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Powell says rate hikes likely to resume; new capital rules would be limited to largest banks

The House Financial Services Committee on June 21 held a hearing on “The Federal Reserve’s Semi-Annual Monetary Policy Report.” The only witness was Federal Reserve Chairman Jerome Powell. Materials from the hearing are available here.

In his opening statement, Chairman Patrick McHenry (R-NC) announced that in the second week of July after the July Fourth recess, the committee will mark up the majority’s digital assets market structure bill and its stablecoins regulation bill. Turning to monetary policy, McHenry said that, “after keeping interest rates too low for too long, the Fed was slow to address the problem. In a stunning about-face, the Fed then raised interest rates by 5 percentage points in a little over a year — the fastest spike in modern history. This approach introduced accelerated interest rate risk for which companies, workers, and families across the country were not prepared.” McHenry said the bank runs that took place earlier this year “are an example of the consequences. Now we’re told these runs represent a systemic threat to the stability of our financial system,” while financial institutions also face commercial real estate exposure.

McHenry said that Fed Vice Chair for Supervision Michael Barr’s speech on June 20 represented “a new approach to stress tests that I can’t quite understand. If reports are accurate, he’s pursuing a massive increase in capital standards for medium and large institutions. This would limit banks’ ability to lend money, exacerbating the looming credit crunch, and starving families and small businesses of the capital they need.” The proposed changes would strain capital markets, he said, “as they will be forced to absorb nearly $1 trillion in new Treasuries. This has led many to believe the Fed may be called on to help, perhaps through its repo or other facilities. Clearly, our economy is in a precarious position. From inflation to a potential credit crunch to substantial balance sheet risks for financial institutions, there is a great deal of uncertainty on the horizon.” Because of that, McHenry said, “It’s become clear that Congress may need to again examine separating supervision and regulation out of the Fed, and gaining greater oversight and control by Congress and the elected branches.”

Additional information is also available in the attached Tax Alert.

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Hearing on monetary policy, inflation, bank capital rules