|This morning, the Senate Banking Committee held Fed Governor Jerome Powell’s nomination confirmation hearing for Chair of the Fed. Republicans and one moderate Democrat used the opportunity to try to secure Powell’s support for S. 2155, The Economic Growth, Regulatory Relief, and Consumer Protection Act. The bill — slated for a markup in the Committee next Tuesday — would significantly deregulate 25 banks with assets exceeding $3.5 trillion.
What did Powell reveal about his regulatory approach? What are his views on TBTF (spoiler alert: DFA is ending it), interest rates, inflation, and balance sheet normalization, and the good and the bad rules in DFA. See below.
Also of note, Senate Budget held a vote this afternoon on Republican FY 18 reconciliation measures. Chair Enzi moved to vote before debate, dramatic protests interrupted proceedings more than once, and Republicans left before Democrats could make final remarks.
The reconciliation instructions passed along party lines. The Committee vote clears the way for a full Senate vote expected later this week.
Powell’s Systemic Regulatory Approach
Members of the Committee questioned Fed Chair nominee Powell regarding his views on financial regulation. Senators cosponsoring S. 2155 tried to win favor from Powell, agreeing with his inclination toward tailoring, regulatory relief, and opposition to strengthening rules for big banks.
But Powell also endorses liquidity requirements, capital standards, stress testing, and living wills explicitly as core reforms, calling them “pillars of stability.” He also — quite significantly — said that the problem of Too Big To Fail has been solved, consistent with Powell’s belief that DFA has TBTF in full retreat.
How will he reconcile these convictions, given that S. 2155 lifts the modified liquidity coverage ratio, resolution planning, and stress testing for 25 large regional banks?
Is the TBTF Era Over?
In a stunning expression of confidence in today’s financial systemic regulatory architecture, Governor Powell said no bank is Too Big To Fail today. Whether true or not, this represents a resounding endorsement of the Dodd-Frank Act, indicating the systemic pillars of DFA will stand the test of time.
• Sen. Crapo’s Solicitation
After listing Powell’s professional experiences, Chairman Crapo took his first public opportunity to advance S. 2155. He said changes to the Volcker rule, stress tests, and resolution planning were due, and also emphasized addressing the $50 billion threshold for enhanced prudential standards for regional banks. Sen. Crapo pointedly asked Powell if he thought S. 2155 provided regulatory relief for regional banks while still giving the Fed authority that it needed to supervise those regulations. Powell, said yes, on both counts.
• Sen. Tester Gets a Concession
Senator Tester directly asked Powell if S. 2155 does anything to put the financial system at risk. Powell responded: “I do not see anything, no, but will have to take a closer look.” To agree that a proposal is not risky is not a ringing endorsement. A closer examination of Section 401 of the legislation reveals relaxed oversight of 25 banks, totalling $3.5 trillion in consolidated firm assets, including in the area of stress testing.
Powell’s Views on Stress Testing
When pressed, the nominee’s responses to Ranking Member Sherrod Brown on stress testing were particularly revealing. Powell called stress testing one of, if not the, most important and successful policy innovations regulators have implemented over the last few years, describing it as a central pillar of today’s regulatory landscape, not something to be whittled away.
Progressives’ Pleas Addressed
Sens. Warren and Schatz wasted no time pointing out Mr. Powell’s deregulatory predisposition. In back-to-back questions, both Senators asked Powell about what regulations he would like to see strengthened. He replied that he supports maintaining certain regulations, citing in particular the Orderly Liquidation Authority.
Outlook: Fed Policy
• Interest Rates — As expected, Powell signaled his intentions to continue a program of gradual rate hikes initiated under Chair Yellen. He argued that, despite pockets of economic hardship, overall national economic robustness at present warrants rate hikes to avoid overheating. Like his predecessor, Powell indicated that increases would occur flexibly, with an eye toward macroeconomic data, and declined to commit to a December rate hike.
• Balance Sheet Normalization — Powell expressed that over the next three to five years, by 2022, the Federal Reserve’s $4.5 trillion balance sheet will be normalized. As bonds mature, they will be given back to treasury, and the new normal of Fed holdings will be in the $2.5 to $3 trillion range, still well above the Fed’s pre-recession holdings of about $1 trillion.
• Inflation — Powell reiterated the Fed’s two percent inflation goal, but admitted that the recent spate of low inflation numbers has taken Fed economists by surprise. He posited that a drop in mobile phone and pharmaceutical prices might be contributing to sluggish inflation figures. When pressed on whether low inflation or low growth is more important for the middle class, he conceded that the latter is more significant.
• Work/Wages — Democrats repeatedly pressed Powell on the wage issue during today’s hearing. The economy is seen to be on strong footing — corporate profits are record highs and and rates are quite low unemployment. In spite of this, wage growth remains stubbornly low, prompting Sens. Brown and Warren to question whether the labor market has yet to reach full employment.
Powell conceded that sluggish wage growth was a cause for concern, but ultimately agreed with Senator Warren that many of the principal causes of slack in the labor market– such as the opioid epidemic and lack of affordable childcare — remain outside of the Fed’s jurisdiction.
Outlook for the Nomination
Despite some moderates Democratic concerns about Powell’s deregulatory predisposition, the Fed Governor is expected to sail through his upcoming nomination vote. A majority of both parties in the Senate voted to confirm Powell to his current position.