Transcripts For CNBC Squawk 20240704

Us in a couple minutes. Plus, nova nordisk is experimenting with an obesity drug. And big tech struggles. Apple, those shares are looking for a bounce after a sixday selloff. Tesla, similar story. No longer one of the most valuable s p 500 companies. Lets begin with the 1 billion Equity Investment led by liberty strategic capital. Hes going to join us in a few moments. Got some clarifications today. More data on deposits, the percentage that are insured and so forth. I think its important to know when the former secretary of treasury did a previous deal, which was a deal involving a bank that really was one of the worst run banks in the country, came in, had the bid that was best for the ftic. The cover bid, much lower. It ended up making him a lot of money. Thats being dredged up as somehow against him. The reason i mention that is because the risks may even be bigger here. If only just because were dealing with so many rentcontrol units and the law changed ip2019 to make it so those who think this is going to be a quick windfall may be completely illadvised to think that. Youre talking about multifamily. Yes. 44 , i believe, is the number of their loans. Yeah. To me, it looks great until because multifamily in new york, which is where this bank does a lot of its business, you would imagine is quite strong given rents are at alltime highs. To your point, if you cant raise the rents in their portfolio of buildings when people have to come to refinance at a higher rate, it could be difficult. Something were going to ask. Dont you think it was curious, theres no loss hearing agreement with the government. This is a private transaction. I have already read stories about its a give away because theres been such dilution. This pank was 48 hours from being new york noncommunity bank. The posit flight was the one characteristic that was not as bad. Hard to know exactly, but something they talked about the Conference Call at 8 00 a. M. This morning. The stock price may have been collapsing but it wasnt clear the deposit base had similar thats true. Mnuchins firm along with a number of other significant investors that include citadel, reverence, which is run by an old friend of mine who once ran Financial Institutions at Goldman Sachs and they have done a lot of these difficult type financially focused deals. Theyre doing great. I mean, its 1. 05 billion overall. Its common and a preferred. Now, its a pipe, remember, so it has to get registered. Theyre not in this for some quick trade. Yes. When you buy at 2 and then they have warrants for 60 of that value at 250, theyre in the money looking great already, jim. So far so good. Obviously, they replaced a lot of the board with their own. Mnuchin is on the board, berlinsky is on the board now. Serious hitters. Theyll be in this for quite some long period of time. Started off well for them as an investment. Danelo said something this morning. He said nycb now has a fortress balance sheet. Similar to jpmorgans . Yeah, jpmorgan is the Gold Standard. I think this could work out for everybody. Im just saying that unlike indy mac, this could be a little dicier. We dont know, now, theyre saying the conference is going on underwriting standards, but david, in 2019 when the law changed,s youed to be able to renovate these apartments and be able to and then increase rents. And then new York State Legislature moved in. And they think everybody should just be able to, yeah. Never have a rent increase. I am not saying im defensive about mr. Secretary. I think he did a great job, whatever, but their articles say he got in there. He got a great price, whatever, and the best price would have been if you let it go. If you let it go. Im saying, he came in in the middle of the day. This thing could have gone to 1. By the way, middle of the day, carl, this thing was down 42 on reports of an equity raise and ended up, it had almost like a 70 reversal during the course of the day. Kind of like apollos chariot, have you been to that one . No. Or more like magic mountain. To your point, jim, a former boston fed president yesterday, the bank continues to struggle. Difficult to dea Capital Raise when the value of the portfolio would be difficult to ascertain given the exact change in laws youre talking about. Thats why im saying you put a billion dollars in, and lets say you have as bad a portfolio as what signature had, a billion might not be enough. Thy feel like its well capitalized and thats something we have to ask mr. Mnuchin. How do we know a billion have we gotten in there and looked at the books. This was not necessarily how many hours did they have here . The good news is we get to do that less than ten minutes from now, talk to steve. Stay tuned. Meantime, stay tuned for our excellence. Meantime, nova nordisk surging to a record high. A phase one trial for its experimental obesity pill. Participants averaging 13 weight loss aftertaking the drug for 12 weeks. The oral treatment could be more effective than wegovy. Theres another company, eli lilly. Eli lilly is as nonpromotional as nova nordisk is promotional. Eli lilly has a pill thats pretty far along, phase three. They have the same safety profile. Doesnt lower the weight as fast. Some people feel you shouldnt lower the weight as fast. Other people feel like if you dont show fast weight loss, people leave the pill. I want to make people understand if you sell lilly down ten, by the way on the eve of what they have what i think will be a very positive readout on their dimiementia drug, youre splitt hairs. Eli lilly has a great product. When you go into eli lilly, you spend some time with them, heres what theyll tell you when you ask about, when you ask them about their drug. No, could you give me a little comment . You always sometimes want no comment, you dont want the blank stare. The blank stare says, are you out of your mind . You think im going to tell you anything. I like that about them. That just reenforces the market seems to be two companies period. Novo and lilly. People are going to say viking. They cant take away the pills. People got sick from it. Not good. David, i want to be sure you understand. Im going to make you a bet. As between viking Cruise Ship Company and viking the therapeutal company, im taking the cruise ship because the cruise ships are red hot. I dont know if you have seen the norwegian numbers lately. No, but norwegian and carnival have been amongst the best performers and Royal Caribbean as well. Royal caribbean has been the best. Okay, i am being a little facetious, but viking did a big fundraiser, and everyone off the back of the phase two. Yes, if you deal with the fda, theyre not anxious to say we need a Third Company in there that we have never heard of. You have said that a number of times. Refresh peoples memory it was only a couple weeks ago viking therapeuti i ics reported a favorable trial, and the stock doubled. Jims point is they have two great drugs on the market already. And they had a phase three for the migraine. And now, carl, theres three agencies to begin with the letter f in the federal government. Furyk, the ftc, and the fda. Two out of three, good. Two out of three not responsive, i think they have upped their reservations. Antioil and gas, ftc, ill leave that to david. Fda is Gold Standard and has not changed through any administration. So theyre not going to were the best. And i just really think that we have to be careful saying oh, theyre going to like viking. They love lilly. Because lilly has a great safety record. As for novo, thats an alltime high this morning. A lot of pieces lately, jim, talking about how its changed not just the danish economy but the european economy. Frank holland had an excellent person from citi about the new magnificent seven is the Foreign Language version, what i found is interesting is it starts with lvmh. They have companies over there. Schneider electric. You know schneider . I do. Mr. Big shot. Wasnt schneider the super on a sitcom in the 70s. One day at a time. Thats incredible. Can i tell you some of mnuchins movies that were good . Whats the ben aflac, argo . Accountant. And the star of that, besides affleck, burnthol. Anyway. Im glad to know, what was his name, schneider in one day at a time. Lets get you back on track to schneider, the french company. Whats your point . My point is that people are gravitating toward europe. You have the ecb being very benign. You have European Companies that are doing far better than what was once our magnificent seven. Although data track yesterday, nonu. S. Stocks underperforming s p by a full standard deviation. Look, theres japan, theres some of europe and kind of the rest of the world. I think, by the way, japan, i feel like i blew it. Warren buffett buying it every day, and im focused on occidental. What do you think . You got the same briefing i got on this . Yeah, im reading stuff about the nycb, because you know what we have coming up . An excellent interview. David, on europe, the reason im focusing on europe is nova nordisk is now more than 500 billion. When we come back, well talk to the former treasury secretary about the nycb iesennvtmt, well get to rivian, tesla, boeing, some retail in a moment. Trade from morgan stanley, were ready for whatever gets served up. Dude, you gotta work on your trash talk. Id rather work on saving for retirement. Or college, since you like to get schooled. Thats a pretty good burn, right . Theyre waiting for you. Hey, do you have a second . Theyre all expecting more. More efficiency. More benefits. More growth. 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And i guess i have to wonder why, when only a week ago, management identified material weaknesses in internal controls related to internal loan review, and analysts will still point out that the Business Model is still very much overweight some of the least desirable parts of the commercial real estate market. So why is this a good investment . Well, first of all, great to be with all of you here today. This is a business i have known well for a long period of time. So we looked at a long time ago potentially merging one west with new York Community so i have been following it. More recently when they did the Signature Bank deal, i followed it as well, which i think was a very attractive deal for the company and particularly bringing the two franchises together. So at the end of january, the Company Announced issues associated with cutting the dividend and increasing reserves. I reached out to the company and began a diligence process in case they wanted to increase capital. It was really at the end of la week that we moved forward very quickly. I like the franchise a lot. Its a top 20 bank in the u. S. With very attractive markets. Its got a great branch network. Unlike the banks that had problems last year, this business has 80 of their deposits are insured so its got a very Stable Deposit base. And the issue is really around perceived risks in the loans. And with putting a billion dollars of capital into the balance sheet, it really strengthens the franchise and whatever issues there are in the loans well be able to work through. Bringing joseph oughting in who i worked with closely at one west and that as controller, i think theres a great opportunity to turn this into a very attractive regional commercial bank. Youre confident that they have effectively recognized some of the risks within the portfolio itself . I mean, again, in reference to the fact that they did sight, and we know there seems to have been material weaknesses in some of their internal controls in terms of reviewing loans, do they still have a ways to go there . What gives you the confidence that that lope portfolio is as strong or perhaps as worthy at least as you seem to indicate . So let me say, sand row, the chairman, and did the flag star deal, when issues came in, chairman sandro took over and stepped into the ceo role and did a great job in a short period of time on this. We did extensive diligence on the large loans. You know, the bank will look at the reserves and will make sure over time it has the appropriate reserves. That can be done through a combination of our capital and earnings. We cut the dividend down to a penny a share so were going to retain almost all of our earnings. And we think the asset side is very manageable. The bank has today about 11 tier one capital, about 10 cet1, and if we need to take more reserves in the future, which well carefully review, we clearly have the capital base to sustain that. Mr. Mnuchin, great to have you on. Thank you. Do you want to go over some of the portfolio issues . Onefifth of these loans are tied to new york rent regulated multifamily, that law changed dramatically since many of these apartments were lent to. You do have a lot of criticized loans including 552 million potential loan losses involving a coop, involving office space. What makes you think i would be willing to say this company was offering suboptimal financials that you really have a handle on how bad this bank is . Let me say i think that coop loan was a oneoff situation and i think they have either sold it or they have it committed to sold. I dont know if its closed yet. That was really a oneoff situation. Look, we understand whats happened in the rentstabilized market. There were a lot of people who bought these properties with the idea they could convert them and raise rents. Theyre not going to be able to, but theres a lot of people in this port pfolio that didnt. A large part are large loans with 100 rent stabilization. When the bank made these loans they were low ltvs. So i think theres a lot of cushion in it. The good thing is, i think Interest Rates are going to come down over the next two years. The great thing about multifamily, unlike office, they have cash flow. With lower Interest Rates, thats going to help a lot. And theyre clearly will be some problems in the portfolio. No question about that. And we have taken that into our account in the underwriting. And thats why we raised a billion dollars of capital. So any issues the bank has with needing additional reserves in problems, well be able to deal with. Okay, we know that some of the loans had already been previously with signature sold. They had a hard time getting 70 cents to the dollar for a lot of these loans, again, because of the 2019 law changes. We know there are starting 2025 a lot of what i can say have to be some sort of refinancing. Are you taking that all into account and feeling confident that maybe the value of real estate is better or maybe the 2019 law will not be as prohibitive for the rest of the properties . I am not taking into account theres any changes in the law. We understand the law and the impact. Let me say the bank was very smart when they did the signature deal, which was an assisted deal, they left the bad loans with the government. So you can assume those were the worst loans. And they were sold at distressed prices to real estate funds. So i think that was a great transaction. When they did it, they got cash. They didnt take any of the bad loans. Look, were going to work through these loans overtime. I would put this in perspective. These are approximate numbers, but when we did the deal yesterday, i think the tangible book value is about 6. 65 a share based on the Closing Price last night and the warrants tangible book is still 6. 20 a share, and the stock is trading at a significant discount to that. So look, joseph and i have done this before. With the bank that needs to be rebuilt. Were going to retain earnings, build reserves when we need do that, and we have plenty of time over the next couple years to really rebuild this franchise, and look, we like the multifamily business. So theres a time to work through this. And i will just say, look, probably the biggest problem in the portfolio is the new york office. Theres about 3. 5 billion of office. We have looked at 2. 5 of the 3. 5 billion. We have taken into account what we think needs to be done, so i would say, you know, the Office Portfolio is the one that we will work out of the quickest. The multifamily portfolio, look, fannie and freddie are refinancing multis. Over the last month or two, a lot of loans refinanced away from the bank. And we can reduce that multifamily portfolio over time. Yeah. You mentioned office and the 2. 5 billion you have taken a look at. What are your expectations there . We know where things stand in new york in terms of only 50 of people showing up more or less most days to work. Therefore, the landlords in particular of aminus to b properties are looking at. Look, on multifamilies that have cash flow and lower Interest Rates, you can work out a lot. On new york office, where you have empty Office Buildings in class b, theres a reason why the values are down a lot. And i dont see new york office particularly class b working out and Getting Better in the future. So thats not an area. We have taken that into account. It is a limited part of the portfolio. We have a lot of flexibility. We have the ability, as i said, to build reserves as we need it. We can work through that. And look, this is rare to be able to come in and buy into a top 20 bank in the u. S. , in great markets with great branches, terrific private Wealth Management teams that came from signature. Im looking forward to visiting with them next week, and this, i believe, is going to be a great franchise over time. Mr. Secretary, i imagine lots of opportunities cross your desk. I wonder if you would entertain a question about the degree to which you see stress or Duration Risk across the spectrum of regional or Community Banks right now. Well, theres no question that higher Interest Rates and credit losses have an impact on kind of regional banks. Look, maybe theres opportunities for us to do acquisitions over time. Thats something that we dont really plan on but well look at. Uknow, at one west, when we bought indy mac, we did two followon acquisitions with the fdic. The good thing about being a bank is if there are assisted deals to do, its a lot easier to do them as a bank than as a private equity firm. Well bleae looking for the rig opportunities if they exist. Did the fdic err in passing it along to nycb given that it took them pass the 100 billion mark which gave them more scrutiny and requirement that they didnt seem to be prepared for . Theres no question at the time they wanted to do a deal quickly. It was important to stabilize the deposits. I think they did a good deal with new York Community bank because quite frankly it strengthened new York Community bank to put that franchise. Obviously, if jpmorgan had wanted to buy it instead of buying first republic, they would have bought it. No, i think the fdic did the right thing, and again, i think you see this as we were able to raise capital. We were able to stabilize the bank. I obviously had extensive conversations with both the fed and the occ over the last few days. And they have been very supportive of us moving forward with this investment. Steven, was there another bidder, and also, are you going to change the name of the bank . It is a great bank in the midwest, or more of a regional and just focus on new york . I cant comment on the other bidders. There was a group of capital that we brought in, into it. Some of the people like milton berlinsky i had a long standing relationship. He was my partner at Goldman Sachs. So in a short period of time, people came into the deal very quickly. We upsized the deal from what was going to be about 700 million to a little over a billion. As it relates to the name, look, new York Community bank is the name of the parent. Its not the name of the branches. The branches are flag star. And you know, joseph and i and sandro will look at whether we should rebrand the parent or rebrand the branches. The branches are not new York Community bank. Youre already up nicely on the investment. Obviously, it hasnt even closed yet. One would expect this will be a long Term Investment for you. Youre on the board. You mentioned a couple years. Is that your expectation . I see a lot of upside in this investment. We look at this as a three to fiveyear transaction. Could be longer in the case of one west. We held it for six years. But theres clearly a lot of work and a lot of upside over the next few years. And the other thing were excited about is, we brought a lot of new people on to the board. So joseph will be on the board, ill be on the board. Milton. Allen puwallsky, who worked with us at one west and was previously at paulson, he had been a senior person at the fdic. He brings significant regulatory experience along with joseph and i. And again, as i said, i think theres a lot of opportunity to build out this business. Its a unique franchise. And not everybody wants to be with the top three or four mega banks. O, understood. Finally, given the long term nature of this deployment of capital, is it your intent to stay in your current position . I ask that because of course your former boss donald trump running for president again. Could well end up in that seat come november. Would you rejoin a new Trump Administration if asked . Well, let me just say on this front, you know, it is my current intention to stay and run bymize. Thats what im focused on. I have obviously spoken to president trump. I have seen him recently and given him a bunch of views on the economy and some strategy issues. If the president called me up down the road, of course, i would have to take that call and consider it, but its my current focus to build out this business. All right. Well, that leaves plenty for conversation for another day, but appreciate your taking time this morning. Thank you for joining us. Great to see you guys. Jim, as we await the opening bell here, thoughts on that conversation . Look y have got to tell you that i think we had it was not the other banks. Its so different from last year. Such faith in the Banking System. I dont think it would have hurt the rest of the banks. The strength of the Banking Group during this period and the turmoil in a very large bank. It has not hurt. Nor was it ever seen as systemic during this period of significant weakness and concern. We may not be through that, but it was interesting hearing mnuchins take in terms of the portfolio. Kre volatility hasnt bubbled in the face of all this. He was the one who brought up he is concerned about the commercial real estate. But in many ways this was a bank where there was no run. The deposits are very firm. He mentioned the insured. And everyone knows he made a lot of money in the indy bank fiasco where he came in and dealt directly with the fdic in a loan share agreement. They have capital risk. I think your reference to a pipe to explain to people, he put money in. You could say hes up immediately, but at the same time, thats not the goal. The three to fiveyear transaction you got out of him was probably the most seminal thing we heard. It is a pipe and it has certain registration rights. It hasnt yet closed although they dont think there will be issued whatsoever. Who are the other bidders . He did say there were other bidders. I think he was referring to other people in his investment group. There has to be somebody who might want to see this. Selling stock at 2 was not ideal. Youre right. Well keep an eye on shares of nycb. Just an amazing moment. One of the best bank rallies i have seen in my life is occurring as this fiasco is unfolding. Especially on the big huge banks, jpmorgan at an alltime high yesterday. Speaking of tesla. Well get to tesla, but all sectors green. Materials, industrials, ge, this investor day conference. I spoke to larry culp at length. 70 of their book is renewable, once you service the engines. He gave you a very longterm outlook that was incredibly hot. 28 outlook. Free cash flow is terrific. Sometimes, you want to literally applaud someone who took a stock, a company, that was frankly in shambles. And really created Ge Health Care has been an incredible standout. Im a believer because of the power that is needed by data centers that has to rely on that gas. But this is the gem of the ocean. This is just a beautiful play. Given the fact that boeing is under fire, we got to name the 25 names. Boeing the Justice Department does not like boeing. This is going to become the pure play. Listening to greg hayes this morning, thats too much defense. Ge did break out its defense business, looks solid. The same kind of refurbished renewables. You also talked about the upcoming investture that comes in april. Thats soon. Is that already incorporated in the stock price . I say no. I say no because i think people are beginning to realize that dont forget, they own about 13 of Ge Health Care which has been monstrous and good. The vernova presentations were incredibly strong. A lot of whats coming down here is if you had gone two years ago before you realize the jenhsun huang revolution data center, the grid, you might have said, oh, this is a flotsam and jetsam wind company. Instead, it is a company that is going to be part of the reindustrialization of america that were having. Its based on data centers and on the electric grid. They are going to be the premier company to be able to buy if you want to reform the electric grid. Speaking of nvidia, cracks above 900 this morning, jim. Mizuho goes to 1,000. Dont forget, jensons keynote is on the 18th. Ill be out there to see jenson. Its a pilgrimage many people are taking. Whats important to realize is this was done virtual, but he is in a deep dive mode, jenson. Hes not like a lot of other executives. Hes doing sovereign ai, so this week was devoted to health care ai. Hes trying to create the three to fiveyear vision that i think makes it so people feel excited about a 1,000 price tag. Meantime, people are starting to pick apart the sox. Theres a healthy population of underperformers and overperformers. Micron today, stifel goes to buy, 120. You always have to get ahead of the cycle. Its either the best performer in the s p or worst performer for several times. And they were not bullish at 65, 68. Because hes not a hype artist. I think it might come down to broadcom. Hes a good partner of nvidia, but theyll report tonight. During the summer, they didnt have enough ai and they had too much cell phone. Now, qualcomm, which has a lot of cell phones, has been red hot. Broadcom shares up 121 . A 640 million market value, far above teslas. Were talking about one of the Largest Companies in the u. S. Market by far. So give me a preview on earnings. I think people have to recognize that tan, as aggressive as he is, is very straight on the Conference Call. If you go back to the september Conference Call, he crushed the stock by saying we still have a lot of businesses that are not on fire. If he does that again, then the people who recommended buying it today are going to be illa vised. I think they should have waited to hear what he has to say, because hes not a promotional man. He also is i think someone who put together a company that i dont want to say it got lucky that it had a connection, but there are other companies that do ai, marvell tech, thats another one. They also have tangential, the optical part, and they report tonight. These are two companies, marvell and broadcom, that are not on the fringes but theyre not wholly there. Those are the two diciest. I like them both. Meanwhile, we have a new potential ai catalyst as microsoft confirms this event on the 21st called new era of work. Which will focus on the surface ten, the laptop hardware, thats going to be interesting. I think that the stock got hurt by some chatter copilot, which i use and think is fabulous, is not being adopted well enough. When i hear these stories, i think what kind of survey did they do . Did they speak to the cfo, did they know this is almost instantly the most popular product microsoft has ever had . Its fantastic. We have been talking about it for some period of time already. You can make an argument, though, jim, that that move up that we saw, and you can go bock a little bit later last year, was in part because of the excitement around the introduction of copilot. They were some degree negligent. They initially came out and said look, this is a product thats going to be enterprise. Not realizing the thirst, the demand that individuals have for all of these products. Including the anthropic product. Why do you keep hyping anthropic . Its just another generative ai, right . A lot of people feel like were playing with facebook and theyre playing with instagram. Okay. Facebook being for fuddyduddies. I get it. Just because you have a great haircut doesnt make you younger. Theres no getter younger, sadly. No one beats father time. Tired of that rap. You are . Yeah. Its going to be its going to be a thrilla in manila between me and father time. Speaking of thrillas in manila, netflix, mike tyson and jake paul live. At t stadium, july 21st. Oh, no, really . Just got confirmed. Mike tyson is my age. Isnt your age about to change . Hes got a much, much better right or left. More of a punch . He could look at you and you would fall ack. You once gave me a hawaiian punch. A live Global Sports event. The evolution of their model continues. Not for disney, for netflix. Youre two years older, close in age to mike tyson. Dont want to talk about it. Making me sweat just thinking about it. Im going to have to step off and take off my jacket. Maybe we ought to go back to the things happening in the market. Kroger, maybe they dont need to do that deal. Maybe the ftc is like, you know what, everyone did well. See you later. Look at that stock. Its nvidia like. That is quite a move there. You have made the point many times that you think in some was the case against the deal was misdirected in the sense of while albertsons and kroger amount to a decent share, they dont come close to walmart share of market and the competitor would say is not albertsons which they want to acquire but is walmart and costco. Walmart reports tonight. Costco and walmart run rings around everybody. They have a good play, a store you have never been to, which is piggly wiggly. And i think that it makes sense. The ftc, i mean, like i said, this is when the agencies really dig in. Its election year. They dont know if theyre still going to be around. There is nearly 50 Democratic Senators and representatives sending a letter urging the ftc to look into oil and gas mergers. We have been talking about the likelihood of scrutiny on that front. You think david will be subpoenaed . Interesting. Thank you for bringing that up. I look forward to that. Since you know more than everybody. I remember that morning i walked out and some guy it was years ago, getting in my car. He put it on my windshield. Youre david faber, here you go. Its a subpoena. We got rid of it. It was some weird class action suit. You have been served. How many times have you been served . I got served one night at friday at 10 00. Are you kidding me . That person didnt fare as well as they thought they would in that tussle. I want to talk oil and gas, not regulation, but joint operating agreements because we did get news yesterday, and then a follow through today on this important deal that were watching in oil and gas. Chevrons deal to acquire hess. Its 1. 05 shares of stock. Hess stock hasnt done much. If the deal were to break, it isnt clear it would create a lot of downside for hess. Its still an enormous deal and an important one. Theres a significant feud going on between the two companies at the top of that chart there, namely exxon and chevron, over what is really in this joint operating agreement in terms of what the rights of first refusal are on guyana. Of which exxon owns most but less than 50 . The giant chinese company, and then you have hess in there in the middle. Its like 25, 45, 35. I think i got my numbers right roughly. Hess today responding to the fact that theyre going arbitration. We said this was a possibility last week when we covered the story. It is now happening. It could be four, five, as much as six months before we get a ruling herefrom an arbitrator for its part, hess says we believe the right of first refusal doesnt apply. We remain fully committed to the transaction. And obviously disagreef control, but the problem in part that the market has with trying to understand the risk of the deal is were not going e langu. Language is not being released. Both sides agree and release the langge so we can make our own decision, because when you talk to darren woods or talk to exxon, you get the following. This was one of their senior vps at a conference yesterday. He said, the joa contract in this case was developed based on the model joa. We understand the detailed lang wrj. We wrote it. We understand the intent of this language of the whole contract because we wrote it. I think most observers in this industry would understand our reputation for rigor, attention to detail in contract language and theyre extremely confident their preemption rights exist and they would intend to preserve them. Now, if in fact they win in arbitration, jim, chevron goes away. Exxon never gets a chance to use those preemption rights. Chevron made it clear f we lose and the language is seen in favor of exxon that they have a right to buy what hess owns of guyana or make a bid on it, were gone. Its not as though once they close the pioneer deal at exxon theyre going to just buy hess. But again, the senior vp yesterday says listen, i dont know if that transaction is going to proceed or not. Thats in their hands. But if that transaction does not proceed, there is potential value down the road for exxon mobile. That option value is really, really important. So meaning hey, if we have an opportunity to put this deal to bed, we have option opportunity to buy hess in the future. So lets put this in the context for people at home. Even big corporate m a people. David, is there some sort of bad blood here between hess and exxon . This is highly unusual behavior. Almost not cricket, i would say. Going in, there was not an expectation. They operation together in certain other areas. But clearly, this is unexpected, i think, on the part of chevron, that exxon would be doing this. Exxon for its part says hey, we have these preemption rights in our opinion and would be derelict in our duty to our shareholders if we didnt try to assert them. Youre right. Its unexpected and quite i dont want to call it lets say its unexpected and an unexpected level of hostility. It is interesting. This is an industry that a lot of people dont pay close attention to, feel its they get in a room and figure out what they want to do. Theyll probably be attacked at the state of the union. But theres no love lost. I mean, i cant believe this. Mike weatrth, he comes in peace. Darren woods. Hes an engineer man. Look, this is what we got. Were going to assert our rights. We havent seen the language at issue which would help experts understand who really has the better case. Maybe both sides will agree to make it public if they believe that. Otherwise, were going to be in the dark a bit in trying to ascertain really what that language says. In the meantime, diamondback buys the intever and the stock goes up and up. I just think that this is one where youre not in the permian, baby. Really quick, we have four names in Specialty Retail up 5 to 8 . Burl, bj, big, and aeo. Aeo did this incredibly interesting reorganization. About time. A lot of people felt big was on its last legs and burlington, right now, people feel burlington is among ross, burlington, and tjx in terms of closeout. People should recognize burlington, its really interesting, its the equivalent of the dollar tree, Dollar General of the group. Its long lines, not necessarily its a place you feel like youre getting a bargain. If you have to read through this, you would say the consumer is thats where you shop when the consumer is downbeat. All those names doing well price wise, the exception would be vsco today. Just a major miss. Bad cadence. People have to recognize, same thing with foot locker yesterday. Foot locker was up big because mary dillon said we had a good thanksgiving, and after that, it was downhill. Victorias secret had a few weeks where i dont know what happened, i guess people just didnt go. David, what did happen to victorias secret . You know, i cant discuss it. No . No. All i know is i always go back to sycamore and the deal they had. Wow, would have been the greatest deal and they called it off. Then the thing soared. They also did some things that didnt work out. At victorias secret . Yeah. I think the mall is a dicy place because ralph lauren had unbelievable numbers and then you go next door and there will be a company that didnt attract anybody. Foot locker, the champs was bad. I have a small position in that because i believe in mary dillon so much about after what she did with ulta, but so far, not so good. Apple down, tesla eking out a small gain so far. Really . Yeah. Apple down. Apple down. So much for camelot, huh . Camelot. I actu jerry orbach in promises, promises. Rest in peace. As we go to break, watch bonds today. Of course, powell day two in front of the senate. Well get mester at 11 30. Claims were in line. Later this afternoon, consumer credit, fed balance sheet. 410 is up a little bit from the 4. 06 we had earlier this m morning. Be right back. Theyre waiting for you. Hey, do you have a second . Theyre all expecting more. More efficiency. More benefits. More growth. When you realize you can give your people everything, and more. Thank you very much. [applause] ask, now what . Heres what. You go with prudential to protect, empower and grow. With everything you need to deliver, you guessed it. More. One more thing. Whos your rock . Learn more at prudential. Com im jack black. Get tickets right now for kung fu panda. Whos your rock . You dont have time for a drum solo. Get tickets [ screaming ] get tickets skadoosh. Get tickets . We want to wish a happy birthday to one of the most beloved people on wall street and a familiar face to cnbc viewers. Thats art cashin. Art, were keeping an eye on your health and looking forward to the resumption of your morning notes. No doubt, jim, he would have a lot to say about the action weve seen in markets in the last few weeks. There are few people you have to read every morning and know you are scared to miss because the history here is kept by one person. Yeah. See his way through all kinds of ayons and epics. I remember speaking to him in 2001. There was. And in 87 and in 08. The panic of 08. I mean, art, yeah, people always listen to art when he comes in the market, a singular voice. We dont have enough people to know that every day is not a perilous day. Meantime dow up 190, holding 5140. Well be back in a moment. You know doug, ever since switching to workday youve been a real rock star. Rock star . What do you know about rock stars . Billy idol . I mean wheres the skintight leather . My shoes are leather. Wheres the unnecessary zippers . That thing billy, rock star is just how doug feels when he uses workday. Thanks, rory. Ill show you rock star be a finance and hr rock star. Workday. For a changing world. Billy idol just stole your golf cart lets get to jim and stop trading. Okay. So look, one of the things that is intriguing to me is the housing, both remold and renovation, as well as new. Sherwin williams, evidence ubs goes to hold to buy and its at its at a 52week high and thats very important. The actual Home Business is not doing well, but the new Home Business, lennar has been doing very well, toll, and the renovation. Paint sold very well at home depot. I have fortune brands which is some sophisticated i dont want to call it plumbing, much different, but my surprise guest is one of the turnarounds, maybe even as good as abercrombie. I have gap tonight. I have gap. I just think that gap is incredibly exciting. The last quarter was just magnificent. If they can turn the juggernaut around, this guy is dynamite. Hes dynamite. I cant wait to speak to him. They got davids attention at ban banana that says something. Told me you thought you were going to a latin american cooperative. Its a division. Hes turning old navy around. Gap has a very fresh look. If youve been to gap lately its crisp. Thats the word ive used, is crisp. I have not. Theyre hard to find. Look, they have remember when they were on block. Now theyre nowhere. Wider pants. Levis doing well. Do not rule out gap going to i may take it to a high of 30. My creme de la cramer. Thats my new name for that. Mad money tonight 6 00 p. M. Apologies to the booth you did see chairman brown getting the session under way. Were going to take you to Senate Banking and day two of lln e llft aer break. At morgan stanley, old school hard work meets bold new thinking. laughter at 88 years old, we still see the world with the wonder of new eyes, helping you discover untapped possibilities and relentlessly working with you to make them real. Old school grit. New world ideas. Morgan stanley. Investment opportunities old school grit. Are everywhere you turn. Do you charge forward . Freeze in your tracks . Or, let curiosity light the way. At t. Rowe price, we ask Smart Questions about opportunities like advances in healthcare and how these innovations will create a healthier world tomorrow. Better questions. Better outcomes. You are looking right now at a live shot of capitol hill where this hour, fed chair, jay powell, is testifying day two this time before the Senate Committee on banking, housing and urban affairs, answering questions on the state of the economy, inflation, possible rate cuts ahead. Well take you there live as soon as q a begins moments from now. Welcome to another hour of squawk on the street. Im sara eisen with Carl Quintanilla and david faber, live as always from post nine of the new york stock exchange. Take a look at stocks this morning. Theyre a little bit higher, teeing off lower treasury yields, s p up 0. 7 . Were continuing to climb back from early losses to start the week. Nasdaq up 0. 8 . Take a look at bonds having a move today. We got lower jobless claims coming in line and the ecb which well talk about in just a moment. The 10year yield turned around, 4. 1 . So there was some buying in the last hour or so thats gone the other way. The 2year yield down 4. 5 . What did we get from the ecb 3m . Christine lagarde just speaking in the last hour sounding similar to powell in that shes patient and she wants to see more data before considering cutting interests. Heres the money line she said moments ago. We are making Good Progress towards our inflation target, ande and we are more confident as a result. But we are not sufficiently confident, and we clearly need more evidence, more data, and we know that this data will come in the next few months. We will know a little more in april, but we will know a lot more in june. She emphasized june there as opposed to april potentially in terms of knowing enough to be more sufficiently confident that inflation is coming back down to target. The market got excited because when the ecb came out they lowered their inflation target for this year and the growth target for this year and reduced the growth target for a Fourth Quarter in a row and now expect the economy in the eurozone to rise 0. 6 . That together could indicate that they were moving closer to cuts. Market got excited about pricing april, but her hint there was more in line with june, so now derivative markets are pricing june for fed and ecb. Will they do the cut . Will they do the first cut at the same time or will it be a raceto cut . Europes economy is in worse shape than ours. Thats been in all the data. And continues to be. And it continuesby to, yeah. I went through the beige book, lets talk about inflation because we got the ecb today. Were getting the state of the union from President Biden tonight. Inflation will be a theme. Heres what i pulled out from the beige book, which is all the summary of what fed districts are talking about, the businesses across fed districts on prices overall. Price pressures persisted during the reporting period, but several districts reported some degree of moderation in inflation. Contacts highlighted increases in freight costs, several insurance categories, Employer Sponsored Health insurance. Nevertheless, businesses found it harder to pass through higher costs to their customers. The costs of many manufacturing such as steel, cement, paper and fuel fell in recent weeks. Its not like inflation is all the way back down. What i got out of that is that price pressures are persisting and companies are having trouble passing it along right now and that indicates, i think, some had hesitancy why youre hearing some of the fed members not ready yet to cut rates and be confident that what theyve been seeing on the progress of inflation will not continue to 2 . I kind of it kind of flies in the face of ppi and cpi, goldman did a piece last week looking at how companies tend to raise their prices when their costs are elevated and when the costs come down, they dont exactly its like the prime rate. Slow to do it in reverse. Youre in the corporate greed inflation camp. Written about a lot. Expect to hear that theme in the state of the union tonight. President biden and the super bowl talked about shrink inflation. Heres one chart on food. Youll only see it on cnbc on state of the union day. Its the Price Per Unit of food, okay. So thats the blue line. Its has come down, right. Input costs have come down, prices have come down, but the 2year average is elevated, which shows you its still painful for consumers and theyre paying a lot more than they were several years ago. The rate of change has been really strong. Its like 30 in the last three years in terms of food at home under President Biden. However, the prices are coming down. This whole notion that companies are ripping off consumers, i dont know, i talked about it with Campbell Soup yesterday with mark, and he said if that were true our Profit Margins would be very good and theyve been weakening over the last few years. There are two sides to that stwror. Well talk to the ceo of kroger next hour and they had earnings this morning. Stock responding nicely. A big beat on samestore sales and profits. Well talk about the shrinkflation idea. Food price have traited but are significantly higher than a few years ago. Among the stickiest of the categories. As we await the fed chairs testimony, lets bring in former fed president Dennis Lockhart and talk about yesterday, if you dont mind, some of the reaction to a testimony that i think it was bofa argued could have been more hawkish, wasnt dovish. A lot of cases being made that june remains a reasonable time for a first cut, maybe, of course, pce gets in the 2. 5 range. Your thoughts . Carl, sounds pretty good to me. I think your analysis is a good one. I think the signaling was very consistent with fed speak for the last two or three months. Basic message is yes, some time this year, but were in no hurry, and were not going to be rushed into a decision. You know, more data equals more confidence. So thats what i thought i heard, and june is certainly on the table, i think, as a reasonable time, but kit could e later. He made two points. One is goods prices have come down, gone negative, made a point to say Housing Services and new leases are softening a bit. Clearly wants more on that front, right . Yes. Yesterday, i believe it was on this program, mark zandi made, i thought, a very interesting analysis which suggested that rate cuts would stimulate more building and conceivably stimulate more inventory in existing homes and more transactions. Having said that, i mean, i think its an interesting analysis, but i dont think the fed will focus on one element of the inflation picture. With the state of the union as ive been talking about in mind tonight and inflation likely to be a theme, the shrinkflation, who really deserves the blame for the historically high inflation rates that americans have experienced and continue to experience right now . Well, first, i have to say, i really dont think president s have a great deal of effect on inflation rates, quite frankly, whether thats for positive or for negative. Well they i mean, the administration did roll out a 2 trillion stimulus bill . Heres i think there are multiple factors at work. I think the supply chain was at work, the ukraine war was at work in this picture and certainly fiscal stimulus was at work and they all combined to create a lot of funding for consumption after the pandemic abated. But i think you cannot blame the inflation on one factor. What is go ahead. Whats your read on productivity . 3. 2 is not a bad number. Are you of the mind of waiting longer rather than shorter in terms of making the leap to say this is going to be a disinflationary force over the long term . Yeah. I would wait longer, but i think its very encouraging. If it is some indication, even very early of the effect of ai or there are other factors at work, over 3 productivity growth is a good number. We need this kind of growth in order to have above trend growth on a sustainable basis. I find it encouraging, but i would say what were seeing now, to use an expression thats been used before, green chutes. These are the early indications. The early indications of what might be a different year for productivity growth. Got a big jobs number coming our way tomorrow. The range of system, pretty tight. Citi the low of 145, barclay the high of 225. There are some who believe that it would really what it takes for the fed to move sooner would be a material step down in the quality or the robustness of the labor force. Any disagreement there . Not a lot of disagreement there. Ive been wrong so many times on predicting the jobs number, and im really hesitant. I think just as the january Inflation Numbers were looked through to an extent and treated as one month, this jobs report could be treated as one month as well. Theyre trying to discern the underlying trend. Underlying trend appears to be the tightening of the labor market which is a good thing and means wage pressures will soften to some extent, and thats i think what theyre going to be trying to discern from the numbers tomorrow. Who do you think cuts first . Europe or the u. S. . Do you think it will happen simultaneously . Well, it will not happen simultaneously on a coordinated basis. In my experience over ten years, theres very few times that theres any kind of coordinated action. I think on balance probably the United States is in a better position, meaning the fed is in a better position, to begin a rate cutting cycle than europe, but having said that, europes growth is much weaker. They may feel that they need to stimulate. Im debating with myself on the air which is not smart. Love that. But if i had to answer the question i guess i would say the signal that we heard a few minutes ago of june, did sound pretty definitive to me. I think the fed could wait past june. Kashkari yesterday suggested maybe one for the year, more likely two. The numbers keep creeping lower and lower below the Market Expectations and the dots. Remember, if you go back to the december sep dots the range was for two to four, and it was a roughly equivalent number of people so the median fell at 3. That was not a committee signal. That was where the math came out statistically. Kashkari is in the 2 camp. Someone else is in the 4 camp and five or six in the 3 camp. They will work this out as they go along, but, you know, we could see anything from 2 to 4. Im going to be looking at the march sep to see how much change there is from the december sep. Dennis, thank you. Really appreciate it as we get back to Senate Banking. Thank you. Very conscious warning, and what we said is if what we expect and what were seeing is continued strong growth, strong labor market and continuing progress in bringing inflation down, if that happens, if the economy evolves over that path, then we do think that the process of carefully removing restrictive stance policy will can and will begin over the course of this year. I know weve had this conversation publicly here and privately also that you know people are hit the hardest with inflation and when companies try to cut costs with layoffs. This town too often seems to forget maximum employment is part of the feds dual mandate. Let me ask you about bank supervisor. Senator scott mentioned last years Bank Failures have the need for strong oversight. Svb grew too big and too fast and fed didnt react decisively enough. The fed undertook an assessment of its supervisory process to identify and address gaps related to the speed, the force, the agility, if thats the right word, supervision. Explain what concrete steps the Federal Reserve has taken to strengthen supervision in any specific areas to make improvements is ongoing . So this is a very broad area. There are, you know, many, many people in this system who are involved in the supervision of thousands of them, and theres a rule book. Theres been careful study and thought and a lot of listening to understand how we can meet those goals of being, you know, quicker and more effective basically, is how i would say it. If you look at Silicon Valley bank we werent quick enough and effective enough, and so were working hard to develop a new rule book and new other set of practices which is still evidence based and fair but going to involve earlier interventions and more effective ones. I think this is work thats ongoing and will be for some time. Thank you. The job of the fed and all Public Officials is to serve the american people, not their stock portfolios. Weve seen abuses in this body. Weve seen abuses at the Federal Reserve. I wrote to you last month asking the fed to identify substantive penalties for board officials who violate the trading rules. Where is that in the process, and i expect these rules in place before the next Monetary Policy hearing in six months. Where is it . So we got our own Inspector General gave us six things to work on. I read the list from beginning to end and the sixth one was what you said and i said were going to do all of these and lets get going. Weve done five and working on the sixth. It will be finish in six months. I certainly hope so and expect so. Expect so is a better answer than hope so. One last question, many more Companies Use algorithms to combine competitor price information to engage in surge pricing. You know corporate pr teams worked hard on this. Just another way for corporations to make it harder for consumers to seek out lower prices and to pad corporate profits. Are you concerned that the wide adoption of these price gouging strategies, these pricing schemes, if you will, will contribute to inflation . I think it works both ways. Let me say this, were well aware of this trend and were monitoring it. Remember prices go down when theres no one in the store and they go up when there are a lot of people if doing dynamic pricing. Same with the ride companies. It work both ways. I dont know that i have an implication for inflation. It would certainly have implication for consumers who need to be informed. You think that this kind of surge pricing might lower prices overall . I mean, thats my understanding is that the idea is that in slow periods, prices actually go down and in higher periods, in busy periods they go up. These are sophisticated economists working for these big companies, and theyre not going to do things to lower their profits. You know, i think the price mechanism is incredibly important in our economy. I think we need to give companies the freedom to do that, as long as theyre not fixing prices or failing to disclose, you know, the nature of the price changes to the public. I have a few seconds. Research has indicated constraint supply was behind a significant amount of the inflation weve seen over the last few years. The supply chain of autos have been more resilient or more housing availability, would that have made your job easier . Yes, in a word. A big part of the inflation was when we saw it in 2023 when that supply chain problems unwound and when the labor supply shock that we had unwound as well, we saw inflation go down quickly in the second half of the year. But its also down to tight Monetary Policy playing a role as well. Which leads me to the plea with you to speak out about inflation, about the contribution of corporate profits and aggreed to inflatio. Thank you. I know you are done. Thats true. Well, i was just i was find yourself agreeing with me more and more often no that would be a nightmare, and im awake. So, what i would say, however, is that the fact of the matter is that so often, if, in fact, 60 i actually listened to what you said which was remarkable the fact that 60 of americans today cant afford a thousand dollar emergency, i cant imagine how the average millennial affords a down payment for a home. I cant imagine how they take into consideration when theyre looking at a snapshot of their financial future fixing and repairing or having a plan for obsolescence that happening for every home owner in the country. I think the issue is far more complicated and would love to delve into that over the next 4 minutes and 18 seconds, but my first question is a combination between the challenges of illegal immigration and crime. It seems like every single week, theres another story of another city under water, attempting to feed and house millions of Illegal Immigrants and american taxpayers are footing that bill. Like i mentioned in my Opening Statement just recently in denver, we saw citi workers having their hours essentially zeroed out so that the city could allocate more resources for the Illegal Immigrants. They say that average cost between San Francisco and oakland because of crime is almost 4 billion. Couple that within new york you see Governor Hochul bringing out the National Guard and the state police to help reduce the impact of crime at the same time mayor adams sayings he needs more money because the state of affairs from Illegal Immigrants in the city is devastating the economy, scaring the citizens, and reducing the opportunity for business as usual to return to new york city. So my question is, can you explain how our economy is expected to continue shouldering the burden and the costs because of illegal immigration and what, if any, information do you have as it relates to the impact of this surge of crime in our major cities on the economic outcomes of those cities . I heard the discussion that when you have more folks in the store, you have more shoppers. Except for these days, when you have more folks in the store, sometimes theyre just there to steal. You quoted my statement earlier. Right before that what i said was immigration policy very important, very much important and its none of our business. We dont set policy and we dont comment on it. You commented on immigration. When youre going to tell a story, please tell the whole story, especially when the nation is frustrated by nearly 10 million folks by the end of this year coming into the country and having the kind of negative impact on prices, on crime, on the challenges that everyday americans, specially americans living in the poorest parts of america face on a daily basis. So as you accurately quoted, i was referring i said over time. Yes, sir. I wasnt referring to the history, with which you agreed. I was staying as far as i possibly could from the current political context. You know, its really not appropriate for us. Were independent. We like to remain that way. The way we do that is staying out of political issues that we really arent assigned, and so the kinds of issues youre talking about are very, very real. I dont deny that. Theyre really not for us. So the fed does not consider the impact of 10 million Illegal Immigrants coming into our country and the costs associate the with those Illegal Immigrants nor do they consider the impact on states like new york or california or illinois where the devastation of crime ravishing americans has an impact . We dont take that into consideration . We do, so does the Congressional Budget Office, try to estimate the immigration and legal or illegal, on gdp. If you look at the Congressional Budget Office has a detailed assessment of all things like that. We dont really have a way we do look at the finances in the aggregate of state and local governments in the hiring that they do, so thats something we look at. We wouldnt do a very specific assessment like that. I mean, cbo probably would, but we wouldnt do that. Thank you. Senator menendez of new jersey is recognized. Before i begin my questions i want to celebrate that in the past year, we have seen the first latino Federal Reserve governor and first ever latino Federal Reserve bank president. These are historic milestones that show we are finally making progress. Something i have been tat some time. The leadership of our economic institutions, so i want to applaud that. Mr. Chairman, i hope that progress can continue and extend to the rest of the Federal Reserve staff. Thank you. I agree with my friend the ranking member, when you tell a story, you should tell the whole story. Mr. Chairman, are you aware of the Washington Post february 27th article, that says, the economy is roaring and immigration is a key reason . I dont recall that, but i would have read it. Immigration has propelled the u. S. Job market further than just about anyone expected. Helping cement the countrys economic rebound from the pandemic as the most robust in the world. It goes on to say, economists and labor experts say the surge in employment was ultimately key to solving unprecedented gaps in the economy that threaten the countrys ability to recover from prolonged shut downs. Would you take issue with those statements . There are a lot of adjectives and adverbs you wouldnt see in fed world, but the take out the adjectives the story is i think broadly this, it is that there was a very significant increase in the size of the workforce last year and it was happening all during the year we were wondering what it was and it was really two things. It was labor force participation, but it was also immigration. If you look at the Congressional Budget Office numbers it makes sense because there was a lot of growth, wages were coming down, the economy is bigger, and thats those are probably and partly in part effect. Without making any judgments on immigration or immigration policy. Im not suggesting that. Im suggesting the facts are that we had 1010 or 11 million jobs going unfilled in our economy, they lacked the productivity that is necessary for success economically, and as part of that, clearly immigration helped fuel part of our revival coming out of the pandemic. In fact, those were the people who were the essential workers when the rest of us were staying home. I agree, we need to do what is necessary to have a regularized border, but i also think that just to create the context of immigration as a scourge is absolutely wrong. Let me turn to another question, in my view the sticky inflation weve been seeing in the housing sector is due to the housing shortage. The feds Monetary Policy reports restrictive zoning, high Interest Rates and tighter underwriting by banks. I would add to that list under funding of key hud programs that shore up and expand our supply of Affordable Housing. If the housing supply shortage continues to grow, are we likely to see continued housing inflation . Yes. We are. And housing is already becoming less and less affordable for low and middleincome americans. According to the National Low Income housing coalitions 2023 out of reach report a worker earning the minimum wage in new jersey would have to work two fulltime jobs to afford a modest one bedroom rental home at fair market rent. Do you agree that increasingly unAffordable Housing is a problem for the economy . I think there are two things going on. One is a longer term housing shortage and the other is the pandemic effects and the associated higher interests which are things that will pass through. When all that passes through and rates are normalized well still have the underlying housing shortage and its going to be causing upward pressure on housing prices. The Monetary Policy report noted, quote, home purchases by low income households have fallen disproportionately more because mortgage lenders impose maximums on the ratio of a borrows debt service to the borrows income. Im worried how this will interact with a proposed Capital Requirements proposal which according to analysis from the urban institute would increase the cost of mortgages for black, hispanic and low and income moderate borrowers. Given this, isnt there a risk that if the capital rules implemented without changes, that it could make it even harder for disadvantaged borrowers to obtain Home Ownership . There is a risk like that. Hopefully youre working to mitigate it. Yes. Thank you. Senator rounds from south dakota. Thank you, mr. Chairman. Chairman powell, welcome back. Look, first of all, ive appreciated the way youve approached the sessions in front of this committee and i understand your desire to stay as neutral as possible with regard to the politics involved in an election year. But i do have sp questions here specifically with regard to the basel iii end game proposal. An analysis of that proposal found that 97 were either opposing it or expressing substantial concerns. In the hearing last march on the Monetary Policy report, you stated that the Federal Reserve is a Consensus Organization and you said and i, quote, i will do everything i can possibly to do i will do everything i can possibly to bring people together in consensus and have a capital framework that could be broadly supported. My question to that is, do you currently believe that there is a consensus on this capital framework . I believe that we will have one. Im fairly confident that we will have such a consensus when we do move forward. So we could expect you will probably not call a vote on the proposal until you believe there is a consensus . I think thats right. Were just in the process of digesting the comments and then making the appropriate changes. Thank you. As you are aware, ive weighed in several times on the concerns i have with regards to basel iii end game. Including im concerned about the lack of transparency, the negative effects on mortgage lending and Home Affordability by disincentivizing banks from Offering High loan to value loans that primarily help firsttime home buyers and low to moderate income borrowers. Im concerned that proposal will make buying a home harder than it already is for many, and further down the road i fear that it could disincentivize mortgage lending from the largest banks, particularly with regard to the secondary market and their impact on Smaller Banks that do business with them. Would you be willing to withdraw the proposal or repropose with significant modifications, particularly addressing the concerns that i and others have on this committee raising specifically with regard to the impact im thinking of freddie and fannie in particular and what impact might be . What would you see as the process involving those particular issues . So on those issues were well aware of and very focused on those issues. We havent decided what to do about that, but we get it on those issues. In terms of process were not at the stage of making that decision i will say if it turns out to be appropriate and we get to that point for us to repropose parts or all of, then we wont hesitate to do so. Thank you. Makes me feel a little bit better because i think there are some very Serious Problems that would occur if the basel iii end game as proposed goes into effect, and i am hoping that the Federal Reserve will find a consensus on this and sounds like that may very well include some significant modifications if it were to be brought at all, is that a fair statement . I expect there will be material and broad changes to the proposal before it comes back to the committee for consideration. The board for consideration. Thank you. Lets just with regard to the economy today, limited level of price growth is believed to help facilitate economic expansion, reduce the risk of recession and help consumers and businesses plan. However, during the Biden Administration we saw inflation climb to 13 and those prices are now the new norm. I know that you make it a policy not to comment on the administrations fiscal policy, but it is well known that i really do believe that high inflation and high prices have been a direct result of President Bidens policies. Failed in many cases. That the Federal Reserve has and that Federal Reserve has limited tools to address some of the problems that these policies created. We talked about supply side versus demand side on these costs. What have been some of the unintended consequences from raising the federal funds rate as rapidly as you felt that you had to as the chair, as the committee . What are some of those . We talked about svb and the failure and their inability to look at treasuries and the increasing Interest Rates and so forth. Can you talk about the things youve seen that were negative with regard to trying respond to those high inflation reads . Yes. High Interest Rates are hard for businesses and hard for people. Theyre the thing that theyre the tool that we have to use to bring inflation down, and our job at this time when high inflation comes it is the feds job to restore price stability. You point to the losses in banks. That was a very substantial thing and the supervisors and that was us didnt get to that problem. We were aware of it but didnt appreciate it enough. Another surprise, though, is that we were able to get this far and get inflation down this quickly without seeing a big increase in unemployment. Thats just a great result. Thats a surprise not consistent with the historical record, but its a positive thing. Thank you. I would note that the only tools available were demand side tools. Yeah. Thats right. Thank you. Thank you, mr. Chairman. Senator warner of vas is recognized. Thank you, mr. Chairman. Great to see you. I would point out to my good friend of south dakota, i do think if we had gone back a year to 18 months ago nobody would have predicted the soft landing and i know youre not ready to declare victory by any means but the fact that flation has come down and some of the things like the chips bill and inflation bill and President Bidens policies kept the economy growth rate at the levels that have allowed you to bring down inflation without seeing a dramatic rise in unemployment and again, that will be something well probably have the opportunity to litigate over the next eight or nine months. I want to take my time on issues around less about Monetary Policy and more about regulation. You know, i think you can never presume were out of the woods on Financial Stability as we saw with the new York City Bank yesterday and the capital infusion. One thing i want to reraise today is nonbank lending, the fact that nonbank lending in terms of nonfinancial terms is exceeding regulated bank lending and maybe clear up that nonbank Financial Sector has done productive things in our society over the years, but when folks like former new york fed president dudley and fed governor grosner said that they had worries about this reliance on the nonbank Financial Sector could lead to Overall Economic lack of stability, i guess what do you think i got a threepart question. What do you think are the risks as we see this push out effect of more and more lending going outside the regulated to the nonbank sector . How much do we really know about these institutions . One of the things, you know, they have very smart sophisticated investors, but of those very smart sophisticated investors said we dont like the lending profile right now and we want you to not make additional loans for the next six to nine months, do you think our system would be able to pick up the slack . So, we have the regulated Banking System where youve got a lot of transparency, deposit insurance and access to, you know, the discount window and all those things. Regulation. If you go outside that, most of the funding that we see now in these folks is sophisticated investors who are actually limited partners, meaning they cant pull their money out. They signed a contract. Theyve funded these deals and so what you see now in the nonbank Financial Sector is a significantly its that kind of thing. It doesnt have the run risk. The point is, the bigger it grows and the more diverse it gets, it is happening outside the regulatory perimeter and you worry that when there is another crisis, youll be surprised but there will be ways that that financial structure can break down, and it does break down in ways we dont anticipate. So i think we need to be smart about the way about intermediation is absolutely moving out of the banks into the Capital Markets and into nonbank financial snoinstitutions. I think we need to be thoughtful understanding where the risks are emerging. That may rightfully say we dont want you to lend anymore for x period of time, but that may then at the moment of crisis mean that the lending will completely dry up. One of the things i never understood until i got a better explanation, why the large regulated banks werent more complaining about this nonbank lending, but as i got to understand a little bit more of the and again, im not criticizing on the nonbank lending but many of the regulated banks lend to these large institutions so they make money off of those relationships and maybe thats, again, an explanation of why theyre not being more critical. 40 seconds left but i would like to come back to another thing that we talked about a lot, and that is the question of use of the discount window. I believe one of the original tools that the fed had, i know banks say well, were concerned about the stigma. I have legislation that would require mandatory use of the discount window. I would love your comment on that. Also just the idea that having the mechanics of the discount window open, potentially even 24 7 because we saw with svb they didnt know how to use it, but two, if they wanted to use it in the nonbank hours could they get access . Theres a lot of work to do on the discount window. Youre right. It needs to be brought up technologically into the modern age. We need to do more to eliminate the stigma problem and make sure that banks are, you know, actually able to use it when they need to use it. And, you know, those things, thats a broad work program that were on right now and its very important. I know youre working on it. I look forward to working more and invite other colleagues. I thine out there. Youre not gone. Senator tillis of north carolina. Thank you, mark. I was about to take control, senator warner. Welcome, chair powell. If you have time after the hearing you ought to go by and see him. I dont want to disturb his nap. But thank you for being here. I want to get back on the basel iii proposal. The senators and i sent a letter indicating our concerns with the curren also worth noting that t number of organizations, the Diverse Group that are not normally aligned on policy, you got bank trades, National Housing conference, naacp, habitat for humanity, National Community reinvestment coalition, the list goes on and on, who have concerns about the current proposal. Heres my concern. I think were, you know, trying to make the best of what was foundationally a bad proposal. Im in the category of people who think that it should be reproposed. Because i think one of the reasons why i did no here. It was pretty clear to me before he ever got confirmed on the board that we were going to be in this place some months or years later, and here we are. I think that the industry felt the same way. All of these stakeholders. Some are in banking trade and some are on the other side of the spectrum. So i would like to cast my vote or provide some weight to the idea that we should repropose it. What we ought to do is talk about the reality of the prospect of increasing Capital Requirements doesnt concern me, i think the prior fed supervisor made made comments publicly that maybe we needed to raise capital standards, but what we did in this proposal and i heard in that dialog is lets deal with puts and takes. Lets talk about raising Capital Requirements, but lets also talk about reducing the cost of the Regulatory Burden today if we can do it responsibly. Theres no evidence of that in the current proposal, and i think that that may actually produce a different set of comments that would be instructive to a final proposal that i think realistically will include in increasing Capital Requirements. So over what time horizon do you think we would expect to either see try to make the best of this foundation or go back and take a look at it, at a new foundation and repropose it . You know, were going to work through as quickly as we can and should. Its more important to get it right than fast. Were not in ak this out over the course of this year. You know, if you take a look at the outsized costs of operational risks, the long list of concerns i have publicly and privately expressed on the current proposal, i think sometimes its easier to knock down a what i think is a Poor Foundation and build a better house, so again, just wanted to make that comment publicly. A question about shrink inflation, i tell you some of the words we come up with, but President Biden is using the idea of shrinkflation and, you know, chastising manufacturers for creating smaller Portion Sizes for potato chips, use that as one example, but if you have rising input, and youre in a marginal business to begin with and now youre saying you cant reduce the quantities, how is a business not making a profit make that work . You know, i mean, we see inflation as at the aggregate level as a mismatch between supply and demand. Yeah. As weve seen supply get better and demand cool off a bit, it was very hot coming out of the pandemic, we see inflation coming down. We saw food inflation between 2010 and 2021 at 18 over 11 years. Over the last three years, weve seen it at 21 . I think that we have an industry trying to provide products that consumers want, and now theyre being chastised for trying to figure out how to make the numbers work. This whole idea of shrinkflation is just confounding to me. I have a im going to subpolice something for the record, but i have a question, i think the share mentioned if i misunderstood this im sure the chair will clarify i thought in his opening comments he suggested that stock buybacks and paying out dividends were a key factor in inflation. Do you as a matter of policy see stock buybacks and dividends as one of the top five reasons were experiencing the inflation we have right now . First thing, i see stock buybacks and dividends as the same thing in a different form and i dont know i wouldnt comment on anything the chair even may have said. I just i would like to avoid that. I dont think im not going to ask you about policy because i think youre consistent on that. I cant imagine that if we decided to outlaw stock buybacks and dividend payments,at would have a material effect on inflation. Im not going to ask you to respond to that but there are some people that by inference you can assume that thats they think that would be helpful. I for one am not an economist, but i cant imagine it would be one of the things that would make your job easier. Can you at least opine on that . Stock buybacks and dividends . Yeah. That would be a change in our Capital Markets. Me too. Shareholders, this is just money going back to shareholders from companies that have nothing to do with it. Thank you, mr. Chair. Well done, sir. Senator smith of minnesota is recognized. Thanks m chair. Thank you, chair powell. Great to see you here again. I appreciate your testimony. Im going to focus my questions on housing and Housing Affordability. As you have well pointed out, overall price have moderated considerably since the fed began raising rates, yet housing costs have remained stubbornly resilient or high, leaving us really no closer to addressing the affordability crisis that we have well before the pandemic. Shortly before the fed began tightening, chair powell, you came before the committee, i asked you about how higher Interest Rates could exacerbate this unaffordability problem that we have by making mortgages more expensive and also hindering housing development, and i think at the time you argued we have an excess Housing Demand during the pandemic and that was kind of at the root of higher costs and that your goal, the feds goal, was to bring demand closer in line with supply. So my question, my first question is this, so the Housing Market has cooled significantly over the last two years. Is it your view that we it has cooled enough so that housing supply and demand is better in balance and following, given feds limited tools, understanding that, at what point will you think that youve done all that you can to lower Housing Demand . My view is that were well past time in congress to take action on the housing supply side, but im interested in how you see this dynamic . Were not focused so much on housing and housing inflation. Were really focused on the aggregate which is goods and nonHousing Services. Thats more than half of the pce inflation. The thing there are things in the housing sector that we didnt fully anticipate. One of them was that people in very low Interest Rate homes with very low Interest Rate mortgages arent selling, so the quantity of homes thats available is incredibly low and thats why very little in the way of existing home sales be and that drives up existing home sale prices but new home sale prices. Again, theres two sets of factors. The longer run issue but then the factors associated with the pandemic and the inflation and our response to it. I think as the overall inflation continues to come down and rates then come down, youll see the Housing Market start to heal and get better and Housing Affordability should go up again, but youre still going to be left with the longer term problem of supply. Right. I think thats right. I mean what i see in minnesota is that higher Interest Rates are, of course, driving up the cost of construction and theyre driving up the cost of Mortgage Rates. Youre seeing people who arent leaving a house that maybe is too small for them because they cant afford it. The housing, just as youre saying, people are staying in their homes longer. And so theres sort of this double whammy of construction slowing at the same time that there is this great need to address housing supply. One of the things that, you know, is happening, a recent analysis by zillow found the monthly mortgage payment on a on a let me get this right. A recent analysis found the monthly mortgage payment on a 343,000 home assuming 10 down payment, is about 2200 a month. Okay. So 2200 a month, that means the cost of owning a typical home is higher than 30 of median income, which is kind of the measure of affordability. And so weve got a lot of issues of people being priced out of the home market. From where i sit, the cumulative issues of higher Mortgage Rates are just really a challenge. And until we can get to the bottom of that, were going to have a hard time addressing the Housing Affordability challenge that we have. Would you like to comment on that . Yes, i agree with all of that. We dont actually home prices dont actually go into the calculation of inflation. Its really rents and owners equivalent rent. I agree, the Housing Market is in a very, very difficult situation. And the sooner we can get back to price stability and restore Interest Rates to lower levels, the sooner it can start healing. Yeah. Thank you. Thank you, mr. Chair. Tnk you. Senator kennedy of louisiana is recognized. Chairman, thank you for being here. Thank you for your services. I think ive said before, i believe you and your team probably saved the economy during the economic meltdown by establishing the currency swap line. So, i thank you for that. You gave an interview, mr. Chairman, on february 4th this year to cbs, 60 minutes, i think, is that right . Yep. I ordered a transcript of that hearing, which i read. I learned a lot reading it. You were asked a question about inflation. And you asked a question about prices declining. And here was your response. Id like to quote you, if thats okay. Quote, so the prices of some things will decline, others will go up. But we dont expect to see a decline in the overall price level. That doesnt tend to happen in economies, except in very negative circumstances. End quote. Did i quote you accurately . I believe you did. Okay. Later in the interview, you were asked about the national debt. Do you recall that . I dont actually, but im sure thats right. At least according to the transcript, your answer was, and, again, im quoting you, in the long run, the United States is on an unsustainable fiscal path. The u. S. Federal governments on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy. So it is unsustainable. End quote. Do you remember saying that . Ive said that many times. I think thats uncontroversial. Okay. Later in the interview, you said, i want to quote, you know, i would just say this, integrity is priceless. And at the end, thats all you have. And we plan on keeping ours, end quote. Is that accurate statement . Yes, it is. Okay. Thats why i want to ask you about the fdic. Have you read the article in the wall street journal entitled, quote, strip clubs, loved photos and a boozy hotel, the toxic fdic bank regularity, end quote. I think i did read that. Did you read the article, fdic lawyer stayed on pay for weeks after child porn arrest, end quote . I did not read that. Did you read the article entitled, fdic chair known for temper, ignored bad behavior in workplace, end quote . Honestly, i i read so much. I remember the broad story, but not particular stories. Did you read the article in which a former female employee of the fdic allegedly recalled her male colleagues saying, women needed to use sex to get ahead at the fdic . I do not recall that. Okay. Did you read the article in which a female Risk Management examiner during a lunch with a male examiner had said she had become friendly with that examiner and he complained to her about his marriage, allegedly, telling her he wasnt getting enough sex and she allegedly said, quote, obviously if i walk or he allegedly said, obviously if i walked into this office and you were naked, id fuck you right here, end quote. I do not remember that and i think i would. Okay. Do you remember the article about mr. Randall ditch, a supervisory examiner in denver, who allegedly was demoted in 2014 to a nonsupervisory position in tulsa after having had sex twice with a subordinate female employee and a number of other rule violations . In this article it says allegedly mr. Ditch urged the woman to not, quote, be a pussy, close quote, and drink a shot of whisky during work hours, the records show. Do you recall that . I do not recollect that. Heres my question, i could go on for a while you could go on but youre not going to go on. Youre past your five minutes. Do your question once. Sir your time has already expired. You did five minutes, consumed the whole five minutes with your monologue of you did six minutes. I timed it. I asked you did six months. Senator kennedy, for months i have let you go way over five minutes. You get on your question but you did six minutes. I chair this committee. I understand. You still did six minutes. Check the record. Youre going to be at six minutes in 15 seconds if you continue this argument. Youre going to ask your question. Ill ask my question. I just wanted the record to be clear, mr. Chairman. Mr. Chairman, in light of these allegations, if theyre proven, how can the fdic lead this charge for basel endgame 3, which is going to turn the Banking Community upside down . I dont know how i would make the connection to basel 3. Its deeply troubling things, but your point was, if proven. I mean, i think we have to decide basel 3 on its merits. Were not looking to the fdic to lead this, by the way. Were looking to the fed to do what the fed thinks is right. Thats what were going to do. We dont they dont look to us. Thank you, chairman powell. Thank you, chair and chair powell. Good to see you in person and thanks for the time to talk. I want to pick up a little where senator smith was in relationship to housing, Housing Affordability, and hopefully draw a little bit on the point you were making about rents. It definitely is an important crisis in my state of california. And i know across the country where at least according to the California Department of housing and urban development, renters in san diego are paying about 50 of what is theyre spending more than 50 of what they consider affordable and statewide the majority of renters, more than 3 million households, are spending more than 30 towards rent. Nearly onethird, more than 1 in 5 million households pay more than 50 of their income towards rent. And the chicago fed president goolsbee even referred to housing as the missing piece of the puzzle in the feds path to lower inflation. So, to the continued conversation, and i know a point that youve made, about how inflation has a disproportionate impact on lower income households who are focused on spending more of their monthly budgets on housing. Is there how is the feds Monetary Policy impacting the supply of Affordable Rentals . I dont know that were affecting the supply of Affordable Housing. If you think of Affordable Housing as something thats connected to some sort of government program, we dont thats not our bailiwick. I mean, clearly Interest Rates do affect the affordability of housing, though. There was a key point you made in our earlier, i think, reference about and in your responses to senator smith about the Monetary Policy in the calculation of rents. Can you spend a couple just briefly talk about that. I have one last issue i want to get to before i run out of time. Its hard to talk about it briefly. Its actually very conceptually challenging to think about housing inflation. Do you include the cost of financing it . Do you include the sale prices . And the answer is, we dont. We convert ownership into an imputed rent. Thats twothirds of homes are owned. And then we actually measure rents. But leases only turn over once a year, so you look at market rents and, you know, whats happening with newly signed leases may be very different from what was happening a year ago. Its complicated. The good thing is, we understand all that and we look through that. We look at Housing Services overall as one of three important category along with nonservices and inflation. Thank you for that. And i in the line of affordability and housing, again, very general, i think, to the broad Monetary Policy an