Posted by on November 28, 2017 1:55 pm
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Update (11:45 am ET): As Powell’s testimony draws to a close, analysts at Stone & McCarthy noted that – as expected – the future Fed chair’s comments were “generally dovish”.

The hearing was largely free of surprises. As it neared its close, Powell offered his thoughts about the blockchain and digital currencies (one day they could impact the Fed’s policies, but right now they’re too small to matter), and the mysterious roots of low inflation (the Fed is still struggling to determine if it’s due to transitory factors, or some kind of fundamental shift.

Here’s Stone & McCarthy:

  • In his confirmation hearing before the Senate Banking Committee, Powell fielded questions mainly on the topics of raising interest rates, shrinking the balance sheet, and his views on “tailoring” regulation.
  • Powell maintained the view that it is appropriate to gradually increase short-term rates against a backdrop of healthy, consistent growth with a strong labor market. He did not address inflation issues.
  • He said GDP growth should be about 2.5% in 2017, and looking forward to “something pretty close to that” next year.
  • Powell declined to specifically say if he would vote for another rate hike at the December 12-13 FOMC meeting. He did say “conditions are supportive” for another rate hike and “the case for raising rates at the next meeting is coming together”.
  • He anticipated that balance sheet normalization will proceed “passively and gradually”, and that in “about 3 or 4 years” that the balance sheet will decline to a “new normal” of about $2.5 trillion-$2.9 trillion. He said no one can be certain about the exact size at the end. He also said the Fed wants the balance sheet to be composed mainly of Treasurys.
  • “I do” oppose auditing of monetary policy decisions. He reiterated that an independent central bank helps ensure better outcomes for the economy. He said there has been “nothing” in his conversation with the Administration to give him any concern about political interference.
  • He declined to answer questions regarding the tax reform bill, he said broadly “the debt needs to be on a sustainable path”, but “not our role” to comment on fiscal policy.
  • He supported “tailoring” of regulation and supervision to put the “most intense and stringent” regulation on the largest institutions and scaling down for smaller banks. “We are taking a fresh look at this now.” He said he and Vice Chair for Supervision Quarles are in agreement on most points.
  • There are currently three vacancies on the Board for the terms ending January 31, 2020; January 31, 2022; and January 31, 2030. There will be a fourth when Yellen retires from the Board for her term as Governor that ends January 31, 2024. By law, one of these seats will go to a community banker.
  • The office of the Vice Chair of the Federal Reserve is currently vacant. The White House has not named a candidate as yet. The position of Vice Chair for Supervision was filled by Randal Quarles as of October 15.

* * *

Update (11:00 am ET): So far, Powell’s testimony before the Senate Banking committee has been a snooze-fest. However, Powell offered what many view as a telling clue about how his approach to banking regulations might differ from his predecessor’s.

In response to a question by Republican Sen. John Kennedy of Louisiana, Powell said that he doesn’t believe there are any more “too big to fail” banks in the US.

The question came after Kennedy admonished Powell to fight harder for community banks, after accusing him of trying to “regulate them half to death.”

In previous remarks, Fed Chairwoman Janet Yellen said her assessment of the country’s financial institutions, and the industry as a whole, is that the US has “a safer” banking system now than it did leading up to the crisis. Because of that, she said the Fed planned to eliminate certain burdens on smaller regional banks.

Powell’s remark suggests he might be open to loosening the burdens on larger banks as well.

Here’s more from WSJ:

Sen. John Kennedy (R., La.) put Mr. Powell in an awkward position with a question about whether big U.S. banks are still “too big to fail.”


The only way to know the answer for sure is for one of those banks to actually fail, without a taxpayer bailout. That hasn’t happened since the last bailouts in 2008.


Mr. Powell first gave the stock answer for regulatory officials: “We’ve made a great deal of progress on that,” he said, citing regulations adopted after the financial crisis. Pressed further, Mr. Powell did something regulators rarely do:


He answered the question directly.


“I would say no,” he said.

Powell also revealed his expectations for GDP growth, saying he expects 2.5% growth this year, and around that level next year thanks to accomodative financial conditions and a strong stock maret. He added that the case for a December rate hike is “coming together,” though he declined to give a “specific answer” about whether the bank would hike.

“We need to go ahead and have the meeting to listen to each other.”

* * *

Just two weeks after President Donald Trump announced that Fed Governor Jerome “Jay” Powell would be his pick to succeed Janet Yellen as chairman of the Federal Reserve, he is appearing today before the Senate Banking committee in a confirmation hearing that’s viewed as a virtual certainty.

The hearing begins at 10 am ET. Watch it live below:

However, while Powell’s chances of approval are high – given that he’s been twice confirmed as a Fed governor – Business Insider’s Pedro Da Costa points out that Powell – a former private equity executive – has commented fairly sparsely on monetary policy and regulatory matters despite serving as a Fed governor since 2012, so there are lots of unanswered questions about his views. As Reuters points out, Powell – once one of the FOMC’s more hawkish members, has recently moderated his position to more closely resemble Yellen’s dovish approach.

Also, Powell’s record isn’t without blemish: In the past, however, Powell has been more cautious about the risks posed by such an expansive approach. In his first months at the Fed, Powell was among those who pressured then chair Ben Bernanke for more clarity on when the central bank would start scaling back its bond buying. When Bernanke made those plans public it triggered a “taper tantrum” spike in market interest rates in the summer of 2013, forcing Bernanke, Powell and others to do damage control.

This could precipitate a lively Q&A session as senators try to get to the heart of exactly what they can expect from the reticent central banker.

According to media reports and analysts’ assessments, Trump’s logic in choosing Powell (over both Kevin Warsh, John Taylor and Powell’s current boss, Janet Yellen) is that, being a lifelong Republican, Powell has a slightly more permissive stance on regulation than Yellen. However, he also shares Yellen’s dovish tendencies, and it’s widely believed that interest rates and the Fed’s balance-sheet unwind will proceed cautiously under his leadership.

During the hearing, da Costa posits that Powell faces two principal tasks: Flesh out his views on monetary policy, regulation and how they differ from those of his predecessor.

Here are a couple hypothetical questions that, if da Costa were a senator, he would ask:

1. Do you intend to continue raising interest rates in December and next year despite below-target inflation, and what factors are you considering in making that decision?

Part of Powell’s early mission on this front will be establishing himself as a leader and developing his own way of communicating on major policy issues, many of which he has touched upon only sparsely as a Fed governor.


Powell should be pressed on his lack of economics training – he’s the first Fed chair in decades to lack a doctorate in the field – and how he will use his staff and the expertise of his colleagues to help guide decision making.


Powell is expected to maintain the more committee-centered approach that began under Ben Bernanke, who wanted to move away from Alan Greenspan’s cult of personality, and continued under Yellen.


The Fed has raised interest rates four times since December 2015, to the current 1% to 1.25% range. The central bank has also started to gradually shrink a $4.5 trillion balance sheet that expanded sharply in response to the Great Recession of 2007-2009.

2. What is your view of the post-crisis financial rules and how willing would you be to roll them back, in particular capital requirements for big banks and consumer protections now under challenge?

Many investors and public advocates worry that weaker rules could lead banks to again take wild risks and put consumers and workers at undue risk. Powell, a former Carlyle Group executive, has plenty of financial market experience, but some might worry he is ideologically too close to the sector to supervise it closely.


Both Yellen and the recently-retired vice chair, Stanley Fischer, have spoken in unusually blunt terms about the dangers of rolling back financial rules.  


Powell has been friendly to the idea of letting financial institutions roam more freely, albeit within limits, according to The New York Times. Indeed, Powell’s industry-friendly stance probably didn’t hurt his chances of landing the job.


A political squabble that started last week over the leadership of the Consumer Financial Protection Bureau is just a small taste of all the political blowback that is likely to ensue from Republican efforts to undo post-crisis financial regulations. These include much higher capital requirements for the largest Wall Street institutions, because these are the ones that brought the financial system to the brink of failure in 2008.


Another big regulatory issue facing the Fed is how to regulate so-called “shadow banks,” which range from hedge funds to private equity to the money market industry — essentially firms without a banking charter that perform banking-like functions.


Before the financial crisis, investment banks were part of the shadow banking world, and the lack of regulatory scrutiny on their activities was a major culprit of the crisis.


Given the massive and lingering costs of that debacle in the form of lost jobs, wealth and productivity, Americans should hope Powell places the burden of proof on the need for any rule rollbacks on the industry, and even then, assesses their assertions with a giant grain of salt.

In his prepared remarks – released last night – Powell said he expected the central bank to continue raising its benchmark interest rate and trimming its balance sheet under his leadership, but had some pointed comments over deregulation, economic stability, and the plunge protection team…

Chairman Crapo, Ranking Member Brown, and other members of the Committee, thank you for expeditiously scheduling this hearing and providing me the opportunity to appear before you today. I would also like to express my gratitude to President Trump for the confidence he has shown by nominating me to serve as Chairman of the Board of Governors of the Federal Reserve System. The Federal Reserve has had a productive relationship with this Committee over the years, and, if you and your colleagues see fit to confirm me, I look forward to working closely with you in the years ahead.


Before I continue, I would like to introduce my wife, Elissa, who is sitting behind me. I would not be here today without her unstinting love, support, and wise counsel.


As you know, I have served as a member of the Board of Governors and the Federal Open Market Committee (FOMC) for more than five years, contributing in a variety of capacities, including most recently as chairman of the Board’s Committee on Supervision and Regulation. My views on a wide range of monetary policy and regulatory issues are on the public record in speeches and testimonies during my service at the Fed. The Congress established the Federal Reserve more than a century ago to provide a safer and more flexible monetary and financial system. And, almost exactly 40 years ago, it assigned us monetary policy goals: maximum employment, meaning people who want to work either have a job or are likely to find one fairly quickly; and price stability, meaning inflation is low and stable enough that it need not figure into households’ and businesses’ economic decisions.


I have had the great privilege of serving under Chairman Bernanke and Chair Yellen, and, like them, I will do everything in my power to achieve those goals while preserving the Federal Reserve’s independent and nonpartisan status that is so vital to their pursuit. In our democracy, transparency and accountability must accompany that independence. We are transparent and accountable in many ways. Among them, we affirm our numerical inflation objective annually and publish our economic and interest rate projections quarterly. And, since 2011, the Chairman has conducted regular news conferences to explain the FOMC’s thinking. Additionally, we are accountable to the people’s representatives through twice-a-year reports, testimony, oversight, and audited financial statements. I am strongly committed to that framework of transparency and accountability and to continuing to look for ways to enhance it. In our federated system, members of the Washington-based Board of Governors participate in FOMC deliberations with the presidents of the 12 regional Federal Reserve Banks, which are deeply rooted in their local communities. I am a strong supporter of this institutional structure, which helps ensure a diversity of perspectives on monetary policy and helps sustain the public’s support for the Federal Reserve as an institution.


If confirmed, I would strive, along with my colleagues, to support the economy’s continued progress toward full recovery. Our aim is to sustain a strong jobs market with inflation moving gradually up toward our target. We expect interest rates to rise somewhat further and the size of our balance sheet to gradually shrink. However, while we endeavor to make the path of policy as predictable as possible, the future cannot be known with certainty.


So we must retain the flexibility to adjust our policies in response to economic developments. Above all, even as we draw on the lessons of the past, we must be prepared to respond decisively and with appropriate force to new and unexpected threats to our nation’s financial stability and economic prosperity–the original motivation for the Federal Reserve’s founding.


As a regulator and supervisor of banking institutions, in collaboration with other federal and state agencies, we must help ensure that our financial system remains both stable and efficient. Our financial system is without doubt far stronger and more resilient than it was a decade ago. Our banks have much higher levels of capital and liquid assets, are more aware of the risks they run, and are better able to manage those risks. Even as we have worked to implement improvements, we also have sought to tailor regulation and supervision to the size and risk profile of banks, particularly community institutions. We will continue to consider appropriate ways to ease regulatory burdens while preserving core reforms – strong levels of capital and liquidity, stress testing, and resolution planning – so that banks can provide the credit to families and businesses necessary to sustain a prosperous economy. In doing so, we must be clear and transparent about the principles that are driving our decisions and about the expectations we have for the institutions we regulate.


To conclude, inside the Federal Reserve, we understand that our decisions in all these areas matter for American families and communities. I am committed to making decisions objectively and based on the best available evidence. In doing so, I would be guided solely by our mandate from the Congress and the long-run interests of the American public.


Thank you. I would be happy to respond to your questions.

The hearing is expected to last until noon ET.

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