The Federal Reserve’s Semi-Annual Monetary Policy Report

House Committee on Financial Services

The Federal Reserve’s Semi-Annual Monetary Policy Report

Wednesday, June 21, 2023

Topline

• Republicans and Democrats expressed skepticism over incoming capital requirement increases.
• Powell affirmed his commitment to price stability, maximum employment, and lowered inflation in the long run

Witnesses

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

 

Opening Statements

Chairman Patrick McHenry (R-NC)

In his opening statement, McHenry highlighted persistent inflation within the U.S. economy that the Federal Reserve anticipates continuing for some time. McHenry went on to express worry over the precarious state of the economy within the current business environment. He finished by posing that Congress may need to examine separating supervision and regulation from the Federal Reserve, giving Congress more power to conduct oversight.

 

Ranking Member Maxine Waters (D-CA)

In her opening statement, Waters said the Federal Reserve’s decision to pause interest rate hikes was the correct choice. She went on to say that expert contend that the U.S. will not continue to increase job numbers with further rate hikes. Waters pointed to the latest CPI report which shows that inflation has been cut in half since its heights in the past two years. She also said that the only way to truly combat inflation is to address soaring housing costs. Waters also spoke of an economic strength that has emerged, in a historically low unemployment rate that has been persistent through recent rate hikes. She finished saying the Federal Reserve must act to correct the supervisory and regulatory failures identified through the Committee’s oversight.

 

Representative Andy Barr (R-KY)

In his opening statement, Representative Barr said that given the current times of economic turmoil, now is not the time to create massive new regulatory changes. Barr said that any large increases to capital requirements, which could be as high as a 20% increase, would only harm the economy and the regional banking system. He also criticized the Fed’s Vice Chair for exerting too much authority in making regulations about capital requirements that Barr felt were out of their regulatory scope.

 

Representative Bill Foster (D-IL)

In his opening statement, Foster praised Congress and the Federal Reserve’s navigation through the economic environment and said that the probability of a soft landing for the economy has increased drastically. He also acknowledged that the necessary monetary policies to reduce inflation have caused stress on American families, but that Congress and the Federal Reserve should discuss the necessary steps to ensure an economic rebound.

 

Witness Statement

The Honorable Jermone Powell, Chairman, Board of Governors of the Federal Reserve

In his statement, Powell affirmed to Congress that the Federal Reserve continues to be committed to bringing inflation back down to or below 2%. He also said that returning price stability to the economy is one of the Federal Reserve’s top priorities. Powell noted that activity in the housing sector remains weak. He also stated that the labor market continues to be tight, with increased jobs and unemployment remaining low. This is a cause of labor demand exceeding the supply of available workers in the economy. Powell went on to say that inflation pressures remain high despite progress since inflation hit its peak and that the Federal Open Market Committee (FOMC) has tightened the stance of monetary policy, through rate hikes and reducing the Fed’s securities holdings. These monetary restraints will take time to be seen in the economy. The restoration of price stability and reducing inflation are critical to long term stability in prices and achieving maximum employment. Powell finished by asserting that the U.S. banking system remains resilient and praised the actions of the Fed and FDIC in protecting the U.S. economy and restoring confidence in the banking system.

 

Question & Answer

New Capital Requirements

Chair McHenry asked how Powell interprets the proposal from the Vice Chair of Supervision to review capital holistically. Powell said many proposals are in the works and that regulations should be transparent and consistent. We need to balance the costs of having stronger banks, as to not over-regulate the smaller banks.

Representative Hill (R-AR) opened by asking if Powell or other Fed Governors have been involved with Vice Chair Barr’s holistic review. Powell said that he had been briefed. Hill asked which Fed Governors made up the Committee on Supervision and Regulation, and Powell explained it is chaired by Vice Chair Barr and includes Governors Jefferson and Bowman. Hill then asked Powell if U.S. Globally Systemically Important Banks were better capitalized than their European or Asian Counterparts. Powell responded by saying U.S. banks are near the top When pressed again by Hill on whether U.S. banks are better capitalized than European banks Powell again affirmed American banks were well capitalized and compete successfully. Hill asked if European banks should do a holistic review to catch up to American standards, and Powell answered saying that we have all agreed to follow the same standards and that Europe is going through the same review process as the United States.

Representative Garbarino (R-NY) asked Powell if any of the recent bank failures including First Republic and Silicon Valley Bank were the result of having too little capital. Powell explained that liquidity was only a piece of the problem among other things, including portfolio losses in the case of SVB. Garbarino then asked if increased capital requirements for these banks would have prevented them from failing. Powell responded saying it is difficult to determine, and that there was a failure of supervision in these cases where stronger regulation around liquidity and uninsured deposits was likely needed. Garbarino pressed Powell asking if the Fed had already decided capital requirement increases and if those increases are necessary at this time. Powell said that any increase would need to be justified and that he will react to any proposal. When asked whether capital requirements would further tighten credit, Powell said it would over the course of several years.

Representative Kim (R-CA) asked if it would be appropriate for the Fed to increase capital requirements and asked what analysis the Fed had conducted to determine the impact on small businesses and borrowers. Powell responded saying that more capital requirements bring stability at the cost of less credit availability. Kim then asked if the Fed is considering policies to provide time for commercial real estate loans to be refinanced and if an increase in capital requirements reduce liquidity in the commercial real estate market. Powell responded saying there is a way to work your way out of these loans, especially in the office sector.

Representative Donalds (R-FL) asked what Powell’s view of the current desire of Vice Chair Barr to fully implement the Basel III capital standards. Powell responded saying there should be discussions about what the proper level of capital is. Donalds asked if increasing the capital requirement since 2008 has been an overall net positive to the banking environment and Powell said it has been positive.

Representative Lawler (R-NY) asked if high capital levels constrain banks’ lending capacity and Powell said there is a balance between capital and safety. Lawler then asked if Powell was concerned that any capital increase could jeopardize the Fed’s ability to limit inflation. Powell said there would be a long period of comments and consideration before coming to an agreement. Then implementation would take a while, so this is not an immediate economic concern.

Representative Nunn (R-IA) asked if farmers and family farms will face a more difficult and expensive credit environment because of the proposal by Vice Chair Barr. Powell responded not in the short term because many of those people deal with community banks. Nunn pressed on saying some knock-on effects from Vice Chair Barr’s holistic review might increase borrowing by $50 to $100 billion. He then asked if this is the right thing to do as we try to cut inflation in half. Powell said these two things are not in conflict. It will take a while to implement the standards so the Fed will reduce inflation before these changes are in effect. Nunn also asked if banks would adjust as soon as the proposal is released, and Powell responded yes.

Representative Lucas asked if Powell was aware of the coordination between Treasury, the Fed, and the SEC regarding potential capital increases. Powell said he has not been part of that conversation but understands that assertion to be correct.

Representative Barr (R-KY) asked if the Vice Chairman is acting unilaterally or is it just a recommendation. Powell explained the Vice Chair for Supervision has the responsibility to develop regulatory proposals for the board. The board then has a majority vote to support them or not. The Fed Board of Governors have all been getting briefings on what is developed, but the Vice Chair’s job is to present something to the board for consideration.

Representative Gottheimer (D-NJ) asked what Powell’s concerns in terms of capital requirements are. Powell said the Fed needs to understand if higher capital is justified. We benefit from banks of all sizes, so we want to make sure we don’t hurt the small banks with regulations.

 

The State of the Economy and Fed Policies

Chairman McHenry asked how the FOMC actions should be interpreted. Powell said the level the Fed raises rates is separate from the speed we raise the rates. The Fed wants to raise rates higher, but at a slower pace now.

Representative Waters (D-CA) asked if Powell agreed that the Fed has a role to play in addressing racial economic inequality. Powell said the Fed’s ability to address those issues is limited and that other agencies are better able to handle them.

Representative Velasquez (D-NY) asked how Powell would respond to some analysts interpreting your desire to get inflation down to 2% as a willingness to from FOMC to trigger a recession to get down to that goal. Powell responded that the Fed’s statutory goals are price stability and maximum employment and that the Fed is dedicated to using its tools to achieve those. Velasquez then asked how the FOMC considers the impact of rising interest rates on LMI communities and small businesses when considering monetary policies. Powell responded saying it hits lower income communities harder, so we want to get inflation under control for the benefit of those people.

Representative Cleaver (D-MO) asked if there was an expectation that unemployment and joblessness would decrease. Powell said There is an expectation that the ratio of open jobs to unemployment will continue to decrease. Cleaver then asked if there were industries where this ratio is expected to decrease, and Powell said that there is still a significant labor shortage. Cleaver finished by asking if we are going to get stuck with interest rates continuing to increase. Powell responded saying he does think so as in housing, supply and demand are leveling out again. Housing inflation will be coming down significantly this year.

Representative Torres asked if price stability and maximum employment are of equal importance or does one supersede the other. Powell said they are equally important. Torres then asked if the Fed would continue raising interest rates until we hit the 2% inflation goal, and Powell said not necessarily as the Fed balances stability, inflation, and interest rates. Torres finished by asking if we can return to 2% inflation and Powell said yes.

Representative Flood (R-NE) asked how we can avoid an environment where any effort to unwind the Fed’s balance sheet is undone any time there is an economic shock. Powell responded saying this is a concern and that the Fed won’t go bac to a framework with it deals with scarce reserves. Flood asked if there is a number Powell wants the balance sheet to be and Powell said smaller than it is now with a buffer. Flood finished by asking how quickly the Fed can unwind its balance sheet and Powell said that the Fed will find a level that is still ample with a buffer.

Representative Horsford (D-NV) asked what Powell sees as the biggest remaining upward pressure on housing services and what can Congress do to moderate the difference in supply and demand with housing. Powell said these are long term issues and that the labor shortage contributes to this problem.

Representative Nickel (D-NC) asked where the economy is headed. Powell responded that this economy is very strong and there is a strong labor market. Inflation is gradually decreasing and there are more job openings than unemployed people.

Representative Pettersen (D-CO) asked how other economies’ recoveries looked like compared to the United States. Powell said our recovery is by far the strongest compared to any other country. Everyone is dealing with inflation now and ours is relatively not bad. Pettersen then asked if tac cuts contributed to inflation and Powell responded saying the pandemic has driven inflation high across the world. It is not just monetary and fiscal policy, but various shocks from the pandemic. Pettersen then asked if an increase in labor supply would help address supply chain issues and our labor shortage. Powell responded that he is not sure in the long term, but that in the short-term businesses are looking for workers.

Representative Lynch asked if there are other tools for the Fed to soften the labor market without interest rate increases. Powell responded saying the labor market softening so far has been around job openings declining, not unemployment increasing.

Representative Loudermilk (R-GA) asked about whether FedNow was necessary, and if the Fed was going to handle protection from fraudulent transactions through the system. Powell responded saying that smaller banks overwhelmingly wanted to be set up with FedNow and that additional security would be necessary to make the system work.

Representative Vargas (D-CA) asked if Biden was the reason for inflation. Powell said the pandemic and fiscal policies all play a role.

Representative Garcia (D-TX) asked what would have to happen for the Fed to reconsider the 2% mark for inflation. Powell said nothing other than unforeseen circumstances would cause him to reconsider this mark during his tenure.

 

Bank Failures

Representative Velasquez asked Powell if he was aware of the cultural shift at the Fed under the supervision of the previous Vice Chair. Powell said he learned from the Silicon Valley failure that we need stronger supervision and regulation for banks of that size. He also said he was aware that the Fed was trying to avoid excessive regulatory burden. Velasquez then asked what steps Powell took to meet with regulatory and supervisory staff. Powell said he is looking at these events carefully and that there are situations where we need to be more proactive.

Representative Torres asked if the Silicon Valley Bank failure shows tensions between the safety and soundness mandate of the Fed as a bank regulator and the mandate of the Fed as an administrator of monetary policy. Powell responded no, saying that interest rate risks are a basic banking risk and Silicon Valley Bank did not hedge for the losses.

Representative Ogles (R-TN) asked if management and failure to hedge caused some of the bank losses. Powell said many banks managed the interest rate risk that came along, but some did not.

Representative Gottheimer (D-NJ) asked if Powell was aware of a regulator mandated pre-approval process banks must complete to bid on firms going into receivership. Powell said that this is under the jurisdiction of the FDIC and is at the heart of that agency’s activities.

 

Crypto

Representative Waters asked if Powell agreed that it is important for the Fed as our central bank to have a chance to approve or decline any state-licensed non-bank entity before it starts issuing payment stablecoins nationwide. Powell responded saying he does see payment stablecoins as a source of money, so it would be beneficial to have a robust federal role with stablecoins moving forward.

Representative Davidson (R-OH) asked if cryptocurrencies and digital assets have staying power in the U.S. economy. Powell said it appears to be that way.

 

Small Banks

Representative Donalds asked if people at the Fed have a concern about the lack of community banking in the U.S. Powell said that is one of his priorities. Donalds then asked if regulatory policy contributed to the decline in community banking and Powell said It has probably been a factor. There are other factors driving this.

Representative De La Cruz (R-TX) asked Powell if increasing regulatory burdens would have consequences for community banks. Powell said he is not looking at community banks and that proposals are relevant to larger, not smaller banks.

Representative Gottheimer asked how the Fed helps small- and medium-sized regional banks manage their portfolios or think about the risks of commercial real estate loans. Powell said this is a problem with banks with higher concentrations. Gottheimer then asked if Powell was concerned about non-banks. Powell said non-banks are not nearly as regulated as banks.

 

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