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Fed Chair Powell: GSE reform essential for U.S. economy

Testifies before Senate on current state of economy

Tuesday, Federal Reserve Chair Jerome Powell gave his semi-annual congressional testimony before the Senate Committee on Banking, Housing and Urban Affairs.

As expected, Powell steered clear of voicing any opinions on political issues, choosing instead to focus on the current state of the economy and speak in more general terms.

Likewise, members of the committee kept their questions relatively mild, and while they did grandstand their political opinions on both sides of the isle about President Donald Trump’s policies, members of both parties showed respect for Powell’s opinions and expertise.

During the hearing, Sen. Jon Tester, D-Mont., turned his focus on the housing industry, asking for Powell’s opinion on reform for the government-sponsored enterprises, Fannie Mae and Freddie Mac. Tester pointed out Fannie’s request for a draw from the U.S. Department of the Treasury of $3.7 billion earlier this year, asking what these requests mean for the economy.

And while Powell didn’t provide any specific details, he did say that he believes it would be healthy for the economy to see GSE reform move forward.

“It’s really important for the longer run that we get the housing finance system of the federal government’s balance sheet,” he said.

Several members of the administration promised GSE reform will happen, including Treasury Secretary Steven Mnuchin, who said it is still a priority for the Trump administration. However, back in May, Mnuchin explained he just doesn’t think it will happen this year.

“What gets done here would need to be on a bipartisan basis,” Mnuchin said previously. “We’ve had conversations with both Democrats and Republicans, and unfortunately I just don’t think this is going to be a focus in this Congress. But we’ll come back to this next year and this will be a big focus of mine post the elections.”

And indeed, while housing reform was brought up during the hearing, it certainly wasn’t the focus of the hearing. Many senators repeatedly brought up concerns over the Fed’s bank stress tests and the upcoming changes.

However Powell assured the senators that stress tests are not getting easier, and in fact are harder to pass than ever before.

“This year’s test was the most stringent test yet,” he said, pointing out that almost all the firms were able to pass the minimum, showing how well capitalized the industry is.

Powell said the stress test is one of the big four pillars of keeping banks in line, but that, “The program has to continue to evolve.”

The Fed chair also defended the board’s decision to pass two banks with conditional approval, saying they were still required to remain at last year’s levels. He said failing a firm means the Fed believes the bank’s capital plan is bad and Fed wants it redone. However, due to timing of the tax bill, capital decreased for the two banks.

Therefore, Powell explained that due to the conditions under the new tax bill, the banks were required to remain at last year’s levels, but not resubmit their plan, hence the conditional approval.

Senators also brought up Trump’s trade war, asking if the higher tariffs will cause long-lasting damage to the economy.

Once again dodging any specific views on the president’s political decisions, Powell explained there are two possible outcomes to the escalating trade wars.

If the trade war results in lower tariffs that would be good for the U.S. economy, Powell explained. But if it results in higher tariffs for longer periods of time that could be bad for the economy. “It’s hard to say how it will play out,” he stated.

Overall, the committee seems to be pleased with Powell’s leadership.

“Following the Fed is getting boring because you’re doing your job so well,” Sen. Bob Corker, R-Tenn., said.

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