Powell: “long way to go” on inflation; defends bank regulatory review By Reuters

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© Reuters. The U.S. Capitol dome is seen from the Russell Senate Office Building on Capitol Hill in Washington, U.S., April 19, 2023. REUTERS/Sarah Silbiger

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By Howard Schneider

WASHINGTON (Reuters) – U.S. Federal Reserve Chair Jerome Powell on Wednesday defended the central bank’s review of bank regulatory and capital rules from skeptical Republican lawmakers concerned that a string of bank failures in the spring would prompt the Fed to push back too hard on the financial sector.

“There are a number of proposals in the works. They have not been finalized,” Powell told members of the House Financial Services Committee, who questioned why the Fed might consider forcing banks to raise more capital while at the same time saying that the financial system was stable, and that the failure of institutions like Silicon Valley Bank was largely the result of poor management.

Any change of capital rules or other regulations “would need to be shown to be justified,” Powell said.

Though the appearance was one of Powell’s regular twice-yearly monetary policy updates to Congress, the hearing was dominated by questions from the panel’s Republican majority about a review of bank supervision and regulation launched by Fed Vice Chair for Supervision Michael Barr after the failure of SVB and other institutions.

Powell said any changes “will take time,” and should not impact the industry in the near term. The proposals “are still to some extent in motion…It will take quite a while to decide what to do” and years after that to implement, he said.

Nominees to three Fed board positions faced similar queries in a separate hearing in the Senate.

On monetary policy Powell kept the focus on the central bank’s fight to lower inflation and said the process “has a long way to go.”

“Inflation has moderated somewhat since the middle of last year,” Powell said in remarks to the House panel. “Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.”

Though Fed officials held off on raising interest rates at their meeting last week, Powell called that an exercise in prudence, allowing time to gather more information before deciding on further rate increases that Fed policymakers feel will be necessary by the end of the year.

Powell and nominees for three Fed Board seats testified over several hours on Wednesday, laying out a set of views that could broadly shape the economic conditions facing the country during what may be an era-defining political rematch next year between incumbent Democrat Joe Biden and Republican former President Donald Trump.

Despite the consensus on lowering inflation, the Fed is at a point where opinions about the need for and timing of additional interest rate increases may start to diverge. As it was for past presidential incumbents, how that debate gets resolved could make the difference between a benign election-year economy and a corrosive one.

For Biden, the success or failure of Fed policy could mean a “soft landing” of continued economic growth, lower inflation and only modestly higher unemployment, or it could force him to campaign against a backdrop of increasing joblessness, stubbornly higher prices, and punishing interest rates for anyone trying to buy a home or car or finance a business.

The Fed at its meeting last week held its benchmark interest rate steady at between 5% and 5.25%, but officials projected rates will have to increase another half percentage point by year’s end because inflation has been falling so slowly and remains more than double the Fed’s 2% target.