SBC Hearing on The Semiannual Monetary Policy Report to Congress

Senate Banking Committee                                                                                           

The Semiannual Monetary Policy Report to Congress

Wednesday, June 22, 2022

Topline

• Committee members on both sides pressed Powell on the Fed’s efforts to fight inflation.
• Powell praised capitalization and liquidity in the banking industry and addressed the illiquidity of money markets. Powell also advocated for a crypto regulatory framework, and Senator Lummis asked about SAB 121.

Witnesses

• The Honorable Jerome Powell, Chairman, The Federal Reserve

Opening Statements
Chairman Sherrod Brown (D-Ohio)

In his opening statement, Brown stated that Congress needs to crack down on corporate concentration and consolidation, adding that fair competition is good for workers and mainstream businesses. He said it is important to keep a close watch on big banks so that excessive risk taking does not create more problems adding that banks must have enough capital to withstand a crisis, serve their communities, and not just enrich themselves.

Representative Thom Tillis (R-N.C.)

In his opening statement, Tillis discussed inflation and the Biden Administration’s approach to addressing supply chain disruptions. He said monetary policy remains too loose and that the Fed has boxed itself into a menu of reactive measures instead of preventative ones. Tillis criticized the Fed’s lack of transparency with Congress and expressed his concern of Senators not receiving answers to their questions. He concluded by saying presidents of regional Fed banks should be appointed by the President and Senate approved. 

Testimony

The Honorable Jerome Powell, Chairman, The Federal Reserve

In his testimony, Powell discussed the importance of bringing inflation down and its impact on the economy. He said increases in interest rates will remain important in bringing inflation down to 2%. He concluded by saying the economy is strong enough to handle tighter monetary policy, adding that the Fed will do everything it can to achieve maximum employment and price stability goals. 

Question & Answer

Interest Rate Increases

Sen. Elizabeth Warren (D-Mass.) asked if gas and/or food prices will go down as a result of interest rate increases. Powell said no. Warren asked how interest increases moderate demand. Powell said interest rate increases effect the economy by three broad channels: interest sensitive spending; asset prices generally; and the exchange rate. Sen. Catherine Cortez Masto (D-N.V.) asked how much the Fed considers consolidation within in an industry as it relates to a rise in good costs before raising interest rates. Powell said questions regarding industry structure are questions for competition authorities adding that the Fed’s job is to obtain maximum employment and price stability. Sens. Jon Tester (D-Mont.), Richard Shelby (R-Ala.), and Bill Hagerty (R-Tenn.) asked Powell what the Fed is doing to make sure the raising of interest rates does not lead to a recession. Powell said the Fed is conducting low short-term interest rate hikes adding that the Fed’s policy rate is still at a low level and, in principle, they would like to get it up to a more neutral level. Tester asked what a neutral level is and if we are there now. Powell said no, adding that they estimate the long-term interest rate hike will be around 2.5% and that we are currently around 1.6%. Powell also said the Fed believes it will be appropriate to raise interest rates above a neutral level to a modestly restrictive level because inflation is so high and discussed the need to get inflation back down to 2%.

Sens. Steve Daines (R-Mont.) and Tester asked if raising interest rates too high too quickly will cause a recession. Powell said it is certainly a possibility. Sens. Chris Van Hollen (D-Md.) and Robert Menendez (D-N.J.) asked how the Fed navigates increasing interest rates when a lot of the causes of high prices are out of the Fed’s control. Powell said interest sensitive spending allows demand to decrease and is a very important aspect of how the Fed’s tools work.

Inflation

Tillis asked Powell if the Fed would consider more of a rule-based strategy in addressing inflation. Powell said rules are generally not applicable in real time, however, he noted that they are not ignored. Tester asked if the Fed could do anything in particular to help bring inflation down in rural areas. Powell discussed problems rural America is experiencing and said the Fed will work directly with farmers if things get worse, but ultimately price stability is the biggest factor in helping rural America. Sen. Kyrsten Sinema (D-Ariz.) asked how the U.S. is positioned compared to other countries to handle inflation. Powell stated that the U.S. level of inflation is comparable to other major countries such as Canada and the United Kingdom. Brown asked Powell if he sees prices stabilizing in the near future. Powell said the Fed is looking for compelling evidence that prices are coming down, which it does not currently have, adding that he sees no evidence of prices stabilizing in the near future. Brown asked if the economy is at a point of a recession. Powell said he does not see the likelihood of a recession at the current moment, adding that the U.S. economy for now is strong but that things within the economy are slowing down.

FedNow Real Time Payments Service

Hollen asked Powell is he would agree the FedNow Real Time Payments Service will save Americans billions of dollars. Powell said yes adding that getting the system implemented quickly is a Fed priority.

Banking and Capital Markets

Sen. Jon Ossoff (D-Ga.) asked what part of capital markets present the greatest risks to financial stability based on the current action the Fed is taking. Powell said the banking system is very strong, adding that it is well capitalized and highly liquid. Powell also said the banking industry does a great job of understanding the risks and managing them and that capital markets did show periods of illiquidity during the immediate aftermath of the pandemic, so the regulatory community has been looking at ways to address that. Ossoff asked Powell if he was concerned about money markets. Powell said money markets, as part of the economy, have become illiquid because assets were not able to be turned into cash quickly. He also said there are current reforms happening at the Securities Exchange Commission (SEC) to address this.

Housing Market

Sens. Raphael Warnock (D-Ga.) and Tina Smith (D-Minn.) asked how the Fed will balance interest rate hikes with housing demand. Powell said the housing market is slowing down, which will have an impact on housing costs. Powell also said there will be fewer home sales, which will help housing supply and demand get back in alignment. 

Cryptocurrency

Sinema asked if the Fed has been tracking crypto markets over the recent weeks given their increased volatility. Powell said the Fed has been tracking crypto related events very closely and that the principal implication here is that there should be a better regulatory framework. Brown asked what monetary policy risks cryptocurrency poses. Powell said cryptocurrency is new and emerging and currently does not have the regulatory framework it needs. Sen. Cynthia Lummis (R-Wyo.) asked if the accounting standards contained in SEC Staff Accounting Bulletin (SAB) 121 can be applied by the Fed banks and bank holding companies. Powell said he does not have an answer but assured Lummis that the Fed is working with bank regulators.

Global Systemically Important Banks Scoring from Basel Committee

Sen. Mike Rounds (R-S.D.) asked if substantive changes made to EU banks’ Global Systemically Important Banks (G-SIB) scores by the Basel Committee will provide advantages to EU banks over U.S. banks in assessing risk in the EU community. Powell explained that the changes don’t affect U.S. banks.

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