The head of the central bank indicates that "they will not hesitate" to introduce changes to the Basel III criteria if necessary

MADRID, 7 Mar. (EUROPA PRESS) -

The president of the Federal Reserve (Fed), Jerome Powell, stated this Thursday that the institution he heads "is not far away" from having the necessary confidence to certify that inflation is on a sustained path of convergence with the objective of price stability of 2%, which would open the door to lowering interest rates.

"We have already said that we would not wait for inflation to fall to 2% because [...] monetary policy operates with long and variable delays," Powell said, referring to the risks of cutting rates early without having data that demonstrate that inflation would not rebound accordingly, or, on the contrary, due to the negative effect on growth and employment derived from maintaining the restrictive tone more than necessary.

In these statements, made in his semiannual appearance before the Banking, Housing and Urban Affairs Committee of the North American Senate, Powell has insisted that interest rates are at their peak.

"If the economy evolves in general terms as expected, it is likely that at some point this year it will be appropriate to begin reducing the restriction of monetary policy, but the economic outlook is uncertain," he elaborated.

In any case, the 'guardian of the dollar' recalled that the Fed will always "carefully" evaluate the data received, the evolution of future prospects and the balance of economic risks when modifying rates. On January 31, the Fed decided to maintain the reference rate for the fourth consecutive time in the target range of between 5.25% and 5.5%, at its highest level since January 2001.

Regarding the Basel III rules, the Fed president has stated that it is likely that "broad and material changes" will be introduced in the proposal to rewrite capital requirements for banks, although, if done, it will be by consensus .

Powell has indicated that comments from affected parties are still being reviewed, but that if it becomes necessary for the Fed to review the regulatory project, either partially or completely, "they will not hesitate to do so." Even so, he has called for patience, since "it will take time" and he has considered it more important "to do things well, than to do them quickly."

The Basel III criteria, if applied in their current format, would increase the level of capital that banks with at least $100 billion (€91.407 million) in assets would be required to maintain.

Reserve more capital means that banks would have fewer funds to lend and inject into the economy, but, in the event of a financial crisis, this greater cushion would facilitate the survival of the entities.

The proposal contemplates that US banks considered globally systemically important would have to reserve, on average, 19% more capital. Banks with more than 250,000 million dollars (228,517 million euros) in assets that are not of systemic importance would see the minimum reserve increased by 10%.

Likewise, Powell has stated that capital requirements will not be modified to take into account climate risks "or anything like that", since he considers that environmental policies are the responsibility of the executive and legislative branches, not of a technical body such as the Fed.

For their part, the loans from the emergency liquidity program, known as 'discount window', will need to be standardized to current technological standards and rid themselves of the stigma associated with them so that the banks that need them can make use of said funds.

Powell has also exercised self-criticism and recognized that the Fed's supervisory action during the collapse of the Silicon Valley Bank (SVB) "was not fast enough, nor effective enough." For this reason, he has announced that he is working on a new supervisory and good practice guide to strengthen his response to future crises.

Regarding the risks to banking from the commercial real estate sector, Powell explained that they do not represent "a first-order problem" for large banks, but for small and intermediate-sized entities.

This sector has been affected by the consolidation of teleworking after the pandemic, which has resulted in empty office rates that could potentially compromise the repayment of credits contracted by landlords in the coming years.

For the rest, the head of the Fed has indicated that the economy is growing at "a healthy, sustainable, solid and vigorous pace", something that coincides with a "very strong and quite tight" labor market and an inflation that, although it has registered "very large falls", still remains at high levels.

In short, the US economy is in "better shape" than any of its peers in the developed world. Projections advanced in December by Fed officials anticipated GDP growth of 1.4% in annualized terms.