The Semiannual Monetary Policy Report to the Congress

Senate Committee on Banking, Housing, and Urban Affairs

The Semiannual Monetary Policy Report to the Congress

Thursday, June 22, 2023

 

Topline

• Chairman Powell discussed the state of the economy, the recent decision to pause interest rate hikes, and the Board’s likely decision to raise them twice more this year.
• Senators also asked about proposed increases to capital requirements and the recent failures of Silicon Valley Bank (SVB) and Signature Bank.

Witnesses

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

 

Opening Statements

Chairman Sherrod Brown (D-Ohio)

In his opening statement, Brown noted that corporations always find a way to increase their profits. He said that when supply chains ground to a halt when Putin invaded Ukraine, then the economy reopened and demand surged everywhere all at once, many corporate board rooms and executives saw an opportunity. He also said that for the largest corporations, inflation has been the perfect excuse to increase profits by raising prices far beyond the cost of their inputs.

Brown also stated that job growth remains strong and that last month wage growth outpaced inflation. He expressed support for the Fed’s announcement last week and added that workers stand to lose the most if the Fed overdoes its rate hikes and loses sight of its dual mandate. Finally, he said that the bank failures this spring were caused by the Wall Street business model, where executives lay off workers and put quarterly profits and their own compensation above everything and everyone else. Specifically, Brown argued that SVB and Signature Bank made risky bets, got massive profits, and paid themselves bonuses right up until the moment these banks crashed.

 

Ranking Member Tim Scott (R-S.C.)

In his opening statement, Scott said that as investigations into bank failures continue, it is important to examine macro factors like rising interest rates that contributed to the failures and the current economic stresses. He said that healthy and well-managed institutions stepped up after the crisis, which helped the U.S. weather the storm. Scott also expressed disappointment with Vice Chair of Supervision Michael Barr, who he said would not commit to firing bad bank supervisors for the supervisory neglect that contributed to the failures of SVB and Signature. Finally, he said that as Barr rolls out higher capital standards, it seems like Powell will be supporting and working to implement the recommendations.

 

Witness Statements

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

In his opening statement, Powell said that the Fed remains squarely focused on its dual mandate to promote maximum employment and stable prices. He also explained that economic activity continues to expand at a modest pace, although activity in the housing sector remains weak. He noted that the labor market remains tight with jobs gains robust and unemployment low, and that while the jobs to worker gap has narrowed, labor demand still substantially exceeds the supply of available workers.

On inflation, Powell noted that while it has moderated somewhat since the middle of last year, pressures continue to run high and the process of getting it down has a long way to go. The FOMC has tightened the stance of monetary policy, but it will take time for the full effects of monetary restraints to be realized. He also noted that nearly all FOMC participants expect that it will be appropriate to raise interest rates further by the end of the year. Finally, in determining the extent of additional policy firming that may be appropriate to return inflation, Powell said the Fed will take into account the cumulative tightening of monetary policy, the lags with which it affects economic activity/inflation, and economic/financial developments.

 

Question & Answer

Interest Rates

Brown said that rising interest rates will not solve “greed-flation” due to corporate profiteering. Powell said the Fed feels that while monetary policy has gotten to a restrictive level, if the economy performs as expected it will be appropriate to raise hikes again this year, perhaps twice. Brown also asked how higher interest rates and job losses will impact Black, Latino, and low-income workers. Powell replied that there has not been a meaningful increase in unemployment, which is how he hopes to continue. He added that it is working families who suffer most directly from high inflation.

Scott asked how much is too much when it comes to capital requirements. He noted that it seems to be the default solution when something goes wrong. Powell replied that there is a tradeoff between making banks safer/stronger, and the availability/cost of credit. Scott added that wage increase minus inflation has led to less spending power, and that the average person struggles to make ends meet because of the inflationary impact on their bottom line.

Sen. Bob Menendez (D-N.J.) asked about progress that Powell expected to see but has not. The Chair replied that headline inflation has essentially come down by half, but that is largely due to energy and commodity prices coming down. He said that monetary policy takes effect in the service sector, and that is where they have not seen much progress. Menendez asked if the lag period for rate hikes has lengthened or if the hikes become less effective. Powell said that they are not less effective, but it is a real question. He also noted that there is not a consensus agreement on how long monetary policy takes to affect the economy.

Sen. Tina Smith (D-Minn.) said that rates have risen ten times, but unemployment is still near record lows and wages are growing. Powell noted that in the beginning it was positive real wage growth only at the bottom of the income spectrum, but on a 12-month basis overall wages are now moving up faster than inflation. He said the goal is to get inflation under control with as little damage to the labor market and economy as possible.

Sen. Chris Van Hollen (D-Md.) asked to what extent concerns about stability in the banking sector will impact decisions about rate increases going forward. Powell replied that shocks to the banking sector tend to result in lower lending data later. He said they have not seen evidence of that, but also would not expect to see it yet.

Sen. Steve Daines (R-Mont.) asked about the outlook for the rest of the year as it relates to bringing inflation back to the 2% target. Powell said they expect modest growth going froward, below the longer run growth rate of the US economy, the labor market to gradually cool off, and inflation to move down gradually. He added that a strong majority of the committee believes it will be necessary to raise the federal funds rate twice before the end of the year.

Sen. Catherine Cortez Masto (D-Nev.) asked if credit tightening from regional banks is acting as an effective substitute to an additional interest rate hike. Powell said that it may be, but they have not actually seen much evidence of additional tightening.

Sen. Jon Tester (D-Mont.) asked about the key determinant as to whether the Fed raise rates or leave them. Powell said that if the economy performs as they expect, two thirds of the Board think it will be appropriate to raise rates twice more. He said they expect continued modest growth, gradual cooling off of the labor market, and improving inflation.

 

Capital Requirements

Brown also asked if increasing capital requirements for banks with $100 billion or more in assets is a strategy the Fed plans to, or is willing to, deploy. Powell said that there is no final proposal, but a draft has been circulated. The capital increases are on larger banks, and there may be increases on banks down to $100 billion, but not below that.

Sen. John Kennedy (R-La.) asked if the Fed is going to raise capital requirements to 20%. Powell said that the idea would be to raise them by 20% of the total existing amount (e.g. 10% to 12%). He reiterated that there is not a final proposal yet.

Sen. Thom Tillis (R-N.C.) asked about the Basel III Endgame proposal. Powell said he will make sure there is enough time for governors to review the final proposal, and that Vice Chair Barr will likely be giving public remarks before the meeting. Sen. Bill Hagerty (R-Tenn.) expressed concern about the Basel III Endgame requirements as well.

Tillis asked how comments about a sound banking system square with the need for more capital. Powell replied that further increases will have to be justified and acknowledged that there are tradeoffs. Daines similarly questioned why there is such an urgency to increase capital requirements if banks are so capitalized. Powell said again that there is no final proposal yet, but banks under $100 billion will not be part of it.

Sen. Katie Britt (R-Ala.) asked how the Fed evaluates the downstream impact of increased capital requirements on smaller community banks. Powell restated that he does not think the proposals under consideration will apply to banks under $100 billon.

Sen. Kevin Cramer (R-N.D.) said that he cannot fathom why they would want to raise capital requirements when there could be a credit crunch. Powell replied that there is always a tradeoff between stronger banks and less capital. He said again that the proposal is really for the largest institutions. He also said that it was always an expectation that there would be a further increase at the end of Basel III globally, but they will need to be justified.

 

Bank Failures

Brown asked what they are doing to prevent more bank failures. Powell said the Fed is committed to learning the lessons from SVB and other failures, and there is a need to strengthen supervision and regulation of banks of that size.

Menendez asked if additional bank failures are possible as property mortgages come due. Powell said that some banks have high concentrations of real estate, particularly smaller banks. He said the Fed has identified those banks and is working with them. Menendez replied that he is concerned that it is a ticking time bomb.

Tillis also noted that he voted against the bill on executive compensation yesterday, because it needs more tailoring. He said there were other root causes of SVB’s failure related to management and supervisory malpractice.

Sen. J.D. Vance (R-Ohio) asked if it was plausible that SVB would have bought more Treasuries if it had been exposed to higher capital requirements, and how that would have affected the bank in the long term. Powell said that if they had more assets of whatever character, including Treasuries, they would have had more capital, but they likely would have had a bigger loss and more uninsured deposits. Vance stated that capital requirements are not a panacea to the type of bank run that occurred with SVB.

Sen. Elizabeth Warren (D-Mass.) said that Powell holds record, as the FDIC has been forced to rescue four failed giant banks on his watch, more than any Fed chair in American history. She said that the decisions he made, the votes he took, and the things he said helped cause this mess. She added that he lobbied, drafted, and voted for weaker rules, and was also responsible for the supervisors who fell down on the job. Powell replied that the main responsibility he takes is to learn the right lessons from this and address them, so that another large bank does not fail unexpectedly and spread contagion into the banking system.

 

Immigration

Van Hollen asked about the role of immigration in adding more people to the labor force. Powell replied that immigration went to almost zero during the pandemic, but there has been quite a strong rebound. He said that one reason that businesses are reporting that labor supply and demand are getting into better balance may be because of participation and immigration.

 

Price Gouging

Sen. John Fetterman (D-Penn.) asked if it is fair to say that big business has been jacking up prices more than costs have increased. Powell replied that during the pandemic, supply was constricted, and prices went up a lot. He said that as the economy returns to normal function and supply chains improve, corporate profit margins have started to come down.

 

Mergers and Consolidation

Hagerty also said that he is concerned that the Administration has created a negative environment for mergers. He discussed his Depositor Protection Act, which will provide a green light to well-capitalized, well-rated banks to merge with institutions that are under distress without regulatory interference.

 

For more information on this meeting, please click here.

For an archive of past SIFMA hearing coverage, please click here.