    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

                              MONETARY POLICY AND
                            THE STATE OF THE ECONOMY

    =======================================================================

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                               FEBRUARY 27, 2018

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 115-76

     [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                                  __________

                         U.S. GOVERNMENT PUBLISHING OFFICE
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
    BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
    BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
    BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
    STEVE STIVERS, Ohio                  AL GREEN, Texas
    RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
    DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
    ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
    ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
    ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
    KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
    LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
    SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
    ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
    BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
    MIA LOVE, Utah                       DENNY HECK, Washington
    FRENCH HILL, Arkansas                JUAN VARGAS, California
    TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
    LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
    DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
    BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
    ALEXANDER X. MOONEY, West Virginia
    THOMAS MacARTHUR, New Jersey
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    DAVID KUSTOFF, Tennessee
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                         Shannon McGahn, Staff Director

                               C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        February 27, 2018............................................     1
    Appendix:
        February 27, 2018............................................    63

                                   WITNESSES
                           Tuesday, February 27, 2018

    Powell, Hon. Jerome H., Chairman, Board of Governors of the
      Federal Reserve System.........................................     5

                                    APPENDIX

    Prepared statements:
        Powell, Hon. Jerome H........................................    64

                  Additional Material Submitted for the Record

    Ellison, Hon. Keith:
        Article from Reveal News entitled, ``For people of color,
          banks are shutting the door to homeownership''.............    69
    Maloney, Hon. Carolyn B.:
        Article from American Banker entitled, ``We are not looking
          to relax regulation: Fed's Quarles''.......................    82
    Powell, Hon. Jerome H.:
        Written responses to questions for the record submitted by
          Representative Royce.......................................    86
        Written responses to questions for the record submitted by
          Representative Sherman.....................................    90
        Written responses to questions for the record submitted by
          Representative Wagner......................................    93

                              MONETARY POLICY AND
                            THE STATE OF THE ECONOMY

                                  ----------

                           Tuesday, February 27, 2018

                         U.S. House of Representatives,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10:05 a.m., in
    room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
    [Chairman of the committee] presiding.
        Present: Representatives Hensarling, Royce, Lucas, Posey,
    Luetkemeyer, Stivers, Hultgren, Pittenger, Wagner, Barr,
    Rothfus, Tipton, Williams, Poliquin, Love, Hill, Emmer, Zeldin,
    Loudermilk, Mooney, Davidson, Budd, Kustoff, Tenney,
    Hollingsworth, Waters, Maloney, Sherman, Meeks, Capuano, Clay,
    Lynch, Scott, Green, Moore, Ellison, Perlmutter, Foster,
    Kildee, Delaney, Sinema, Beatty, Heck, Vargas, Gottheimer,
    Gonzalez, Crist, and Kihuen.
        Chairman Hensarling. The committee will come to order.
        Without objection, the Chair is authorized to declare a
    recess of the committee at any time. All members will have 5
    legislative days within which to submit extraneous materials to
    the Chair for inclusion in the record.
        This hearing is for the purpose of receiving the semiannual
    testimony of the Chair of the Board of Governors of the Federal
    Reserve System on monetary policy and the state of the economy.
        I now recognize myself for 3-1/2 minutes to give an opening
    statement.
        Notwithstanding the greatest monetary and fiscal stimulus
    in our Nation's history, the economy has limped along for 8
    years, averaging only 1.6 percent GDP growth. Wages remained
    stagnant and personal savings failed to recover from the 2008
    financial crisis.
        A new phrase was coined by left-leaning academics in an
    attempt to rationalize the phenomena, namely secular
    stagnation. A far more accurate and descriptive phrase, though,
    is high taxes and heavy-handed regulatory policy.
        Fortunately, with the election of Donald Trump and the
    passage of the Tax Cuts and Jobs Act, that has all changed.
    Unemployment is now at a 17-year low. Wage growth is the
    fastest in almost a decade. Companies all over America are now
    announcing bonuses to their employees and expansions in their
    communities. Economic growth is once again averaging 3 percent.
        However, there are some concerns. We all recognize that
    there has been great volatility in our equity markets recently,
    although I note the S&P 500 is still up more than 14 percent
    since last year.
        There is clearly concern now whether the Fed can
    successfully unwind a historically unbalanced balance sheet
    after a decade of radically unconventional monetary policy and
    artificially low interest rates. This was not particularly an
    issue when the economy was stuck in low gear, but now that the
    economic transmission has been shifted into high gear, it
    clearly is an issue.
        With that backdrop, we welcome you, Chairman Powell, to
    your first of many Humphrey-Hawkins hearings. Please know we
    are all rooting for you, for much is at stake.
        As we begin a new era in Federal Reserve leadership, I
    think it is a good time to reestablish Congressional
    expectations. Now more than ever the Fed must commit to a
    credible, orderly, and well-communicated normalization plan.
        The Fed must do an even better job of communicating clearly
    to market participants, all the variables used to conduct
    monetary policy and their relative weightings and interactions.
    Certainly it is a positive sign that the Fed has begun to
    compare their policies with known policy rules so that the
    public can better evaluate their performance.
        Next, monetary policy must remain independent but the Fed
    must also remain accountable to Congress, which incidentally
    created it and has the responsibility of coining money and
    regulating its value under our Constitution.
        Furthermore, it is critical that the Fed stays in their
    lane. Interest on reserves, especially excess reserves, is not
    only fueling a much more improvisational monetary policy, but
    it has fueled a distortionary balance sheet that has clearly
    allowed the Fed into credit allocation policy, where it does
    not have business. Credit policies are the purview of Congress,
    not the Fed.
        When Congress granted the Fed the power to pay interest on
    reserves, it was never contemplated or articulated that IOER
    (interest rate on excess reserves) might be used to supplant
    FOMC (Federal Open Market Committee). If the Fed continues to
    do so, I fear that its independence could be eroded.
        Finally, in addition to its monetary policy
    responsibilities, we all know the Fed has an outsized
    prudential regulator role vastly expanded by Dodd-Frank. This
    responsibility is clearly not designed to be independent of
    Congress and must be made subject to appropriations, as are
    other prudential regulators.
        Additionally, formal rulemaking must not be issued for de
    facto rulemaking through guidance, and all formal rulemaking
    must be subject to rigorous statutory cost-benefit analysis so
    as to not unduly hamper economic growth and the hopes and
    dreams of millions.
        In closing, regardless of the exigencies of 2008, monetary
    policy is not and can never be a substitute for sound fiscal
    policy.
        Chairman Powell, we look forward to a prudent path to
    normalization where interest rates are once again market-based
    and credit is allocated to its most efficient use.
        I now yield 4 minutes to the Ranking Member for an opening
    statement.
        Ms. Waters. Thank you, Mr. Chairman, and welcome, Chairman
    Powell. I look forward to your testimony today on monetary
    policy, recent economic developments, and the outlook for our
    economy.
        I am concerned that the hard-earned economic recovery,
    which came as a result of policies and reforms put in place by
    President Obama, Democrats in Congress, and the Federal
    Reserve, will be undermined by the reckless and misguided
    policies of this President and our Congressional Republicans.
        This President and his allies in Congress are working every
    day to roll back the critical protections for consumers,
    investors, and the economy that Democrats put in place in the
    Dodd-Frank Wall Street Reform and Consumer Protection Act.
        As they move to take an axe to Dodd-Frank, they seemingly
    have forgotten about the tremendous economic harm that resulted
    from the financial crisis and appear to be perfectly willing to
    pave the way right to another crisis.
        With their tax scam, Republicans have engineered a massive
    giveaway to corporations and the ultra-rich at the expense of
    hard-working Americans. The tax scam balloons the national debt
    by $1.8 trillion, gives corporations a $1.3 trillion tax break,
    and will eventually raise taxes on 86 million American
    families.
        Despite the huge windfall for corporations, most are not
    raising wages, but are instead buying back their own stock to
    boost share prices. Some corporations are giving one-time
    bonuses for optics, but these one-time bonuses represent a tiny
    fraction of the windfall the corporations will pocket.
        On top of that, the latest Trump budget request is, again,
    a cruel, senseless proposal that would be deeply harmful to
    millions of families, seniors, veterans, and persons with
    disabilities. The budget request slashes the social safety net,
    cutting billions of dollars in funding for supplemental
    nutrition assistance and health care and housing programs.
        These policies show that Donald Trump simply has no
    interest in standing up for Americans who need a hand up.
    Instead, he has put forth a series of harmful policies that
    tell families and communities that they are on their own.
        Our majority colleagues have also launched a full-fledged
    legislative assault on the Federal Reserve. The majority is
    pushing damaging legislative proposals that roll back
    constraints on the influence of commercial banks within the
    Federal Reserve System, eliminate tools that proved critical to
    the Federal Reserve's support of the economy following the
    financial crisis, undermine the Federal Reserve's focus on
    employment, and eliminate its independence from the broken
    Congressional appropriations process.
        The majority is also using the Federal Reserve as a piggy
    bank to pay for the cost of legislation like the latest short-
    term spending measure and now H.R. 4296, which will be on the
    floor today. These Republican efforts to undermine the Fed
    diminish its ability to support American workers if we face
    another crisis.
        Chairman Powell, I look forward to hearing your views on
    the economy and the path to sustaining the economic progress
    that was set in motion during the Obama Administration.
        I yield back the balance of my time.
        Chairman Hensarling. The gentlelady yields back.
        The Chair now recognizes the gentleman from Kentucky, Mr.
    Barr, the Chairman of the Monetary Policy and Trade
    Subcommittee, for 1-1/2 minutes.
        Mr. Barr. Welcome, Chairman Powell.
        Since the 2007 and 2009 financial crisis, the Federal
    Reserve's distortionary balance sheet has exploded from just
    under $1 trillion to more than $4.5 trillion, injecting new and
    unknown risks into the economy.
        Clearly, whether you believe this unprecedented Government
    intervention into our economy had merit or not, it has
    distorted prices of key assets like housing, stocks, bonds, and
    treasuries. That was the intention.
        Fortunately, the Fed has begun to unwind these distortions,
    and I hope that they stick to their plan, enabling a more free
    market environment that, like the recent tax cuts and
    regulatory relief, will help foster economic growth and
    opportunity for all.
        Over recent weeks, we have seen more than usual levels of
    market volatility. Without question, Chairman Powell, this
    volatility is attributable to the fact that no Fed Chairman has
    ever inherited the task you have before you: The job of
    unwinding the most unprecedented and unconventional monetary
    experiment in the history of central banking.
        Your task is to continue to unwind the Fed's asset
    purchases, gradually and predictably return to market-based
    interest rates, and remove monetary distortions from the
    economy without producing excessive market disruption.
        This is a serious responsibility, but at least the Fed now
    has the backdrop of a strong economy and faster economic growth
    from tax cuts so that it can achieve this very difficult task.
        I personally want to commend you, Chairman Powell, for
    leading the way on normalization and I encourage you to
    continue in this pursuit. I also commend your commitment to
    tailoring financial regulations for community financial
    intuitions and rightsizing our regulations.
        I look forward to your testimony and wish you the best.
        Chairman Hensarling. Time of the gentleman has expired.
        The Chair now recognizes the gentlelady from Wisconsin, Ms.
    Moore, the Ranking Member of the Monetary Policy and Trade
    Subcommittee, for 1 minute.
        Ms. Moore. Thank you so much, Mr. Chairman.
        Thank you, Chairman Powell, for attending today. I look
    forward to your testimony and getting to know you through your
    tenure as Chairman.
        You are taking over the Federal Reserve at a very
    precarious time. Your predecessor has talked about slowly
    tightening rates as employment has improved and thinking it was
    a return to normalcy. I am interested in hearing if that means
    an emphasis on increasing rates and/or unwinding the portfolio.
        Your tenure comes at a time when the GOP tax bill will only
    make your task more difficult, I believe, as changes to health
    care may increase inflation for coverage.
        The GOP tax bill is a windfall for shareholders that will
    untether the real economy that most of us live in, as distinct
    from Wall Street, leaving you stuck between competing problems:
    A contracting real economy and growing asset bubbles, with
    minimum room to lower rates if necessary.
        We should thank Dodd-Frank that has buttressed the
    financial system and that we should hold on for, perhaps, a
    bumpy ride. I hope your term is successful and I look forward
    to your testimony.
        I yield back. Thank you, Mr. Chairman.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        Today we welcome the testimony of the Honorable Jerome H.
    Powell. This is the first time that Chairman Powell has
    appeared before this committee. It will not be the last time he
    appears before this committee.
        Chairman Powell took office as Chairman of the Board of
    Governors of the Federal Reserve System on February 5th, 2018,
    for a 4-year term. He has previously served as a member of the
    Board of Governors and took office on May 25th, 2012. Mr.
    Powell also serves as Chairman of the Federal Open Market
    Committee.
        Prior to his appointment to the Board, Chairman Powell was
    a Visiting Scholar at the Bipartisan Policy Center, as well as
    a Partner of the Carlyle Group. Chairman Powell has previously
    served as an Assistant Secretary and as an Undersecretary of
    Treasury under President George H.W. Bush. Prior to joining the
    Administration, he worked as an attorney and an investment
    banker in New York.
        Chairman Powell received an A.B. in politics from Princeton
    University and earned a law degree from Georgetown University,
    where he was the editor-in-chief of the Georgetown Law Journal.
    Without objection, the witness' written statement will be made
    part of the record.
        Chairman Powell, again, welcome, and you are now recognized
    to give an oral presentation of your testimony.

                   STATEMENT OF HON. JEROME H. POWELL

        Mr. Powell. Thank you very much, Mr. Chairman. Thank you,
    Ranking Member Waters and members of the committee.
        I am pleased today to present the Federal Reserve's
    Semiannual Monetary Policy Report to the Congress. On the
    occasion of my first appearance before this committee as
    Chairman of the Federal Reserve, I want to begin by expressing
    my appreciation for my predecessor, Chair Janet Yellen, and her
    important contributions. During her term as Chair, the economy
    continued to strengthen and Federal Reserve policymakers began
    to normalize both the level of interest rates and the size of
    the balance sheet.
        Together, Chair Yellen and I have worked to ensure a smooth
    leadership transition and provide for continuity in monetary
    policy.
        I would also like to express my appreciation for my
    colleagues on the Federal Open Market Committee.
        Finally, I want to affirm my continued support for the
    objectives assigned to us by Congress: Maximum employment and
    price stability, and for transparency about the Federal
    Reserve's policies and programs. Transparency is the foundation
    for our accountability, and I am committed to clearly
    explaining what we are doing and why we are doing it.
        Today, I will briefly discuss the current economic
    situation and outlook before turning to monetary policy.
        The U.S. economy grew at a solid pace over the second half
    of 2017 and into this year. Monthly job gains averaged 179,000
    from July through December, and payrolls rose an additional
    200,000 in January. This pace of job growth was sufficient to
    push the unemployment rate down to 4.1 percent, about three-
    quarters of a percentage point below that of a year earlier,
    and the lowest rate since December 2000.
        In addition, the labor force participation rate remained
    roughly unchanged on net, as it has for the past several years.
    That is a sign of job market strength, given that retiring baby
    boomers are putting downward pressure on the participation
    rate.
        Strong job gains in recent years have led to widespread
    reductions in unemployment across the income spectrum and for
    all major demographic groups. For example, the unemployment
    rate for adults without a high school education has fallen from
    about 15 percent in 2009 to 5-1/2 percent in January of this
    year, while the jobless rate for those with a college degree
    has moved down from 5 percent to 2 percent over the same
    period.
        In addition, unemployment rates for African Americans and
    Hispanics are now at or below rates seen before the recession,
    although they are still significantly above the rate for
    whites.
        Wages have continued to grow moderately, with a modest
    acceleration in some measures, although the extent of the
    pickup in wages likely has been damped in part by the weak pace
    of productivity growth in recent years.
        Turning from the labor market to production, inflation-
    adjusted GDP rose at an annual rate of about 3 percent in the
    second half of 2017, a full percentage point faster than its
    pace in the first half of the year.
        Economic growth in the second half was led by solid gains
    in consumer spending, supported by rising household incomes and
    wealth and upbeat sentiment.
        In addition, growth in business investment stepped up
    sharply last year, which should support higher productivity
    growth in time.
        The housing market has continued to improve slowly.
        Economic activity abroad has also been solid in recent
    quarters, and the associated strengthening in demand for U.S.
    exports has provided considerable support for our manufacturing
    industry.
        Against this backdrop of solid growth and a strong labor
    market, inflation has been low and stable. In fact, inflation
    has continued to run below the 2 percent rate that the FOMC
    judges to be most consistent over the long run with our
    Congressional mandate.
        Overall, consumer prices, as measured by the price index
    for personal consumption expenditures, or PCE inflation, as we
    say, increased 1.7 percent in the 12 months ending in December,
    about the same as in 2016.
        The core PCE price index, which excludes the prices of
    energy and food items, and is a better indicator of future
    inflation, rose 1.5 percent over the same period, somewhat less
    than in the previous year. We continue to view some of the
    shortfall in inflation last year as likely reflecting
    transitory influences that we do not expect will repeat.
        Consistent with this view, the monthly readings were a
    little bit higher toward the end of the year than in earlier
    months.
        After substantially easing during 2017, financial
    conditions in the United States have reversed some of that
    easing over the past month. At this point, we do not see these
    developments as weighing heavily on the outlook for economic
    activity, the labor market, or inflation. Indeed, the economic
    outlook remains strong.
        A robust job market should continue to support growth in
    household incomes and consumer spending. Solid economic growth
    among our trading partners should lead to further gains in U.S.
    exports, and upbeat business sentiment and strong sales growth
    will likely continue to boost business investment.
        Moreover, fiscal policy has become more stimulative. In
    this environment, we anticipate that inflation on a 12-month
    basis will move up this year and stabilize around the
    committee's 2 percent objective over the medium term. Wages
    should increase at a faster pace as well. The committee views
    the near-term risks to the economic outlook as roughly
    balanced, but we will continue to monitor inflation
    developments closely.
        Turning to monetary policy, the Congress has assigned us
    the goals of promoting maximum employment and stable prices.
    Over the second half of 2017, the FOMC continued to gradually
    reduce monetary policy accommodation. Specifically, we raised
    the target rate for the Federal funds rate by a quarter
    percentage point at our December meeting, bringing the target
    to a range of 1-1/4 percent to 1-1/2 percent.
        In addition, in October, we initiated a balance sheet
    normalization program to gradually reduce our securities
    holdings, and that program has proceeded quite smoothly. These
    interest rate and balance sheet actions reflect the committee's
    view that gradually reducing monetary policy accommodation will
    sustain a strong labor market, while fostering a return of
    inflation to 2 percent.
        Engaging the appropriate path for monetary policy over the
    next few years, the FOMC will continue to strike a balance
    between avoiding an overheated economy and bringing PCE price
    inflation to 2 percent on a sustained basis.
        While many factors shape the economic outlook, some of the
    headwinds the U.S. economy faced in previous years have turned
    into tailwinds. In particular, fiscal policy has become more
    stimulative, and foreign demand for U.S. exports is on a firmer
    trajectory.
        Despite the recent volatility, financial conditions remain
    accommodative. At the same time, inflation remains below our 2
    percent longer run objective. In the committee's view, further
    gradual increases in the Federal funds rate will best promote
    attainment of both of our objectives.
        As always, the path of monetary policy will depend on the
    economic outlook as informed by incoming data.
        In evaluating the stance of monetary policy, the FOMC
    routinely conducts monetary policy rules that connect
    prescriptions for the policy rate with variables associated
    with our mandated objectives. Personally, I find these rule
    prescriptions quite helpful.
        Careful judgments are required about the measurement of the
    variables used in these rules, as well as about the implication
    of the many issues that the rules do not take into account.
        I would like to note that this monetary policy report
    provides further discussion of policy rules and their role in
    our policy process, extending the analysis we introduced last
    July.
        Thank you very much, and I look forward to taking your
    questions.
        [The prepared statement of Mr. Powell can be found on page
    64 of the appendix.]
        Chairman Hensarling. Thank you, Chairman Powell.
        The Chair now yields to himself for 5 minutes.
        Chairman Powell, in your statement, you used the term
    ``normalization.'' I would like to explore that for a moment,
    and particularly with respect to interest on excess reserves.
    Is our expectation, should it be, that IOER is the new primary
    monetary policy tool, or will it instead be the fire
    extinguisher behind the glass that you break out in times of
    emergency? What should be our expectation?
        Mr. Powell. Mr. Chairman, interest on excess reserves is
    currently the principal policy tool that we use to keep the
    Federal funds rate in the range that we designate. We have not
    made a decision in the longer run whether that will continue to
    be our framework or whether we will return to something more
    like what we did before the crisis.
        I don't have a schedule for--I don't expect to be returning
    to that decision in the near term. I would just say that our
    current approach seems to be working very well. It gives us
    control over rates, and the market seems to understand it.
        Chairman Hensarling. It remains an open question?
        Mr. Powell. In the long run. The long-run operating
    framework, does remain open, yes.
        Chairman Hensarling. OK. As you heard in my opening
    statement, it still remains a concern. You would be hard-
    pressed to find in the Congressional Record or any testimony
    from members of the Federal Reserve at the time Congress
    granted this power that it would be used to supplant open
    market operations of the FOMC. I trust we will be having
    further discussions about that.
        With respect to normalization, I think you have said
    publicly that you expect the new normal, with respect to the
    size of the balance sheet, to be roughly $2.5 trillion to $3
    trillion and get there over 3 to 4 years. Do I understand that
    correctly, Mr. Chairman?
        Mr. Powell. Yes.
        Chairman Hensarling. OK. As I understand it, though, I have
    not been able to see on the public record the expectation with
    respect to the composition of the balance sheet. I believe that
    currently you are carrying $2.4 trillion of treasuries, $1.8
    trillion of mortgage-backed securities. Is our expectation--
    that is roughly back of the envelope, one-third, two-thirds
    ratio. Is it your intention to keep that same ratio of
    mortgage-backed securities?
        Again, many of us are concerned about the possibility of
    the Fed involved in credit allocation decisions. Because right
    now, I don't really see a glide path to a treasuries-only
    balance sheet.
        Mr. Powell. No, sir. Our intention over the long term is
    that the balance sheet would be no larger than it needs to be
    to implement monetary policy, and that it would consist
    primarily of treasury securities.
        We purchased the mortgage-backed securities in the
    aftermath of the crisis. That was an unusual practice, and it
    was something that we did in unusual circumstances. Those will
    run off over time, and I don't expect that we would use that
    tool again, other than in a very severe situation.
        Chairman Hensarling. The Monetary Policy Report that came
    out days ago shows the balance sheet roll off caps. What I am
    having a little trouble with is, as I look at the charts in the
    report, Mr. Chairman, you don't seem to have sufficient MBS
    (mortgage-backed security) redemptions that allow you to reach
    your $20 billion runoff pace.
        As I read the charts, I think the expectation is by the end
    of the year, we are looking at a $50 billion balance sheet roll
    off. But as of today, I don't think you have sufficient
    treasuries in MBS to do that. How do you achieve it?
        Mr. Powell. In the case of mortgage-backed securities, the
    roll off is less predictable. Of course with treasuries, you
    know when they are going to mature and you can really see what
    that roll off is going to be. With mortgage-backed securities,
    roll off will depend on the level of interest rates and the
    level of people refinancing their mortgages.
        As rates go up, refis will go down and you will see slower
    roll off--
        Chairman Hensarling. But should the public expect, by
    year's end, a $50 billion roll off?
        Mr. Powell. No, I would say that the public should expect
    that there will be a consistent substantial roll off this year
    and the next year, that over the period of maybe 4 years will
    get us back to something approaching a new normal. I don't know
    that you can say it will be--
        Chairman Hensarling. But we don't know the exact pace.
        Mr. Powell. Yes, and I don't think that the--the caps are
    not going to be binding in the case of the MBS.
        Chairman Hensarling. My time is starting to wind down. I
    would like to explore inflation targeting. In your testimony,
    it appears the Fed is keeping to their 2 percent inflation
    target. I am still trying to--I struggle with how this is
    commensurate with a statutory mandate for achieving price
    stability.
        But I also saw from the FOMC minutes, the most recent
    minutes, that there was at least discussion about moving from
    the 2 percent target to a target range. At least 2 percent is a
    linear function. A range, obviously, is not.
        I am really struggling with how is this commensurate with
    price stability? Some commentators are calling for a 3 percent,
    4 percent target.
        Two questions, number one, do we have an expectation the
    Fed will move from its 2 percent target? At some point, at 3
    percent, 4 percent, 5 percent inflation targeting, have you
    violated your price-stability mandate?
        Mr. Powell. Our current framework says that the committee
    would be concerned with sustained or persistent deviations of
    inflation above or below 2 percent. We understand that
    inflation is going to be buffeted by various factors, and that
    it may not be exactly at 2 percent. It will be above; it will
    be below. We see it as a symmetric objective.
        I would say that framework is working. The market
    understands it. We have been trying to get up to 2 percent. But
    generally speaking, inflation has been low and stable for 15 or
    20 years now.
        Chairman Hensarling. My time has long since expired.
        The Chair now recognizes the Ranking Member for 5 minutes.
        Ms. Waters. Thank you very much.
        Chairman Powell, with a permanent voting seat on the FOMC,
    and its role in supervising some of the largest and most
    complex financial institutions in the country, the president of
    the New York Federal Reserve has one of the most important
    economic policymaking roles in the Nation.
        Bill Dudley will step down this year. The search for his
    replacement is under way. Historically, the New York Fed's
    close proximity to Wall Street has led to the selection of an
    individual with close ties to the financial sector.
        In your view, how important is it that the individual
    chosen is a diverse candidate, with demonstrated independence
    from Wall Street and a strong commitment to the Fed's maximum
    employment mandate and regulatory responsibilities?
        What steps is the board taking to ensure that candidates
    from diverse gender, racial, and ethnic backgrounds are given
    due consideration? If diverse candidates are not afforded due
    consideration, are you prepared to exercise your power as Chair
    to reject such candidates to serve as the next president of the
    New York Fed?
        I know you have a lot on your plate, but I have to put this
    question to you because we have to do better about diversity,
    in particular at the highest levels. Not only am I looking at
    what is happening with the New York Fed and the possibility
    there, but we have to look at our own Fed, and think about how
    diverse is it at the top levels, management levels. Help me
    out. What do you think about this?
        Mr. Powell. Thank you, Ranking Member Waters. I have been
    involved. This is the seventh process to select a reserve bank
    president that I have been involved in since I joined the Fed
    in 2012, so I am very familiar with the way the process works.
        We always insist that the search committee, which consists
    of the B and C directors of the Reserve Bank, hire a national
    search firm. We always insist--and they don't need to be pushed
    into this, this is something they want to do--we always insist
    that there is a highly diverse candidate pool and that diverse
    candidates are given serious consideration and every chance to
    become the successful participant in that process.
        I can absolutely guarantee you that that will continue to
    be the case. We will always have diverse candidates. They will
    always have a fair shot.
        I cannot in any individual case guarantee that there will
    be a diverse outcome, but I can guarantee that the process will
    be working in that direction.
        Ms. Waters. I appreciate that. I am sure that you are
    committed to that. But the diverse candidate question is a
    question that many of us have, and we don't know that there has
    been consideration for diverse candidates with these very, very
    important positions. I am wondering where do the
    recommendations come from? How is the outreach done and how can
    you ensure that there are diverse candidates to be considered?
        Mr. Powell. Different Reserve Banks have done new and
    different things. We have really raised our game in this area.
    For example, the New York Fed has done extensive outreach to
    community groups and of that nature, universities and all sorts
    of things around the New York region and around the Nation.
        In addition, the national search firms have a very large
    presence in the candidate population and know who is out there,
    know who would be a good candidate. They are always trying to
    find new candidates, and we are too.
        It is something we work very hard at and are always
    interested in having new ideas for qualified candidates as
    well. We invite the general public generally to offer their
    thoughts, as well as some of the interest groups.
        Ms. Waters. There is an organization, maybe more than one
    that is made up of minorities in financial services, that
    include everything from those who are doing management in the
    financial services industry, working with hedge funds, with
    equity firms, et cetera. Have you reached out to those--not
    you, but do you know if those firms have been contacted?
        Mr. Powell. I know that our search committees and our
    headhunters have reached out to many, many groups of that
    nature.
        Ms. Waters. How can I follow up on that? Is it possible
    that those of us who know about these organizations can ask
    them if they have been contacted? If not, how can we refer
    them?
        Mr. Powell. We will be happy to provide you with the
    contact person at the New York Fed who is responsible for the
    current search and in case of any future searches will be able
    to do the same.
        Ms. Waters. I will follow up on that, and I thank you very
    much.
        I yield back the balance of my time.
        Chairman Hensarling. The gentlelady yields back.
        The Chair now recognizes gentleman from Kentucky, Mr. Barr,
    Chairman of our Monetary Policy Subcommittee, for 5 minutes.
        Mr. Barr. Thank you, Mr. Chairman.
        Chairman Powell, congratulations again on your
    confirmation. I appreciate your commitment in our conversations
    to transparency and your demonstration of that commitment to
    date to clearly communicate the Fed's monetary policy
    trajectory.
        You have noted on numerous occasions that the remaining
    slack that may exist in the labor market is at least in part
    attributable to stagnant wage growth. In your confirmation
    hearing, a Senator on the Banking Committee cited a 2016 Fed
    research paper concluding that corporate tax cuts do not
    translate into higher wages.
        But we have seen a wave of corporate announcements of
    bonuses and raises since the tax cuts were enacted.
    Specifically over 4 million workers and counting have received
    over $3 billion in bonuses and raises during the last 8 weeks.
    The Labor Department recently announced the largest increase in
    wages since the end of the recession.
        Based on these numbers, is the Senator in question, and are
    the Fed researchers that he cites, are they wrong and have tax
    cuts in fact helped increase wages as your testimony indicates
    that wages should be increasing at a faster pace as a result of
    a more stimulative fiscal policy?
        Mr. Powell. Thank you, Chairman Barr. It is very hard to
    trace through the effects of a change in tax policy into things
    like wage growth in the economy. But let me try.
        Lower corporate taxes should lead to higher investment. The
    effect is not easy to estimate but you would think and the
    studies find that it should lead to higher investment. Higher
    investment should lead to higher productivity over time, and
    higher productivity should lead to higher wages over time.
        It is very hard to put your hands on exactly how much that
    would be, but higher productivity, of course, is very, very
    welcome, and will be driven by higher investment.
        Mr. Barr. Clearly the wave of bonuses and raises and the
    announcements certainly suggest that there is upward pressure
    on wages as a result of these tax cuts.
        In a 2015 speech, you expressed concern that quantitative
    easing and unconventional monetary accommodation could fuel
    dangerous risk-taking. Specifically, you said, quote, ``The
    current extended period of very low nominal rates calls for a
    high degree of vigilance,'' unquote. Can you elaborate? What
    specific risks have been created that the Fed now has to watch?
        Mr. Powell. I do think this is a time when we need to be
    alert to buildup of either financial imbalances or to inflation
    building up. We don't really see those right now. I think I
    also said that in my 2015 speech.
        But if you look at the financial stability situation
    broadly, we do see some high asset prices. What we don't see is
    the buildup of leverage among households. We see the banking
    system and the financial system generally as being very
    resilient. I think the financial stability picture shows at
    most modest risks.
        Mr. Barr. If I could point out a possible risk that is out
    there and have you react to it that was created by the
    unconventional monetary policy. Some have blamed the Fed for
    contributing to the 2008 financial crisis by producing an
    inverted yield curve, where short-term interest rates exceeded
    long-term rates.
        At the beginning of 2011, the spread between the 10-year
    and 2-year Treasury notes was almost 3 percent. But as of
    February of this year, that same spread has been whittled down
    to a mere 0.5 percent, and this is a 450 percent drop. Given a
    flattening yield curve, and economic conditions that you can
    see, call for raising the Fed funds rate, how will the Fed
    avoid another inverted yield curve?
        Are there any plans within the balance sheet normalization
    strategy to roll off longer-term assets more quickly to
    counteract that flattening yield curve?
        Mr. Powell. Flattening of yield curves in the past has been
    a precursor of recessions, but largely because in many prior
    recessions the Fed had to raise rates quickly to hold inflation
    down.
        That is not the situation we have now. It is very typical
    for the yield curve to flatten as short-term rates come up, as
    the economy strengthens. I don't see a particularly large--
    there is always a risk of a recession at any given point in
    time. I don't see it as at all high at the moment.
        Mr. Barr. I don't either. But it is a risk that
    normalization after this unprecedented, unconventional policy
    is created. To dovetail off of what the Chairman's point was in
    terms of the roll off strategy, it would be important if there
    are not enough maturing mortgage-backed securities, that mature
    in order for the Fed to actually hit its monetary roll off
    targets. To that end, to avoid an inverted yield curve, do you
    anticipate perhaps selling assets?
        Mr. Powell. No, I certainly feel that our balance sheet
    normalization plan was carefully crafted and carefully rolled
    out, and the markets took it without much of a reaction. I
    think I would have little inclination to change the general
    parameters of it.
        Mr. Barr. Thank you. My time has expired.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentlelady from New York, Mrs.
    Maloney, Ranking Member of our Capital Markets Subcommittee.
        Mrs. Maloney. Thank you.
        Chairman Powell, the Fed's median projection is for three
    interest rate increases in 2018. What would cause you to raise
    rates more than three times this year? Would you have to see a
    material increase in inflation, faster GDP growth, higher wage
    growth? What would cause you to raise rates more?
        Mr. Powell. Thank you, Mrs. Maloney. You are right that
    every quarter each participant in the FOMC submits a projection
    of what they feel is going to happen in the economy and also
    their projection for appropriate monetary policy. At the
    December meeting, the median participant called for three rate
    increases in 2018.
        Now, we will submit another projection, all of us, in 3
    weeks. But since then, what we have seen is incoming data that
    suggests a strengthening in the economy. We have seen
    continuing strength in the labor market. We have seen some data
    that will, in my case, add some confidence to my view that
    inflation is moving up to target.
        We have also seen continued strength around the globe. We
    have seen fiscal policy become more stimulative. I think each
    of us is going to be taking the developments since the December
    meeting into account and writing down our new rate pass as we
    go into the March meeting, and I wouldn't want to prejudge
    that.
        Mrs. Maloney. OK, the last time the Fed released its
    projections for the pace of interest rate increases was in mid-
    December. Since then, we have had two major financial events.
    One was the tax-reform legislation and the other was the major
    budget agreement.
        My question is, has your outlook for how quickly the Fed
    should tighten monetary policy changed in light of tax reform
    and budget agreement?
        Mr. Powell. I would say that my personal outlook for the
    economy has strengthened since December. Again, each member of
    the FOMC is going to be writing down a new set of projections
    and a new estimate of appropriate monetary policy as we go into
    the March meeting, which begins 3 weeks from today. So I
    wouldn't want to prejudge that new set of projections, but we
    will be taking into account everything that has happened since
    December.
        Mrs. Maloney. Yesterday, Fed Governor Quarles, who is
    leading the Fed's review of post-crisis regulations stated, and
    I quote, ``We are not looking to relax regulation,'' end quote.
    He also said, and I quote, ``We are not looking to reduce
    capital for banks,'' end quote. Do you agree with Governor
    Quarles that your goal is not to either relax regulations or to
    reduce bank's capital requirements?
        Mr. Chairman, I ask unanimous consent to place his comments
    in the record.
        Chairman Hensarling. Without objection.
        Mr. Powell. The way I think about it is this. We have
    several primary pillars of post-crisis financial regulation
    that we want to strengthen and protect, and those are high-risk
    based capital, high liquidity, stress testing, and resolution.
    We want to make sure that we keep those strong and, by the way,
    transparent as they apply particularly to our largest
    institutions.
        I think as we move down into smaller and smaller
    institutions, down to the community banks, we want to make
    absolutely sure that we have tailored regulation so that we are
    achieving our safety and soundness goals without creating
    excessive burden. That is really the way I think about what we
    are doing.
        Mrs. Maloney. Last, Chairman Powell, last week, several
    academics published a paper claiming that the Fed's
    quantitative easing programs during the Great Recession were
    largely ineffective at stimulating the economy. New York Fed
    President Dudley and Boston Fed President Rosengren disagreed
    and said that they thought that quantitative easing had been
    effective.
        My question to you is, do you think the Fed's quantitative
    easing program was effective, and do you believe the Fed should
    keep this tool in its toolbox for future challenges?
        Mr. Powell. I do think our post-crisis policies were
    effective. I haven't carefully studied that report yet, but let
    me say that what these reports try to do is they try to
    identify the surprise element in a particular Fed announcement
    and isolate that from what was already priced into the market.
        Most things that happen on announcement day are already
    priced in. It is very hard to isolate that surprise element.
    This paper takes a different way of doing that, and it comes up
    with the answer that comes in.
        Overwhelmingly, studies of the effects of asset purchase
    programs suggest that asset purchase programs did their job,
    which was to create downward pressure on longer-term interest
    rates through the term premium. I would say that that is very
    likely the case.
        Mrs. Maloney. Thank you. My time is up.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The Chair now recognizes the gentleman from Missouri, Mr.
    Luetkemeyer, Chairman of our Financial Institutions
    Subcommittee.
        Mr. Luetkemeyer. Thank you, Mr. Chairman, and welcome,
    Chairman Powell. Congratulations, and it is nice to see a
    banker actually being the chief banker of this country instead
    of an economist. To me, I think we get to look at some
    different policies, and I think we have a different
    perspective, and I think that is healthy.
        Just want to start by talking about leverage lending a
    little bit. I want to follow up on the GAO (Government
    Accountability Office), which determines that agency leverage
    lending guidance is a rule under the Congressional Review Act
    (CRA), and is therefore ineffective because it was never
    submitted to Congress.
        As I pointed out in the past, the same would presumably be
    true for other agency guidance. I have heard reports from banks
    that many of them have outstanding matters requiring attention,
    or MRAs, based on such guidance, and that they are still being
    told either by examiners or their compliance departments to
    treat guidance as binding regulations.
        Mr. Luetkemeyer. Although no one seems to be disputing
    GAO's conclusion, the word does not appear to be getting out.
    Would you agree that rules are rules and guidance is guidance,
    and guidance is not binding?
        Mr. Powell. Yes, Mr. Luetkemeyer, I would agree absolutely
    with that. I think in the case of the leveraged lending
    guidance, we do accept and understand that that is nonbinding
    guidance. In fact, since the GAO ruling, we have made it a
    point to go out and make sure that that message is getting out
    to supervisors of banks.
        We are also thinking of--we are in discussions and thinking
    about other ways we can underscore that, perhaps putting it out
    for further comment.
        Mr. Luetkemeyer. I just left another meeting before I got
    here, of a group of bankers from more of the States around the
    country. We were discussing issues similar to this with regards
    to the culture within agencies and the ability of change to be
    taking place. Even though we changed the head of the agency,
    sometimes the message doesn't get all the way to the bottom.
        When I made that comment, I saw a lot of heads nodding in
    the audience. There is concern that while the leadership has
    changed, good intentions may be there, that, again, this needs
    to filter down all the way through the entire agency and an
    understanding needs to take place by everybody that this is a
    new way of doing business, that guidance is guidance, rules are
    rules, and there is a big difference between how they are
    adjudicated and administered and enforced by the body itself. I
    sure appreciate your taking that into consideration.
        Mr. Powell. It is an important point, and it is a feature
    of our distributed Federal Reserve system, of which I am a big
    supporter, of the structure of our system. I think we know how
    to manage that problem, and I think we actually do a pretty
    good job at it. We are going to continue to try to do the best
    job we can.
        The heads of supervision at all Reserve Banks are in close
    and constant conversation and discussion with Vice Chair
    Quarles and others at the board. I don't sense any reluctance
    to engage in those discussions, and I think it is on us to
    communicate well and successfully. We will try to do that.
        Mr. Luetkemeyer. I look forward to working with you on
    that, because I told the bankers when I left them, if you see a
    problem, let me know, because I have a chance to talk to Mr.
    Powell myself here this morning, so we will carry the message.
    Thank you for that.
        With regards to data security and cybersecurity, this is an
    issue that we are working on right now. My committee, my
    subcommittee, has a bill that we are putting together. Data
    security, cybersecurity threats have the potential to wreck our
    economy, to wreak havoc with it. We subject financial companies
    to an absurd maze of cybersecurity regulations.
        The Federal Reserve is one of the many entities that
    examines for cybersecurity. There is zero harmonization between
    the agencies. The result is that financial firms spend
    thousands of hours complying with regulations, rather than
    actually protecting their systems and their customers. Do you
    see this as a problem?
        Mr. Powell. I do. I think cybersecurity overall is one of
    the really significant threats and we can never feel like we
    have done enough to deal with it. We have tried to harmonize
    through the FFIEC process, our supervisory guidance on what we
    expect from firms on cybersecurity issues and data safety and
    that kind of thing. I am sure we can do a better job, and we
    are committed to trying.
        Mr. Luetkemeyer. I know that is an issue that--financial
    institutions in particular are right in the crosshairs of this
    because of the amount of personal data that they hold and the
    risk that is there. They are an easy target. We want to make
    sure that we work on that issue and work with you.
        You sit in a position where you can harmonize those rules
    and regulations, I think, pretty easily with the different
    discussions and different groups of regulatory agencies that
    actually meet on a regular basis discussing things.
        Is this ever discussed at all in your meetings with the
    Fed, the Treasury, FDIC (Federal Deposit Insurance
    Corporation), Comptroller, CFPB (Consumer Financial Protection
    Bureau), any of those meetings? Is this ever discussed at
    length?
        Mr. Powell. Yes, it is. In fact, there is a group Chaired
    by Treasury which focuses on cybersecurity issues which the
    Chair--I haven't attended one of those yet, but as Chair, I
    will attend those meetings. It is certainly a very big focus
    for Treasury and for us.
        Mr. Luetkemeyer. My time has expired.
        Thank you, Mr. Chairman. I yield back.
        Chairman Hensarling. Time of the gentleman has expired.
        The Chair now recognizes the gentleman from California, Mr.
    Sherman.
        Mr. Sherman. Chairman Powell, welcome. As the Chair of our
    committee points out, you are required to be independent and
    accountable. You are also required to be tall and short.
        Your opening statement mentions great exports. But you
    don't mention that our trade deficit has gone up by $60 billion
    in the last year. I would point out that the entire economic
    establishment in this country has made it almost prohibited to
    discuss the trade deficit. That is why the country elected
    Donald Trump President.
        Now, the Chair of the subcommittee boasts that we had a
    good economy in 2017. He is right. We had Obama's fiscal
    policies, Obama's tax policies, Obamacare, Dodd-Frank, Janet
    Yellen's monetary policies and her big balance sheet, and we
    had a great year.
        As a matter of fact, we have been on a roll since 2011. We
    were closing in on having a high enough employment rate so that
    we would have a labor shortage and higher wages. We were going
    well, and so instead of continuing to be on a roll, we have
    abandoned those policies and adopted a profligate tax and
    spending policy, throwing away the budget caps, $1.5 trillion
    plus interest of the debt from the tax bill.
        But I think that we will still do well because our
    scientists, our entrepreneurs, and our workers are the best in
    the world, and they will make up for all the mistakes we are
    making here in Washington.
        I see behind you, sir, the green shirts that call for full
    employment. It is not enough to go with the economists'
    definition of full employment, say 4 percent. We need real full
    employment that causes a labor shortage and desperate employers
    bidding up the price of labor.
        That is also consistent with the fact that many economists
    are saying that you should be aiming not for 2 percent, but 2-
    1/2 percent inflation. That is the kind of expansionary economy
    that will allow these folks to come back in fancy polo shirts
    with the same slogan on it in a couple years from now.
        Now, when we talk about some workers getting a $1,000
    bonus, yes, a few have, but a family of five's share of the
    increase in the national debt from the tax bill is $26,000.
    What greater proof do we need of the need for financial
    literacy in this country than that some charlatan can say,
    ``Here is the deal. I will give you $1,000. It is money in your
    pocket, and we will just slap a $26,000 mortgage on your
    future.''
        Now, Chairman Powell, in your confirmation hearings, you
    said that, I believe, that no bank is any longer too big to
    fail. I would point out that the biggest banks are bigger now
    than in 2008 when they came to us and said they were too big to
    fail; they would pull the entire economy down. We had to bail
    them out with $700 billion.
        I would point out that the Wall Street prices into the
    value of the banks' stock, but more importantly, to the value
    of their unsecured debt, an implicit Federal guarantee, an
    assumption that they will be bailed out.
        I have a number of questions for the record, but I will
    actually ask one for you to respond to. We have adopted these
    profligate fiscal policies. Huge tax cuts leading to a massive
    increase in the deficit number that is right behind you, then
    we busted the budget caps.
        Is our monetary policy going to need to be more restrictive
    this year than it would have been had we not adopted these
    profligate fiscal and tax policies?
        Mr. Powell. Thank you. Of course when we are setting
    monetary policy we are focused on achieving stable prices and
    maximum employment. In doing that, we consider many, many
    factors all around, the global economy, et cetera.
        Fiscal policy changes can have an effect, and changes of
    this size can have an effect. That can be seen, of course, in
    the path to policy. It is very hard to say in advance what that
    would be, but the answer to your question is generally we take
    all those things into account.
        Mr. Sherman. The more profligate the fiscal and tax
    policies, the higher the interest rates you need to set all
    other things being equal?
        Mr. Powell. I would just say our own job is to focus not on
    fiscal policy, but on monetary policy, and so that is our frame
    of reference.
        Mr. Sherman. Thank you for evading my question.
        Chairman Hensarling. Time of the gentleman has expired.
        The Chair now recognizes the gentleman from California, Mr.
    Royce, Chairman of House Foreign Affairs Committee.
        Mr. Royce. Thank you, Mr. Chairman. Chairman Powell, thank
    you very much for being with us here today. I also wanted to
    thank you for another effort you undertook, and that was in
    2011. You spent a considerable amount of time with members of
    the House, trying to walk them through the debate that we had
    on raising the debt ceiling.
        You were trying to get us focused on all the unintended
    consequences, which would occur if we did not raise that debt
    ceiling, and I very much appreciated the time, effort, and
    facts that you put forward.
        You have a new voice now at the Fed. I assume your opinions
    on the severe consequences of failing to raise the debt ceiling
    remain. I know that in August, it looks as though the Federal
    Government is going to have to borrow, or have to roll over,
    $500 billion of debt in August.
        If we are in a quasi-default situation in August, then
    clearly it is a real question as who would want to purchase
    that debt and at what cost would they purchase that debt?
    Clearly a premium on that, a 10 percent premium, it would be a
    $50 billion hit right there to the interest expense, but there
    is much more than that that would befall the impact on our
    markets and, frankly, at corporate debt.
        Maybe I could just give you this opportunity to explain
    some of the concerns about that issue?
        Mr. Powell. Thank you, Mr. Royce. Of course we don't do
    fiscal policy at the Fed, but I will accept your invitation and
    just say that it is very important that the Federal Government
    and government generally be on a sustainable fiscal path,
    meaning as the baby boomer generation retires, we will need to
    address the significant fiscal issues that are coming to us
    over time. I think it is important that Congress do that.
        At the same time, the debt ceiling should be something that
    we always raise in a timely fashion. There is no other country
    in the world that has a separate vote over whether to pay bills
    that we have already agreed to incur. I think the United States
    has never defaulted on a principal or interest payment and
    never should.
        I think doing so would be something I would really hate to
    see and could bring very significant consequences.
        Mr. Royce. I appreciate your articulating that. You have
    also said that raising the ceiling is only the first step. The
    job that must be attacked is deficit reduction and addressing
    the cost associated with mandatory spending.
        We heard a similar thing from Chairman Greenspan, we heard
    that from Chairman Bernanke and Chairman Yellen. We are on an
    unsustainable budget path, are the remarks that Fed Chairmen
    have traditionally shared with us.
        As I have raised with previous Chairs, I don't think the
    American public really understands the magnitude of the problem
    we are facing. We certainly haven't galvanized the political
    action necessary to address it.
        What do you think we, and what do you think you can do to
    raise the alarm that the biggest and fastest growing costs in
    mandatory spending must be addressed?
        Mr. Powell. I think I will follow the path of my
    predecessors and not become a regular commentator on fiscal
    issues, but rather limit myself to a couple of overarching
    points.
        Mr. Royce. Fair enough.
        Mr. Powell. The first of which is just that we really need
    to get on a sustainable fiscal path, and that the time to
    really be doing that is now. The second thing I will say is
    that when fiscal changes are made, it is important that, to the
    extent possible, they be directed at enhancing the productive
    capacity of the economy.
        We can't affect productivity other than through keeping
    prices stable and regulation on a balanced basis. Productivity
    is the thing that allows incomes to rise, per capita incomes to
    rise, over time.
        We don't control the potential long-run growth rate. You
    have much more authority over that, and I think to the extent
    fiscal policy can focus on ways to increase attachment to the
    labor force, create incentives for more skills and aptitudes
    among our labor force and greater investment in R&D and that
    kind of thing, that is a healthy thing.
        Mr. Royce. Thank you very much, Chairman.
        Chairman Hensarling. Time of the gentleman has expired.
        The Chair now recognizes the gentleman from New York, Mr.
    Meeks.
        Mr. Meeks. Thank you, Mr. Chairman. Mr. Powell, welcome.
        The Treasury Department is currently undergoing a review of
    the CRA, Community Reinvestment Act's regulations. We will be
    recommending changes to the banking agencies, including the
    Federal Reserve.
        My question to you, Mr. Powell, is do you believe that a
    financial firm's demonstrated pattern and practice of racial
    discrimination in lending should be considered during a CRA
    examination?
        Mr. Powell. Thank you, Mr. Meeks. I am familiar with that
    process, and I take the point of it to be, what I am
    understanding about it, is to inquire into whether CRA policies
    are, in fact, providing benefits to their intended
    beneficiaries. I think we are part of that. We are providing
    our own input into that process.
        In terms to the answer to your question, I think it is
    currently the practice that such considerations are considered
    in CRA exams.
        Mr. Meeks. It is currently, but I am concerned that some
    want to defang CRA and take away as part of the process the
    history as far as discrimination practices and pattern. That is
    why I am asking you, since the Treasury will be looking at a
    new--and I am a fan--I think we need to update CRA, but I
    believe that in looking at CRA you should take into
    consideration one's practice and pattern of racial
    discrimination. I am asking you, sir, what is your position on
    that?
        Mr. Powell. I haven't taken a position on that. I want to
    see the overall work that comes out of this and evaluate it on
    that basis. I may well come to the view that you have, but I
    really haven't thought carefully enough about it.
        Mr. Meeks. All right. I just want to remind you, sir, that
    the CRA was Congress' response to widespread racial
    discrimination, and in the form of redlining. That was one of
    the primary reasons of the implementation of CRA. If you are
    even thinking about stripping out practice and patterns of
    discrimination, you are thereby gutting the reason Congress did
    CRA in the first place.
        It seems to me that that should not even be a part of the
    dialog. In fact, as just given to me by the Ranking Member, we
    have an article, Lending Discrimination and Redlining Still
    Plaguing St. Louis, that all the new data shows. We can go from
    city to city across America.
        I have real concerns about your answer just now, because to
    even think about removing that from the CRA, as much as I am an
    advocate of renewing, because I think that when you look at
    where we are now and how banking is done and financial services
    are rendered, is completely different than when it was done
    when we initiated, but the essence of it was to stop redlining
    and racial discrimination.
        Mr. Powell. Let me say that we take a very serious view of
    any kind of racial discrimination in lending, and we look at it
    through a variety of our consumer affairs tools, and it is
    something we take very seriously.
        Mr. Meeks. Now, let me ask this question, and I would like
    to follow up with you on this matter particularly.
        But let me ask you this when we just talk about these tax
    cuts. How much of corporate tax savings do you think will
    actually go toward wages, as opposed to stock buybacks, capital
    investments, and mergers?
        I say this because I want to just let you know, even before
    you answer, Morgan Stanley announced it is estimated that 43
    percent of corporate tax savings will go to buybacks and
    dividends, which enriches just the top 1 percent of those major
    investors; 19 percent would go toward mergers and acquisitions;
    17 percent would go toward investments; and only the crumbs, 13
    percent, would go to one-time bonuses and scant raises.
        In fact, there are nine pharmaceutical companies that have
    already announced over $50 billion in buybacks since the tax
    law was passed. How much of these taxes will go into salaries
    and wages? Or how much of it will really help the income
    disparity to increase and grow wider?
        Mr. Powell. We have particular responsibilities, maximum
    employment, stable prices. We don't have estimates of that kind
    of thing. There are many other estimates out there, but
    honestly we don't have a Fed estimate for what that number
    would be.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Minnesota, Mr.
    Emmer.
        Mr. Emmer. Thank you, Chair Hensarling.
        Thank you, Chair Powell, for being here. Good to see you
    again.
        I want to go back to something that I think was touched on
    when you began your testimony this morning. During your
    confirmation hearing, you spoke about the importance of
    tailoring regulations to fit the specific scope and practices
    of a financial institution.
        I think your quote was actually, ``Even as we have worked
    to implement improvements to the banking system, financial
    system, we have also sought to tailor regulation and
    supervision to the size and risk profile of banks, particularly
    community institutions.''
        I just want to make sure that your view on continuing to
    tailor regulations to the specific institution has remained the
    same. You are still committed to doing that?
        Mr. Powell. Very much so. It is at the heart of what we are
    doing at the moment, which is to focus on smaller institutions
    and, without losing any safety and soundness, try make sure
    that our regulation is no more burdensome than it needs to be
    and then work our way up the food chain.
        Mr. Emmer. Right, because you would agree that we need
    everyone in the financial services food chain, all the way from
    the largest banks in the world to the small family community
    banks on Main Streets all across this country?
        Mr. Powell. Indeed. Small businesses create a lot of the
    jobs and small banks have a disproportionate share of small
    business lending, although the bigs lend to the small
    businesses. We really want that credit to flow and we don't
    want regulation to inappropriately create too much burden.
        Mr. Emmer. Right. Earlier this month, Secretary Mnuchin
    testified before this committee. He expressed his commitment to
    working with Congress to make changes in statute to the way
    regulators tailor regulations based on the size and complexity
    of a financial institution. Would you also support this type of
    legislative effort, where necessary, to put these tailored
    regulations in statute?
        Mr. Powell. Yes, we would and we have. Of course, the devil
    is in the details. But as a general matter, I think we could
    see some law changes that would enable us to better and further
    tailor regulation to small or medium-sized institutions.
        Mr. Emmer. I want to move onto another topic, but
    continuing the discussion on the importance of getting our
    regulations right to benefit Main Street and rural America.
        Minnesota's 6th Congressional District, which I represent,
    is home to some of the finest and most productive farmers and
    manufacturers in the world. Many of these same individuals and
    businesses, who are making such a positive economic impact on
    my district, are inadvertently harmed by the current
    formulation of the supplemental leverage ratio (SLR) that fails
    to recognize the exposure-reducing nature of initial client
    margin.
        This bank capital rule is increasing clearance costs for
    farmers and manufacturers, making it more expensive for them to
    use the cleared derivatives market.
        I hope that as you and your colleagues at the Fed review
    the SLR that you come to the same conclusion that a coalition
    of Republican and Democrat members on this committee have, that
    we must recognize the exposure-reducing nature of initial
    client margin in a revised bank capital rule.
        Will you commit to working with us and our colleagues on
    the Ag Committee who want their constituents to have access to
    affordable and competitive cleared derivatives markets?
        Mr. Powell. Yes, I will. We think we need the leverage
    ratio as a high and hard backstop to risk-based capital. We
    think that the current calibration of the enhanced supplemental
    leverage ratio is not appropriate. We are looking at a
    recalibration that would address that exact concern.
        Mr. Emmer. Thank you. I want to move on to one other topic
    before my time runs out. Pages 1 and 5 of your monetary policy
    report dated February 23 refers to the labor market. There are
    a couple of specific entries with respect to numbers of people
    that our unemployment rate is at 4.1. It is essentially full
    employment.
        But I believe it is on page 5 where it references the
    percentage of--and I am going to add able-bodied working aged
    adults that are actually in the workforce is about 62 percent.
        This is still abnormally low. Don't you have any concern
    about that number and, well, why don't I add this? You talk
    about retirements being part of this, the baby boomers leaving
    the marketplace, the labor force.
        But doesn't this also have something to do with the
    disincentives created by our welfare system in terms of giving
    people an opportunity to get back into the job market?
        Chairman Hensarling. Time of the gentleman has expired. A
    very brief answer from the witness, please?
        Mr. Powell. We focus on labor force participation all the
    time. It is a really important thing and certainly worthy of a
    longer discussion, which I would be delighted to have with you.
        Mr. Emmer. We will do that, thank you.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Massachusetts,
    Mr. Capuano.
        Mr. Capuano. Thank you, Mr. Chairman. Thank you, Mr.
    Powell, for being here, welcome.
        Some of my colleagues have talked about how we are, where
    we are. The economy is--clearly seems to be getting better. We
    all agree with that. We will disagree on why and how. I
    personally think that a lot of the good we are seeing today is
    the result of the actions we took several years ago to
    stabilize, secure, and improve the economy and is now working
    its way through the system. But I will leave that debate for
    another day.
        I also want to associate myself with the comments made by
    Mr. Meeks. I would encourage you as well to keep a close eye on
    the CRA.
        I also want to take that and I will expand it a little bit,
    just a little bit more. I presume that the Fed would not be
    interested in an economy that just worked for Wall Street and
    did not work for Main Street.
        I assume that the Fed would not be interested in an economy
    that just worked for Texas and didn't work for New York.
    Therefore, I presume the Fed has some degree of interest not in
    perfect equity, but at least some equitable distribution of the
    benefits of a good economy. Is that a fair assumption, or am I
    completely off?
        Mr. Powell. I would say I think we want prosperity to be
    high and broadly spread. We don't actually have a lot of tools
    for--distributional tools.
        Mr. Capuano. I understand that.
        Mr. Powell. There are much more things that the Congress
    has.
        Mr. Capuano. I respect that. I understand you have limited
    tools for lots of things but as long--I agree that that is
    obviously one of the things. A good economy for three people
    doesn't help for the 300 and some odd million people that live
    here. Thank you for that.
        Are you familiar with a relatively new British law that has
    just been enacted just being imposed that requires companies of
    over 250 employees to report income and wages on the basis of
    gender? Are you familiar with that at all?
        Mr. Powell. No, sir, I am not.
        Mr. Capuano. OK, well that just came out. The first company
    to do that report was Barclays, one of the largest banks in the
    world. That report, pursuant to British law, shows that women
    at Barclays earn 26 percent less than men and receive bonuses
    that are 60 percent lower than men.
        Now, I know that some of those reasons might be reasons as
    to who owns which position. But it certainly goes toward the
    idea of equitable distribution of the benefits of the economy.
        Are you familiar with a rule that was proposed by the Equal
    Employment Opportunity Commission in 2016 that was supposed to
    go into effect in March that would have required similar
    reporting by American companies over 100 employees, not just on
    the basis of gender but also on the basis of race and
    ethnicity?
        Mr. Powell. No, sir.
        Mr. Capuano. OK, fair enough. The reason you are not
    familiar with it is because the Trump Administration stopped
    it. It was proposed in 2016. Companies were given 2 years to
    work their way in. But as of last August, the Trump
    Administration said no, we don't want to know how you pay
    women, how you pay people of racial groups or ethnicity groups.
    We don't care about that.
        Now, I personally think that is horrendous and I would
    actually say that, again, if you are interested in an economy
    that has some degree of equitability you need statistics. You
    need numbers. Anecdotal answers are very interesting and they
    make for good political commentary, but they don't help us
    address the problems.
        I would ask therefore if something like that, that is new
    to Britain, doesn't seem to have impacted Barclays in any
    particularly bad way, but provides us the information we have
    to go forward to argue for pay equity across the board.
        Now, I am a white male, but I am not interested in my
    success being at the expense of people who are not white men. I
    would ask, is the Fed interested in all, would you be
    interested in pursuing something--you oversee 7,000 entities,
    some of them large, some of them small, most of them pretty
    large.
        Would you be interested in pursuing some degree of, not
    intrusive, but some degree of investigation as to how they pay
    their employees, if it is equitable or not?
        Mr. Powell. First, again, I am not at all familiar with
    either the British bill or the EEOC proposed rule that was--I
    am not familiar with either of those. These are the things that
    Congress should consider. We have a job, we have a really
    important job to do that you have assigned us to do. For now we
    are going to stick to that and try to achieve--
        Mr. Capuano. I respect that, and I want you to stick to
    that. But as we talked about earlier, some degree of equitable
    distribution of the benefits of a good economy is your job. Not
    perfect equity, not every aspect, but in the one aspect you can
    control--overseeing 7,000 financial institutions.
        Don't you think it is a fair thing to ask how they pay
    their women, how they pay their African Americans, how they pay
    their Hispanics, if it is based on fairness or if it is based
    on some degree of discrimination? You don't think that is a
    fair thing for you to ask?
        Mr. Powell. I don't think it is a question for the Fed. I
    think it is a question for other agencies and for really--
        Mr. Capuano. You think it would be--boy, that is a great
    answer. I think we are going to hear more about this.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from North Carolina,
    Mr. Pittenger.
        Mr. Pittenger. Thank you Mr. Chairman. Thank you Chairman
    Powell for coming before the committee, congratulations on your
    confirmation. We look forward to working with you.
        Chairman Powell, it is my understanding that the Fed has
    been actively involved in developing a potential alternative to
    LIBOR (London Inter-bank Offered Rate), called SOFR--the
    Secured Overnight Funding Rate.
        Has there been a robust cost-benefit analysis conducted by
    the Fed regarding the potential economic impact to consumers
    and commercial borrowers relative to shifting from LIBOR to
    SOFR?
        Mr. Powell. Let me say that the situation with LIBOR is
    such that the Financial Conduct Authority (FCA) in London has
    said that they will no longer compel banks to submit their
    submissions to the LIBOR panel after the end of 4 years.
        At that time, the FCA can no longer guarantee the
    continuation of LIBOR. Now if LIBOR were to stop being
    published then, there are $300 plus trillion worth of LIBOR-
    based contracts in the world. That has all the potential of
    being a pretty significant financial stability problem.
        Solving it is very high priority for us and I think for
    financial regulators around the world. There will be costs to
    doing so, but they would be trivial in comparison to the
    failure to be ready for this change, should it be necessary.
        Mr. Pittenger. What type of borrowing costs do you project
    for businesses as a result of the impact of this change?
        Mr. Powell. We are actually seeking a lot of input from
    businesses that will be subject to this at the moment. But
    honestly, though, the cost of failure to act would be,
    potentially, quite high.
        Mr. Pittenger. Yes, sir. Since repo rates go the opposite
    direction to LIBOR during market stress, do you anticipate any
    new systemic risks that arise in the banking sector from
    shifting to SOFR?
        Mr. Powell. Yes, I do, I think systemic risk would be
    decreased by moving to SOFR. LIBOR spreads blew out during the
    crisis, and I think a risk-free rate, which is really used to
    price the vast derivative markets and not so much the bank
    lending markets. It is really much more in a derivatives based
    now, would be an improvement from a financial stability
    perspective to have SOFR over LIBOR.
        Mr. Pittenger. When, SOFR was selected through the process
    of the Alternative Reference Rates Committee in 2014, were
    community banks and regional banks a part of that process?
        Mr. Powell. Some of the regional banks were. It is
    principally affecting the derivatives business, at least in the
    first instance. We had a lot of different groups around the
    table, and at this point we are very much broadening that
    circle to include other financial institutions, including
    community banks and other parts of the financial system.
        Mr. Pittenger. Do you anticipate any potential cost
    relative to community banks in this shift?
        Mr. Powell. I don't think it--there shouldn't be meaningful
    costs, and we would sure like to know if there are.
        Mr. Pittenger. If banks do continue to participate in the
    LIBOR panel, would you encourage a multiple rate approach that
    was driven by market choice?
        Mr. Powell. Yes, we are--
        Mr. Pittenger. Or would you support LIBOR for banking
    lending for SOFR, for derivatives?
        Mr. Powell. Yes sir, we have always said that if people
    want to keep using LIBOR, that is fine, as long as it is
    continuing to be published. What we are doing is preparing for
    the risk that it wouldn't be published. We are not saying that
    that is what will happen. But we need to be ready, just in case
    that does happen.
        Mr. Pittenger. Yes, sir. On another subject, what do you
    anticipate will be any changes you will bring to the Fed
    relative to transparency in the Fed?
        Mr. Powell. I think we are committed to being as
    transparent as we possibly can about monetary policy and about
    regulation. I think, if I remember what it was like back when I
    was an undersecretary of the Treasury in the 1990's, the Fed
    didn't even publish a post-meeting statement.
        Now you look at the massive number of things we publish, we
    are much more transparent. I think we can continue on that
    path. We are never done with that.
        In regulation, I think it is very important that we be
    transparent. In fact, we are working across a broad range of
    issues there, including, I would point out, stress testing. We
    have a package of transparency regulations. In general, I think
    it is appropriate for us to always be working on that, and it
    is just--
        Mr. Pittenger. One last quick question, I have 50 percent
    fewer banks in North Carolina today than we had in 2010. Do you
    foresee Fed policies that would enhance and assist community
    banks in particular?
        Chairman Hensarling. Time of the gentleman has expired. A
    very brief answer from the witness, please?
        Mr. Powell. It is a long running trend and we don't like to
    see it and we don't want to make it any worse. I would be happy
    to continue this with you.
        Mr. Pittenger. Thank you.
        Chairman Hensarling. Again, the time of the gentleman from
    North Carolina has expired.
        The Chair now recognizes the gentleman from Missouri, Mr.
    Clay, Ranking Member of our Financial Institutions
    Subcommittee.
        Mr. Clay. Thank you, Chairman Hensarling, for holding this
    hearing.
        Thank you, Chairman Powell, for your testimony today.
        Chairman Powell, do you agree that the U.S. housing is in a
    recovery mode, as far as transactions and housing market in
    general is healthy?
        Mr. Powell. Yes, sir, it has been a gradual recovery, but
    it is ongoing.
        Mr. Clay. Along those lines, I want to pick up where Mr.
    Meeks and Mr. Capuano questioned you. I have shared with your
    staff a recent article from my hometown newspaper about black
    home buyers continuing to be denied conventional mortgage loans
    at a much higher rate than whites, even when controlling for
    income, loan amount, and neighborhood.
        In the St. Louis metropolitan area, African Americans who
    applied for conventional mortgages are two and a half times
    more likely to be denied than non-Hispanic whites. That is
    according to 2 years of recent HMDA (Home Mortgage Disclosure
    Act) data.
        Where there is loan activity houses have a chance to sell.
    Where houses sell, people move in. Where people move in,
    restaurants, community centers, and grocery stores are built.
    None or very little of that is happening in low- to moderate-
    income neighborhoods in St. Louis or elsewhere in this country.
        My question is, what can the Federal Reserve do to ensure
    that applicants for home mortgages are treated equally and the
    bad actors who steer and redline communities of color are
    eliminated from this process or change their policies? Can you
    give me any direction in that area?
        Mr. Powell. I would be glad to, sir. First of all, racial
    discrimination in mortgage lending, in any kind of lending, is
    completely unacceptable. Wherever we have authority we will use
    it to stop that from happening and punish it when it does
    happen.
        We have some authority here. The CFPB has quite a lot of
    authority in this area as well, but where we have it for the
    banks that we supervise, we supervise carefully and
    aggressively to try to find these problems and address them.
        Mr. Clay. As you know, the Fair Housing Act of 1968, a law
    that has been on the books for 50 years prohibited those
    practices of steering and redlining. Now, I share with you this
    article because I want a more extensive response from you on
    what action we can take against bad actors like U.S. Bank, who
    is cited in that article, the fifth largest financial
    institution in this country, who have denied mortgages across
    the board in the community that I represent. That stymies
    economic activity. It doesn't help it.
        I would love to collaborate with your office on how we stop
    these policies and practices that are discriminatory and
    hopefully you will be willing to work with me on that.
        Mr. Powell. Yes, sir.
        Mr. Clay. While President Trump recently tried to take
    credit for December unemployment numbers, showing African
    American unemployment at its lowest recorded level, this too is
    part of a long-term trend that started under the Obama
    Administration in which African American unemployment has
    steadily declined for the past 7 years.
        In addition, racial disparities continue to persist, with
    the unemployment rate for whites currently at 3.5 percent,
    unemployment for African-Americans stands at 7.7 percent. With
    African American unemployment more than twice as high as white
    unemployment, clearly more progress is needed.
        Share with us your vision for the Fed attacking persistent
    unemployment among African Americans.
        Mr. Powell. What we can do on that front, sir, is we can
    take seriously our obligation to pursue maximum employment. We
    understand fully that while the national unemployment rate is
    low and while, in many regions, the unemployment is actually
    even lower than 4.1 percent, you meet a lot of Congressmen and
    Senators who come from places where unemployment is in the
    twos.
        Mr. Clay. I would like to explore that with you--
        Chairman Hensarling. Time of the gentleman has expired.
        The Chair now recognizes the gentleman from Oklahoma, Mr.
    Lucas.
        Mr. Lucas. Thank you, Mr. Chairman.
        Chairman Powell, I thank you for being here. Before I ask a
    general question and a broader question, I do note that I think
    you are my fourth Chairman to be able to visit within this
    environment since I have been a member of this committee.
        I would like to discuss an issue with you today that you
    and I have already discussed. My good colleague, Subcommittee
    Chairman Mr. Luetkemeyer has a bill regarding, and that is the
    supplemental leverage ratio clearing margin.
        I know that Blaine's bill has strong bipartisan support
    from members of this committee and the Ag Committee. In
    essence, it would offset those margin amounts for purposes of
    SLR because margin is inherently a risk management tool and
    legally must be kept separate from a bank's own funds.
        The Fed can effect this change without legislation,
    however, and your predecessor showed a willingness to look at
    the issue. I was hoping you might be willing to consider that
    situation, that sort of a fix yourself?
        Mr. Powell. Thank you, Mr. Lucas. What we are doing right
    now is we are taking a careful look at the enhanced
    supplemental leverage ratio. I think our view is that the
    leverage ratio is a very important requirement for banks, but
    it should be a backstop. It should be a high and hard backstop
    to risk-based capital.
        I think that the enhancement to the supplemental leverage
    ratio that we put into place in, I guess 2013 in that range,
    went a little too far. It unfortunately seems to be deterring
    some low-risk wholesale-type activities that we really want
    financial institutions to engage in. One of those is client
    clearing, and particularly not counting margin.
        But I think our way of addressing that is going to be, I
    think, to lower the calibration of the enhancement to the
    supplemental leverage ratio. That does seem to get done what
    needs doing there.
        Mr. Lucas. Clearly something needs to be addressed.
        Now, let me ask a more broader question. I represent the
    northwest half of the great State of Oklahoma. It is ag and it
    is energy and it is Main Street business. We are a commodity-
    driven economy and the price of commodities, of course, is a
    reflection of both supply and demand.
        While supply is not an issue for the Fed to be concerned
    about, I represent industries where technology advancement has
    been used successfully, whether it is precision agriculture and
    increasing the output of our farms and ranches with fewer
    inputs or, on the energy side of the equation, 3D
    seismographic, horizontal drilling, just the most amazing
    technological advances of the last 10 years. That is increased
    supply.
        But my producers see, since 2014, that whether it is oil
    and gas or wheat and cattle, that literally prices are half of
    what they were in 2014. Let us discuss for just a moment,
    expand on your comments earlier about where you think the Fed
    projections would have economic growth and demand in a year or
    two or three down the road in the United States. Because we
    have a supply equation, that is our challenge. But if demand
    picks up, life gets better economically at home.
        Mr. Powell. That is typically the case, as you know. I
    haven't updated my own projections, but I will just say
    generally that it does feel to me that the next couple of years
    look quite strong, and you should see strong demand from
    consumers. You should see businesses investing. I would expect
    the next 2 years on the current path to be good years for the
    economy.
        Labor markets continuing to improve, inflation moving up to
    2 percent, and I would think that that should create a good
    environment for people in your district who are in the
    commodities businesses as well.
        Mr. Lucas. The old adage about the rising tide raises all
    ships. Thank you, Mr. Chairman.
        Mr. Powell. Thank you.
        Chairman Hensarling. Would the gentleman yield to the
    Chairman?
        Mr. Lucas. Of course, Mr. Chairman.
        Chairman Hensarling. In the 1-1/2 minutes that he had
    remaining, I had a question, Chairman Powell, back on the
    interest on excess reserves.
        I had asked your predecessor this question, and the answer
    was not clear to me. I think as you know, under statute, that
    the rate must be--and I am trying to find the exact language--
    cannot be above the usual level of short-term market interest
    rates.
        Yet we know that the Fed has been paying a price over the
    Fed funds rate--paying over LIBOR and certainly I think it is
    currently paying 150 basis points, yet our constituents
    typically receive about 10 basis points on their savings
    account. I am just curious on what does the phrase above the
    usual level of short-term market interest rates mean?
        In your 2012 rulemaking that implemented IOER, it allowed
    the rate to get pegged to your primary credit rate, but that is
    an administered rate, which means you can set it where you want
    to set it. Legally is there any cap to the interest rate you
    can pay in IOER? Could you pay 300 basis points, 400 basis
    points, 500 basis points?
        Mr. Powell. I think, as you have suggested, we are not
    permitted under the law to pay above--I think the language is
    the general level of short-term interest rates. That is, I
    think, something like that.
        I would look at that and I would see commercial paper, I
    would see repo, I would see wholesale deposits, I would see
    short-term interest rates, money market funds, things like
    that, less than a year.
        I think where IOER is set is--the whole idea of IOER is to
    use it as a tool to move those kinds of interest rates around
    and they tend to be highly--
        Chairman Hensarling. But you are paying 150 basis points,
    our constituents are getting 10 basis points. You can--
        Mr. Powell. Retail deposits are sticky on the way up. They
    generally come up with a lag.
        Chairman Hensarling. Time of the gentleman has expired.
        The Chair now recognizes the gentleman from Massachusetts,
    Mr. Lynch.
        Mr. Lynch. Thank you, Mr. Chairman. Thank you, Mr.
    Chairman. Thank you for your attendance, appreciate that. A
    couple of weeks ago, there was a story in the Wall Street
    Journal around ETFs (exchange-traded funds), and I wanted to
    get your thoughts on this.
        The particular story noted that shares of everything from
    manufacturers to banks to oil production companies are all
    rebounding together after tumbling in unison earlier in the
    month.
        The article noted that one factor contributing to the close
    correlation among the S&P's various sectors was driven by the
    growing popularity of exchange-traded funds. I know that ETFs
    usually invest in wide swaths of the market, and when that is
    all correlated it can sometimes increase the volatility. At
    least that is what the data would suggest.
        I am just wondering, does the Fed think that there are
    risks to the broader financial system associated with complex
    ETFs? Is the Fed concerned about that? Any ideas?
        Mr. Powell. It is an interesting question. I saw that
    article and, of course, we looked after the volatility came and
    then subsided. We looked carefully to try to understand,
    really, what did happen. It seems that the markets were
    generally orderly through almost all of that time.
        ETFs are a particular form of fund, and I don't think they
    were particularly at the heart of what went on in those days.
    But it is something we are talking to our fellow agencies,
    particularly the SEC, I think, would be best positioned to look
    at this. But it is a question that we are looking into.
        Mr. Lynch. OK. Thank you. On a completely different topic,
    in your remarks you talked about the historically low
    unemployment rate among people of color. But again, you
    acknowledge that the rate of unemployment for people of color
    is much higher than for white workers.
        Given the fact that the participation rate, according to
    your own testimony, has been fairly constant, does the Fed have
    any suggestions to the Trump Administration about if the wind
    is at our backs now, if we are putting more people to work, how
    do we close that gap? How do we get more people of color into
    the workforce so that, again, we close that gap?
        Mr. Powell. As I mentioned, Mr. Lynch, our part of it is to
    take seriously our obligation to achieve maximum employment,
    and I think we are doing that. We don't have tools that are
    good at addressing these kind of disparities, and those--
        Mr. Lynch. I am not asking you to do it. I am asking you to
    suggest recommendations to the White House. That is they have
    the power to do it. They have the tools to do it.
        Mr. Powell. Right. I wouldn't want to presume to recommend
    policies that are away from our general mandate, but I will
    just say, generally, that I think that policy--
        Mr. Lynch. Let us just say we are trying to reduce
    unemployment. That is certainly part of your--
        Mr. Powell. I think the constructive thing in this area is
    really to focus on--and it is a long-run problem--but to focus
    on education and training. We want everyone to have
    opportunity. We want this to be a society where everyone has
    opportunities to succeed. Part of that is reaching people
    through the educational system, and I would point you in that
    direction.
        Mr. Lynch. Very good.
        Thank you, Mr. Chairman, I yield back.
        Chairman Hensarling. The gentleman yields back.
        The Chair now recognizes the gentleman from Illinois, Mr.
    Hultgren.
        Mr. Hultgren. Thank you, Chairman Hensarling.
        Chairman Powell, good to see you. Thank you for your work.
    Thank you for being with us today.
        On June 22, 2017, you testified before the Senate Banking
    Committee. You said, and I quote, ``We believe that the
    leveraged ratio is an important backstop to the risk-based
    capital framework, but that it is important to get the relative
    calibrations of the leverage ratio and the risk-based capital
    requirements right.
        Doing so is critical to mitigating any perverse incentives,
    and preventing distortions in money markets and other safe
    asset markets. Changes along these lines also could address
    concerns of custody banks, that their business model is
    disproportionately affected by the leverage ratio,'' end quote.
        I have worked with my colleagues on this committee,
    especially Keith Rothfus and Bill Foster, on legislation that
    was passed out of the committee, 60 to 0, that would provide
    relief from the supplementary leverage ratio for institutions
    who are predominantly in the business of providing custody
    services.
        The Treasury Department's June 2017 report recommends
    changes to the supplementary leverage ratio for cash on deposit
    with central banks, which is in line with legislation reported
    by the committee.
        I wonder, do you support the Treasury Department's
    recommendation, and how will you work with the OCC and FDIC to
    make those changes?
        Mr. Powell. I agree with you, sir, that the leverage ratio
    can deter banks from engaging in low-risk wholesale activities,
    particularly the custody banks. We have looked carefully for
    some time now at how to provide relief.
        Our preference for the way to do that, is to just
    recalibrate the enhanced supplemental leverage ratio. The
    custody banks would feel significant relief because they have
    the smallest surcharges. That is our preferred way to do that.
        Mr. Hultgren. Following up on that, with these considered
    changes to the enhanced supplementary leverage ratio, they only
    cover the G-SIBs (global systemically important banks). Do you
    believe changes to the Basel leverage ratios are only necessary
    for the G-SIBs, or would you also support changes to the larger
    supplementary leverage ratio?
        Mr. Powell. The regular supplementary leverage ratio, based
    on my conversations with financial institutions including the
    custody banks, is not particularly binding for them, certainly
    as it relates to the custody banks.
        We chose to make this enhancement, and I think we have the
    calibration a little bit wrong and so our plan is to roll that
    back.
        Mr. Hultgren. OK. One last thing on this, then I will move
    on, but CBO (Congressional Budget Office) recently provided a
    cost estimate for the implementation of H.R. 2121. As you
    probably know, the CBO oftentimes relies upon input from the
    Executive Branch for such estimates.
        I wonder if you could commit to sharing this correspondence
    between the Fed and CBO with my staff and with the committee of
    determination of costs for implementation of 2121? Would you be
    willing to work with us on that?
        Mr. Powell. I would be willing to work with you. I have to
    look into how we would do that sort of thing.
        Mr. Hultgren. That is great. My concern for this is that
    the bank regulators are only providing relief to the G-SIBs. G-
    SIBs are subject to the enhanced SLR, as you said, while the
    less-large banks are only subject to SLR.
        Northern Trust is important in Chicago, amazing
    institution. 120-some years, more than that, that they have
    been around, but they are not a G-SIB and, thus, not subject to
    the eSLRs. However, they are still subject to binding capital
    constraints, so it is a concern of mine.
        Moving on, similar to my question regarding adjustment to
    the Basel leverage ratios, I want to ask you about the
    treatment of centrally cleared options.
        The Treasury Department's October 2017 report on capital
    markets notes, and I quote, ``The current exposure method
    model, for example, requires options contracts to be sized in
    their notional face value, rather than allowing for a risk
    adjustment to notional to reflect the actual exposure
    associated with these derivatives. Specifically, CME does not
    permit delta adjustment for the notional value measurements of
    options,'' end quote.
        It also notes, and I quote, ``The CME may be responsible
    for a corresponding reduction in a bank's ability and
    willingness to facilitate access for the market-makers'
    clients, who are the primary liquidity providers in these
    markets,'' end quote. I understand this concern was realized by
    some market-makers during some of the volatility incurred by
    markets in recent months.
        I wonder if you agree with the Treasury report's
    recommendations. Specifically, do you believe there should be a
    risk-adjusted approach for valuing options for purpose of the
    capital rules to better reflect the exposure, such as
    potentially weighting options by their delta?
        Mr. Powell. I actually believe there is an alternative, a
    more risk-sensitive approach that we are moving to in that
    area. But I want to check back with our experts and I will
    follow up with you.
        Mr. Hultgren. That would be great, if you can let us know
    that. My time is up, but thank you again. I appreciate your
    willingness to work with us.
        I yield back to the Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Georgia, Mr.
    Scott.
        Mr. Scott. Thank you very much, Mr. Chairman. Welcome
    Chairman Powell. What is disturbing me and what is remarkable
    and I think downright disturbing to me are the policies coming
    out of this Trump Administration in three specific areas that
    you, as the Chairman of the Fed, our chief economic balancing
    officer, shall we say, has direct input on.
        Did you know, for example, there are three areas
    particularly? First, the tax cuts of the President. Are you
    aware that 83 percent of the President's tax cuts go to benefit
    just 1 percent of the American families? That is not fair at
    all.
        If we go to his budget cuts, you know who is impacted the
    most because of his budget cuts? It is the African American
    community.
        Let me go to his draconian, terrible proposals to cut $17.2
    billion away from food stamp recipients. Then if that is not
    mean and ugly enough, they want to turn out and now stop food
    stamp recipients from even being able to go into the grocery
    stores and buy groceries, just like you and I. This is mean,
    man.
        I want you--you seem like a very reasonable person. Tax
    cuts going to 1 percent, the wealthiest people? Then on the
    same token, they want to send food? We can do without a lot of
    things, but not food. They want to send food in boxes, canned
    food, dried milk, powder milk, to the poor people in this
    country.
        Now, Mr. Chairman, you have the dual mission of inflation,
    unemployment. On top of that, they are crushing. The most
    primary group that's being crushed are African Americans and
    people of color, and I am here to tell you, we are going to
    stand up and fight this Administration.
        I want to ask you to get on our side, the side of the
    American people, because it is clear to me that President Trump
    is not on the side of the American people. You tell me, getting
    83 percent of the benefits of the tax cut to the 1 percent of
    the wealthiest?
        Then turn around, cutting $17.2 billion out of the thing we
    need the most; food for the poorest people? Then on top of
    that, shipping their food in boxes to sit on their porch. Dried
    milk for their babies.
        You tell me, Mr. Chairman, is this the way you think about
    America?
        Mr. Powell. Thank you, sir. I can only say these are very
    important issues, and I take it to heart. But these are not
    issues that we have authority over or--
        Mr. Scott. Now, I was waiting on you to say that, Mr.
    Chairman.
        There is nobody better suited. You are the Chairman of the
    Federal Reserve. Do you know when you sneeze Wall Street
    crumbles? That is why I am pointing this at you, Mr. Powell. I
    have looked at your background. You are well-prepared for this.
        Your experience, as I have read it, shows that you have a
    deep compassion for people. All I am asking you to do is to
    every once in a while, if you could say hold on, Mr. President,
    this isn't right, to be shipping the food to the poorest people
    in this country and denying them a right to go into the grocery
    store, just like me and you buy food. It is not--
        Chairman Hensarling. Time of the gentleman has expired.
        The Chair now recognizes the gentleman from Pennsylvania,
    Mr. Rothfus.
        Mr. Rothfus. Thank you, Mr. Chairman, and welcome Chairman.
    It is good to have you here. The Fed supervises several
    insurance companies that own thrifts. An insurance company that
    has been designated as a non-bank SIFI (systemically important
    financial institution), Congress has taken a strong interest in
    ensuring that Fed supervision reflects the business of
    insurance and the privacy of State regulation of insurance.
        Most notably, Congress passed legislation in 2014 to ensure
    that capital rules for insurance companies are tailored to the
    business of insurance. We appreciate all your work on this
    rule.
        Separate from the pending capital rule, I believe that more
    could be done to ensure that on-the-ground supervision of
    insurance companies is proportional to the risk these companies
    pose in terms of safety and soundness and also reflect the
    existing system of State supervision. What are you doing to
    ensure this, and what more could the Federal Reserve do here?
        Mr. Powell. Thank you, sir. Thanks for your comments. We
    do. I think from the beginning, as I think you see, we have
    tried hard to look at insurance as a new area for us where we
    needed to develop expertise and where it is different from
    banking and it needs to reflect the risks of the insurance
    business.
        We have really invested in that and we have tried to be
    open with it. Continue to do that in developing our capital
    requirement. We have tried to reflect that. I think we were
    very open to the views of experienced insurance regulators,
    some of whom we have hired, and also people from the industry.
        Mr. Rothfus. By my count, there are four vacancies on the
    Board of Governors. How do these vacancies impact the ability
    of the Fed to fulfill its mission?
        Mr. Powell. I am glad you mention that. We could really use
    some more faces on the hall. I don't think we have been down to
    three Governors, certainly not for an extended period before,
    so I am eager to have more colleagues.
        As you may know, I wore an awful lot of hats before I took
    over my current role, and so I have handed those hats out to my
    two colleagues. We are all three quite eager to have more
    people on board. We don't necessarily need all seven
    immediately, but we would sure love to get there.
        Mr. Rothfus. We have talked a little bit about diversity of
    backgrounds, I would like to talk a little bit about diversity
    of experiences. Professor Charles Calomiris of Columbia
    University has highlighted the importance of bringing
    individuals with a diversity of experiences to the table when
    discussing monetary and regulatory policy.
        He describes the culture of the Federal Reserve system as
    academic dominated. While academics surely need to have an
    important voice in these highly technical debates, I can also
    see how a nonacademic practitioner perspective can be helpful.
    Can diversity of experiences like yours help support a more
    reliable monetary and regulatory policy?
        Mr. Powell. I strongly believe that. Let me say, I think we
    need great economists around the table and we need lots of
    them, but we also need people from other backgrounds, people
    experienced in business and from managing profit and nonprofit
    institutions and from the financial markets. I think--and from
    law. Those people bring diverse perspectives and they make our
    decisions better and our discussions better.
        Mr. Rothfus. As you may know, our national debt exceeds $20
    trillion and continues to grow rapidly. At the same time, the
    Fed has been engaged in an unprecedented monetary policy
    experiment. Some have argued that in carrying out this
    experiment, the Fed has stepped beyond what is necessary for
    the conduct of monetary policy and ventured into credit policy.
        Do you worry that unsustainable public debts and the Fed's
    engagement credit policy may increase political pressures on
    the Fed?
        Mr. Powell. It is not a near-term risk, I would say. I just
    would mention, of course, that we are now in the process of
    normalizing our balance sheet and shrinking it. We are moving
    back to a more normal level balance sheet, and I think we will
    be there in 3, 4, 5 years.
        Mr. Rothfus. One thing that has always puzzled me is this
    target 2 percent inflation rate. Just as a layman and looking
    at this and this suggestion seems like it is benign. But, over
    20 years, you mentioned about 20 years, then we hear about 100
    bucks, 20 years ago and you had 2 percent every year the
    purchasing power for that 100 bucks went down. Can you educate
    us a little bit from your perspective about this 2 percent
    target?
        Mr. Powell. Sure.
        Mr. Rothfus. Because my count, what was $100, 20 years ago
    at 2 percent it might cost around 150 bucks today.
        Mr. Powell. This was a big debate which was settled around
    2 percent as opposed to 0 for central banks to aim at, and it
    has become a global standard all around the world. Central
    banks are aiming at 2 percent. The reason why that was picked
    over 2, in essence is that it gives us a little more room to
    cut real interest rates.
        If the interest rate--if inflation is 0 then interest rates
    would be, in the 1, 2, 3 range. Then when a recession comes, we
    would have very little to cut. Having 2 percent inflation we
    think oils the wheels of the economy and gives central banks a
    little more ammunition. It has now become the global standard.
    It would be hard for any bank to diverge from it.
        Mr. Rothfus. I yield back.
        Chairman Hensarling. The gentleman yields back.
        The Chair now recognizes the gentleman from Texas, Mr.
    Green, the Ranking Member of our Oversight and Investigations
    Subcommittee.
        Mr. Green. Thank you, Mr. Chairman, thank the Ranking
    Member. Also I would like to thank the persons who were here
    who call themselves full employment defenders, welcome.
        Mr. Chairman, what do you consider full employment? I have
    the number 5.5 percent, but if you differ, I would like to hear
    your number please.
        Mr. Powell. Yes, so if I had to make an estimate, I would
    say it is somewhere in the low 4s, but I would stress that it
    could be that--what that really means is it could be 5 and it
    could be 3.5
        Mr. Green. Let us take the low 4s or 3.5. When is the last
    time that African American unemployment was in the low 4s or
    3.5?
        Mr. Powell. I don't think it ever has been in the years we
    have been measuring it.
        Mr. Green. Quite frankly speaking, it hasn't been since
    slavery. That is the last time there was full employment for
    black people.
        Mr. Chairman, 6.8 percent seems to be the lowest number
    that I can find since we have been keeping numbers. For the
    last 47 of the last 54 years, it has always been twice that of
    white unemployment, twice. Do you agree?
        Mr. Powell. Do I agree?
        Mr. Green. Yes sir.
        Mr. Powell. That is--
        Mr. Green. Do you agree that black unemployment is,
    generally speaking, twice that of white unemployment?
        Mr. Powell. I think that is what the numbers would support,
    yes.
        Mr. Green. Mr. Chairman, do you agree?
        Mr. Powell. I agree. Yes.
        Mr. Green. OK. Thank you.
        Mr. Powell. It is a true statement.
        Mr. Green. All right. Thank you. It is a true statement.
    Mr. Chairman, do you also agree that invidious discrimination
    still exists in the United States of America?
        Mr. Powell. I would.
        Mr. Green. Do you agree that when we have had an
    opportunity to test banks we have found that invidious
    discrimination exists in lending?
        Mr. Powell. Yes.
        Mr. Green. Do you agree that testing is an effective means
    by which we can acquire empirical evidence necessary to show
    that discrimination exists?
        Mr. Powell. I do believe it is used in that way, yes.
        Mr. Green. Then Mr. Chairman, would you support legislation
    to help us acquire the empirical evidence to show that this
    exists so that we can do something about it?
        You see, we now know the facts. The question is what are we
    going to do about it? Your charge is the promotion of full
    employment. I take that to mean full employment not just for
    white people. I take that to mean for everyone.
        At some point, black unemployment has to be addressed
    because it is chronically twice that of white people. We have
    to use terms like black people and white people to make the
    point. We also have to ask that our friends on the other side
    join black people in doing something about this.
        Mr. Chairman, that which we will tolerate, we will not
    change. We have learned to tolerate African American
    unemployment being twice that of white unemployment. I refuse
    to tolerate it. That is why I use language that is clear and
    concise. There is no question about what I say. The question is
    what are we going to do about it?
        We know that discrimination exists in banking in terms of
    lending. We know that it exists in other areas of the economy
    as it relates to African Americans. The question is what will
    we do about it?
        By the way, I am not assigning all of the responsibility to
    you. That is why I mentioned my friends on the other side and
    my friends on this side. I am a liberated Democrat. Democrats
    and Republicans have to do more about black unemployment.
        Unfortunately, when a black person challenges the system,
    such as I do, it becomes playing the race card. Let me say
    today that I am playing the race card because we have for too
    long allowed this condition to exist.
        Mr. Chairman, I am going to send you a letter and in the
    letter I will request that you explain the role that covert and
    overt unemployment plays in this issue of black unemployment
    being twice that of whites. I will ask you to identify the
    primary factors that limit African Americans' access to
    employment opportunities in sectors that are protected from
    cyclical downturns in the economy.
        I am going to ask you, if allowed, would testing provide
    beneficial empirical data? You have have already said that you
    think it would. I will ask you to put that in writing, Mr.
    Chairman.
        I respect you and I ask that you be of service to all
    Americans, not just white Americans.
        I yield back.
        Chairman Hensarling. The time of the gentleman is expired.
        The Chair now recognizes the gentleman from Colorado, Mr.
    Tipton.
        Mr. Tipton. Thank you Mr. Chairman. Chairman Powell,
    appreciate you taking the time to be able to be here.
        One of the big challenges I think we have really faced as a
    country is the policies in the previous Administration have
    yielded a lethargic growth that impacted communities across the
    country.
        We are now seeing policies starting to step into place that
    are actually getting the economy moving, creating job
    opportunities, putting the resources back into the pockets of
    the individuals who actually earn it, and creating that
    opportunity for people to be able to increase their prospects
    for their families, for their communities as well, which I
    applaud but want to make sure that they are applied across the
    board in the country, as well to each community.
        Now, I would like to be able to highlight one of the
    benefits that I have seen in my district from the Tax Cut and
    Jobs Act in Colorado. The Bank of Colorado, which has a
    significant presence in the western slope of Colorado, the Four
    Corners region that I represent, wrote me after passage of the
    Tax Cut and Jobs Act that they anticipate the passage of the
    reform is going to be having a positive effect on the growth of
    their businesses and our local economy.
        In fact, the Bank of Colorado added a special bonus at the
    end of the year for all 641 of their associates in Colorado and
    New Mexico. They are going to be receiving $1,000 in terms of a
    bonus and part-time associates are going to be receiving $250
    to $500.
        Mr. Chairman, in my part of the country, that is real
    money. It is not a crumb. It is how we pay a mortgage. It is
    how we pay for the electric bill. It is how we provide,
    literally, for our children. To be able to boost those
    opportunities for those employees is actually helping Main
    Street right now.
        The Bank of Colorado's actions, I think, provide an example
    for us in terms of new possibilities that exist in the current
    economy and also looking forward.
        I guess what I would like to able to speak to you on is in
    my State of Colorado we have--and I often spoke to it as a tale
    of two economies--urban Colorado has been doing well. Their
    unemployment is down.
        However, when we move into rural Colorado, we are just now
    starting to see the signs of the recovery and those
    opportunities for the people who live at those rural areas.
        One of the real challenges that I have heard in our
    communities has been from our small community banks, in terms
    of the trickledown effect over regulation that came out of
    Dodd-Frank. The best practices that are being employed that may
    not have been on paper but are implied and they are feeling
    those real impacts.
        I know Mr. Loudermilk had brought up with you earlier in
    the questioning, in regards to being able to tailor some of the
    rules and regulations to be able to meet the size, the risk
    portfolio, the institution.
        Can you give us an idea of what you see as that real
    tailoring? When we could expect that to start to take place, to
    be able to open up those doors of economic opportunity for
    rural America?
        Mr. Powell. In the regulatory space for smaller
    institutions, first of all, we are mindful that the number of
    small banks in rural and non-urban areas has declined very
    sharply over the years. We don't see that as a good trend and
    we don't want to be any part of making it worse. There are
    bigger forces at work there as people move to the cities and
    that kind of thing.
        But as it relates to our regulation, I think we have, just
    recently here, dramatically reduced the scope and burden of the
    call report. We have made exam frequency longer so you have
    longer gaps between exams.
        I think we tried hard to find ways to simplify the capital
    requirements because you just don't need that kind of--you
    don't have the resources to be managing these highly complex
    capital requirements. We went through and, in a number of
    areas, we simplified. We tried to address the shortage of
    appraisers in many rural areas.
        But, honestly, you could go on forever. I think there are a
    lot of small things. I will just tell you that we are committed
    to doing more, and I hope you will hold us accountable for
    that.
        Mr. Tipton. I appreciate that Mr. Chairman. I have a piece
    of legislation, the Taylor Act, to be able to make sure that we
    have rules and regulations that are going to be written to be
    able to meet the size risk portfolio of the institution and
    appreciate your commitment and hopefully willingness to be able
    to work with us.
        Because the objective is to be able to open up those doors
    of economic opportunity for all of our communities across the
    country. One issue which has been brought up to me is also in
    regards to the Community Reinvestment Act, and if you would be
    able to work with us on that as well.
        Our banks do want to be able to make those real
    contributions back in but we have some outdated rules that I
    think we need to address.
        Thank you, and I yield back Mr. Chairman.
        Chairman Hensarling. Time of the gentleman has expired.
        The Chair now recognizes the gentlelady from Wisconsin, Ms.
    Moore, Ranking Member of the Monetary Policy and Trade
    Subcommittee.
        Ms. Moore. Thank you, Mr. Chairman, and thank you again,
    Mr. Chairman, for appearing.
        Just want to appreciate the fact that in your written and
    your oral statement you have doubled down on your commitment to
    tend to your dual mandate to look at unemployment as well as
    the monetary policy. I just want to thank you for--appreciate
    you for that.
        Given that, I just want to focus a little bit on some of
    the things that I think previously Mr. Green just talked about
    and also my good friend, colleague, Mr. Barr, talked about in
    terms of trying to figure out how the Fed is going to balance
    things.
        When we look at unemployment for the general public, I am
    wondering if we continue to have 2 percent as our inflation
    rate, is that, in fact, discouraging toward getting some of
    those groups, like African Americans, mobilized and moved
    toward more full employment? Do you take any guidance from some
    suggestions that perhaps the target, inflation target, ought to
    be 2.5 percent?
        Mr. Powell. I think we are pretty committed to our--we are
    strongly committed to our 2 percent inflation goal. Over time
    the level of employment in the economy is not a function of--
    you can't increase it by increasing the inflation rate.
        We are committed to having a symmetric 2 percent goal so
    that we would be equally concerned with persistent undershoots
    of 2 percent and persistent overshoots.
        Ms. Moore. OK. Given that, I am wondering what your
    thoughts are about the increased income inequality we see in
    this country.
        According to the United Nations Rapporteur Report, the
    United States is on track for being the most unequal, having
    the most inequality in the world. Given the recent tax bill
    where we see, despite what Mr. Barr has indicated about all the
    bonuses and wage increases, that about 43 percent of these
    moneys are being spent in buybacks, another 19 percent mergers
    and acquisitions. That is like 62 percent, those two together.
        Only 17 percent in capital investment improvements and then
    the 13 percent that are in bonuses and raises. We know bonuses
    are one-time only events, which pale in comparison to the
    economic benefit that the company gets. What concerns does the
    Fed have about the increase of income inequality?
        Mr. Powell. It is a big, very complicated set of issues,
    and I will just point to a couple of things. The first is that
    we have seen stagnation of middle-class median incomes. That
    seems to be closely tied to the flattening out of educational
    attainment and skills attainment by our workers.
        I think we need to have the best-trained workforce and the
    most highly educated workforce. That will translate into
    productivity. That will translate into higher wages. I think
    that should be an important focus for us.
        Ms. Moore. OK. Before my time expires, Mr. Chairman, and
    thank you for your patience, I am wondering if you think, as
    the Chair, that we are going to have this tremendous GDP
    growth?
        As you might know, the CBO and the JCT (Joint Committee on
    Taxation) put additional GDP growth of the tax bill, under 1
    percent, despite the $1.5 trillion tax cuts which will increase
    the deficits by that amount over 10 years. Do you agree with
    the CBL and JCT that this GDP growth is going to be under 1
    percent?
        Mr. Powell. The tax bill was passed about a week and a half
    after our December meeting and then the spending bill was about
    a week and half after our January meeting. In each case, we
    didn't really have the full set of information.
        I think my personal view would be that there will be a
    meaningful increment to demand, at least for the next couple of
    years, from the combination of those two things.
        Ms. Moore. There will be increased demand.
        Mr. Powell. Yes.
        Ms. Moore. Although wages aren't necessarily going to keep
    up with that, given the way these moneys are being spent.
        Mr. Powell. I would expect wages to increase this year,
    too, as I mentioned.
        Chairman Hensarling. Time of the gentlelady has expired.
        The Chair now recognizes the gentleman from Texas, Mr.
    Williams.
        Mr. Williams. Thank you, Mr. Chairman. Chairman Powell,
    thank you for being here this morning.
        Sound monetary policy is critically important to unleashing
    the economic opportunity of this great Nation and her citizens.
    In 2018, I can tell you--I am a small business owner for 47
    years on Main Street--we are off to a great start. With a
    booming economy, low unemployment, and Americans having more
    money in their pocket due to the Tax Cuts and Jobs Act.
        While I am encouraged by the strides we have made in the
    last year, I do acknowledge that there is still so much work to
    do. I look forward to working with you to ensure that our
    economy is fully empowered and never unnecessarily restricted.
        Question: Federal Reserve Bank presidents serve a critical
    role in providing local information to the FOMC. This bottom-up
    flow of information is one of the Federal Reserve system's most
    productive features. However, the voting rotation exposes an
    inconsistency in that some of the largest district economies
    cast a vote every 3 years while smaller economies are
    represented annually or every other year.
        Chairman, is it your opinion that each region is properly
    represented under the current voting structure?
        Mr. Powell. Let me begin by saying that I am a very strong
    supporter of our federated system and I think that what the
    Reserve Bank system does, among other things, is it guarantees
    that we will have a diversity of perspectives around the table.
        You have 12 reserve banks. You have 12 economic staffs. I
    think you make mistakes when everybody agrees, generally, has
    been my experience, when you have diverse perspectives and
    people disagreeing.
        In terms of the structure, I really don't think it is
    broken. I will just say when we have an FOMC meeting, you look
    around the table, all 12 Reserve Bank presidents are there and
    they all speak. Honestly, I have to go find the list to
    remember who the voters are and who aren't the voters. It is
    really not so much about who has the vote. It is who has
    persuasive things to say.
        I really do think the current equilibrium served us well,
    and I wouldn't see a reason to change it.
        Mr. Williams. OK. I believe that monetary policy would be
    better informed if district representative, voted consistently
    and San Francisco, Atlanta, Richmond, and Dallas vote every 3
    years, while New York votes every year and Chicago and
    Cleveland every other year. I fear that this underrepresents
    certain economies and that the needs of regions that vote more
    frequently could be unjustly prioritized.
        The presence of Federal Reserve Bank presidents on the FOMC
    helps to drive power away from Washington and New York and
    empower every economic constituency across the country.
        For that reason, I have introduced H.R. 4759, the FOMC
    Representation Improvement Act that would provide every Federal
    Reserve Bank president consistent voting rights, just as New
    York currently enjoys.
        Chairman, do you support a policy that would allow all
    districts consistent voting rights? Be as detailed as you want
    to be.
        Mr. Powell. I would just say I really think the current
    system has served us well, and I think you have a great Reserve
    Bank president in Texas and his voice is certainly well heard,
    as it should be.
        Mr. Williams. OK.
        Mr. Chairman, I yield my time back. Thank you.
        Mr. Powell. Thank you.
        Chairman Hensarling. If you would yield to the Chairman?
        Mr. Williams. I yield to the Chairman. I yield my time to
    the Chairman.
        Chairman Hensarling. Following up on the gentleman from
    Texas, though, Mr. Chairman, again, as we rely more on the IOER
    and less on the FOMC to determine the Fed funds rate, then
    haven't we diminished the role of these regional Fed
    presidents? I know that the FOMC is similar to the Board of
    Governors, but it is the Board of Governors that set IOER,
    correct?
        Mr. Powell. As a legal matter, yes. But it is always set
    consistent with the broader decision of the FOMC.
        Chairman Hensarling. OK.
        Mr. Powell. We don't disagree on that.
        Chairman Hensarling. I would just say, Mr. Chairman,
    perhaps that is one more reason we should attempt to normalize
    monetary policy to ensure that this diversity of view is
    represented at the table.
        Speaking of diversity of view, last year in a speech, New
    York Fed Reserve Bank President William Dudley commented on the
    Volcker Rule and said, quote, ``The line between market making
    and proprietary trading is not always clear-cut, which makes
    regulation in this space difficult. It may be worth considering
    giving greater discretion to trading desks that facilitate
    client business to intervene when markets are illiquid and
    volatile.''
        We know we have seen historic volatility and illiquidity in
    our fixed income market since the advent of the Volcker Rule.
    Do you agree or disagree with President Dudley's analysis?
        Mr. Powell. I would agree. My view is that we can--and we
    are taking a fresh look at the Volcker Rule to try to implement
    it in a way that is faithful to the spirit and letter of the
    law, but do it in a way that is--
        Chairman Hensarling. We have had a lot of testimony in this
    committee about how this does inhibit job creation and economic
    growth. In the Financial Choice Act, we repeal the Volcker
    Rule.
        An alternative, we have legislation to make at least the
    Fed the lead regulator so there would be one centralized
    regulator in exempt community banks. Would the Fed be ready to
    take on that role should this be signed into law?
        Mr. Powell. We would. I think we would probably take it on
    even without law. I think we are the natural group to have the
    pen there, and it is a multiagency rule and someone needs to
    coordinate it and we would be happy to do that.
        Chairman Hensarling. Thank you, the time of the gentleman
    from Texas has expired.
        The Chair now recognizes the gentleman from Nevada, Mr.
    Kihuen.
        Mr. Kihuen. Thank you, Mr. Chairman, and thank you,
    Chairman Powell, for being here and for your testimony.
        I just have a couple of quick questions. I represent
    Nevada, which had the highest unemployment rate in the country
    during the recession. Despite the progress in reducing the
    overall level of unemployment since the recession, wage growth
    has largely remained low and stagnant for the vast majority of
    Americans.
        In fact, the average American hasn't seen a real pay
    increase since the early 1990's. Many working people have not
    seen one since the 1970's.
        According to the Economic Policy Institute, middle-aged
    workers, hourly wage is up only 6 percent since 1979. Low-wage
    workers' wages have decreased by 5 percent, while those with
    very high wages have seen an increase of 41 percent.
        Piggybacking on what Mrs. Beatty was saying, we live right
    now in a country where the rich are getting richer at the
    expense of middle-class people.
        I say this, from somebody who has been unemployed before,
    who has woken up, gotten dressed up, and having nowhere to go,
    but just knowing that if you keep your head up, you are going
    to find something and everything will be OK. But most of the
    people who are receiving the tax breaks today don't understand
    that struggle that most Americans have gone through.
        With that in mind, what steps can the Fed or Congress take
    to help combat this wage inequality, to piggyback on what Mrs.
    Beatty was saying, and ensure that further wage gains are
    shared by middle-wage and lower-wage workers?
        Mr. Powell. I think our part of this, sir, is to take
    seriously our obligation to achieve maximum employment. That is
    what we are doing. I would say more broadly on wages, over long
    periods of time the only sustainable way for wages to go up is
    for productivity to increase. Productivity is a function of
    investment in people's skill and investment in plant and
    equipment by businesses and by people.
        Those are things that, I think, that Congress should--we
    don't have those tools. Those aren't things we control. But
    those are things that Congress and the Administration, I
    believe, would be well served to focus on.
        Mr. Kihuen. Thank you, Mr. Chairman. Do you think that the
    minimum wage requirements offset the failure of the private
    market to afford workers a livable wage? We have seen this
    discussion in the last couple of years, whether we should be
    raising the minimum wage nationally.
        People have been talking about $12 an hour. People have
    been talking about $15 an hour. Do you think that this is
    something that needs to happen here in America?
        Mr. Powell. Minimum wage policy is really a form of fiscal
    policy, it is really not for us. There is research that shows,
    for example that people who provide less value than the minimum
    wage, entry-level workers and that kind of thing, can be
    disadvantaged.
        Then there is research that shows that they aren't. I think
    these are questions that are really best left for you.
        Mr. Kihuen. Mr. Chairman, you are the Chairman of the
    Federal Reserve, and I know you are an expert. You probably
    know more about this than I do. But I believe that when you
    increase the wages of workingclass families, they spend more
    money.
        They go out there and stimulate the economy. Businesses
    make more money, they hire more people, they expand. They open
    up a second and a third store and so on and so on.
        I know some of my colleagues believe that somehow you give
    these big tax breaks to the millionaires and the billionaires
    and somehow it is going to trickle down to the workers. I don't
    believe in that.
        I represent part of Las Vegas where a lot of the folks are
    hard-working people--janitors, housekeepers, cooks, chefs,
    waiters. Those folks are the people who make Las Vegas run. If
    you increase the wages to those folks, they are going to go out
    there and spend more money and stimulate the economy. That is
    the reason why I believe we have had this wage inequality in
    this country.
        But with that being said, Mr. Chairman, my last question is
    why has the Fed been so focused on pre-empting inflation since
    the 1980's, when wages have barely budged?
        Mr. Powell. I think it serves all constituencies well,
    including by the way, the people in the lower income groups to
    have inflation low and under control. It really hits those
    groups the hardest when inflation gets out of control.
        I think it is a good thing for the economy that we have
    managed to control inflation. I think the way we get at wages,
    again, is by taking maximum employment seriously. I think, at
    the moment we have really done that, and for some years we have
    really done that. It will show up in wages.
        Mr. Kihuen. Thank you, Mr. Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Arkansas, Mr.
    Hill, the Majority Whip of the committee.
        Mr. Hill. Thank the Chairman. I thank Chairman Powell for
    his testimony today. In listening to the discussion this
    morning, I think we need to be clear on the record, both
    Chairmen--Chairman of the committee and Chairman of the Fed--
    that the biggest thief for working people in this country and
    across the world is inflation.
        Nothing depresses buying power more than inflation, and
    nothing cuts into those at the hardest working part of our
    society than inflation. I think minimizing inflation and having
    dollar stability and safe and sound capital markets are a
    worthy objective of the Fed. Thank you and your colleagues for
    fighting for modest inflation so that people have real wage
    increases.
        I do believe that one of the benefits of the restructuring
    of our tax system will be to increase productivity, and
    productivity will see wages go up. We have certainly seen that
    here in the first 2 months of the year, as company after
    company has talked about that.
        Ms. Moore referenced it as well, but I saw a Morgan Stanley
    research study this week that calls for earning projections for
    2018 to be up 8 percent.
        That over 44 percent of those companies fully expect to
    reinvest in their companies, in training and capital
    expenditures and both these efforts will produce higher wages.
    Another 30 percent of companies plan to increase CapEx to
    increase productivity, as well as distribute more earnings. I
    view these things as positive for our economy.
        I want to follow up on Chairman Hensarling's comments a
    bit, Chairman Powell, about your exchange you had on the
    Volcker Rule. The Chairman talked about a bill I have
    introduced to harmonize regulatory oversight, because you have
    noted in previous testimony, President Dudley has, even Mr.
    Tarullo has about the complex of this rule that we are not
    getting it done. We are not doing a good job of even enforcing
    the rule.
        But on this harmonization bill, I have had some difficulty
    in getting members to understand that giving relief to banks
    under $10 billion, community banks, which is what is in Senator
    Crapo's bill over in the Senate, is somehow letting those
    community institutions off the hook of safe and sound banking
    practices. I would like for you to respond to what I told them.
        Saying our community banks are not subject to the Volcker
    Rule, that doesn't mean that they are not subject to the
    careful scrutiny of our bank regulators for safe and sound
    banking practices.
        Isn't it true that if one of your regulators went in a bank
    under $10 billion, a holding company, and they were doing
    something that you deemed unsafe and unsound related to
    Volcker-type activities, that they could be disciplined for
    that under the existing banking rules?
        Mr. Powell. Yes, sir. It is absolutely true that we don't
    need Volcker to go in and find unsafe and unsound practices. In
    addition, certainly in the bill you mentioned that Senator
    Crapo has introduced, you can't have anything more than a very
    small trading book in the first place--
        Mr. Hill. Right.
        Mr. Powell. --Even if you are under $10 billion.
        Mr. Hill. Right.
        Mr. Powell. We don't see significant safety and soundness
    implications at all from that.
        Mr. Hill. I appreciate that. I just think it needs to be
    clear in this committee that we have the tools necessary to
    enforce safe and sound banking practices for banks of all
    sizes, particularly those in the smaller size that is
    referenced in my legislation.
        But that the real mission here, by designating the Fed as
    the principal regulator among your colleagues, that we will get
    better, more discrete, interpretive guidance on how to properly
    enforce the Volcker Rule, which I think is a big source of
    confusion around the capital market system. Do you agree with
    that?
        Mr. Powell. I do. It has been difficult with these multi-
    agency groups to get to agreement. Just the Volcker Rule in
    particular, I think, is quite complex and we can certainly
    simplify it.
        Mr. Hill. I think when you have testified previously, said
    that some trading desks needed a Ouija board to figure out the
    decision to make. That freezes up capital markets in times of
    illiquidity that I am the most concerned about is
    misinterpreting that rule by compliance departments
        Mr. Powell. I think we--
        Mr. Hill. Have you seen that in your work with your
    district bank presidents about that exact thing where we are
    hurting illiquid securities?
        Mr. Powell. We do hear that. I think it stands to reason,
    if you provide more certainty about where the law applies and
    where it doesn't, if you don't have to convene a giant meeting
    and break out the Ouija board to find out whether you are
    complying with the law or not, then you are going to have more
    certainty and you are going to have people being able to do
    their business better.
        Mr. Hill. I appreciate you, and I wish you my very best
    wishes for your service as our Chairman of the Federal Reserve.
        Chairman Hensarling. Time of the gentleman has expired.
        The Chair now recognizes the gentleman from Minnesota, Mr.
    Ellison.
        Mr. Ellison. Thank you, Mr. Chairman, Ranking Member.
        Welcome to the committee, Mr. Chairman.
        Now, Mr. Chairman, the Cato Institute estimates that ending
    the Deferred Action for Childhood Arrivals program and making
    those young people deportable could cost the U.S. economy over
    $280 billion in reduced economic growth over 10 years.
        The Center for American Progress puts that number at about
    $460 billion--bigger, but still a loss. The U.S. Chamber of
    Commerce does not put a number on it, but they do say, and I
    will quote, ``Ending DACA would be a nightmare for America's
    economy.'' What economic impact would ending DACA and making
    700,000 Dreamers deportable have on our economy?
        Mr. Powell. Let me say that these are difficult and
    important issues. We, of course, don't do immigration policy at
    the Fed--
        Mr. Ellison. But I am not asking you about immigration
    policy. I am asking about economic impact of taking 700,000
    people, 90 percent of whom are employed, out of the economy
    suddenly. That is what I am asking you about.
        Mr. Powell. I don't want to wade into a very hot political
    discussion. But I will say this. You think about economic
    growth, it can really come from only two ways. You can simplify
    it. It is either going to be more people working or it is going
    to be higher productivity.
        We have talked a lot about productivity, but the workforce
    is now growing, only at about 0.5 percent per year. Some of
    that has been from immigration. To the extent you care about
    potential growth, you need to be considering that in your
    discussions about immigration.
        Mr. Ellison. What I hear you saying is that taking 700,000
    people, 90 percent of whom are employed, out of the workforce
    could cause problems.
        Mr. Powell. I am just not going to comment on that
    particular situation.
        Mr. Ellison. I hear you. But I am asking you about the
    economics of it. I am asking you as somebody who leads an
    institution that has a mandate not just to keep inflation down,
    but to pursue full employment. You have a dual mandate. I am
    asking you about employment. You are declining to answer my
    question.
        Would you like to just talk about what it means--what it
    would mean to take 700,000 people out of the economy? Let us
    just say they all went to Mars for some reason.
        Mr. Powell. In fairness, Congressman, I really am not going
    to get into the debate over DACA. I am just not going to do
    that.
        Mr. Ellison. I am not asking you to, sir. I am just asking
    you to talk about the economics of it.
        Mr. Powell. Well, and I--
        Mr. Ellison. Let me ask you this.
        Mr. Powell. I said the--
        Mr. Ellison. Let me see if you can answer this. What does
    it mean to have a group of people in their prime working years
    suddenly disappear from the economy?
        Mr. Powell. All else held equal you would lose some
    productivity from that, some output from that.
        Mr. Ellison. OK. Thank you very much. There is a research
    group known as REVEAL. They did a study looking at, literally,
    millions of HMDA reports.
        I would like to ask for unanimous consent to have their
    report submitted for the record?
        Chairman Hensarling. Without objection.
        Mr. Ellison. Yes. But they looked at 31 million HMDA
    records in a year-long analysis and found that 61 municipal
    areas across the United States had denied people of color,
    black and brown people, the right to take on a mortgage
    compared to equally qualified whites.
        What is the economic impact of that discrimination, in your
    view? When people can afford a mortgage and are told you can't
    have one, what sort of impacts could we expect to see when that
    happens on a systematic basis?
        Mr. Powell. I think it is so fundamental to our society
    that there should not be racial discrimination along the lines
    of credit availability--
        Mr. Ellison. But see, that is a moral position, and I agree
    with you. But I want to know how does it affect the economy?
        Mr. Powell. Start with those people. I think if people are
    denied access to credit, then they are going to be less able to
    attend school, perhaps less able to start a family, less able
    to move to a new job, all kinds of things.
        Economic outcomes for individuals would be, potentially,
    significantly reduced. I think if you take that out across a
    broad population, it would certainly hurt the growth of the
    country.
        Mr. Ellison. I do want to get your views on whether you
    agree with Fed Chairman Neel Kashkari that increasing legal
    immigration would grow our economy. But I will probably have to
    get that answer another time.
        I yield back, Mr. Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from North Carolina,
    Mr. Budd.
        Mr. Budd. Thank you, Mr. Chairman.
        Chairman Powell, again, congratulations. I know you have
    heard it many times today, but we are glad to have you here.
        Would it be fair to say that the current Administration is
    willing to review and perhaps even question decisions made by
    the FSB, the Financial Stability Board, in the past? I would
    love to have some of your thoughts on that, about looking back
    at decisions that they have made. Would you be willing to
    review and question those?
        Mr. Powell. Sure. I think we always--the FSB doesn't make
    decisions about U.S. regulation. They make recommendations.
    Then if we were to enact something into law, in a regulation we
    would put that out for comment and anything like that could be
    reconsidered in principle, sure.
        Mr. Budd. Sure. As much as their--
        Mr. Powell. I can't think of anything that comes to mind,
    but maybe you will help me.
        Mr. Budd. Certainly. As much as--I have one in particular,
    but as much as their opinions have influenced policy, here is
    one in particular that I am thinking about.
        In 2013, FSB instructed the International Association of
    Insurance Supervisors (IAIS) to create a new international
    capital standard for internationally active insurance groups.
    There seems to be universal concern among U.S.-based insurers
    that the current trajectory of these discussions would be bad
    for the U.S. market and U.S. policyholders.
        Many times when questioned, the IAIS leadership attempts to
    hide behind the FSB. They say, FSB told us to do this, they
    told us to do that. It is my view that these negotiations on an
    international capital standard, if they don't move in a more
    positive direction, we might just need to rethink how the FSB
    just gets affected by this.
        Just wanted to have your thoughts on that and about going
    back and reviewing that, particularly with the international
    capital standards?
        Mr. Powell. I served on the supervisory committee for
    several years but I haven't been involved with it for some time
    now, and I am not exactly sure where that one is. But I know
    that we had rolled out a capital requirement in broad form. I
    will have to come back to you on where that stands, if that is
    all right?
        Mr. Budd. Sure. One of the things is just, and it may have
    the FSB involved, new directives, but just can I have you
    confirm or that you are willing to work through the FSB to
    redirect the IAI--excuse me, there are so many acronyms in this
    place, aren't there?
        Mr. Powell. There are a lot.
        Mr. Budd. But the IAIS if needed, would you have the FSB
    review that?
        Mr. Powell. Can I just confer with our people who do
    insurance regulation?
        Mr. Budd. Absolutely.
        Mr. Powell. I promise to come right back to you.
        Mr. Budd. No problem at all, thank you.
        Mr. Powell. Thank you.
        Mr. Budd. I yield back.
        Chairman Hensarling. Would you yield to the Chairman?
        Mr. Budd. Yield to the Chairman.
        Chairman Hensarling. I appreciate the gentleman for
    yielding. Chairman Powell, I just want to revisit an area that
    we had spoken about briefly during my questioning, and I am
    still not sure I am completely clear on the answer. This has to
    do with the run off of the balance sheet.
        Again, the monthly cap on your security rolloffs, your
    treasury security rolloffs, rather, will rise to $30 billion,
    in the report that you just released Friday.
        But according to data from the system's open market
    account, you don't have $30 billion of treasury securing every
    month. I am trying to figure out, are you making up the
    shortfalls? Did I understand you to say these caps are
    flexible? I still don't quite understand what you intend to do
    when you don't have enough treasuries that are actually
    maturing to hit the $30 billion.
        Mr. Powell. The purpose of the caps was to give us a way to
    gradually start the run off. You are right. The caps are not
    going to be binding either for treasuries or MBS in most
    months. I think only for treasuries in the big treasury
    refinancing months.
        You can think of them as not really restraining either. We
    didn't. We weren't saying--our projections don't say we are
    going to roll off exactly $50 billion per month. That is not
    how it works.
        That is never how it was intended. Of course we don't know
    how fast MBS are going to run off because they run off
    depending on where interest rates are. We do know with
    treasuries, and we do know that we are moving right along.
    These are significant reductions this year and next year in the
    size of the balance sheet.
        Chairman Hensarling. As of a couple of weeks ago, the
    balance sheet, if I saw it right, was at $4.4 trillion. By
    year's end, at the current rate of roll off, it ought to be at
    $4 trillion. If you kept to the pace, $3 trillion, 2 additional
    years of roll offs, about $2 trillion 4 years from now. Does
    that sound about right? Is that the current expectation?
        Mr. Powell. Something like that, yes.
        Chairman Hensarling. OK. But that still leaves your balance
    sheet roughly twice of what it was pre-crisis era. Do you
    expect it again to stay there? Do you not expect the demand for
    cash to wane as interest rates rise?
        Mr. Powell. Right now we have $2.2 trillion in non-reserve
    liabilities. That is to say--and when we shrink the balance
    sheet, what goes away is the reserves. That is the liability
    that goes away.
        That $2.2 trillion in liabilities, you then have to add on
    whatever the equilibrium demand for reserves is. It is probably
    going to be at least several hundred billion no matter what we
    do. That is how I get to 2.5 to 3.
        Chairman Hensarling. Time of the gentleman has expired.
        The Chair now recognizes the gentleman from Illinois, Mr.
    Foster.
        Mr. Foster. Thank you for appearing here. This is an
    important part of communication with Congress.
        I would like to follow up on Representative Royce's line of
    questioning about the dangers of default. I would like to
    repeat his thanks to you for being involved in educating
    Members of Congress about the necessity of taking seriously our
    payments on principal and interest. They are really two
    different kinds of defaults.
        They are defaults driven by fundamentals. When a country
    simply does not have the ability to repay its debt if you think
    about Iceland where there were debts from the banking crisis of
    700 percent of GDP, and just no way to get people to pay it
    off, much less the country.
        There are other ones that are just self-inflicted wounds,
    like our voluntary failure. This is when a country that has
    more than enough money to pay its debts, simply has, for some
    political reason, refuses to do it. Over time, both parties
    have been guilty of abusing and weaponizing the debt limit.
        I just want to encourage you that there is a bipartisan
    consensus that could be assembled to permanently get rid of it.
    It is always being abused by whichever party is in the
    minority. At some point, I think everyone should step back. You
    are an important part of opinion-making in Washington and in
    financial circles so I wanted to--anything you can do to
    encourage that to actually happen.
        There may be a moment when the stars align and we can just
    get rid of this uniquely dumb thing that we do, of threatening
    to not pay our debt.
        Now, there is also the question of, is there enough money?
    You hear often, oh, there is just not enough money because of
    things like the publicly held debt. There is just not enough
    money and we have to cut Medicare, and that we have to cut all
    the things that, frankly, poor people depend on. I would like
    to go into that.
        The U.S. household net worth sometime this year it is going
    to go over $100 trillion. OK? $100 trillion and debt, publicly
    held debt, is 75 percent of GDP, so it is around 16, 17, I
    would guess. Would you agree that there is clearly enough money
    in the United States to pay off our national debt?
        Will we ever reach a situation where the world says there
    is so much debt in the United States, public or private, that
    we simply cannot do it? We cannot cover our debts?
        Mr. Powell. I wouldn't want to run the test. I do think
    there would come a time that which--and it is not this time by
    a long shot. But there could come a time where the public, the
    global debt-buying public would come to the view that we either
    weren't prepared to honor our debts or that we couldn't service
    them. But we are a long way from that.
        Mr. Foster. But that is different. For example, in Japan
    where the debt is more than 200 percent GDP, the markets are
    not concerned simply because the amount of private wealth in
    Japan is more than enough to cover that.
        The situation is different in China where there is a huge
    amount of often unacknowledged private-sector debt. When you
    think of what will happen when that debt fails that will land
    first on regional banks and then the main banks and basically
    on the government's balance sheet.
        There is a real danger in the case of China that there is
    just not enough money in China and enough wealth in China to
    cover the debt. Would you agree there is a fundamental
    difference in the United States, that we actually do have the
    money to pay off our debts by a long margin, because of the
    large public wealth in this country? That really it is a
    political problem that we face rather than one of just not
    having enough money?
        Mr. Powell. Yes. We certainly have enough money to service
    our debts and honor them without question.
        Mr. Foster. Yes.
        Mr. Powell. But really the issue, I think, is servicing
    them gets more and more expensive as they accumulate, as the
    numbers go up and those bills are going to be borne by our
    children.
        Mr. Foster. No, I agree completely. The wisdom of lowering
    taxes at a time when the economy, frankly, doesn't need to be
    stimulated is something that, well, it is elementary
    macroeconomics that you run a deficit when the economy is in
    trouble and then when the economy recovers you pay off the debt
    that you have accumulated in order to smooth things out.
        You have a section on pages 14 and 15 of your report that
    you are presenting on the low inflation in advanced economies,
    which is something that is a wide spread. Do you have any
    thoughts on really what your main suspicion is for why that is
    taking place?
        Mr. Powell. It has been a long-run trend. Inflation has
    been coming down for 25 to 30 years all over the world. It
    probably has something to do with the aging of the population
    and with low productivity and those sorts of things. It
    probably also has to do though with--sorry.
        Chairman Hensarling. Time of the gentleman has expired.
        The Chair now recognizes the gentleman from Maine, Mr.
    Poliquin.
        Mr. Poliquin. Thank you, Chairman Hensarling, very much,
    and welcome Chair Powell. It is wonderful to meet with you
    again, and I know it is your first time before us and thanks
    for being so direct and giving us the answers to the questions
    that we ask.
        Sir, I represent probably the most stunningly beautiful
    part of the world. It is rural Maine. If you haven't been there
    Mr. Powell, we are blessed with such natural beauty. We have
    3,600 miles of breathtaking coastline. We have thousands and
    thousands of lakes and ponds and hundreds of miles of rivers
    and streams. We are also called Vacationland.
        Now, you look like a fellow that probably needs a vacation,
    and I am not sure if you booked your Maine vacation yet but if
    you have a problem, Mr. Powell, you just call up our office and
    we will help you out.
        Now, when you go on your Maine vacation, and this is a
    great time to go by the way, if you like to snowmobile or the
    summer, you are going to find throughout our district, the
    rural part of Maine mostly, that we have a lot of shutdown
    factories and mills.
        When I was a kid growing up we had maybe 2 dozen paper
    mills. We have six left and they are healthy. You look at a lot
    of our textile and tanneries and shoe factories, mostly
    shutdown.
        We have in many cases, Mr. Powell, done that to ourselves
    with trade agreements that were unfair and hurt our workers,
    high taxes that didn't allow us to be competitive. I know we
    have partially fixed that problem back in December with passing
    the tax cuts and then costly regulations.
        Now, I am sure you are familiar, Mr. Powell, with the
    Competitive Enterprise Institute computation, which says, and I
    summarize, about $1.9 trillion a year cost is paid by our
    employers and through them, pass through to some of our
    consumers. $1.9 trillion cost just to comply with Federal
    regulations, not State and local, just Federal.
        Is it fair to say, Mr. Powell, that unnecessary and costly
    regulatory burdens hurt the economy's growth and hurt job
    creation? Is that a fair thing to say?
        Mr. Powell. I think it is. Yes.
        Mr. Poliquin. OK. Would you look at the past year, 2017,
    and up until now when you have the economy growing at roughly 3
    or so percent as compared to about 1.7 percent the last,
    roughly, 8 to 10 years, is part of that increased economic
    growth and more jobs and fatter paychecks, the result of
    repealing unnecessary and expensive regulations?
        Mr. Powell. Intuitively I would guess that it is, but it is
    very hard to pin that down. It is very hard to--
        Mr. Poliquin. I think anybody, with all due respect, Mr.
    Powell, who has run a business as I have, realizes that if it
    is less burdensome to run my business and sell product or
    services, that I am going to be more competitive. I will be
    able to hire more people and do better.
        Let me give you an example. This morning I met with about
    100 folks from our credit unions in Maine. These are wonderful
    people who are spending more time or too much time dealing with
    compliance as compared to pushing money into community so
    businesses can grow and hire more workers.
        Can you commit today, Mr. Powell, that you will do
    everything humanly possible within your purview to make sure
    that the regulatory burden for our small financial institutions
    are controlled and hopefully repealed?
        Mr. Powell. I will make you that commitment.
        Mr. Poliquin. You will or will not?
        Mr. Powell. Will.
        Mr. Poliquin. Thank you, sir. Have you taken a look at
    Senate Bill 2155 which deals with part of the Choice Act that
    we sent over to the Senate and they are dealing with issues, in
    particular with small credit unions, community banks that help
    them deal with the regulatory burden. Have you taken a look at
    that sir?
        Mr. Powell. I am not so good on the numbers of the bill.
    Does this bill have a name?
        Mr. Poliquin. It is, I believe, Mr. Crapo's bill.
        Mr. Powell. Yes. No. I am familiar with that bill.
        Mr. Poliquin. Great. You are supportive of that I take it,
    because it deals with exactly with what you and I are talking
    about.
        Mr. Powell. It is a big bill. There is a lot in there. I
    think it is a very constructive enterprise, and I think the
    aspects of it that you are talking about and I certainly think
    are sensible.
        Mr. Poliquin. Perfect. Let us move on. Thank you, Mr.
    Powell. I appreciate that. Let us talk a little bit about what
    Mr. Foster was talking about.
        This is just wonderful talking about the national debt. We
    have $21 trillion and Chairman Hensarling is very good to put
    that number up every time we come in here and you can see it on
    both sides of the room. I am looking at it, and I tell you it
    makes my belly sick.
        Now, we have had other folks in the last Administration,
    Mr. Powell, that have come here and said, well, this no big
    deal, Bruce, $21 trillion in national debt. I used to be the
    State treasurer in Maine and I will tell you we knew how to
    balance our books and spend only what we took in. When I was
    there, the debt clock was unwinding.
        Now we have about $240 billion, $245 billion per year
    interest payments on that debt. Mr. Powell, do you take a
    different tack from the folks that were here earlier, the last
    Administration? Do you think this is a problem?
        Mr. Powell. Do I think is a--
        Mr. Poliquin. Yes, this $21 trillion in debt.
        Mr. Powell. Yes, I think we are not on a sustainable fiscal
    path and I think--
        Mr. Poliquin. I would agree with that. We can agree that
    this is a problem. With that said, sir, my second day here in
    Congress, I co-sponsored--the first bill I co-sponsored was a
    balanced budget amendment to the United States Constitution to
    finally force Washington to live within its means, stop
    balancing our books and start paying down the debt. Do you,
    sir, think that is a good idea?
        Mr. Powell. Not a supporter of the balanced budget
    approach. Am a supporter of a sustainable fiscal path.
        Mr. Poliquin. Mr. Chairman, I am going to come back to Mr.
    Powell on that at some time.
        Chairman Hensarling. Time of the gentleman has expired.
        Mr. Poliquin. Yes, sir.
        Chairman Hensarling. The Chair now recognizes the
    gentlelady from Ohio, Mrs. Beatty.
        Mrs. Beatty. Thank you, Mr. Chairman, thank you, Ranking
    Member, and thank you, Mr. Chairman.
        Certainly, as one would expect, with you being the Chair of
    the Federal Reserve, that the questions would be centered
    around economic projections, economic developments, financial
    stability, monetary policy.
        But I am going to keep in my true form of asking you the
    same question that I have asked everyone who has sat in that
    seat. Are you familiar with Section 342 of Dodd-Frank?
        Mr. Powell. Yes, ma'am, I am.
        Mrs. Beatty. OK, the OMWI, so with that, the Office of
    Minority and Women Inclusion, can you tell me, in your short
    time, which I recognize, but you also have almost a half-decade
    of being Chairman of that board. Tell me what you are proud
    about that is under your leadership with OMWI.
        Mr. Powell. I will be glad to. A couple of things, first,
    as I mentioned, I have been involved in now my seventh Reserve
    Bank Presidential search, and I think, in every case, we have
    been able to expand the universe of diverse candidates and
    select diverse candidates, too. I am proud of that. I think the
    Reserve Banks do a good job, by the way, on this.
        I think, at the board, Chair Yellen started a group of us
    to meet regularly and try to advance diversity and inclusion
    agendas at the board. I was an enthusiastic--
        Mrs. Beatty. Let me ask you this. Who is your OMWI person?
        Mr. Powell. Sheila Clark.
        Mrs. Beatty. OK. Do you think you can increase your
    numbers, as Chairman Yellen had worked on rising them? While it
    was a fair job under her, I asked her the same question, and
    she admitted it could be better.
        While I am saying you the entity, has done something, I
    want to hear how we can do more, because it is still not at
    bragging rights, in my opinion. I want you to think about that.
        We have a lot of people who are in the audience today in
    green T-shirts, who represent many of the people who I
    represent in the 3rd Congressional District, many of them
    women, many of them women of color, who also are concerned.
        The only difference with them is they put the people face,
    the human resources, on the same monetary policy and all the
    questions my colleagues on the other side have been asking you
    about numbers.
        Have you met with these individuals?
        Mr. Powell. Yes, I have.
        Mrs. Beatty. OK. Can you share with me some positive
    progress that you or the people who work with you are doing
    with them?
        Mr. Powell. We met with a group with the green T-shirts a
    couple years back. They just wanted to tell us about what was
    going on in their communities, and frankly, I thought it was a
    proud day. We sat there and listened to what was going on in
    their communities, and it was very respectful, and it was
    useful. We also have other meetings.
        Mrs. Beatty. Would someone on your staff be able to send me
    a report so I would have something in writing to know some
    benchmarks? Because I know, in meeting with them and their
    representatives, they have specific questions that they want to
    see, and they are asking about interest rates. They are asking
    about how we can help improve the economy for what we call
    working middle-class Americans.
        Let me put it a different way. I would like to get a report
    from your staff sharing with me, since you have had a meeting,
    what type of commitments or things you are going to work on. I
    would like to have that.
        Second, let me move to another financial question. I
    noticed in your report that there wasn't anything about the
    stock market. Can you tell me if you think the stock market is
    one of the best or better indicators of the strength of the
    economy or the strength of the financial conditions for
    everyday Americans?
        I ask you this because a lot of my colleagues on the other
    side have been bragging a lot about the stock market and how
    the stock market is going up.
        Mr. Powell. There was one reference in there about the
    recent volatility. I don't think we called out the stock market
    by name, but that was what we were talking about. We don't
    manage to the stock market. We manage to stable prices and
    maximum employment.
        The stock market enters into our thinking. It is an
    important place for businesses to raise capital. It is an
    important place for investors to invest.
        Mrs. Beatty. Is that a yes or a no, in your opinion?
        Mr. Powell. In my opinion is it what? Is it an important
    indicator of the overall state of the economy?
        Mrs. Beatty. Yes.
        Mr. Powell. I think the general thing is the stock market
    is not the economy, but it is a factor. It plays a factor as a
    role--
        Mrs. Beatty. Would you say that only 50 percent of
    Americans own stock market, so the other 50 percent, who may be
    women and minorities, don't?
        Mr. Powell. That is right, yes.
        Mrs. Beatty. I yield back.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The Chair now recognizes the gentleman from Georgia, Mr.
    Loudermilk.
        Mr. Loudermilk. Thank you, Mr. Chairman. Chairman Powell,
    thank you for being here today and spending so much of your day
    with us. We really appreciate it. But it is important that we
    have this dialog.
        I want to talk about something. I don't know that it has
    been discussed much here today, but it is something that is
    very important for me, especially spending over 20 years in the
    IT industry, dealing with securing data. That is something that
    has been on the mind of most Americans, and that is
    cybersecurity and protecting the data of Americans.
        One of the areas of interest of mine, and I have stated
    this in almost every hearing that we have had on this topic,
    when I was in the military working intelligence, I worked on
    the technology side of it. Of course, when you are dealing with
    the Nation's secrets, there is a huge responsibility to protect
    that information.
        We had a simple principle. That principle was, you don't
    have to protect what you don't have, which means, if you don't
    absolutely need it, get rid of it. Otherwise, it becomes a
    risk.
        The Federal Board of Governors has experienced more than 50
    data breaches since 2011. Of course, that is very alarming,
    given how much data the Government collects, and not only
    collects itself, but requires private sector businesses to
    collect, which means they have to protect it, as well.
        Your predecessor, Chair Yellen, told me, when I asked these
    type of questions, that the Fed follows the NIST cybersecurity
    framework and was working on minimizing access to sensitive
    data.
        I would like to follow up. What are you working on to
    strengthen the Fed's cybersecurity profile and to protect the
    data that you have?
        Mr. Powell. Thank you.
        I am just getting started on this. I am going to place a
    high priority. I think Chair Yellen and others did before her,
    too. We need to protect the sensitive information that we do
    have, and we don't need to collect sensitive information that
    we don't need. That is a very fair point.
        Mr. Loudermilk. Thank you. Yes.
        Mr. Powell. I think we have done a good job. We can
    certainly do better. It is going to be a high priority.
        Mr. Loudermilk. I appreciate that, and that is one of the
    areas, and I am glad to hear you say that you are looking at
    disposing of or not keeping certain data unless you need it,
    because that is something I think that we overlook as a
    Government, because access to information is power. But when
    you have it, you have to secure it.
        Transition over into another area that we have been dealing
    with here. I understand that you are supportive of some of the
    regulatory relief proposals that we have pending in Congress,
    such as increasing the SIFI threshold to $250 billion from the
    current $50 billion.
        While I believe that Mr. Luetkemeyer's SIFI designation
    reform bill takes a more thoughtful approach to measuring and
    designating systemic risk, I think it is still a step in the
    right direction.
        Can you help explain why banks under $250 billion in assets
    don't pose a systemic risk to the economy?
        Mr. Powell. As a general matter, banks under $250 billion
    are more engaged in the traditional business of banking, less
    complex activities and, of course, they are much smaller. They
    have smaller footprints.
        The way that Senator Crapo's bill works is we would still
    have the ability to create a framework to look below $250
    billion down to $100 billion institutions, to identify places
    where, perhaps, enhanced prudential standards might need to be
    applied.
        That is the way the bill works. But I think our view has
    been that that combination of raising the threshold and giving
    us the ability to go below it, in cases where needed, gives us
    the tools that we need.
        Mr. Loudermilk. From what I understand, even some of the
    authors of the Dodd-Frank bill are saying that $50 billion was
    the wrong threshold and we need to adjust it. I appreciate
    that.
        One last question. What is the Fed doing with the private
    sector on faster payment technologies? Are you engaged in that
    at all?
        Mr. Powell. I am glad you asked. I was right in the middle
    of that in my prior life at the Fed. This really came out of
    the thought that we are falling behind other countries in
    faster, widely available mobile payments and that sort of
    thing.
        We have really convened a group of companies and consumer
    groups and regulators and customers and everything around a
    table and tried to make progress toward faster mobile payments.
    I am really proud of what we have done.
        Esther George at the Kansas City Fed has had the lead on
    that the last several years and has done a great job at it. It
    is something we are continuing to work on. We think it is very
    important.
        Mr. Loudermilk. All right. I thank you for your leadership.
    I am looking forward to working with you over the next few
    years. Thank you.
        I yield back.
        Chairman Hensarling. Time of the gentleman has expired.
        The Chair now recognizes the gentleman from Washington, Mr.
    Heck.
        Mr. Heck. Thank you, Mr. Chairman. Chairman Powell,
    congratulations on assuming this incredible and awesome
    responsibility for the country.
        I am going to ask you the same question I have asked each
    of your predecessors since I have been a member of this
    committee. When does America get a raise?
        The reason I am asking that question is because we have
    obviously been through a protracted period of time in which
    wage growth has been fairly stagnant.
        Before you answer, sir, I know you are probably going to
    make some indication of the uptick in the latest report to wage
    growth of 2.9 percent. I just want to qualify your response by
    reminding you that that 2.9 percent was probably impacted by
    some transitory or one-time bonus payments.
        If you disaggregate the data between supervisory and non-
    supervisory employees, non-supervisory employees didn't get
    anywhere near 2.9 percent. It was quite a bit below that.
        2.9 percent, even in and of itself, despite how encouraging
    we may or may not put it in the context of the last 18 months
    or so, is significantly below modern historical averages of
    closer to 4 percent. I am really interested in when is this
    economy going to function and grow in a fashion that enables
    Americans to get a meaningful raise?
        Mr. Powell. Over time, wages should grow in keeping with
    the sum of inflation and increased productivity. If we assume
    inflation is going to be around 2 percent, it really comes down
    to productivity.
        Productivity since the financial crisis has averaged,
    output per hour, has averaged an increase of about 0.5 percent,
    and if you think about wages have been increasing at about 2.5
    percent. That is why. Before the crisis, wages were increasing,
    at full employment, maybe 3.5 percent, and that is because
    productivity was 1.5 percent.
        If we want wages to go up on a sustainable basis over a
    long period of time, and that is what we want, we need to have
    more productivity. Unfortunately, those are not the things that
    we have the tools for. But that really is--
        Mr. Heck. But is that true, Mr. Chair? It seems to me that
    they are not unrelated. To the degree that you keep your foot
    off the brake and allow unemployment to continue to fall, and I
    am going to return to this issue in some things you have said
    on the record in the past about whether or not we should be
    looking at unemployment rates or wage growth as a measure of
    full employment per se.
        But to the degree that we keep our foot off the brake and
    allow U-3 or U-6 or pick your measure to continue to drop and
    continue to create pressures in the economy for wage growth to
    continue, does that not in and of itself incentivize businesses
    and employers to invest in labor-saving devices, read here,
    improve productivity?
        Is it not possible that improved wages themselves can help
    lead to improved productivity, which can create a virtuous
    cycle with wage growth over time?
        Mr. Powell. Yes. That is exactly what we hope is happening
    right now.
        Mr. Heck. You are committing to keep your foot off the
    brake?
        When I was getting ready for this hearing, I went back and
    read something that you said in your very first year on the
    FOMC committee. At the very first meeting, one of the bank
    presidents mentioned tighter labor markets. You noted that you
    haven't seen anything in the wage data yet to support that.
        It struck me as interesting, because it got me into
    thinking about U-3 and U-6 and my frustration with both, and
    how it has been, I think, 2-1/2 years since we hit the supposed
    definition of full employment, yet U-3 keeps dropping and the
    definition of full employment keeps chasing it.
        It made me wonder, as it relates to what you said earlier,
    why don't we just use wage data to help define what full
    employment is?
        Mr. Powell. We use it as a factor to look at. But, look, I
    think it is important to see, though, that for a long time,
    there was slack in the labor market. That argued for continuing
    to support lower unemployment.
        We have reached the point where the risks are really two-
    sided, now. We need to take that into account, because if we do
    get behind and the economy does overheat--we don't see that
    now, I hasten to add--but if that does happen, then we will
    have to raise rates faster, and that raises the chances of a
    recession. Recessions tend to hit vulnerable populations the
    most.
        That is why we are raising rates on a gradual path. We are
    trying to balance the risk of getting inflation up to 2 percent
    with the risk of the economy overheating.
        Mr. Heck. Fair enough, Mr. Chair, but I would only observe
    that you tap the brakes at the expense of the people who have,
    over a long period of time, not received a raise.
        Thank you, sir.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentlelady from New York, Ms.
    Tenney.
        Ms. Tenney. Thank you, Mr. Chairman. Thank you, Mr. Powell.
    I appreciate your long time here. I think I am the end of the
    line here for you today. I just have a couple of quick
    questions that deal with in-the-weeds policy.
        First, would like to ask you about the Federal Open Markets
    Committee and their role in determining interest on excess
    reserves. Back in 2006, Congress passed the Financial Services
    Regulatory Relief Act, which authorized the Federal Reserve to
    pay interest on excess reserves at Reserve Banks.
        However, when the bill was amended, the Federal Reserve, in
    determining those interest rates, was left to the Board of
    Governors and not to the entire Federal Open Markets Committee.
    We know this is a valuable tool, using the entire committee to
    determine monetary policy.
        My question for you is would you support an initiative or a
    legislation that would give the full role of determining what
    the excess interest on reserve--interest on excess to an entire
    expanded FOMC and the Federal Reserve?
        Mr. Powell. I would say this is less of a problem than it
    seems to be.
        Ms. Tenney. OK.
        Mr. Powell. The full FOMC decides the range for the Federal
    funds rate, and the IOER is only set at the top of that range.
    So it really is the voting members of the FOMC who decide that.
        It would have been a reasonable decision for Congress to do
    that. I always loathe to support changes to the Federal Reserve
    Act, because that opens up the act. But I would say, as a
    practical matter, this is not a problem that we need to solve,
    because there is no difference between the two things.
        Ms. Tenney. Would you be supportive or not supportive of
    legislation that would allow the district presidents to weigh
    in on that decision, as well?
        Mr. Powell. Yes, I--
        Ms. Tenney. If not, why not?
        Mr. Powell. I don't think we are looking for legislation.
        Ms. Tenney. OK. Obviously, I always like less legislation.
    But in this case we are looking for more stakeholders to be
    part of the decision process, I think.
        Mr. Powell. I think that the real decision that is made is
    the one that the bank presidents do take part in. It is the one
    that sets the range for the Federal funds rate. They make that
    decision with us, under the law.
        This is just an implementing thing. If I thought it was
    really unfair or a problem, then I would support a change. But
    I don't really think it is a problem. It is less so than it
    would appear.
        Ms. Tenney. OK. It has been expressed by them that they
    would be interested in having input on that. I just wanted--if
    you would consider support of that.
        Let me go to the next thing, and that would be the Federal
    Open Markets Committee blackout period and how you feel about
    that and whether we could restore some transparency to that
    period, whether it is necessary to go through that part? Just
    so we know we have an ability to find out what is going on
    during that period, that 8 times a year when the committee is
    meeting, where we don't have an opportunity to hear from the
    stakeholders.
        Mr. Powell. I would want to look at what you are proposing.
        Ms. Tenney. OK.
        Mr. Powell. The whole idea of that period is that we don't
    speak publicly to market participants or anybody about monetary
    policy during that period. That gives us a chance to keep our
    mouths shut for a while and let us get in a room and do our
    thinking. Then we come out of that at the end of the FOMC
    meeting and make an announcement. Then there is a day or two,
    and then people can give speeches and that kind of thing.
        Ms. Tenney. Do you think there would be anywhere in there
    on certain parts of the policy that would be better off with
    more transparency on certain issues? Obviously, there are some
    that you would like to keep in the negotiating process, but
    others where we could at least speak on it and know what was
    going to come out at that point?
        Mr. Powell. I think I would be happy to discuss this with
    you offline.
        Ms. Tenney. OK.
        Mr. Powell. Why don't we commit to do that? I don't--
        Ms. Tenney. Thank you. I know I would love to talk. It is
    just I have legislation that would just offer a little more
    transparency in that aspect of it. Just not to eliminate the
    blackout period, but to minimize some of the issues that we are
    not allowed to be revealed during that blackout period.
        Mr. Powell. We are concerned that when we are actually
    thinking about what to do at the next meeting, that we take a
    step away from our public conversations. That generally has
    been seen by us as a healthy thing.
        Ms. Tenney. OK. One other quick question on another topic.
        The Wall Street Journal recently reported that two monetary
    policy specialists will serve as your senior advisers. You may
    recall that our House-passed FORM Act, the Federal Oversight
    Reform and Modernization Act, provides for each Federal Reserve
    board Governor to also have access to two senior advisers.
        Chairman Powell, would you be willing to allow two senior
    advisers to help a more diverse set of perspectives to your
    committee's monetary policy deliberations?
        Mr. Powell. I do remember that provision of the bill, as a
    matter of fact.
        But, I think the board has changed, really, in the time
    since I have been there. We are back to where every Governor
    has one or two advisers. We don't need legislation on that.
        Ms. Tenney. OK. That is something you would support.
        Chairman Hensarling. Time of the gentlelady has expired.
        Ms. Tenney. Thank you.
        Chairman Hensarling. The Chair now recognizes the gentleman
    from Ohio, Mr. Davidson.
        Mr. Davidson. Thank you, Mr. Chairman. Chairman Powell,
    thank you so much for your testimony today.
        Before I get into my prepared questions, I have two follow-
    ups to previous questions.
        One, Chairman Barr asked you about intervention in terms of
    selling assets in a particular scenario where the yield curve
    may become inverted, whether monetary policy might be
    appropriate, up to and including selling assets, in order to
    prevent a yield curve inversion.
        Just for clarity, if yield curve inversions are generally
    seen as bad, why wouldn't intervention to prevent a yield curve
    inversion be seen as good?
        Mr. Powell. In terms of yield curve inversions, I think the
    history is what it is, but it really is a history of times when
    the Fed, to some extent, has gotten behind and had to raise
    rates really fast. That is not where we are right now. I think
    most observers of this environment don't see that problem.
        If you look at projections of the likelihood of a recession
    in the next year or so, they are very low. They are as low as
    they normally are. I don't look at the current yield curve
    situation as a problem needing solution.
        Also, going to the issue of selling assets, though, I
    really like our current plan of allowing these MBS and treasury
    securities to roll off passively. The market has accepted it. I
    would have a high bar for wanting to change something that is
    working very well.
        Four years is not a long time. We will be back to some kind
    of new normal within 4 years. I think my strong prior would be
    to let the successfully announced and created program just run
    its course.
        Mr. Davidson. Thank you. Thank you, Chairman.
        Also, Chairman Hensarling asked you about the IOER
    payments, and I think your answer was that they are constrained
    by commercial rates, so things that are available in the
    marketplace. But I would note that an interest rate consists,
    generally, of two parts. One is time value of money and the
    other is default risk.
        Presumably IOERs don't have a default risk, so I am not
    sure that is the right metric. Would you care to comment on
    that?
        Mr. Powell. What the law, I think, says is that we
    shouldn't pay interest on reserves that is greater than the
    general level of short-term interest rates. That is--
        Mr. Davidson. But those short-term interest rates--so I see
    perhaps a need for clarification on the law, because those
    short-term interest rates contain time value of money risk, but
    also default risk, whereas IOER does not contain default risk.
        The real alternative for a financial institution in the
    market isn't a one-for-one rate. It is if they make loans out
    in the marketplace, they inherently have default risk that the
    IOER does not have.
        Mr. Powell. We are trying to manage--what we are trying to
    use that tool to do is to set short-term interest rates for the
    public. A lot of those will have a credit risk component. These
    short-term interest rates really don't have a big window,
    particularly repo, which is secured by treasuries.
        Mr. Davidson. Great. All right. Thank you, Chairman.
        I do have a question about the two roles of the Fed, two
    basic roles, as a regulator and as a monetary policy entity.
    Would that be consistent with how you see the structure of the
    Fed?
        Mr. Powell. Yes.
        Mr. Davidson. OK. To understand the internal operations, do
    you actually track the budget between the two activities
    separately? Are there people who are generally involved in
    regulatory activity and then a different body of people that
    are generally involved in monetary policy?
        Mr. Powell. Different divisions do have different budgets,
    and we do look at it from a functional basis. But it is pretty
    intertwined, as a matter of fact.
        We do call upon what we learn in the supervisory,
    regulatory space. We do get a lot of input. The board gets
    briefed on that all the time. It informs our monetary policy. I
    think our knowledge of the transmission mechanism also informs
    supervision. There is quite a lot of intertwining there. It is
    not a clean separation.
        Mr. Davidson. OK. But internally there is already at least
    some level of a separate budget for the activities involving
    regulators. My particular curiosity involves a bill that we
    have put together called H.R. 4755. It is the Federal Reserve
    Regulatory Oversight Act.
        This would put the regulatory component of the Federal
    Reserve on appropriations, which would be, to me, a compromise
    position, because we could propose putting the entire Federal
    Reserve on appropriations.
        The purpose would be to focus on the regulatory side so
    that all the standard strings attached to an executive agency
    that is engaged in rulemaking apply to the regulatory side of
    the Federal Reserve in the same way that others do. I hope that
    we can enact that later in the year.
        My time is expired.
        Chairman Hensarling. Time of the gentleman has expired.
        The Chair now recognizes the gentleman from Indiana, Mr.
    Hollingsworth, and informs all members that a vote is currently
    pending on the floor. The gentleman is recognized.
        Mr. Hollingsworth. I appreciate you being here and I have
    heard great things about the testimony that you have given so
    far. Looking forward to the opportunity to continue to interact
    with you and work with you in supporting the Fed's stated
    goals.
        I wanted to ask some questions that I hear a lot about in
    district, which is as we continue to see unemployment tick
    lower and lower, one of the questions I get a lot is why aren't
    we seeing more wage growth across the country?
        What is constraining some of the wage growth that may be
    happening as we tend to push down unemployment, whether that
    reflects on--whether the Phillips curve theory is somehow
    incorrect, or whether it is kinked and a nonlinear curve, or
    what your views are on that?
        Mr. Powell. There are two ways to think about it. One is
    that for wages to go up sustainably you need higher
    productivity. We have had very low productivity since the
    crisis, and it is averaging about 0.5 percent per year. We need
    to get that up if we want wages to go up sustainably.
        Mr. Hollingsworth. Right.
        Mr. Powell. But maybe more relevant to your question is, as
    you get this close to full employment, you would think that
    there would be some tightness in the labor market. You would
    think wages would be getting bid up. We are going to be looking
    at that as one of many indicators of where the natural rate of
    unemployment is.
        Mr. Hollingsworth. Yes.
        Mr. Powell. I wouldn't say it is a great mystery, but I
    would have expected to see more increases in wages. Frankly, I
    do expect to see more increases in wages in the next year or
    so.
        Mr. Hollingsworth. I know one of the theories that I think
    the Fed has put out quite a bit is that there is a--called a
    shadow labor market. There are a great number of people that
    aren't currently participating in the labor market, either
    looking for employment or currently employed, that might be
    tempted to come back in or lured back in.
        Do you still think that is the case, that higher wages or
    just more employment opportunities might lead to more people
    getting to the workforce? Or is there some sort of decay in
    their skill set if they have been unemployed for a period of
    time that might lead to them not being able to participate
    meaningfully in the workforce and need some help getting back
    into it?
        Mr. Powell. We have seen the labor force participation rate
    go sideways now for 4 straight years.
        Mr. Hollingsworth. Right.
        Mr. Powell. That is actually a big gain against what is a
    downward trend due to aging and other things. I think we have
    seen some of that. We have seen people either not leaving or
    coming back into the labor force as it has gotten tighter. How
    much more of that can there be? I hope there is a lot more, but
    I am not really sure--
        Mr. Hollingsworth. There are still some statistics about
    working-age population individuals, though, that are less
    employed or less likely to be looking for employment than they
    were 20 or 30 or 40 years ago.
        I have certainly heard the demographic argument made quite
    a bit, and I think you made it in one of our private meetings
    before, is that holding on to current labor force participation
    is actually a gain, once you look at those that demographically
    would be falling out.
        But it seems like working-age population individuals are
    still somewhat challenged to get back into the workforce. Have
    you guys seen some of that or seen some anecdotal or
    statistical evidence as to what that might be leading to or
    what the cause might be?
        Mr. Powell. Actually, labor force participation by prime-
    age workers is still more than a full percentage point below
    where it was before the crisis.
        Mr. Hollingsworth. Right.
        Mr. Powell. That is the other--the two things were, you are
    getting a signal that there might be more slack on wages, and
    prime-age labor force participation.
        Mr. Hollingsworth. Right.
        Mr. Powell. That is the other place. There are many other
    ones that suggest that we are at or above full employment.
        It may be that there are some portion of those people that
    can come back in. It may be that it is mostly structural. The
    only way to know is to is to find out.
        I think we are, with relatively low unemployment, we are
    close to full employment now. We should be finding out whether
    we can keep these people, get them back in the labor force.
        Mr. Hollingsworth. Right.
        Does that imply, and I have read in other comments that you
    have made, and please don't let me misconstrue them, because I
    don't want to mischaracterize what you are trying to say, that
    there might be a tolerance to continue to see more and more
    tightening in the labor market and maybe run above historical
    average inflation and a goal to try to drive more wage growth
    and get more people back into the workforce? Is that a fair
    characteristic of what you have said before, or--
        Mr. Powell. I think we are engaged in a process of
    discovering the natural rate. I think the median SEP
    participant says it is in the mid-fours. That sounds about
    right to me.
        Mr. Hollingsworth. Yes.
        Mr. Powell. I think, in terms of inflation we haven't said
    that we are seeking inflation above target. What we say is that
    we would look at persistent deviations from inflation, both
    above and below target, as being undesirable. We will conduct
    policy to move inflation back to target.
        Mr. Hollingsworth. When you think about--just one last
    question, maybe more generic. When you think about the economy
    today, you think about monetary policy today and maybe its
    future, as well, what keeps you up at night? What are you most
    worried about with regard to the economy; you mentioned
    productivity, monetary policy?
        Mr. Powell. Yes. I think right now the economy is in the
    best shape it has been in a while, and that is true around the
    globe. We are having a moment of global growth. It is great to
    see.
        We have the problems associated with strong growth, and
    that is a great relief. My hope is that we can sustain that for
    as long as possible.
        Mr. Hollingsworth. Understood.
        With that, I yield back, Mr. Chairman.
        Chairman Hensarling. Time of the gentleman has expired.
        There being no further Members in the queue, I would like
    to thank the witness for his testimony today.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        This hearing now stands adjourned.
        [Whereupon, at 1:19 p.m., the committee was adjourned.]

                                A P P E N D I X

                               February 27, 2018
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