House Financial Services Committee Hearing with Fed Chair Powell

House Financial Services Committee

“Monetary Policy and the State of the Economy.”

Tuesday, February 11, 2020

 

Key Topics & Takeaways

• LIBOR Transition: Rep. David Scott (D-Ga.) asked Powell about the Alternative Reference Rates Committee (ARRC) pursuing legislation to address legacy contracts in New York State and if the Federal Reserve Board (Fed) would support federal action. Powell responded that some members of the ARRC are pursuing the legislation. He added that the Fed has not reached a determination as to whether legislation to address legacy contracts is necessary. Scott followed up by asking Powell why the Fed has not been as direct as U.K. regulators in ceasing LIBOR lending by Q3 of 2020 and if the Fed plans to set clear goals and guidelines for regulated institutions. Powell said that Fannie Mae and Freddie Mac have begun to do this, and that the Fed would follow suit before the 2021 deadline.
• Repo Market: Powell expressed the Fed will continue repo market operations until April to maintain adequate reserve levels. He noted that the Fed funds rate moved outside the target range and that the level of reserves necessary is higher than initially anticipated.
• Capital Requirements: Powell said that it is appropriate the draw “bright lines” for LISCC membership and that he agrees with Vice-Chair Randall Quarles’ approach. Powell said he expects to incorporate the core capital buffer changes in the 2020 stress tests. Powell stated that he believes capital requirements are at the right level for banks, and that the Fed will adjust stress testing where applicable.
• Volcker Rule: Rep. Alma Adams (D-N.C.) asked about the Fed’s changes to the Volcker Rule and about making bank compliance metrics public. Powell answered that the Fed’s proposal is consistent with the pen and spirit of the law and that they will be seeking public comment. He added that the Fed aims to make the rule simpler, more effective and efficient, while also maintaining the legal metric of the law.

Witness

• The Honorable Jerome H. Powell, Chairman, The Board of Governors of the Federal Reserve System

Opening Statements

Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters welcomed Chairman Powell back to the committee and expressed the importance of the Fed remaining independent. She criticized the Trump administration’s trade war, tax “scam” bill as well as the administration’s actions that have increased the debt. Waters added that she is disappointed in the Fed de-regulatory changes to the Volcker Rule. She said that the Fed should ensure strong capital rules and promote a stable market while not reducing bank liquidity requirements. Waters discouraged the Fed from joining the Office of the Comptroller of the Currency’s (OCC) proposal to update the Community Reinvestment Act (CRA). She also recommended the Fed keep a “watchful eye” over Facebook in their efforts to launch a digital wallet.

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

In his opening statement, McHenry stated that under the Trump administration, the economy is benefiting all Americans. He continued that the unemployment rate is at a half-century low, consumer confidence has increased and that he has observed a right sizing of regulation. McHenry continued that he would like Powell to discuss regulation that is encroaching on the Fed’s ability to make broader monetary policy decisions. He added that he is particularly concerned about the repo market, cyber threats, the transition away from the London Interbank Offered Rate (LIBOR), China and the coronavirus.

Testimony

The Honorable Jerome H. Powell, Chairman, The Board of Governors of the Federal Reserve System

In his testimony, Powell expressed a strong desire to achieve maximum employment and price stability, as well as maintain Fed independence. He stated that the economy is in its eleventh year of expansion, modestly increasing in the second half of 2019 with a tight labor market. He added that inflation remains low and stable, below the Fed’s two percent objective. Powell highlighted the job gains of 2019, stating that the pace of job growth remains above new workers entering the labor force. He added that as of last month, the unemployment rate was at 3.6 percent and that gross domestic product rose at a modest rate to conclude 2019. He expressed that residential investment increased in the second half of 2019. Powell continued that he has observed recent weaknesses in manufacturing as trade uncertainties diminish. He emphasized that global growth remains a concern, specifically noting that disruptions in China that could spill over to the global economy. Powell highlighted that the Fed made accommodations in 2019 in order to adjust for weaker global growth and trade uncertainty and to promote a faster return of inflation. He added that the Fed will continue to make monetary policy decisions that support continued economic growth, an active labor market as well as a return of inflation to the two percent objective. Powell also highlighted the Fed Listens program and the progress the Fed has made in increasing public engagement

Question & Answer

LIBOR Transition

Rep. David Scott (D-Ga.) asked Powell about the ARRC pursuing legislation to address legacy contracts in New York State and if the Fed would support federal action. Powell responded that some members of the ARRC are pursuing the legislation. He added that the Fed has not reached a determination as to whether legislation to address legacy contracts is necessary. Scott followed up by asking Powell why the Fed has not been as direct as U.K. regulators in ceasing LIBOR lending by Q3 of 2020 and if the Fed plans to set clear goals and guidelines for regulated institutions. Powell said that Fannie Mae and Freddie Mac have begun to do this, and that the Fed would follow suit before the 2021 deadline.

Reps. Brad Sherman (D-Calif.) and Scott Tipton (R-Colo.) also asked about LIBOR legacy contracts. Powell reiterated that if legislation is necessary, the Fed will communicate their concerns to Congress. He said the Fed is currently coordinating with other agencies and market participants for feedback.

Repo Market

Reps. Ann Wagner (R-Mo.), Warren Davidson (R-Ohio) and McHenry inquired about the Fed’s review of the repo market. Powell expressed that the Fed will continue repo market operations until April to maintain adequate reserve levels. He noted that the Fed funds rate moved outside the target range and that the level of reserves necessary is higher than initially anticipated.

OCC Community Reinvestment Act Proposal

Reps. Nydia Velazquez (D-N.Y.), Alma Adams (D-N.C.), Gregory Meeks (D-N.Y.), Wm. Lacy Clay (D-Mo.), Barry Loudermilk (R-Ga.), Waters, Scott and Tipton asked about the Fed’s plans regarding the OCC’s CRA proposal. Powell responded that the Fed, the Federal Deposit Insurance Corporation (FDIC), and the OCC agree on updating the CRA, but did not reach a consensus on the right approach. He said the Fed would observe and learn from the public commentary that the OCC receives on their proposals before determining next steps.

Capital Requirements

Rep. Blaine Luetkemeyer (R-Mo.) asked if the Fed intends to change its Large Institution Supervision Coordinating Committee (LISCC) regime. Powell said that it is appropriate the draw “bright lines” for LISCC membership and that he agrees with Vice-Chair Randall Quarles’ approach.

Reps. Frank Lucas (R-Okla.), Andy Barr (R-Ky.), Trey Hollingsworth (R-Ind.), Loudermilk, Wagner and Scott asked for an update regarding the stress capital buffer proposal. Powell said he expects to incorporate the core capital buffer changes in the 2020 stress tests.

Rep. Ted Budd (R-N.C.) and Hollingsworth asked if capital requirements are at appropriate levels. Powell stated that he believes capital requirements are at the right level for banks, and that the Fed will adjust stress testing where applicable.

Loudermilk asked about the Financial Accounting Standards Board’s (FASB) current expected credit losses (CECL) proposal. Powell said the Fed will continue to monitor the implementation of the CECL proposal carefully.

Volcker Rule

Adams asked about the Fed’s changes to the Volcker Rule and about making bank compliance metrics public. Powell answered that the Fed’s proposal is consistent with the pen and spirit of the law and that they will be seeking public comment. He added that the Fed aims to make the rule simpler, more effective and efficient, while also maintaining the legal metric of the law.

Rates, Wages and Employment

Reps. Al Green (D-Texas), Joyce Beatty (D-Ohio), Clay and Meeks asked about the delayed economic benefits for low and moderate income families, as well as minimum wage increases and the impact on minority communities. Powell emphasized that the Fed does not comment on fiscal policy. However, he said that the lower end of the economic spectrum has seen the most significant benefits of the economic expansion over the last few years. He added that there is a need for governments and businesses to use their tools to help close the gaps.

Reps. Al Lawson (D-Fla.), Ayanna Pressley (D-Mass.), and Adams inquired about the Fed’s rate change decisions. Powell said that the Fed adjusts rates to achieve their goal of symmetric two percent inflation. He said that they have learned that the natural unemployment rate is lower than previously considered. Powell said recent adjustments to the rates were to offset global and trade factors.

Rep. Roger Williams (R-Texas) asked about efforts for continued expansion and negative interest rates. Powell said the U.S. has chosen not to decide on negative or zero interest rates because it could limit credit expansion. He recommended focusing on labor force participation and productivity in order to continue economic expansion.

Fiscal and Trade Policy

Rep. Bill Posey (R-Fla.) asked about the Fed’s audit policies. Powell said that the Government Accountability Office (GAO) audits the Fed’s actions, except for monetary decisions due to the way Congress set up the law to maintain Fed independence. He said that the House Financial Services Committee and Senate Banking Committee maintain oversight authority over the Fed’s monetary actions.

Tipton asked about the impacts of implementing a financial transaction tax (FTT). Powell responded that he does not comment on specific fiscal policies.

Tipton also asked about the impact of the United States-Mexico-Canada Agreement (USMCA). Powell stated that he would not advise on trade policy but commented that the signing of the agreement removes some trade uncertainty.

Climate Change

Reps. Sean Casten (D-Ill.), Jesus “Chuy” Garcia (D-Ill.) and Lucas asked about the Fed’s thoughts on climate change risks and incorporating climate change in stress testing. Powell noted that the Fed is monitoring the actions of the Bank of England. He added that climate change risks are long term measures and that the Fed makes forecasts for the immediate two or three years.

Digital Currency and Data Protections

Reps. Bill Foster (D-Ill.) and French Hill (R-Ark.) asked about digital currencies. Foster asked about Facebook’s digital wallet LIBRA. Powell said technology has made digital currency possible and that the Fed will continue to monitor the tradeoffs when it comes to digital currencies. He added that the U.S. economy continues to grow as a largely cash-based economy.

Wagner asked about cyber threats. Powell said cyber is a top priority for the Fed’s supervisory landscape. He added that internally, government operatives continue to meet to ensure resiliency.

Systemic Risks

Reps. Steve Stivers (R-Ohio), Hill, Luetkemeyer, and Budd asked about areas of the financial system that pose systemic risks. Powell responded that China’s high debt to GDP does not pose a systemic threat to the global economy. Powell noted that the Fed continues to monitor non-grade investment yields, specifically leveraged lending, carefully. He expressed that the economy is generally in a good place, especially for banks, and that his primary concern is the threat of cyber risks.

Impact of Coronavirus

Reps. David Kustoff (R-Tenn.), Lucas, and McHenry asked about the effects of the coronavirus on the global economy. Powell said it is too early to determine what effects it may have on the economy.

International Insurance Standards

Williams and Budd asked about international capital standards. Powell said the Fed is committed to the U.S. state-based insurance regulatory framework.

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