[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

                               __________

                             JULY 18, 2018

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-110
                           
                           
  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
  
  
                               __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
31-509 PDF                  WASHINGTON : 2018                     
          
-----------------------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, 
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].   
  
  
  
  

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

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

                     Shannon McGahn, Staff Director
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 18, 2018................................................     1
Appendix:
    July 18, 2018................................................    63

                               WITNESSES
                        Wednesday, July 18, 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

Powell, Hon. Jerome H.:
    Written responses to questions for the record submitted by 
      Representatives Beatty, Gottheimer, Huizenga, Messer, 
      Sinema, Sherman, and Stivers...............................   136

 
                          MONETARY POLICY AND
                        THE STATE OF THE ECONOMY

                              ----------                              


                        Wednesday, July 18, 2018

                     U.S. House of Representatives,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:01 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Present: Representatives Hensarling, McHenry, Royce, Lucas, 
Pearce, Posey, Luetkemeyer, Huizenga, Duffy, Stivers, Hultgren, 
Ross, Pittenger, Wagner, Barr, Rothfus, Tipton, Williams, 
Poliquin, Love, Hill, Emmer, Zeldin, Trott, Loudermilk, Mooney, 
MacArthur, Davidson, Budd, Kustoff, Tenney, Hollingsworth, 
Waters, Maloney, Sherman, Clay, Scott, Green, Cleaver, Moore, 
Ellison, Perlmutter, Himes, Foster, Kildee, Delaney, Sinema, 
Beatty, Heck, Vargas, Gottheimer, and Crist.
    Chairman Hensarling. The committee will come to order. 
Without objection, the Chair is authorized to declare a recess 
of the committee at any time. And 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.
    As we meet today, thanks to the fiscal policies of the 
Trump Administration and this Congress, many Americans are 
seeing the strongest economy of their lifetime. Most 
importantly, 3 percent average economic growth is back, 90 
percent of Americans are seeing bigger paychecks, and in the 
last quarter real disposable income increased a very strong 3.4 
percent, and unemployment remains near a 50-year low.
    But the economy may be challenged in significant ways if 
either we find ourselves in a protracted global trade war or 
the unconventional monetary policy tools of the Fed are not 
carefully and skillfully wound down in transition to normalcy.
    In February, during or last Humphrey-Hawkins hearing, I 
questioned whether the Fed would ever return to a monetary 
policy balance sheet after a decade of accumulating and 
maintaining, in contrast, a macroprudential balance sheet. And 
my concern remains, because less than a year into the Fed's 
balance sheet wind-down some FOMC (Federal Open Market 
Committee) members are already calling to slow down or end the 
process.
    We were told by the Fed that letting the roll-off schedule 
run for 3 or 4 years would be less exciting than watching paint 
dry. But as we meet today, we face the prospect that maybe the 
paint stays wet.
    In other words, we seem to be faced with an increasing 
prospect of a balance sheet that may never return to a more 
conventional size or composition.
    I believe this is problematic. An unconventional balance 
sheet may well threaten ultimately the integrity and 
independence of the Feds's conduct of monetary policy by 
enabling competing activities that lie outside its mandate for 
stable prices and full employment. This matter must be reviewed 
carefully.
    Additionally, I have governance concerns. I would note 
today that only three individuals, as a practical matter, are 
actually empowered to set U.S. monetary policy.
    This is a matter of concern. We know that interest rates on 
reserve deposits have now supplanted open market operations of 
the FOMC in playing the lead role in conducting monetary 
policy, given that the Board of Governors can administer 
interest rates on reserve deposits without any input from the 
FOMC or any district bank president. This means three 
individuals--or, to be more precise, two, given a majority 
vote--set monetary policy in the U.S.
    I certainly don't believe this is currently being abused, 
but I do believe, as a matter of public policy, the full FOMC 
should vote on where to set interest rates on reserve deposits. 
And furthermore, I would call upon the Senate to expeditiously 
confirm the Federal Reserve Board Governors that the President 
has long since nominated.
    Finally, many members, including myself, share a concern 
about the apparent inconsistency of a 2 percent inflation 
target with the goal of price stability. A 2 percent inflation 
target means that every dollar a couple sets aside at a child's 
birth for her college education will have lost approximately 30 
percent of its purchasing power by the time the first tuition 
bill arrives.
    I understand that other central banks do this. I understand 
this may be good policy. But if so, Congress should decide 
this, because Section 2A of the Federal Reserve Act mandates, 
quote, ``stable prices.'' And last I looked up the word 
``stable'' in the dictionary it means quote, unquote, 
``fixed,'' quote, unquote, ``not changing,'' or, quote, unquote 
``permanent.'' And yet we see even some advocating a policy 
rate target that allows for even greater swings than the 
current 2 percent inflation target.
    Chairman Powell, we welcome you and we look forward to 
hearing more about these issues, and 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 recognize the Ranking Member of the committee, the 
gentlelady from California, for 3 minutes for an opening 
statement.
    Ms. Waters. Thank you, Mr. Chairman.
    And welcome, Chairman Powell.
    Mr. Chairman, I am very concerned about the impact of the 
reckless economic policies of Donald Trump on hardworking 
Americans, vulnerable families, and our Nation's economy. This 
President has started a trade war that is already harming 
American consumers and companies.
    For example, Whirlpool, based in Michigan has seen its 
share price drop over 15 percent as a result of Trump's tariffs 
on steel and aluminum. Washing machines and dryer prices have 
increased 20 percent. According to The Wall Street Journal, the 
mayor of Clyde, Ohio, where Whirlpool has a plant, commented on 
the tariffs saying, I quote, ``People's anxiety level is higher 
because nobody knows what is going on,'' quote, unquote.
    The tax scam that the Congressional Republicans and 
President Trump pushed through, explodes the deficit and raises 
taxes on 86 million American families to help out big 
corporations and very wealthy individuals. But most of these 
corporations are not using the windfall to pay better wages to 
their employees. Instead, they are buying back their own stock 
to boost share prices and enrich their CEOs. And in the end, 
this massive misguided giveaway will be paid for by future 
generations of taxpayers.
    In addition, the Trump Administration's latest budget 
proposal makes deep cuts to important healthcare, nutritional 
assistance, housing and community development programs, and 
would be detrimental to families, veterans, seniors, and 
persons with disabilities.
    In all, the Trump Administration's policies are deeply 
harmful and threaten the hard-earned economic gains put in 
motion during the Obama Administration. As a result of 
Democratic policies and the policies of the Federal Reserve, we 
are now experiencing the longest stretch of private sector job 
growth on record, but with these harmful economic policies 
Trump is putting all of that progress at risk.
    So I am interested in Chairman Powell's views on these 
matters, especially the long-term effect of Trump's damaging 
economic policies and what tools, if any, the Federal Reserve 
has to prevent a possible recession that could be triggered by 
the policies of this Administration.
    With that, 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. Thank you, Mr. Chairman.
    Chairman Powell, thank you for testifying today.
    As Chairman Hensarling has already stated, the economy is 
strong and the data supports this statement. Americans have 
more money in their paychecks thanks to tax reform, job 
creation is strong, unemployment is near a 50-year low, and 
many Americans who left the workforce during the financial 
crisis are reentering it.
    While overall the economic outlook of America is bright, 
there are a few items that we need to carefully watch. One is 
uncertainty surrounding U.S. trade policy which impacts key 
Kentucky industry such as bourbon, agriculture, and auto 
manufacturing. Another is the legacy of the Fed's 
unconventional monetary policies and bloated asset sheet that 
continues to distort credit allocation. A third is a flattening 
yield curve that some economists warn could signal a downturn. 
And a final risk is out-of-date regulation, such as the G-SIB 
surcharge calculation that puts American banks at a 
disadvantage relative to their international competitors.
    Chairman Powell, thank you for your service at the Federal 
Reserve, and I look forward to hearing from you today about 
these and other important topics.
    I yield back.
    Chairman Hensarling. The gentleman yields back.
    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.
    Mr. Chairman, it is lovely to see you again.
    I am going to paraphrase and channel Ben Franklin here: 
Dodd-Frank gave America a stable economic system if we can keep 
it.
    I fear your greatest challenges in the future will be 
directly related to the actions of Republican policymakers and 
our President. Ruinous trickle-down tax cuts, adopting their 
policies that drive debt and income inequality, and of course 
the Wells Fargo model, will saddle regular Americans with 
fourth-place payday loans to pay it all back.
    Destabilizing financial deregulation and unqualified 
nominees like Kathy Kraninger to head the Consumer Financial 
Protection Bureau, capricious trade wars, Harley in my 
district, farmers in my State bracing for ruin, fiscal 
mismanagement, low grade scams, and incompetence all seem to be 
hallmarks of Mr. Trump.
    But, as we discuss Esther 4:14, you have been called for 
such a time as this. God bless you.
    Chairman Hensarling. The gentlelady yields back.
    The Chair now recognizes the gentleman form Michigan, Mr. 
Kildee, the vice Ranking Member, for 1 minute.
    Mr. Kildee. Thank you, Mr. Chairman, for yielding.
    Chairman Powell, thank you for being here.
    I lead an initiative in Congress entitled The Future of 
America's Cities and Towns. Its purpose is to fuel a national 
conversation around the economic health of our country's older 
industrial cities and towns, places like my hometown of Flint, 
that have not fully recovered from the Great Recession.
    Even with the job growth and economic recovery we have 
seen, it is uneven. In economic terms there is no average 
American anymore. A whole cohort of communities across the 
country continue to experience the kind of stress that 
threatens their sustainability as communities and the fiscal 
solvency of their municipalities.
    I believe we have to have a much more serious and 
thoughtful conversation about how we support these places and 
the millions of people who live there. Many of the regional 
banks, such as the Boston, Cleveland, and Chicago banks, have 
taken an interest in working to improve the fiscal health of 
these places within their jurisdiction. And so I would be 
interested in hearing your thoughts on how the Fed can help 
these places.
    Monetary policy is by nature a broad tool for economic 
growth. We must have a particular focus on creating more 
economic opportunity for those families and those communities 
that continue to struggle.
    Thank you, Mr. Chairman, for your indulgence.
    Chairman Hensarling. Today we welcome back to the committee 
for his second appearance Governor Powell, Chairman of the 
Board of Governors of the Federal Reserve System. Governor 
Powell has previously testified for this committee, so I 
believe he needs no further introduction.
    Without objection, the witness' written statement will be 
made part of the record.
    Chairman Powell, you are now recognized for your testimony. 
Welcome.

             STATEMENT OF THE HON. JEROME H. POWELL

    Mr. Powell. Thank you very much, and good morning, Chairman 
Hensarling, Ranking Member Waters, and other members of the 
committee here today. I am happy to present the Federal 
Reserve's semiannual Monetary Policy Report to Congress.
    Let me start by saying that my colleagues and I strongly 
support the goals that Congress has set for us for monetary 
policy: Maximum employment and price stability.
    We also support clear and open communication about the 
policies we undertake to achieve these goals. We owe you and 
the general public clear explanations of what we are doing and 
why we are doing it. Monetary policy affects everyone and 
should be a mystery to no one.
    For the past 3 years we have been gradually returning 
interest rates and the Fed's securities holdings to more normal 
levels as the economy strengthens. And we believe this is the 
best way we can help set conditions in which Americans who want 
a job can find one and in which inflation remains low and 
stable.
    I will review the current economic situation and outlook 
and then turn to monetary policy.
    Since I last testified here in February, the job market has 
continued to strengthen and inflation has moved up. In the most 
recent data, inflation was a little above 2 percent, the level 
that the Federal Open Market Committee thinks will best achieve 
our price stability and employment objectives over the longer 
run. The latest figure was boosted by a significant increase in 
gasoline and other energy prices.
    An average of 215,000 net new jobs were created each month 
this year in the first half of the year. That number is 
somewhat higher than the monthly average for 2017. It is also a 
good deal higher than the average number of people who enter 
the workforce each month on net.
    The unemployment rate edged down one-tenth of a percent 
over the first half of the year to 4.0 percent in June, which 
is near the lowest level of the past two decades.
    In addition, the share of the population that either has a 
job or has looked for one in the past month, what we call the 
labor force participation rate, has not changed much since late 
2013, and this development is another sign of labor market 
strength.
    Part of what has kept that participation rate stable is 
that more working-age people have started looking for a job, 
which has helped make up for the large number of baby boomers 
who are retiring and leaving the workforce.
    Another piece of good news is that the robust conditions in 
the labor market are being felt by many different groups. For 
example, the unemployment rates for African Americans and 
Hispanics have fallen sharply over the past few years and are 
now near their lowest levels since the Bureau of Labor 
Statistics began reporting data for these groups in 1972.
    Groups with higher unemployment rates have tended to 
benefit the most as the job market has strengthened. But 
jobless rates for these groups are still higher than those for 
Whites. And while three-quarters of Whites responded in a 
recent Federal Reserve survey that they were doing at least OK 
financially in 2017, only two-thirds of African Americans and 
Hispanics responded that way.
    Incoming data show that alongside the strong job market, 
the U.S. economy has grown at a solid pace so far this year. 
The value of goods and services produced in the economy, or 
GDP, rose at a modest annual rate of 2 percent in the first 
quarter after adjusting for inflation. However, the latest data 
suggested that economic growth in second quarter was 
considerably stronger than in the first.
    And this solid pace of growth so far this year is based on 
several factors. Robust job gains, rising after-tax incomes, 
and optimism among households have lifted consumer spending in 
recent months. Investment by businesses has continued to grow 
at a healthy rate. Good economic performance in other countries 
has supported U.S. exports and manufacturing. And while housing 
construction has not increased this year, it is up noticeably 
from where it stood a few years ago.
    I will turn now to inflation. After several years in which 
inflation ran below our 2 percent objective, the recent data 
are encouraging. The price index for personal consumption 
expenditures, or PCE inflation, as we call it, which is an 
overall measure of prices paid by consumers, increased 2.3 
percent over the 12 months ending in May, and that number is up 
from 1.5 percent a year ago.
    Overall inflation increased partly because of higher oil 
prices, which caused a sharp rise in gasoline and other energy 
prices paid by consumers.
    Because energy prices move up and down a great deal, we 
also look at core inflation. Core inflation excludes energy and 
food prices and is generally a better indicator of future 
overall inflation.
    Core inflation was 2.0 percent for the 12 months ending in 
May, compared with 1.5 percent a year ago. We will continue to 
keep a close eye on inflation with a goal of keeping it near 2 
percent.
    Looking ahead, my colleagues on the FOMC and I expect that 
with appropriate monetary policy the job market will remain 
strong and inflation will stay near 2 percent over the next 
several years.
    This judgment reflects several factors. First, interest 
rates and financial conditions more broadly remain favorable to 
growth. Second, our financial system is much stronger than 
before the crisis and is in a good position to meet the credit 
needs of households and businesses. Third, Federal tax and 
spending policies will likely continue to support the 
expansion. And fourth, the outlook for economic growth abroad 
remains solid, despite greater uncertainties in several parts 
of the world.
    Now, what I have just described is what we see as the most 
likely path for the economy. Of course, economic outcomes that 
we actually experience often turn out to be a good deal 
stronger or weaker than those in our best forecast. For 
example, it is difficult to predict the ultimate outcome of 
current discussions over trade policy, as well as the size and 
timing of economic effects of the recent changes in fiscal 
policy.
    Overall, we see the risk of the economy unexpectedly 
weakening as roughly balanced with the possibility of the 
economy growing faster than we currently anticipate.
    Over the first half of 2018 the FOMC has continued to 
gradually reduce monetary policy accommodation. In other words, 
we have continued to dial back the extra boost that was needed 
to help the economy recover from the financial crisis and the 
recession.
    Specifically, we raised the target range for the Federal 
funds rate by 1/4 percentage point at both our March and June 
meetings, bringing the target today to its current range of 1-
3/4 percent to 2 percent.
    In addition, last October we started gradually reducing our 
holdings of Treasury and mortgage-backed securities, and that 
process has been running quite smoothly. Our policies reflect 
the strong performance of the economy and are intended to help 
make sure that continues.
    The payment of interest on balances held by banks in their 
accounts at the Federal Reserve has played a key role in 
carrying out these policies, as the current Monetary Policy 
Report explains in some detail. Payment of interest on these 
balances is our principal tool for keeping the Federal funds 
rate in the FOMC's target range. This tool has made it possible 
for us to gradually return interest rates to a more normal 
level without disrupting financial markets and the economy.
    As I mentioned, after many years of running below target, 
our longer-run objective of 2 percent inflation has recently 
moved close to that level, and our challenge will be to keep it 
there. Many factors affect inflation. Some of them are 
temporary and others longer lasting. Inflation will at times be 
above 2 percent and at other times below. And we say that the 2 
percent objective is symmetric because the FOMC would be 
concerned if inflation were running persistently above or below 
that 2 percent objective.
    The unemployment rate is low and expected to fall further. 
Americans who want jobs have a good chance of finding them. 
Moreover, wages are growing a little faster than they did a few 
years ago.
    That said, they are still not rising as fast as in the 
years before the crisis. One explanation could be that 
productivity growth has been low in recent years. On a brighter 
note, though, moderate wage growth also tells us that the job 
market is not causing high inflation.
    With a strong job market, inflation close to our objective, 
and the risks to the outlook roughly balanced, the FOMC 
believes that for now the best way forward is to keep gradually 
raising the Federal funds rate. We are aware that on the one 
hand raising interest rates too slowly may lead to high 
inflation or financial market excesses. On the other hand, if 
we raise rates too rapidly the economy could weaken and 
inflation could persistently run below our objective.
    The committee will continue to weigh a wide range of 
relevant information when deciding what monetary policy will be 
appropriate. As always, our actions will depend on the economic 
outlook, which may change as we receive new data.
    For guideposts on appropriate policy, the FOMC routinely 
looks at monetary policy rules that recommend a level for the 
Federal funds rate based on the current rates of inflation and 
unemployment. The July Monetary Policy Report gives an update 
on monetary policy rules and their role in our policy 
discussions. I continue to find these rules helpful, although 
using them requires careful judgment.
    Thank you very much, and I will look forward to our 
conversation.
    [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 5 minutes for questions.
    I don't believe, Chairman Powell, there was a discussion 
about this on the Senate side yesterday. I didn't hear much 
about it in your testimony. But I still seek greater 
specificity on the current goals for the wind-down of the 
balance sheet.
    It is my current understanding that it is the goal, with 
respect to the pace, that this wind-down will take about 3 to 4 
years, that ultimately the size of the balance sheet, as of 
today, the target is 2 to 2.5 trillion. And with respect to 
composition, primarily Treasury's, but some MBS (mortgage-
backed security).
    Is my understanding correct? Is that the current goal of 
the Fed?
    Mr. Powell. So the plan is to return the balance sheet over 
time to a mainly Treasury balance sheet. I have provided 
estimates, others have provided estimates, of how long that 
with take. They are fairly uncertain. But my estimate has been 
3 or 4 years.
    What will guide the time at which we will ultimately stop 
shrinking the balance sheet will really be a function--and the 
ultimate size of the balance sheet--will really be a function 
of the public's demand for our liabilities.
    During quantitative easing that was really about assets. In 
the long run what matters is the public's demand for currency, 
which has grown very strongly for the last few years, and also 
the public's demand for reserves. And in an era where we 
require the banks to have lots of high quality liquid assets, 
reserves are the ultimate high quality liquidity asset.
    So I think we are going to be finding out how big that 
demand is for those two liabilities, and also some others. I 
think there are estimates. We don't have a target range, for 
example.
    Chairman Hensarling. OK. So you really don't know.
    Mr. Powell. That is right.
    Chairman Hensarling. Obviously, we all acknowledge there 
will be a greater demand for reserves, but I still would 
anticipate that in the 2 to 2.5 trillion that might actually 
exceed demand.
    So I guess, Chairman Powell, my next question is, is it a 
goal of the Fed--so I understand you want to keep IOER 
(interest rate on excess reserves), that particularly today 
this is how monetary policy is determined. But do you see a 
day, is it the goal of the Federal Reserve to again have open 
market operations, the FOMC, primarily drive monetary policy?
    So I guess this is really the debate between the floor and 
the corridor. Currently we are using the floor. But is that the 
ultimate goal? Is this a permanent tool? Or will we see a 
future where IOER sets the floor, the FOMC sets the higher end, 
and let the market determine the interest rate in between that 
floor and ceiling? What is the goal of the Fed?
    Mr. Powell. The committee has not made a decision on 
whether in the longer run will it go back to a corridor system 
or stay in what we have now, which is a floor system.
    Chairman Hensarling. When might the Fed contemplate this?
    Mr. Powell. We will be returning to that question, I would 
say fairly soon. It is something we have talked about 
periodically at various FOMC meetings. And my thinking is that 
we will return to that discussion in a serious way in the 
relatively near future.
    Chairman Hensarling. Well, one thing I would have you 
consider, Chairman Powell, as the Board of Governors takes a 
look at this, is ultimately the potential risk to the Fed's 
independence of having such an unconventional-size balance 
sheet.
    I would say regrettably, Congress raided a relatively small 
fund of the Federal Reserve to fund a transportation bill. I 
tried to fight that. I wasn't successful. It has been raided 
twice. So I have joined in with my colleagues.
    We also know now that the Fed funds the Bureau of Consumer 
Financial Protection. Both of these have nothing to do with 
monetary policy. I could foresee a day with a large, large 
balance sheet out there, and with the potential of either 
municipalities of States on the brink of insolvency, having 
Congress decide the Fed needs to buy their bonds and prop them 
up.
    I can also see one day, an infrastructure bill coming down 
the pike, with no good way to pay for it, and there is a big 
pot of money that the Fed has, maybe the Fed should be directed 
to buy these bonds. And I think we are seeing some of this, 
frankly, across the pond when I look at the Swiss central bank 
or the ECB.
    So I am just curious, as you think about the size of your 
balance sheet, do you ever consider its impact on your 
independence?
    Mr. Powell. We do think about those things. And we have 
said that the balance sheet will return to a size that is no 
larger than it needs to be for us to effect monetary policy in 
our chosen framework.
    Chairman Hensarling. Well, I just assure you, Mr. Chairman, 
if there is a big pot of money out there, this Congress might 
find a way to get its hands on it. So you might consider that 
as you consider the size of your balance sheet.
    The time of the Chair has long since expired. The Chair now 
recognizes the Ranking Member.
    Ms. Waters. Thank you, Mr. Chairman.
    Chair Powell, while I have heard you state repeatedly that 
it is too soon to tell whether the economic efforts of the 
recent implementation of tariffs will be either positive or 
negative, there are already serious indications that we are 
headed for trouble.
    In the most recent June FOMC meeting minutes, several 
participants noted that their district business contacts had 
expressed concern about the adverse effects of tariffs and 
other proposed trade restrictions on future investment activity 
and that they were not planning any new investments to increase 
capacity.
    Mid Continent Nail, America's largest nail manufacturer, 
based in Missouri, has already laid off 60 workers and expects 
to go out of business by Labor Day. Harley-Davidson, based in 
Wisconsin, is moving jobs overseas to Europe to avoid tariffs 
on its exports.
    Whirlpool, based in Michigan, has seen its share price drop 
over 15 percent as a result of Trump's tariffs on steel and 
aluminum. Washing machine and dryer prices have increased 20 
percent in the past 3 months as a result, the steepest rise in 
the past 12 years, according to the Department of Labor.
    These tariffs are affecting the price of everything from 
bicycles to washers to automobiles. In addition to these 
immediate effects, to your point, there may be delayed negative 
effect on the economy as well. While the U.S. is taking a 
protectionist stance toward trade policy, the rest of the world 
is moving forward on trade without us.
    What long-term economic effects can we expect to see if 
these tariffs continue to escalate to the point of a trade war? 
Do you expect the economic effects of a trade war to be felt 
more acutely in certain regions of the U.S.? And furthermore, 
is the Fed well suited to respond to a recession caused by a 
trade war? If not, what can be done?
    Mr. Powell. I should start by quickly reminding all of us, 
including me, that we stay in our lane at the Fed, and when we 
talk about things like fiscal policy and trade policy that are 
not assigned to us, we try to stay at a high level, a principle 
level.
    But answering your question, if this process leads to a 
world of higher tariffs on a wide range of goods and services 
that are traded and those are sustained for a longer period of 
time--in other words, if it results in a more protectionist 
world, that will be bad for our economy. And it will be bad for 
other economies, too. It will be bad for the world economy.
    That is not what the Administration says they are trying to 
achieve. It isn't up to us to criticize their policies in this 
activity.
    But the evidence is clear that countries that remain open 
to trade have higher productivity, they have higher incomes. 
Not every group is affected positively by trade. There are 
groups that are hurt by trade. And I think all countries have 
learned that they need to do a better job of addressing the 
needs of those populations, but not through trade barriers and 
tariffs of that kind.
    Ms. Waters. While certainly the Fed does not have direct 
responsibility for trade and for tariffs, were you consulted at 
all when the tariff decisions were made?
    Mr. Powell. No, we play no role in the Administration's 
discussions on these. Like I imagine just about everyone here, 
we hear from our extensive network of business contacts a 
rising chorus of concern.
    As you pointed out, lots and lots of individual companies 
have been harmed by this. We don't see it in the aggregate 
numbers yet because it is a $20 trillion economy and these 
things take time to show up. But we hear many, many stories of 
companies that are concerned and are now beginning to make 
investment decisions--or not make them--because of this.
    Ms. Waters. Have you had any action at all in relationship 
to the Chamber of Commerce? Have they talked with you? Have 
they sought your opinion? Have you talked with them? What do 
you know about the Chamber of Commerce position on tariffs?
    Mr. Powell. Well, I saw that they took a very strong public 
position against tariffs. We try to have good relations and 
strong relations with the Chamber. I haven't personally 
discussed their position on trade, but I know what it is.
    Ms. Waters. Do you know what specifically they were 
concerned about as it relates to tariffs in a particular part 
of country, agriculture, et cetera?
    Mr. Powell. I shouldn't speak for them, but I think it is 
really a general thing. The bottom line is a more protectionist 
economy is an economy that is less competitive, it is less 
productive. We know that. This is the torch we have been 
carrying around the world for 75 years.
    So it is not a good thing, if that is where this goes. We 
don't know ultimately yet where this will lead. The 
Administration says they want lower tariffs, and that would be 
good for the economy, if we achieve that.
    Ms. Waters. Well, thank you very much.
    And I yield back the balance of my time.
    Chairman Hensarling. The gentlelady yields back.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr, Chair of the Monetary Policy and Trade Subcommittee.
    Mr. Barr. Thank you, Mr. Chairman.
    Chairman Powell, welcome back to the committee.
    Some economists argue that a flattening of the yield curve 
is an indication that an economy is headed for a recession. 
Obviously, with the strong data that we are seeing, we don't 
see any indication of a recession in the near-term.
    But I asked you this question 6 months ago in your last 
report, and I asked you, given the flattening of the yield 
curve and the risk potentially that short-term rates might 
exceed long-term rates, whether there would be any plans within 
the normalization strategy to accelerate the roll-off of 
longer-term assets more quickly to counteract the flattening of 
the yield curve? I believe you indicated that there were no 
such plans 6 months ago.
    I just wanted to ask you, given the fact that that yield 
curve has flattened even further in the interim, since we last 
met, is there any discussion within the FOMC to alter or 
accelerate the balance sheet reduction program in contemplation 
of this flattening yield curve?
    Mr. Powell. Thank you.
    No, there is not. We very carefully developed and 
socialized to the public the balance sheet reduction, balance 
sheet normalization plan. It is working smoothly. We are not 
thinking really about changing it, except in the conditions 
that we have identified, which would be a meaningful downturn.
    Mr. Barr. If that is the case, what are the Fed's plans 
with respect to that flattening yield curve? And what risk does 
that pose to the economy?
    Mr. Powell. Maybe let me tell you how I think about the 
yield curve.
    We know why the short end of the yield curve is moving up. 
It is because essentially out to 2 years or so really the 
market is pricing in its expectations of what the Fed will do, 
plus or minus maybe a little bit of a term premium when you get 
out to 2 years. So we know why the short end is moving up.
    The real question is, what is the story with long rates? So 
the long rate, like take the 10-year Treasury, you have to 
decompose that and ask what is in it.
    And I think the whole point of the yield curve conversation 
is that you can decompose that, and in that, whatever the long-
term rate is, 2.85 percent this morning, 10-year--what is in 
there is a term premium. But there is also the market's 
estimate of the long-run neutral rate. And so it is telling you 
something and we are listening.
    But it involves many other things. You have to do a 
decomposition to pull that out. And then that tells you what 
the stance of monetary policy is. So whether a policy is 
accommodative or whether it is restrictive. And that is the 
important question, not the shape of the yield curve.
    Mr. Barr. Chairman, would you agree that the oversized 
balance sheet is putting downward pressure on those long-term 
interest rates, continues to put downward pressure?
    Mr. Powell. Yes, but to a diminishing degree.
    Mr. Barr. Let me switch gears to IOER. For decades now the 
Board of Governors has administered interest rates on reserves, 
not for the intended purpose of fairly compensating commercial 
banks for required deposits at Federal Reserve banks, but 
rather as a monetary policy rate.
    Given the fact that IOER is now your principal tool for 
interest rate setting, would it not be better if IOER was set 
by the FOMC, a much more diverse body that includes not only 
the Governors, but also the five voting district bank 
presidents, as opposed to just the Board of Governors?
    Mr. Powell. I guess I would--I think of it this way. The 
FOMC sets the target range for the Federal funds rate. IOER is 
just a tool to make sure that the Federal funds rate trades in 
the range that has been set by the FOMC. So it is really just a 
tool to follow through on the much more important decision 
which is made by the FOMC.
    Mr. Barr. Well, thank you. This committee and the Congress 
is considering a proposal to transfer that responsibility of 
IOER to the FOMC, the larger, more diverse group, and we 
continue to engage you on that.
    Let me finally conclude with a question about trade. I 
agree with your assessment that free trade and low tariffs 
result in better economic performance as opposed to a trade war 
or high tariffs.
    How important is it for the Administration to quickly 
resolve its trade and tariff negotiations? And what are the 
risks of a protracted period of increasing tariffs?
    Mr. Powell. Again, wanting not to be an adviser or in any 
way a participant in these discussions, which are really up to 
the Administration, uncertainty is one of those things where 
businesses--there was a lot of momentum in the economy earlier 
this year. I wouldn't want to see uncertainty lead people to 
start putting off decisions, and that would be the risk of a 
long, protracted discussion.
    Mr. Barr. Thank you for your answers.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Wisconsin, Ms. 
Moore, Ranking Member the Monetary Policy and Trade 
Subcommittee.
    Ms. Moore. Thank you so much Mr. Chairman.
    Again, welcome back, Mr. Chairman.
    You talk a lot about productivity, and indeed economists 
keep talking about an aging population, the boomers, and that 
is impacting productivity, and how lagging productivity is an 
ongoing drag on economic growth.
    I an wondering if you think that having a comprehensive 
immigration policy would help increase productivity?
    Mr. Powell. Immigration is another one of those policies 
that is high up on the list of things that are not assigned to 
us, but I can--I can still--so I am going to try to stay in our 
lane.
    But I do think to the extent these issues connect to the 
health of the economy in the long run, then we have an 
obligation to speak to that.
    So you think about potential growth in the United States, 
you can really boil it down to how fast is the labor force 
growing and how much is output per hour growing. That is it, 
that is all you have.
    Ms. Moore. Our CRS does anticipate that over the next 
decade or so it could increase our economy by a trillion 
dollars to get these people out of the shadows.
    You talk in your remarks about the lower unemployment rates 
for African Americans and Hispanics. That is something we are 
all celebrating. But I swear to you, I know a lot of African 
Americans, I am related to them, I don't know many that don't 
have two jobs in order to make it. I know some who have 
bachelor's degrees, and yet they are forced to live with 
roommates because they can't sustain themselves.
    So what we have found is that while there might be lower 
unemployment, wages have actually decreased, despite the tax 
cuts, which claimed that there were going to be $4,000 for 
everybody, we know we got these one-time-only bonuses.
    Wages have decreased and income equality has increased. And 
I am wondering what your projection is for flat or lowered 
wages despite increased unemployment.
    Mr. Powell. We look at a wide range of wage and 
compensation indicators, and pretty consistently across the 
board, if you look back at where they were 5 years ago and look 
back where they are now, they have all moved up. They used to 
be right around 2 percent increase per year. Now they are 
around 3 percent. We think this is a good thing.
    Ms. Moore. So African Americans, their wages are 
increasing?
    Mr. Powell. Yes. I think it is pretty broad at this point 
in different--
    Ms. Moore. And I would surely like to see these data, 
because other economists have said that it has actually 
decreased. All right. Thank you.
    I am wondering--I know you aren't going to ask any 
questions about the tax cut, so I'll let you off--I am 
wondering, though, about the big tax cut, I have to ask, the 
big tax cut that we just provided and it has increased income 
inequality.
    I am just wondering what your thoughts are and projections 
about how sustainable that is when 80 percent of these tax cuts 
have gone for shareholder type buybacks versus increase in 
wages or capital improvements. I am wondering what do you think 
going forward, what impact that will have on economic growth.
    Mr. Powell. U.S. Fiscal policy has been on an unsustainable 
path for some time. It continues to be unsustainable.
    Ms. Moore. Higher debt?
    Mr. Powell. Yes. The debt is going up and I think it is 
growing faster than the economy. We need to get the economy 
growing faster than the debt, it comes down to that, and we are 
not doing that. It is something we should be working on now. We 
should all be working on that together.
    Ms. Moore. Do you think that shareholder buybacks is a 
healthy indicator of healthy prospect for growth?
    Mr. Powell. I think when a company decides to buy back 
stock, they are saying that we have more cash than we can put 
to work for our shareholders, that is the capital markets 
working. That money doesn't go away, of course, it goes into 
people who then can spend it or--
    Ms. Moore. This is more money for them to use to chase 
yield. Don't you think that the chasing of yield creates 
bubbles and that is one of big problems that we had in 2008, is 
money chasing yield?
    Mr. Powell. I think we certainly can find ourselves in a 
situation where we are seeing financial bubbles. We watch that 
very closely. Don't see that now, but it is a key risk that we 
monitor very carefully.
    Ms. Moore. And I thank you so much, sir.
    Mr. Powell. Thank you.
    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.
    Yesterday we had a hearing with our Financial Institutions 
Subcommittee, and I asked the question of Acting Comptroller of 
the Currency, Keith Noreika, about the implementation about S. 
2155, and specifically whether or not the statutory language 
around the $250 billion threshold for SIFI (systemically 
important financial institution) designation was clear. Mr. 
Noreika said that the language and Congressional intent were 
pretty straightforward.
    And so my question to you is, would you agree with your 
former colleague that the language is pretty clear, no 
ambiguity there, that you know exactly what should be done with 
those banks under 250 with regards to SIFI activity and 
testing?
    Mr. Powell. I think that it is very clear and I think that 
the language gives us the authority that we need.
    Mr. Luetkemeyer. OK. So now we know what we should be 
doing. How long would you anticipate it is going to take to 
implement the statute with regards to 2155?
    Mr. Powell. So with regards to that particular provision, 
we are thinking already about exactly the framework we are 
going to publish for comment and receive public comment on that 
will allow us to identify systemic risk or risks to safety and 
soundness among banks below 250.
    Some of the aspects of 2155 were already out of door. We 
published a document on Friday of July Fourth week which talked 
about many things that we are doing. We have a big job to 
implement 2155 and we are going at it very hard.
    Mr. Luetkemeyer. Thank you very much. And it is nice to 
know that--or it should be noted anyway--that those banks under 
250 are not significantly important financial institutions from 
the standpoint of endangering the economy. That is what a SIFI 
is supposed to be, a bank that would endanger--while they are 
nice size banks, they are not something that is going to 
endanger the economy and therefore they fall under a different 
regulatory regime. So we thank you for that.
    With regards to another issue I brought up yesterday, 
former Governor Dan Tarullo said in his farewell address that 
stress testing programs should be moved into the normal 
examination cycle. And I agree with that proposition and said 
while I don't underestimate the importance of stress tests, 
those tests should be run by regulators. Banks are doing this 
right now on a regular basis with regulatory oversight.
    Would you agree with Governor Tarullo that we need to 
assimilate those exams, the stress testing things into the 
regular examination cycle, or do you want to retain those as a 
separate type of testing that the banks are going to be putting 
out information for and modeling?
    Mr. Powell. I believe he was talking about the qualitative 
aspect, so we are looking to return the qualitative part of the 
test over time to the regular examination cycle. And we are 
looking for the right way and time to do that.
    Mr. Luetkemeyer. Well, it seemed to me, just to throw ideas 
out, that it would seem to me if the Fed would have several 
different models and then they would go into the bank, take the 
information from it, throw it into those models, to see once if 
there is an area within the bank's business model that is of 
concern, that could be pointed out by the various models and 
update those models on an annual basis or whatever it would 
take.
    It seems to me like now the stress testing is a game of 
``gotcha.'' The models are not disclosed until the very last 
instance. And then are the models going to actually be useful?
    So I would hope that you would think along those lines, 
that you could assimilate it into part of the examination 
process, take the information and put it into several different 
models to see once if there is a weakness somewhere in the 
bank's business model. Does that make sense?
    Mr. Powell. Yes. We are working hard to make the 
quantitative side of the test and the qualitative side more 
transparent to the public generally and to the firms, and we 
think that is a key innovation. We have a proposal out on that.
    Mr. Luetkemeyer. And one of the things also with regards to 
international banks, I have had some visits from our friends 
across the pond recently. And so while I am a staunch advocate 
for capital, I am also concerned about this notion that 
arbitrarily parking capital around the globe creates a safer 
financial system.
    The Fed started this trend with FBO rule, something I 
pointed out to Chair Yellen during her tenure. Now Europe is 
following suit with the immediate parent undertaking rule, 
which will hit the U.S. and ultimately U.K. banks. It seems as 
though we are finding ourselves in a global back and forth here 
with regards to capital. Would you agree with that? Or what are 
your comments?
    Mr. Powell. I think we feel like our intermediate holding 
company regulation is working. It has settled down now and it 
is working. We have been consulted as Europe has looked at 
something similar to that. And I think the last time I checked 
we felt that our concerns were being reasonably well addressed. 
I will look back, though, to make sure that is right.
    Mr. Luetkemeyer. One of the questions I got yesterday from 
a group of politicians from Europe, was with regards to 
equivalency. And I am not a big fan of that from the standpoint 
of with the equivalency rules and regulations, somebody wins 
and somebody loses. I am fearful that we are going to lose in 
that situation. So just to comment.
    Thank you very much for being here.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Cleaver, Ranking Member of our Housing and Insurance 
Subcommittee.
    Mr. Cleaver. Thank you, Mr. Chairman.
    And thank you for being here, Mr. Chairman.
    Last week we were here having a conversation with Secretary 
Mnuchin, and when I raised issues, they related to the fact 
that I represent a rural part of the State of Missouri.
    I had a townhall meeting in Higginsville, Missouri, 2 weeks 
ago and brought in the Canadian consul general to talk with the 
farmers in my district. Standing room crowd. Nobody in there 
supported what was going on.
    Some of the farmers were questioning whether they should 
allow the beans to just stay in the fields this year, because, 
as you probably know, the price is continuing to fall since the 
tariffs were implemented.
    First of all, I am concerned about whether or not the harm 
could spread and do damage to the economy. I know you were 
asked a similar question earlier, but it stands to reason that 
if the soybean crop is damaged, as it apparently is, there has 
to be a rippling effect.
    And I am wondering, right now we are just talking mainly 
about some farm products from my State. I think China buys $60 
billion a year in soybeans, just in soybeans, $60 billion from 
us, from the United States.
    If you just deal with the $60 billion, is there cause to be 
concerned about the damage that other parts of the economy 
could experience?
    Mr. Powell. The answer would be yes. You are just beginning 
to see the retaliatory tariffs come into place, they are only 
just beginning. And so we hear a few reports here and there 
about this company and that company. The agricultural patch is 
clearly very seriously affected, but it is just beginning. So I 
think you want to be careful to walk on this path because it 
may not be so easy to get off it.
    Mr. Cleaver. I have a large rural part of my district, and 
then I have the largest city in the State, Kansas City, in my 
district. So I have talked about my farm problem. When I was 
mayor of Kansas City, I was successful in bringing Harley-
Davidson to Kansas City, they built a plant, went up to 1,000 
employees. We made an investment as a city. Of course, we are 
now facing the possibility of an empty building.
    But the steel tariffs are going to also have a rippling 
effect. The SmootHawley Act is credited with making the 
Depression even worse. But I am just wondering if you are not 
going to answer this question, I understand it, so it is almost 
a statement, I have to say it.
    So I think when decisions like this are made they probably 
should be made with the Legislative Branch of the Government 
because the issues are too significant for one human being on 
the planet. I don't care if it is a Democrat or Republican or a 
member of the Oakland Raiders. We are talking about the world 
economy being impacted and only one person has something to 
say.
    Frankly, Congress hasn't spoken on issues like this since 
1930. We have just been frozen out of the process on an issue 
that can impact the entire world.
    Thank you for listening to me.
    And I would also--just like to yield back, Mr. Chairman--I 
would also like to express appreciation that you speak English. 
When I was first elected to this committee a lot of people from 
the Fed didn't speak English.
    Mr. Powell. Thanks.
    Mr. Cleaver. Thank you.
    Chairman Hensarling. The Chair takes note that the Chairman 
of the Fed speaks English.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, Chairman of our Capital Markets Subcommittee.
    Mr. Huizenga. Thank you, Mr. Chairman.
    Chair Powell, good to see you again.
    And I think my friend from Missouri is very pleased for 
English versus economese or economistism or whatever you want 
to tag it with. But this clearly is some complicated stuff.
    I have a number of issues I want to hit on very briefly. 
And one of them is just a simple thing, something that we had 
talked about with the FEC, the FORM Act bill that I had 
proposed previously. We had a provision that we had put in 
there that each Federal Reserve Board Governor should be able 
to hire up to two senior staff members. And just wondering if 
you could maybe briefly comment on that or whether you have 
looked at that.
    Mr. Powell. I think it is a good idea. Don't need 
legislation on it. That is now the rule.
    Mr. Huizenga. All right. Well, good, we are making progress 
already.
    As Chair of the Monetary Policy and Trade Subcommittee, I 
had worked on monetary policy and the effects of that. Now as 
Chair of the Capital Markets Subcommittee, we still see a lot 
of that tie-in in the world economy and the health of what is 
going on.
    I have real concerns about the Volcker rule situation. Last 
month the Fed, along with the other four Federal agencies, 
something that Mr. Quarles had called the five-headed hydra at 
one point. Had put some proposed rule changes in there.
    And my understanding is that the goal of the new rule is to 
simplify the regime and make it easier on the regulators, as 
well as the regulated institutions, to identify proprietary 
trading while allowing banks to continue providing important 
market-making activities.
    How do these reforms address the Volcker rule so that 
compliance can be streamlined, rules clarified, and markets 
actually made more efficient?
    Mr. Powell. I think for the smaller institutions we will be 
streamlining quite a lot.
    Let me say, this rule is out for comment and we are very, 
very open to better ideas, how to do this better. But we want 
to stay faithful to Congress' intent, which is, these 
institutions, particularly the largest ones, should not have 
big proprietary trading businesses, shouldn't be doing 
proprietary trading as a business line.
    Mr. Huizenga. I look forward to continuing to explore how 
the Fed and FOMC will be properly tailoring the Volcker rule. 
However, I have been hearing some complaints from some 
companies that the proposed rule, as introduced, has a new 
concept of using accounting rules to identify prop trading, 
which were not included in the original Volcker rule. I have 
been told that this could actually result in more activities 
getting caught up in the Volcker regime than there are pulled 
in today.
    Can you please tell me how that result, to simplify the 
rule, appears to make it actually a little more cumbersome and 
complex? Again, my understanding is a new metrics regime could 
result in a roughly 50 percent increase in metrics reporting by 
the banks subject to the rule.
    Mr. Powell. That is not the intent at all. And I assume we 
are going to see those comments through the comment process, 
and believe me, we will give them careful consideration.
    Mr. Huizenga. OK. And we are wide-ranging and far afield 
here on a number of issues.
    My next issue, on page 39 in your report you had your chart 
about the rules. You mentioned this on page 5 of your 
testimony. You gave an update on monetary rule. This is a quote 
from your July Monetary Policy Report, gives an update on 
monetary policy rules and their role in our policy discussions.
    I understand you have a series of rules that you reference 
as you are moving forward, including the Taylor rule, the 
adjusted, the Taylor rule as it is.
    What is the balanced approach rule? I am not familiar with 
that. The balanced approach rule would have called for the most 
negative interest rates during the downturn. Could you unpack 
that a little bit?
    Mr. Powell. So each of the rules have an estimate of the 
neutral rate inflation, they have how far you are away from 
your inflation target and how far you are away from your 
unemployment target or your slack target.
    What the balance rule does is, it doubles the coefficient 
on the slack target. So in this case unemployment. So the 
weighting is doubled. That is all it is.
    Mr. Huizenga. And then real quickly, Chairman Barr had 
talked about the yield curve flattening. And I am wondering if 
there could be a circumstance when what might be good for the 
Federal Government, lower interest rates long term as we deal 
with our national debt load payments, frankly, might that not 
necessarily be beneficial for the overall economy?
    Mr. Powell. We are concerned with carrying out the mandate 
you have given us, which is maximum employment, stable prices, 
financial stability. We are not concerned with fiscal.
    Mr. Huizenga. Do you have discretion as to whether to sell 
short-term versus long-term?
    Mr. Powell. Sure.
    Mr. Huizenga. OK. And if you sell long--
    Mr. Powell. So we are not selling anything. We don't sell 
any assets. We let them mature.
    Mr. Huizenga. OK. I will have to follow up with some 
written on that, because I am curious, if you did sell those 
long terms could the long-term rate go up.
    Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Connecticut, 
Mr. Himes.
    Mr. Himes. Thank you, Mr. Chairman.
    Chairman Powell, welcome. It is a pleasure for me to have 
this opportunity to chat with you. It is something I hope we 
can do on an ongoing basis in the future.
    I want to use my 5 minutes to ask you about two specific 
risks and for your elaboration thereon. The first one is 
related to financial stability and stability in the overall 
financial system. I watched carefully the conversation you had 
with Senators Warren and Brown about capital.
    I am actually interested in hearing you for a couple of 
minutes, because I do have two questions, elaborate on risks 
that we might not see coming, that aren't conventional capital 
risks.
    So my concern of course is that we tend to get hit by the 
bullets that we don't see, and while we are focused on Volcker 
rule or capital, what happens, what comes upon us out of 
nowhere. These things tend to come with a speed and severity 
that we don't predict.
    So what keeps you up at night that is not conventional 
capital ratio type issues? Is it student loans? Is it 
proprietary trading? Is it ETFs? Elaborate for me, if you 
would, on things that concern you with respect to stability in 
the banking system in particular.
    Mr. Powell. The clear answer to me from that would be cyber 
risk. We have spent 10 years building up capital, helping the 
banks be much more conscious of their risks, building up 
liquidity, stress testing all those things. And we have a 
really good playbook there. I think we carefully monitor all of 
the things that you mentioned, although some of them are worth 
talking about as well right now.
    But the thing that is really hard, is the idea of a 
successful cyber attack. And we work hard on having a plan for 
that. The Administration plays a leading role in that. That 
would be the big one.
    I think if you turn to traditional financial stability, we 
think that risks are at the normal/moderate level. You see some 
high asset prices. You don't see high leverage among households 
or among banks. You do see a little bit of high leverage in 
nonfinancial corporates, and that is something we are watching 
very carefully. But again, nothing really is flashing red in 
our observation of it in the financial market.
    Mr. Himes. Let me ask you to elaborate. You said there are 
some worth talking about, and then you highlighted asset 
prices. Which category of assets in particular were you?
    Mr. Powell. Just generally, you have had 10 years, almost 
10 years of low interest rates and we are in the process of 
normalizing policy. Bond prices are high, equity prices--
broadly speaking, commercial real estate prices are in the 
upper range, generally elevated. I wouldn't use the bubble word 
here, but I would say that many financial asset prices are 
elevated above their normal ranges and we will have to see.
    Mr. Himes. With respect to cybersecurity, which is where 
you started, what would you recommend to this body that we do 
as you do your reviews and whatnot, within the banking 
industry, what should Congress do to assist in the process of 
addressing cybersecurity risk?
    Mr. Powell. I would say as much as possible, and then 
double it.
    So we do a great deal and it is about making sure the banks 
have basic plans in mind. A lot of it is just basic cyber 
hygiene and making sure that your systems, you are implementing 
the latest things that come out.
    So--and I think planning for failure too is very important. 
That is what we do. We do everything we can to prevent a 
failure, but then you have to ask yourselves, OK, what would we 
do if there were a successful cyber attack. You have to have a 
plan for that too. So those are the things we are working on.
    Mr. Himes. OK. Let me ask you another category of risk that 
is maybe a little bit more sensitive. But like so many people, 
I scrutinize the words in this report--my words, not yours--
very bullish on the economy. Careful on inflation. You note 
that inflation has moved up. Our challenge will be to keep it 
there.
    I am reflecting on where we have been in the last 10 years 
in that regard. We saw a pretty substantial fiscal stimulus in 
2009.
    My friends on the other side of the aisle completely 
rejected Keynesian economics at the time and said that wasn't 
going to work. They then had an epiphany and embraced Keynesian 
economics around a $2 trillion deficit-financed fiscal tax cut 
at a time in which the economy was growing robustly. It has 
been a long time since I studied economics, but stimulus in the 
face of a robust economy concerns me from the angle of 
inflation.
    You say that the 2 percent objective is symmetric in the 
sense of your concern. How would you divide the probability 
that we see upward trending inflation versus downward trending 
inflation going forward from this point?
    Mr. Powell. I would say it is roughly balanced. I think 
maybe slightly more worried about lower inflation still. But I 
think, for a long time, inflation was below target and we were 
pushing it. We have now just about reached a symmetric 2 
percent objective, so it is very close. And I think from this 
point forward the risks are roughly balanced.
    Mr. Himes. Thank you. Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. McHenry, Vice Chair of the committee.
    Mr. McHenry. Well, Chair Powell, thank you for being here. 
I want to shift to cryptocurrency, which is a bit of your 
monetary policy hat, but also a bit of your regulatory hat. And 
I want to get your thinking along the lines of cryptocurrency.
    So the Bank of International Settlements just released a 
report saying that cryptocurrencies were, quote: ``a poor 
substitute for the solid institutional backing of money.''
    You have stated publicly that cryptocurrencies are 
currently not big enough yet to matter, or something along 
those lines. I would submit the report by the Bank of 
International Settlements misses the mark of the potential of 
blockchain, the potential of crypto, more broadly, but there is 
a great deal of interest in your views and Central Bank's views 
more broadly on cryptocurrency.
    So can you just outline to me your thinking on 
cryptocurrency?
    Mr. Powell. Sure. So, first, I would say I think the 
question I was asked that you are referring to was, do 
cryptocurrencies currently present a serious financial 
stability threat. And my answer was they are not big enough to 
do that yet.
    Mr. McHenry. Sure.
    Mr. Powell. That is really what I was saying, not that they 
are not a longer term thing. So they are very challenging 
because cryptocurrencies are great if you are trying to hide 
money or if you are trying to launder money. So we have to be 
very conscious of that. I think there are also significant 
investor risks.
    Investors, relatively unsophisticated investors, see the 
asset going up in price and they think, this is great, I will 
buy this. In fact, there is no promise behind that. It is not 
really a currency. It doesn't really have any intrinsic value. 
So I think there are investor or consumer protection issues as 
well.
    Another thing I will say is that we are not looking at 
this, at the Fed, as something that we should be doing, that 
the Fed would do a digital currency. That is not something we 
are looking at.
    So mainly, I have concerns. If you think about what 
currencies do, they are supposed to be a means of payment and a 
store of value, basically. And cryptocurrencies, they are not 
really used very much in payment. Typically, people sell their 
cryptocurrencies and then pay in dollars.
    In terms of a store value, look at the volatility. And it 
is just not there.
    Mr. McHenry. Well, has there been discussion with other G7 
central banks along the lines of cryptocurrency?
    Mr. Powell. It comes up a lot, yes. I am only just starting 
to go to G7 meetings, but it comes up quite a bit in 
international forums of various kinds.
    There is a broad concern that the public needs to be well 
informed about this, again, the money laundering and terrorist 
financing and all of that is a big risk.
    Mr. McHenry. It is a big risk, but is there any conclusion 
that you are hearing or is it just a broad concern?
    Mr. Powell. Well, I think the BIS report and others have 
called out these risks and called on the appropriate regulatory 
bodies to address them.
    We don't have jurisdiction over cryptocurrency. We have 
jurisdiction over banks. And so we know in their activities 
with cryptocurrency companies and cryptocurrency, we can 
address that. The SEC can address the investor protection 
aspects of it.
    Mr. McHenry. But you don't see this as impairing your 
ability to act on monetary policy just given the current shape 
and scope of the size of the market?
    Mr. Powell. Really not at all today.
    Mr. McHenry. OK. We currently have some level of framework 
around regulation of cryptocurrency. You have a money service 
license at the State level. In our 50 States, they all have 
some requirement. So there is a great look into that 
conversion, the movement of cash into cryptocurrency or out of 
cryptocurrency back into cash. We have some element of 
regulation of the CFTC and the SEC. So there is some broad 
framework of it, but not a concerted effort by the Federal 
Government to understand what is happening in cryptocurrency.
    Do you have any staff resources devoted to figuring out 
cryptocurrency or following cryptocurrency?
    Mr. Powell. Yes. So we have looked at it carefully. I spoke 
about it. Other Governors have spoken about it, Reserve Bank 
presidents. Certainly, we have work going on. But, again, we 
just don't have regulatory authority to deal with it, so I 
think that is the key thing, is to be looking at the places 
where there is that regulatory authority.
    Mr. McHenry. Thank you, Chairman.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from California, Mr. 
Vargas.
    Mr. Vargas. Thank you, Mr. Chair.
    First of all, I would like to thank you for one thing that 
is obvious, and that is that you haven't gotten yourself in 
trouble. You have been a great public servant, and I really 
appreciate that.
    Mr. Powell. Thank you.
    Mr. Vargas. Unfortunately, you shouldn't have to say that 
these days, but you really do, with what we have seen recently.
    I do want to ask a little more about cryptocurrency, 
however. You talked about terrorism and you also talked about 
hiding money.
    I had a bill here with a colleague of mine on the other 
side exactly on that point. And I would like you to go a little 
deeper on that.
    You said it is not an issue yet because it is not large 
enough, but it does seem to be growing. And you said you also 
have jurisdiction, you have jurisdiction over the banks. Should 
you have jurisdiction here, cryptocurrency?
    Mr. Powell. That is a deep question. We are not seeking it.
    Mr. Vargas. But should you?
    Mr. Powell. I am not going to say yes today. We are not 
looking to--it is right in the middle of the SEC's turf, the 
investor protection aspects of it. I think, Treasury and FinCen 
and other people have--I think it should be well regulated. I 
don't really see us as probably the right group to do that.
    Mr. Vargas. But it seems to me right now, that no one seems 
to have quite a hold on it either. It seems to be this 
amorphous blob that is moving around. You talk to the SEC and 
they, at the same time, kick the ball around also.
    Shouldn't there be a more concerted effort to try to figure 
out who is in charge here of cryptocurrency? Because I think 
that there are lots of opportunities here for, not only 
terrorism, but also for drug trafficking, sexual exploitation, 
human trafficking. You said terrorism, but all sorts of bad 
actors can use this. And I don't think that we have a good hold 
on it yet.
    Mr. Powell. I think it is a good idea to focus on getting 
the regulation at the Federal level of this right. Again, we 
are not seeking that at the Fed. And I know Treasury has done 
some thinking on this. This would be an area where they would 
have the lead to identify the right regulatory structure. They 
may have already published something on this. I am not sure.
    Mr. Vargas. In fact, part of the bill asks them to speed 
that up and to report back to us.
    I do want to ask you also about the issue of wage 
increases. You said that there has been some movement upwards, 
2 percent, 3 percent. I think you said 3 percent, so it is 
beating inflation. But the question was then specifically on 
people of color, African Americans and Latinos. You said you 
had some breakout numbers for those.
    Mr. Powell. Not handy, I don't. I can get those for you.
    Mr. Vargas. OK. I would be interested in that, because I 
see the same situation in California where you have people that 
have been underemployed working very, very hard, two and three 
jobs, and they continue to say that they haven't seen that wage 
increase yet.
    We have seen, for sure--I think you are correct about the 
unemployment go down, but we haven't seen yet, certainly not in 
my district in any measurable way, the increases in wages.
    Mr. Powell. Wages in general have been somewhat slow in 
moving up and as the labor market has tightened. We understand 
that really matters to people, people's lives a lot.
    Mr. Vargas. Yes.
    Mr. Powell. And we do see the moving up in the aggregate, 
but I will be happy to supply.
    Mr. Vargas. You said there was an issue of productivity, 
because maybe this time the reason the rates haven't increased 
as much is because of productivity. Could you talk about that 
for a second?
    Mr. Powell. Sure. So over a long period of time, wages 
really can't forever go up faster than productivity.
    Productivity is slow, but there is a reason for that. And 
that is, after the financial crisis--there are many reasons for 
it--after the financial crisis, though, companies didn't invest 
much because there was no need to or there wasn't demand, the 
economy was weak. And so weak investment casts a shadow over 
productivity growth for a number of years.
    So we are still--investment has now popped up. Investment 
was strong in 2017. That continues in 2018. That is really 
important, and we are glad to see it, but it may take some time 
to show up in higher productivity. It is not because people 
aren't working harder. It is because you need those information 
technology and other tools to be more productive.
    Mr. Vargas. And again, with the last moments that I have, I 
just want to thank you again. The way you have comported 
yourself, the way you have been open to talking to people, the 
confidence that we have in you. I think the American people 
really need, at the moment, someone like yourself that we can 
look up to and say you are not involved in any scandal, you are 
not involved in any other thing out there that would lose 
confidence. It is just the opposite. And I want to appreciate 
that and thank you for that.
    Mr. Powell. Thank you, sir. I will try to live up to that.
    Mr. Vargas. I hope you do.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Duffy, Chairman of our Housing and Insurance Subcommittee.
    Mr. Duffy. Thank you, Mr. Chairman.
    And thank you, Mr. Powell. Some of my colleagues on the 
other side of the aisle have discussed harmful economic 
policies. Some in their opening statements, specifically.
    So if you look at the harmful economic policies that have 
taken hold over the last year and a half, so President Trump 
has worked hard to streamline and reduce regulation. We had a 
historic tax cut. We have tried to rebuild our military. We 
have pushed for American energy independence.
    When you take together all of, I would quote, ``those 
harmful economic policies, what has that actually done for the 
African-American unemployment rate in America?''
    Mr. Powell. As I mentioned, I think--
    Mr. Duffy. Is it going up?
    Mr. Powell. It is going down significantly.
    Mr. Duffy. Say that one more time. What has happened to 
African-American unemployment?
    Mr. Powell. It is come down quite a bit.
    Mr. Duffy. It is come down quite a bit.
    How about the Hispanic unemployment rate? Has that gone up 
under these harmful economic policies?
    Mr. Powell. It has come down quite a bit.
    Mr. Duffy. It has come down quite a bit.
    So is it fair to say these policies actually aren't 
harmful? They are actually growing the economy. They are 
putting people back to work.
    Is that a fair assessment, Mr. Powell?
    Mr. Powell. It is fair to say that the unemployment rates 
are very low and a lot of things go into that.
    Mr. Duffy. So you wouldn't say today that it has anything 
to do with regulation or tax?
    Mr. Powell. I am reluctant to get into the credit 
assignment game. It is really not up to us. I can report on the 
economy, but I do think that--
    Mr. Duffy. But you report on the economy and you look at 
all the different factors that come into play in the economy.
    Mr. Powell. Yes.
    Mr. Duffy. So have these factors had anything to do with 
the growth that you have seen in this economy?
    Mr. Powell. So I attribute declining unemployment to 
positive surveys among businesses, really they feel good about 
the business climate.
    Mr. Duffy. Why do they feel better about their businesses, 
Mr. Chairman? Because they get to keep a little more of their 
money? Is that possible, maybe?
    How about if instead of having to navigate government rules 
and regulations, they actually get to focus on running their 
business. Could that attribute to the positive view they have 
on the economy and their businesses?
    Mr. Powell. I think you have seen very positive business 
confidence surveys.
    Mr. Duffy. So I will take it that you are not going to 
answer my question. I understand the position and what you 
said.
    I want to talk to you about trade. I am a free trader like 
you are. I think free trade is great for our economy. But I 
also think that if you don't have fair trade, if you have deals 
with places like China where you have American companies that 
invest millions or billions of dollars in their technology and 
you do business with China and they steal it from you, and/or 
they subsidize their companies that come and do business in 
America where we have, for the most part, free trade ourselves, 
where we actually can't--they have barriers to American-
produced goods, how long does that relationship last where our 
economy is open and theirs is closed? Does that set us up for a 
long-term successful economy as it relates to China?
    Mr. Powell. I strongly agree with you that trade needs to 
be fair as well as free.
    Mr. Duffy. Is it fair now?
    Mr. Powell. Well, I think--so if you look at the rules-
based post-war system, it has consistently resulted in lower 
and lower trade barriers.
    Mr. Duffy. No. Our relationship with China, is it a fair 
trade--do we have a fair trade relationship with China?
    Mr. Powell. I think it is very clear that some countries, 
and China in particular, have less open trading systems than we 
would like.
    Mr. Duffy. It is not fair.
    Mr. Powell. And it is inappropriate for us to address that.
    Mr. Duffy. And so do you think it is easier to deal with 
China 15 years from now when their economy is that much larger 
and stronger or maybe their military is larger and stronger 
than it is today?
    Mr. Powell. That is really a judgment for the people who 
have responsibility for trade.
    Mr. Duffy. I would agree with that.
    I am going to quickly turn to the President's America First 
policy. Do you agree with that?
    Mr. Powell. Maybe you could be more specific.
    Mr. Duffy. Do you think we should put American interest 
first? Do you think we should look out for the global interest 
or American interest?
    Mr. Powell. We work under a statute that has us focused on 
maximum employment and stable prices here in America.
    Mr. Duffy. Maximum employment for Americans, not for the 
globe.
    Mr. Powell. Here in America.
    Mr. Duffy. So we are looking out for Americans.
    Mr. Powell. Of course, we live in a global economy where 
the global economy affects that.
    Mr. Duffy. That is true. But we go to the global economy, 
but always how it affects our own--
    Mr. Powell. Entirely domestic. Our goals are entirely 
domestic.
    Mr. Duffy. Do you believe the U.S. insurance companies are 
well capitalized and solvent today?
    Mr. Powell. Yes.
    Mr. Duffy. Do you believe that our system of regulating 
American insurers has worked well over the last 150 years?
    Mr. Powell. I can speak to the last decade or so, and I 
would say yes.
    Mr. Duffy. Pretty good, huh?
    Mr. Powell. Yes.
    Mr. Duffy. So would you agree that we should not enter into 
any international agreement or standards that would undermine 
our U.S. insurance regulatory system, State-based model?
    Mr. Powell. Yes, I would.
    Mr. Duffy. Great. My time is up. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. I commend the gentleman from Wisconsin and the 
Chair of the Fed for their comments about insurance. And I will 
probably disagree with many other things.
    Thank you once again for returning where you will be 
independent and accountable, tall and short, the Fed plays an 
interesting role.
    First as to cryptocurrencies. You and we should have the 
courage to ban them. As an investment, they are an investment 
with no investor protection, and they take the animal spirits, 
the willingness to invest, divert them from the real economy, 
and instead engage in what is basically gambling. Many 
jurisdictions support gambling only if there is local taxation, 
but cryptocurrencies don't pay gambling taxes.
    As a medium of exchange, cryptocurrencies offer no 
advantages over regular currencies, unless you are a terrorist, 
a narcotics dealer, or a tax evader. There is no positive role 
for us for cryptocurrencies.
    A lot of discussion in here about who deserves credit for 
the good economy. Let me point out, since Dodd-Frank, 17 
million jobs have been created; 15 million of them under Obama, 
2 million under Trump. That is 15 million, 2 million. That's 
the right ratio.
    Now, the Trump Administration claims credit for the last 3 
months of the Obama Presidency, but Obama was actually 
president until January 2017, but his policies remained in 
force all through 2017. Dodd-Frank, Janet Yellen's balance 
sheet, and Obama tax policies were in force until the beginning 
of this year. And in fact, the Fed policies and the securities 
regulation remained pretty much unchanged since the Obama 
Administration.
    The chairman of this committee urges you to abandon all of 
the unconventional tools, while taking credit for the good 
economy that is in part a result of your unconventional tools.
    I would say keep your balance sheet as big as it was when 
we achieved the economic growth that is so good that Democrats 
and Republicans are fighting over who gets credit, and 
certainly do not cut your balance sheet until Chairman 
Hensarling tells you how he is going to increase taxes to 
replace the $80 billion of profit you gave us last year because 
you had a big balance sheet.
    The Chair talks about the inflation rate, the Chair of this 
committee. You ought to have a goal of 2-1/2 percent, not 2 
percent. The law that we passed in 1978 draws a 3 percent 
objective or maximum for inflation and for unemployment. So 
unemployment is still too high and inflation is too low, and if 
we have a looser economic policy, maybe we will get somewhat 
higher inflation and the labor shortage necessary to increase 
wages.
    He puts forward the idea that somebody would save for their 
daughter's college education by putting money aside in a 
mattress where its value would decline by 30 percent by the 
time his young girl got to college.
    I would say if you are smart enough to save for college 
education once your daughter is born, you are probably smart 
enough to invest the money in something that grows faster than 
inflation.
    As to trade, my party suffers from Trump derangement 
syndrome which is, whatever Trump does, we have to be the 
opposite.
    The fact is China launched this trade war against us in the 
year 2000, right after two-thirds of Democrats voted against 
giving China most favored nation status. We were right then; we 
shouldn't change now.
    There are those who say that trade deficits don't have a 
harm. They lead to hollowed-out manufacturing, which leads to 
manufacturing towns where you have opioids, alcoholism, and 
votes for Donald Trump. Three terrible scourges that hit the 
Midwest.
    As to your testimony, Mr. Chairman, you say that wages are 
growing a little faster than they did a few years ago. That is 
nominal wages. Real wages, if anything, have stagnated over the 
last year, depending upon your measure of inflation. One more 
reason for a looser monetary policy, faster economic growth.
    And believe it or not, I have a question, that is, LIBOR 
was tainted by scandal. You have the alternative reference 
rates committee. Most of the LIBOR referenced debt is 
derivatives, but what really matters to people is mortgages. 
And what are you going to do to make sure that the new 
benchmark doesn't increase mortgage bargaining costs or disrupt 
the mortgage market? That is the one question.
    Mr. Powell. That is a great question. So you are right, 
many, many mortgages reference LIBOR. LIBOR is a rate that is 
under a lot of pressure. It may not be there in 3 or 4 years, 
so there is a big move to find a good backup. We have 
identified a backup, and it is not designed to represent an 
increase at all in people's mortgage costs. Rather, it is 
designed to represent just a more sustainable rate that will 
always be there and less volatile and more predictable, more 
reliable.
    Mr. Sherman. And it will be as good for mortgages as it is 
for derivatives?
    Mr. Powell. Yes.
    Mr. Sherman. Good.
    Mr. Barr. [presiding]. The gentleman's time has expired.
    The Chair recognizes the gentlelady from Missouri, the 
Chair of the Oversight and Investigation Subcommittee, Mrs. 
Wagner.
    Mrs. Wagner. Thank you. I thank the Chair. And welcome, 
Chairman Powell.
    In comments that you made shortly after being sworn in as 
Chairman of the Federal Reserve, you noted that you were 
committed to, and I quote: ``explaining what we are doing and 
why we are doing it, and will continue to pursue ways to 
improve transparency both in monetary policy and in 
regulation.''
    Sir, how much value do you place on being as open and 
transparent as possible so that, not only Congress, but the 
American people understand the decisions the Fed is making, why 
they are making those decisions? I am just interested in what 
that kind of transparency and openness looks like.
    Mr. Powell. I think it is our obligation to explain 
ourselves. What we do is very important, sometimes not well 
understood. And it is really on us to explain what we are doing 
with financial regulation and monetary policy.
    We have this precious grant of independence. We have to 
earn it by being accountable, and the way we do that is through 
lots and lots of transparency. I see myself as following in the 
footsteps of three prior chairmen who worked on this: 
Greenspan, Bernanke, and Yellen.
    Mrs. Wagner. When you say transparency, what are we talking 
about in a specific fashion?
    Mr. Powell. So we doubled the number of press conferences.
    Mrs. Wagner. OK.
    Mr. Powell. I will have a press conference after every FOMC 
meeting. That is, in monetary policy, that is a way for me to 
get out and talk about what the committee did at each meeting 
and communicate to the public in a comprehensible way.
    I have also focused very much on communicating in terms 
that people can understand generally, not just economists. 
There is a very small professional audience that understands 
what we do very, very well--economists on Wall Street. And I 
think the rest of the country needs to be let in on this too, 
and I am trying very hard to do that.
    Mrs. Wagner. I absolutely agree, especially in this era 
where we have a savings crisis and people need to understand 
the movements that you make as Fed Chair, how it relates to 
monetary policy and how it affects them and how they invest for 
their future.
    So I absolutely applaud your efforts in terms of press 
conferences, but also trying to shape the vernacular so that 
everyday low- and middle-income investors and savers in this 
country can understand what your policy actually means to them 
personally.
    In 2012, the Fed dealt with a leak of confidential 
information relating to the deliberation of the Federal Open 
Market Committee, FOMC. Access to that information is valuable 
to markets and investors because the Fed does not make clear 
what it is likely to do in the future.
    The committee believes that a monetary policy rule would 
provide the public transparency into future monetary policy 
decisions and eliminate the value of leaks.
    Again, you have talked a lot about being transparent, and 
we have discussed it here previously, but you are the new boss. 
And what is going to change on the issue of securing some of 
that confidential information and transparency to prevent this 
going forward? And then also, when will the board improve its 
internal governance, so episodes like these don't repeat 
themselves, sir?
    Mr. Powell. We take the confidentiality of our 
deliberations very, very seriously as you, I am sure, know and 
would imagine. We remind every person who has access to FOMC 
information, including all the participants, but also all the 
staff every year have to review those rules, have to signify 
that they understand, have read them, and are bound by them.
    So we do all of the things we can humanly think of to make 
sure that people understand their obligations to 
confidentiality. And I think--
    Mrs. Wagner. If I could interrupt, sir, as Chairman of the 
Oversight and Investigation Committee, we have looked into this 
specific leak. We have had difficulty receiving specific 
information about your internal governance and exactly how it 
is that we make sure these episodes don't repeat themselves.
    I would like your brief comments on that, and also want to 
work with you to make sure that we are receiving the 
information in our role of oversight and investigation into 
these kinds of matters.
    Mr. Powell. I will be happy to take that offline and talk 
to you about it.
    I don't know what you are referring to about information 
you can't get. Obviously, there is a lot of confidential 
information that we don't release that we try to protect, but 
in terms of our procedures and the kinds of things that we do, 
I would think that is the kind of thing we--
    Mrs. Wagner. Specific to improvements of internal 
governance, I believe, so--
    Mr. Powell. OK.
    Mrs. Wagner. I thank you. I look forward to following up 
with you.
    Mr. Chair, I yield back the remainder of my time.
    Mr. Barr. [presiding]. The gentlelady's time has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Chairman Powell, welcome back again. And I want to thank 
you for spending some private time with me. We had a wonderful 
discussion and covered a lot of territory when you were here 
last.
    But I watched your testimony over in the Senate yesterday, 
and I want to clarify something with you. You talked about the 
regional banks, those banks that are between $100 billion and 
$200 billion in range. And you talked about Senate bill 2155, 
which I supported very strongly, and we got good support on, in 
terms of the banking regulations.
    But in Senate bill 2155, we gave you, the Fed, substantial 
authority through rulemaking to tailor regulations for these 
mid-sized banks, for these important regional banks.
    And I watched the testimony, and you reassured the Senators 
that the Fed wasn't going to just flip the switch off on a 
bunch of the enhanced prudential standards, but instead would 
diligently work through a thoughtful and careful rulemaking. 
And I was very pleased to hear that.
    But I want to get some clarifying information from you. 
Because Georgia, as you may know, is the home of a couple of 
these very important regional banks: Regents Bank and SunTrust 
Bank.
    And the question is, do you envision the end product of 
this thoughtful and diligent rulemaking process to be a set of 
enhanced prudential regulations to the SIFI banks that is 
drastically different than those of the G-SIBs or the global 
banks?
    Mr. Powell. I anticipate that we will begin by identifying 
and then putting out for comment a framework that we will use 
to assess financial stability and safety and soundness risks of 
those institutions from $250 billion down to $100 billion. And 
then we will take comment on that and then we will go ahead and 
move forward with a framework.
    And I anticipate that many of the factors that are used to 
identify the SIFIs will be used in this context as well. We are 
still working on exactly how to think about it. We have great 
flexibility under the law, which we appreciate, and we will be 
coming forward with something on this pretty quickly, I think.
    Mr. Scott. Do you see any problem areas that these mid-size 
banks or regional banks might have to be concerned about? Or do 
you see a clear field here?
    Mr. Powell. Well, I guess I would just say we are going to 
go ahead and do what the law asks us to do. I don't see why 
anyone should be concerned about that.
    Mr. Scott. Good. Wonderful. That is good to hear. Those 
banks, all our banks are very important. But we have so many 
different sizes, we have to make sure there is a level playing 
field for all of them.
    Now, let me ask you this question. One of your fellow 
Cabinet members was here, the Treasury Secretary. And we got 
into discussion on the trade situation. So I want to ask you a 
question that I asked him, and I am hoping I will get a 
different answer.
    And that is this: Are we or are we not in a trade war?
    Mr. Powell. Let me say, of course, as an independent 
regulatory head, I am not a member of the Cabinet. And also, I 
am not at an independent agency that has any authority over 
trade, so--
    Mr. Scott. Yes, but the reason this is so important, you 
may not be a member of the Cabinet, but let's face it, Chairman 
Powell, when you sneeze, Wall Street gets pneumonia.
    Mr. Powell. It is better than the other way around.
    So on this, we do have responsibility for the economy, and 
to the extent we see--
    Mr. Scott. But my timing is coming up, I need an answer. 
Are we or are we not in a trade war?
    Mr. Powell. It is just not for me to say. Sorry.
    Mr. Scott. Well, Mr. Powell, you are our anchor. You are, 
as the head of the Federal Reserve, the fulcrum of our economic 
system. And on top of that, I talked with you, and you are a 
very learned intelligent person, and you do have a very 
important opinion that the people of this Nation will want to 
hear from you. Are we are or are we not in a trade war?
    Mr. Barr. [presiding]. The gentleman's time has expired.
    The Chair now will recognize the gentleman from Oklahoma, 
Mr. Lucas.
    Mr. Lucas. Thank you, Mr. Chairman.
    Chairman Powell, you are my fourth Chairman of the Federal 
Reserve that I have had the opportunity to interact with as a 
member of this committee. And I have over time come to 
appreciate that the best use of my time perhaps is to focus on 
more specific issues since my friends are very broad sometimes 
in their inquiries of you.
    So I would like to ask you about the recent proposal the 
Fed released with other agencies regarding the Volcker rule. 
And while a great deal of attention has been paid to 
proprietary trading restrictions, I would like to focus on the 
manner in which banks have been restricted from making long-
term investments in small businesses, startups, merging growth 
sectors as a result of the covered funds provisions.
    I can understand that the agencies want to ensure that 
banks cannot evade the trading restrictions of the Volcker rule 
through certain private funds, but I am concerned that the 
agency's interpretation of the restrictions on investing in 
funds that facilitate capital formation has resulted in 
prohibitions on an activity that we want banks to engage in, 
such as making long-term investments in American companies to 
help them grow.
    These restrictions cut off as a source of capital where 
they are both needed and important to economic growth. And I 
will note that the venture capital groups also share my 
reservations, and Comptroller Otting testified last month that 
bank lending provided key funding to small businesses by 
investing in these funds.
    Do you have any plans to modify the scope of the 
restrictions on banks' long-term investments in covered funds 
so that the banks are able to serve as an important source of 
capital to these funds?
    Mr. Powell. We put out that proposal and we are very eager 
to hear comments on that. I think we are bound by what the 
statute says, but within that, we don't see it as an activity 
that typically threatens safety and soundness. We would be 
willing to do whatever we can within the statutory language and 
intent to accommodate that activity.
    Mr. Lucas. I am going to define that as a very positive 
answer. And in the respect for my colleagues, yield back the 
balance of my time, Mr. Chairman, while I am ahead.
    Mr. Barr. [presiding]. The gentleman yields back.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green.
    Mr. Green. Thank you, Mr. Chairman. I thank the Ranking 
Member as well, and welcome the Chair back to the committee.
    I want to thank you for this effort that you are making to 
talk to Members of Congress. I think it is important for you to 
hear from us, and I appreciate greatly your outreach. Also 
appreciative that you have made some reference to African-
American unemployment in your statement for the record. I think 
that is important as well.
    And like many, I salute the notion that African-American 
unemployment is low, comparatively speaking. But I still am 
concerned about the historic position that it continually 
occupies in that of being twice that of White unemployment, 
generally speaking. Sometimes a little bit less, sometimes a 
little bit more. And to this end, you and I will continue our 
interaction about this to see if there are some things we may 
be able to do collectively to have an impact.
    I want to move quickly to something related to the United 
State of Texas and tariffs. Texas is the 10th largest economy 
in the world. And based on GDP, it is, of course, our Nation's 
top exporter. In Texas, we export 42 billion in goods to China, 
second only to Mexico. Half of the U.S. cotton exported to 
China comes from Texas.
    While you have not captioned it, you have not styled it as 
a trade war, I assume that you would say there is a dispute. 
And this trade dispute is having an impact on people in Texas. 
But I would like for you to give your thoughts on how it will 
impact middle class Americans, if you would.
    Mr. Powell. Sure. So I think as it relates to China, it is 
appropriate to address the problems with China's trading regime 
as well. That is a very appropriate thing for the U.S. to do, 
and we have been doing it for a long time and I think it is 
something to carry on.
    Again, we are not in charge of trade, but I think it is 
hard to know exactly where this process goes. If it goes to a 
place where we lower trade barriers elsewhere and U.S. trade 
barriers go down, then it might be worth paying a little bit of 
a short-term price to get to that better place.
    Lower trade barriers, lower tariffs help our economy over 
time. They make for a better, more productive economy, higher 
incomes. They don't help every single group, and we need to do 
a better job of addressing the groups that are not helped by 
trade.
    I think if you go more broadly in a more protectionist 
direction over time, for a sustained period, that is bad for 
our economy. That will mean lower incomes and lower 
productivity and I just hope it doesn't go in that direction. 
But I think it is hard to say where it goes from here.
    Mr. Green. Well, we do have Canada and European allies 
engaged in the dispute currently, so it is a little bit bigger 
than China. To what extent it will grow is, I suppose, to be 
seen. But given that it seems to be consuming other nations as 
well, how, again, will this impact middle class people, 
assuming that we continue along the path that we are going?
    Mr. Powell. I think an open trading system worldwide with 
low barriers is good generally. It creates rising incomes for 
middle class people and all different kinds of people, 
generally. Not every group is helped, though, and we know that 
for factory workers who lost their job over the years. And I 
think we need to do a better job of addressing those issues.
    Mr. Green. So is it fair to say that persons who have been 
traditionally among those who are unemployed at a higher rate, 
that they will be impacted adversely to a greater extent?
    Mr. Powell. I think that is probably right. I think the 
groups who are more at the margins of the labor force, at the 
lower end of the labor force in terms of compensation, things 
like that, who get hit the hardest in a downturn. So 
unemployment goes up the most for those people. And I think 
they tend to be the ones who are hardest hit by downturns, 
generally.
    Mr. Green. And for the record, I would simply add that it 
appears that African Americans would probably be a part of that 
group. And I thank you for nodding.
    I yield back the balance of my time.
    Mr. Barr. [presiding]. The gentleman's time has expired.
    The Chair now recognizes Mr. Stivers, from Ohio.
    Mr. Stivers. Thank you, Mr. Chairman. Thank you for being 
here, Mr. Chair. We appreciate your ability to be very 
accessible to all of us. I know you were in my office. You have 
been in a lot of our offices. I appreciate that.
    This hearing today is about the state of the economy and 
monetary policy. And if you could just give me some true or 
false's here, we will give a quick summary to people.
    Is it true or false, economic growth is 3.1 percent, the 
best in over 20 years?
    Mr. Powell. I didn't know where you have 3.1 percent, but 
it was 2 percent in the first quarter. It is going to be way 
higher than that next quarter.
    Mr. Stivers. This quarter that is projected to be 3.1 
percent? Or around that?
    Mr. Powell. It is going to be higher than that.
    Mr. Stivers. OK. Higher than that.
    Mr. Powell. Projected to be higher than that.
    Mr. Stivers. All right. So good economic growth, true?
    Mr. Powell. Yes. True.
    Mr. Stivers. Low unemployment, below 4 percent?
    Mr. Powell. It is at 4 percent today, projected to go 
lower.
    Mr. Stivers. OK. Around 4 percent.
    Wage growth is increasing?
    Mr. Powell. Has increased.
    Mr. Stivers. Has increased. And we have stable prices?
    Mr. Powell. We are close to our stable price mandate.
    Mr. Stivers. Close to our stable prices.
    So as you think about the full employment mandate that you 
have, the Fed has historically used the unemployment rate. And 
over the last 10 years, what we have seen, although it is 
picked up a little bit lately, is a decline in the labor 
participation rate.
    Don't you think that would be a better proxy for you to use 
when you compare the United States to the U.K. or Japan? Their 
labor participation rate is 5 to 7 points higher than ours 
among working-age people.
    Mr. Powell. We say in our longer run statement of 
principles in monetary policy strategy that we actually look at 
a broad range of indicators to define maximum employment. And 
it is many, many measures of unemployment. It also includes 
labor force participation.
    I would strongly agree with you that is a very important 
area of focus for us and I believe for you as well. It is an 
area where the United States has fallen behind other advanced 
economies, and it is an area where we need to do better.
    Mr. Stivers. I think we need to transition there. There are 
lot of people left behind. And whether they are looking for 
work or not, we need to figure out how to get them moving 
toward the American dream. And I appreciate you being willing 
to look at that.
    Quickly on the Volcker rule, I just want to speak for 
middle America. We have a lot of banks in my district, medium-
size banks, little banks. They are precluded from investing in 
our economy. They can loan to our economy, but they can't 
invest in our economy. The preponderance of the wealth that is 
invested in private equity and other things is on the coasts.
    If we were to--and I know it would require a statutory 
change--if we were to allow some of that investment to happen, 
but separately capitalize those funds at the banks so they 
can't just come to the Fed funds window--that is the concern, I 
get it, and why the Volcker rule is there--it would really help 
middle America.
    I'm not asking to you comment on it, but I would love to 
work with you on that issue.
    Mr. Powell. Great. We will do that.
    Mr. Stivers. Quickly, a follow up from Mr. Himes on cyber 
policy. With regard to the thing that keeps you up at night the 
most, I think everybody you regulate inside the financial 
system has incentives that are aligned with behavior that 
works. Because the customer is limited to a $50 loss, the 
financial institutions have skin in the game.
    The problem is many other people in the cyber system, 
retailers and others, offload their financial risks while they 
have reputational risks to others, and it has become a 
jurisdictional fight between our committee and Energy and 
Commerce. I believe we need to change that.
    And I think the way to do it is to use cyber insurance the 
way we used workers' compensation insurance in the 1900s to 
improve worker safety. If we gave safe harbors for certain 
coverages and made sure the payouts aligned the incentives, I 
think you would be able to price a system, but you would have a 
dynamic system instead of naming standards and having them 
being out of date the next day. So we look forward to working 
with you on that.
    I don't expect you to comment on that either since I am 
just throwing it at you right now, but I think it is a 
different way that maybe can break through our jurisdictional 
problem inside Congress. But I agree with you, it is one of the 
biggest threats that we have right now.
    And quickly, one last thing, and this is a question that I 
do want you to address. Because there have been some comments 
on the committee about stock buybacks and how they don't do 
anything. But, I think it is important that we note that when a 
company decides to buy back stock, that money doesn't just 
disappear into the wallets of wealthy people; it goes to work 
inside the corporation. It is their way of saying this is a 
better way to put our money at work.
    But when you look at stock ownership, many people in the 
middle class have 401(k)s, and that money gets a better return 
for them as well as every other stockholder.
    So I guess the point is--and you have answered it a couple 
times, but just to be more clear, do you believe that stock 
buybacks can help the economy and the middle class, including 
401(k) stockholders?
    Mr. Powell. I see stock buybacks as a way for companies to 
allocate funds that they don't need in their own business 
through the capital markets to those who do need them.
    Mr. Barr. [presiding]. The gentleman's time has expired.
    Mr. Stivers. Thank you. I yield back.
    Mr. Barr. [presiding]. Thank you. And just as an 
announcement, the chairman has requested a brief break at noon. 
So we will recognize the gentleman from Minnesota and then take 
a recess for a few minutes.
    And now we recognize the gentleman from Minnesota, Mr. 
Ellison.
    Mr. Ellison. Thank you.
    Good morning, Mr. Chairman. How are you doing?
    Mr. Powell. Great, thanks. How are you?
    Mr. Ellison. So there has been a little bit of discussion 
about whether or not real wages have gone up or going down. But 
I am just looking at what was reported by the Bureau of Labor 
Statistics yesterday. They said that the median weekly earnings 
of the Nation's 116 million full-time wage salaried workers 
rose 2 percent on the year, but inflation was up 2.7 percent 
over the same time period. That says to me that the median 
full-time wages have actually been falling in real terms for 
the past three quarters.
    Would you agree with my analysis?
    Mr. Powell. Yes, as far as it goes.
    Mr. Ellison. OK. So thank you. And I appreciate that, 
because that allows me to ask what I really want to know, which 
is why in such low unemployment do we have wages either 
stagnant or even declining a little bit over the last three 
quarters? And I will just give you a minute or two to try to 
give me some understanding--all of us.
    And it is not a setup question. It is a real question, 
because you would expect, with this level of low unemployment, 
we would see wages go up, but they are not.
    So what some of your observations as to why that is 
happening?
    Mr. Powell. So if you look at a range of wages. Of course, 
there are four or five main ones, but there are many, many 
others, and they have differences. None of them is exactly 
right. And if you look at them, they have overall moved up from 
around 2 percent to pretty close to 3 percent now. That is 
good. We like to see--
    Mr. Ellison. Nominally.
    Mr. Powell. This is nominal. Yes, this is nominal. It is 
reported in nominal, not real.
    So that is a good thing. We like to see that moving up. I 
have said before, and I still think you would have expected, 
when unemployment moves from 10 percent to 4 percent, you might 
have expected a little bit more in the way of increases.
    On the other hand, inflation has been--employers are 
looking at this through the lens of how much are prices going 
up. And the answer has been, inflation has been low. And also, 
how much more output am I getting? In other words, people 
should earn inflation plus productivity. Both of those have 
been low, through no fault of any worker.
    Mr. Ellison. Now, Mr. Chairman, I hate this process because 
it makes me interrupt you.
    Mr. Powell. I am sorry.
    Mr. Ellison. And I appreciate what you are sharing, so I 
didn't want to do that, but I think it has something to do with 
anti-competitive practices that we see across various sectors. 
For example, many of us have a piece of legislation to ban 
something called no-poaching agreements.
    Do you know what a no-poaching agreement is?
    Mr. Powell. I do, yes.
    Mr. Ellison. Could you describe in about 30 seconds for the 
folks listening what a no-poaching agreement is?
    Mr. Powell. So, for example, you work at a fast-food 
outlet. As a condition of getting that job, you have to promise 
not to take a job at another fast-food outlet. It is probably 
unenforceable, but a worker working at a fast-food outlet 
doesn't have the means to go to court and might not know to go 
to court. So it is a way of restraining competition. And there 
is really nothing good to be said about it.
    Mr. Ellison. Right. And to me, I think that Congress needs 
to be aggressive about this. Because if we are truly believing 
in free-market economics, the free market is being strained by 
these anti-competitive practices. This ought to be a bipartisan 
thing where we are together saying that if--you cannot, Mr. 
Employer or Ms. Employer, have an agreement between yourselves 
that you will not hire each other's employees if they go to you 
looking for a better wage or have a noncompete clause.
    Mr. Powell. I think just shining a light on it helps. By 
the way, you may have seen some of the big fast-food companies 
announce they won't do that anymore.
    Mr. Ellison. Well, because some Democratic attorneys 
general went after them, and they said, OK, we won't do it, 
because they know they are going to be held accountable.
    But deeper than that I think is the fact that we have 
highly concentrated markets these days. Can you talk about 
market concentration in this particular economy?
    It seems like every industry you look at has highly 
concentrated markets. Look, for example, Amazon, how they are a 
dominating online retailer. If you look at search engines, look 
at what Amazon is doing. It could even be beer or pizza or 
chicken or whatever it is. It seems like the other side of a 
monopoly is a monopsony, with limited number of buyers of 
labor, which makes it easier for them to simply hold wages 
down.
    I wonder what you think about that.
    Mr. Powell. It is true that we do see measures of 
concentration going up, but I think that the tech companies 
that come out and invent a new business, they are a special 
case. And it is hard to know how to think about that in terms 
of the traditional antitrust in other ways. It is not something 
I feel like there are really clear answers on yet.
    Mr. Ellison. Would you consider having the research 
department at the Fed talk about concentrated markets and the 
impact on wages and the fact that they are growing very slow in 
an unexpected way?
    Mr. Powell. We will look into that.
    Mr. Ellison. Thank you.
    Mr. Barr. [presiding]. The gentleman's time has expired.
    And pursuant to the announcement just made, the committee 
stands in recess, subject to the call of the Chair. The Chair 
anticipates that we will reconvene in 10 minutes.
    [Whereupon, at 11:57 a.m., the committee was recessed, 
subject to the call of the Chair.]
    Mr. Barr. [presiding]. The committee will come to order.
    The Chair now recognizes the gentleman from California, the 
gentleman of the Foreign Affairs Committee, Mr. Royce, for 5 
minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    And let me ask this, Chairman Powell. Housing financial 
reform remains the great undone work of the financial crisis, 
and you have previously called for reform stating that we need 
to move to a system that attracts ample amounts of private 
capital to stand between housing sector credit risk and the 
taxpayers.
    A nationalized mortgage market is an unsustainable status 
quo, obviously, from a moral hazard perspective on this thing. 
And sadly, the situation we find ourselves in today was a 
predictable one.
    In 2003, I introduced legislation, and again in 2005, which 
would have reigned in the GSEs, allowing them to be regulated 
at that time for systemic risk. Then Fed Chairman Greenspan 
backed the amendment, but it was not enough to overcome the 
outsized political pressure brought by the GSEs themselves.
    To be fair, you said last summer that this was not a normal 
issue on which the Fed would comment, but that we were in a now 
or never moment for reform, as there is not a current risk with 
a healthy economy now in the housing system. How long with this 
now or never moment last? And what are the consequences of 
inaction on this?
    Mr. Powell. I think now continues to be a good time to move 
forward on this. It is one of the big pieces of unfinished 
business from the crisis. It is unsustainable to have 
effectively the U.S. housing finance system on the government's 
books for the long run and it's not healthy.
    I don't know how much long--we are going to need to address 
this. I assume we will at some point, and I would just say the 
sooner the better.
    Mr. Royce. Let me ask you another question on this front. 
Chairman Greenspan often commented on the role of the GSEs in 
our economy. In 2004, in testimony before the Senate, he said: 
Concerns about systemic risk are appropriately focused on 
large, highly leveraged financial institutions such as the 
GSEs. To fend off possible future systemic difficulties, which 
we assess as likely if the GSE expansion continues unabated, 
preventative actions are required sooner, rather than later.
    Those were his words in 2004; ominous words no doubt.
    Today, pressure is being brought on the Administration to 
release the GSEs out of conservatorship. Although I oppose this 
move, absent Congressional action, I am hopeful that if this 
were to occur, there is no doubt today that Fannie and Freddie, 
given their size and role in the housing market, would be 
regulated as systemically important.
    Do you share this view?
    Mr. Powell. I--so the form in which this reform takes place 
will, of course, be up to you, not to us, and it is not in our 
lane. I would say I would really hope that these institutions 
would not be systemically important at some point. I would 
think when you figure out a process where they can be moved off 
the balance sheet, the idea would be that they would not 
present systemic risk, ideally.
    Mr. Royce. Let me move to another question, Chairman 
Powell. Earlier this year, this committee passed legislation 
that would reverse the previous SEC rule requiring that certain 
money market funds float the NAV. I certainly remember when the 
Federal Reserve fund broke the buck in 2008--I remember where I 
was when that occurred--and the massive backstop the U.S. 
taxpayers provided to restart the entire market as a result of 
this and other factors.
    The fact is that the value of the underlying assets of 
those products fluctuate. They go up and down. As I said in 
opposition to the bill at the time, if we learned anything from 
the financial crisis, it should be that the price should 
reflect risk. While understanding this is the primary 
jurisdiction of the SEC and Chairman Clayton has already 
expressed his concerns, I was hoping, as a member of the FSOC 
and as someone uniquely positioned to comment on macro 
financial stability, that you could comment on any concerns 
with this potential move.
    Mr. Powell. I very much share your concerns. This was one 
of the many critical weaknesses identified in our financial 
system during the crisis. We worked hard to address it, I think 
successfully, to some extent. And I would not like to see that 
undone.
    Mr. Royce. Chairman Powell, I am out of time. Thank you 
very much.
    Mr. Barr. [presiding]. The gentleman's time has expired.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Foster.
    Mr. Foster. Thank you, Mr. Chairman.
    Chair Powell, the last time that you were here, I discussed 
with you a policy of countervailing currency purchases as a 
response when a country has been determined to be a currency 
manipulator. I believe that my staff has transferred to your 
staff the ideas from the Peterson Institute on the specifics of 
how countervailing currency intervention may be an appropriate 
response. But I am actually more concerned now about the 
currency manipulation than I have been.
    Obviously, President Trump has recklessly now begun a trade 
war with many of our trading partners, particularly with China. 
I think many of the countries that are on their currency 
manipulation watch list that gets reported every so often by 
Treasury have been either hit or threatened by tariffs. Some of 
these countries are going to run out of gas in terms of the 
products that they can impose retaliatory tariffs on, at which 
point I think it is quite likely that they will resume currency 
manipulation that they have done in the past.
    And China is probably top of my list on this, because they 
have--they will run out of gas fairly quickly. And the damage 
that has been done in the past by Chinese currency manipulation 
is enormous and one that many of my constituents have felt in 
their businesses.
    And so I think it is more pressing than now that we 
actually have a response in place, ready to go, if and when any 
one of those countries, in particular China, resumes currency 
manipulation. Countervailing currency manipulation is something 
that can be done. I think it is an appropriate response and it 
can be done.
    And so I was wondering, has Treasury contacted you in any 
way with our suggestions that we have given to them on 
getting--having this take place? Because, obviously, a 
significant response would be a joint project between Treasury 
and the Federal Reserve.
    Mr. Powell. The currency issues are entirely up to 
Treasury. I don't know whether they have technically consulted 
with us about it or not. It is the first time hearing about it.
    Mr. Foster. OK. Well, anyway, so I encourage you to look 
into this. If you find that there is any legislative 
impediments to that, I believe the suggestion from the Peterson 
Institute is that if this goes forward, it would be a joint 
effort where the currency purchases would be jointly done by 
Treasury and the Fed.
    Mr. Powell. We would just be implementing their decisions, 
though. We wouldn't be making those decisions.
    Mr. Foster. Correct. But it is something that I hope that 
we are prepared for, because the risk of anything of a 
resumption of significant currency manipulation has certainly 
gone up because of the Republican tariffs. And so I just want 
to flag that for you.
    Second, there has been some discussion in the previous 
testimony about wage growth and so on, and this plot that's up 
here. Did you see the article in The Wall Street Journal a 
couple of days ago about how inflation is eating up workers' 
wage increases? Yes. And this is essentially the plot from that 
showing that while workers wages were out--during the Obama 
era, workers wages were modestly outstripping inflation; that 
is no longer true in the Trump era that things like the massive 
tax cut for the wealthy and the deficit spending have driven 
inflation more than they have driven wages. As a result, for 
wage earners, the situation has not improved. That is in great 
contrast to the situation for CEOs and so on who have seen 
their compensation go up way faster than inflation.
    And so there was an announcement by the Federal Reserve, I 
guess a month or so ago, that the historic milestone of 
household net worth exceeding $100 trillion, which I think it 
was a very interesting milestone in the recovery itself from, I 
believe, around $55-or $60 trillion during the deficit of the 
crisis. And so it is a real milestone, but that is an aggregate 
number.
    And so one of the things we are seeing more and more is a 
divergence between average numbers when you average in the 
results of the very wealthy with numbers like this, which is 
the wages for wage earners where the situation is very 
different. What I would like to urge you to do is when you 
report, for example, household net worth, to report it not only 
as an aggregate but as quintiles or top 1 percent, top 10 
percent, and to report this on a quarterly basis the same way 
you report the aggregate number. I think it would really 
illuminate a lot of where our economy is going. And I would 
like to see that in the next report and future reports, if that 
is possible.
    Mr. Powell. I will look into that.
    Mr. Foster. All right. Well, thanks much.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New Mexico, Mr. 
Pearce, Chairman of our Terrorism and Illicit Finance 
Subcommittee.
    Mr. Pearce. Thank you, Mr. Chairman.
    Mr. Chairman, I appreciate you being here today and your 
leadership on the economic front for the country. So you had 
given testimony yesterday or whenever to the Senate about the 
effect of opioids and the labor force participation rate. Can 
you walk through that briefly for me?
    Mr. Powell. Yes. Well, labor force participation by prime 
age males has been declining for 60 years. It has been 
declining for females for maybe the last 15, 20 years in the 
United States. We stand out compared to other countries. So 
many things that happened in the economy are global. This is 
really something that we have.
    A significant number of those in their prime working years 
who are not in the labor force, close to half I think in that 
one estimate was 44 percent, are taking painkillers of some 
kind, which is the opioid crisis to some extent. So there are 
many, many people who are out there in their prime working 
years, not in the labor force. We would all be better off if 
they were in the labor force, including them. And part of the 
reason they are not is the drug issue.
    Mr. Pearce. The problem is especially egregious in much of 
New Mexico, and so we passed a series of bills here that are 
directed at beginning to stem that problem. Have you looked 
much at the legislation that we have passed through the House, 
anything that stands out as being especially effective in your 
ideas or the ideas of the committee?
    Mr. Powell. I haven't looked at it carefully. I did see 
that, but I will be happy to go back and look.
    Mr. Pearce. OK, yes. Now, for New Mexico, we have a little 
bit of an aging population and we also have a lower income 
population. That all argues for less complexity in the 
investments. And so, typically, they would like safe 
investments, but then the interest rate is always at such a low 
rate that it is driving unsophisticated investors into 
sophisticated items seeking rates of return.
    Any ideas how it can help out our seniors who typically 
fall into that category? I am thinking about my mom. The last 
few years of her life, she just wanted not to lose money and 
just to have it safe. And yet we are seeing a lot of seniors 
chasing rates of return and getting into very unsafe things, 
then they lose their nest egg. So how is the Reserve looking at 
that?
    Mr. Powell.  We are not responsible for investor 
protection, but we are responsible--
    Mr. Pearce. No, it is the rate of return. It is the rate of 
return on simple investments. The rate of return on passbook 
savings or money markets, that is the question.
    Mr. Powell. Right. We have kept rates low for a long time, 
and we think that has had a very positive effect on the 
economy. It has boosted employment, it has boosted activity. I 
think it has definitely been tough for seniors who are really 
relying on their passbook savings, for example, for interest. 
But overall for the economy, it has been a good thing. Rates 
are going up now, to reflect the strength of the economy. So 
that should be helping some.
    Mr. Pearce. Yes. As we talk about the labor force 
participation rates, we are also noting a lot of skilled 
atrophy. People who have been on different public assistance 
programs for some time actually don't have much skills.
    So as the President talks, he talks about the 
apprenticeship programs. Have you all taken a close look at how 
the apprenticeship programs could be directed at the people who 
have been out of the labor force, not the people in the high 
schools, but the people who have been on the sidelines for some 
time? Are there any studies available to us on the 
effectiveness of those programs?
    Mr. Powell. Yes. We have an excellent group of labor 
economists, and that has been a particular focus. So we would 
be delighted to supply that to you, discuss it with you or your 
staff. We would be happy to work with you on that.
    Mr. Pearce. The energy economy that you reference in your 
report a couple of times is one that is playing out in the 
southeast part of New Mexico. Some of the largest finds in most 
productive wells being drilled are occurring right there. The 
pipeline capacity is becoming a chokepoint and then also the 
refining capabilities. So we are suggesting building a refinery 
in New Mexico and asking for White House help to get the 
permits done. All of that would help us to become energy self-
sufficient.
    Thank you, Mr. Chairman. I yield back.
    Chairman Hensarling. The time of the gentleman is expired.
    The Chair now recognizes the gentlelady from Ohio, Mrs. 
Beatty.
    Mrs. Beatty. Thank you, Mr. Chairman, and thank you, 
Ranking Member.
    And thank you, Chairman Powell. Good to see you again. I 
just have a couple of quick questions I am going to try to get 
through. Mr. Chairman, I brought the Federal Reserve 
supervision and examination of the insurance savings and loan 
holding companies up previously with Federal Reserve Governor 
Quarles. And my staff brought this topic up with the Fed staff 
on several occasions.
    Since the economic crisis, the number of insurance and 
saving and loan holding companies has dwindled from some 30 to 
just 11, according to the Fed's 2017 annual report. I have two 
of these insurance companies in my district which employ 
thousands of people. And one of them just announced that they 
are closing their depository institution.
    While I understand that there are several business reasons 
for an insurance savings and loan holding company to close 
their own depository institution, there is little doubt that 
one of the factors why they are closing them down is due to the 
burdensome and inefficient supervisory regime by the Federal 
Reserve. I have worked with my colleague on the other side of 
the aisle, Mr. Rothfus, to introduce legislation that would 
force the Federal Reserve to tailor their bank centric 
regulations to those to insurance companies, which are wholly 
different from banks. While I think there should be some cost 
of admission for an insurance company to own a depository 
institution, I don't think that cost should be so high that it 
makes no financial sense to own one, which is where I think 
that we are headed.
    Do you think that this problem that these insurance 
companies are closing their banks, that this is part of the 
reason, or is it the Federal Reserve's desire for no insurance 
companies to own a depository institution?
    Mr. Powell. It is certainly not our desire to drive anybody 
out of owning a bank who can legally own a bank. I think in the 
case of depository institutions that are owned by insurance 
companies, our interest is in the safety and soundness of that 
depository institution. So we work very carefully not to 
duplicate the insurance regulatory work that the State 
insurance supervisors capably do, but we have a role to play as 
the holding company supervisor as it relates to the depository 
institution. And that is what we care about. That is really all 
we care about.
    I think my recollection--these companies are getting out of 
owning depository institutions mostly for business reasons as 
opposed to for regulatory reasons. In any case, we are 
committed to doing that as efficiently as we can and--
    Mrs. Beatty. Are you familiar with our legislation?
    Mr. Powell. Yes, I am.
    Mrs. Beatty. Is it something that will be helpful, or do 
you have an opinion?
    Mr. Powell. We have raised concerns. The concern that we 
raised is that we would be effectively out of the business of 
supervision at the holding company. We would promulgate 
standards, but they would supervised by the insurance 
supervisor. And the insurance supervisors, they do a fine job 
of supervising insurance, but they are not prudential 
regulators of banks. And we think if you are going to own a 
bank, you should be subject to regulations by a prudential 
regulator of banks, which would be us in this case.
    Mrs. Beatty. But you would be at least willing to see if we 
could tweak it or work together?
    Mr. Powell. Absolutely, absolutely.
    Mrs. Beatty. OK, thank you. On another good note, let me 
also say thank you for being very responsive to our letters to 
you from the Congressional Black Caucus and from you on 
diversity. I really appreciate that.
    As you will probably recall, we have had several 
conversations about the Beatty rule that is patterned after the 
Rooney rule. If you are looking for minorities and, more 
specifically, African Americans to serve on the Federal 
Reserve, then you have to put them on the list. You have to 
include them in the room.
    So while we weren't necessarily overjoyed with the last 
appointment, I am pleased that Mr. Bostic is there, and just 
hoping as more openings come, that you will keep that in the 
back of your mind.
    Last, I have an odd question. I was on my way back to 
Washington, I stopped in a restaurant, and a gentleman came up 
to me and chased me down, and said, I know that Mr. Powell's 
going to be coming before your committee, would you ask him 
this question. We are going to paraphrase it because my team 
wasn't quite sure what he was asking and he stated it more as a 
fact. But I think what the constituent was asking me, and he 
stated it more as a fact than a question, but he essentially 
wanted me to ask you whether or not you believe the Federal 
Reserve's monetary policies exacerbates the wealth inequality 
in our country.
    I think for some reason he felt that organizations who 
receive the interest payments on our national debt is 
destroying the middle class.
    Mr. Powell. No, we don't think monetary policy is 
exacerbating inequality. We think, in fact, it is helping those 
who didn't have jobs get jobs. So those are the people who need 
those jobs.
    Mrs. Beatty. Thank you very much. And I yield.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Florida, Mr. 
Ross.
    Mr. Ross. Thank you, Chairman.
    Chairman Powell, thank you for being here. Your 
predecessor, for whom I have a great deal of respect, I know 
struggled for some time with regard to the impact of the 
quantitative easing, the low interest rates, the high 
unemployment. And I see that, based on your report today, the 
outlook is much brighter and doing much better.
    I echo the concerns of my colleague, Mr. Pearce, because I 
have a great deal of retirees in my community and they want to 
start seeing some return on their investment, of course, 
instead of having to keep dipping into the principle of their 
savings.
    Chairman Powell, it has been more than 9 months since the 
Federal Reserve had its first official Vice Chair for 
supervision sworn in. Prior to Vice Chair Quarles taking 
office, the responsibilities of his position were unofficially 
shared between former Fed officials to such an extent that it 
was never really sure who was in charge of regulatory affairs 
at the Federal Reserve. As a consequence, it felt to many of us 
in Congress that the divide between the Federal Reserve's 
regulatory responsibilities and those related to monetary 
policy wasn't as explicit as it should have been. Further, 
there seemed to be a high risk that Federal Reserve regulations 
were not being given the necessary oversight and evaluations. 
There were more and more regulations coming out.
    And now with the position filled by Vice Chair Quarles, I 
would like to hear if things have changed at the Federal 
Reserve. Do you find that having a Vice Chair for supervision 
has allowed you to focus more on monetary policy the side of 
the Federal Reserve's work? In other words, does it help 
prevent inappropriate overlap of the Fed's roles now that you 
have distinguished supervisory roles in the Fed?
    Mr. Powell. Let me say it is great to have Vice Chair 
Quarles in his role. And I know he was confirmed yesterday into 
his underlying Governor term. He is terrific. I worked with him 
25 years ago, so he has been great.
    We think of the roles as pretty complimentary actually. We 
think that, essentially, the financial system, more broadly, 
and the banking system is the transmission channel for monetary 
policy. So we think we learned a lot about what is going on in 
the economy and also about how monetary policy is getting out 
into the economy by virtue of the fact that we are in 
supervision.
    We do have a separate division that takes care of all that, 
and Vice Chair Quarles as the Vice Chair has particular 
authorities under the statute to recommend policies to the 
Board. I hope I am getting to your question.
    Mr. Ross. Yes. But as I mentioned, I think the past 10 
years, as a result of financial crisis, we have seen new 
regulatory schemes being imposed. And it seems to me that now 
would be an appropriate time for the regulators to take a step 
back and conduct a holistic review of the impact of these 
regulations. And I believe that having Vice Chairman of 
supervision renders this holistic view more appropriate at this 
time.
    Do you think now would be a good time for such a review?
    Mr. Powell. It is a good time. In fact, we are doing that. 
We are committed to sustaining the important post-crisis 
regulatory reforms, higher capital, higher liquidity, stress 
testing, resolution. We are also committed to looking at 
everything that we have done in the last 10 years and making 
sure that it is right sized and effective.
    Mr. Ross. Has your review revealed any duplicative or 
burdensome regulations that could probably be done away with at 
this point?
    Mr. Powell. Yes. I think we are finding quite a lot to do, 
mainly as it relates to smaller and medium-sized institutions, 
which I think there is quite a lot of good work that we can do 
on that front.
    Mr. Ross. And also part of your report you note that 
residential investment has leveled off for the first 5 months 
this year. And that is a little disappointing to me, because I 
think that is a leading indicator force in terms of residential 
investment.
    When I go home to central Florida, I can see skyrocketing 
demand for homes, but for some reason developers just can't 
keep up. One of the things that you have talked about, and I 
think that Mr. Pearce talked about also, is the, quote, ``tight 
supply of skilled labor.''
    Can you expand on that? How long have we been approaching 
this tight supply of skilled labor?
    My concern is this, is that we have a great tailwind behind 
us right now. We have a 4 percent GDP. We have lower 
unemployment than we have had in a long time. We have more 
capital than we have seen before, but yet if we are not going 
to have the economic recovery because we don't have a labor 
market, what is in store for us? And how can we best address 
this labor market shortage that is facing us?
    Mr. Powell. It is a real challenge. Plumbers, carpenters, 
electricians in short supply. A lot of people left the industry 
after the crash. Now there is a need. And also, it is very hard 
to get lots. It is difficult. The zoning and everything is 
quite difficult.
    Mr. Ross. The training programs?
    Mr. Powell. They are also facing high materials prices.
    Mr. Ross. Which is a component of it too. But even if we--
we have to have the labor is what I am getting at. And even if 
we have to import the labor, we need the skilled labor.
    Mr. Powell. I think you are right. There is a good question 
about how the economy will absorb all of this momentum, and I 
think the tools to expand the labor force are really not ours, 
they are really yours.
    Mr. Ross. I agree. Thank you. I yield back.
    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.
    And thank you, Chairman Powell, for being with us. I really 
want to commend you for taking the initiative to provide time 
to be with members and allow those discussions to occur. I 
think it is very helpful for us.
    Mr. Chairman, as I understand, it is your directive to 
promote stable prices. Some of your policy committee members 
have expressed interest in replacing the current inflation 
target with different target measures that would provide even 
greater variability. Given that, would you help me just better 
understand the difference between price stability and stable 
prices?
    Mr. Powell. I think they mean the same thing. I wouldn't 
say there is a big difference there.
    Mr. Pittenger. Good. Well, thank you. That clarification 
helps.
    In this year's monetary policy report, you state that the 
labor force participation rate has been in decline for decades. 
And has seen a recent increase among prime age individuals. 
Despite the factors that continue to cause the decline 
persisting, you have said that the continuation of increases 
seen over the past few years is possible if favorable labor 
market conditions continue as well.
    Have you seen these favorable labor markets, at least more 
recently, remain or even show increases since the passing of 
the Tax Cuts and Jobs Act?
    Mr. Powell. We do see the labor market continuing to 
strengthen. And as you point out, labor-first participation by 
prime age males and females has kicked up in the last couple of 
years. That is a great thing to see. We really hope those gains 
are sustained against a longer run trend of decline. But we 
hope that this is a great chance for people to get back in the 
labor market and we hope stay there.
    Mr. Pittenger. Would you draw any correlationship between 
the Tax Cut and Jobs Act bill and that dimension?
    Mr. Powell. I think that there are a variety of things 
contributing to this. Certainly, the business tax cuts are 
helping support activity, and the individual tax cuts too.
    Mr. Pittenger. How has the Tax Cuts and Jobs Act affected 
your current monetary policy?
    Mr. Powell. It is hard to single out an effect. We really 
look at many, many different things. The economy's strong and 
we are on a path of gradually raising rates, and I think that 
reflects all of the things that are going on, including the 
changes in fiscal policy.
    Mr. Pittenger. Yes, sir. With the new tariffs coming from 
both at home and abroad, some businesses are shying away from 
both capital and labor force investments. The report States 
that exports had increased in the second quarter, led by 
agricultural exports. Do you see this changing, especially in 
light of the retaliatory tariffs on numerous agricultural 
products from Canada and the European Union?
    Mr. Powell. I think there is a lot of uncertainty about how 
this round of discussions between us and essentially all of our 
major trading partners will come out. I think if it does wind 
up in a lot of reciprocal tariffs, then it would certainly 
affect our exporting industries, including in a big way, U.S. 
agriculture. So it is a risk.
    Mr. Pittenger. Yes, sir. You previously stated that the 
U.S. financial system is substantially more resilient than the 
decade before the financial crisis. Should there be a trade 
war, what tools do you have, to move quickly to ensure this 
continued resiliency in economic growth?
    Mr. Powell. I think the financial system is well 
capitalized and so much more strong and resilient in so many 
ways that it is there in a position so that it can resist or be 
resilient against shocks of various kinds, and that would 
include changes to trade policy that became disrupted. Our 
monetary policy tool we can always use to--it really relates to 
demand. So if demand weakens, then we can support demand.
    The harder issue is you could be seeing higher prices 
because of tariffs at the same time you are seeing lower 
economic activity. And potentially, that would imply higher 
inflation. A mirror increase in tariffs wouldn't mean 
necessarily higher future inflation, but if it did have that 
implication, it could be very challenging for policy.
    Mr. Pittenger. Thank you. My time has expired.
    Chairman Hensarling. The 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.
    I want to talk a little bit about the automatic SIFI 
designation being set at $250 billion in S. 2155. This was an 
important change that right sized the regulatory burden for a 
significant number of small and medium-sized institutions.
    In setting the threshold at $250 billion, however, we 
grouped large regional banks together with banks that have 
assets in excess of $1 trillion. These institutions do not only 
differ from each other in terms of size, they also differ in 
their levels of risk and complexity, as well as their capital 
structure and their business mix.
    Would you agree with that assessment that there is a 
distinction between those large regional banks and those other 
banks?
    Mr. Powell. Very much so. Not just size, activities as 
well.
    Mr. Rothfus. Given this distinction, how will the Fed be 
tailoring regulations for banks above the $250 billion 
threshold?
    Mr. Powell. Working on a framework now. Some ways away from 
publishing it, but it will take into account a range of 
factors, including size will be one, but also many others, such 
as complexity, interconnectedness, the nature of their 
activities, all those. We will take in a wide range of factors. 
The bill gives us a great deal of flexibility to identify the 
appropriate factors, and we are just in the process of doing 
that. We are going to put that out for comment and listen 
carefully to public reaction too.
    Mr. Rothfus. Any timeframe yet on when that might happen, 
comment period?
    Mr. Powell. I can't be precise. I will just tell you we are 
working hard on it right now.
    Mr. Rothfus. When Secretary Mnuchin testified before this 
committee, I asked him about an issue that many of us on this 
committee have expressed concerns about: Nonbank SIFI 
designations. I have advocated for an activities-based approach 
to addressing systemic risk. I was pleased to hear that 
Secretary Mnuchin also supported adopting this approach and 
that the FSOC was moving in that direction. Do you support an 
activities-based approach?
    Mr. Powell. Yes. I think that makes sense.
    Mr. Rothfus. What would be the status of FSOC's 
implementation of that approach?
    Mr. Powell. Really a question for the Secretary, but I 
think that is more how we are looking at things these days, is 
looking at activities, as well as we can always look at 
institutions when it is appropriate. But for now, we are 
looking at a lot of activities.
    Mr. Rothfus. If I could talk a little bit about the yield 
curve. The inversion of the yield curve is typically viewed as 
a sign of a coming recession. The yield curve is currently 
flattening and this has attracted a lot of attention.
    In a recent post, Minneapolis Fed president Neel Kashkari 
wrote, quote: ``This suggests that there is little reason to 
raise rates much further. Invert the yield curve and put the 
brakes on the economy and risk that it does, in fact, trigger a 
recession.''
    Do you agree with this view?
    Mr. Powell. I don't see any evidence that a recession is 
imminent. We are not forecasting a recession. And so I don't 
really think we see a recession coming.
    Mr. Rothfus. Do you have an opinion on how strong of a 
signal the yield curve inversion is?
    Mr. Powell. So the inversion of the yield curve has been--
just as an empirical matter it has been associated with 
downturns in the past. But I would just say the real point is 
the yield curve inverts--we know why short-term rates go up, 
because basically they are looking at the Fed's expected rate 
path. The real question is what is going on with longer term 
rates. And if you back out the term premium and look at that, 
then it is really an assessment in the market of what the 
neutral longer term rate is, what it will be. So if, in fact, 
monetary policy is higher than that, then that means that 
policy is tight. You are actually tightening policy.
    So the yield curve is simply a way to identify what is 
really the important thing, which is where is current policy 
and where is expected policy relative to neutral. So I prefer 
to look directly at the question at hand. And you think about 
the yield curve as giving you evidence on that, so the yield 
curve is not inverted now. It is still at a positive slope and 
it is something that we will watch. All of us have a little bit 
different ways of thinking about it. That is how I think about 
it. Something we are looking at carefully.
    Mr. Rothfus. Thank you. When you last testified before this 
committee, we discussed the importance of monetary policy 
independence and potential risks to that independence posed by 
both our national debt and the Feds outsized balance sheet. 
Would swapping mortgaged-backed securities holdings for 
treasuries help to mitigate some of the political risks that 
follow for monetary policies becoming credit policies?
    Mr. Powell. I don't see our MBS holdings as--they are 
dwindling over time now. They are in normalization mode. I 
don't see them as presenting a particularly salient 
independence risk to us right now.
    Mr. Rothfus. Thank you, Chairman. I yield back.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Maine, Mr. 
Poliquin.
    Mr. Poliquin. Thank you, Mr. Chairman, very much.
    Thank you, Chair Powell, for being here. You have been 
here, sir, for almost 3 hours with a 10-minute break, and you 
look like you need a vacation. I want to remind you that Maine, 
that I represent, is vacation land. You don't even need air 
conditioning up there. And I am sure you and your family would 
enjoy it. If you want to go up there, just give us a call, we 
will send you in the right direction.
    Sir, the past couple of years, the economy has been getting 
stronger and stronger, and you mention in your testimony that 
the national unemployment rate has been about the lowest it has 
been in 20 years. Up in Maine, we have also good news. The 
unemployment rate is roughly 2.8 percent. It has been the 
lowest in about 50 years, and folks are making more money and 
they are able to change jobs if they don't like the one they 
have. And some of our young workers are able to come back to 
the State, where in the past, they haven't been able to. And 
our confidence with our consumers and our small businesses is 
all very strong.
    Now, if you look at the prior 7 to 8 years, the exact 
opposite was going on. Unemployment rates were very high. 
Confidence was low. Taxes and regulations were high, and we had 
a real problem everywhere.
    Now, my point to you, sir, if you would agree with me, that 
this strong economy we have now is not by accident. It didn't 
fall out of sky. There is something that had to be done to 
correct this. Would you agree with me that making it easier for 
businesses to grow and hire more people and pay them more 
through lower taxes and fewer regulations, more predictable 
regulatory environment, has helped the economy?
    Mr. Powell. Yes. I guess I would just say in principle that 
regulation should be balanced.
    Mr. Poliquin. Sure.
    Mr. Powell. And it should be fair and that will support--
    Mr. Poliquin. Anybody that is running a business--and I 
come from that part of the world, sir--would agree with that. 
And I appreciate--I know you don't want to dig into policy that 
we do here and I understand that.
    One of my concerns, my major concern, Mr. Powell, is how do 
we keep this going? How do we keep this going for our families 
in Maine and elsewhere?
    I look back at the last few recessions. In 2001, we had a 
bubble in the dot.com sector of the tech stocks and that caused 
a recession. The terrorist attacks of 9/11 caused a mild 
recession after that. That is an external event that we can't 
control here anyway. And then in the 2008 to 2012 Great 
Recession, again, a real estate bubble in part brought on by 
financial instruments that dealt with the real estate market 
brought that on.
    So I think we can both conclude that what happens in the 
capital markets, what happens in the financial sector has a 
huge impact on what happens on Main Street when it comes to a 
growing economy or the other way around.
    Now, here is my concern, Mr. Powell, and I would love to 
have your response to this. During the past 10 years--for most 
of the past 10 years, interest rates have been very low, in 
some cases at zero, unusually low. And that has caused a rising 
financial sector, whether it be the equity market or the fixed 
income market. So I am looking and I am saying, here we have 
the Chair of the Fed before the committee of jurisdiction in 
the House. What advice can you give to Congress, Mr. Powell, to 
make sure that we keep this strong economy going? What should 
we make sure we do not do?
    Mr. Powell. Well, let me say we strongly share a goal to 
keep this expansion going, and we think that continuing to 
gradually raise rates for now is the right way to do that. As I 
think we discussed when we were together, I think it is 
important to address things like we talked about earlier, 
things like labor force participation, things like education 
and training. We need people. We need more people who can fill 
these jobs that are going to be coming open.
    My concerns are really about the supply side at this point. 
We are close to full employment, maybe not quite there. But it 
is the issues like labor force participation and job training 
and addressing the people who are out of the labor force, get 
them back in.
    Mr. Poliquin. There are some folks that think we ought to 
raise taxes and go back to where we were before. Is that a good 
idea?
    Mr. Powell. I am not going to give you advice on fiscal 
policy. Sorry.
    Mr. Poliquin. OK. The national debt--I am pivoting a little 
bit, Mr. Powell--is about $21 trillion. It is horrible. The 
interest on that debt now is approaching roughly $300 billion 
per year, which is about 1-1/2 times what we spend to care for 
our 7 million veterans every year in this country. At what 
point do you think the debt service payments, the interest on 
that debt becomes a problem for our economy?
    Mr. Powell. It is hard to identify a particular point. I 
would just say we have been on an unsustainable fiscal path for 
some time and the theory is we should be addressing it when the 
economy is strong.
    Mr. Poliquin. Do you agree with me that a balanced budget 
amendment for the Constitution is a good idea to force 
Washington to spend within its means and start paying down our 
debt, sir?
    Mr. Powell. No, I do not.
    Mr. Poliquin. Thank you, Mr. Chairman. I yield back my 
time.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
Emmer.
    Mr. Emmer. Thank you, sir. Mr. Chairman, it is again a 
pleasure to have you here and have an opportunity to hear you 
and speak with you.
    For starters, I would just like to make a brief comment 
about tailoring regulations. You mentioned the importance of 
taking a tailored approach to financial regulation when you 
appeared before our committee in February, but that was 
actually prior to the passage of the Economic Growth, 
Regulatory Relief, and Consumer Protection Act.
    Eliminating the one-size-fits-all regulatory mindset for 
small community financial institutions is obviously important. 
However, S. 2155 was explicit in its requirement that Federal 
regulators shall tailor enhanced prudential standards for all 
financial institutions based on their risk instead of asset 
size. This is a very important issue, and I hope that we can 
keep an open and constructive dialog on this issue in the weeks 
and months ahead.
    Again, for us it is the issue of risk versus asset size. 
And I see you are nodding, so hopefully that means we are going 
to keep a constructive dialog.
    Mr. Powell. Look forward to that.
    Mr. Emmer. Moving on, Chairman Powell, your committee 
initiated a balance sheet roll-off less than a year ago, 
October 2017. During your--shortly thereafter, during your 
confirmation hearing, you testified the balance sheet 
reductions would likely stay in place for, quote, ``about 3 or 
4 years.''
    I understand, however, that now, some FOMC members are 
already calling for an early end to what has been a seemingly 
slow balance sheet normalization schedule. Are you considering 
a premature end to your balance sheet roll-off program?
    Mr. Powell. No, but let's be clear. We have always said 
that there is significant uncertainty about how long it will 
take. Ultimately, the balance sheet will be no larger than it 
needs to be for us to conduct monetary policy and will consist 
primarily of Treasury securities. And its ultimate size in the 
long run will be driven by the market's demand and the people, 
public's demand for our liabilities, principally currency and 
reserves.
    So we are learning, along with everybody else, as the 
balance sheet shrinks, as to what the new normal will be. And I 
have to say there is a significant amount of uncertainty. We 
will learn a lot. The markets are moving their estimates up, 
but I don't think we are going to know for some time exactly 
what that equilibrium size will be. It will be much bigger, 
though, than it was before the crisis, because the public 
wants--currency and circulation more than doubled since 2008, 
well more than doubled, and reserves have gone up substantially 
because they are a highly desirable liquid asset for banks.
    Mr. Emmer. All right. But at this point, there is no plan 
to prematurely end the roll-off?
    Mr. Powell. Certainly not prematurely, no.
    Mr. Emmer. All right. The European Central Bank is 
reportedly convinced that the region's economy is strong enough 
to withdraw some of its crisis-era support. Our economy, by 
contrast, has been humming for more than a year. If the EU is 
lifting off from its unconventional stance, should we be 
slowing or stopping return to fundamentals? And would doing so 
leave us stuck with a balance sheet that remains conflicted 
between monetary and macro prudential policy?
    Mr. Powell. We are much more significantly down the road in 
the normalization process. The European Central Bank has said 
that they would stop asset purchases, assuming certain 
conditions are met by the end of year, and would not begin to 
raise interest rates until at least the end of the summer of 
2019. So they are some years behind our process. We have been 
raising interest rates since December 2015. Our balance sheet 
has been shrinking, as you pointed out, since last October.
    And I think our path is working very well. We think the 
gradual rate increases are right, just about right. And we 
think the balance sheet normalization process is working very 
smoothly.
    Mr. Emmer. Has your committee devised a strategy for how 
and when to change the balance sheet roll-off schedule? I am 
taking you down this road because I understand your answer 
earlier is there is a lot of uncertainty and we learn as we go. 
But what is the strategy here or is it just that general, that 
we are going to see how this goes and we are going to leave 
ourselves the flexibility to jump in and change things?
    Mr. Powell. We said we would continue the program as 
announced, unless there were--and we will get the exact terms, 
but it is really a significant economic downturn requiring a 
meaningful reduction in interest rates, words close to but not 
exactly that.
    Mr. Emmer. I don't know if you will have time, but I do 
want to ask this. Do you think, Mr. Chairman, that market 
participants have the transparency they need to make productive 
investments in our economy? And what data would persuade your 
committee to speed up, slow down, or even stop?
    Mr. Powell. A significant downturn in the economy required 
meaningful reduction in the interest rates. I think the markets 
understand it very well.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Washington, Mr. 
Heck.
    Mr. Heck. Thank you, Mr. Chairman. And thank you, sir, for 
being here.
    So for over a year now, I have been helping to lead a task 
force trying to understand why home prices and rents, frankly, 
are soaring all over the country. And it turns out the answer 
is pretty simple: We are not building enough housing units, 
period. I looked this morning, and as it turns out, new home 
starts are lower than when you started at Treasury under the 
first President Bush. And a lot of time has passed and the 
population has grown considerably. Fewer home starts than way 
back then.
    So prices are rising because of the simple fact that we are 
missing millions of homes and we have too many people bidding 
for too few homes. And we are trying to understand why 
construction isn't happening and what can be done about it. We 
feel pretty strongly about this because homeownership is still 
an integral part of the American Dream and, frankly, it is the 
number one source of retirement security for most Americans. 
But it also strikes me that it is pretty important to your 
work, sir.
    Now, in my mind, I have a simple model. When the economy 
goes bad, you all cut rates, and that means that more people 
buy more automobiles and more homes, and the workers in those 
industries work longer hours and get more wages, and it creates 
a virtuous cycle of economic growth. But what happens if home 
construction doesn't or can't respond?
    The weakness in housing in this last recovery was clearly a 
reason why it was at historic, some would say anemic levels. 
And if home construction continues to be broken, and there is 
every bit of evidence that it is, I am wondering what that 
means for the next recession and what your response can and 
should be. Does it mean you have to cut interest rates even 
more aggressively to get the economic response? Because it 
didn't seem to work out very well that way this time.
    Mr. Powell. So you are right, those back in the day, it was 
nothing to see--well, it was common to see 2 million housing 
starts in a year and more. And we don't see that now. And part 
of that is just the population's growing a lot less, like a lot 
more slowly now, much, much slower than it was, so there is 
less demand.
    And I am sure you talked to a lot of home builders and 
their representatives in your work, and what they say now is it 
is really supply side constraints. They can't find 
electricians, plumbers, carpenters. Also, it is hard to get 
zoning, it is hard to get lots. Very difficult to do that. They 
are yelling loudly about materials prices, lumber in 
particular. And so that is what they are doing is they are 
building fewer homes and the prices are going up more quickly. 
We don't really have the tools to deal with that.
    In terms of the importance of housing, though, the economy 
is so much bigger than it was before and housing is smaller 
than it was before. So it is a less important driver of 
economic activity at the aggregate level. It is still 
tremendously important for individuals. It is still part of the 
American Dream and part of what young families and folks want 
to have.
    But I don't think it has--it doesn't have--it is not the 
single most important factor driving monetary policy right now. 
I think these issues are really issues out in the labor market 
that we don't directly affect.
    Mr. Heck. So would you agree, however, that historically, 
housing construction has played a much more important role in 
economic recovery?
    Mr. Powell. It was a far bigger part of the economy and it 
was also--can be very cyclical. So yes. You go back to the 
seventies and eighties, it was, first in first out, first in 
the recession, first out.
    Mr. Heck. And before, during recoveries--and if you do the 
math on what the increase in GDP growth would be, if we simply 
had a housing market that was in balance, then it wouldn't be 
too hard to calculate a material increase in GDP growth. Would 
you agree with that?
    Mr. Powell. It would be bigger. If housing starts were 50 
percent higher or something, yes, that would be meaningful, for 
sure.
    Mr. Heck. So some of what you said, not only do I agree 
with, but our study concludes as well, which is that these 
other inputs, land, labor, lending, lumber, or materials, are 
the key drivers here. But the takeaway I have from you today is 
that those inputs and whatever limitations and challenges that 
they are presenting is holding back housing construction may, 
in fact, be immune to interest rate reduction and so we better 
get to work on those factors.
    Mr. Powell. Well said.
    Mr. Heck. Thank you, sir.
    Chairman Hensarling. Time of the gentleman has expired.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Hultgren.
    Mr. Hultgren. Thank you, Chairman Hensarling.
    Chair Powell, welcome. Glad you are here. I would echo much 
of what my colleagues have said on both sides of the aisle of 
our gratitude for your openness and willingness to meet with us 
and hear from us, and that is so affirming. So thank you very 
much and I appreciate your work.
    I have shared some very specific concerns with you about 
how our current risk-based and leverage-based capital rules are 
damaging to liquidity and the listed options markets. Title 7 
of Dodd-Frank requires central clearing for derivatives in case 
of options. This service is generally provided by bank clearing 
members. The Financial Services Committee reported a bill, with 
unanimous support, which recently passed the House directing 
bank regulators to adjust the capital rules. However, as I 
understand it, no change in law is necessary for the Fed to 
provide targeted capital relief.
    I wonder if you have thought any further about how the Fed 
can address this issue in an expeditious manner. And do you 
believe SA-CCR can be implemented within the next 8 to 12 
months? I understand that there is not even a proposal out for 
comment yet, but we have an issue in the options markets right 
now.
    Mr. Powell. We think SA-CCR is a good policy, and we are 
working on a rule on it now. And I hope it can get out before 8 
or 12 months. I will go back to the office and check in. But it 
is a priority. I know there is actual drafting going on and 
negotiation between agencies, so it will happen.
    Mr. Hultgren. That is perfect. That is what we want to 
hear. I think you can see from even just the action yesterday 
and in the last couple weeks of very strong bipartisan support 
to make sure that these markets work well.
    I sent a letter to financial regulators with responsibility 
for the Volcker rule back just a couple weeks ago, July 6, 
requesting that they reconsider the definition of covered 
funds. That definition currently excludes venture capital. As 
my letter states, the Congressional Record clearly 
demonstrates, through a colloquy between Senator Boxer and then 
Chairman Franks, that investing in venture capital was never 
intended to be prohibited by the Volcker rule when section 619 
was drafted by Congress. This prohibition restricts access to 
capital for startup companies.
    I wonder, do you believe the Volcker rule should be amended 
in a way that ends this prohibition on investment and venture 
capital? And have you discussed this issue with your peers at 
the other financial regulators? Any thoughts on odds that there 
could be change made here?
    Mr. Powell. I am not directly handling those discussions 
now, but, we put a draft out for comment, and we are hearing on 
this point a lot, I believe. Although, I guess the comment 
period, the comments haven't really come in yet. The comment 
period hasn't started running yet because we haven't published 
the notice.
    But our idea is that these activities are not ones 
generally that threaten safety and soundness. So consistent 
with the letter and intent of the law, we want to allow what 
flexibility there is and we look forward to getting input on 
how we can do that.
    Mr. Hultgren. Great. Thanks. I recently sent your office a 
letter that I hope will draw your attention to the growing 
issue of wire fraud. This is something that we have heard 
testimony on in the Financial Services Committee last year.
    In general, since reviewing my letter, I wonder if you have 
any ideas for how to prevent wire fraud. And have you 
considered any recommendations, maybe some that I have made, of 
having financial institutions apply a payee matching system 
when initiating a wire transfer?
    Mr. Powell. So we appreciate your letter. I was looking at 
it again this morning, as a matter of fact, and we are putting 
together a nice response. Some of the data in your letter is 
quite alarming. So I appreciate your bringing that to our 
attention.
    Mr. Hultgren. Great.
    Mr. Powell. So we will come back to you with something in 
detail.
    Mr. Hultgren. That is great. Thank you so much.
    If there is anything else you need from us or that we can 
be helpful with, again, I think it is something that is so 
important for that confidence, especially in home purchases and 
things that are being abused right now.
    Last question, last minute here, and a lot of my colleagues 
on both sides have talked about this, but over the last 18 
months, by almost every measure, we have had a very strong 
economy and taken appropriate actions to allow this momentum to 
continue. We have seen a boost in consumer and business 
confidence following the recent tax cuts and continued 
regulatory relief efforts.
    That said, there are certainly issues that Congress must 
continue to address, like better training of our labor forces 
to meet labor demands of our expanding modern economy. I 
wonder, do you have concerns that protectionist trade measures 
may generate headwinds that counteract the recent stimulus 
provided by Congress and the Administration? And do you believe 
a trade deficit is somehow a measure of whether the U.S. is 
winning or losing in the global economy? In other words, do you 
believe trade is a zero sum game?
    Mr. Powell. We have these discussions going on with 
basically all of our major trading partners, NAFTA, the EU, 
China. And we are not responsible for those. We are not even a 
participant. We are not consulted in any way. But it would be 
good if they resulted in lower tariffs broadly. If they 
resulted in higher tariffs, higher trade barriers, then that 
will be a bad thing for our economy, for our workers, and for 
incomes.
    Mr. Hultgren. Thanks, Chair. I yield back.
    Chairman Hensarling. The gentleman yields back.
    The Chair wishes to inform all members that I will be 
excusing the witness at 1:30. I anticipate clearing four more 
members. Currently in the queue are Mr. Gottheimer, Mr. 
Loudermilk, Mr. Davidson, and Mr. Budd.
    The Chair recognizes the gentleman from New Jersey, Mr. 
Gottheimer.
    Mr. Gottheimer. Thank you, Mr. Chairman.
    Chairman Powell, thank you for being here today.
    Our economy is entering a phase of increasing technological 
disruption, including automation through artificial 
intelligence. These factors are expected to eventually increase 
our productivity, but also to significantly affect our 
workplace.
    McKinsey recently issued a report on automation and jobs 
that projects 16 million to 54 million Americans will have to 
find new occupations by 2030, depending on how quickly 
technology is adopted.
    If you take the taxi industry as an example, the use of 
ride-sharing apps has devalued assets like taxi medallions and 
transformed that industry. And it has pushed some drivers out 
and brought new entrants in. And as tech companies strive for 
more automation and leverage artificial intelligence, more 
drivers will likely be pushed out or transitioned.
    AI and automation will have the same effect on other 
spaces, like trucking and trading and a host of other 
industries. And I believe in tech, and I obviously don't 
believe we should become Luddites. We need to look toward the 
future and constantly innovate. It is a big competitive 
advantage for our country, and obviously our foreign 
competitors are doing the same.
    I believe our government needs fiscal and monetary policy 
to ease the transition, or at least be aware of it and 
understand what we need to do in this process. And the Fed's 
monetary policy is obviously a blunt tool, but given your dual 
mandate, are you monitoring automation's impact on productivity 
and our labor? And what tools are you considering in this 
transition, sir?
    Mr. Powell. We look very carefully at those issues. We have 
great researchers at the Fed. We don't have a lot of tools to 
deal with it, but they do present really challenging issues for 
us in the future and now.
    Mr. Gottheimer. Are there things that you believe that 
Congress should be considering to help minimize the effects of 
these transitions or make sure we are prepared as a workforce?
    Mr. Powell. I think when I graduated from college, I think 
there was this sense that people would find a career and find 
an employer, and many of them would spend 30 years with that 
employer. I think that is not the world we are in so much 
anymore, not that some people won't do that.
    So I really think the idea that education ends when you get 
out of college or grad school, we need to be thinking a lot 
about midcareer training and education so people can go on and 
have another leg to their careers rather than being let out to 
pasture at age 40.
    So I think that is a key thing we need to be doing, and 
Congress can certainly play a role there.
    Mr. Gottheimer. Thank you, sir.
    And just to switch topics slightly, and I appreciate your 
response there, on the housing front, I wanted to speak to you 
about the market a bit, specifically, the change we have seen 
in the Federal Housing Administration's (FHA) insured loans, 
but also the market as a whole.
    The mortgage market is now dominated by nonbank lenders. 
They are upwards of 75 percent of FHA loans. Prior to the 
housing crisis, in that frothy era, this number was flipped on 
its head. Banks made up more than 75 percent, if not more, of 
the housing market.
    What risks do you think this presents as the credit cycle 
turns? That is my first question, if you don't mind.
    Mr. Powell. So in housing now, we do see that most of the 
borrowers now have much higher credit scores, so it is a very 
different market. The question is, was that line drawn at the 
right place?
    But it is clear that most of the people who have access to 
mortgage credit now are people with fairly high credit scores, 
so it is quite different. And that is where the household 
borrowing is, again, from people who are well off.
    Mr. Gottheimer. So you think if there is a downturn, we are 
better prepared for it?
    Mr. Powell. We are better prepared for it, yes.
    Mr. Gottheimer. Are there things that you think, as you 
look at this, that Congress should be doing to get banks back 
into the mortgage market more to ensure lending during economic 
downturns looking forward there?
    Mr. Powell. Well, I think a good question for Congress is--
and it is not one for us, but for you--is coming out of the 
crisis the one place where we really changed credit 
availability was in mortgages, and that had to be done because 
we know that mortgage credit was--people were making loans that 
they may not have understood, but that really shouldn't have 
been made, lots and lots of those.
    So, the question is, was that made at the right level? Are 
there still, at the margin--and there has been some work done 
on this--there are probably significant numbers of creditworthy 
borrowers who are not getting access to mortgage credit. And I 
would think part of it is that the banks know that they made 
these terrible mistakes and paid great prices for it, and so do 
the households.
    Still, I think it is worth looking at that. It is not too 
soon to be looking at that.
    Mr. Gottheimer. I think you are right.
    Thank you, Mr. Chairman. I appreciate your time.
    Mr. Powell. Thank you.
    Chairman Hensarling. The gentleman yields back.
    The Chair recognizes now the gentleman from Georgia, Mr. 
Loudermilk.
    Mr. Loudermilk. Thank you, Mr. Chairman.
    Chairman Powell, thank you for spending the time with us 
today.
    I actually want to circle back to something that Chairman 
Luetkemeyer raised earlier today. And since that was probably a 
couple hours ago, refresh.
    He was talking about the banks that fall between the $150 
and $250 billion in assets, and how after the 18-month period, 
they are relieved from SIFI regulation. After that the law 
allows the Fed the ability to restore the regulations if the 
bank chose to be a systemic risk.
    Regarding current conditions, recent CCAR (Comprehensive 
Capital Analysis and Review) results and GSIB surcharge risk 
data show, that banks with less than $250 billion do not 
present a systemic risk at this time. And I, as well as many 
others, believe that there should be exemption from the SIFI 
regulation for those.
    So I want to follow up, that when you testified back in 
February, I had asked similar questions. And you had said that 
banks under $250 billion are more engaged in traditional 
banking and less complex and generally do not pose a systemic 
risk to the economy.
    So my first question is, am I correct in assuming that 
since the CCAR results further confirm your view, that these 
firms don't pose a systemic risk at this time?
    Mr. Powell. It is interesting, as a general matter, yes, 
actually one of the eight SIFIs has less than $250 billion in 
assets and is still a SIFI. One of them does because of the 
nature of its activity.
    So we look at a range of things. I would stand by what I 
said, though. Under 250, these are institutions which generally 
are simpler, they are less complex, and they are engaged in 
traditional banking activities. So they are different from the 
very large ones that deserve and get the higher scrutiny.
    Mr. Loudermilk. OK. Well, I appreciate that.
    And at yesterday's hearing you discussed a thorough 
rulemaking process, that you are going to make sure that these 
firms are strictly reviewed before receiving regulatory relief.
    On that topic, some bankers who I have spoken with are 
concerned that your staff wants to tailor the regulations or 
partially apply them to firms that are not systemically risky.
    If this is true--which would be somewhat troubling--I think 
data and evidence should determine the outcome. Can you confirm 
that firms that don't pose a systemic risk will be exempt from 
the SIFI regulations?
    Mr. Powell. We are going to do exactly what the bill orders 
us to do, which is publish a framework for how we are going to 
think about risk to financial stability and safety and 
soundness. This is the language of the bill. We are going to 
put that out as soon as we can possibly get it thought through. 
We are going to get comment on it. And then we are going to go 
forward from there.
    And we very much take to heart the letter and spirit of the 
bill, and we will look forward to getting input when we finally 
propose something, I hope soon.
    Mr. Loudermilk. So am I right to interpret that we are 
going to let the data determine the outcome?
    Mr. Powell. Yes, we are in the process now of identifying 
the factors that we will think about. The bill gives us a lot 
of flexibility, identifies some factors, and gives us other 
flexibility.
    We are going to publish a framework that says how we are 
going to look at activities and institutions below 250, and 
then we are going to hear back from the world about how we did 
and how we should think about these things.
    And it is a process that the statute orders us to 
undertake, and that is what we are doing.
    Mr. Loudermilk. So is it conceivable that--or maybe it 
isn't--is it, I guess, possible that you have a regional bank, 
let's say $150 billion or so, that may have partial regulation 
of SIFI? Or is it going to be either they are systemically 
risky or not?
    Mr. Powell. I really haven't faced that question yet. We 
have always tailored, even when the limit was 50, we always 
tailored the application of the so-called enhanced prudential 
standards under 165. We tailored those a lot in the prior 
world. So we will obviously do that, too. And we will certainly 
continue to do that.
    Mr. Loudermilk. OK. And probably don't have time to get 
into my last question, so I will submit it to the record. And I 
will yield back the rest of my time to maybe allow somebody 
else to get in before the hard time.
    I yield back, Mr. Chairman.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Ohio, Mr. 
Davidson.
    Mr. Davidson. Thank you, Chairman.
    Chairman, thanks for your testimony. Thanks for the work 
you are doing there. And I look forward to the Senate giving 
you some more colleagues soon hopefully.
    You have spoken a fair bit about trade. A lot of our 
colleagues are concerned about trade and the impact that bad 
trade practices have had on our economy. Frankly, some concern 
about the tactics that have been employed to engage in that.
    I wanted to see if I have your quote right. ``Trade is 
really the business of Congress, and Congress has delegated 
some of that to the Executive Branch.''
    Do you think it would be a positive development from the 
economy's perspective to have collaboration across the entire 
cross section of the economy that Congress represents?
    Mr. Powell. I think this is really--Congress--the 
Constitution gives this to you, authority, and you have over 
time delegated some of it to the Executive Branch. But it is 
your authority.
    Mr. Davidson. Thank you. And we are working to reclaim it 
with the Global Trade Accountability Act, H.R. 5281. We are 
always looking for cosponsors. And this leaves the authority in 
the President's hands to negotiate, but similar to the REINS 
Act, gives authority to Congress to review. And I think it 
would promote a more collaborative process than Peter Navarro 
has recommended and, in fact, persuaded folks to implement.
    Do you think that if we had practices that were more 
targeted in the effect that we could be able to focus on bad 
things then? Let's just phrase it the other way. Do you think 
uniform action across all countries in all sectors is 
potentially more disruptive to the economy than targeted 
actions?
    Mr. Powell. Mr. Davidson, we don't have this authority. 
This is authority that--
    Mr. Davidson. Correct. I am just asking about the impact on 
the economy, macroeconomically.
    Mr. Powell. I think on issues like fiscal policy, trade 
policy, immigration policy that can affect the economy, I think 
we have a role there because we are responsible for the 
economy, but I think we need to stay at a higher level of 
principle. And what I am comfortable saying is that a more 
protectionist approach to trade, if it is sustained over a 
period of time, has not historically been good for economies. 
It has meant lower incomes, less opportunity for workers.
    Mr. Davidson. On the economic principle of trade, it is the 
called trade because it is reciprocal in the sense both parties 
benefit in trade. Do you see trade as a zero-sum game?
    Mr. Powell. No. I do think that trade needs to be fair as 
well as free, and I think it is very appropriate to have an 
internationally agreed set of rules, and when anybody breaks 
those rules, they have to face the other countries in that 
setting and change their policies. I think that is a healthy 
way to go. I don't think a bilateral trade deficit is a good 
measure of trade between countries, though.
    Mr. Davidson. Thank you very much.
    One of the things we have also dwelled on is workforce 
participation. And one of the big barriers to the growth rate 
in the economy is workforce participation.
    Without alluding to specific policy--and I don't want to 
put you in that spot--we have tried to make some reforms on 
bills.
    Most notably, recently, the farm bill, which is really only 
about 20 percent about farming, a very incremental change to 
expect that working-age adults, 18 to 59, able-bodied, no 
dependent kids at home, not in an economically depressed area, 
a couple other qualifiers, that in order to continue to receive 
support through food stamps, that they would work.
    Would this, in your mind, policy tools that motivate people 
to participate be effective at workforce participation?
    Mr. Powell. I can't really take a position on that. I will 
say that there is not a lot you could do that would be more 
constructive than to find ways to support labor force 
participation that will work on a bipartisan basis and can be 
enacted. It is tremendously important.
    Mr. Davidson. Thank you for that. Thank you.
    And so cryptocurrency is a big thing. And so without 
talking about specific things in our policy, we are working 
with Basel on a number of fronts. And some concern, we always 
protect our sovereignty in that. Where do you see Basel going 
with respect to cryptocurrency?
    Because essentially, the concern there is that even if the 
U.S. creates a better regulatory framework than we have today, 
there is still arbitrage in markets.
    So there is a desire to have some regulatory framework. Is 
Basel addressing that, particularly with respect to 
cryptocurrency?
    Mr. Powell. I think anybody who owns--if a bank owns 
cryptocurrency, then it will be subject to capital. It will 
have to hold capital against that. I guess a good question is, 
should it be more than the normal level of capital, because it 
is a risky asset?
    Mr. Davidson. Right. So to the extent that it is an asset, 
it would be treated, if it is a commodity, treated as if it is 
a commodity. If it is truly a currency, it would be treated as 
a currency based on its amount of volatility as a currency. For 
example, the pound sterling is probably a different reserve 
currency than the Thai baht.
    Mr. Powell. Yes. And I don't know that we--so it is not 
mainly a bank capital issue. Of course, I think the regulatory 
issues facing cryptocurrencies are big and broad and go way 
beyond banking.
    Mr. Davidson. Thank you. My time has expired.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair will recognize one more member and then we will 
dismiss the witness and adjourn.
    The Chair recognizes the gentleman from North Carolina, Mr. 
Budd.
    Mr. Budd. Thank you, Chairman Hensarling.
    Chairman Powell, again, welcome back. It is always good to 
be with you. I appreciate you being here today.
    So I want to start off with Volcker. I think a lot of us 
can at least appreciate the intent behind Volcker, which is to 
reduce risky activities in banks, in particular high risk prop 
trading, and that potentially makes sense.
    However, it seems to be odd results that under the current 
rule activities such as providing capital and loans to growth 
and startup companies, activities that we should be encouraging 
banks to engage in, are materially limited as a result of that 
rule.
    Your recent NPR is open-ended on covered funds and does not 
provide a lot of guidance about where the Fed may intend to go. 
Yet, these funds can be critical sources of capital for 
companies looking to grow their businesses. And the prohibition 
on funds is fairly broad and even includes restrictions on 
venture capital funds.
    So, Chairman Powell, is there a way for the Fed to simplify 
the covered funds regime to help smaller companies obtain 
greater access to capital?
    Mr. Powell. And we are looking for ways to simplify Volcker 
in ways that are faithful to the language and intent of the 
statute, and that is one particular provision. And we look 
forward to getting constructive comments on how we may do that 
better.
    Mr. Budd. So you are just waiting through the NPR period, 
then, on that?
    Mr. Powell. Yes, we are really looking for input here on--
this is a notice of proposed rulemaking. We want a lot of 
input. Our job is to implement Congress' wish, and that is the 
Volcker rule, but we want to use such flexibility as we have 
that doesn't undermine safety and soundness. And there would 
clearly be some flexibility around the issue you are talking 
about.
    Mr. Budd. Thank you. I want to switch topics to the ongoing 
negotiation of new international capital standards, or ICS.
    First, I want to thank you for such a quick and thorough 
response to questions I had after we met last time. We don't 
always get quick responses, but you did, so thank you. We are 
genuinely grateful.
    And the following question, sir, it was originally intended 
for Vice Chairman Quarles, but a letter he sent back to my 
office on this question we received just yesterday and chose 
not to respond at this portion. So hopefully, I will pitch it 
to you for an answer.
    Governor Daniel Tarullo stated in a speech at the National 
Association of Insurance Commissioners' International Insurance 
Forum--this is May 20 of 2016--he said, quote:
    ``There are, as you all know, a lot of ideas out there as 
to how we should construct the capital requirements we will 
apply to insurance companies. Some, such as variations on the 
Solvency II approach used in the European Union, strike us as 
unpromising.
    ``Evaluation frameworks for insurance liabilities adopted 
in Solvency II differ starkly from U.S. GAAP and may introduce 
excessive volatility. Such an approach would also be 
inconsistent with our preferred or strong preference for 
building a predominantly standardized risk-based capital rule 
that enables comparisons across firms without excessive 
reliance on internal models.''
    ``Finally''--this is a mouthful, isn't it--``Finally, it 
appears that Solvency II could be quite pro-cyclical.''
    So do you agree with what Governor Tarullo said there?
    Mr. Powell. It makes sense to me. I have to admit I don't 
recall that speech and what issue he was talking about there.
    Mr. Budd. About Solvency II, being used by the EU, being 
pro-cyclical rather than countercyclical.
    Mr. Powell. I would want to check with our insurance 
capital experts. But, yes, I do believe that, I think that 
reflects our view.
    Mr. Budd. Good. Can you give us any explanation as to why 
the Federal Reserve staff participating in the Kuala Lumpur 
negotiations agreed to accede to the Europeans at the IAIS to 
mandate that the financial reporting for the referenced ICS be 
done using a Solvency II approach--what we just talked about--
Solvency II approach, and not something more suitable for the 
U.S. insurance industry, like GAAP or statutory accounting?
    Mr. Powell. I will have to check up on this. I don't have 
this kind of detail.
    Mr. Budd. Pretty in the weeds, but I appreciate you 
thinking through it. And if we could give that back. Thank you.
    And finally, do you agree with Governor Tarullo that a 
Solvency II accounting approach introduces excessive volatility 
into the U.S. insurance markets? And if so, how do you plan on 
remedying this at the next IAIS negotiations on ICS?
    Mr. Powell. I am really going to have to go--
    Mr. Budd. We just delved further into these weeds.
    Well, if we could get a response it would be great, at 
another time.
    Thank you so much, again, for your time.
    Mr. Chairman, I yield back. Thank you.
    Mr. Powell. Thank you.
    Chairman Hensarling. The gentleman yields back.
    I would like to thank Chairman Powell 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.
    I would ask Chairman Powell that you respond as promptly as 
you are able.
    This hearing stands adjourned.
    [Whereupon, at 1:28 p.m., the committee was adjourned.]

                            A P P E N D I X



                             July 18, 2018
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

                                 [all]