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Federal Reserve Chair Powell testifies before the House committee on monetary policy — 3/6/24

CNBC Television・149 minutes read

Inflation, housing costs, regulatory policies, and the impact of various government initiatives on the economy are discussed at the Federal Reserve's semiannual monetary policy report, with Democrats and Republicans sharing differing views on key issues. The Federal Reserve aims to balance economic stability, employment, and price stability, considering factors like supply chain disruptions, global conflicts, and proposed regulatory changes in making policy decisions.

Insights

  • Inflation is a significant concern, with substantial increases in food, energy, and shelter costs since President Biden took office.
  • Democrats credit their policies for economic improvements, while Republicans express worries about inflation's impact on families.
  • Disagreement exists on the causes of inflation, with blame placed on corporate greed, shrinkflation, and interest rate hikes due to Democrat spending.
  • Regulatory policies, specifically the Basel 3 in-game proposal, are under scrutiny for potential negative impacts on families and small businesses.
  • Housing plays a crucial role in inflation, prompting proposed bills from Democrats to address the housing crisis and reduce inflation.
  • Efforts to strengthen labor markets and control inflation are suggested for other countries based on the success of US policies during the pandemic.

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Recent questions

  • What are the main concerns about inflation?

    Inflation remains a significant concern, with notable increases in food costs, energy costs, shelter costs, and the price of eggs since President Biden took office. The Biden Administration and Democratic colleagues attribute improvements to their policies, while Republicans express concerns about inflation's impact on families. There is a disagreement on the causes of inflation, with blame placed on corporate greed, shrinkflation, and interest rate hikes necessitated by Democrat spending. The focus shifts to housing as a key driver of inflation, with Democrats proposing bills to address the housing crisis and reduce inflation. Republicans are criticized for their handling of housing issues, with Democrats highlighting their efforts to enact critical housing bills in previous Congresses.

  • What is the Federal Reserve's focus on housing?

    The Federal Reserve's focus on housing as a key driver of inflation is evident in their incorporation of new lease rent data into economic assessments to gauge housing inflation accurately. The Fed plans a methodical approach to rule-making, prioritizing accuracy over speed due to potential economic implications. Concerns are raised about the impact of rising property insurance rates on inflation and housing affordability. Efforts post-Silicon Valley Bank crisis focus on improving liquidity positions in financial institutions with high uninsured deposits, with ongoing work on liquidity rules. The Fed is monitoring rising insurance costs and their impact on the economy, emphasizing the need for long-term progress in addressing housing issues.

  • What are the concerns about the Basel 3 proposal?

    Concerns about the Basel 3 proposal are multifaceted, with discussions expanding to the long-term debt proposal rule affecting regional banks, potentially increasing costs and regulatory burdens. The Federal Reserve is reviewing comments on the Basel 3 proposal, expecting significant changes based on feedback, but no decisions have been made yet. The impact of the Basel 3 proposal on access to capital for businesses, farmers, and small business owners is highlighted, with calls to reconsider the proposal. The Fed acknowledges concerns about the Basel 3 proposal's impact on capital markets and is evaluating necessary changes. Finding broad consensus at the FED on proposals like Basel 3 is crucial, emphasizing the importance of common ground and understanding.

  • How does the Federal Reserve address interest rates?

    The Federal Reserve's decision on rate cuts hinges on economic progress, maximum employment, and price stability, influenced by incoming data. The Fed aims to reduce policy rates once inflation sustainably decreases to 2%, requiring more data for confidence. The Fed's commitment to reducing rates if the economy progresses as expected is mentioned, with a focus on managing the economic impact effectively. The impact of interest rate hikes on housing construction costs is raised, with the Fed explaining its policy to raise interest rates to control inflation, affecting housing and durable goods. Disproportionate impacts of interest rate hikes on low-income and minority communities are acknowledged, highlighting the complexities of managing rates for economic stability.

  • What is the Federal Reserve's stance on labor force growth?

    Labor force growth is essential for economic stability, with discussions analyzing if gains in labor productivity are more likely to benefit workers in states with stronger union presence and bargaining power. The Federal Reserve, along with other agencies, released a proposal requiring long-term debt issuance for certain banks, raising concerns about lack of tailoring and estimating costs. Efforts are made to educate on the benefits of diversity in workplaces and society, despite challenges faced. The necessity of collecting data to ensure inclusion of minority and women-owned businesses in contracting opportunities is highlighted, emphasizing the importance of diversity and inclusion efforts in economic policies. The Federal Reserve is assessing concerns raised by stakeholders regarding Basel 3's impact on the banking system and economy, focusing on addressing potential challenges to economic growth and stability.

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Summary

00:00

Federal Reserve's Inflation Concerns and Policy Recommendations

  • The committee convenes for the Federal Reserve's semiannual monetary policy report titled "The Federal Reserve's semiannual monetary policy report."
  • The hearing has a strict end time at 1 PM.
  • Inflation remains a significant concern, with food costs up by 21%, energy costs by nearly 32%, shelter costs by over 19%, and a 37% increase in the price of a dozen eggs since President Biden took office.
  • The Biden Administration and Democratic colleagues are optimistic about the economy, attributing improvements to their policies, while Republicans express concerns about inflation and its impact on families.
  • There is a disagreement on the causes of inflation, with blame placed on corporate greed, shrinkflation, and interest rate hikes necessitated by Democrat spending.
  • The discussion shifts to regulatory policies, with concerns raised about the Bosel 3 in-game proposal and its potential negative impact on families, communities, and small businesses.
  • Recommendations are made to withdraw the Bosel 3 in-game proposal and start over, emphasizing the need for a holistic approach to regulatory policies.
  • The focus shifts to housing as a key driver of inflation, with Democrats proposing bills to address the housing crisis and reduce inflation.
  • Republicans are criticized for their handling of housing issues, with Democrats highlighting their efforts to enact critical housing bills in previous Congresses.
  • The Federal Reserve's Chair, Jerome Powell, presents the semiannual monetary policy report, highlighting the progress made in achieving the dual mandate of maximum employment and stable prices, while acknowledging the challenges posed by inflation.

18:09

Federal Reserve's Focus on Inflation and Rates

  • The political year heavily focuses on all government aspects, especially the impact of high inflation on American families over the past three years.
  • Speculation arises about the Federal Reserve cutting rates, with varying opinions on the extent of rate cuts.
  • The Fed's decision on rate cuts hinges on economic progress, maximum employment, and price stability, influenced by incoming data.
  • The Fed aims to reduce policy rates once inflation sustainsably decreases to 2%, requiring more data for confidence.
  • Concerns are raised about the Basel 3 in-game proposal's process and substance, with potential broad changes expected.
  • The Fed is analyzing comments and impact studies on the Basel 3 proposal, aiming for a final product with broad support.
  • The Fed's decision on the Basel 3 proposal's process is pending, with the possibility of a repr proposal not ruled out.
  • Housing costs play a significant role in inflation, with a focus on housing services inflation coming down.
  • The Fed incorporates new lease rent data into economic assessments to gauge housing inflation accurately.
  • The Fed plans a methodical approach to rule-making, prioritizing accuracy over speed due to potential economic implications.

33:38

Global Economies Navigate Pandemic Challenges and Recovery

  • Economies worldwide faced disruptions in supply chains during the pandemic, leading to shortages of essential items like toilet paper and paper towels, causing prices to surge due to supply and demand imbalances.
  • The Federal Reserve (FED) had to implement measures to navigate the pandemic's economic impact, ensuring stability and recovery.
  • Post-pandemic, the US economy is performing well compared to other nations globally, with low unemployment rates and decreasing inflation.
  • Policies implemented by the US during the pandemic are credited for the country's economic resilience and recovery.
  • Suggestions are made for other countries to consider similar policies to strengthen their labor markets and control inflation.
  • The connection between global conflicts, like Russia's actions in Ukraine, and economic pressures, particularly on commodity prices, is highlighted.
  • Efforts to support Ukraine and address disruptions in commodity markets are crucial to lowering food prices and stabilizing the economy.
  • Concerns are raised about proposed increases in capital requirements for commodity derivatives, potentially impacting end-users and banks offering clearing services.
  • Collaboration with other agencies like the Commodity Futures Trading Commission (CFTC) is essential to address challenges in the financial markets.
  • The focus remains on sustaining economic growth, maintaining a strong labor market, and achieving inflation targets for the benefit of the public, without declaring any official victory or soft landing.

50:26

Impact of Energy Policy on Prices and Jobs

  • The speaker discusses the impact of energy policy on prices, business, and households, emphasizing the need for long-term progress.
  • They express reluctance to comment on energy policy due to their focus on employment and price stability.
  • The speaker criticizes the energy policies supported by the President and the Democratic party for keeping prices high and affecting jobs and foreign contracts.
  • They highlight the importance of energy policies on housing, job availability, and overregulation causing nervousness among Americans.
  • The speaker urges for a memo to showcase the impact of energy policies without expressing a personal opinion.
  • They acknowledge the economic stability achieved despite ongoing challenges faced by consumers due to high prices.
  • The speaker questions the Federal Reserve Chairman about the risks associated with the commercial real estate market and the tools available to manage them.
  • The Chairman assures that the risks in the commercial real estate market are manageable, focusing on downtown real estate oversupply and the need for banks to have plans to address losses.
  • The discussion shifts to the oversight of banks like Silicon Valley Bank and the need for supervisors and examiners to prevent irresponsible actions.
  • The Chairman emphasizes the importance of evaluating comments on proposed regulations and the legal obligation to assess interchange fees based on costs.

01:05:10

Immigration and Labor Force Drive Economic Growth

  • Adding millions of people to an economy can increase output through increased workforce participation.
  • Immigration policy is not within the Federal Reserve's purview.
  • Labor force growth is essential for economic stability.
  • Labor supply increased due to higher workforce participation and immigration.
  • Immigration and labor force participation contributed to economic growth in 2023 and 2024.
  • The Congressional Budget Office (CBO) is responsible for assessing the economic impact of immigration, not the Federal Reserve.
  • The CBO's 10-year growth projections do not directly impact current monetary policy.
  • Diversity and inclusion efforts are prioritized in hiring processes at the Federal Reserve.
  • Coordination with other agencies on rulemaking agendas is essential but not mandated.
  • Basel 3 regulations and stress tests overlap, requiring further consideration.
  • Compensation incentives were not a primary factor in Silicon Valley Bank's failure.
  • Section 956 of the Dodd-Frank rule has not been finalized by the Federal Reserve.
  • Executive compensation rules should be robust and address failures adequately.
  • Executives responsible for bank failures should not profit from their actions.
  • Climate change poses risks over the long term, but interest rates are primarily focused on employment and price stability.
  • High interest rates can impact fixed-income individuals the most due to inflation.
  • Stable prices benefit individuals over time, especially those on fixed incomes.

01:19:58

"Central Bank Focus on Real Estate"

  • Larry Summers, former treasury secretary, suggests Central Bank focus on real estate portfolios in banks they supervise rather than abstract arguments.
  • Fed supervisors and regulators should prioritize monitoring commercial real estate and other real estate investments.
  • Median estimate by monetary policy committee suggests a 4.1% target overnight interest rate in 2024.
  • Expectation of three rate cuts this year, totaling 75 basis points, as per the December FOMC projections.
  • Concerns raised by Congress members about Basel proposal impacting US capital markets activities.
  • Fed acknowledges concerns about Basel proposal's impact on capital markets and is evaluating necessary changes.
  • SEC Chair pushing regulations beyond Congressional mandate, potentially encroaching on Fed's jurisdiction.
  • Fed would react if another agency encroaches on its jurisdiction.
  • Rising property insurance rates are contributing to inflation and affecting affordability of housing.
  • Fed is monitoring rising insurance costs and their impact on the economy.

01:38:31

Banking challenges and solutions in discussion

  • The speaker discussed the concept of a "doom loop" similar to Silicon Valley Bank, where depositors losing confidence in a bank can lead to financial instability.
  • Concerns were raised about a 20% vacancy rate in office spaces in Boston affecting tax revenues, questioning if lowering interest rates could help banks facing lending issues.
  • Commercial real estate has seen a decline in demand due to economic changes, impacting office and retail spaces, with regulators working with banks to address high concentrations and potential losses.
  • The issue is more serious in some locations and for certain banks, requiring a long-term solution and careful planning to absorb losses and maintain lending practices.
  • Efforts post-Silicon Valley Bank crisis focused on improving liquidity positions in financial institutions with high uninsured deposits, with ongoing work on liquidity rules.
  • The discussion shifted to redirecting frozen Russian assets to Ukraine, highlighting the complexity of such decisions controlled by the Administration.
  • Concerns were raised about the Basel 3 proposal impacting access to capital for businesses, farmers, and small business owners, with calls to reconsider the proposal.
  • The Federal Reserve is reviewing comments on the Basel 3 proposal, expecting significant changes based on feedback, but no decisions have been made yet.
  • The discussion expanded to the long-term debt proposal rule affecting regional banks, potentially increasing costs and regulatory burdens, prompting a commitment to implement tailored regulations.
  • Inflation concerns were raised, attributing it to various factors like the pandemic, strong demand, and supply chain shortages, with a focus on managing the economic impact effectively.

01:53:41

Rising Credit Card Debt and Economic Impact

  • Average monthly credit card balances were 27% higher in 2023 compared to 2019, reaching $1.7 trillion.
  • The driving force behind the record high credit card debt levels is attributed to the growth in the economy, leading to increased spending.
  • People had extra cash during the pandemic from forced savings, which has now been spent, leading to borrowing.
  • Tightening lending rules for banks could drive businesses and consumers towards alternative forms of credit, like non-bank lenders and credit cards.
  • There is a call for an analysis of how Bank Capital proposals, like Basel, affect small business credit access before finalizing such proposals.
  • Small businesses are considered the backbone of the economy, creating jobs and driving growth.
  • Discussions are ongoing about withdrawing the Basel 3 endgame proposal, with concerns raised by board members about its impact.
  • Finding broad consensus at the FED on proposals like Basel 3 is crucial, emphasizing the importance of common ground and understanding.
  • The freezing of Russian assets and leveraging them for reconstruction assistance to Ukraine is being considered, with concerns about its impact on the central banking system and the dollar's primacy.
  • The Federal Reserve's practice of paying interest on excess reserves is questioned for potentially distorting the market and hindering small and mid-market firms' access to competitive loans.

02:08:13

Fed's Monetary Report: Inflation, Rates, Economy

  • Raising rates to control inflation results in absorbing paper losses without affecting operational functioning of the Fed.
  • Earnings are not retained but given to the treasury, causing no issues in operations.
  • Encouragement to halt the development of a central bank digital currency is emphasized.
  • The labor market's strength and low unemployment rates are acknowledged in the monetary report.
  • The impact of the global pandemic on inflation rates is discussed, with a decline noted.
  • Job gains and robust job growth are highlighted in the report.
  • Concerns about the adverse effects of interest rate hikes on housing construction costs are raised.
  • The Fed's policy to raise interest rates to control inflation is explained, affecting housing and durable goods.
  • Disproportionate impacts of interest rate hikes on low-income and minority communities are acknowledged.
  • The Fed's commitment to reducing rates if the economy progresses as expected is mentioned.

02:23:08

"Federal Reserve Analyzes Wage Growth and Regulations"

  • New England and the West consistently show wage increases above average, while the West South Central states like Texas, Oklahoma, Arkansas, and Louisiana consistently experience wage growth below average since July 2022.
  • These states are all "right to work" states, making it harder to unionize or organize.
  • The Federal Reserve is analyzing if gains in labor productivity are more likely to benefit workers in states with stronger union presence and bargaining power.
  • The Federal Reserve, along with other agencies, released a proposal requiring long-term debt issuance for certain banks, with concerns raised about lack of tailoring and estimating costs.
  • The Federal Reserve is reviewing comments on the long-term debt proposal and considering the impact of Basel III regulations.
  • Category 2, 3, and 4 banks are required to issue long-term debt at both the parent holding company and bank level, raising questions about the rationale behind this dual requirement.
  • Category 4 banks were not initially included in the advanced notice for the long-term debt rule, potentially putting them at a disadvantage.
  • Regulatory agencies are considering providing smaller regional banks with longer phasing periods to meet long-term debt requirements.
  • The impact of proposed regulatory changes on past financial crises, like the SVB and Signature cases, is hypothetical but worth considering.
  • Congresswoman Pressley urges the Federal Reserve to cut interest rates to address the housing market crisis, particularly impacting affordable housing projects and homebuyers.

02:38:09

Federal Reserve addresses concerns on Basel 3

  • Rising mortgage rates are a concern for working families, especially people of color, in accessing home equity.
  • The Federal Reserve is considering actions to mitigate the impact of the Basel 3 proposal on minority borrowers.
  • Concerns exist about the potential reinforcement of banks' retreat from the mortgage market due to risk weight shifts.
  • New operational risk requirements in Basel 3 are questioned for potentially increasing costs and limiting bank services.
  • Urgency is emphasized in making decisions to reduce market uncertainty and negative effects.
  • Efforts are made to educate on the benefits of diversity in workplaces and society, despite challenges faced.
  • The necessity of collecting data to ensure inclusion of minority and women-owned businesses in contracting opportunities is highlighted.
  • Concerns are raised about the impact of excessive government spending and regulatory restrictions on economic growth.
  • The Federal Reserve is assessing concerns raised by stakeholders regarding Basel 3's impact on the banking system and economy.
  • The potential impact of new regulations, like the climate change rule, on inflation and employment is a focus for the Federal Reserve.
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