Five takeaways from Powell’s House testimony

Federal Reserve Chair Jerome Powell testified before the House Financial Services Committee Wednesday amid lingering inflation and recession fears.

Lawmakers questioned Powell on a wide range of issues, including inflation, the debt ceiling standoff and the U.S. dollar’s status as the world’s reserve currency.

Here are five takeaways from the hearing.

Fed won’t rescue US from debt ceiling crisis

Powell warned lawmakers that Congress must raise the debt ceiling, noting that the Fed doesn’t have the tools to prevent or mitigate the economic catastrophe resulting from an unprecedented U.S. debt default.

“No one should assume that the Fed can protect the economy from the non-payment of the government’s bills, let alone a debt default,” Powell said.

House Republicans have pledged only to raise the debt ceiling if it’s accompanied by spending cuts, something Democrats are not willing to do, setting up a potential crisis when the U.S. runs out of ways to pay its bills this summer.

A January analysis from Moody’s Analytics found that a debt default would wipe out 6 million jobs and $12 trillion in household wealth. 

Powell said Wednesday that it’s “very possible” that interest rates could spike further if the U.S. gets too close to a debt default and prompts concerns from borrowers. 

“We’ve never crossed that line and if we cross that line, we’re going to find out,” Powell said. “I think it’s highly uncertain.”

In an exchange with Rep. William Timmons (R-S.C.), Powell poured cold water on the idea of the Treasury Department minting a trillion-dollar coin to pay the nation’s bills, which some liberal economists and legal experts have pitched as a potential solution to the debt crisis. 

“There are no rabbits to be pulled out of hats here. … That would be a rabbit coming out of a hat,” Powell said. 

Fed is eyeing more rate hikes 

Powell indicated that interest rates might need to go higher than previously anticipated, pointing to surprisingly strong economic data that is hurting the Fed’s push to reduce demand for goods and services. 

He said that Fed officials will look at a series of economic indicators — including Wednesday data showing that there were 10.8 million job openings at the end of January, higher than analysts expected — ahead of their March 21-22 meeting. 

“Those will be important and we’ll scrutinize them,” Powell said. “We’re not on a preset path. We will be guided by the incoming data and the evolving outlook.”

The Fed has raised interest rates 4.5 percent over the last year to cool inflation. Experts warn that continued rate hikes could lead to huge job losses as businesses struggle with higher borrowing costs. 

But Powell said Wednesday that he’s more concerned about the threat of lingering inflation. Prices rose 0.6 percent in January, up from 0.2 percent in December, according to Commerce Department data. 

“While there will be costs to success, the cost of failure will be much higher,” Powell said. “You’d be looking at an extended period where people would learn to expect and live with high and volatile inflation, and it’s very hard to have rising real incomes during such a period.”

Powell acknowledges potential job losses

Powell recognized that roughly 2 million Americans could lose their jobs this year due to the central bank’s efforts to slow the economy, according to the Fed’s projections. 

In an exchange with Rep. Joyce Beatty (D-Ohio), Powell confirmed that the Fed’s projections show Black unemployment rising 2.3 percent, while White unemployment would rise just 0.9 percent. 

“When unemployment goes up quickly in a recession, it goes up much faster for African Americans, when the economy grows again, it comes down faster,” Powell said, adding that he wants to create a period of sustainable growth that would keep Black unemployment down. 

Democrats cautioned against aggressive rate hikes at the hearing, noting that a recession brought on by the Fed would disproportionately harm lower-income Americans.

Republicans largely encouraged Powell to keep up the fight against inflation, with only a few GOP lawmakers expressing concern about rate hikes’ impact on the housing market and jobs.

“Fewer jobs hit those who can least afford to lose a job,” Rep. Bill Huizenga (R-Mich.) said. “The lower rungs of the economic ladder will suffer more than the rest of the ladder.”

Powell says US dollar’s dominance isn’t threatened 

Republican lawmakers asked Powell whether the U.S. dollar’s status as the world’s primary reserve currency — which allows U.S. businesses to more easily access capital — is at risk. 

They pointed to Russia’s decision to rely on China’s renminbi to distance itself from the dollar following U.S. sanctions, and noted that Beijing is also pushing Arab nations to trade in the renminbi. 

“The U.S. dollar is widely accepted, and really the only serious candidate for the world’s principal reserve currency,” Powell said. “That’s because of our democratic institutions, our liquid markets, the rule of law … and also the fact that the dollar has held its value over time.”

The U.S. dollar accounts for more than half of the world’s central bank reserves. The Treasury Department is considering creating a central bank digital currency to help preserve the dollar’s dominance. 

Republicans scrutinize Fed’s capital requirements 

Several GOP lawmakers questioned Powell over a “holistic review” of banks’ capital requirements recently launched by Michael Barr, the Fed’s vice chair for supervision, who has said that capital standards may be too loose. 

Republicans said that higher standards would limit banks’ lending ability, hurting growth, and urged Powell to ensure the process is transparent, echoing concerns from the banking industry. 

“The Fed shouldn’t operate in the shadows, especially when the regulation in question can have broad and significant economic effects,” said Patrick McHenry (R-N.C.), the committee’s chairman. “It’s also unclear the motivation of the Fed’s holistic review, particularly when so many board members have stated that the banking system is very well capitalized.”

Powell said that it’s normal for incoming vice chairs to “take a fresh look” at Fed requirements and said that the process would be transparent. He added that the requirements wouldn’t apply to smaller banks after lawmakers raised concerns.