Powell Fed Chair Nomination Hearing
Senate Committee on Banking, Housing, and Urban Affairs
Tuesday, January 11, 2022
- Jerome Powell, Chairman, Board of Governors of the Federal Reserve System
Opening StatementsChairman Sherrod Brown (D-Ohio)
In his opening statement, Brown said Powell’s renomination represents Biden’s commitment to results over partisanship and touted Powell’s record throughout the pandemic. Brown then criticized executive pay and stock buybacks and called for Powell to stop consolidation in the banking industry from hurting consumers. He also discussed Community Reinvestment Act reform, diversity within the Federal Reserve (Fed), the Fed’s trading scandal.
Ranking Member Pat Toomey (R-Pa.)
In his opening statement, Toomey touted Powell’s record during the pandemic and pushed back against criticisms of Powell’s regulatory reforms. He then discussed inflation and government spending and expressed approval for the Fed’s tapering. Toomey also criticized the Fed’s monetary policy framework and weighing in on political issues.
TestimonyJerome H. Powell, Chair, Board of Governors of the Federal Reserve System
In his testimony, Powell said the economy is expanding at its fastest pace in many years, the labor market is strong, yet challenges remain. He said the economy has rapidly gained strength despite the ongoing pandemic, giving rise to persistent supply and demand imbalances and bottlenecks and elevated inflation. Powell said the Fed knows that high inflation exacts a toll, particularly for those less able to meet the higher costs of essentials like food, housing, and transportation. He continued that he is strongly committed to achieving the Fed’s goals of maximum employment and price stability and will use all tools to prevent higher inflation from becoming entrenched.
Question & Answer
InflationToomey asked if it is realistic to bring inflation back to the target level. Powell said we currently have a mismatch between demand and supply and that things will be in better alignment through demand shifts and after a return to stronger supply conditions. Powell then said if the Fed needs to raise interest rates more over time, they will. Sen. Chris Van Hollen (D-Md.) asked why the Fed is confident in hitting its 2.6% inflation target while continuing high employment. Powell said the Fed is anticipating significant relief on the global supply chain side, which will push inflation down.
Sen. Mike Crapo (R-Idaho) asked what is now expected with inflation, and Sen. Robert Menendez (D-N.J.) asked if inflation is expected to subside. Powell said yes but that inflationary pressures will last well into the middle of this year, and if they last longer than that, the Fed’s policy will continue to adapt. Sen. Jon Ossoff (D-Ga.) asked Powell if he is prepared to act quickly if inflation becomes too high and what the risk is. Powell responded yes and that his expectation is that we will see some relief on the supply side and that shortages will become lesser. He added that if inflation increases, there is a risk that inflation will become entrenched in the mindset of businesses.
Sen. Richard Shelby (R-Ala.) asked why the Fed initially forecasted inflation as transitory, if the threat of inflation has changed, and why the U.S. has had higher inflation than other developed countries. Powell said the Fed called inflation transitory at first because forecasts showed that supply side bottlenecks would abate, but they have been very persistent.
Sen. Catherine Cortez Masto (D-Nev.) asked if increasing the housing supply would affect inflation. Powell said yes and that the housing market is tight right now.
Politicization and Fed IndependenceSens. John Kennedy (R-La.), Jon Tester (D-Mont.), and Toomey expressed concern about political activism at the Fed. Powell said he is aware of these concerns and that the Fed should act without political considerations outside of the Fed’s mandate.
Monetary Policy OptionsCrapo asked what tools the Fed will use if inflation persists and unemployment levels remain for the next three to four months. Powell said this year they will likely raise the federal funds rate, end asset purchases in March, and at some point, possibly begin to allow the balance sheet to shrink.
Sen. Mike Rounds (R-S.D.) asked how much of the inflationary trends can be impacted by the Fed. Powell said there is not much they can do the affect the supply side, which is largely the issue with the energy and food industries.
Sen. Bill Hagerty (R-Tenn.) asked about shrinking the balance sheet, to which Powell said more clarity will come soon after the Federal Open Market Committee (FOMC) meets in January.
TaperingSen. Thom Tillis (R-N.C.) asked if there is possibility of a faster taper pace. Powell said they expect to talk about it again at the January meeting, and there have been no decisions yet.
Quantitative EasingHagerty asked if quantitative easing should be temporary and rare. Powell said it depends on where interest rates are.
Bank MergersTillis expressed concerns that there will be a trend towards making it more difficult for regional banks to get through the merger and acquisition process and asked if this is true. Powell said their practices have not changed, and they are still working their way through the applications they have received.
Sen. Tina Smith (D-Minn.) asked how the Fed thinks about bank mergers today and what the impacts are of bank consolidation. Powell said the Fed considers a number of factors and that bank consolidation has been driven in part by the decline in rural populations, trends in demographic changes, regulatory costs, and other factors. He added that the Fed does not want to add to the issue but that Fed regulation is not the main factor.
Special Purpose Depository InstitutionsSen. Cynthia Lummis (R-Wyo.) expressed concerns about the manner in which special purpose depository institutions (SPDIs) are being treated by the Fed and asked for an update on the charter.
Balancing the Fed MandatesSen. Kevin Cramer (R-N.D.) asked how the Fed should balance its mandates. Powell said when unemployment is high, cutting interest rates help unemployment decrease, and then inflation moves up back to two percent. He explained that in rare occasions, the two goals are not complementary, and the Fed needs to focus on the more drastic mandate first.
Slow Wage Growth
Sen. Jack Reed (D-R.I.) asked if increased interest rates would slow the rise in wages. Powell said rising wages is positive, that the Fed is watching carefully, and that the economy no longer needs accommodative policies (like lower interest rates) from the Fed. Menendez asked how Powell will keep prices manageable while not slowing wage growth. Powell touted the strong labor market and said there is a significant labor supply problem and a need for price stability.
Pre- versus Post-pandemic EconomiesSen. Mark Warner (D-Va.) asked what differences in pre- and post-pandemic economies the Fed must take into consideration when making decisions. Powell said supply chains and labor force participation have changed, the Fed must deal the economy as it is today, it will likely take a long expansion to draw workers back into the labor market, and childcare has weighed on labor force participation.
Predicting Future Crises
Ossoff asked how the Fed can improve modeling to not be surprised by macroeconomic dynamics in a future crisis. Powell said there is no expansive history of pandemics to look back on but that there is consistent data that supply side issues come in more substantial than expected.
Reed asked how dealing with demand will help supply of products like microchips, etc. Powell said the Fed cannot directly affect supply side conditions. Van Hollen asked about Powell’s perception of clearing supply chain bottlenecks. Powell gave examples of continuing bottlenecks and said that Omicron can still disturb supply chains again and that the Fed is monitoring the situation.
Climate RiskVan Hollen and Brown asked if the Fed will follow the Financial Stability Oversight Council’s (FSOC) climate report recommendations including climate stress tests and how the Fed will address climate change in his next term. Powell said the Fed is looking at climate stress tests but emphasized that climate stress scenarios are different than normal stress tests and that the Fed will make climate stress testing a priority over the coming years. Sen. Elizabeth Warren (D-Mass.) asked why it’s important for the Fed to assess climate change risks. Powell said the Fed’s role in climate risk is limited but important, adding that the Fed should ensure that banks monitor their risk and protect financial stability. Reed said the Fed should view climate risk as an economic issue and be responsive.
Sen. Steve Daines (R-Mont.) asked for an example of climate related events that would impact the financial system. Powell said there are physical risks in the form of extreme weather, but this type of risk would not likely be a threat to the financial system. Rather, the more likely impact will be from transition risk that could cause a large financial institution to fail.
Fed’s Digital Currency Report
Crapo asked for the status of the Fed’s report on digital currencies. Powell said the report is ready to go, and they expect to release it in the coming weeks.
Central Bank Digital CurrencyToomey asked if Congress were to authorize a central bank digital dollar, would that prevent privately regulated stablecoins from existing. Powell said absolutely not.
CDFIs and MDIs
Warner asked how the Fed can help Community Development Financial Institutions (CDFI) and Minority Depository Institutions (MDI). Powell said the Fed is focused on helping those institutions and is working with banking agencies to give preferential capital treatment to them and foster their work.
Cortez Masto asked what changes the Fed has made to its ethics guidelines and trading. Powell said the Fed has changed its securities buying and selling practices so that no one can buy individual stocks and that when someone sells mutual fund shares, 45 days notice must be given. Ossoff asked if Powell will comply with requests for information to exam ethics issues related to securities trading. Powell said yes and explained the Fed’s new ethics system.
Diversity and Labor Market
Brown asked about Fed diversity, and Powell stated his belief in the need for a diverse workforce. Menendez also decried the lack of diversity of the Fed. Brown asked if the Fed should address race and gender disparities in employment. Powell said the Fed’s tools do not have distributional effects but that a strong labor market can benefit everyone in the economy. He added that, focusing on monetary policy, the Fed can influence interest rates which influence demand for labor over time and can foster a stronger labor market.
Smith asked how the Fed should consider factors like minority unemployment numbers when evaluating economic strength. Powell said the Fed looks at a wide range of indicators to determine if labor market conditions are consistent with maximum employment.
For more information on this hearing, please click here.