During a lengthy session Tuesday morning before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Jerome Powell faced intense questioning from both sides of the aisle about his nomination as Fed Chair. Topics ranged from Powell’s philosophy on deregulation, to interest rates and shrinking the size of the Fed’s balance sheet, to the potential effects of tax reform. If confirmed, Powell would replace Janet Yellen, who announced her retirement from the Fed’s Board of Governors in early November, following Powell’s nomination as Fed Chair by President Trump.
Senator Sherrod Brown (D-Ohio) praised Powell personally, but leveled harsh words at the current administration’s focus on deregulation, criticizing what he called “collective amnesia about what happened 10 years ago.”
Later in the session, Powell said that he would “not characterize what we’re doing as deregulation.” Instead, he emphasized the importance of looking back over the various regulations and legislation instituted since the 2008 financial crisis and making sure it still makes sense. In response to questioning by Senator Elizabeth Warren (D-Massachusetts), who asked if Powell believed there were any regulations that needed to be stronger, Powell said, “Honestly, Senator, I think they’re tough enough.”
Powell said the Fed would continue to err on the side of caution, but added that “it doesn’t help anyone for banks to waste money.”
Instead, Powell highlighted the importance of tailoring regulations to the size and importance of the institution in question, with a decrease in intensity and stringency for smaller and regional banks. However, Powell pointed out that “Fundamentally, size is only one indicator of the riskiness of a firm and the possibility of it damaging the financial system through its failures.”
Powell said he was in favor of exempting banks worth less than $10 billion from the Volker Rule, which limits risky trading by U.S. banks.
On the subject of the Fed’s balance sheet, Powell said he would work to continue shrinking it, although he conceded that it will remain considerably larger than before the financial crisis, and that it will consist mostly of Treasury securities. As securities mature, they would continue to be allowed to “roll off passively,” and Powell predicted an eventual balance sheet total of between $2.5 and $3 trillion. He said he believed this “new normal” could likely be achieved within three to five years. Much would rely, however, on “the public’s demand for cash and banks’ demand for reserves.”
When asked about housing reform by Senator Michael Crapo (R-Idaho), Powell agreed that it was an important priority, calling it a “highly important piece of unfinished business from the financial crisis.”
Powell was repeatedly asked about the implications of the Senate’s tax bill, but Powell insisted that the Fed would react to any such legislation once it is passed. “Our responsibility is to carry out the mandate [Congress has] given us,” Powell said. “I don’t believe you don’t rely on us to score fiscal proposals.” When pressed throughout the session, Powell said he believed in focusing on the “sustainability of our fiscal path in the long run.”
Powell said, under his leadership, the Fed would at least consider raising interest rates in the near term. “Conditions are supportive of doing that,” said Powell, but he declined to make any specific commitments on the subject.
When asked about his impressions of the current administration by Democratic senators such as Warren and Brown, Powell said that none of his interactions had given him concerns that the independence of the Fed would be in question under President Trump. Powell said the administration would be free to voice its opinions on matters, but it was better for the Fed “not to look at the politics of things.”
Senator Jack Reed (D-Rhode Island) asked Powell about how the Fed would respond to ongoing cybersecurity concerns, and Powell pinpointed cybersecurity as “maybe the single most important risk to our financial institutions.” However, he said there are no easy answers in this area, and constant diligence is required. “There can never be any sense of ‘mission accomplished’ there,” Powell said.
The Senate Banking Committee wrapped up the session by calling for Senators to submit any further questions they had for the record by Friday, December 1, at noon. The Committee asked for Powell’s responses to those questions to be submitted by Monday, December 4, at 10 a.m.