Economic Policy Week in Review

Update 703 – Economic Policy Week in Review
Powell’s Report; RECOUP Clears Banking Cmte.

Amid the celebrated pause in interest rate hikes, all eyes were on Fed Chair Jerome Powell this week as he took the stand for his Humphrey-Hawkins hearings to deliver the central bank’s semi-annual monetary policy report. Questions for the Fed Chair ranged broadly in the topic, as Democrats used the opportunity to focus on his positively persistent inflationary journey, while Republicans hawkishly hammered down on putative increased capital requirements. 

As the Hill prepares to disband for the July 4 recess, we offer a recap of the most significant economic policy developments that occurred on the Hill this week. From Senate Banking marking up the historic RECOUP Act to the House GOP grilling SEC General Counsel Barbero, we have everything you may have missed this week below. 

A good summer recess, all…

Dana

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Hearings and Markups This Week: 

• Powell on Semi-Annual Monetary Policy Report

On Wednesday, Chairman of the Federal Reserve Jerome Powell testified before the House Financial Services in the first part of his semi-annual Report to Congress. The majority’s questions for Powell focused primarily on rumors about the central bank’s intentions to increase capital requirements, and Republican members emphasized their strong opposition to tightening regulations, asserting that a well-capitalized banking system does not need such measures. 

Capital requirements remained a topic of conversation on the Senate side where Republicans continued to oppose the increased capital requirements that they expect to be proposed by Federal Reserve Vice Chair of Supervision Michael Barr in his holistic review, which is expected to be released in the coming months. 

Inflation was also a key point of debate at the hearings. In the House, Chair Patrick McHenry (R-NC) blamed the Administration’s spending policies for persistent inflation and criticized the Fed’s characterization of inflation as “transitory.” Ranking Member Waters (D-CA) applauded the Fed’s response to inflation and commended the slowdown in rate hikes, emphasizing the Fed’s legal mandate to consider low unemployment rates, criticizing Republicans for focusing on unrelated issues like gas stoves instead of addressing high housing costs. 

Powell acknowledged the need for further rate hikes to curb inflation but suggested that the pace of increases may slow down. He cited the importance of data in guiding the Fed’s decision-making process and expressed a commitment to transparent and consistent regulation. 

Powell acknowledged the Fed’s distance from its 2 percent inflation target and voiced concerns about the housing shortage across the country. He highlighted the Fed’s commitment to achieving both employment and inflation goals but did reaffirm his position that the labor market is experiencing excess demand. 

Returning to the Fed’s role in regulating financial institutions, Powell recognized the strength of existing capital buffers in the banking system, while acknowledging the potential increased resilience that could result from more. He assured the committee that smaller banks would be given deference to avoid an excessive burden. Powell endorsed Basel III international banking rules and noted ongoing research on topics such as: such as stablecoins, a central bank digital currency (CBDC), and commercial real estate.

Senator Elizabeth Warren (D-MA) pointedly questioned Powell on his role in lobbying for, drafting, and voting to weaken rules that may have helped prevent the recent turmoil in the banking sector. Powell directed focus to the role and legal responsibility of Fed Vice Chair of Supervision Barr.

• Senate Banking Reins In RECOUP 

On Wednesday, the Senate Committee on Banking, Housing and Urban Affairs approved the Recovering Executive Compensation from Unaccountable Practices (RECOUP) Act to strengthen penalties against the executives of failed banks. The bill, led by Committee Chair Sherrod Brown (D-OH) and Ranking Member Tim Scott (R-SC), was approved with overwhelming bipartisan support within the committee, passing by a 21-2 margin. The only holdouts were Senators Thom Tillis (R-NC) and Bill Hagerty (R-TN). The bill is the first legislative response to recent turmoil in the banking sector to pass through the Committee. 

The RECOUP Act is the latest bill to be introduced seeking to clawback compensation from executives of banks that collapsed earlier this year. The most notable of these, the Failed Bank Executives Clawback Act of 2023 was introduced by Senator Elizabeth Warren (D-MA) with support from members of the Senate Banking Committee on both sides of the aisle, including Senators J.D. Vance (R-OH) and Josh Hawley (R-MO), earlier this month. Senators Reed (D-RI) and Grassley (R-IA) had also introduced the Bank Management Accountability Act in early May. 

Staffers of offices involved worked through the early hours of Wednesday morning finalizing amendments to be passed at the markup. Amendments from numerous Senators, including Senators Reed, Lummis, and Smith, were included in a manager’s amendment that was passed with broad bipartisan support. While the Warren-Hawley bill provided strong clawback requirements, a broad period of retrospective coverage, and comprehensive coverage of compensation to provide the accountability we would like to see in such legislation, the RECOUP Act represents a strong compromise and a potentially powerful tool to hold bank executives accountable. 

• House, Senate Appropriations Markups

The House Appropriations Committee began this week’s markups with the Homeland Security and Legislative Branch appropriations bills on Wednesday. The Committee met again yesterday to consider the Defense and Energy and Water bills. Of the four bills marked up by the full Committee this week, only the Defense bill offers an increase in funding over current levels, as the Committee’s Republicans continue to cut to levels below the bipartisan agreement negotiated last month.

The bills marked up this week in the House also contain a number of harmful policy riders, including language that would; inhibit access to reproductive and gender-affirming care for servicemembers and their families; block the Biden administration from implementing executive orders on diversity, equity and inclusion; and allow discrimination against LGBTQA+ individuals if the discrimination is due to a sincerely held religious belief. The Clean Budget Coalition has identified 90 poison pill riders so far this cycle.

In the Senate, Chairwoman Patty Murray (D-WA) and Ranking Member Susan Collins (R-ME) are hoping to get their twelve bills done by August. The Senate Appropriations Committee met yesterday to consider 302(b) subcommittee allocations and markup the Military Construction, Veterans Affairs, and Related Agencies and Agriculture, Rural Development, Food and Drug Administration, and Related Agencies bills. The Committee approved the MilCon-VA and Agriculture bills unanimously, a sign of bipartisanship at the first full Appropriations Committee markup in two years.

The Committee will reconvene on July 13th to markup the Legislative Branch; Commerce, Justice, Science, and Related Agencies; and Financial Services and General Government Appropriations bills.

• House GOP Sets Sights on SEC Oversight 

On Thursday, the House Financial Services Committee called SEC General Counsel Megan Barbero to testify on the progress the SEC is making in complying with document requests. Committee Republicans pressed for the SEC to slow its rulemaking and enforcement activity, citing the precedent of the Supreme Court’s recent decision in West Virginia v. EPA reigning in the regulatory authority of executive branch agencies..

Barbero noted that Republican requests were broad and that the staff work involved in sorting through the millions of documents involved could be a major cause of the slow timeline. 

Other:

• Kanter Reaffirms DoJ’s Role in Bank Mergers

On Tuesday, Assistant Attorney General Jonathan Kanter delivered the keynote address at the Brookings Institution’s Center on Regulation and Markets event on “Promoting Competition in Banking.” His remarks came at the 60th anniversary of a landmark Supreme Court decision – United States vs. Philadelphia National Bank (PNB) – which upheld the Department of Justice’s authority to block bank mergers even after those mergers have been approved by the banks’ primary regulators.

Kanter’s speech is timely and follows recent comments from Treasury Secretary Janet Yellen and Acting Comptroller of the Currency Michael Hsu suggesting that additional mergers may occur as stocks of some banks remain under pressure. Kanter’s remarks show that the DOJ may be willing to consider a broad range of factors – beyond two dimensions of competition, deposit concentration and the geographic concentration of bank branches – in its own assessment of mergers and ultimately exercise their authority in blocking mergers as they see fit moving forward.

The Week Ahead:

Both the House and Senate will be out of session next week.