'Sky Is Falling Scenario': Andy Barr Rips Into Big Beautiful Bill Criticism During Jerome Powell Questioning

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During a House Financial Services Committee hearing on Tuesday, Rep. Andy Barr (R-KY) asked Federal Reserve Chair Jerome Powell about the impact of a recession on the deficit.

Transcript

00:00The Chair now recognizes the gentleman from Kentucky, Mr. Barr, who is Chairman of the Subcommittee on Financial Institutions, for five minutes.

00:07Thank you, Mr. Chairman, and thank you, Chairman Powell, for the generosity of your time.

00:11We're at the witching hour, but appreciate your endurance.

00:15And with respect to my friend's, the gentlelady's line of questioning,

00:20would a recession that would potentially result from a massive tax increase, a $4 trillion tax increase,

00:28would a recession help the debt and deficit picture?

00:32No. Tax receipts would go down and all that.

00:37Yeah, so I think this sky-is-falling scenario about the one big, beautiful bill we have to put into context,

00:44and I'm not asking you, Chairman Powell, to comment on this, but this is my editorial response to my colleague.

00:50A massive $4.5 trillion tax increase that would put us into a recession is not a recipe for fiscal discipline.

00:58Chairman Powell, let me switch gears to tariffs.

01:02Governor Waller argued in a speech earlier this month that tariffs might result in just a one-time price increase

01:10as opposed to increasing long-term inflation expectations,

01:14especially since this Congress has not pumped massive spending into the economy,

01:17as Democrats did under President Biden.

01:20On this issue of a one-time price increase versus inflation expectations,

01:25do you generally agree with Governor Waller's analysis?

01:29So I do agree that basically if things are a one-time increase, then you don't respond to them.

01:40That's the whole idea, is there's a shock to prices.

01:42It could be an oil shock. It could be a tariff shock.

01:46Generally speaking, you don't respond if you are highly confident that it will just be a one-time shock.

01:52I think the current situation, though, is a complicated one,

01:56and I think a number of my colleagues and I feel like it's a decision we need to take with some care.

02:01And the reason is because, you know, we're not at price stability in 2018 and 19 when the President's tariffs were put into place.

02:12Not only did we not raise rates, we cut rates three times that year because the tariffs were so much smaller.

02:17These tariffs are many times larger, and they do raise kind of more concern.

02:22In 2019, we hadn't had high inflation in 30 years.

02:25Now we're only a few years reduced away from high inflation.

02:28So I think we think that they may well prove to be a one-time thing,

02:34but in the meantime, it's a decision we want to approach with some care.

02:37I think we've made a lot of progress towards getting closer to that 2% goal.

02:42Does the Fed take into account the disinflationary fiscal policies,

02:46like supply-side tax cuts, deregulation, and more energy production,

02:50that could be a counterweight to whatever one-time price increase that might materialize as a result of tariffs?

02:56So we look at aggregate inflation, not any particular kind,

03:01and I'm very gratified at the performance of services inflation, which has come down now.

03:05That was the very sticky inflation.

03:07So I think overall the inflation picture is actually pretty positive.

03:11Chairman Powell, we're looking forward to this rulemaking later this week addressing Treasury market liquidity.

03:17Can you talk about how banks are constrained from holding U.S. Treasuries and other low-risk assets on their balance sheet

03:28as a result of these restrictive leverage ratios?

03:33Yes.

03:34When banks are bound by the leverage ratio, when that's the binding capital constraint,

03:39then that's going to make sort of low-risk, low-return assets something you don't want to hold.

03:48And so lots of fairly low-risk intermediation, including Treasury market intermediation,

03:53gets taxed to the point with capital requirements that you just see less of it.

03:59So I've always thought that it would be better if we had a leverage ratio that wasn't,

04:03it was a backstop rather than the binding thing, and that's what this proposal is going to do.

04:07Well, let me preemptively thank you and Vice Chair of Supervision, Bowman,

04:11for working on SLR reform to accommodate more bank holdings of Treasuries to stabilize our Treasury markets.

04:21Finally, I'm pleased to see that the Fed join its interagency counterparts

04:25and announce that you no longer plan to consider reputational risk in your examination process.

04:31Senator Scott and I introduced the FIRM Act to stop the weaponization of the supervision process.

04:37to stop the targeting of politically unfashionable groups.

04:43Our bill requires regulators to focus on the true risks as opposed to political factors.

04:49What was the Federal Reserve's thought process in implementing this common-sense reform?

04:54That it's common sense.

04:55And, you know, I think this is an area where we learned over the last couple of years

05:00that there really was a problem here.

05:02The reports were louder and louder and more and more troubling.

05:05So we, you know, we just thought, let's take this off the table.

05:09It may have been unintentional on the part of banks that just there was so much,

05:14it was just such a fraught issue that banks turned away people with,

05:20they didn't intend to discriminate.

05:21That's what the banks...

05:22Thank you for helping to deep politicize the banking system.

05:24The chair will announce to the membership we will recognize Mr. Torres

05:26and Mr. Loudermilk then adjourn for our 1 p.m. agreed-to hard stop time.

05:31And with that, the gentleman from New York, Mr. Torres, is recognized for five minutes.

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