Jerome Powell’s semi-annual appearance before Congress was perhaps a bit more newsworthy than it has been for past chairmen of the Federal Reserve, and his core message signals a few key moves that will certainly impact how banks manage themselves over the next several months.
Powell’s appearance was overshadowed with questions about trade policy and what was happening further down Pennsylvania Avenue, but the core message from Powell, who has been on the job for less than a year, was that the central bank is continuing on a path toward normalization of interest rates, a place the U.S. economy hasn’t seen in a decade or longer.
Despite the tangents that media-savvy politicians tried to take Powell down, his core messages as it applies to bankers is important and provides signals as to how the Fed will manage the economy over the next several months.
Here’s some takeaways:
Bank profitability likely to remain high. Powell’s comments about the overall tax climate and overall business environment point to good things on the horizon for banks, which have reported strong earnings since the end of last year when tax reforms were passed.
Said Powell: “Our financial system is much stronger than before the crisis and is in a good position to meet the credit needs of households and businesses … Federal tax and spending policies likely will continue to support the expansion.”
Second-quarter results have illustrated that, with some banks reporting quarterly earnings per share around 40 percent above last year.
Fed getting back to “normal.” For several years since the crisis, the Fed bought large quantities of U.S. Treasury bonds—known as quantitative easing—to pump cash into the market and boost the economy. With plenty of indicators that the economy is now humming, Powell said the Fed has begun allowing those securities to mature, bringing that practice to an end.
“Our policies reflect the strong performance of the economy and are intended to help make sure that this trend continues,” Powell said.
“The payment of interest on balances held by banks in their accounts at the Federal Reserve has played a key role in carrying out these policies … Payment of interest on these balances is our principal tool for keeping the federal funds rate in the FOMC's target range. This tool has made it possible for us to gradually return interest rates to a more normal level without disrupting financial markets and the economy.”
Cybersecurity tops list of risks. In his appearance before the House Financial Services Committee, Powell said cybersecurity, and the unexpected threats therein, is what keeps him up at night, aside from what he called “elevated” asset prices that would fall under more traditional concerns, like commercial real estate.
Preparing for the worst-case cybersecurity scenario is top-of-mind, he said, even more than traditional risks. Preventing and preparing should be the focus, he said.
“(Do) as much as possible, and then double it,” he said, a signal of how serious the Fed views the issue.
He then tamped that statement down, and said the Fed “does a great deal” with its supervision of banks, and advised them to continually maintain “basic cyber hygiene” by keeping up to date on emerging trends and threats.
“We do everything we can to prevent failure, but then we have to ask what would we do if there were a successful cyberattack,” he said. “We have to have a plan for that too.”