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

“What the current law and rule do is effectively force you to look into the mind and heart of every trader on every trade to see what the intent is,” Powell said Saturday at the American Finance Association meeting in Chicago. “Is it propriety trading or something else? If that is the test you set yourself, you are going to wind up with tremendous expense and burden.”

Powell's comments compare to Fed Chair Janet Yellen, who has supported the sweeping bank rules of the 2010 Dodd-Frank Act in the wake of the global financial crisis. President-elect Donald Trump has vowed to dismantle Dodd-Frank. The Volcker Rule restricts banks with taxpayer-backed deposits from making certain types of speculative “proprietary” trades.

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

In the text of his remarks, Powell urged more monitoring of financial 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 has shown up in the form of financial excess,” Powell said. “The current extended period of very low nominal rates calls for a high degree of vigilance against the buildup of risks to the stability of the financial system.”

Officials are weighing how quickly to raise interest rates amid investor optimism that Trump can shake the economy out of its low-growth rut by delivering tax cuts, investment and regulatory reforms that may also lift price pressures.

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

“Policy is very accommodative still. Growth has definitely strengthened in the second half of the year,” he said in response to a question, noting that this creates more upside risk. “You have asset prices going up, confidence going up, and sort of a very positive feeling about the economy: Rates going up, the price of oil going up, inflation expectations going up.”

Trump Economy Dawns

Minutes of December's Fed policy meeting showed officials were shifting their focus toward the possibility that expansionary fiscal policy under Trump may warrant a faster pace of rate hikes than expected. Their quarterly forecasts also showed that officials had increased the number of quarter-point rate hikes they expect this 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 focus on this “dot plot” median, noting there was “tremendous uncertainty” around the forecasts and changes by a couple of meeting participants can cause a move.

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

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

Griffin cited as one example mortgage documents that can run to 200 pages, with disclosure requirements so lengthy that no consumer bothers to read them. It is a “tangled mess of paperwork no one understands,” he said.

Bloomberg News

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Fed Official Urges Congress to Reconsider Volcker Rule

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