Update 334: Hitting Hill for Humphrey-Hawkins;
Powell Cites Concerns, Holds Rates in Place
This Tuesday and yesterday, Federal Reserve Chairman Jerome Powell appeared before Senate and House Committees to report, as the Fed Chair does semi-annually, on the state of the economy and monetary policy. In his July 2018 testimony, Chairman Powell painted a picture of a stable and fast-growing economy backed by reports of record-low unemployment and growth in general.
This week, Powell’s tone was more cautious, pointing to “softening data” as the Fed keeps its hold on rates and slows its quantitative tightening program. Capital markets love the rate news but may not have discounted Powell’s uncertainty about the sustainability of current growth.
Although the Fed looks on course to fulfill its dual mandate to maximize employment and stabilize prices in 2019, recent volatility in the equities market and issues highlighted in the Fed’s Financial Stability Report suggest clouds on the economic horizon.
Chairman Powell’s appearances before both chambers were the first of the 116th Congress and his first before a Democrat-controlled House. Members in both chambers questioned Powell on the proposed BB&T/SunTrust merger, S. 2155 implementation, Fed independence, GSE conservatorship, and the health of the economy.
On Tuesday, Chairman Powell delivered testimony before the Senate Banking Committee. He navigated controversial topics such as bank consolidation and allegations of political influence from the White House.
Notable lines of questioning from Democratic senators include:
- Ranking member Sherrod Brown and Sens. Menendez and Warren asked about the planned BB&T/SunTrust merger, noting that the Fed hasn’t denied a bank merger in over a decade and has in fact sped up its merger approval process. Sens. Brown and Warren called the Fed’s process a “rubber stamp”. Powell responded that Fed policy on mergers is transparent, and he would oversee a fair and careful decision-making process in regards to BB&T/SunTrust.
- Sen. Schatz questioned Powell on whether President Trump has improperly interfered with Fed policy, which would undermine the Fed’s independence. Since Powell became Fed Chairman last February, Trump has regularly blamed him for continuing to raise interest rates, a move that the President says caused stock market instability and weakened economic growth. Earlier this month, Powell joined President Trump and Secretary Mnuchin for a rare dinner at the White House to discuss the economy. When asked by Sen. Schatz if he had communicated with the White House about interest rates, Powell declined to answer.
Labor Force Concerns
The Chairman addressed the long-running policy concern regarding labor force participation — the amount of people available to work as a percentage of an overall population. The current US labor participation rate is 63.2 percent; in 2000, it was over 66 percent. Powell said that while labor force participation is improving since hitting levels under 62 percent last year, progress is far too slow, and the US still ranks behind other developed economies. In terms of causes, Powell pointed to factors such as job displacement stemming from technological change and globalization, as well as workforce challenges related to the ongoing opioid crisis.
Dovish in the Near-Term?
In his prepared remarks, the Chairman stated that while the US economy grew at a “strong pace” last year, and unemployment remains low, “crosscurrents and conflicting signals” may dictate monetary policy changes. He pointed to slow growth in China and Europe, as well as ongoing US trade negotiations as reasons for caution. The Fed has been slowly raising rates since late 2015, and the targeted federal funds rate is currently between 2.25 and 2.5 percent. In his testimony, Powell reiterated what he said in a January 30th press conference: in light of uncertain economic trends, the Fed would be “patient” before adopting more rate hikes.
On Wednesday, Chairman Powell delivered testimony before the House Financial Services Committee. During the testimony, HFSC Chair Waters expressed concerns with the Fed following the Trump Treasury’s deregulatory roadmap to weaken the capital and liquidity buffers on some of the largest banks. Given that in 2018, U.S. banks made a record $236.7 billion in annual profits — $28.8 billion courtesy of the Republican tax cuts — with the largest six banks alone making $120 billion, Chair Waters made it clear that the Fed should not be taking “the guardrails” off industry.
Notable questioning from House members focused on the Government Sponsored Enterprises (GSEs), which have been under Federal Housing Finance Agency (FHFA) conservatorship since the financial crisis:
- With GSE conservatorship a continuing policy issue dividing Republicans and Democrats, GOP Rep. McHenry explicitly asked Chairman Powell if he thought it was important for Congress to address housing finance reform. Powell replied that it would be good for the economy if private capital supported housing risk, rather than the Fed’s balance sheet.
- Highlighting the division between Republicans and Democrats on this issue, Rep. Sherman countered Powell’s comments by arguing that “never again should Fannie Mae and Freddie Mac be semi-public-private agencies where shareholders take the profit and taxpayers take the risk.”
Congress looks set to approve Mark Calabria as the next Federal Housing Finance Agency (FHFA) director, with a full Senate vote in late March or early April. Calabria has said in the past that he is “committed” to ending GSE conservatorship, despite saying he wouldn’t impose his own vision on the agency during his Senate Banking Committee nomination hearing on February 26.
Capital Levels “About Right”
Powell rebuffed Republicans on the Committee who argued that the capital surcharge for the global systemically important banks (G-SIBs) should be re-examined. “I think the overall level of capital, particularly at the largest firms, is about right,” he said.
Despite this, Powell was very dismissive of the impact of the Fed and Office of the Comptroller of the Currency’s joint rulemaking proposal meant to reduce the loss-absorbing capital for the nation’s big banks. HFSC freshman Rep. Katie Porter explicitly asked if the Fed was reducing loss-absorbing capital requirements for big banks. Powell responded by saying the amount of capital leaving the system is “de minimis,” despite the proposed enhanced supplementary ratio rule lowering capital requirements at the G-SIBs by an estimated $121 billion.
His testimony this week reflects Powell’s backtrack from his optimistic outlook of just last summer and his acknowledgement that the economy is not ready to resume its rates normalization (read hikes). Re-affirming the Fed’s caution on rate raises, he noted that “some [economic] data has softened,” a euphemistic way of saying that the economy is worse off than last report.
Since Powell became chairman of the Fed, there has been a departure from the standards that emerged in the Bernanke, Yellen, and Tarullo years. Powell has created a more bank-friendly, deregulatory atmosphere. Powell’s dovish tone on rate raises, his response to the speed of the BB&T/SunTrust merger, and his ambivalence as to whether deregulation has helped boost economic growth all point to a notably less confident Chairman and Fed than we saw in July.
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