Jerome Powell to face grilling on US interest rates in Congress hearing

Federal Reserve officials have been outspoken on need to keep US rates elevated until they are confident that inflation is moving towards their goal

Federal Reserve Chairman Jerome Powell suggested the US central bank will keep interest rates elevated for a prolonged period of time. Reuters

Federal Reserve Chairman Jerome Powell is expected to defend his position of keeping US interest rates elevated at a House of Representatives committee hearing on Wednesday.

His testimony before the House Financial Services Committee will be the most high-profile remarks Mr Powell has given since he ruled out a March rate cut following the Fed's meeting in January.

He and his colleagues at the US central bank have embarked on a speaking tour since saying that they need to have more confidence before they begin dialling back rates.

The Fed has raised interest rates to the current 5.25 per cent to 5.50 per cent range over a period of roughly two years in response to a surge in US inflation.

Recent economic data has shown inflation steadily climbing down towards the Fed's long-term goal without the widespread job losses Mr Powell and politicians had predicted.

The Fed's preferred metric gauge slowed to 2.4 per cent last month after reaching a peak of 7.1 per cent in the summer of 2022, according to Labour Department data. And continued strong growth has boosted hopes that the Fed can achieve a so-called soft landing.

But last week's inflation report also highlighted the Fed's bumpy path to return to 2 per cent. The Personal Consumption Expenditures (PCE) Price Index rose 0.3 per cent last month after a 0.1 per cent increase in December, leading markets to believe the Fed will not begin cutting interest rates until June.

Mr Powell is expected to use his testimony to defend the Fed's higher-for-longer position, despite pressure from some politicians who say elevated rates are harming American consumers and businesses.

In a letter to Mr Powell, Democratic chairman of the Senate Banking Committee Sherrod Brown said higher interest rates are harming consumers through higher housing costs.

“Keeping interest rates high will be detrimental to American workers and their families and do little to bring down prices or promote moderate economic growth,” Mr Brown wrote on January 30.

But Mr Powell is likely to shrug off political pressure on dialling back, as he did in his 2023 testimony.

In addition to his Wednesday appearance before the House Financial Services Committee, Mr Powell on Thursday will also appear before the Senate Banking Committee.

Banking capital requirements

This week's congressional hearings also come roughly one year after the collapse of three regional US banks, which rekindled fears of a potential new global financial crisis.

Politicians are expected to use their lines of questioning to grill Mr Powell on the Fed's proposal to raise capital requirements for large banks by roughly 20 per cent.

The requirements from the Fed and Federal Deposit Insurance Corporation (FDIC) would affect banks whose assets range from $100 to $250 billion, exceeding the standards of Basel 3 Endgame.

Mr Powell has said that the proposal must have “broad support” of the Federal Reserve Board.

The chief executives of America's largest banks who would be subject to this rule cautioned against these standards during a hearing in December.

“We believe this will negatively harm the American economy without making the US financial system safer,” Goldman Sachs chief executive David Solomon told a Senate Committee.

The proposal, written by vice chairman for supervision Michael Barr, was published in June last year in response to the March 2023 collapses of Silicon Valley Bank, Signature Bank and First Republic Bank.

SVB's collapse prompted emergency actions from the Fed, FDIC and Treasury Department to protect the failed banks' depositors.

Speaking at a Brookings Institution event on Tuesday, Republican House Financial Services chairman Patrick McHenry criticised federal regulators for failing to supervise the failed banks.

“They did not act in an appropriate fashion commensurate with the rules that they had. And because they didn't do that, it had to then graduate up to … Chairman Powell and [Treasury] Secretary [Janet] Yellen stepping in to calm things when it should have been done at lower levels,” he said.