[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
                           
                           
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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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