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SBC Powell Hearing

Senate Banking Committee

Monetary Policy and the State of the Economy

Thursday, March 3, 2022

Topline

  • The hearing focused largely on inflation and, to a lesser extent, on labor force participation, interest rates, and Russia.
  • There were a few comments about the Fed nominations confirmation process.

Witnesses

Opening Statements
Chairman Sherrod Brown (D-Ohio)

In his opening statement, Brown expressed support for Ukraine, emphasized that the U.S. economy is strong, discussed the challenges of inflation, criticized corporations for giving executives and shareholders a bigger slice of profits and raising prices, which he stated was a choice and asserted that companies could cut costs instead and make executive bonuses or stock buybacks smaller. He added that the Federal Reserve (Fed) has a responsibility to tackle inflation as well as ensure we have a resilient labor market, a safe and stable banking system, an efficient and reliable payments system, and empowered local communities where consumers, workers, small banks, and small businesses thrive. Brown also discussed the need for a full Fed Board.

Ranking Member Patrick Toomey (R-Pa.)

In his opening statement, Toomey agreed with Brown’s sentiments on Ukraine, discussed rising inflation, criticized Democrats legislative agenda, and said the Fed should not weigh in on political issues, like climate change risk, which he stated is outside of the Fed’s statutory mandate. He then outlined three reform ideas: subjecting the Fed banks to the Freedom of Information Act (FOIA), subjecting regional Fed bank heads to Senate confirmation, and changes to the Fed’s structure.

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

LIBOR

Sen. Thom Tillis (R-N.C.) asked if Powell could speak to the importance of getting the Economic Continuity and Stability Act passed. Powell said it is very important to get the Act passed, especially from a financial stability standpoint.

Cybersecurity

Brown asked how the Fed addresses cyber attack reporting. Powell said the Fed has not seen any significant issues but remains vigilant, in constant contact with financial institutions, and on high alert.

Russia

Brown asked how the Fed assesses economic uncertainty from Russia’s actions and sanctions against Russia. Powell said the ultimate effects are highly uncertain but that we will see upward pressure on inflation, possible risk-taking sentiment declining, and uncertain impacts on supply and demand. Sen. Robert Menendez (D-N.J.) asked about the effects of sanctions on Russian banks. Powell said sanctions are the role of Treasury but added that sanctions make it difficult for the central bank of Russia to support the Russian Ruble. Sen. Jack Reed (D-R.I.) engaged in a colloquy with Powell regarding China’s efforts to prepare a rudimentary Society for Worldwide Interbank Financial Telecommunication (SWIFT) system to avoid a similar fate in the future to what Russia is experiencing under its current SWIFT ban, and Powell confirmed those concerns as longer-run issues.

Interest Rates

Brown asked what steps the Fed will take to ensure that raising interest rates will not affect job growth. Powell said the biggest risk to long expansion is to restore price stability, which is the single most important thing the Fed can do. Sen. Kyrsten Sinema (D-Ariz.) asked if Russia’s invasion of Ukraine changes how the Fed thinks about interest rates and asked about U.S. industry exposure to Russia. Powell said it is still appropriate for the Fed to go ahead with its plan to raise rates and that U.S. industry and banks do not have much exposure to Russia. Sen. Jerry Moran (R-Kans.) asked what the relationship is between balance sheet decisions and rate increase decisions and the consequences of altering both. Powell said the Fed looks at the interest rates as the active role of monetary policy and that its balance sheet is used in emergency situations to buy assets to drive down interest rates. He added that cutting interest rates and buying long-term assets provides support for the economy.

Labor

Brown asked if vaccines, testing, and affordable childcare benefit the labor force participation and labor supply. Powell answered in the affirmative. Menendez asked if a better immigration process would help address the labor shortage and rising inflation. Powell said immigration issues account for a meaningful part of the labor shortfall. Sen. Tina Smith (D-Minn.) asked what raising interest rates would do to the workforce shortage. Powell said there is a lot we can do to bring demand gradually back down to where demand and supply are more in sync without risking damage to the labor force. Sen. Jon Ossoff (D-Ga.) asked what the Fed thinks about the labor participation rate when considering the Fed’s mandate with respect to employment. Powell said many measures determine maximum employment, which factors in price stability.

Inflation

Toomey asked about the importance of fighting inflation if growth becomes less robust. Powell said it will be appropriate to continue to proceed along stated plans before the Ukraine invasion happened, including raising rates. Sen. Jon Tester (D-Mont.) asked what Congress should look at to address inflation. Powell said in the near term, the private sector and supply chain must be fixed but that more labor supply, semi-conductors, workers are needed. Sen. Richard Shelby (R-Ala.) asked if the Fed missed or ignored certain price stability data. Powell said it was not about data at all and that there is no precedent for this. Menendez asked how persistent supply chain issues contribute to inflation. Powell said much of inflation comes from high demand and that we have not seen much relief on the supply side and have a labor supply problem. Menendez asked if strengthening supply chains would help with long-term inflation. Powell said in the near-term, it would. Sen. Mike Crapo (R-Idaho) asked if strains on oil or energy markets will harm inflation. Powell said yes, but that the question will be how persistent that effect is. Sinema asked how the Fed is assessing the impact of Russia’s invasion of Ukraine and sanctions against Russia on the price of oil and gas for consumers. Powell said the question is how long that price rise will exist and whether there will be lower economic activity due to higher energy prices. Sens. Catherine Cortez Masto (D-Nev.), Tillis, and Smith asked if making childcare more affordable would help labor force participation and inflation. Powell said it would but declined to comment on universal childcare. Sens. Raphael Warnock (D-Ga.), Tim Scott (R-S.C.), Mike Rounds (R-S.D.), Bill Hagerty (R-Tenn.), and Ossoff asked about the Fed addressing inflation and the price of consumer goods. Powell said the Fed is embarking on a series of rate increases and shrinking its balance sheet. Ossoff asked what considerations the Fed will take when shrinking its balance sheet. Powell said the next Fed meeting will be used to set a pace at which run-off will happen. Cortez Masto asked if the Fed should have engaged its tools to address price instability a year ago, instead of waiting until March. Powell said if the Fed knew that the supply side problems would not have gotten better, the Fed would have engaged its tools earlier.

Fed Independence

Toomey asked if the Fed should engage in political advocacy. Powell said the regional banks are insulated from the Board to prevent groupthink and emphasized the importance of the Fed’s independence. Toomey asked about climate risk analysis and if the Fed should determine the pace at which the U.S. transitions to a low-carbon economy. Powell said no. Crapo asked if the Fed should pursue limiting access to capital for certain industries. Powell said no.

Digital Assets

Sen. Mark Warner (D-Va.) asked if Putin or his oligarchs could use digital payments to avoid sanctions. Powell said we need a crypto regulatory regime that restricts illegal activity and a framework that takes away the possibility that actors could use unbacked crypto to evade the law. Sen. Elizabeth Warren (D-Mass.) asked if other countries are using cryptocurrency to evade sanctions. Powell said the Fed is not responsible for sanctions. She then asked if the crypto industry is enforcing the sanctions that have been put in place. Powell said he has read that crypto industry is reluctant to do so.

For more information on this hearing, please click here.

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