Fed Chair Powell resists lawmaker efforts to pigeonhole his views

WASHINGTON — Federal Reserve Chair Jerome Powell walked a bipartisan tightrope while appearing Tuesday on Capitol Hill, assuring Republican lawmakers the central bank would not overstep its statutory bounds while emphasizing to Democrats the Fed’s responsibility to monitor financial stability and the risks of climate change.

Testifying before the Senate Banking Committee after being renominated by the Biden White House to lead the Fed for a second term, Powell spent much of the morning addressing lawmakers’ concerns about inflation. But the Fed chair also touted the central bank’s policy record under his watch.

“We increased capital and liquidity requirements for the largest banks — and currently, capital and liquidity levels at our largest, most systemically important banks are at multidecade highs,” Powell said in his opening remarks. “We worked to improve the public's access to instant payments, intensified our focus and supervisory efforts on evolving threats such as climate change and cyberattacks, and expanded our analysis and monitoring of financial stability.”

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Powell, originally appointed to lead the Federal Reserve by former President Donald Trump in 2017, is expected to easily secure Senate confirmation to a second term steering the central bank. Senate Banking Chairman Sherrod Brown, D-Ohio, called Powell’s nomination “another step in President Biden’s effort to rebuild our economy,” while the committee's ranking Republican, Pat Toomey of Pennsylvania, said there was “broad bipartisan backing for Chairman Powell’s renomination.”

But throughout the hearing, Republican lawmakers made clear they were uncomfortable with some of the policies pursued by the Fed in recent years, frequently invoking the danger of the Fed becoming “politicized” and jeopardizing its status as an independent federal regulator.

“Beyond monetary policy, I’m deeply concerned to see the Fed, especially at the regional banks, wade into politically charged areas like global warming and so-called racial justice,” Toomey said in his opening remarks.

“If the Fed is going to stray from its mandate and become a political actor, advocating a certain set of social policies,” Toomey added, “then there’s no way it’s going to maintain its independence from the political branches of government that are actually responsible for those topics.”

Powell maintained that the Fed had a “narrow” but “important” role to play in climate-change policy and did not shy away from detailing its ongoing work on climate risk. He told lawmakers that the central bank is “looking at climate stress tests” and that it was “very likely that climate-stress scenarios, as we like to call them, will be a key tool going forward.”

Beyond climate risk, other Republicans said they were worried about the potential for Democrat-appointed policymakers to assert too much influence on the Fed's board even with Powell at the helm, particularly as Washington awaits White House appointments to fill three of its seven seats.

One Republican senator pointed to a recent power struggle on the board of the Federal Deposit Insurance Corp., where Democratic appointees clashed with the agency’s Trump-appointed chair over control of the agency’s policymaking, eventually leading to the resignation of Chair Jelena McWilliams.

“A five-member board overturned 88 years of tradition and independence with Biden political appointees, led by CFPB Director Rohit Chopra, forcing out the FDIC chairman before her five-year term was up, strictly for partisan reasons,” said Sen. Bill Haggerty, R-Tenn. “This incident causes me to worry that an activist block at the Federal Reserve Board could sideline you.”

Powell declined to comment on the FDIC fracas but pointed to “a history at the Fed of working collaboratively and coming together and getting consensus on issues.”

The central bank chair felt pressure from both sides of the aisle on bank-merger reviews, an increasingly visible policy concern for the Biden administration over the past year. Brown urged Powell in his opening remarks to “do more to stop consolidation in the banking industry from hurting consumers and small businesses.”

But Sen. Thom Tillis, R-N.C., sought the opposite response, asking for assurances from Powell “that there isn’t increasing bias on the part of the federal regulators to make it more difficult for some of these superregional and smaller banks to actually get through a merger and acquisition process.”

Powell responded by saying “the law hasn't changed, and our practices haven’t changed. We’re still working through the applications we have in front of us.”

Powell made clear that he did not view continued bank consolidation as a necessarily bad thing for the economy or consumers. “Fixed costs are going up,” Powell said. “Regulatory costs are going up, and that's a fixed cost. The need to invest in technology to serve your customers is really a fixed cost now, and that requires a bigger bank.”

“There are strong secular forces that are driving this consolidation apart from regulation, although that can certainly be part of it,” Powell added.

Crypto policy also played a prominent role in the hear hearing. Sen. Mike Crapo, R-Idaho, pressed Powell on the expected publication of a long-awaited Fed report on central bank digital currencies, which policymakers at one point expected in early September.

Powell said the CBDC report was “ready to go” and would be published within weeks, but he also tried to downplay its ultimate significance.

“It’s more going to be an exercise in asking questions and seeking input from the public, rather than taking a lot of positions on various issues,” Powell said, “although we do take some positions.”

Powell was also grilled by Sen. Cynthia Lummis, R-Wyo. on whether the Fed would ever allow novel depository institutions, such as those chartered under Wyoming’s Special-Purpose Depository Institution charter, to have access to the central bank’s payment rails. (SPDI charters in Wyoming and Nebraska are considered by some in the crypto industry as promising routes for certain crypto companies to access the banking system.)

“The Fed actually uses substantial discretion in providing master accounts to depository institutions, or denies them by delay, simply starving the master account application until it does,” Lummis said.

Powell stressed the caution the Fed was taking with regard to new entities accessing its payment system, but he also expressed a modicum of support for the idea.

“We want to be really careful, because [novel charter applications are] hugely precedential,” Powell said, adding later: “I would say there are good arguments for viewing SPDIs as depository institutions for this purpose.”