Senate Committee on Banking, Housing, & Urban Affairs: The Federal Reserve’s Semi-Annual Monetary Policy Report
Senate Committee on Banking, Housing, & Urban Affairs
The Federal Reserve’s Semi-Annual Monetary Policy Report
Thursday, March 7, 2024
Topline
- Republicans and some Democrats expressed concerns over the Basel III Endgame Proposal, with Powell predicting material and broad changes to the proposal before it is finalized.
- Democrats pressed Powell on the impact of high interest rates on consumers, with a particular focus on the impact of high rates on the housing market.
Witnesses
- The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System
Opening Statements
Banking Chair Sherrod Brown (D-Ohio)
In his opening statement, Brown discussed how the cost of living is still far too expensive for most Americans. He noted that the Fed only has one tool available to fight high prices, interest rates, which do nothing to address the real cause of why prices remain too high. Brown criticized corporations for price gouging to boost profits and explained that while higher interest rates don’t force corporations to lower their prices, they hinder wage growth, stifle small businesses, and raise housing costs. He told Powell that the Fed needs to decide if it will make good on its commitments to workers and their families by lowering interest rates to protect our financial system. Brown warned that keeping rates too high for too long would strangle the economy.
Brown noted how in 2022, at the peak of inflation, corporate profits soared to historic levels. He lamented that Ohioans are forced to subsidize corporate executive bonuses and stock buybacks every time they go to the grocery store. Brown warned that shrinkflation is real and said that he introduced legislation to stop this type of deceptive corporate practice.
Brown discussed Basel III and explained how strong capital requirements ensure that if Wall Street’s bets don’t pay off, shareholders and investors will be on the hook – not taxpayers. He emphasized the need for Basel’s guardrails and urged Powell to remain committed to protecting the public, despite the massive amount of money big banks and their lobbyists are spending to kill the proposal. Brown called on Powell to finish the job and finalize Basel III. He also voiced support for his and Senator Scott’s bipartisan RECOUP Act, which would hold senior executives accountable when they gamble with customers’ money.
Banking Ranking Member Tim Scott (R-S.C.)
In his opening statement, Scott criticized President Biden’s economic policies for driving record inflation. He said Americans are drowning in disastrous regulations and warned that the Biden Administration’s policies have pushed the American Dream out of reach. Scott discussed the economic impacts of illegal immigration, and blasted President Biden’s open border policies for straining the economy. He warned that local economies would continue to be crushed until we get the immigration crisis under control. Scott also said the tsunami of financial red tape coming from regulators is crushing economic activity. He then moved on to how Basel III proposal would restrict lending and access to credit to those who need it the most and noted that the opposition to Basel III comes from a diverse group of viewpoints. Scott concluded that he was encouraged by Powell’s comments to the House Financial Services Committee on Basel III endgame.
Testimony
The Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System
In his testimony, Powell described how the economy’s steady progress towards slowing inflation and maintaining employment. He emphasized the Fed’s strong commitment to returning inflation to its 2 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 link 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 that excluding the volatile food and energy categories core PCE price rose 2.8 percent, a notable slowing from the peaks of inflation. He said long-term inflation expectations appear 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, the Fed will begin dialing back policy 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, constricted 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
Sen. Bob Menendez (D-N.J.) said he was worried about how the affordable housing shortage would be impacted by the capital requirements proposal. He asked if there was a risk that implementing Basel without changes could make it even harder for disadvantaged borrowers to obtain homeownership.
Powell said yes and emphasized that the Fed was very focused on this issue.
Sen. Mike Rounds (R-S.D.) cited an analysis of Basel III, which found that 97% of commenters opposed the proposal. He noted Powell’s statements that the Fed is a consensus organization, and asked if there was a consensus on Basel. Powell said the Fed would have a consensus when they move forward. Rounds asked if Powell would wait to call a vote on Basel until there is a consensus. Powell said he thought so.
Rounds discussed his concerns with Basel’s lack of transparency and the negative effects on mortgage lending and home affordability through the disincentivizing of banks to provide high loan to value (LTV) loans. He worried that Basel would make buying a home harder than it already it is, since the proposal would disincentivize mortgage lending from the largest banks. Rounds asked if Powell would withdraw the proposal or re-propose it with significant modifications, particularly addressing his concerns. Powell noted the Fed is very focused on the issues Rounds raised. He said that if it’s appropriate to re-propose parts or all of Basel III, the Fed wouldn’t hesitate to do so.
Rounds said it sounds like the consensus the Fed reaches on Basel could include significant modifications. Powell said he expects material and broad changes to the proposal before returning to the Board for consideration.
Sen. Thom Tillis (R-N.C.) emphasized that it’s worth noting the number of organizations that are not normally aligned on policy who have concerns about the current Basel proposal. Tillis said Basel should be re-proposed and said he did not support Barr’s nomination for this reason.
Tillis said the prospect of increasing capital requirements did not concern him but called for discussion about responsibly reducing the cost of the regulatory burden. He asked when either a re-proposal or an effort to make the best of the current proposal could be expected. Powell said the Fed would work quickly but emphasized that it’s more important to do it right than to do it fast. He predicted a resolution this year.
Sen. John Kennedy (R-La.) discussed recent media reports detailing inappropriate workplace behavior at the FDIC. He asked how the FDIC could lead the charge on Basel III, which he said would turn the banking community upside down, in light of the allegations. Powell said the Fed is not looking to the FDIC to lead the effort on Basel.
Sen. J.D. Vance (R-Ohio) asked about Basel’s original intent regarding which banks would fall under its requirements. Powell said the proposal extends to category 4 banks as well as category 1, 2, and 3 banks. Vance asked about the minimum assets under management. Powell said the minimum is $100 billion.
Vance noted his concern with that threshold and asked for the justification for drawing down from the $700 billion threshold to the $100 billion threshold. Powell explained that SVB was a category 4, which prompted the need to ask the question about what if anything needs to be changed about the way that category of banks is regulated. He discussed the importance of tailoring and emphasized that he wants to preserve a diverse banking sector.
Vance asked if the final decision about where to set the threshold had been made. Powell said it had not. Vance asked when the Fed expects to issue a final proposal. Powell said sometime over the course of this year, but that the Fed is not rushing.
Vance asked if Powell would be willing to commit to removing the regional bank drawdown and limit Basel’s application directly to the G-SIBS. Powell explained that while he couldn’t get that specific, but that the Fed is looking at the tailoring issue. Vance encouraged the Fed not to apply regulations that don’t solve the problem.
Sen. Elizabeth Warren (D-Mass.) blasted Powell for allowing the Fed to weaken the rules for the biggest banks. She said that after years of hemming and hawing, Powell finally agreed to put Basel III rules in place. Warren noted that Basel rule would only apply to 37 banks. She asked if Powell had backed down from his comments last year in support of the proposed capital requirements. Powell said he had not.
Warren cited reporting that Powell is driving efforts inside the Fed to weaken Basel III rules, as well as Powell’s comments to the House Financial Services Committee that he could withdraw the rule. She asked if Powell is committed to finalizing the strongest version of the Basel III requirements this year. Powell said it will be appropriate to make material and broad changes to the proposal before finalizing the proposal. Warren criticized Powell for backing down after opposition and lobbying efforts from big banks.
Sen. Chris Van Hollen (D-Md.) said he supports the overall effort on Basel, but raised concerns over the unnecessary impact the proposal could have on clean energy tax credit investments.
Sen. Cynthia Lummis (R-Wyoming) asked if Basel III was more likely to make it more difficult for consumers to buy a house or to push lending outside of the banking system. Powell said both were likely.
Supervision
Brown asked what concrete steps the Fed has taken in the aftermath of Silicon Valley Bank’s failures to strengthen supervision. Powell said in the case of SVB, the Fed was not quick or effective enough and so the Fed is working to develop a new rule book and set of practices which will involve earlier interventions and more effective ones.
Brown referenced his request to the Fed to identify substantive penalties for board officials who violate the trading rules and asked where that is in the process. Powell said the Fed’s IG had made six recommendations and what Brown requested was the sixth recommendation. He continued saying that the first five recommendations have been put in place and that the Fed is working on the sixth, and that he expects it to be complete before his next testimony in front of the Senate Banking, Housing, and Urban Affairs Committee.
Interest Rates & Inflation
Brown cited Powell’s acknowledgement that the Fed likely waited too long to raise rates when prices shot up in 2021. He warned that regulators can’t make that mistake again and said that if the Fed waits until unemployment starts increasing it may be too late to cut rates. Brown asked if the Fed should act now to prevent workers from losing their jobs rather than reacting after the fact. Powell said the Fed is aware of that risk and conscious of avoiding it. He explained that if the economy evolves as they expect, the process of removing restrictive policy will begin over the course of this year.
Brown noted that more and more companies are engaging in surge pricing. He asked if Powell shared his concerns about the wide adoption of these price gouging strategies contributing to inflation. Powell said the Fed is monitoring the trend but noted that it works both ways. He said he didn’t know if it had implications for inflation but noted that it certainly does for consumers.
Sen. Bill Hagerty (R-Tenn.) asked if inflation reaching 2% would be considered a return to the target rate on a sustainable basis. Powell said it would take the Fed a while to really get comfortable that inflation had settled in at 2%. He referenced previous comments that the Fed would not wait for inflation to get down to 2% before restricting interest rates, noting that monetary policy works with variable lags. Powell said that assuming the economy moves along the lines that he expects, the Fed plans to start a process of dialing back restrictions.
Hagerty asked if increased net issuance by the Treasury leads to higher rates. Powell noted that in principle, more supply should lead to modestly higher rates. He affirmed that would not impact the Fed’s work, noting their balance sheet normalization is running as expected.
Rounds asked about the unintended consequences of raising rates as rapidly as the Fed felt that they had to. Powell agreed that high interest rates are hard for businesses and for people. He noted the Fed was able to get inflation down quickly without seeing a rise in unemployment, which he described as a great surprise.
Long-Term Debt Requirements for Large Bank Holding Companies
Sen. Steve Daines (R-Mont.) noted that he joined many of his colleagues in writing to Powell about concerns with the long-term debt proposal. He explained he was worried that the proposal would have a disproportionate impact on smaller regional banks.
Daines asked Powell to explain how the long-term debt requirements proposal aligns with the tailoring requirements set forth in S. 2155. Powell noted that proposal is out for comment, and said the Fed is reviewing the comments. He explained that the proposal is meant to be a middle step without imposing all of the burdens regulators impose on the G-SIBS. He pledged to move forward as appropriate.
Immigration
Scott said American taxpayers are footing the bill for illegal immigration and asked how the economy could continue shouldering the burden and the costs of illegal immigration. Powell said that immigration policy is none of the Fed’s business, and explained that since they don’t set immigration policy, they don’t comment on it.
Scott asked if the Fed considers the impact and costs associated with 10 million illegal immigrants coming to the U.S. Powell said the Fed tries to estimate population and the impact of immigration on the workforce and GDP.
Menendez said Scott was not telling the entire story about immigration. He asked if Powell was familiar with the Washington Post’s recent article, which found that economy is roaring because of immigration. Menendez then quoted from the article, reading, “immigration has propelled the U.S. job market further than just about anyone expected, helping cement the country’s economic rebound from the pandemic as the most robust in the world.” Powell agreed that there was a very significant increase in the size of the workforce last year, which he said was due to labor force participation and immigration. Menendez explained that we had 11 million jobs going unfilled, and said immigration helped fuel our economy’s revival. He emphasized that Scott’s framing of immigration as a scourge was wrong.
Central Bank Digital Currency
Sen. Kevin Cramer (R-N.D.) asked Powell to differentiate between Bitcoin and a central bank digital currency (CBDC). Powell said the Fed is nowhere near adopting or recommending a CBDC. He explained that as technology has evolved, money has become digital. Powell noted that a CBDC raises concerns that the government could see all of your transactions, which is how China’s CBDC works. He explained that if the United States ever created a CBDC, it would be through the banking system.
Lummis cited constituent concerns that the Fed would create a CBDC without legislative authorization. She asked if Powell agreed that the Fed could not introduce a CBDC without authorization from Congress. Powell agreed.
Housing
Sen. Laphonza Butler (D-Calif.) said rent affordability is a huge concern in her state and noted that nearly one third of California households pay more than 50% of their income in rent. She asked how the Fed’s monetary policy is impacting the affordable supply of rentals. Powell said interest rates impact affordability.
Sen. Tina Smith (D-Minn.) noted that housing costs have remained stubbornly high. She asked whether the housing market has cooled enough that housing supply and demand is better in balance, and given the Fed’s limited tools, at what point Powell would think he had done all he could on housing demand.
Powell said the quantity of available homes is incredibly low. He explained that as rates come down the housing market would start to heal, while the supply problem would persist.
Sen. Raphael Warnock (D-Ga.) explained that too many Americans can’t afford a home, and asked if Powell was concerned about the interplay between lower demand and stubbornly high prices. Warnock also asked why prices are so high. Powell cited the existence of a longer run housing shortage, noting that the supply of homes for sale is at a historic low, which pushes up prices. He added that rates are also high but said the issues with rates would abate as the economy normalizes.
Menendez asked if Powell agreed that increasingly unaffordable housing is a problem for the economy. Powell explained that there is a longer-term housing shortage, so that even once rates have normalized, we will still have the housing shortage.
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