appropriate level given the fast and strong economic recovery. Torres asked about the risk of raising rates causing stagflation. Powell said the goal is to raise rates to reach price stability and provide a strong labor market but that there are no guarantees. Dean asked what impact consumers can expect to see from rate hikes. Powell said as rates move up, rates on mortgages, car loans, appliances, etc. will gradually increase, people will start to spend a little bit less, and the economy will go back to normal.

Rep. Bill Foster (D-Ill.) asked about the time scale of unwinding the balance sheet. Powell said it takes about three years to get back to where the Fed believes the balance sheet needs to be with ample reserves.

Reps. David Kustoff (R-Tenn.) and Anthony Gonzalez (R-Ohio) asked how Russia’s invasion of Ukraine affect the Fed’s balance sheet and rate hike policies. Powell said it remains to be seen how Fed policy would change without the invasion and that a long-term conflict with Russia has not yet happened, so the effects are uncertain.

Small Business Lending

Velazquez asked about online lending challenges for businesses. Powell said data produced by recent surveys on the issue is incomparable.

Community Reinvestment Act (CRA)

Velazquez asked about a potential joint CRA notice of proposed rulemaking (NPRM). Powell said that is coming soon. Torres asked if race should be considered when enforcing the CRA. Powell said the Fed is now sitting down with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) about this and that race is being considered in those conversations.

Cybersecurity

Lynch asked if after banning Russia from SWIFT, the SWIFT system could withstand a cyber attack. Powell said that is a question for Treasury. Torres asked how much the Fed invests in its own cybersecurity every year, and Wagner asked what the Fed has done since the invasion of Ukraine. Powell did not have a figure for Torres but said the Fed invests heavily in cybersecurity and has seen no troubling incidents yet. He also said the Fed has been on very high alert for cyber-attacks. Kustoff asked what confidence the Fed has in banks to thwart a Russian cyber-attack. Powell said banks are on high alert and doing everything they can to protect themselves.

Fed Board Nominations

Rep. Alma Adams (D-N.C.) asked if the Fed should have a full Board. Powell declined to answer, citing his position as a nominee.

Financial Stability

Adams asked if there are U.S. institutions that have outside default risk related to Russian assets. Powell said U.S. institutions have relatively little exposure to Russia. Wagner and Lucas asked about U.S. financial stability and capital levels needed to handle an economic fallout from the war. Powell said U.S. capital levels and equity levels are at decades high and that a lack of capital is not a threat at this point. He added that the effects may be unexpected but that it is hard to say what those may be but that there would be no direct effects.

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