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"Basel III Endgame

Banking regulation, particularly the Basel III endgame proposal, was another top issue for Republican lawmakers

Since the collapse of Silicon Valley Bank and Signature Bank in March 2023, considerable focus has been placed on the sweeping blueprint for stricter bank capital requirements. The framework would apply to banks with more than $100 billion in assets, changing how some of the largest financial institutions manage their capital.

Republican senators, including Sen. Tim Scott (R-S.C.), have expressed caution that the regulatory proposal would be another example of overregulating and forcing more capital to sit on the sidelines.

“Basel III capital requirements are like taking your star quarterback and telling him to sit on the sidelines because he just might get injured during the season,” Mr. Scott said. “It’s just plain ridiculous.”

Republicans urged Mr. Powell to bring transparency to further rulemaking for the banking system.

“The stakes are high. And that is why we have to get this right,” Mr. Scott said.

The Fed head stopped short on when the Basel III plan would be finalized but estimated that it would be another year before there is a final determination on the proposal.

In media appearances, news conferences, and congressional testimony, Mr. Powell has hinted that the original capital proposal could be revised and said he would seek “broad support” for the final model from voices inside and outside the central bank.

Wall Street executives, such as JPMorgan Chase CEO Jamie Dimon, have warned that raising capital requirements would “hamper American banks.”

“The Basel III endgame has been 10 years in the making, and it still has not been completed,” Mr. Dimon wrote in his annual report to shareholders in April. “In my view, many of the rules are flawed and poorly calibrated. If the Basel III endgame were implemented in its current form, it would hamper American banks.”

Ms. Warren has accused Mr. Powell of affording the banking sector too much influence on regulations, expressing concern over language that the banks will regulate themselves.

The Fed chief denied the accusation.

“You let them do whatever they want, but you don’t work for the giant banks. You work for the American people. I urge you to do your job,” Ms. Warren said.

In a June 17 letter, the senator from Massachusetts, who is seeking a third term, asserted that Mr. Powell was “advocating for slashing in half” the increase in capital requirements.

“I am disappointed by press reports indicating that you are personally intervening—after numerous meetings with big bank CEOs—to delay and water down the Basel III capital rules,” she said.

“It now appears that you are directly doing the bank industry’s bidding, rewarding them for their extensive personal lobbying of you.”

Inflation Ahead

Following Mr. Powell’s two-day appearance on Capitol Hill, the Federal Reserve will pay close attention to the consumer price index (CPI) and the producer price index (PPI) data.

After two straight months of easing inflation, the June CPI report is expected to show a slowdown to 3.1 percent, according to the Cleveland Fed’s Inflation Nowcasting model. Core inflation, which excludes the volatile food and energy components, is projected to ease to 3.3 percent.

The market consensus estimate shows that producer prices—the prices for goods and services paid by businesses—are anticipated to rise by 0.1 percent month over month and increase to 2.3 percent year over year. Core PPI is expected to climb by 0.2 percent monthly and 2.5 percent year over year.

The financial markets hope for softer-than-expected inflation prints to nudge the Fed to pull the trigger on its first quarter-point rate cut.

Economists contend that a blend of easing inflation pressures and weakness in the U.S. economy could be enough to allow the Fed to cut interest rates.

“The Fed doesn’t want to cause a recession if it doesn’t have to and if the data allows it to start making monetary policy slightly less restrictive, we think the Fed will take that opportunity, potentially as soon as September,” James Knightley, chief international economist at ING, wrote in a report.

The challenge for the institution has been sticky and stubborn inflation, whether in shelter or services. Although the upcoming CPI is seen as falling, the Cleveland Fed’s model asserts that it could rise to 3.2 percent.

Additionally, the Atlanta Fed’s sticky-price CPI—a weighted basket of items that change price relatively slowly—is up by 4.3 percent year over year.

U.S. households think that the Fed will be unable to restore its 2 percent inflation target.

According to the New York Fed’s latest Survey of Consumer Expectations, households believe that the one-year inflation outlook is 3 percent. The three-year horizon rose by 0.1 percentage points to 2.9 percent, while the five-year horizon slipped by 0.2 percentage points to 2.8 percent.

As for the broader economy, evidence in recent weeks suggests weakness in the national economy.

Annualized consumer spending growth is likely to slow to 1.5 percent in the first half of 2024 from the 3.2 percent growth rate in the second half of 2023, according to Mr. Knightley.

The unemployment rate ticked up above 4 percent in June, initial jobless claims are trending higher, and tepid business hiring surveys might signal a weakening labor market.

“GDP growth will remain lacklustre this year but, as the shift in monetary policy begins to boost spending, growth should reaccelerate from 2025,” Jennifer McKeown, chief global economist at Capital Economics, wrote in a report.

“Slower wage growth and strong productivity growth will bear down on core inflation, prompting the Fed to cut rates in September. But the upcoming election adds to uncertainty.”
https://prescottenews.com/2024/07/10/fed-chair-leaving-interest-rates-too-high-for-too-long-could-harm-us-economic-growth-the-epoch-times/