House Committee on Financial Services: The Federal Reserve’s Semi-Annual Monetary Policy Report
House Committee on Financial Services
The Federal Reserve’s Semi-Annual Monetary Policy Report
Wednesday, March 6th, 2024
Topline
- Members from both parties expressed concerns over the Basel III proposal, with Powell acknowledging that a re-proposal is a very plausible option.
- Republicans also raised concerns over the Fed’s proposal on Long-Term Debt Requirements for Large Bank Holding Companies.
- Democrats pressed Powell to start lowering interest rates, citing the negative impact higher interest rates have had on the housing market and affordable housing.
Witnesses
- The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System
Opening Statements
Financial Services Chair Patrick McHenry (R-N.C.)
In his opening statement, McHenry said the inflationary fire has not been extinguished, noting that food, energy, and shelter costs remain high. He blasted the Biden Administration for false claims that Bidenomics and the American Rescue Plan have put the country back on track. McHenry also criticized the Biden Administration for playing the blame game and pointing to corporate greed and shrinkflation instead of acknowledging their own inflationary spending. He commended Powell for leading the Federal Reserve with a steady hand and noted that the Federal Reserve had to adjust rates because of Democrats’ spending. McHenry described the Basel III proposal as fatally flawed and called on regulators to withdraw the proposal and start over. He warned regulators against proceeding with a cut-and-paste regulation system and cautioned against finalizing the long-term debt proposal.
Financial Services Ranking Member Maxine Waters (D-Calif.)
In her opening statement, Waters noted that while she is happy with the Biden Administration’s progress on inflation, there is more to do. She warned that housing is the number one driver of inflation and said inflation would remain an issue until the housing shortage is addressed. Waters criticized Republicans for making the economy worse by cutting funding for housing assistance programs. She discussed Democrats’ introduction of three groundbreaking bills to address the housing crisis and bring down inflation. Waters concluded that those three bills, the Housing Crisis Response Act, the Ending Homelessness Act, and the Downpayment Towards Equity Act, would collectively create 1.4 million affordable, accessible, and resilient homes.
Subcommittee on Financial Institutions and Monetary Policy Chair Andy Barr (R-Ky.)
In his opening statement, Barr noted that while rates of inflation have come down due to monetary tightening, overall price levels remain high. He warned that the average American family is paying $15,000 more for the same goods and services that they were purchasing three years ago before the Biden Administration. Barr said that while he is pleased that the Federal Reserve is taking action to get inflation under control, he is not pleased with the Federal Reserve’s numerous politicized and under-analyzed policy proposals. He urged the Fed to withdraw and repropose the irredeemably flawed Basel III Endgame proposal and noted that 97 percent of public comments on the proposal express disapproval.
Subcommittee on Financial Institutions and Monetary Policy Ranking Member Bill Foster (D-Ill.)
In his opening statement, Foster explained that since the U.S. has recovered from the worst economic impacts of the pandemic, ordinary monetary and fiscal policy should satisfy the Fed’s dual mandates.
He noted that inflation is slowing, jobs are being created, and GDP is outpacing expectations. Foster concluded that the fiscal response to the pandemic was appropriately tailored, and said the country is approaching a soft landing.
Testimony
The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System
In his testimony, Powell described how the economy is making steady progress towards slowing inflation and maintaining employment. He emphasized the Fed’s strong commitment to returning inflation to its two percent objective. He noted that while GDP grew over the past year, activity in the housing market was subdued. Powell said the labor market remains tight but noted that supply and demand conditions are coming into a better balance. He emphasized that the unemployment rate has remained near historic lows, and noted the links between strong job creation, new workers entering the labor market, and high immigration.
Powell explained that total personal consumption expenditures (PCE) prices rose 2.4 percent over the past year and excluding the volatile food and energy categories, core PCE prices rose 2.8 percent. He said long-term inflation expectations appear to have remained well anchored, and discussed how restrictive monetary policy is putting downward pressure on economic activity and inflation. Powell said the Fed believes that its policy rate is likely at its peak for this tightening cycle and explained that if the economy continues to evolve as expected, they will begin dialing back policy restraint at some point this year.
He warned that reducing policy constraints too soon or too much could harm progress and require additional, possibly more intense, restrictive policy. Powell pledged to carefully assess incoming data, evolving outlook, and balance of risks before adjusting the policy rate target range. He concluded that it would not be appropriate to reduce the rate until the Fed gains greater confidence that inflation is moving sustainably towards 2 percent.
Question & Answer
Basel III Endgame
McHenry said there have been serious concerns expressed about the Basel III endgame proposal. He noted there are process concerns, as well as substantive concerns as the proposal goes much further than the Basel Committee’s recommendations. He then asked if the Fed is listening to these comments and what the status of the rulemaking is. Powell said they have received many comments and they had begun conducting a quantitative impact study (QIS). He also said that the Fed understands the concerns and that there will be broad and material changes to the proposal. Powell expressed confidence that the final product will be one that has broad support from the Fed and the public. He also noted that on process, there have not been discussions yet on reproposal but that when the Fed reaches that point in the process it would not hesitate to do so if deemed necessary.
McHenry followed up asking if Powell would not rule out reproposal. Powell responded that he would not rule it out and said it is a very plausible option. McHenry applauded Powell’s intention to build consensus on the rulemaking before finalizing any regulation.
Rep. Frank Lucas (R-Okla.) asked if the Fed would work to fix issues in the Basel III endgame proposal regarding its potentially harmful effects on commodities and derivatives markets. Powell first said that he wants to echo the fact that the US commodity and capital markets are one of our greatest national assets and must be protected. He said the Fed is aware of the concerns Lucas raised and is working on the issue.
Lucas explained that the Basel III endgame proposal will disincentivize banks from participating in central clearing and said that he worries the new rules will make it more difficult for end users to find a bank to clear their hedges. He then noted that this also comes at a time when the SEC has just finalized a rule that will increase clearing and costs in Treasury markets. He said this will have a serious impact on market access and liquidity in commodity and treasury markets. Lucas asked if the Fed would work with the CFTC to address this problem. Powell said he is aware of those concerns and that he will work with other agencies and make sure that the capital proposal properly addresses them.
Rep. Bill Huizenga (R-Mich.) said he has heard repeatedly that elements of Basel III overlap with the Fed’s annual stress tests and asked what the Fed will do to address that. Powell said the Fed has just begun to figure out what it will do with Basel III and said that its interaction with stress tests is something they are looking at.
Huizenga then asked if the banks that needed a government bailout during the bank failures of the Spring of 2023 needed more capital or if they were simply poorly managed. Powell said that in the case of Silicon Valley Bank, the event that triggered their eventual failure was their announcement of a capital raise, but that he would not say capital is what caused their failure. Instead, he explained that their funding structure was the primary issue. Huizenga noted that some proponents of the proposal attempt to use the failures of Silicon Valley Bank and others to justify these new capital rules.
Rep. Ann Wagner (R-Mo.) highlighted her and Ranking Member Sherman’s letter to the Fed on the proposal’s impacts on capital markets. She then asked why the Fed is continuing to pursue this proposal instead of reproposing the rule. Powell said that the capital markets concerns Wagner raised are among the concerns he raised when the rule was first introduced. Powell then explained the Fed is working through the comments and will begin making decisions about what to do with the proposal soon.
Barr said that Powell has previously said that capital frameworks are about right and that banks are well capitalized. Barr asked if Powell still believes that, and Powell responded he does. Barr then asked if a reproposal of Basel III in a capital neutral way could be done without jeopardizing financial stability. Powell said hypothetically it could. Barr then cited a report that said 97% of the comments letters on Basel III either opposed, called for a reproposal, or expressed substantial concerns and asked Powell if he saw that report and if it concerned him. Powell said he did see that and said that it is unlike anything he has seen.
Barr noted the strange timeline of the Fed finishing collecting data for its quantitative impact study on the day of the comment period deadline instead of making that data available to the public prior to the proposal of the new capital requirements. He then asked why the Fed chose to do data collection during the comment period. Powell said it is not over yet and that Vice Chair Barr committed to putting the QIS out for comment and that those comments will be taken into consideration as the Fed thinks about its path ahead.
Barr asked if Powell has seen any other proposal during his tenure that has elicited this much dissent, and Powell responded no. Barr then noted that Powell has previously said the Fed aims to achieve consensus on the Basel proposal and asked if the Fed has achieved consensus on the Basel proposal yet. Powell said that he believes the Fed will, but that they are only now beginning to decide on the path ahead.
Barr asked if the banking system-wide business model heterogeneity contributes to financial stability and Powell answered that he strongly believes that. Barr followed up asking if a concentrated business model in the banking sector would present a potentially systemic risk and Powell said it potentially could. Barr then noted that the proposal could push smaller and more regional banks out of certain business areas and push them into a smaller and more concentrated looking industry, increasing risk and decreasing competition and asked if Powell shared those concerns. Powell said that it is a serious concern and goes into his thinking about the proposals and where it needs to go.
Rep. Roger Williams (R-Texas) emphasized that it’s time for federal regulators to listen to Americans and rework the Basel III proposal entirely. Williams asked Powell to discuss how the Fed is addressing concerns about the Basel proposal. Powell said they are reviewing comments and will start to make decisions about altering the proposal soon.
Rep. Brad Sherman (D-Calif.) said the Basel III proposal discriminates against Main Street and prioritizes Wall Street. Sherman said that private firms will have a harder time getting loans under the Basel proposal, noted the proposal ignores mortgage insurance as a factor in setting capital requirements on mortgages, and explained that making investments in long term bonds on Wall Street would allow firms to not recognize the losses so long as they are in the hold till maturity category. Sherman said he hoped that Powell would look at these issues with regards to Basel III. He then asked if Powell would personally look at the paradox where Basel III treats clean energy tax credits much more harshly than low-income tax credits. Powell said yes.
Rep. Barry Loudermilk (R-Ga.) asked if a rule that forced banks to tighten lending would drive businesses and consumers to alternate forms of credit. Powell said he does and that if lending costs are raised for banks, then at the margin non-bank lenders will get some of that business. Loudermilk then asked if Powell would commit to considering the effects of the proposal on small business lending before moving forward with Basel III. Powell said he did not want to commit to conducting a large study but would investigate the issue.
Loudermilk asked if Powell had discussed withdrawing the proposal with Vice Chair Barr and other Fed Governors. Powell said he did not want to get into internal workings of the Fed and said that reproposal is a live option and that first the Fed must decide what changes need to be made.
Foster said directionally the effect of raising capital requirements is clear but expressed skepticism about the magnitude at which raising capital requirements would raise costs on banks and in turn consumers. Foster then asked if the data the Fed has collected is enough to analyze the magnitude of these effects. Powell said it is very hard to get down to the micro level to try and analyze that. Foster emphasized that the magnitude matters a lot and asked if that will not be in the analysis done in the Fed’s QIS. Powell said he believes the Fed has done some work on that and that the banks and other participants have done work on that as well, coming up with a range of answers, but it is hard to say with any confidence what the magnitude will be.
Rep. Warren Davidson (R-Ohio) said he agreed with everything Barr said about the Basel III proposal.
He added that we should not reward banks for having excess reserves and warned that rewarding them for taking no market risks harms the economy. Davidson said people wouldn’t be able to afford loans and would see higher interest rates as the result of the Basel III proposal.
Rep. John Rose (R-Tenn.) asked if Powell was committed to maintaining equal competitive opportunity for foreign banks’ US operations. Powell said yes. Rose asked how that would impact Powell’s work to finalize the Basel III proposal. Powell noted they received comments from foreign banks and said the Fed would consider those comments and make appropriate changes.
Rose said Basel III incentivizes derisking balance sheets. He noted that can be done through the synthetic securitization framework, which has to be approved by the Fed. Rose said there is a significant backlog of reviews and approvals of synthetic securitizations and that the Fed is simultaneously directing and impeding the risk transfer. He then asked Powell if he would commit to looking at the back log and addressing it. Powell said these types of transactions are becoming popular right now and explained that the Fed is not stopping them, they are just trying to be careful.
Rep. Sean Casten (D-Ill.) asked if Powell could examine the clean energy tax equity provisions in the Basel III proposal and issue an addendum before the rule is finalized. Powell said he didn’t know, but emphasized they were making good progress on reviewing comments.
Rep. Steven Horsford (D-Nev.) asked what steps the Fed is taking to mitigate the impacts that Basel III may have on minority borrowers who disproportionally rely on high loan to value (LTV) mortgages. Powell said they are carefully evaluating comments. Horsford asked if Powell was concerned that these policies would reinforce the decade-long retreat of banks from the mortgage market and push more originations to non-bank institutions. Powell said the Fed was seriously considering that as they make decisions about recommended changes.
Horsford then asked why the Fed feels it is necessary to include new restrictions around operational risk in light of concerns that they will increase the cost of or prevent banks from offering altogether important services such as underwriting, investment advisory, or insurance. Powell responded that that is one of the concerns that has been raised about the proposed changes to operating risk and that the Fed is in the process of looking at these issues.
Rep. Bryan Steil (R-Wisc.) asked if the broad diversity of voices who are concerned about the Basel III proposal is of concern to Powell. Powell said the Fed is assessing those concerns to eventually address them.
Rep. Ritchie Torres (D-N.Y.) said he has an open mind on the Basel III proposal. He noted the Fed is reassuring people that the banking system is sufficiently capitalized, but it is advancing the Basel III proposal on the assumption that we are under-capitalized. Powell said increased capital always adds to safety and soundness but that there is a cost and emphasized the need to find the right balance.
Torres asked if the goal is to align the US banking system with global banking, why the Fed is imposing regulations that are more stringent than those in the rest of the world. Powell agreed that proposal exceeds the minimal standards and what other countries are doing and said that Torres question is a good one.
Torres asked Powell to reconcile Basel III’s regulatory standardization with Congress’ mandate for tailoring. Powell agreed tailoring is necessary for a diverse banking system to work and that the Fed should not throw tailoring away.
Torres asked if Basel III could have the unintended consequence of reinforcing the trend toward shadow banking and increased consumer risk. Powell said yes that is a risk and said that the Fed has seen intermediation activity moving out of the regulated system.
Interest Rates & Inflation
McHenry explained that since inflation is coming under control, there is significant speculation about whether there will be significant rate cutting this year. He asked Powell to respond to the speculation. Powell explained that the answer depends on the path of the economy, and noted the Fed would consider inflation and employment data.
McHenry asked when the Fed would be forced to cut rates. Powell noted there is some confidence that inflation is declining and remaining stable, but said he wants more data to support that confidence.
Hill noted the FOMC’s framework on a flexible average inflation targeting framework which was released during the pandemic and would give the Fed flexibility to allow inflation to run above two percent and stay there for some time. Hill asked if Powell thought that was a mistake in hindsight and if it was under review. Powell said the Fed agreed to review that on a five-year basis meaning the review would begin later this year and said that Hill’s question is one they would look at. Powell noted that the FOMC’s change in approach was really a response to the fact the US had low interest rates and low inflation for a long time, but now we have entered a different period where the effective lower bound could be very different.
Rep. Gregory Meeks (D-N.Y.) asked if our economy is doing better than most others in the world right now. Powell said yes. Meeks noted that unemployment is near a 50-year low, and inflation is coming down in the U.S. faster than anywhere in the world, and Powell agreed. Meeks asked if we need to get the housing market and commodity prices under control, to which Powell said yes. Meeks said the U.S. is recovering from the pandemic better than any other country thanks to Powell’s leadership at the Fed and the policies of President Biden.
Rep. Al Green (D-Texas) asked if we are approaching a soft landing of the economy. Powell noted there are very attractive economic conditions right now, and explained there is a possibility to continue growth while reducing inflation. Green asked if there would be an official statement that we’ve achieved a soft landing to give people a sense of progress and relief. Powell said no and explained that the Fed would keep their heads down and work. He noted that other people can make that determination.
Rep. Pete Sessions (R-Texas) said the Biden Administration’s energy policies are keeping prices arbitrarily high and diminishing long-term economic progress. He asked Powell to respond to President Biden’s recent announcement on natural gas explorations. Powell said it wasn’t appropriate for him to comment on policies outside of his jurisdiction. Sessions said energy policy and overregulation are impacting the housing crisis and inflation and asked Powell for a memo that outlines the effects of the Biden Administration’s energy policy on the economy.
Rep. Jim Himes (D-Conn.) said the U.S. economy has made a soft landing and outperformed economic predictions. He noted core inflation is falling as supply bottlenecks have eased.
Wagner noted members on the Fed’s Monetary Policy Committee estimate that the Fed’s target interest rate will average 4.1 percent in 2024. She asked if that meant that those members anticipated that the Fed would be cutting interest rates this year by as much or than a full percentage point. Powell said no and explained that those numbers are for through 2025.
Wagner asked if Powell anticipated more cuts coming. Powell explained that if the economy continues to grow, unemployment remains low, and inflation slows, it would be appropriate for interest rates to come down significantly over the coming years. He emphasized that the Fed must be responsive to the economy.
Rep. Nydia Velazquez (D-N.Y.) asked Powell to explain what evidence he’s looking for with inflation before the Fed lowers interest rates. Powell explained the Fed is being careful and is looking for more evidence that the economy is on a path to sustainably reaching and maintaining 2 percent inflation.
Sherman said he wanted to convince Powell to cut rates sooner. He noted there are a lot of arguments that the goal for inflation should be a little higher than 2 percent and warned of interest rates’ impact on the cost of living for consumers.
Rep. Joyce Beatty (D-Ohio) noted that during the Biden Administration, there has been historically low unemployment, high economic growth, and slowing inflation.
Beatty asked if Powell was concerned about the effects that rising interests have on financing new housing construction, and how he planned to control for long-term housing inflation. Powell said you bring inflation down by raising interest rates. He acknowledged that it affects housing but supports long-term price stability.
Rep. Ayanna Pressley (D-Mass.) noted that while she welcomed the Fed’s decision to freeze rates late last year, she feels the Fed needs to start cutting rates. She asked Powell about the impact of lowering interest rates on the housing market, including the rental, construction, and purchase markets. Powell said lowering rates would likely lead to the housing market picking up. Pressley emphasized how higher rates have slowed down affordable housing developments.
Long-Term Debt Requirements for Large Bank Holding Companies
Hill asked if the Fed is considering changes to the requirements for regional banks to issue long-term debt. He noted that there is currently a 6 percent requirement at the holding company level and bank level, which he described as redundant. Powell said the Fed is evaluating comments.
Rep. Blaine Luetkemeyer (R-Mo.) said he would like to associate himself with Hill’s remarks on the Long-Term Debt proposal. He emphasized that the proposal should be held up until there is a final Basel rule.
Williams said the long-term debt proposal would be punitive to regional banks and asked if this proposal goes against the requirements of S2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act which requires banking regulation to be tailored to the size of an institution. Powell said that the Fed is committed to implementing S2155 and that regulation and supervision needs to reflect the size of an institution.
Rep. William Timmons (R-S.C.) cited his concerns over the Long-Term Debt proposed rule. He asked if the Fed provided feedback about the rule’s potential interplay with the Basel III proposal. Powell said they are currently reviewing comments.
Timmons echoed Williams’ concerns that the proposed rule violates the Economic Growth, Regulatory Relief, and Consumer Protection Act, specifically the Act’s tailoring requirement. Powell said the Fed will be asking the tailoring question internally as part of the review process.
Timmons asked if category 4 banks were not included in the notice of intended rulemaking. Powell said he couldn’t confirm that.
Timmons asked if regulators should provide small regional banks with more time than the three-year phase in period to meet final long-term debt requirements. Powell said the Fed was considering that.
Timmons asked Powell if he thought the outcome would have been different if the rule’s policies were in place before Silicon Valley Bank and Signature Bank failed. Powell said things could have been different if the banks had more long-term debt to turn to.
Debit Card Interchange Fees
Luetkemeyer discussed the Fed Board’s proposed rulemaking to update the interchange fee cap and Regulation II. He discussed his Secure Payments Act, which would prevent a final rulemaking until the Fed studies the impact of the proposed rule, completes a quantitative analysis of its impact – specifically on affordable banking services for low-income Americans, and reports those findings to Congress.
Luetkemeyer urged Powell to proceed with extreme caution with any kind of price control proposals. He asked Powell whether the negative impacts this policy will have on low-income consumers gives him any pause. Powell noted the Fed extended the comment period on this proposal. He explained they were mandated by law to assess whether an interchange fee received by a large debit transaction is reasonable and proportional to issuer costs. Powell said the Fed would need to continue down this path as long as it is their mandate.
Luetkemeyer asked about the legal framework for these updates. Powell said his reading of the law is that fees need to be reasonable and proportional, meaning that when costs change, there needs to be an update.
Bank Mergers
Waters noted that last week, 15 Congressional Democrats wrote a letter to Powell, the DOJ, OCC, and FDIC expressing strong concern about the lack of progress made in updating bank merger procedures. She asked for an update on the bank merger procedures, and whether the Fed plans to hold public hearings on the merger of Capital One and Discover. Powell said he is in frequent contact with the DOJ about their review of the merger procedures. He added that the Fed has not received an application for the Capital One and Discover merger but pledged to evaluate the factors under the law.
Waters asked if the current bank merger procedures are ready to do the work necessary when the Fed does evaluate the application for Capitol One and Discover’s potential merger. Powell said yes. Waters asked if Powell would support organizing community hearings about the Capital One-Discover merger. Powell explained that the Fed has not discussed that yet but has done so for other large mergers.
Interaction & Coordination With Other Regulators
Huizenga discussed his concerns regarding the cumulative impacts of proposed rules over consumer products and services currently before the Fed, FDIC, OCC, and CFPB. He emphasized the need to look at all of these proposals together. Huizenga asked if Powell coordinates and talks with regulators from other agencies. Powell said he doesn’t lead that side of the Fed. He noted there is a lot of talking going on, but said he wasn’t sure how much coordination there is.
Huizenga asked if the Fed is mandated to look through all the pending rules under its purview and see if changes need to be made when a rule is finalized under another regulator. Powell said there is no mandate, but explained they do so when it makes sense.
Huizenga noted the SEC’s finalization of its climate disclosure proposal and asked Powell why the Fed and other regulators have limited their guidance on climate-related financial risk to large financial institutions instead of all institutions. Powell said it’s a new thing and that this is something that needs to be handled by elected representatives. He explained that this issue is being handled carefully and that they are starting with large institutions because, to remain active internationally, are already working with these regulations and understand them. Powell closed by noting that imposing climate-risk guidance on small banks is not something he supports.
Wagner said that Chairmen Gensler has pushed the envelope and risks pushing into the jurisdiction of other agencies. She asked Powell for his response to another agency encroaching on the Fed’s jurisdiction. Powell said he wouldn’t comment on other agencies’ policies. He clarified that in the hypothetical case that another agency encroached on the Fed’s jurisdiction, they would react.
Steil asked Powell to comment on the SEC’s new climate disclosure regulation. Powell said the Fed doesn’t comment on other agencies’ regulations.
Immigration
Rep. Sylvia Garcia (D-Texas) discussed how immigration has increased job creation and consumer demand. She asked Powell about the CBO’s report on immigration and the economy, and whether he agreed with the report’s estimate that there will be $7 trillion of economic growth caused by immigration over the next decade. Powell said the Fed does not make or comment on immigration policy.
Garcia asked Powell if he agreed that immigration has contributed to strong labor force growth. Powell said there’s been a surge in labor supply from people who were already here participating in the workforce, as well as immigrants.
Garcia asked if the Fed could conduct a formal assessment of the positive impacts that immigrants have on the economy and report back to Congress. Powell said that’s more of a job for the CBO.
Huizenga said it was stunning to him to hear questions about an illegal workforce and an underground economy. He said that’s not a healthy alternative to the regular economy, and that strategy will fail.
Casten asked if immigration relieves inflationary pressures. Powell said it’s probably close to neutral in the long run but explained that immigration can positively impact inflationary pressures in the short-term.
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