Fed nominee signals he’ll stay the course

President Trump’s nominee to head the Federal Reserve, Jerome Powell, on Tuesday indicated that he would bring a moderate approach to the central bank that would largely leave monetary policy on its present course.

Powell, a Republican Fed governor, testified before the Senate Banking Committee, which will vote whether to recommend his confirmation to lead the Fed. He was first nominated to the bank’s board in 2012 by President Obama, and as a member has voted in step with current Fed Chairwoman Janet Yellen. 

Republican lawmakers have expressed some concerns about Powell’s moderate stance on financial regulation, while some Democrats have called on him to back stricter rules for the financial sector.

Despite misgivings on the left and right, Powell appears to be on a smooth path to confirmation.

{mosads}The Federal Reserve position comes with enormous power, as the chairman’s utterances are capable of causing instant swings in the stock market.

That dynamic forces Fed officials to choose their words carefully — a tradition Powell continued Tuesday.

Several Democrats, including ranking member Sen. Sherrod Brown (Ohio), pushed Powell to say how the pending GOP tax plan could impact the economy. 

Powell demurred, saying he didn’t feel comfortable analyzing a tentative draft of legislation that hasn’t passed yet. His approach differs from that of former Fed Chairman Alan Greenspan, who gave a crucial endorsement to President George W. Bush’s tax cuts in 2001.

When Brown insisted that lawmakers relied on Fed data and perspectives guidance, Powell shot back that the central bank doesn’t “score fiscal proposals.”

Also during his testimony, Powell pledged to defend large portions of Dodd-Frank Act rules that were created to curb risky behavior in the financial sector, but said he would seek to limit the law’s impact on smaller firms.

He also promised a steady rise in interest rates back toward neutral levels and a gradual sell-off of the more than $4 trillion in debt the Fed purchased during the financial crisis to stabilize interest rates. 

Powell pledged to shed more light on the Fed’s decision-making process, boost the bank system’s diversity and take measures to insulate the Fed from political interference. 

“We must help ensure that our financial system remains both stable and efficient. Our financial system is without doubt far stronger and more resilient than it was a decade ago,” Powell said. 

Powell has supported keeping most of Dodd-Frank intact despite widespread opposition to the law from most other Republicans. He said Tuesday that he supports maintaining key provisions of the law, such as strict stress tests for the largest banks, capital requirements across the sector and a federal backstop for large failing financial firms called Orderly Liquidation Authority (OLA). 

OLA would use an account funded by fees on large banks to fund the careful dismantling of a failing bank or financial firm if their collapse could trigger another financial crisis. While OLA gives no taxpayer money to any financial institution, Republicans say it’s a bank “bailout” by another name.

Powell said he prefers major bank failures to be handled through the bankruptcy process. But unlike most other Republicans, he said an OLA-like system is essential to protect the financial system.

“Bankruptcy should be the preferred option of any of these institutions,” Powell said. “However, there may come a time where bankruptcy is not going to work in a really stressful situation that threatens the economic health of the country”

“It isn’t a perfect law or a perfect structure, but we need something like that,” Powell added.

As he has done before, Powell suggested other elements of Dodd-Frank could be rolled back and endorsed the general principles of a bipartisan deal released earlier this month. He said the Volcker Rule banning banks from investing their own assets in certain risky trades shouldn’t apply to banks worth less than $10 billion, and that banks worth less than $100 billion should be exempt from federal stress tests. 

Powell also said he’d support moving away from the strict asset thresholds Dodd-Frank uses to divide regulatory levels and toward a system that considers risk and business operations.

“Size is only one indicator of the riskiness of a firm and the risk of it damaging the financial sector,” Powell said. “We’ll work with you on any of those combinations”

Senate Banking Committee Chairman Mike Crapo (R-Idaho) last week unveiled a deal with nine Democratic senators to exempt more than a dozen mid-sized banks from the post-crisis regulations. Eight other Republican senators are also sponsoring the bill — seven of the Banking Committee.

The bill includes the changes Powell outlined during his hearing, and the nominee said the deal could help smaller banks grow. Even so, Powell declined to take a formal position on the bill and said he still needed to read it.

Some Democrats questioned Powell on why he was eager to roll back parts of Dodd-Frank without strengthening others, citing record-high bank profits and return on equity.

“So of all the rules the Fed has issued” since the financial crisis, Sen. Elizabeth Warren (D-Mass.) asked, “you don’t think a single one should be made tougher?”

Powell said no, insisting the rules were tough enough.