Federal Reserve Chairman Jerome Powell provided some hints on the future of monetary policy as well as recommendations for boosting bank regulation in light of recent bank failures during testimony before a Senate committee Thursday,
Sen. Sherrod Brown (D-OH), the chairman of the Senate Committee on Banking, Housing, and Urban Affairs, sought clarification regarding the Federal Reserve’s decision to hold steady on interest rates in June.
The decision is a continuation of a slowdown phase, with FOMC members seeing a rate hold as appropriate after reaching restrictive levels, Powell said.
If the economy continues to perform as projected, interest rates may be raised twice this year, he said.
“There is a little further to go,” Powell said, adding that “the Fed doesn’t see rate cuts happening anytime soon.”
Powell On Potential 20% Increase In Bank Capital Requirements
Much of Thursday’s Q&A session focused on the impending increases in capital requirements for U.S. banks, with Sens. Tim Scott (R-SC), John Kennedy (R-LO), Thom Tillis (R-NC) and James D. Vance (R-OH) voicing worries about the danger of fewer resources and liquidity available for the private sector.
Powell acknowledged the existence of a trade-off between increasing bank capital and facilitating the flow of capital into the economy. Powell emphasized the necessity of financial institutions maintaining a healthy in light of the recent collapses of Silicon Valley Bank and Signature Bank.
Powell hinted at a potential 20% rise in bank capital requirements from present levels, with a special focus on globally systemic banks (G-SIBs) and those with more than $100 billion in assets. The proposal is currently being developed by Michael Barr, the Fed’s top regulatory official, and is expected to be finalized in the coming weeks.
The Financial Select Sector SPDR Fund XLF traded 0.9% lower on Thursday.
Commercial Real Estate Mortgages A Ticking Time Bomb?
Committee member Sen. Bob Menendez (D-NJ) expressed concern about the $1.5 trillion in commercial real estate mortgages set to mature next year, particularly those held by smaller banks.
He referred to it as a ticking time bomb and questioned the Fed about its efforts to avoid possible losses on these assets from increasing sector concentration.
Powell acknowledged the concerns and said the Fed is actively engaging with institutions exhibiting high concentration in commercial real estate loans, urging them to take necessary steps such as increased capital requirements to mitigate potential loss risks.
Increased Budget Deficit Would Be Inflationary
Powell has tried to avoid commenting on the Biden administration’s fiscal policy, but when pressed by Kennedy about the impact of a 10% increase in government spending in this current economic phase, the Fed chairman agreed that it would lead to higher inflationary pressures.
While shifts in fiscal policy in the past were more inflation-neutral, Powell said that with a tight labor market, an increase in government spending that is not financed by higher taxes will generate greater demand and stimulate the economy — and inflation — in this current phase.
A reduction in the deficit, on the other hand, would result in less pressure on consumer prices, Powell said.
Read now: Third Consecutive Week Of Higher-Than-Expected Unemployment Claims: Is US Job Market Losing Steam?
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