Federal Reserve Governor Jerome Powell urged Congress to rewritethe Volcker Rule, which restricts proprietary trading, while urging“a high degree of vigilance” against the buildup of financial risksamid improving U.S. growth.

“What the current law and rule do is effectively force you tolook into the mind and heart of every trader on every trade to seewhat the intent is,” Powell said Saturday at the American FinanceAssociation meeting in Chicago. “Is it propriety trading orsomething else? If that is the test you set yourself, you are goingto wind up with tremendous expense and burden.”

Powell's comments compare to Fed Chair Janet Yellen, who hassupported the sweeping bank rules of the 2010 Dodd-Frank Act in thewake of the global financial crisis. President-elect Donald Trumphas vowed to dismantle Dodd-Frank. The Volcker Rule restricts bankswith taxpayer-backed deposits from making certain types ofspeculative “proprietary” trades.

“We don't want the largest financial institutions to beseriously engaged in propriety trading,” Powell said. “We do wantthem to be able to hedge their positions and create markets.” Hesaid the Volcker Rule, as enacted by U.S. lawmakers, doesn'tachieve that goal. “I feel the Congress should take another look atit.”

In the text of his remarks, Powell urged more monitoring offinancial risks following a period of record low interest rates,citing commercial real estate as one area of concern.

“More recently, with inflation under control, overheating hasshown up in the form of financial excess,” Powell said. “Thecurrent extended period of very low nominal rates calls for a highdegree of vigilance against the buildup of risks to the stabilityof the financial system.”

Officials are weighing how quickly to raise interest rates amidinvestor optimism that Trump can shake the economy out of itslow-growth rut by delivering tax cuts, investment and regulatoryreforms that may also lift price pressures.

Powell said the Fed was “close to meeting” its dual mandate offull employment and stable prices, which it defines as about 2%inflation.

“Policy is very accommodative still. Growth has definitelystrengthened in the second half of the year,” he said in responseto a question, noting that this creates more upside risk. “Youhave asset prices going up, confidence going up, and sort of a verypositive feeling about the economy: Rates going up, the price ofoil going up, inflation expectations going up.”

Trump Economy Dawns

Minutes of December's Fed policy meeting showed officials wereshifting their focus toward the possibility that expansionaryfiscal policy under Trump may warrant a faster pace of rate hikesthan expected. Their quarterly forecasts also showed that officialshad increased the number of quarter-point rate hikes they expectthis year to three, according to the median of their estimates,compared to two in September.

Powell, however, cautioned that it was a mistake to overly focuson this “dot plot” median, noting there was “tremendousuncertainty” around the forecasts and changes by a couple ofmeeting participants can cause a move.

Powell spoke on a panel with Kenneth Griffin, founder and chiefexecutive officer of $26 billion hedge fund Citadel, who voiceddoubts that Trump's planned tax cuts and infrastructure spendingwould add much to economic growth. He said an acceleration in theeconomy would rest largely on less burdensome regulation.

Banks are faced with heavy regulation that requires thousands ofcompliance employees, and “we see the same thing across the entireeconomy,” Griffin said. “We are going to have to think about how tobring that load down.”

Griffin cited as one example mortgage documents that can run to200 pages, with disclosure requirements so lengthy that no consumerbothers to read them. It is a “tangled mess of paperwork no oneunderstands,” he said.

Bloomberg News

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