Michael Barr, Speech/Interview: Why Bank Capital Matters

Fed Funds

“And that might let us shift to a slower pace of rate increases going forward as early as the next meeting I imagine we’re going to be considering this. And I think that’s smart. It’ll give us space to begin to modulate a bit and then think about, again, what that rate is, how high it needs to be, how long we need to keep it at that rate in order to get the job done, which we’re quite committed to do.”

“I think that the rate is going to have to stay high for a long period of time, and that’s because it’s going to take us a long period of time to really bring inflation down to 2%. It’s really quite critical that we stay in that sufficiently restrictive territory so that we can reach that target. And these things, famously monetary policy works with long and variable lags. And we’re paying quite close attention to that. The mistakes in the past have been when loosening happens too early. We’re not thinking about loosening. We’re still very much 100% focused on getting to a sufficiently restrictive rate and staying at a restrictive rate for a long enough time to bring inflation down to 2%.”

Restrictive Territory

“We moved very, very quickly this year to move into restrictive territory. And we are now at a point, as I think you heard Chair Powell say just yesterday, where those of us who are working on these issues can begin to spend a little bit more attention trying to make sure we’re thinking about the right rate we’re trying to get to and less attention on the pace that we’re doing to get there.”

“And I think it’s fair to say that we’re in restrictive territory. The question that we’re working on is, is it sufficiently restrictive, how much more restrictive do we need to be in order to see the kinds of changes in the economy that will eventually lead to a reduction in inflation?”

Crypto Related Assets

“And so I think it’s really important as we go forward in thinking about regulation of crypto related assets and activities that we think about those risks. I also want to be clear at the same time, Michael, it’s important for us not to set up a regulatory environment that stifles innovation. Innovation is really critical to the financial sector, it’s critical to the American economy. It’s one of the reasons we have amazingly vibrant economic system is because we permit, encourage, allow that kind of innovation. And so we’ve got to get the balance right. We have to have really good guardrails so that investors and consumers are protected, so that the safety and soundness of the financial system is protected. And then we need to let innovation flourish within those guardrails so that we don’t lock in old technology or incumbents. And getting that balance right is very, very tricky. We clearly don’t have it right now in the world that we’re seeing.”

Capital Regulation

“Stress testing and all the other aspects of capital regulation that I have discussed today will be considered as part of our holistic review. We’re starting from a good place because capital today is strong. I hope to have more to say about that review early in the new year. As I have argued today, capital plays a central role in how a bank manages its risks, and capital regulation is fundamental to bank oversight. History shows the deep costs to society when bank capital is inadequate, and thus how urgent it is for the Federal Reserve to get capital regulation right. In doing so, we need to be humble about our ability, or that of bank managers or the market, to fully anticipate the risks that our financial system might face in the future.”