Federal Reserve Vice Chair for Supervision Barr: Monetary policy is closely linked to financial stability

According to the Zhitong Finance APP, Michael Barr, the Vice Chairman responsible for supervision at the Federal Reserve, stated in a speech on Tuesday that monetary policy and financial stability are "inseparable." Barr will step down from his role as Vice Chairman of Supervision this Friday while continuing to serve as a Federal Reserve Governor. In his final days as Vice Chairman of Supervision, he emphasized the importance of strong regulation and the independence of the Federal Reserve.

Before Barr's speech on Tuesday, U.S. President Trump recently issued an executive order seeking to tighten control over independent agencies, including the Federal Reserve's banking supervision and regulatory work. Although this executive order will not directly affect the Federal Reserve's monetary policy, it requires agencies to submit regulatory draft proposals for White House review and to consult with the government on priorities and strategies.

Barr did not mention this executive order in his speech on Tuesday, but he did state during the Q&A session that the Consumer Financial Protection Bureau (CFPB) has brought "tremendous benefits" to American families. He said, "The regulation of financial markets, the supervision and regulation of banks, federal deposit insurance, and the laws protecting investors, consumers, and businesses are all aimed at promoting financial stability and sustainable economic growth." "I have previously discussed how monetary policy and financial stability are closely linked, and how the tools we use to implement monetary policy and support financial stability work together."

The CFPB mentioned by Barr was established in 2011 as an agency set up by the U.S. government after the 2008 financial crisis, primarily to protect the public from unfair, deceptive, or predatory financial practices. After Trump took office, a series of actions were taken to weaken the CFPB, including an order on February 10 to halt nearly all of the agency's work, suspend the entire agency's operations, terminate probationary employees, and cease drawing additional funds from the Federal Reserve, effectively shutting down the agency.

However, according to reports on February 25, lawyers from the Trump administration denied in a court document that the White House intended to dissolve the CFPB, contradicting Trump's earlier statements this month. Justice Department lawyers on the evening of February 24 rejected a request from the union representing CFPB workers, which sought a court order to stop actions aimed at destroying the agency. Nevertheless, the Trump administration acknowledged that a more "streamlined" agency requires less office space, and the agency has decided to cancel its headquarters lease. Justice Department lawyers stated that the premise for operating a more streamlined and efficient agency is that the CFPB will continue to exist.

It is worth mentioning that Federal Reserve Chairman Jerome Powell also stated on February 11 that no federal regulatory agency can replace the work of the CFPB, and if the CFPB were to close, there would be a gap in consumer compliance protection.

Additionally, Barr provided more details regarding the pressures facing the U.S. banking industry in 2023. He stated that over 1,800 institutions borrowed funds from the Federal Reserve's Bank Term Funding Program, a special arrangement providing liquidity to banks facing deposit outflows or liquidity pressures. He noted that most of the borrowing came from institutions with assets of less than $10 billion, "and these smaller institutions accounted for 50% of the total loans and nearly 95% of the total loan volume." He added, "The analysis by Federal Reserve staff shows that this practice is more likely to occur in institutions experiencing deposit outflows, but it is also common in companies without deposit outflows." He pointed out that when banks cannot provide credit to the economy, the impact is "severe and widespread."

Barr also warned last Thursday that relaxing banking regulatory rules and oversight could make financial institutions more vulnerable to unexpected shocks. He emphasized the need to maintain a strong regulatory framework to prevent the spread of financial risks.

Although Barr will continue to serve as a governor at the Federal Reserve, it remains uncertain whether his warnings will be heeded. The Trump administration has made it clear that reducing regulatory burdens is part of its economic growth strategy, so the future direction of financial regulation remains uncertain. Currently, the Federal Reserve has not announced a successor for Barr