House Financial Services Committee Hearing with Federal Reserve Chairman Powell

House Financial Services Committee

“Monetary Policy and the State of the Economy”

Wednesday, July 10, 2019

 

Key Topics & Takeaways

  • Rates and Inflation: Powell said the Fed would consider a broad range of data that includes the labor market, second-quarter GDP, retail sales and other data when deciding about rates at the end of July. He said the Fed would take a rational and analytical approach based on objective analysis and fact.
  • Transition from LIBOR: Powell said moving forward this is a very important project for the Fed to have swaps, derivatives, and retail user contracts meet obligations and have fallbacks in place, by 2021. He said the Fed ideally wants people to move obligations to the Secured Overnight Financing Rate (SOFR) or another rate and be included in contracts for consumers.
  • Trade: Powell said passage of the United States-Mexico-Canada Agreement (USMCA) would lead to economic certainty but said he would not comment on specific details of the agreement.
  • Federal Reserve Policy Changes: Powell said the Fed has not made stress tests easier but have the intention to evolve and adapt them to markets and institutions. He said they are a very successful regulatory innovation and will continue to be strong moving forward. Powell said the Fed has been working on inter-affiliate initial margin and Basel requirements and reviewing public comments, with hopes to decide whether the Fed needs to act on them or not, soon.

 

Witness

Opening Statements

Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters said that the President has no understanding or respect for the independence of the Federal Reserve (Fed) from the executive branch and urged Fed Chairman Jerome Powell not to follow Trump’s tactics and policies. Waters questioned Facebook’s plan to introduce a cryptocurrency and pivoted to note her concern that the Fed may be following Trump’s plans to lessen capital requirements and liquidity buffers, stressing that she believes this is ill-advised.

Ranking Member Patrick McHenry (R-N.C.)

In his opening statement, McHenry stated that the economy has witnessed “remarkable” growth, the unemployment rate has reached many lows, and millions of people have benefited from tax and regulatory reforms which have led to wage and job growth noting that the Federal Open Market Committee (FOMC) has reported “solid’ job gains and an unemployment rate that remains low. He said he hopes the Fed undertaking targeted rulemaking for regulatory relief and potential monetary policy and operational changes are taken with prudence and mitigate limitations. McHenry also stated his hope for Powell to address global economic uncertainty, especially regarding risks posed by China, stating there is a need for banks to understand and sufficiently address concerns regarding China.

Testimony

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

In his testimony, Powell stated his “strong” support for the Fed to achieve maximum employment and price stability through policies and activities. He presented to Congress the Fed’s semiannual Monetary Policy Report and said the U.S. economy has performed “reasonably” well in the first half of 2019, with 11 consecutive years of continued economic expansion. Powell said that inflation has been running below the FOMC’s two percent objective and that crosscurrents such as trade tensions and the slowing of global growth concerns have been impacting economic activity. Powell said that Gross Domestic Product (GDP) increased at an annual rate of 3.1 percent in the first quarter of 2019, largely driven by net export and inventories, which he said are not reliable economic indicators compared to consumer spending and business investment. Powell said that trade tensions, a slower global economy, and a decline in housing investment and manufacturing output might be reasons for slowed growth. Powell said the Fed’s baseline outlook is for economic growth to remain solid, labor markets to stay strong, and inflation to move back closer to the two percent objective. He said that economic uncertainties such as trade, the debt ceiling, and Brexit need to resolve, as well as the Fed’s continued monitoring of the risk of weak inflation. He said that the Monetary Policy Report reflects the FOMC’s 2019 activities, as well as updates to monetary policy rules, and that the Fed is conducting a public review to improve the Fed’s monetary policy strategy, tools, and communications.

Question & Answer

Federal Reserve Independence

Reps. Denny Heck (D-Wash.), Wm. Lacy Clay (D-Mo.), Andy Barr (R-Ky.), and Waters asked Powell if comments made by the President or if other external factors influence the Fed’s decision making. Powell said he intends to serve his four-year term and is committed to carrying out the job he is expected to do with independence.

Rates and Inflation

Reps. Carolyn Maloney (D-N.Y.) and McHenry asked what factors the Fed will consider when making recommendations for rates at the end of July. Powell said the Fed would consider a broad range of data that includes the labor market, second-quarter GDP, retail sales and other data. He said the Fed would take a rational and analytical approach based on objective analysis and fact.

Rep. Trey Hollingsworth (R-Ind.) asked what symmetry means to the Fed and how the Fed plans to address inflation moving forward. Powell said symmetry is based upon whether inflation runs above or below two percent and that the Fed is considering whether this is the correct approach or whether to reform their framework.

Transition from LIBOR

Reps. Bobby Scott (D-Ga.) and McHenry asked about the Fed’s plans for the transition away from the London Inter-bank Offered Rate (LIBOR). Powell said moving forward this is a very important project for the Fed to have swaps, derivatives, and retail user contracts meet obligations and have fallbacks in place, by 2021. He said the Fed ideally wants people to move obligations to the Secured Overnight Financing Rate (SOFR) or another rate and be included in contracts for consumers.

Trade

Reps. Ed Perlmutter (D-Colo.), David Kustoff (R-Tenn.), Steve Stivers (R-Ohio.) and Maloney asked how the passage of the United States-Mexico-Canada Agreement (USMCA) would impact the economy. Powell said passage would lead to economic certainty but said he would not comment on specific details of the agreement.

Federal Reserve Policy Changes

Reps. Ann Wagner (R-Mo.) and Roger Williams (R-Texas.) asked about the Fed’s approach to stress tests. Powell said the Fed has not made them easier but have the intention to evolve and adapt them to markets and institutions. He said they are a very successful regulatory innovation and will continue to be strong moving forward.

Reps. Anthony Gonzalez (R-Ohio.) and Jim Himes (D-Conn.) asked about the Fed’s approach to interest paid on excess reserves. Powell said interest on excess reserves is now a principle monetary policy and are preferred over treasuries. He said the Fed could buy these whenever they would like, as there is no shortage of them, but this is not the current approach of the Fed.

Rep. Frank Lucas (R-Okla.) asked about inter-affiliate initial margin and Basel requirements. Powell said the Fed has been working on these issues and reviewing public comments, with hopes to decide whether the Fed needs to act on them or not, soon.

Reps. Barry Loudermilk (R-Ga.) and Lance Gooden (R-Texas.) asked about the Fed’s approach to foreign bank and domestic bank tailoring. Powell said the Fed wants to give fair treatment to banks domestically and globally for capital to flow in and out of the U.S. economy.

Reps. Ayanna Pressley (D-Mass.) and Loudermilk asked about real-time payment systems. Powell said the Fed is working to decide on the best approach and would like to offer a payment system to everyone.

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