Chair Powell addresses Fed's stress testing amid litigation and foreign bank reliance

The U.S. House Committee on Financial Services held a pivotal meeting on February 12, 2025, focusing on the Federal Reserve’s Semi-Annual Monetary Policy Report. A key discussion point was the Fed's commitment to transparency in its operations, particularly regarding the potential privatization of certain assets. Lawmakers expressed concerns that privatization could undermine value for American taxpayers, emphasizing the need for clear communication about such decisions.

Chair Jerome Powell addressed questions about the Fed's evolving approach to stress testing, acknowledging that recent legal challenges have prompted a reassessment of their methods. He noted that the landscape of administrative law has shifted significantly, impacting how the Fed conducts stress tests and capital requirements for banks. This change is crucial, as it affects the stability of the U.S. economy and the predictability of regulatory processes.

Another significant topic was the role of foreign banks in the U.S. treasury market. Lawmakers highlighted that stricter regulations have made it more challenging for domestic banks to participate in treasury operations, leading to a reliance on foreign institutions. Powell acknowledged this trend, indicating that the increased capital costs for U.S. banks have resulted in lower liquidity and intermediation in the market. He mentioned ongoing efforts to adjust the supplemental leverage ratio to enhance liquidity and support market activity.

The meeting concluded with a note of optimism regarding the American public's sentiment, suggesting a potential shift in economic confidence. As the Fed navigates these complex issues, the implications for both domestic banking operations and the broader economy remain significant. The committee's discussions underscore the importance of regulatory clarity and the need for a balanced approach to ensure the stability of financial markets.