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Jerome Powell: Next interest rate hike “coming together”

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The U.S. central bank will likely raise interest rates when it meets next month, Federal Reserve Chairman nominee Jerome Powell said on Tuesday. 

"I think the case for raising interest rates at our next meeting is coming together," Powell told the Senate Committee on Banking, Housing and Urban Affairs in a hearing to confirm him as the next Fed chief after current Chair Janet Yellen steps down.

Powell, who is President Donald Trump's pick to lead the Fed, sought to convey stability and continuity in his hearing, which lasted nearly two and a half hours over two rounds of questioning. But he indicated his openness to key reforms such as exempting smaller banks from certain regulatory requirements.

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Sen. Mike Crapo, R.-Idaho, the banking committee chair, welcomed Powell and expressed his hope that the nominee would strike a balance between maintaining stability and "a vibrant, growing economy." Ranking member Sherrod Brown, D.-Ohio, was more critical of Powell's nomination, although he praised the man's experience and past positions.

"I'm disappointed that President Trump has broken with tradition of reappointing the last president's Reserve chair," he said. "This administration has also broken with the tradition of making the Federal government more diverse. That said, Governor Powell, those mistakes were not yours," he said.

Powell has been a member of the Fed's board of governors since 2012, prior to which he worked for the Carlyle Group, the global investment firm. He is nominated to succeed Janet Yellen, whose four-year term as chair ends in February. In deciding not to offer Yellen another four years as chair, Mr. Trump made her the only Fed leader in nearly four decades not to be re-nominated for a second term.

In his opening remarks and testimony, Powell indicated he would continue the central bank's gradual pace of rate hikes and continue the process of reducing the central bank's balance sheet, which ballooned in the wake of the financial crisis to over $4.5 trillion. 

Ultimately, the Fed will hold $2.5 trillion to $3 trillion on its balance sheet, Powell predicted, mostly in Treasury securities, but added that "we don't really know." 

Deregulation versus 'streamlining'

On banking regulations, Powell said, "We have sought to tailor regulation and supervision to the size and risk profile of banks, particularly community institutions."

"We will continue to consider appropriate ways to ease regulatory burdens while preserving core reforms ... so that banks can provide the credit to families and businesses necessary to sustain a prosperous economy," he said.

Powell expressed support for a bill that would exempt banks with less than $100 billion in assets from the Volcker rule, a highly contested part of the Dodd-Frank law. 

Among those reforms, Powell mentioned the stricter standards for capital and liquidity that banks must maintain under the Dodd-Frank financial reform law and the annual "stress tests" that the biggest banks must undergo to show they could withstand a severe downturn.

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Several senators, including Brown, Brian Schatz, D.-Hawaii and Elizabeth Warren, D.-Mass., pressed Powell on this deregulatory stance, citing record bank profitability in the face of stagnant wages. Powell disputed that description. 

"I'm not going to characterize what we're doing as deregulation," he said. "It's looking back at eight years of very innovative regulation... looking back at what we did and making sure it makes sense."

"It's nice to see banks profitably serving their customers," he added, arguing that regulations that are too costly for banks to follow would end up falling on consumers. He went on to say that he didn't "see any case" for reducing regulations on the largest and most complex institutions. 

Yellen has rejected claims that tighter regulations make banks less likely to lend.

Labor pains

Despite saying several times that the U.S. is "at or around" full employment, Powell acknowledged that low wage growth and the low labor participation rate, even among prime-age workers, was a problem, and said that inequality was a drag on global growth. He opined that education was to blame for stagnating middle-class incomes.

"The way for U.S. workers to compete in the global economy is to have the best skills and education in the world," he said.

Nonetheless, Powell indicated that the Fed would almost certainly raise interest rates at its meeting next month. "I think the case for raising interest rates at our next meeting is coming together," he said.

Wall Street showed little reaction to the news. Overall, the hearing "contained few signs that he will bring any new thinking or a change of approach to the FOMC," Capital Economics wrote in a note. 

The Yellen Fed has raised rates four times starting in December 2015, including two rate hikes this year. Economists expect a third rate hike to occur in December, and they're projecting at least three additional rate increases in 2018.

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