Senate Banking Committee Hearing with Fed Chair Powell

Senate Banking Committee

“The Semiannual Monetary Policy Report to the Congress.”

Wednesday, February 12, 2020

 

Key Topics & Takeaways

• LIBOR Transition: Sen. Pat Toomey (R-Pa.) asked Powell about the Federal Reserve Board’s (Fed) plans to address the potential mismatch for bank credits and liabilities under a new rate, such as the Secured Overnight Financing Rate (SOFR). He asked Powell if the Fed intends to introduce a credit risk component to integrate with SOFR. Powell said that after 2021, LIBOR publication will cease and that SOFR is the preferred rate for the derivatives market and others. He added that the Fed is exploring other suitable rates for the banks, specifically those that are credit-sensitive.
• Repo Market: Toomey asked Powell if he shares the concern about regulators pressuring banks to favor cash on Fed deposits over the repo market. Powell said that there is not a preference in the liquidity coverage ratio (LCR), but there is a preference for internal liquidity stress. Powell expressed that the equal treatment of Treasuries and reserves is a good goal. Powell noted that the Fed will continue to observe adjustments to the repo market without undermining safety and soundness.
• Guidance and Rulemaking: Powell said the Fed has been forthright in saying that guidance is not a rule, is not binding, or a basis for enforcement. He highlighted that Quarles spoke about this issue in January and said that the Fed sends the Government Accountability Office (GAO) some of their proposed supervisory guidance for review. Powell continued that the Fed, specifically Quarles, is providing clear the Large Institution Supervision Coordaining Committee (LISCC) standards for which firms fit within the framework.
• Faster Payments System: Powell said interoperability is a very high priority in the design of the payments system and that it is not clear that banks would want the Fed to commit to uniform pricing.

Witness

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

Opening Statements

Chairman Mike Crapo (R-Idaho)

In his opening statement, Crapo highlighted that the U.S. economy is experiencing its longest continued expansion and underscored the increase of labor force participation, the low unemployment rate, wage increases, and positive consumer outlook. He added that the 2017 tax reform, right-sizing of regulation, including S. 2155 the Economic, Growth, Regulatory Relief, and Consumer Protection Act, have “undoubtedly” helped fuel the economy. Crapo continued that Americans could potentially reap benefits from the United States-Mexico-Canada Agreement (USMCA) and the China phase one deal. Crapo expressed interest for Chairman Jerome Powell to talk about the Fed’s recent purchase of Treasury bonds, their future short-term borrowing plans and risks from the transition away from the London Interbank Offered Rate (LIBOR). He also expressed his desire for an update about the impact of the coronavirus, amendments to the Volcker Rule, and the Fed supervisory and guidance examination. Crapo provided support for Fed Vice Chair Randall Quarles’ bank supervisory roadmap. Crapo concluded by seeking input from Powell about innovative tools such as Facebook’s digital wallet LIBRA, the application of distributed ledger technology as well as the adoption of public cloud technology.

Ranking Member Sherrod Brown (D-Ohio)

In his opening statement, Brown raised concerns about the Trump administration recently pulling the nomination of Jessie Liu for a position at the Treasury. He added his desire for the Fed to “create and innovate” in order to help main street investors the same way they do for banks. Brown stated he has no objections to Fed action in the repo market but reiterated his encouragement for the Fed to help working Americans. Brown also outlined concerns about manufacturing growth being “anemic” in the U.S. and the Trump administration’s proposed budgetary cuts.

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 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 in order 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 and 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

Sen. Pat Toomey (R-Pa.) asked Powell about the Fed’s plans to address the potential mismatch for bank credits and liabilities under a new rate, such as the Secured Overnight Financing Rate (SOFR). He asked Powell if the Fed intends to introduce a credit risk component to integrate with SOFR. Powell said that after 2021, LIBOR publication will cease and that SOFR is the preferred rate for the derivatives market and others. He added that the Fed is exploring other suitable rates for the banks, specifically those that are credit sensitive.

Repo Market

Toomey asked Powell if he shares the concern about regulators pressuring banks to favor cash on Fed deposits over the repo market. Powell said that there is not a preference in the liquidity coverage ratio (LCR), but there is a preference for internal liquidity stress tests. He expressed that the equal treatment of treasuries and reserves is a good goal. Powell noted that the Fed will continue to observe adjustments to the repo market without undermining safety and soundness.

Guidance and Rulemaking

Sen. Thom Tillis (R-N.C.) asked about the Fed’s review of guidance and rulemaking, as well as its plans for the LISCC. Powell said the Fed has been forthright in saying that guidance is not a rule, is not binding, or a basis for enforcement. He highlighted that Quarles has spoked about this issue in January and said that the Fed sends the Government Accountability Office (GAO) some of their proposed supervisory guidance for review. Powell continued that the Fed, specifically Quarles, is providing clear LISCC standards for which firms fit within the framework.

Sen. Mike Rounds (R-S.D.) followed up about the Fed’s plans for tailoring. Powell pointed to Quarles’ public comments and said that some of the Fed’s plan includes guidance, rulemaking and changes to the guidance. Powell emphasized that the Fed will work within its discretion for more effective and transparent tailoring requirements while maintaining the right to due process.

OCC Community Reinvestment Act Proposal

Sens. Bob Menendez (D-N.J.), Jack Reed (D-R.I.), and Tillis asked about the Fed’s involvement with the Office of the Comptroller of the Currency’s (OCC) Community Reinvestment Act (CRA) proposal. Powell said that the Fed, the Federal Deposit Insurance Corporation (FDIC) and the OCC agreed on the need to modernize the CRA but could not come to a complete agreement. He said the OCC adopted several of the Fed’s ideas, but differences remain. Powell expressed that the Fed will continue to observe and learn from public comment.

Faster Payments System

Toomey asked if the Fed’s real-time payments system would be fully interoperable with the clearinghouse system and if the Fed would commit to uniform pricing. Powell said interoperability is a very high priority in the design of the payments system and that it is not clear that banks would want the Fed to commit to uniform pricing.

Wages and Labor Force Participation

Sens. Brian Schatz (D-Hawaii), Chris Van Hollen (D-Md.), Catherine Cortez Masto (D-Nev.), Doug Jones (D-Ala.), Martha McSally (R-Ariz.), David Perdue (R-Ga.), John Kennedy (R-La.), Brown and Crapo asked several questions about wage growth and labor force participation. Reed and Schatz also asked about wealth inequality. Powell highlighted that labor force participation growth has been a positive thing for the economy and that the Fed will continue to pursue the goal of maximum employment as well as support continued growth. He added that wage growth for 2019 was roughly 3.1 percent and that he believes the level has been at or above 3 percent for 18 consecutive months. He added that wage growth has not been as projected due to productivity and inflation running below the Fed’s objectives. He suggested that both Congress and the business community could use their tools to incentivize education and job training.

Trade Policy

Rounds asked if trade uncertainty was a factor that led to declines in business fixed investment. Powell suggested that the Fed has observed many factors regarding the decline. He added that factors include a slowdown in global growth, particularly in manufacturing, as well as oil price volatility and trade uncertainty.

Climate Change

Schatz asked about climate-related disclosures and stress testing. Powell said that the Fed and others are in the beginning stages of understanding how climate change affects the financial system. He continued that disclosures are under the FDIC’s jurisdiction and that the Fed is carefully monitoring the work of the Bank of England regarding climate-related stress testing.

Digital Currency and Data Protections

Sen. Mark Warner (D-Va.) asked about digital currencies and concerns with China leading in this area. Powell responded that there are pros such as greater financial inclusion and convenience, but also cons such as cyber, privacy and fraud risks. He said the Fed is broadly engaging in this discourse and will ask Congress for authority if needed. He continued that LIBRA “lit a fire” around the world.

Sen. Ben Sasse (R-Neb.) asked why the top concern for Powell is cybersecurity and if there could be spillover effects from cyber-attacks. Powell answered that cyber is a newly emerging threat and the sophistication of attacks is increasing. He said the Fed is very focused on ensuring that banks have good cyber hygiene and that they are able to mitigate any uncertainty due to a lack of confidence.

Sen. Tom Cotton (R-Ark.) asked about concerns regarding China hacking into the U.S. financial system. Powell responded that state actor attacks are an area of interest for the Fed and that the Fed remains vigilant in actively working with intelligence communities on the matter.

Other Concerns

Sens. Jon Tester (D-Mont.) and Cotton asked Powell to address concerns of an economic downturn and the debt. Powell said the Fed will continue to use their traditional tools changing interest rates. Powell added that in the event of a downturn, the Fed would turn to guidance to ensure that rates remain low and purchase longer-term securities to drive down longer-term rates. He noted his concern regarding the debt to gross domestic product (GDP) ratio being imbalanced and causing future generations to spend more tax dollars servicing the U.S. debt.

McSally asked if the Fed has studied the effects of banking deserts and how they define the issue and challenges. Powell said the Fed has met with communities around the country about the issue of branch closing. Powell defined banking deserts as when a community lacks access to basic bank services. He added that the Fed cannot prevent banks from closing branches, but incentives such as CRA reform can help communities.

Housing

Tester and Jones asked about challenges to affordable housing and benefits from government sponsored enterprise (GSE) reform. Powell said there are several difficulties, such as supply-side constraints, that prevent affordable housing. He noted that GSE reform is a reform that should happen and would help with sustainable housing finance in the long run.

Impact of Coronavirus

Cotton asked about the economic effects of the coronavirus, specifically for supply chain and manufacturing. Powell said there is too much uncertainty for the Fed to speculate on the impact, but reported that the Fed is closely monitoring the issue.

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