Senate Banking Committee Hearing with Federal Reserve Chairman Powell
Senate Banking Committee
“The Semiannual Monetary Policy Report to the Congress”
Thursday, July 11, 2019
Key Topics & Takeaways
- Real Time Payments: Powell said the Fed is going through public comments on its proposal for real-time payments and will have to consider its jurisdiction under the Depository Institutions and Monetary Control Act and regulations, specifically for costs to capital and tax. He said community banks favor the proposal and the U.S. lags other countries on a broad level in having an equitable payments system.
- Foreign Banks: Powell said the Fed’s proposal is about providing national treatment for foreign banks operating on the U.S. and that they would be subject to the same standards applied to U.S. banks. He also said that the U.S. expects the same treatment globally.
- Leveraged Lending: Powell said that the risks of leveraged loans are held mostly in collateralized loan obligations (CLO’s) and in debt obligations, which are market-based vehicles that are not runnable and have stable funding. He also said mutual funds are an area the Fed continues to monitor as they could be amplifiers to a macroeconomic downturn.
- Capital Requirements: Powell said stress tests are a “strong” tool to measure shocks to the global market and banks meet capital requirements plus a buffer and are still able to pay out dividends. He added that it is “too early” to consider reducing capital requirement standards and that the Fed is considering ways to continue to evolve the tests over time.
Witness
Opening Statements
Chairman Mike Crapo (R-Idaho)
In his opening statement, Crapo stated that the economy is growing strongly, following a 3.1 percent growth in the first quarter of 2019 and a low unemployment rate. He suggested that regulators need to simplify the Volcker Rule by eliminating the proposed accounting prong and revising the broad definition of covered funds. Crapo said that there needs to be simpler capital requirements set at eight percent for the community bank leverage ratio, as well as other long-term investments and loan liquidity requirements. Crapo said that regulators need to harmonize margin requirements for inter-affiliate swaps by quickly making targeted changes to margin rules to enhance end user’s ability to hedge against risks. Crapo recommended that regulators must decide whether intermediate holding company regulations should be applied on assets of a company alone, rather than on all U.S asset operations for foreign bank organizations (FBOs). He said that regulators need to encourage the alignment of foreign bank proposals with existing domestic proposals and should exclude inter-affiliate transactions from any risk-based calculations. Crapo said that the Community Reinvestment Act must be modernized to ensure banks are serving all businesses in their communities. Crapo then said that the Financial Stability Oversight Council (FSOC) should assess the threat of Fannie Mae and Freddie Mac to the economy as they are systemically important, adding that the FSOC should consider designating them as such and subject them to enhanced supervision and prudential standards.
Ranking Member Sherrod Brown (D-Ohio.)
In his opening statement, Brown stated that the Federal Reserve (Fed) needs to measure and evaluate the economy with an account for everyday middle-class workers. He said it was clear that even though productivity has increased in the economy, so has the wage gap. Brown stated the Fed needs to ensure all active participants in the economy receive the benefits of their participation, and that the Fed must increase its “policing” of Wall Street. Brown stated that the recent steps made by the Fed to weaken rules is a “failure” to activate countercyclical capital buffers and for the Fed to prepare for the next crisis. Brown said that in general, the Fed and other regulatory agencies are not doing enough to protect Americans.
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
Foreign Banks
Sens. Crapo and Brown asked about the Fed’s proposal regarding foreign bank operations in the U.S. Powell said the proposal is about providing national treatment for foreign banks operating on the U.S. and that they would be subject to the same standards applied to U.S. banks. He also said that the U.S. expects the same treatment globally.
Leveraged Lending
Sens. David Perdue (R-Ga.) and Brown asked about the risks to the economy posed by leveraged lending. Powell said that the risks of leveraged loans are held mostly in collateralized loan obligations (CLO’s) and in debt obligations, which are market-based vehicles that are not runnable and have stable funding. He also said mutual funds are an area the Fed continues to monitor as they could be amplifiers to a macroeconomic downturn.
Capital Requirements
Sens. Mike Rounds (R-S.D.) and Brown asked about the Fed considering reworking the Comprehensive Capital Analysis and Review (CCAR) framework and lessening capital requirements for banks. Powell said stress tests are a “strong” tool to measure shocks to the global market and banks meet capital requirements plus a buffer and are still able to pay out dividends. He added that it is “too early” to consider reducing capital requirement standards and that the Fed is considering ways to continue to evolve the tests over time.
Federal Reserve Policy
Perdue asked if there are risks to the current currency reserve structure. Powell said that the currency is set based on a nation that follows the rule of law, has financial institutions, open trade, and financial inflow and outflow, and currently only the U.S. meets these standards. He said in the near term there is no threat, but there are long term fiscal issues, including debt, that the U.S. needs to address.
Sen. Thom Tillis (R-N.C.) asked Powell if now is the right time for individuals to lock in on long-term financing deals and his thoughts on long-term bonds. Powell said right now would be a “nice” time for individuals to lock in on 10-year yields, and that it is the role of the Treasury to determine the U.S. policy on bonds.
Sen. Jack Reed (D-R.I.) asked about the importance of the Fed selecting a credible auditor in the audit process. Powell said it is very important and the Fed board has extended analysis on who they hire to audit the agency.
Trade
Sens. Richard Shelby (R-Ala.), Bob Menendez (D- N.J.), Doug Jones (D-Ala.), Tim Scott (R-S.C.), and Reed asked about the impact to the economy from the uncertainty of trade in the U.S. Powell said that trade uncertainty impacts business confidence, manufacturing and innovation. He said that business supply chains are being disrupted and distracted from rolling out new products, which ultimately leads to weakness in future outlooks.
Federal Reserve Independence
Sens. Jon Tester (D-Mont.), Menendez, and Reed asked about the importance of the independence of the Fed for the economy. Powell said the Fed has a narrow set of protections in place to ensure its independence, and that these protections have served the economy well over time. He said when protections are not in place, “bad” outcomes such as high inflation similar to the 1960s and 1970s can occur. Powell said the Fed will continue to make decisions based on data and be focused on transparency to do what is right for the economy.
Debt Ceiling
Tester and Jones asked about the importance for the U.S. to address the debt. Powell said the U.S. has never failed to make payments on its debt, and he believes the debt ceiling should be addressed to continue this trend. He said otherwise the consequences would be “highly” unpredictable and no agency could shield the economy from ramifications.
Real Time Payments
Sens. Chris Van Hollen (D-Md.) and Tillis asked about the implementation of the real-time payments system and funding. Powell said the Fed is going through public comments on its proposal and will have to consider its jurisdiction under the Depository Institutions and Monetary Control Act and regulations, specifically for costs to capital and tax. He said community banks favor the proposal and the U.S. lags other countries on a broad level in having an equitable payments system.
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