[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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__________
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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
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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
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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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