[Senate Hearing 115-157]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-157


                     NOMINATION OF JEROME H. POWELL

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

                                HEARING

                               Before The

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                                   ON

                           THE NOMINATION OF:

 Jerome H. Powell, of Maryland, to be Chairman, Board of Governors of 
                       the Federal Reserve System

                               __________

                           NOVEMBER 28, 2017

                               __________

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
            
            
            
            

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada                  JON TESTER, Montana
TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada

                     Gregg Richard, Staff Director

                 Mark Powden, Democratic Staff Director

                      Elad Roisman, Chief Counsel

                      Joe Carapiet, Senior Counsel

              Kristine Johnson, Professional Staff Member

                 Elisha Tuku, Democratic Chief Counsel

            Laura Swanson, Democratic Deputy Staff Director

           Corey Frayer, Democratic Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                     James Guiliano, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                       TUESDAY, NOVEMBER 28, 2017

                                                                   Page

Opening statement of Chairman Crapo..............................     1

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2

                                NOMINEE

Statement of Jerome H. Powell, of Maryland, to be Chairman, Board 
  of Governors of the Federal Reserve System.....................     4
    Prepared statement...........................................    43
    Biographical sketch of nominee...............................    45
    Responses to written questions of:
        Senator Brown............................................    55
        Senator Toomey...........................................    67
        Senator Sasse............................................    70
        Senator Menendez.........................................    77
        Senator Warner...........................................    82
        Senator Warren...........................................    87
        Senator Perdue...........................................    90
        Senator Heitkamp.........................................    94
        Senator Schatz...........................................    97
        Senator Van Hollen.......................................   101
        Senator Cortez Masto.....................................   105

                                 (iii)

 
 NOMINATION OF JEROME H. POWELL, OF MARYLAND, TO BE CHAIRMAN, BOARD OF 
                GOVERNORS OF THE FEDERAL RESERVE SYSTEM

                              ----------                              


                       TUESDAY, NOVEMBER 28, 2017

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:07 a.m., in room SD-216, Dirksen 
Senate Office Building, Hon. Michael Crapo, Chairman of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. And the Committee will come to order for 
the hearing.
    This morning, we will consider the nomination of the 
Honorable Jerome, or Jay, Powell to be Chairman of the Board of 
Governors of the Federal Reserve System.
    Governor Powell, welcome, and congratulations on your 
nomination. I see friends and family behind you, and I welcome 
them here today as well.
    Governor Powell has had an accomplished public and private 
sector career in financial services. He served as an Assistant 
Secretary and Under Secretary of the Treasury under President 
George H.W. Bush, where he was responsible for policy on 
financial institutions and the Treasury debt market, among 
other areas.
    He also has firsthand experience in investment banking and 
was a partner at The Carlyle Group before being appointed to 
serve on the Board of Governors in 2012.
    During his years of service in Government and in the 
private sector, Governor Powell has proven he is qualified to 
lead the Fed. If confirmed, he will play an important role in 
striking the proper balance between the need for a safe and 
sound financial system and the need to promote a vibrant, 
growing economy.
    Over the past year, I have been encouraged to see Federal 
regulators carefully and thoroughly evaluating current laws and 
regulations.
    Governor Powell has shared specific areas in the past where 
the Fed believes some laws and regulations can be changed to 
alleviate burden, including the Volcker Rule, stress tests, and 
resolution plans, among others.
    Several weeks ago, 13 Members of this Committee, including 
myself, introduced legislation to improve our Nation's 
financial regulatory framework and to promote economic growth.
    Introduced by 10 Democrats and 10 Republicans, the bill 
demonstrates very strong bipartisan support for tailoring and 
simplifying regulations. Part of the bill tailors regulations 
for smaller financial institutions and community banks, while 
at the same time improving access to mortgage credit and 
housing and ensuring strong consumer protections.
    The legislation also addresses the $50 billion SIFI 
threshold, for which Governor Powell, Chair Yellen, and many 
others have expressed support.
    On the monetary policy front, I was encouraged by the Fed's 
June announcement detailing the approach it will use to reduce 
its asset holdings in a gradual and predictable manner.
    As the Fed continues its path to normalizing monetary 
policy, which I hope it does continue, clear communications 
should be a central priority.
    I look forward to working with the Federal Reserve on some 
of these issues and welcome any additional thoughts or ideas 
that Governor Powell has on areas where the Fed and Congress 
can act to further reduce unnecessary burden and promote 
economic growth.
    Congratulations again on your nomination, Mr. Powell, and 
thank you and your family for your willingness to serve.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman.
    Welcome, Governor Powell. Nice to see you. I want to start 
off by thanking Janet Yellen, the Chair of the Federal Reserve. 
She has done an excellent job leading the Fed. During her 
tenure as Chair and as Vice Chair, the United States 
experienced one of the longest economic expansions in its 
history, an expansion we still enjoy.
    As I said at the time of her nomination, Chair Yellen was 
among the most qualified people to ever be nominated to be 
Chair of the Federal Reserve. You do not have to have a 
doctorate in economics to lead the Fed, but we were lucky that 
both she and Chairman Bernanke were students of the Fed's 
mistakes in the 1930s.
    Her strong and steady stewardship of an independent central 
bank following the worst financial crisis since the Great 
Depression ensured that we did not repeat those mistakes.
    Chair Yellen was, as we know, the first woman ever to serve 
as Chair of the Board of Governors of the Federal Reserve. I am 
disappointed that President Trump has broken with the tradition 
of re-appointing the last President's Federal Reserve Chair. 
This Administration has also broken with the tradition of 
trying to make the Federal Government more diverse.
    That said, those decisions, Governor Powell, were not 
yours. I congratulate you on your nomination to be Chair of the 
Federal Reserve Board of Governors.
    We have had a good working relationship since you were 
first nominated to be a member of the Fed by President Obama in 
2012. I hope that will continue.
    You have supported tough rules for the Nation's largest 
banks as the Fed implemented Wall Street reform. For that, we 
are appreciative.
    As Chair of the Reserve Bank Affairs Committee, you worked 
to put more diverse individuals in the top spots at the 
regional Federal Reserve banks, on their boards, and throughout 
the Fed's workforce. Much more needs to be done. There has been 
progress.
    And you understand the importance of an independent central 
bank. You strongly opposed misguided congressional efforts to 
micromanage the Fed and make other changes that undermine the 
ability of the Fed to conduct its monetary policy. I hope you 
will stick to those positions on these important matters and 
others.
    But there are good reasons to be concerned. The current 
Administration does not appear to value independence in the 
judiciary, the FBI, or the Federal Reserve. It is an 
unprecedented way. The President has made comments about the 
current Fed Chair as well as interest rates. The search for the 
Fed Chair too often seemed like an episode of ``The 
Apprentice.''
    I am concerned about the direction of financial regulation 
under the current Administration. While banks across the board 
make record profits, once again paying executives big bonuses, 
the Administration makes unfounded claims in order to justify 
the rollback the reforms put in place after the crisis.
    The new Vice Chair for Supervision at the Fed does not seem 
to be inclined to support the current regulatory framework put 
in place by the Fed since the crisis. He has troubling views on 
stress tests and more generally the role of watchdogs in the 
financial system.
    Industry has an outsized influence. Industry, especially 
Wall Street, has an outside influence on this Administration. 
The individuals have put in charge--that the individuals that 
they have put in charge as financial watchdogs are far too 
often former bankers or former bankers' lawyers--or bankers' 
lawyers. Some Federal bank regulators seem willing to abet 
rather than combat regulatory arbitrage.
    The June Treasury report on financial regulation put out by 
Treasury Secretary Mnuchin was a big bank wish list. In 
formulating the report, Treasury met with 17 industry 
representatives for every consumer group representing ordinary 
Americans--17 industry representatives for every consumer group 
representing ordinary Americans.
    Mr. Powell, even your schedule indicates you are meeting 
far more frequently with industry than with consumer groups. 
You have met with the Wells Fargo CEO more times than all the 
consumer groups on your schedule combined.
    This Administration has already forgotten the Americans who 
lost their jobs and their homes and their retirement savings 
less than a decade ago.
    I take this personally. In many ways, I assist--Members of 
this Committee have heard me say, my wife and I live in 
Cleveland, Ohio, in ZIP Code 44105. That ZIP Code in the first 
half of 2007 experienced more foreclosures than any ZIP Code in 
the United States of America. I still see the blight 200 yards 
from my house that happened in large part because of Wall 
Street overreach.
    The loss to so many Americans of jobs, of homes, of 
retirements savings was particularly harmful to African 
Americans and Latino communities, which have not recovered from 
the financial crisis as quickly as white Americans.
    The financial industry is doing better than ever. There 
seems to be a collective amnesia in this room, in this 
Committee, and this Congress, a collective amnesia about what 
happened 10 years ago. But Americans still struggle because of 
low wages, because of underemployment or unemployment and lack 
of opportunities. Loosening the rules for some of the country's 
largest banks is not the way to solve these problems.
    Your record has been strong on a number of these issues. We 
urge you to continue that record. I look forward to hearing 
your views and the direction you will take monetary policy and 
bank regulation in central bank decisions. I hope you will make 
your decisions based on facts independent from the political 
pressure from the President of the United States and from the 
Treasury Secretary.
    Thank you.
    Chairman Crapo. Thank you, Senator Brown.
    At this point, we will administer the oath. Governor 
Powell, will you please rise and raise your right hand. Do you 
swear or affirm that the testimony you are about to give is the 
truth, the whole truth, and nothing but the truth, so help you 
God?
    Mr. Powell. I do.
    Chairman Crapo. And do you agree to appear and testify 
before any duly constituted Committee of the Senate?
    Mr. Powell. I do.
    Chairman Crapo. Thank you. You may be seated.
    Your written statement will be made a part of the record in 
its entirety, and I invite you to introduce your family in 
advance of making your statement.
    Governor Powell, you may proceed.

  STATEMENT OF JEROME H. POWELL, OF MARYLAND, TO BE CHAIRMAN, 
        BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Powell. Thank you, Chairman Crapo and Ranking Member 
Brown, and I will begin, as you suggest, by introducing my 
wife, Elissa, without whose loving support and wise counsel, 
someone else would be sitting here.
    I will also introduce two of my five siblings here today, 
my sister Libby and my sister Monica. The other three siblings 
are here in spirit and all will later claim to have watched 
this hearing live.
    [Laughter.]
    Chairman Crapo. Which I am sure will be true.
    [Laughter.]
    Mr. Powell. We will deem it true. Some stories are too good 
to fact check.
    So thank you again, Chairman Crapo and Ranking Member Brown 
and other Members of the Committee for expeditiously scheduling 
this hearing and providing me the opportunity to appear before 
you today.
    I would also like to express my gratitude to President 
Trump for the confidence he has shown by nominating me to serve 
as Chairman of the Board of Governors of the Federal Reserve 
System.
    The Federal Reserve has had a productive relationship with 
this Committee over the years, and if you and your colleagues 
see fit to confirm me, I look forward to working closely with 
you in the years ahead.
    As you know, I have served as a member of the Board of 
Governors and the FOMC for more than 5 years, contributing to 
our work in a variety of capacities, including most recently as 
Chairman of the Board's Committee on Supervision and 
Regulation.
    My views on a wide range of monetary policy and regulatory 
issues are on the public record in speeches and testimonies 
during my service at the Fed.
    Congress established the Federal Reserve more than a 
century ago to provide a safer and more flexible monetary and 
financial system, and almost exactly 40 years ago, you assigned 
us the dual monetary policy goals of maximum employment, 
meaning people who want work either have a job or are likely to 
find one fairly quickly, and price stability, meaning that 
inflation is low and stable enough that it need not figure into 
households' and businesses' economic decisions.
    I have had the great privilege of serving under Chairman 
Bernanke and Chair Yellen, and like them, I will do everything 
in my power to achieve those goals while preserving the Federal 
Reserve's independent and nonpartisan status that is so vital 
to their pursuit.
    In our democracy, transparency and accountability must 
accompany that independence. We are transparent and accountable 
in many ways. Among them, we affirm our numerical inflation 
objective annually, and we publish our economic and interest 
rate projections quarterly.
    Since 2011, the Chairman has conducted regular news 
conferences to explain the FOMC's thinking. Additionally, we 
are accountable to the people's representatives through twice-
a-year reports and testimony as well as through oversight and 
audited financial statements. I am strongly committed to that 
framework of transparency and accountability and to continuing 
to look for ways to enhance it.
    In addition, in our federated system, members of the 
Washington-based Board of Governors participate in FOMC 
meetings with the presidents of the 12 Federal Reserve Banks, 
which are deeply rooted in their local communities, and I am a 
strong supporter of this institutional structure, which helps 
ensure a diversity of perspectives on monetary policy and also 
helps sustain the public's support for the Federal Reserve as 
an institution.
    If confirmed, I would strive, along with my colleagues, to 
support the economy's continued progress toward full recovery. 
Our aim is to sustain a strong jobs market with inflation 
moving gradually up toward our target. We expect interest rates 
to rise somewhat further and the size of our balance sheet to 
gradually shrink. However, while we endeavor to make the path 
of policy as predictable as possible, the future cannot be 
known with certainty. So we must retain the flexibility to 
adjust our policies in response to economic developments.
    Above all, even as we draw on the lessons of the past, we 
must be prepared to respond decisively and with appropriate 
force to new and unexpected threats to our Nation's financial 
stability and economic prosperity, the original motivation for 
the founding of the Federal Reserve.
    As a regulator and supervisor of banking institutions, in 
collaboration with other Federal and State agencies, we must 
help ensure that our financial system remains both stable and 
efficient. Our financial system is, without doubt, far stronger 
and more resilient than it was a decade ago, with higher levels 
of capital and liquid assets, with greater awareness of the 
risks that banks run, and a greater ability on the part of the 
banks to manage those risks.
    Even as we have worked to implement improvements, we have 
also sought to tailor regulation and supervision to the size 
and risk profile of banks, particularly community institutions. 
We will continue to consider appropriate ways to ease 
regulatory burdens while preserving the core reforms of strong 
levels of capital and liquidity, stress testing, and resolution 
planning, so that banks can provide the credit to families and 
businesses necessary to sustain a prosperous economy.
    In doing so, we must be clear and transparent about the 
principles that are driving our decisions and about the 
expectations we have for the institutions that we regulate.
    To conclude, inside the Federal Reserve, we understand that 
our decisions in all these areas matter for American families 
and communities. I am committed to making decisions objectively 
and based on the best available evidence. In doing so, I would 
be guided solely by our mandate from Congress and with the 
long-run interests of the American public.
    Thank you, and I will be happy to respond to your 
questions.
    Chairman Crapo. Thank you again, Governor Powell.
    The Fed recently began the process of shrinking its balance 
sheet, which currently sits above $4 trillion. In a speech 
earlier this year, you cited long-run estimates of the 
appropriate size of the balance sheet as about $2.4 to $2.9 
trillion by 2022. Would you clarify what you do believe is an 
appropriate stable size for the Fed's balance sheet and what 
factors you expect to focus on in determining the pace and the 
ultimate scope of the balance sheet reduction?
    Mr. Powell. I will, Senator.
    So the Fed's balance sheet is about $4.5 trillion now, and 
we know that it will be much smaller than that when it reaches 
its new sort of equilibrium side. It will be larger, however, 
than it was before the crisis, and we have also said that it 
will consist primarily, mostly of Treasury securities at that 
time. And it will be no larger than it needs to be for us to 
conduct monetary policy.
    We will be shrinking the balance sheet by allowing 
securities, as they mature, to roll off passively, and that 
process should take 3 or 4 years before we reach our new sort 
of stable level of the balance sheet.
    And the factors that will determine that will be really, in 
the end, the public's demand for our liabilities, particularly 
cash and reserves. Those will be principal factors that will 
decide what the final size of the balance sheet will be. We do 
not actually know what that demand will be, but my own 
thinking, it moves us to a balance sheet of in the range of, as 
I mentioned, 2.5 to 3 trillion. Again, there is no certainty in 
that.
    Chairman Crapo. All right. Thank you very much.
    And the last time you appeared before the Committee, you 
stated that it is very important that the intensity of 
regulation be tailored approximately for the risks that the 
institutions present. There is bipartisan support to tailor 
existing regulations and laws to ensure that they are 
proportional and appropriate. Are there any specific areas that 
you think could benefit most from tailoring?
    Mr. Powell. Yes. First, let me say that tailoring of 
regulation is one of our most fundamental principles. We want 
regulation to be the most intense, the most stringent for the 
very largest, most complex institutions, and we want it to 
decrease in intensity and stringency as we move down through 
the regional banks and of the community banks. So this is 
something that we strive to achieve.
    We are taking a fresh look at that right now, and I would 
just point out a couple of areas. I think in certainly capital, 
we require the largest banks higher capital, and we have less 
stringent requirements as we move down and more simple capital 
requirements as well.
    I would also point out something like the Volcker Rule, 
where really it can apply in its strongest form to the banks 
that have very large trading books and much less stringently, 
we believe, as we go to the smaller banks. In fact, I saw that 
your proposed bill exempts banks under $10 billion in assets 
from the Volcker Rule, which is something that we have been in 
favor of.
    Chairman Crapo. Well, thank you.
    Actually, my next question is on that bill. As you just 
pointed out, 2 weeks ago, 20 U.S. Senators introduced the 
Economic Growth, Regulatory Relief, and Consumer Protection 
Act, and I am not going to ask you to get into the business of 
the politics of that act here with us. But I do want to know do 
you believe--if you have had a chance to review it, do you 
believe that that act, if enacted into law, will provide 
significant regulatory relief to community banks, midsize 
banks, and regional banks, while still giving the Federal 
Reserve the authority it needs to supervise and regulate those 
institutions?
    Mr. Powell. I do. On both counts, Senator, I do.
    Chairman Crapo. All right. Thank you.
    And last for me, housing reform. After our economic growth 
markup next week, housing finance reform will be one of my top 
priorities for the remainder of this Congress. Earlier this 
year, you gave a speech in which you outlined a few principles 
for housing finance reform and, in your words, do whatever we 
can to make the possibility of future housing bailouts as 
remote as possible; number two, change the system, to attract 
large amounts of private capital; number three, any guarantee 
should be explicit and transparent and should apply to 
securities, not to institutions; and number four, identify and 
build upon areas of bipartisan agreement.
    I strongly agree with these points that you made and 
believe that there is bipartisan support to seek a solution in 
that zone. Would you commit to work with the Committee on our 
efforts to pass housing finance reform?
    Mr. Powell. Yes, I will, Senator.
    Chairman Crapo. And I guess I will just take my last 15 
seconds to ask you one final question on that. I believe 
housing reform is one of the most significant issues we need to 
make next. That is why I said I would prioritize it. How would 
you rank housing finance reform in terms of the importance that 
we move to it and get it resolved?
    Mr. Powell. I think it is a highly important piece of 
unfinished business from the financial crisis, and I think 
there have been a lot of great proposals. And I think, at a 
time when the economy is healthy, this is a great time to move 
forward on it, and I look forward to working with you on it.
    Chairman Crapo. Thank you.
    Senator Brown. Thank you, Mr. Chairman.
    In 2013, you stated that, ``The Fed was created as an 
independent agency. A broad consensus has emerged among 
policymakers and other informed observers around the world 
that''--and the most important part of the quote--``that better 
economic performance is achieved when the conduct of monetary 
policy is free from political control.'' What will you do, if 
confirmed, to ensure that the Fed maintains its independence 
from outside political influence, especially influence from the 
White House? And be as specific as you can.
    Mr. Powell. Senator, I am strongly committed to an 
independent Federal Reserve, and I would add nothing in my 
conversations with anyone in the Administration has given me 
any concern on that front. And I just would plan, if confirmed, 
to follow in the footsteps of distinguished prior chairs and of 
our long tradition, really, to assure that we do conduct 
monetary policy and financial regulatory policy, by the way, 
without a view to political outcomes, but with a view solely to 
the right answers.
    Senator Brown. Thank you.
    The Senate this week will vote on a tax bill that will 
reduce Federal revenues substantially over the next 10 years. 
When the country fell into the Great Recession a decade ago, 
the Fed had to resort to extraordinary measures, in part 
because of the tepid fiscal stimulus provided by Congress. Nine 
years later amidst one of the longest recoveries on record and 
low overall unemployment, some of my colleagues think now is 
the time for $1.5 trillion in attempted stimulus.
    What does the Fed anticipate will be the impact on GDP 
growth over the next decade if the tax cuts are enacted along 
the lines of the bill before the Senate?
    Mr. Powell. Senator, we do not have an estimate of that, 
and I would say these fiscal policies are important matters for 
you and your elected colleagues to decide.
    Senator Brown. Well, with all due respect, Governor, the 
Fed's projection with long-term GDP growth now is 1.8 percent. 
That is the stated Federal projection over the next 3 years. I 
have to assume that with the staff, the highly skilled, not 
tiny staff that the Fed has that you have done modeling and all 
kinds of different ways, different legislation, different ideas 
coming out of the House and Senate.
    You have an FOMC meeting coming up in maybe 2 weeks. Are 
you telling me the Fed has not modeled any of this, any of the 
tax bill in these kinds of tax cuts and what it will do to 
economic growth?
    Mr. Powell. Senator, of course, we are monitoring these 
discussions, but it remains unclear exactly what will pass, and 
so it is really--in my view, it has been very difficult or 
impossible for us to start to incorporate----
    Senator Brown. But you know, Governor, that the overall 
arching theme of this is $1.5 trillion in tax cuts, that it 
will cause greater economic--it will cause a larger deficit. 
You know that people on this side of the aisle claim, as they 
always do, every time there is a tax bill that will grow out of 
that. Do not you have a responsibility in an ongoing sort of 
way to talk to us about the modeling that you have done, that 
what this will mean to the fiscal situation of our country in 
the years ahead?
    Mr. Powell. I think our responsibility is to carry out the 
mandate that you have given us, which is to achieve stable 
prices and maximum employment and also look after the financial 
stability of----
    Senator Brown. But, of course, we rely on you for data all 
the time.
    Mr. Powell. Respectfully, Senator, I do not think you rely 
on us to score fiscal proposals. That is not really our role, 
and I do not have a forecast for you on that today.
    Senator Brown. We have discussed the need for an 
independent Fed. Do you believe it is important for the other 
independent financial regulatory agencies to be free from 
Administration pressure, the independent agencies to be free 
from Administration pressure?
    Mr. Powell. I think it is good for all supervisory 
regulatory agencies to operate doing the best that they can 
with their mandates and not to look at the politics of things.
    Senator Brown. I cannot tell if that is a yes or no.
    Mr. Powell. I would not want to hypothetically sort of 
agree with your hypothetical that there is political pressure.
    Senator Brown. Well, I am not saying--I am not asking that. 
I am asking should regulators at the various independent 
agencies be free from Administration pressure. Should they be 
free from independent pressure? I am not asking you if they are 
now.
    Mr. Powell. Certainly. Certainly on individual enforcement 
and matters like that, I think the Administration is well 
within its rights to express its views on different regulatory 
matters, but as it relates to supervision of individual 
institutions, absolutely.
    Senator Brown. Is independence well served by the 
appointment of an interim agency head who holds another full-
time position that reports directly to the President and the 
President's Chief of Staff?
    Mr. Powell. Senator, I would have to say that is not 
something that is in my bailiwick to deal with.
    Senator Brown. Then you have no opinion of that?
    Mr. Powell. Not today, no.
    Senator Brown. OK. Tomorrow?
    [Laughter.]
    Senator Brown. I am concerned, as I think we all are, about 
the Administration's attempt to push out a full-time 
independent director at the CFPB in favor of a part-time 
political appointee with a history of attacking the Bureau, and 
I am concerned about that, that attitude infecting other 
independent agencies. I am concerned about the tradition or the 
potential--the way that the President could look at this and 
begin to do this in other places, a nonconfirmed appointment, 
like he is doing to the--trying to do--the judge will decide--
to the CFPB.
    And I am concerned, too, Mr. Chairman, that one of the 
first things that Mr. Mulvaney did as, quote/unquote, ``acting 
director'' was to stop payments to consumers, to 
servicemembers, to veterans, payments where they were wronged, 
civil penalties payments, that they were wronged by banks and 
that they need to be made whole, and this director stopped it. 
And that kind of political interference--I bring that up, one, 
because a lot of us in this country are very unhappy with what 
happened, but second, I bring it up as a warning to all of us 
that independent agencies need independent agencies.
    I have watched your career. You have followed things with--
you have done things with integrity, but I do worry about White 
House pressure and a White House we have never seen the likes 
of in terms of not understanding the independent judiciary and 
the independence of the FBI and the independence of CFPB and 
the independence of the job you will have at the Federal 
Reserve.
    Thank you.
    Chairman Crapo. Thank you.
    And I did give the Ranking Member a little latitude on the 
clock there.
    Senator Brown. Thank you, Mr. Chairman.
    Chairman Crapo. I am going to encourage the rest of my 
colleagues to please recognize the clock.
    Senator Rounds. Thank you, Mr. Chairman.
    Mr. Powell, first of all, congratulations on your 
nomination.
    I think the first time that you and I met was when you were 
a visiting scholar at the Bipartisan Policy Center here in 
Washington, and I most certainly appreciate your thoughts and 
common-sense approach to not only Federal policy with regards 
to the budget, but I was very, very happy to see when you had 
been appointed as a member of the Federal Reserve as one of the 
Governors.
    And I think the fact that you have worked with Chairman 
Yellen and that you have worked through issues with her, I 
think that speaks in terms of how you would handle a board and 
in terms of how you would approach policy.
    I am just curious. I was listening to your comments with 
regard to that which Senator Crapo was visiting with you on. 
One of the most common criticisms that I have heard about our 
Government's current regulatory structure is that financial 
regulations are not written according to the risks that they 
are meant to mitigate.
    Treasury Secretary Mnuchin talked at length about his--
about this during his confirmation hearing saying that bank 
regulation should be tailored to activity, not just to the size 
of the institution.
    Many of the recommendations in the Treasury report on 
depository institutions that was released in June also 
discussed this issue with respect to a number of regulations.
    Earlier this year, I was able to, once again, reintroduce 
the TAILOR Act, which would require Federal regulators to more 
precisely tailor the regulations they issue based on the risk 
profile of the institutions that they are writing regulations 
for.
    In response to Chairman Crapo, you agreed that tailoring 
regulations is important. Can you elaborate on this view as it 
applies to asset thresholds, and should we have asset 
thresholds to begin with?
    Mr. Powell. So the decision over whether to have a 
numerical threshold or now is clearly one for Congress, and 
Congress has tended to--it provides clarity, of course. A 
numerical threshold makes it very clear who is not covered 
above a certain level, and that is nice.
    If you go entirely with a discretionary approach, then you 
are leaving the regulators a lot of room to decide things, and 
so Congress has generally come down and done both. And I think 
maybe both are appropriate.
    I do think, though, that fundamentally, size is only one 
indicator, and I think it is healthy. One indicator of the 
riskiness of a firm and the possibility of it damaging the 
financial system through its failure is through its activities. 
So the business model really matters, and all sorts of things 
matter. So I think we have a set of factors that we look at, 
and I think it is healthy to look at those too.
    We have said that we are willing to work with you on 
numerical thresholds, on discretionary application of enhanced 
prudential standards, for example, and we will work with you on 
any of those combinations.
    Senator Rounds. I am sure that you are aware, as the 
Chairman has indicated, that a number of my colleagues on both 
sides of the aisle and on and off of the Banking Committee have 
recently come to an agreement on a regulatory relief package 
that would right-size regulations for smaller financial 
institutions and improve our financial regulatory framework.
    I am pleased to see that we were able to reach agreement on 
a number of priorities that I had, such as the HMDA data 
reporting relief, the right-sizing of the enhanced supplemental 
leverage ratio, reform to the way that municipal data is 
treated in bank capital requirements, and relief from some of 
the most arduous supervisory standards in Dodd-Frank.
    From what you know about the agreement--and I understand 
that you have had a chance to cursorily look through it--
Governor Powell, are there any additional reforms that you 
would recommend the Committee include in this agreement or in 
future legislation? Did we miss some things that were obvious?
    And once again, this was a bipartisan plan, and that is 
exactly what we want it to be. And it is a first step for us, 
but are there some things in there that we should be addressing 
that we have not really looked at?
    Mr. Powell. Senator, we did get the text of the bill, just 
before the Thanksgiving break, and we have all looked at it 
quickly. We have agreed to come back to the Committee with our 
technical thoughts and policy thoughts as well.
    I will just say in response to your question, we will be 
happy to do that. I think, generally, we look at the framework 
as a workable one, as a sensible one, so we will try to come 
back with very constructive thoughts on how to bring it 
forward.
    Senator Rounds. Very good. I look forward to supporting 
your nomination, sir.
    Mr. Powell. Thank you, Senator.
    Senator Rounds. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Rounds.
    Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman.
    Thank you, Governor Powell, for your service.
    As you mentioned in your introductory statement, you do 
have a dual mandate. One is maximum employment, but right now, 
we seem to be doing fairly well. Your comments on where we are 
with respect to maximum employment?
    Mr. Powell. Maximum employment is, indeed, our statutory 
goal, and I guess the thing I would say at the beginning is it 
is kind of an imprecise thing. You cannot look at one 
particular measure of what that is. So we look at a range of 
things.
    And I think, for example, 4.1 percent unemployment is at or 
around or even below many estimates of the natural rate of 
unemployment. So that is one data point.
    There are other dimensions, though. For example, labor 
force participation really matters and particularly labor force 
participation by prime-age workers, particularly prime-age 
males, and that is the one measure I think that stands out now 
as suggesting that there may be more slack more people that can 
come back to work. A wide range of other indicators suggest 
that we are at or near or in the neighborhood of full 
employment. We really cannot be more precise than that.
    The other one, that was wages, of course. We look at wage, 
and wages in one sense are at appropriate levels, given low 
productivity and low inflation, but at the same time, we do not 
see wages signaling any tightening, any tightness in the labor 
market. There is no sense of an overheating economy or a 
particularly tight labor market, so that is what I would say 
about maximum employment.
    Senator Reed. I think those are insightful comments, but it 
raises a dilemma for both of us, both monetary policy and 
fiscal policy; that is, as you point out, we have this large 
number of people who seem to be out of the labor force but 
years ago would be in the labor force. We have a group of part-
time workers who would like to be full-time workers, and wages 
seem to be not rising at all. What can we do? I do not think we 
can claim victory on, as you suggest, unemployment, but we have 
to take steps, both monetary and fiscal steps. Any suggestions?
    Mr. Powell. Senator, I would say that really the steps that 
can be taken are steps for Congress and not so much for us. We 
can manage demand through a business cycle, and we can try to 
achieve our goal of maximum employment. But these are very 
long-running trends.
    For example, among prime-age males, participation in the 
labor force by prime-age males has been declining for 60 years 
kind of thing, and the opioid crisis plays a role in it now. It 
is making it worse. So these are issues that we do not really 
have the tools to deal with.
    Senator Reed. You do not have to respond to this, but I 
think we have identified some significant problems that affect 
every household in this country. And the tax bill that is 
before the Senate does not respond, in my view, to any of those 
problems of how to raise wages directly, how to get people back 
in the workforce, and, oh, by the way, how to prepare for a 
future in which artificial intelligence, autonomous vehicles 
are going to be more and more competing with human beings for 
work. So we have got a lot of work to do.
    Let me ask another question. Could you explain why you 
think the orderly liquidation authority is so crucial and why 
it must be retained?
    Mr. Powell. Sure. My view is that bankruptcy should be the 
preferred option for the failure of institutions, including 
very large financial institutions. I think we have made 
tremendous progress on that through multiple submissions of 
living wills and such, much more progress than, frankly, I 
anticipated we could.
    However, there may come a time when bankruptcy is not going 
to work in a very stressful situation that really threatens the 
economic health of the country, just like happened in 2007, '8, 
and '9, and in that case we really will need a backup in the 
form of something like orderly liquidation authority. It is not 
a perfect law or a perfect structure, but we need something 
like that as a backup, which we can guarantee will be there for 
really an emergency situation where bankruptcy is not going to 
work.
    Senator Reed. Thank you.
    Let me make two quick points before my time expires. First 
of all, we talked about this. I spent a lot of time--in fact, I 
was aided by one of your key staff members who worked for 
Senator Gregg at the time--in trying to develop the clearing 
platforms for derivatives, and as you so wisely pointed out, we 
have taken bilateral risk and we have made it mutual risk. But 
we still have the problem with those platforms. So I would hope 
that in your tenure, you would look very carefully at this 
potential for systemic risk as you have indicated before. It is 
critical.
    A final point, which I think, unfortunately, probably 
defines too much of what we do around here today, cybersecurity 
is an issue that is not going away. It is going to be even more 
dramatic in your tenure.
    Chairman Clayton of the SEC has pointed out in his 
testimony that this is something we have got to get on. I 
sincerely believe we are way behind, and the Federal Reserve 
has to take a very proactive position with respect to 
cybersecurity. If you can in a very few seconds comment upon 
your view of cybersecurity?
    Mr. Powell. Well, I agree with everything you have said. It 
is very, very important, maybe the most, single most important 
risk that our financial institutions, our economy, our 
Government institutions face. We are very focused on providing 
the resources to deal with it and to make sure that the 
financial institutions we regulate and supervise address it. 
There could never be any sense of mission accomplished there. 
It is just one of those things we are always going to be 
feeling like we are doing as much as we can, but it is just not 
enough. But we are very committed, both as it relates to the 
Federal Reserve and as an institution and as to the 
institutions we supervise.
    Senator Reed. Thank you.
    Chairman Crapo. Thank you, Senator Reed.
    Senator Kennedy. Thank you, Mr. Chairman.
    Good morning, Governor. Welcome.
    Mr. Powell. Good morning.
    Senator Kennedy. I have read those media accounts, too, 
that in the past year you have met with 50 Wall Street 
executives. How many community bankers did you meet with in 
that time?
    Mr. Powell. I do not have a number for you, Senator, but it 
would certainly be in the hundreds, if you consider the State 
delegations and the other meetings that we have had.
    Senator Kennedy. What did the community banks do wrong, 
contribute to the meltdown in 2008?
    Mr. Powell. Fair to say that the community banks did not 
contribute to the meltdown in 2008.
    Senator Kennedy. OK. Then why as a Governor have you 
repeatedly voted to punish them and regulate them half to 
death?
    Mr. Powell. I guess I would quibble with that 
characterization of my votes and of the things that we have 
done. I would like to think that I have been--and frankly, my 
colleagues as well on the board have been very focused on 
avoiding excessive regulation for community banks.
    I actually chaired the subcommittee of the board that its 
sole job was to make sure that the regulations that we put in 
place for the larger institutions do not apply to the smaller 
banks.
    I understand that this is never a battle that you win. You 
just have to fight it every day. We do fight it, and we are 
committed to doing better.
    Senator Kennedy. I mean no disrespect, Governor, in saying 
this, but you need to fight harder. I think you have been in 44 
Fed meetings. You have not dissented one time, and the 
community banks in America have had to pay the price with the 
overregulation. And I do not understand, given your public 
statements that you want to help our community banks. I believe 
you. I think you are sincere, but you have supported regulating 
them half to death over the past 5 years.
    Mr. Powell. Senator, I think we are well set up to make 
progress on that, and I hope you will hold us accountable for 
that.
    Senator Kennedy. Do we still have banks that are too big to 
fail?
    Mr. Powell. I think we have made a great deal of progress 
on that. As I mentioned earlier, I think if you think about 
where we were before the financial crisis, where really no one 
had thought, oh, what would happen if there is a run on one of 
these big-money center banks, and really, the regulators had no 
practical choice but to keep them from failing because they 
would have brought down the whole financial system with them.
    So you start from that place, less than 10 years ago, and 
you look at where we are now. So we now have living wills.
    Senator Kennedy. Yes.
    Mr. Powell. We have the banks that----
    Senator Kennedy. Please forgive me for interrupting, but we 
are limited strictly to 5 minutes. And I understand what we 
have done, but I want to ask you again. Do we still have banks 
that are too big to fail in America?
    Mr. Powell. Yes. I would say no to that.
    Senator Kennedy. OK. I want to ask you about in 1991, 
Governor. You were working for the Treasury Department, and by 
the way, while we are on that subject, what role did Secretary 
Mnuchin have in helping you make decisions if you are 
confirmed?
    Mr. Powell. He would have no role in that.
    Senator Kennedy. None?
    Mr. Powell. I do not believe so. No. I cannot----
    Senator Kennedy. Zero?
    Mr. Powell. I cannot think of any.
    Senator Kennedy. Nada?
    [Laughter.]
    Senator Kennedy. All right. In 1991, while working at 
Treasury, you dealt with the collapse of the Bank of New 
England. You prevented a bank run. You decided to guarantee all 
deposits. How many of the bankers went to jail?
    Mr. Powell. There was some jail-going. I cannot put a 
number on it for you.
    Senator Kennedy. OK. In that same year while you were at 
Treasury, there was an auction rate bond, big bid-rigging 
scandal. Do you remember that? You know what----
    Mr. Powell. Very well. I do, indeed.
    Senator Kennedy. Yeah, I bet you do. I do too. Maybe some 
other time, we can talk about what an auction rate bond is.
    But you were in charge of dealing with the scandal by 
Salomon Brothers, and you did iron out an agreement that 
penalized the bank. But what about the people who did it? Did 
anybody go to jail?
    Mr. Powell. Indeed, they did. Indeed, they did.
    Senator Kennedy. OK. Well, that is good to hear. How many?
    Mr. Powell. Again, I am not sure. I know--maybe just one, 
but it might have been more than one. For sure, though, one in 
particular did jail time over that.
    Senator Kennedy. Is not it true that throughout this entire 
auction rate bid-rigging process, which cost taxpayers in this 
country billions of dollars--and States--that less than five 
people who participated in these bid-rigging went to jail?
    Mr. Powell. I am not sure what scandal you are referring to 
now, and the Salomon scandal was something quite different than 
that. I am not actually sure which----
    Senator Kennedy. Do you know what an auction rate----
    Mr. Powell. I do. Do you mean--this is from--OK. The 
auction, OK. Yeah. Honestly, I was not----
    Senator Kennedy. I am over. I want to try to stick to my 
time. Forgive me for being so direct, but this is obviously an 
important job, Governor.
    Mr. Powell. Thank you, Senator.
    Senator Kennedy. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Kennedy.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Governor, congratulations on your nomination.
    In a speech that you gave in June, you noted that the 
average hourly wages are rising only about 2.5 percent per 
year, slower than before the crisis, and while the Nation had 
experienced the longest post-war economic expansion on record, 
corporations have raked in record profits. Many families in New 
Jersey and throughout the country are still waiting for a 
raise.
    Some claim that if we give corporations a massive tax cut, 
families will see their wages rise by an astounding $9,000. 
Now, I have not seen any evidence that that is credible. In 
fact, a 2016 Federal Reserve Board study found there is no 
evidence that corporate tax cuts boost economic growth unless 
they are implemented in mid-recession.
    So, in reality, what this comes down to is hardworking 
families already squeezed with rising housing, medical, and 
education costs whose paychecks will now have to foot the bill 
for a bad deal.
    So my question is, assuming that there is a plan in which 
families making less than $75,000 a year would collectively 
lose more than $59 billion in household income, an income loss 
that would be as high as $1,350 per year for certain 
households, explain to us the potential negative economic 
impacts of such an outcome for middle-class families.
    Mr. Powell. Well, Senator, I guess I would start by saying 
that part of the deal when you are an economist at the Federal 
Reserve Board is that you have time to do your own research, 
and I think the paper you are referring to, if it is the one I 
am thinking of, was the research of three or four individuals, 
and it does not represent a position of the board. It is just 
someone's research, so I would not--do not associate that with 
a position of the board.
    More broadly, as I discussed earlier, we do not have a 
model of the effect of these tax bills. That is just not 
something that we do. We will incorporate when it is done, 
fiscal changes that are made. There will be one of many factors 
going into a model.
    Senator Menendez. Well, let me refine my question. So what 
I am asking--it is not a trick question. So what I am asking 
very simply is, Do you think it is good or bad for the economy 
if middle-class families were to lose $59 billion in household 
income year after year?
    Mr. Powell. Well, that, I think is an easy one, and yes, I 
think it will be bad.
    Senator Menendez. All right. Now, what also do you view are 
the economic risks both at a household and macro level if we 
would add an additional $1.5 trillion in debt?
    Mr. Powell. Again, without commenting on any particular 
bill, like all of us, I am concerned about the sustainability 
of our fiscal paths in the long run, and it is something that 
needs to be attended to over time. Very concerned about that.
    Senator Menendez. But it would be a negative consequence to 
further add to the debt which already exists?
    Mr. Powell. I think we need to be concerned with fiscal 
sustainability over the long term.
    Senator Menendez. Now, in a speech you gave in June, you 
said with regards to monetary policy, and I quote, ``The 
problems that some commentators predicted have not come to 
pass. Accommodative policy did not generate high inflation or 
expensive credit growth. Rather, it helped restore full 
employment and return inflation closer to the 2 percent goal.'' 
That is not a study. That is your comments.
    Mr. Powell. That is right.
    Senator Menendez. So can you explain how in your view the 
Fed's monetary policy stance over the last 5 years helped 
contribute to economic expansion, and how will this inform your 
approach to monetary policy decisions going forward?
    Mr. Powell. Yes. Thank you, Senator.
    I think the Fed remained committed after the financial 
crisis to provide significant accommodation to the economy as 
it recovered. When I joined in 2012, which is about 5 years 
ago, I think unemployment was still above 8 percent, and I 
think we have been patient in removing accommodation. And I 
think that patience has served us well.
    I think now the economy is strong. Unemployment is low. 
Growth is strong. In fact, it appears to have even picked up, 
and so it is time for us to be normalizing interest rates and 
the size of the balance sheet as well.
    But I do think that that policy that we have had in place 
has generally served us well.
    Senator Menendez. OK. So let me ask----
    Mr. Powell. Served the country well, rather.
    Senator Menendez. Let me ask you this finally. As you know, 
healthcare accounts for nearly 20 percent of U.S. GDP, 
including not only the delivery of life-saving and life-
enhancing health services but also fueling innovations in 
patient care, diagnostic, preventative health, research and 
development of curative diseases.
    Earlier this year, I asked Chair Yellen about the impacts 
both at a household and macro level of a spike in the number of 
uninsured Americans, and she said that large-scale loss of 
access to health insurance could have a significant impact on 
household spending for goods and services as well as impact job 
mobility. Do you agree with her assessment?
    Mr. Powell. I think she was referring to some research, and 
if Chair Yellen was referring to research, we can be pretty 
confident that she was accurately reflecting what that research 
said. It sounds right to me.
    Senator Menendez. Thank you very much.
    Chairman Crapo. Thank you.
    Senator Heller.
    Senator Heller. Mr. Chairman, thank you, and, Governor, 
thank you for being here. Appreciate you taking time and glad 
to have your family here also. Welcome to them also.
    You are about to become the most important economic 
policymaker in the world. How do you feel about that?
    Mr. Powell. I feel fine about it, Senator.
    [Laughter.]
    Senator Heller. I am glad to hear that.
    Historically, I did not support your nomination in 2012 nor 
in 2014, worried about the Wall Street bailouts, concerns about 
new bailouts and new regulations, but what I am trying to do--
and as we talked personally--is to try to figure out how to get 
yes on your nomination this time, and I will continue to look 
for that. But I do have some questions for you.
    You talked a lot in your opening statement about clarity 
and transparency with the Feds. The question I have is, Do you 
continue to oppose audit-the-Fed legislation?
    Mr. Powell. I do, and I will tell you why. The Fed, of 
course, is audited, and in fact, I chaired the committees of 
the board that oversee the audit of the Reserve banks and the 
audit of the Board of Governors. So we are audited in the sense 
in which the general public would understand that world--word. 
It means something very different in the current context, and 
in this context, what it means is Congress has chosen to shield 
monetary policy from a policy audit by the General Accounting 
Office. General Accountability Office, we call it now. And that 
is I think a wise choice that has been made as a way of showing 
respect for the independence of monetary policy.
    I think a GAO audit at the request of any Member of 
Congress would be a way for Congress to insert itself into the 
making of monetary policy on a meeting-by-meeting basis. This 
is not something I think would serve us well.
    Senator Heller. Do you still largely support the Dodd-Frank 
reforms?
    Mr. Powell. That is a big, broad bill. That is a thousand 
pages of bill there.
    Senator Heller. Yes.
    Mr. Powell. I guess I would say that if you look at the--
let me broaden it out, if I may, Senator, to the post-crisis 
reform program, which is broader than just Dodd-Frank. It talks 
about Basel as well.
    Senator Heller. Yes.
    Mr. Powell. I think the things that we have done--our 
capital, higher liquidity, stress testing, resolution--I think 
those are important pillars of reform. We can make them more 
transparent, more efficient and that sort of thing. I think 
other things, we can do more tailoring, and that is really what 
we are involved in right now. But generally speaking, as I 
said, I think the financial system is quite strong.
    Senator Heller. You said on October 5th that more 
regulations is not the best answer to every problem. Do you 
continue to believe that, and if that is the case, would you 
work with us to consider changes in Dodd-Frank?
    Mr. Powell. I do strongly believe that and will work with 
you, as appropriate.
    Senator Heller. Going back to what the Ranking Member was 
talking about on GDP, what do you anticipate the GDP being next 
year?
    Mr. Powell. Next year.
    Senator Heller. You got to make a decision in December 
whether or not to raise rates, don't you?
    Mr. Powell. Yeah. So I----
    Senator Heller. So I am assuming that you have some 
forecast of GDP over the next 3 years.
    Mr. Powell. I do. So I would say that this year, I expect 
GDP to come around--coming around 2.5 percent, in that range, 
plus or minus. As you look forward, I would expect something 
pretty close to that, and the reason is we continue to see high 
confidence among businesses and households, accommodated 
financial conditions. The stock market is strong. It feels like 
we are going to see continued strength next year.
    Senator Heller. I want to continue to push on this tax bill 
that we have here. I am assuming you are going to tell me the 
board does not have a position on the tax bill.
    Mr. Powell. Yes, Senator, I am.
    Senator Heller. How about personally? Do you have a 
personal position on the tax bill?
    Mr. Powell. No, Senator, I do not.
    Senator Heller. OK. So let me ask you this question. Are 
you going to raise rates in December and next year?
    Mr. Powell. You know, I have made it a practice not to talk 
really specifically about individual meetings because that is 
why we have the meeting. We are all supposed to hold back on 
that final decision and then go in and listen carefully to each 
other's views, all the Reserve bank presidents and all the 
Governors. That is how we do it out of respect for each other.
    I will say, though, Senator, I think that the case for 
raising interest rates at our next meeting is coming together.
    Senator Heller. Do you anticipate we will be raising rates 
in December?
    Mr. Powell. Well, to repeat myself, Senator, I am not going 
to give you a really specific answer on December because 
again----
    Senator Heller. I do not know what ``coming together'' 
means. That is why I asked a second--the question again.
    Mr. Powell. It means I think the conditions are supportive 
of doing that, but we need to go and have the meeting and 
listen to each other. We generally have a rule. It is a 
communications rule that we are not supposed to be saying 
exactly what we are going to do before we go in and listen to 
one another's views.
    Senator Heller. All right. I respect that.
    Governor, thank you for being here. Thanks for taking time.
    Mr. Powell. Thanks, Senator.
    Senator Heller. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Warren. Thank you, Mr. Chairman, and, Governor 
Powell, welcome, and congratulations on your nomination.
    So before the 2008 crisis, the Fed had a lot of authority 
to regulate and supervise the biggest banks in the country, but 
they filed to use that authority. When times were good, it 
looked like maybe we did not need strong rules to protect the 
financial system, and then when things went south, the Fed's 
failure to put strong rules in place ended up costing millions 
of people their jobs, millions of people their homes, and 
millions of people their savings.
    Under Chair Yellen's leadership for the last 4 years, the 
Fed has adopted a number of rules to reduce the risk of another 
financial crisis, and you have supported those rules and helped 
implement them. I understand that now if you are confirmed, you 
intend to take another look at those rules. In your written 
testimony, you say that you will--and I will quote you--
``continue to consider appropriate ways to ease regulatory 
burdens.''
    So let me ask this. You specifically say that you will look 
for ways to roll the rules back. Are there any rules you 
believe should be made stronger?
    Mr. Powell. Well, I do--yes. I would say if you think of 
the four principal pillars of reform, I think they can all be 
made stronger and all be made more transparent, clearer, more 
efficient. I have also said there are a number of things that I 
would not roll back.
    Senator Warren. So what are the rules that you said you 
would make stronger?
    Mr. Powell. Well, I think if you think about resolution, we 
will expect firms to continue to make progress in 
resolvability.
    On stress testing----
    Senator Warren. So you would want to see rules that are 
more aggressive on the living wills, for example?
    Mr. Powell. Yeah. And I am not so much thinking of more 
aggressive rules as our expectation.
    Senator Warren. Well, but that is the question I am asking 
about. If you are going to revisit the rules for rollback 
purposes, which is what you said in your testimony, the 
question I am asking is the reverse. I do not want to see a 
one-way street here where it is all about rolling-back rules 
and it is not considering the places where the rules need to be 
stronger.
    Mr. Powell. OK. I get your question. I would say that there 
are a lot of problems that we need to address in the banking 
system.
    I do think we have had 8 years now of writing new rules, 
and honestly, I cannot really think of a place where we are 
lacking an important rule. I think we filled out the rules that 
we need, and it is really a question now of dealing with things 
from a supervisory standpoint.
    Senator Warren. So of all the rules the Fed has issued 
during your time here--you have been there for 5 years--on 
capital, on leverage, on liquidity, on stress test--you do not 
think a single one should be made tougher?
    Mr. Powell. Honestly, Senator, I think we have--I think 
they are tough enough.
    Senator Warren. Well, OK. I got to say this worries me, but 
let me take a look for just a minute here, then, at the rules 
you say you want to roll back.
    A few years ago, the Fed and other agencies finalized the 
Volcker Rule, with your support on that. It prohibits banks 
from trading on their own account unless it is directly related 
to customer service, and this addresses one of the main ways 
that banks got into trouble during the buildup of the financial 
crisis that sent them to Congress for a $700 billion bailout. 
Do you support significant changes in the Volcker Rule that 
apply to big banks, for example, by exempting additional forms 
of trading?
    Mr. Powell. I do support a rewrite of the Volcker Rule. I 
do believe we can do that in a way that is faithful to both the 
language and the intent of the Volcker law.
    Senator Warren. So you would favor exempting more trading, 
for example?
    Mr. Powell. I would favor tailoring the application of the 
proprietary trading.
    Senator Warren. OK. I think I would call that weakening the 
rule, but I will tell you what. My time is nearly up, and I am 
going to follow up with questions for the record here.
    But I am deeply concerned that you believe that the biggest 
regulatory problem in the country right now is that the rules 
are too hard on Wall Street banks. That kind of mindset led the 
Fed to ignore the financial system risks before 2008. It helped 
lead to the financial crisis, and it helped lead to the 
recession that followed it.
    So I am worried that we not go down this path again because 
if we do it is going to be the same thing, and that is that 
millions of families are going to pay the price while the banks 
end up, once again, getting bailed out and with record profits.
    So I will submit additional questions for the record, Mr. 
Chairman, on this line. Thank you.
    Chairman Crapo. Thank you, and I note you have 15 seconds 
credit, but it only lasts for this hearing.
    Senator Warren. But we do get a second round.
    Chairman Crapo. Maybe, maybe.
    [Laughter.]
    Chairman Crapo. Senator Scott.
    Senator Scott. Thank you, Mr. Chairman.
    Governor, good to see you again. Thank you for your 
availability in the recent past.
    We have talked about these issues before, and very much 
like Mr. Kennedy, I have had some concerns that relates to past 
performances. But I do want to talk about specifically the 
interest rate environment that we have currently.
    Senator Heller asked a couple specific questions as it 
relates to increasing the interest rate in the next meeting. As 
opposed to asking that specific question, I want to paint a 
story, paint a picture, and then ask a question about the 
interest rate environment overall. If you are a retiree in 
South Carolina--by the way, a great place to retire whenever 
that time comes--it certainly has a high quality of life, good 
economy, wonderful places to live. But if you are on a fixed 
income in Saluda, South Carolina, and you are retired, the 
current interest rate environment cuts really into your ability 
to live off of your interest income.
    As an example, someone with a $10,000 CD, 12-month CD 
today, earns about .25 percent interest. If you extend that for 
5 years, it is still less than 1 percent.
    Said differently, if your nest egg is a half a million 
dollars or a million dollars and you are earning 1 or 2 
percent, you are living off of $220,000 a year. So the 
significant impact of the artificially, in my estimation, low 
interest-rate environment has a negative unintended 
consequence, I assume, in the current marketplace.
    I do realize that the advantage of a low interest-rate 
environment helps spur economic activity. Folks are more likely 
to buy homes, but that knife cuts both ways.
    I would love for you to talk to me about the principles or 
the characteristics of an economy that would require or 
encourage a more normalization of our interest rate 
environment.
    Mr. Powell. Thank you, Senator.
    I think we have that economic right now, and that is we 
have low unemployment, 4.1 percent unemployment. We have got 
strong growth. The very low settings of interest rates that 
were appropriate during the crisis and after to support 
economic activity are no longer appropriate, and that is why we 
are raising interest rates now on a gradual path. And I expect 
that that will continue.
    But I agree. As we discussed, I guess, yesterday or the day 
before, the interest rates are a blunt instrument that we have, 
and so while interest rates, low interest rates support 
economic activity, they lower people's interest bills, they 
support investment by businesses, it generally has supposed a 
pretty strong recovery, particularly in the labor market.
    If you really are dependent on a fixed income and bank 
deposits and short-term interest rates, then it has been a 
burden for you, unfortunately. But I think, overwhelmingly, 
people are helped by lower interest rates and have been. I 
would just say help is on the way. I do expect that rates will 
continue to go up, and that will feed through into the interest 
rates that your constituent is having.
    Senator Scott. Thank you.
    As it relates to the balance sheet of the Fed, over the 
last decade, we have seen that balance sheet balloon, and I 
know we talked a lot about starting--creating a new starting 
place for a conversation about unwinding that balance sheet and 
then getting to a number that would be perhaps our new normal, 
not necessarily the $1 trillion that I believe it was 
beforehand. But can you walk me through what you see as a 
snapshot in about 30 seconds or less, since my time is running 
out, of what you see happening with that balance sheet?
    Mr. Powell. Sure. As we have announced, we are allowing--as 
bonds mature, we are allowing them to just--we are just giving 
the money back to Treasury, and so our balance sheet is 
shrinking passively and gradually. The market has not reacted 
to that, and on that path in about 3 or 4 years, we will be 
down to a new normal.
    Now, what will that new normal be? It will be much smaller 
than the balance sheet of today. It will be much bigger than 
the balance sheet of 10 years ago, and ultimately, that level 
will depend on two things. It will depend on the public's 
demand for cash, which to us is a liability, to them an asset, 
and also on banks' demand for reserves, which is going to be 
much higher than it was before the crisis. Demand for cash has 
more than doubled in 10 years. So those two things are the 
reasons why the balance sheet will be bigger.
    And I said earlier my guess is--and it is a guess--is that 
it will be somewhere in the $2.5 to $3 trillion range, but the 
truth is we do not really know.
    Senator Scott. With my last 15 seconds, there are two 
points. One, I am encouraged by your thoughtfulness about 
taking a look at the asset thresholds that may be a part of 
Senator Crapo's legislative package and looking for ways for us 
to perhaps increase the thresholds that have stringent, prudent 
regulations.
    The second thing I would say is I would encourage, as we 
look at the SIFI designation in the nonbank arena, having spent 
a quarter of a century in the insurance industry, I would 
suggest that clarity on what makes you--gets you designated and 
clarity on how you lose that designation would be incredibly 
important.
    Mr. Powell. Thank you, Senator.
    Chairman Crapo. Thank you.
    Senator Schatz.
    Senator Schatz. Thank you, Mr. Chairman.
    Thank you, Governor, for your willingness to continue to 
serve. I thank you for the conversation we had last week.
    I want to give you some data points. According to the FDIC, 
banks had record-breaking profits in 2016 and the highest 
return on equity in years. Data from 2017 shows that banks are 
likely to do even better this year across the board. Banks have 
increased their dividends to shareholders by 17 percent. 
Community banks' earnings have also been increasing. They were 
up almost 10 percent this quarter compared to last year.
    Household credits such as home loans, car loans, credit 
cards has surpassed pre-recession highs, and according to the 
Fed, sluggish loan growth in the commercial sector is due to a 
lack of demand.
    And so the question follows on Senator Warren's question 
which is, What problem are we solving with deregulation?
    Mr. Powell. I am not going to characterize what we are 
doing as deregulation. I would rather think of it as looking 
back over 8 years of what is very innovative regulation in many 
cases, things that have never been done, like liquidity 
requirements and resolution and stress testing. All of those 
are brand-new, and looking back, as I think it is our 
obligation to do, and making sure that what we did makes sense.
    Senator Schatz. Right. But is not the objective to get all 
these metrics up, and are not these metrics already up? And so 
does it not make sense to err on the side of caution?
    I understand in principle--some people in principle believe 
that too much regulation is a problem, and it ought to be 
eliminated almost as an ideological precept. But if you are 
looking at, as a practical matter, are not these the data 
points you want? Are we not where we want to be in terms of 
bank profitability? In fact, is not bank profitability not the 
problem? But to the extent that there was net income among the 
10 bank holding companies in the United States, 99 percent of 
their net income was distributed in the form of dividends and 
stock buyback.
    So I ask the question again. What are we fixing, and for 
whom?
    Mr. Powell. Let me agree that the banking system is 
healthy. It is great to see. That was not the case a few years 
ago, and it is nice to see banks profitably serving their 
customers again. So we are not looking to change that.
    And I would also agree that we do want to err on the side 
of caution, and we think we are doing that. But even consistent 
with that, it does not help anyone for banks to waste money, if 
you will, to spend more money than they reasonably need to 
spend to accomplish these safety and soundness objectives. 
Those costs will fall on customers and borrowers and such. So 
it is our obligation among other obligations to make sure that 
regulation is efficient.
    Senator Schatz. You are just saying it is too much 
paperwork, too much compliance?
    Mr. Powell. Yes. You hear that a lot on different issues. 
It is different things on different issues, but there is 
certainly just a lot of regulatory burden. And a certain amount 
of it is unavoidable, but our job is to be efficient and 
effective as well as protecting the safety and soundness.
    Senator Schatz. I guess my concern is that if you are a 
bank, both sort of dispositionally and from the standpoint of 
wanting to make profits, you want to reduce paperwork burden. 
And no doubt, when you lay down a whole new matrix of 
regulation, there are going to be instances in which it is a 
pain for a bank, small or large, to comply.
    But, again, they have managed record profitability, even 
despite whatever paperwork and compliance burdens there may be, 
and there is zero evidence that if we reduce the paperwork 
burden or the compliance burden that they will pass on the 
savings in the form of increased lending or increased 
remuneration in whatever form to their customers.
    I only have 50 seconds left, and I just want to follow up 
on a question that I asked you in private. When the Fed 
formulates monetary policy, it takes a broad look at the 
economy and identifies short- and medium-run risks and trends.
    I have a copy of the minutes from the most recent meeting, 
and there is a brief discussion of the economic impact of 
hurricane-related disruptions as well as dislocation from 
wildfires. The minutes indicate that in the past, these have 
only had a temporary impact. So I will take these--I will offer 
the questions and then take the answer for the record. How many 
events would it take to have a material impact on the economy? 
Has the Federal Reserve considered what number would be--what 
number that would be in terms of the number of events or the 
total cost of the damage? And have you worked with NOAA or 
other science agencies about the likelihood of the number of 
severe weather events increasing?
    My basic point is that I understand this is difficult to 
quantify, but you are in the business of analyzing things that 
are difficult to quantify. And I think we now believe that this 
is material, and I would like you to consider it. And I will 
take those for the record.
    Chairman Crapo. Senator Tillis.
    Senator Tillis. Thank you, Mr. Chair and Mr. Powell. Thank 
you for being here. Also, thank you for being so generous with 
your time in the meetings that you have had in my office.
    I have covered some of this in the meeting that we had in 
my office, but I want to go back to it again. You have been 
nominated to a position where you are ultimately going to be, I 
believe when you are confirmed, Randy Quarles' boss. You also 
said in the private--in our meeting in the office that you are 
going to rely a lot on him to take a look at regulatory reform 
issues, regulatory right-sizing. In that first meeting that any 
boss has with somebody that they are working with, they try to 
give them some direction.
    So, thematically, what are you going to talk about when it 
comes to recalibration of regs post-crisis? I am kind of 
curious, your comments on Basel Committee and the so-called 
Basel IV. Actually, just if we could start with that and a 
general discussion about how regulations--it is not about 
repealing regulation. Some of them need to exist, and if they 
had been in place in 2008, we probably would not have had a 
crisis of the magnitude that we had.
    But now it is almost as if we either have too many people 
regulating the same regulations, too many organizations, or we 
are not really clean in our executions, which is making it very 
costly, very difficult for businesses, and distracting from 
what they want to do is run their business. So that was a 
compound question. You can answer any part of it or all of it.
    [Laughter.]
    Mr. Powell. OK. I will start by saying my relationship with 
Randy Quarles goes back so far, I cannot think of what a first 
meeting would be like. I actually hired him at Treasury 25 
years ago, and he has been a close friend all that time. I 
think we are very well aligned on our approach to the issues 
that he will face as Vice Chair for Supervision.
    You asked about Basel. My understanding--and Vice Chairman 
Quarles has the lead on this now, but my understanding is that 
there is significant progress toward an agreement among all of 
the principal participants at Basel around uniform floors for 
particular risk categories, and that would give us a way to 
wrap up Basel III. And I think that would be very much in our 
interest to do so. It is other countries that have lower floors 
and lower risk weightings on their assets, so this really helps 
us.
    Senator Tillis. I just came from a press conference 
promoting the tax plan that we hope creates economic activity, 
but in my own personal experience in North Carolina, the two 
things that really combined creates a great economic activity 
were tax reform and regulatory reform.
    So I am hopeful over the course of this year within your 
lanes, you are doing everything you can to question how 
regulations get executed, right-sizing them to the point, to 
the minimum lightest touch necessary so that we are reducing 
what is an increasing cost in regulatory compliance, but by 
definition, with all due respect to my friends and colleagues 
at Pricewaterhouse, many of those compliance jobs are, by 
definition, nonproductive jobs. All they do is count whether or 
not all the productive activities were cross-tied right.
    So, hopefully, we can see some leadership on your part with 
respect to the Fed and the other regulatory agencies about more 
clarity, and I think a more tip of the spear--we had the 
discussion about tip of the spear, regulators staying within 
their lanes and relying on other ones to the extent they need 
the information to complete their responsibilities.
    Now, I have a question about the goal of the Fed over the 
last 9 years. It has been an increase in inflation and not 
growth, but what has a more corrosive impact on the middle 
class? Low inflation or low growth?
    Mr. Powell. Well, low growth.
    Senator Tillis. And so outside of the things that you are 
directly responsible for on the supply side, what sorts of 
things should we be looking at to help stimulate growth?
    Mr. Powell. Let me just amplify our mandate is inflation 
and maximum employment, stable prices and maximum employment. 
It is not growth. So really the things that can increase the 
stable--the sustainable growth rate of the U.S. economy are 
things that are really in your lane, not so much ours, and I 
would boil that down into a couple of things.
    One is labor force participation, and the other is 
productivity. If you think about it really you want as many 
people as possible taking part in the labor force not just for 
the overall U.S. economy's good, but for their own good. People 
are happier and healthier if they are in a labor force, and 
there are policies that can affect labor force participation.
    Productivity is very, very difficult to forecast, and it 
comes down to a technological advance and its effect on 
economic growth--very, very hard to forecast. It is also, 
though, the skills and aptitudes that our labor force brings to 
the job, and that is something that you can affect. It is 
policies that promote investment, investment in infrastructure, 
private investment by companies, and I think all of those 
policies are really in the hands of Congress. I think it is 
important that we have a long-run focus on increasing our 
sustainable growth rate.
    Senator Tillis. So it is outside of your lane, but just a 
quick question. If you reduce the tax and regulatory burden on 
certain businesses, in your opinion, will there be more or less 
investment in productivity?
    Mr. Powell. I mean, I think there clearly are ways in the 
Tax Code to support different kinds of activity, and certainly, 
investment is one of those.
    Senator Tillis. Thank you.
    Chairman Crapo. Thank you.
    Senator Van Hollen.
    Senator Van Hollen. Thank you, Mr. Chairman and to the 
Ranking Member, and congratulations, Mr. Powell, on your 
nomination.
    You know, both your immediate predecessors at the Fed, 
Chairman Yellen and Chairman Bernanke, repeatedly testified 
before congressional committees about their concern and the 
impact of the rising debt, national debt, on the economy.
    Here is what Chairman Bernanke told the Joint Economic 
Committee in June of 2012. He said, ``Large deficits in debt 
over a long period of time raise interest rates above levels 
where they normally would be and crowd out private investment 
and are bad for growth and productivity. They also may involve 
borrowing from foreign, foreign lenders, which is also a drain 
on current U.S. income,'' unquote. Do you agree with Chairman 
Bernanke's statement?
    Mr. Powell. Yes, I do.
    Senator Van Hollen. And here is what Chairman Yellen said 
this year on July 12th before the House Committee on financial 
services expressing he concerns about rising debt. She said, 
``Current spending and taxation decisions will lead to an 
unsustainable debt situation with rising interest rates and 
declining investment in the United States that will further 
harm productivity, growth, and living standards,'' unquote. Do 
you agree with that statement?
    Mr. Powell. I do.
    Senator Van Hollen. All right. Obviously, if we increase 
the national debt, we are going to make those problems even 
worse; in other words, the long-term debt impact harming 
economic growth. Is not that the case?
    Mr. Powell. Yes. I think the idea would be to get GDP 
growing faster than the debt over a long, long period of time.
    Senator Van Hollen. Do you have any reason to doubt the 
Congressional Budget Office's analysis of the debt increase 
that would result from the bill that has been proposed here in 
the Senate by Republican Senators?
    Mr. Powell. To tell you the truth, Senator, I have not 
looked at that. it is not something that we are responsible 
for.
    Senator Van Hollen. No. So you have no reason to doubt 
those numbers, do you?
    Mr. Powell. I have no reason to know those numbers, let 
alone doubt them.
    Senator Van Hollen. Do you have a concern about what the 
debt impact of actions the Senate and the House take, whether 
on the tax side or the spending side, with respect to the 
economy?
    Mr. Powell. It is a bit of a fine line that we have to walk 
on this, and I am hoping I can walk it. And that is, clearly, 
the debt needs to be on a sustainable path. We all know that. I 
think we all agree on that.
    On the other hand, it is not for us to be taking part in 
the discussion that you and your other elected colleagues are 
having over this. It is not our role, and there are agencies 
who have that role. It is really not for us.
    Senator Van Hollen. OK. Well, both of your immediate 
predecessors commented repeatedly about their concern over the 
impact of rising national debts, and you just indicated that 
you shared their concern and agreed with their earlier 
statements.
    So putting aside whether or not you think the CBO analysis 
of $1.5 trillion addition of the debt is correct or not, if 
there was another $1.5 trillion addition to the debt, it would 
make a bad situation worse, would it not?
    Mr. Powell. It would, all else equal.
    Senator Van Hollen. And as Chairman Bernanke said a number 
of years ago, he said--and I quote--``So, at some point, 
Congress is going to have to make a tradeoff between what its 
spending programs are and what taxes it is willing to''--he 
said at that time ``raise.'' We are now talking about reducing 
the amount of revenue coming into the Federal Treasury, but the 
basic math remains the same, does it not?
    Mr. Powell. It does.
    Senator Van Hollen. So if we want to avoid making the debt 
even worse and you are going to add $1.5 trillion to debt, the 
only way to deal with that is to then cut things like Social 
Security, Medicare, Medicaid. Is not that the case?
    Mr. Powell. You know, there are a lot of moving pieces in 
it. As I mentioned earlier, what the country really needs is to 
have debt growing faster than GDP. What matters is our debt-to-
GDP ratio. That is what makes us on an unsustainable path, so 
growth also enters into the equation.
    Senator Van Hollen. That is right. And the Congressional 
Budget Office, they have their own projections, as you do, as 
was indicated earlier of what the projected growth path would 
be. There are things that we may or may not be able to do to 
improve that, but there is no analysis out there, no credible 
analysis that suggests that when you have a massive tax cut 
primarily going to major corporations that the result is 
actually going to be a growth that actually makes up for the 
lost revenue in terms of debt. Do you know of any credible 
analysis that shows that?
    Mr. Powell. Senator, honestly, I have not been following 
the analysis.
    Senator Van Hollen. Do you know of any credible analysis 
that indicates that this tax cut would, quote, ``pay for 
itself''?
    Mr. Powell. I am not an expert on what analysis is out 
there about this tax bill, this proposal, this set of 
proposals.
    Senator Van Hollen. All right. Well, I would urge you to 
follow the tradition of your predecessors, who were very 
careful not to have weighed into the specifics of the fiscal 
decisions made by Congress but did express this concern about 
rising debts.
    And I thank you for your testimony.
    Thank you, Mr. Chair.
    Chairman Crapo. Thank you.
    Senator Perdue. Thank you, Mr. Chair, and thank you, 
Governor Powell, for being willing to take on this 
responsibility.
    I am encouraged that we are having a conversation about our 
debt, and I appreciate the conversation you and I had privately 
about it. And I like your considerations on that.
    I would like to remind the Committee in the last 16 years, 
we have added $14 trillion to a $6 trillion debt at the end of 
2000, 4 under President Bush and 10 in the last Administration. 
And in that last Administration, we had the lowest economic 
growth in United States history.
    In the next 10 years, if we do nothing from today, this 
Federal Government will add $11 trillion in current dollars to 
the current debt. So we will end up--right now, the current 
projection is if this Government does not change the way it 
does business, we will add $11 trillion to the debt.
    In 2000, the size of the Federal Government, Governor, was 
$2.4 trillion in constant dollars. Last year, it was $4 
trillion. There is our problem. We collected more tax last year 
than any time in our history, and the year before that, we 
collected more tax than any other time in our history.
    Globally, we have $200 trillion of debt. Of that, 60 is 
sovereign debt. Of that, $20 trillion is U.S. debt, and yet a 
number of countries have interest rates in their sovereign debt 
that actually are put out at negative interest rates. And I do 
not think the world has ever seen a situation where we had the 
four major central banks with somewhere around $18 trillion on 
their balance sheets, in a situation where we have $200 
trillion of debt, of which 60 is sovereign, and of that, a 
significant number is let out at negative interest rates.
    As you think about restructuring your balance sheet, what 
concerns you relative to the size of Government debt, sovereign 
debt around the world, and of that, the United States being 
one-third of that sovereign debt in terms of how you are going 
to manage one of the four major central banks going forward?
    Mr. Powell. Thank you, Senator.
    I think we have a good plan, and I think the market agrees 
to shrink our balance sheet. We have laid out very clearly in a 
series of public minutes over three meetings over the last 
year. I think we were quite careful to socialize the plan, and 
the market has accepted it. And it will lead to a much smaller 
balance sheet, and it will do so over what in these matters is 
a fairly quick period of time, 3, 4, 5 years, kind of a range 
of things, so----
    Senator Perdue. Are there any--I am sorry to interrupt. Are 
there any assumptions in that calculation or in that thought 
process of the freeing up of capital on the private side in 
terms of the money that is withheld from being active in the 
economy today? Some estimates as high as $6 or $7 trillion are 
not at work in the U.S. economy right now because of fiscal 
policy, not monetary policy. Does that weigh into that 
decision?
    Mr. Powell. Actually, it does not. What happens, Senator, 
is that when we allow a security to roll off, Treasury will 
reissue a comparably sized security or in bulk. The same amount 
will--the U.S. Government debt will remain the same. It will 
just be issued to the public rather than being on our balance 
sheet. That is what will happen. So it does not add to capital.
    You point to the other central banks, and there are big 
balance sheets, but they are some way behind us. Ideally, over 
time, all of our balance sheets can shrink.
    Senator Perdue. But all four of the balance sheets are 
around $4.5 to $5 trillion right now. It is the highest they 
have ever been, and so I applaud your background and applaud 
your ability to deal with that.
    I would like to change subjects, in the minute I have got 
left, to talk about blockchain technology. It is a little bit 
off the wall, but I think I am very--I am beginning to be very 
concerned that we have another bubble that is some four or five 
times the size of the dot-com bubble in the late '90s, and that 
has to do with the cryptocurrencies like Bitcoin. Bitcoin's 
market value now is bigger than all but 29 of the S&P 500 
corporations in America. Assuming that this continues and 
talking about that bubble and the size of--and the growth of 
the use of these cryptocurrencies, if that continues to grow, 
to what extent will that affect your ability to affect results 
from your typical monetary policy options that you typically 
have as a central bank?
    Mr. Powell. You know, in the long, long run, things--
cryptocurrencies of that nature could matter. They do not 
really matter today. They are just not big enough.
    Senator Perdue. Right.
    Mr. Powell. There is not anywhere near close to enough 
volume for it to matter for us.
    Senator Perdue. Well, that was the problem with the dot-com 
bubble, too, on a different level, was there were so few 
entities, and there was so much money interested in chasing. 
And that is what is happening right now in the Bitcoin area, 
but the growth of that area was much, much faster than anybody 
thought at that time, too, in the late '90s.
    Mr. Powell. Yes. There is no question the valuations have 
really gone up quite a lot in the last year or so. I do not 
have a view on the appropriate level of the valuation, of 
course, but again, from our standpoint, cryptocurrencies are 
something we monitor very carefully. We actually look at 
blockchain as something that may have significant applications 
in the wholesale payments part of the economy, something we pay 
close attention to.
    Senator Perdue. So you are watching what Ali Baba is doing 
in Asia today relative to the blockchain technology?
    Mr. Powell. We are watching all of those technologies. It 
is something we have to do, I think, and it is something that 
is actually kind of enjoyable and interesting to do.
    Senator Perdue. Well, thank you for being willing to do 
this. Thank you.
    Thank you, Mr. Chairman.
    Mr. Powell. Thank you, Senator.
    Chairman Crapo. Senator Cortez Masto.
    Senator Cortez Masto. Thank you, Mr. Chair.
    Welcome, Governor Powell. It is good to see you again. 
Thank you for taking the time with me. Welcome to your family. 
It is great to see you here as well.
    So I am going to start with something, a little topic, a 
little different. President Mester of the Cleveland Federal 
Reserve gave a speech earlier this month where she noted that 
more immigration is needed to drive the U.S. economy at a time 
when the population is aging and productivity is stalling.
    Governor Powell, do you agree with President Mester that we 
need more, not less, immigration to help drive our country's 
long-term economic growth?
    Mr. Powell. Senator, as I mentioned earlier, the size of 
the labor force is an important determinant of our potential 
growth over time. Labor force growth is really slow these days. 
It is about a half of 1 percent. You go back 30 years, it was 
2.5 percent. So it is a big reason why our economy has slowed 
down, and immigration has been a real contributor to that.
    Having said that, immigration is another one of those 
issues that is really not in our lane, and really those 
decisions are for you and your elected colleagues.
    Senator Cortez Masto. No, I appreciate that, but we have 
been talking about growing the economy, and part of your 
purview is labor. And I appreciate your comments that 
immigration is an important part of that labor force that grows 
our economy, so thank you.
    As Chair of the Fed's committee overseeing the Federal 
Reserve Bank's operations, including the Presidential search 
processes, we have seen some improvement in the diversity of 
the regional bank presidents, the boards of directors, the 
banks' workforces, and better interactions with advocacy groups 
in the banks' communities. If confirmed, what will you do to 
increase the diversity of the leadership workforce and opinions 
in the Federal Reserve system?
    Mr. Powell. Thank you.
    As I mentioned, I am a big supporter of the Federal Reserve 
system and also of diversity. I think we make better decisions 
when we have diverse voices around the table, and that is 
something we are very committed to at the Federal Reserve, both 
at the Board of Governors and in the Reserve banks. And that is 
something I have been deeply involved in during all my time 
there, and I would say that--so I have had a chance to--this is 
something people have been working on for decades now, and you 
begin to see what works. And so my view of what works is a lot 
of private companies have been very successful in advancing 
diversity, and what seems to work is to have a holistic plan 
that you stick with over a long period of time, and it is about 
recruiting. It is about going out of your way to bring people 
in. Once they are in, it is about giving them paths for 
success, and it is about having an overall culture and company 
that is very focused on diversity and that sticks with that 
focus for a long period of time. That works.
    Senator Cortez Masto. I appreciate that.
    Mr. Powell. It is not something you can do overnight.
    You mentioned the Reserve bank president searches.
    Senator Cortez Masto. Right.
    Mr. Powell. That is something that I have been responsible 
for, and I assure you, we always have a diverse pool of 
candidates.
    Senator Cortez Masto. And I agree, and I appreciate it. It 
is not just check the box. It is a cultural change that is 
constant, so thank you for your comments there.
    Congressional Republicans are set to pass, as we have 
discussed today, a tax cut bill geared toward large 
corporations. At the same time, this Committee is about to 
consider legislation to roll back rules for some of the 
Nation's largest banks. What can you do at the Fed to ensure 
that this tax windfall and this deregulation actually benefits 
workers and does not just translate into more executive bonuses 
and stock buybacks?
    Mr. Powell. Well, our tools are what they are. So we have 
monetary policy, which can shove the economy in the direction 
of stable prices and maximum employment, and we have regulatory 
policy, which can ensure safety and soundness of institutions. 
When institutions become more profitable, just taking your 
suggestion, some of that is going to go to shareholders. Some 
is going to go to customers. Some is going to employees. But we 
do not really have tools that affect the distribution of 
profits.
    Senator Cortez Masto. Right. But you do have a component of 
consumer protection.
    Mr. Powell. We do.
    Senator Cortez Masto. And you do have a concern about the 
workforce and growing that workforce and making sure there is a 
strong workforce, correct?
    Mr. Powell. Yes.
    Senator Cortez Masto. So part of the concern that I am 
hearing--and I did not have--I really have not heard a lot of 
that discussion--is what you are going to do to address 
specifically those consumer protection issues and particularly 
also protecting the workers in that work force.
    Mr. Powell. Consumer protection, we have not actually 
talked much about. We have been assigned an important role in 
consumer protection. We take it very seriously. I am committed 
as chair, as I have been as a Governor, with responsibility for 
our budgets that consumer protection will have the resources it 
needs to do its job. Whatever Congress assigns us, we will try 
to do well and aggressively, and that is my undertaking to you.
    Senator Cortez Masto. I appreciate that.
    I know my time is running out, and I will submit the rest 
of my questions for the record. But I, like many of my 
colleagues, do have concerns. I come from Nevada. Dodd-Frank 
was there for a reason, because we had a horrific crisis, as 
you well know. We talked about this, and the deregulation of 
Dodd-Frank and many of these regulations that were put in place 
to protect individual consumers are so important. And I am 
concerned about rolling back any regulations that is going to 
open that door in lessen any type of consumer protection, any 
type of work that we have done particularly in Nevada process 
country to protect individuals.
    So I look forward to having further conversations with you 
with respect to the idea of tailoring your regulations as well.
    Thank you.
    Mr. Powell. Thank you, Senator.
    Chairman Crapo. Thank you.
    Senator Shelby.
    Senator Shelby. Governor Powell, congratulations. I look 
forward to voting for you and helping in any way I can to get 
you confirmed. I think it will not be long, hopefully, that you 
will be over at the Fed as the Chairman, and you will have a 
full complement over there, which you will need. You will put 
your stamp on the Fed, and I hope it will be in a good way 
based on your experience in the past.
    We have talked about a lot of things here, but I am going 
to get back to basic inflation scares, if any, price stability, 
which is so important, as one of your mandates. A lot of 
economists are puzzled by the outlook of inflation statistics. 
At a time, you mentioned or alluded to that there is not real--
these are my words, not yours--not real pressure on wages, 
which is always a big factor. I do not see a lot of--myself, a 
lot of pressure from energy cost and so forth.
    We are in a different economy than some of us grew up in, 
with the globalization of things. You alluded to the fact that 
you would have an open market meeting soon, and you could bump 
up the interest rate some. I hope you will not spook the bond 
markets in doing this gradually because certainty is important 
in the economy and predictability.
    So where do you see the specter of inflation? I do not see 
the psychology of inflation out there, which is a dangerous 
thing. I do not see the wage stuff and other things I already 
mentioned. What do you see there that maybe we do not that you 
can tell us about?
    Senator Shelby. OK. Thank you, Senator.
    So inflation has been below our 2 percent objective. I 
think every single month or maybe every single month but once 
since I joined the Board of Governors in May 2012, and for most 
of that time, it has been in the range of 1.5 percent. It is 
actually really important that we achieve our 2 percent target 
because our credibility is important on that front.
    Lately, inflation was moving up, and it got pretty close to 
2 percent at the beginning of this year, and then this year 
came, and we have actually stronger growth. We have a healthy 
labor market, but to my surprise, to all of our surprises, I 
believe, inflation readings started to come in weak. And that 
was a surprise, and the question is why. There are multiple 
possible explanations. One is that these are just idiosyncratic 
factors, like the ones that you hear about are--there was a big 
drop in pricing for mobile telephone services because of a 
price war and also a change in the way that they calculate 
that; in addition, pharmaceutical prices.
    Basically, underlying inflation moves according to a slowly 
changing, evolving trend, but then there are these factors that 
move around a lot. And we happen to have had a number of 
factors that push it down, and there are different views. We 
have been very public about this debate that we have been 
having in the FOMC and in our public remarks, as you mentioned.
    One question is: Is it transitory, or are there more 
fundamental things at work here? I think we are all watching 
carefully to see, and we will have to be guided by the data as 
they come.
    Senator Shelby. We really do not know yet, do we?
    Mr. Powell. No, we do not.
    Senator Shelby. Is it transitory, or is it a larger trend? 
But you will be watching it day by day, right?
    Mr. Powell. We will, and that is what will dictate the path 
of our policy. We can afford to go more slowly if we determine 
that inflation is going to perform lower than we thought, and 
we can move more quickly.
    Senator Shelby. Let us talk about the balance sheet just a 
minute. I think you are on the right trajectory. I think you 
used the term that you might draw the balance sheet down to 
$3.5 trillion, something like that, whatever. Is that the new 
norm? Because that was not the norm. That is still a pretty 
high threshold, and if you did draw it down to, say, $3.5 
trillion, does that hamper you down the road in case you had 
some drastic things to do?
    Mr. Powell. Senator, I would say that we do not really know 
with any certainty what the new normal will be. My own guess 
would be--and this depends on a number of things that I will 
mention, but would be more in the range of $2.5 to $3 trillion, 
which is $1.5 to $2 trillion smaller than our current balance 
sheet.
    Ultimately, what will dictate the size of the balance sheet 
is going to be the public's demand for our liabilities, 
particularly cash, which has been growing surprisingly fastly 
in world--quickly in a world where everyone seems to use 
electronic cash. Nonetheless, people like paper cash a lot--and 
also demand for reserves, which are going to be higher than 
they were because the requirements for banks to hold high-
quality liquid assets. The highest-quality liquid asset is our 
reserve.
    So somewhere in that range of 2.5 to 3 might be the answer. 
It might be a little higher or a little lower.
    Senator Shelby. In the area of the other mandate you are 
all involved in is the regulatory area. Is it important when 
you come through the Fed or FDIC or anybody comes through with 
a regulation, proposes a regulation, that they have some type 
of serious cost-benefit analysis before they implement a 
regulatory change?
    Mr. Powell. It is, Senator, and we always try to implement 
the laws that you pass. We try to turn them into regulations as 
appropriate, and we try to do it in the most efficient, least 
costly way that we can that is consistent with Congress' 
intent.
    Over the last 3 or 4 years, we have really raised our game, 
I think, significantly on this, and we are doing more of that. 
We have been putting out, for example, white papers in 
connection with big rules like the G-SIB surcharge or the 
others I could mention, and they explicitly solicit comment on 
cost-benefit analysis.
    We have also started a unit of economists and policymakers 
that is going to focus very particularly on cost-benefit 
analysis. So I think we are always trying to be better at that. 
We regard it as a very fundamental part of what we do.
    Senator Shelby. You also mentioned the word ``capital,'' 
which is very important to any financial institution, and I 
think it is key to bank survival and financial survival. But 
liquidity is important too, is it not? You can have all the 
capital in the world, if you cannot have liquidity--do they not 
kind of go together to have a strong institution?
    Mr. Powell. They do, and in fact, liquidity, as you have 
suggested--liquidity runs is really what kills banks when they 
die, but having higher capital makes it much less likely that 
there will be a run on the bank in the first place. So that is 
the sense in which I agree with you that they do work together. 
They are both important.
    Senator Shelby. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator.
    Senator Tester.
    Senator Tester. Yeah. Thank you, Mr. Chairman, and thank 
you for being here, Governor Powell.
    I want to start my comments by echoing the Ranking Member's 
comments on Janet Yellen. I think she has done an incredible 
job and in a very difficult situation when she came on board, 
and she needs to be recognized for that.
    Governor Powell, I appreciate you being here today. I guess 
the debt is about $20 trillion. Could you give me any idea on 
what an additional $2 trillion would impact, how that would 
impact the economy, another $2 trillion in debt?
    Mr. Powell. Holding all else equal?
    Senator Tester. Yeah.
    Mr. Powell. Well, you would have higher interest costs, 
obviously. If you hold all else equal, then you have higher 
interest costs and either taxes will have to go up to pay for 
that or you will have even more debt, and that will crowd out 
private capital and private investment.
    Senator Tester. Is there any numbers that you have on 
potential impact to the economy, the higher the debt goes? Is 
it half percent, a quarter percent, a full percent per 
trillion? Do you know?
    Mr. Powell. I do not have that handy, no.
    Senator Tester. OK. I mean, the reason it is important is 
because about a third of our current debt is due to the last 
tax cut that was done during the Bush administration, and so I 
think we need to get the right information.
    I do not know that there is anybody on this side of the 
aisle that does not want to see a more simplified Tax Code and 
want to see a Tax Code that does not drive the economy in a 
positive direction, but I think the reason the Ranking Member 
asked you the questions he asked you, the reason I asked a 
question is because there is just not a lot of information out 
there on what the impacts are going to be, and after it is 
done, it is too late. And I just wanted to make that point. It 
is not in your portfolio, but it will impact your portfolio 
very significantly moving forward.
    There is a bipartisan bill out that we are probably going 
to address, I think, later this week or next week called the 
Economic Growth, Regulatory Relief, and Consumer Protection 
Act. Have you had a chance to take a look at that bill? It is a 
bipartisan bill. I think there are 20 cosponsors, 10 D's, 10 
R's. Have you had a chance to take a look at it at all?
    Mr. Powell. Yes, I have, Senator.
    Senator Tester. OK. And I was not here earlier, so if this 
has been asked before, I apologize. But as you looked at this 
bill, are we doing anything that is going to put our 
financial--since I am a cosponsor, I say ``we''--putting our 
financial system at risk with the regulatory relief that is in 
that bill?
    Mr. Powell. I really do not see anything. You know, we are 
looking at it carefully. We are going to offer technical 
comments, but I do not see anything, no.
    Senator Tester. OK. Part of that bill is eliminating the 
Volcker Rule of compliance for community banks with less than 
$10 billion as long as they have less than 5 percent trading 
assets and liabilities. Any concerns there?
    Mr. Powell. None.
    Senator Tester. OK. There is an EGRPRA process that the Fed 
completed earlier this year. A portion of that review talks 
about synchronization, streamlining, I think something that 
everybody can get behind. I think it is key that the regulators 
need to work to share information so that they are not being 
duplicative. It is something that I hear a lot from community 
banks.
    Do you have any plans as Chairman, because I think you will 
be confirmed--but do you have any plans as Chairman to update 
and modernize the examination process between regulators?
    Mr. Powell. Between regulators?
    Senator Tester. Yep. So that there is not that duplication.
    Mr. Powell. Assuming that I--if I can assume for a second 
that I will be confirmed----
    Senator Tester. Yes.
    Mr. Powell.----then that is something that I am committed 
to trying to do better on. We are blessed with a lot of 
regulatory agencies in our system, and some of that is good, 
but it does lead to overlap and duplication. I will be 
committed to improving on that.
    Senator Tester. As you look at your position--and you are 
no rookie to this. You have been around the block a time or 
two. Would you say that the number one job that you have to do 
as Chairman of the Fed is to make sure that consumers are not 
harmed without harming the safety and soundness of our 
financial system?
    Mr. Powell. I cannot disagree with that.
    Senator Tester. OK, good.
    Just real quick--and I have got about 50 seconds here. 
Senator Heller and I introduced the International Insurance 
Capital Standards Accountability. It would require the Federal 
Reserve to create an advisory committee on international 
insurance standards. It would require more transparency 
surrounding the process when the standards are being set.
    As Chairman of the Fed, how would you work with prudential 
regulators to ensure that the Fed fully understands the nature 
of these entities and their current regulatory oversight?
    Mr. Powell. For insurance companies, I think we have 
acquired a significant amount of insurance talent at the Fed 
and in the other agencies and on the FSOC, and we would be 
committed to understanding the industry as best we can, and by 
the way, for our regulation of insurance, of the insurance 
industry to be as transparent, ex ante as we can make it.
    Senator Tester. And so you would agree that the insurance 
capital standards would be different than financial capital 
standards----
    Mr. Powell. Yes.
    Senator Tester.----financial institutions?
    Mr. Powell. The risks of those institutions are quite 
different. We are aware of that.
    Senator Tester. Yeah. Thank you. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    That concludes a first round. There have been several 
Senators who have asked for a second round, and so we will do 
that.
    I will forego, although I may--I reserve the right to jump 
back in, but I am going to go immediately to our Ranking 
Member, Senator Brown.
    Senator Brown. Thank you, Mr. Chairman, and again, thank 
you for being here, Governor.
    I want to follow up somewhat on Senator Cortez Masto's 
questions, comments. Since Kennedy and also I think, Senator 
Schatz and Van Hollen mentioned some of this--since 2008, bank 
profits are up, executive compensations rebounded. The wages 
for working people are stagnant. The wealth gap between whites 
on the one hand and African Americans and Latinos on the other 
has not narrowed. Many people in my State have yet to feel the 
impact of the economic recovery. You know all those things. I 
hope they are central to your chairmanship.
    Past Fed Chairs Bernanke and Yellen cited inequality not 
just as a humanitarian personal problem, but also a pressing 
economic problem. There is not really a consensus among 
economists that income inequality and wage inequality is a drag 
on growth. Do you agree with that, and if so, what do you do to 
address income inequality?
    Mr. Powell. I do agree with that, Senator, and I would say 
to me, the most compelling factor--I think a number of factors 
are at work here, but if you look at the flattening out of U.S. 
educational attainment in the '70s and '80s and you look at the 
rise in inequality of the stagnation of middle-class incomes, 
median incomes, those two stories fit together so well that I 
think that the way for U.S. workers to compete in the global 
economy is through having skills, the best skills, the best 
education in the world, and in a sense, that is a big part of 
the story behind inequality.
    Senator Brown. OK. But the question was what do you do? You 
are not President. You are not a Member of Congress that should 
do more to invest in retraining and education, in early 
childhood education. What do you do to address income 
inequality?
    Mr. Powell. We do not have a lot of tools to address the 
income inequality. We do not have tools to address 
distributional effects really at all, but I would say that our 
commitment to our dual mandate in particular, to the maximum 
employment mandate is to make sure that anyone who wants a job 
either has one or can find one relatively easily. That should 
help.
    Senator Brown. Does that give you pause when some day you 
can raise interest rates because we are at full employment, 
knowing full employment may be for people that look like me 
that get to go to college? Full employment is full employee, 
but people that are people of color, people that have left the 
workforce, have given up on a job, that it is not full 
employment for them, does not that construct give you pause for 
thinking about increasing interest rates?
    Mr. Powell. Yes, of course. We are very focused on pockets 
of people and different pockets of people for whom the recovery 
is not real yet and people who have--such that groups have 
higher unemployment rates than others and higher poverty rates 
than others and that sort of thing.
    I think we do deal at the aggregate level, and it is 
important to say that we are raising interest rates now because 
the economy is strong, and if we wait too long--I am not saying 
we are waiting too long now, but if we were to wait too long, 
the economy could overheat. We would have to raise rates, and 
the economy would have a recession. That would not help those 
people.
    So the best way to sustain the recovery, I believe, is to 
continue on this path of graduate interest rate increases.
    Senator Brown. As I asked you privately about coming to 
Cleveland, as your predecessor did, in seeing Ohio high tech, 
good, strong, productive, efficient Ohio manufacturing, I would 
echo what Pope Francis said in exhorting his parish priests 
soon after he assumed the papacy. He said, ``Go out and smell 
like the flock,'' and I would ask you to think about doing some 
of the things that she did, not that you pattern your 
chairmanship after any one of your predecessors, but to really 
talk to people and see people who still are not in this 
economy. It has been pretty good for people like us but not so 
good for others.
    One other question. Financial crisis, as we know, was not 
the result of a single bad decision--dozens of small choices, 
including by regulators, to change the rules and weaken 
supervision for the big banks. We know that.
    Earlier this month, FDIC Chairman Gruenberg said he is 
feeling, quote, ``a certain sense of deja vu,'' unquote, with 
bankers and policymakers becoming complacent to risk the 
financial system.
    Between this legislation, this Committee is set to consider 
that the Chairman and you talked about and all the deregulation 
and the works by the Administration and regulators. Look whom 
the President has put on some of these--and boards and 
regulators--were on course to weaken the rules for large 
regional banks, were on course to make stress tests and living 
wills easier for global banks or on course to insert yet more 
exemptions under the Volcker Rule. Are you certain that all 
these changes are not paving the way for the next financial 
crisis?
    Mr. Powell. Certainty is kind of a high standard, but I am 
confident that we are not. That is really not the intent, and I 
do not see how the kind of things we are talking about doing 
would push us in that direction particularly.
    Senator Brown. Potentially fewer stress tests?
    Mr. Powell. Well, that is not something we have decided. I 
think stress testing is a really important post-crisis 
innovation, maybe the single most successful, and the banks 
will say that to you privately.
    Senator Brown. I know you have said it, and I know the 
banks have said it.
    Mr. Powell. Yes.
    Senator Brown. So should we be even considering pulling 
away from stress tests and even the regional banks?
    Mr. Powell. Well, I think I would go back to tailoring. We 
really want the most stringent things to be happening at the 
systemically important banks, the most stringent stress tests 
in particular, and we want to tailor, or taper as we go down 
into less significant, less systematically important 
institutions.
    Senator Brown. Were not some instructions like Countrywide 
smaller--and I think Wash Mu, if I remember right--smaller than 
some of these regional banks that will have a relaxed stress 
test or a less frequent, less than annual stress test?
    Mr. Powell. Well, again, we have not--that is not something 
we have decided.
    Senator Brown. But it is something you weighed in on a 
moment ago and a bill that Congress is looking at.
    Mr. Powell. I think you are referring to the idea of having 
regular stress tests as opposed to annual.
    Senator Brown. ``Periodic,'' I think is the word, which is 
a very different word from ``annual.''
    Mr. Powell. Yes.
    Senator Brown. Does that concern you, or does that give you 
discretion to decide?
    Mr. Powell. I have not had a chance to--as we discussed, 
that is not something that we have looked at yet. The bill----
    Senator Brown. Well, but you are coming to this Committee. 
With all due respect, Governor, you are coming to this 
Committee saying you support this legislation, and now you are 
saying, well, you have not had time to really look at it. So I 
guess that means you are not publicly yet supporting this 
legislation, but you might, after digesting it as the Chairman, 
decide to support.
    Mr. Powell. Well, it is not the legislation. It is what we 
do with the legislation after it were passed. I think it will 
be in our discretion to decide--if I understand the legislation 
correctly, proposed legislation--to decide how frequent stress 
tests would be. They would be periodic, and I do not know what 
we are going to decide about that.
    I mean, we have not looked at the question is what I am 
saying. We are going to exempt banks below--I guess it is $100 
billion from stress testing. So that makes some sense to me. 
Those banks are not systematically important. Between 100 and 
250, we will do something else, and I honestly do not know what 
that will be. My strong preference will be that we will 
continue to have meaningful stress testing for them because I 
think it is a successful tool.
    Senator Brown. Thank you.
    Chairman Crapo. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman.
    So I want to follow up on Senator Brown's questions about 
full employment. As you know, Congress gave the Federal Reserve 
a dual mandate to pursue maximum employment and to keep prices 
stable. The official unemployment rate is now 4.1 percent. Many 
economists are predicting the rate will dip below 4 percent in 
the near future. An unemployment rate this low in the past 
would have been considered full employment, which would be good 
news for the workers that should be accompanied by higher 
wages, but wages have barely budged.
    So let me start by asking, Mr. Powell, given that wage 
growth is so weak, do you believe that the labor market is 
currently at full employment?
    Mr. Powell. Full employment is not sort of a precise 
concept in our thinking, in my thinking, and I think a number 
of indicators would suggest that we are at or around full 
employment.
    But I will point to a couple that suggest that maybe there 
is more room for growth in the labor market, and those would 
be, in particular, wages which you cited. There is no 
indication in wages that the labor market is overheating or 
even hot and that there is----
    Senator Warren. How about stone cold?
    Mr. Powell. Well, we have----
    Senator Warren. To people who are trying to live on those 
wages, I think that is how they feel.
    Mr. Powell. You have growth of about 2.5 percent, which is 
roughly in keeping with increases in productivity and 
inflation, but nonetheless, it is not as fast as--that growth 
is not as fast as it was at other cyclical peaks or before the 
crisis. But that is an indicator, I would agree with you, that 
suggests a lack of tightness in the labor market.
    Senator Warren. So let me just push on that a little bit 
because one possible explanation for the breakdown in the 
relationship between low unemployment and increasing wages is 
that the labor market is not actually that tight. As you know, 
individuals who are not actively looking for jobs are not 
counted as unemployed under the traditional U3 unemployment 
measure that the Federal Reserve relies on.
    A better measure of the strength of the labor market might 
be the prime-age employment rate, which is simply the 
population age of 25 to 54, who actually hold a job. As of last 
month, the prime age of employment rate was only 78.8 percent. 
In other words, almost one in four prime-age workers--that is 
24 million Americans--do not have a job, and while the prime-
age rate has been increasing, the proportion of prime-age 
workforce who actually have jobs is well below the high that 
was set back in 2000.
    So, Mr. Powell, there are a lot of reasons why the prime-
age employment rate is so low, but I want to focus on one that 
is not typically on the Federal Reserve's radar. According to 
recent research by Princeton economist Alan Kreuger, about 44 
percent of prime-age, out-of-work men said they had taken pain 
medication within the preceding 24 hours, and about two-thirds 
of them are taking prescription pain medications.
    So, Mr. Powell, if you are confirmed as Chair of the Fed, 
how does this affect what you will do as Fed Chairman to 
achieve full employment?
    Mr. Powell. Well, let me just agree with everything you 
said about prime age. Prime page participation--that is the 
other place I was going--is a full percentage point lower than 
it was before the crisis, and there is no real obvious reason 
for that. That also suggests some slack.
    In terms of participation by prime-age males and 
particularly Alan Krueger's research, what we can do is we can 
push harder on maximum employment. I think we are doing that. I 
think we are looking at an economy that is going to go under 4 
percent unemployment.
    Ultimately, though, the tools for dealing with the opioid 
crisis and with the long-term 60-year decline in participation 
by prime-age males, those are tools that Congress really has to 
wield, not so much of the----
    Senator Warren. So just to make sure I am following this, 
it is your opinion that in order to ensure that the United 
States labor market is reaching its full potential, Congress 
needs to deal with the opioid crisis. Is that fair?
    Mr. Powell. Yes.
    Senator Warren. So I want to ask you about one other 
factor--holding back prime-age workers. More than twice as many 
prime-age women are out of the labor force as prime-age men, 
and according to a recent study by the Hamilton Project, more 
than half of women who are on the sidelines in the labor market 
cite that they are not working because of caregiving 
responsibilities, either for children or for seniors.
    Mr. Powell, how can the Fed bring women who are not working 
due to caregiving responsibilities back into the labor market?
    Mr. Powell. Again, we do not really have those tools.
    Senator Warren. Good. And that is really the point I wanted 
to make here.
    I appreciate your making the point that the opioid epidemic 
and the lack of paid family leave are holding back workers, and 
that Congress has to do something on both fronts. If you are 
confirmed as Chair of the Federal Reserve, I hope you will 
promise to come before Congress to advocate for policies, to 
make our labor market and our economy stronger for everyone.
    Thank you, Mr. Powell.
    Mr. Powell. Thank you, Senator.
    Senator Warren. I will take that as a yes?
    Mr. Powell. Thank you.
    Senator Warren. Thank you.
    Chairman Crapo. Thank you.
    Senator Cortez Masto, do you wish to ask questions?
    Senator Cortez Masto. I do. One more.
    Chairman Crapo. All right. You will be our final 
questioner.
    Senator Cortez Masto. Thank you.
    Chairman Crapo. Thank you.
    Senator Cortez Masto. Governor Powell, large banks have 
been fined a combined $160 billion since the crisis, yet 
recidivism continues and regulators have been very reluctant to 
impose harsher penalties. Take, for example, Wells Fargo, which 
has a new scandal that arises, it seems, every week. Do you 
view the post-crisis response on the part of regulators toward 
the largest banks as being too harsh?
    Mr. Powell. Well, I guess I would regard the fact that we 
are still seeing things like what you referred to in the paper 
as very disturbing. I do not think I would characterize our 
reaction to these kinds of problems as too harsh.
    I do think it is appropriate that we strike a professional 
tone in our supervision and regulation of financial 
institutions, and we always strive to do that.
    But, no, my main reaction to what you referred to is one of 
concern that institutions are still having problems with bad 
behavior, bad conduct toward consumers.
    Senator Cortez Masto. So can we then address the issue? And 
I am looking at this as well, but the conversation that you 
just had with Senator Brown regarding stress testing and the 
changing of the thresholds, which would then diminish any type 
of stress test for Wells Fargo as well as Bank of America and 
some of the others, is that true, the way you read the bill?
    Mr. Powell. No. No, I do not think it would have any effect 
on stress testing for Wells Fargo or the other larger 
institutions. It would only affect institutions between $100 
and $250 billion in assets.
    Senator Cortez Masto. It would not impact them 
domestically, their domestic operations here?
    Mr. Powell. No. No, it would not, to my--would be my United 
States.
    Senator Cortez Masto. If it did, would you have concerns?
    Mr. Powell. It would depend on what the effect would be, 
but I do not see any case for legislation of that nature that 
would affect the largest and most complex institutions.
    Senator Cortez Masto. Thank you.
    Chairman Crapo. And I know I would let Senator Cortez Masto 
be last, but I am going to take the Chairman's prerogative and 
ask you a couple of other very quick questions.
    In fact, I just wanted to go back and clarify my 
understanding of an answer that you gave to, I believe, Senator 
Heller, but one of the Senators asked you what your 
understanding was of the current GDP rate of growth in the 
United States today.
    Mr. Powell. Well, for the year 2017, about 2.5 percent. I 
would say for the last three quarters of this year, it is more 
like 3 percent.
    Chairman Crapo. All right. And then you did mention what 
your expectation was as to what we could expect in the next 
year or two, didn't you?
    Mr. Powell. I would say in a range--you know, the truth is 
that there are big uncertainty bands around these forecasts----
    Chairman Crapo. Certainly.
    Mr. Powell.----but my starting point for next year would be 
in the range of 2.5 percent, 2 to 2.5 percent, something like 
that, which is better than what it has been for the last few 
years. But that is just where I would start.
    Chairman Crapo. And then do you have any--I know I am kind 
of pushing you out further and further, but for next year or 
the following year, would you expect them to stay in the same 
range or not?
    Mr. Powell. You know, I would have no confidence on a 
forecast 2 and 3 years out.
    I mean, ultimately, as we are nearing full employment and 
everybody is back to work, it will then--at that point, it will 
come down to productivity, and it is hard to see growth quite 
as high. You might see a little bit lower growth.
    Chairman Crapo. Lower than?
    Mr. Powell. Lower than the 2.5 percent. You could see 
growth more like 2 percent.
    Chairman Crapo. So it could be 2 to 2.5?
    Mr. Powell. It could be.
    Chairman Crapo. It is hard to say.
    Mr. Powell. Very hard to say, yeah.
    Chairman Crapo. All right. Thank you very much, and I 
appreciate the fact that you have been here and answered all 
the questions. We appreciate your willingness also to serve the 
country, Governor Powell.
    For Senators, all questions for the record need to be 
submitted by Friday at noon, and, Governor Powell, we ask for 
your responses to those questions by Monday at 10 a.m. So 
please respond quickly to questions you may receive from the 
Senators.
    With that, this hearing is adjourned.
    Mr. Powell. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    [Whereupon, at 12:10 p.m., the hearing was adjourned.]
    [Prepared statement, biographical sketch of nominee, and 
responses to written questions supplied for the record follow:]
                 PREPARED STATEMENT OF JEROME H. POWELL
    To Be Chairman, Board of Governors of the Federal Reserve System
                           November 28, 2017
    Chairman Crapo, Ranking Member Brown, and other Members of the 
Committee, thank you for expeditiously scheduling this hearing and 
providing me the opportunity to appear before you today. I would also 
like to express my gratitude to President Trump for the confidence he 
has shown by nominating me to serve as Chairman of the Board of 
Governors of the Federal Reserve System. The Federal Reserve has had a 
productive relationship with this Committee over the years, and, if you 
and your colleagues see fit to confirm me, I look forward to working 
closely with you in the years ahead.
    Before I continue, I would like to introduce my wife, Elissa, who 
is sitting behind me. I would not be here today without her unstinting 
love, support, and wise counsel.
    As you know, I have served as a member of the Board of Governors 
and the Federal Open Market Committee (FOMC) for more than 5 years, 
contributing in a variety of capacities, including most recently as 
chairman of the Board's Committee on Supervision and Regulation. My 
views on a wide range of monetary policy and regulatory issues are on 
the public record in speeches and testimonies during my service at the 
Fed. The Congress established the Federal Reserve more than a century 
ago to provide a safer and more flexible monetary and financial system. 
And, almost exactly 40 years ago, it assigned us monetary policy goals: 
maximum employment, meaning people who want to work either have a job 
or are likely to find one fairly quickly; and price stability, meaning 
inflation is low and stable enough that it need not figure into 
households' and businesses' economic decisions.
    I have had the great privilege of serving under Chairman Bernanke 
and Chair Yellen, and, like them, I will do everything in my power to 
achieve those goals while preserving the Federal Reserve's independent 
and nonpartisan status that is so vital to their pursuit. In our 
democracy, transparency and accountability must accompany that 
independence. We are transparent and accountable in many ways. Among 
them, we affirm our numerical inflation objective annually and publish 
our economic and interest rate projections quarterly. And, since 2011, 
the Chairman has conducted regular news conferences to explain the 
FOMC's thinking. Additionally, we are accountable to the people's 
representatives through twice-a-year reports, testimony, oversight, and 
audited financial statements. I am strongly committed to that framework 
of transparency and accountability and to continuing to look for ways 
to enhance it. In our federated system, members of the Washington-based 
Board of Governors participate in FOMC deliberations with the 
presidents of the 12 regional Federal Reserve Banks, which are deeply 
rooted in their local communities. I am a strong supporter of this 
institutional structure, which helps ensure a diversity of perspectives 
on monetary policy and helps sustain the public's support for the 
Federal Reserve as an institution.
    If confirmed, I would strive, along with my colleagues, to support 
the economy's continued progress toward full recovery. Our aim is to 
sustain a strong jobs market with inflation moving gradually up toward 
our target. We expect interest rates to rise somewhat further and the 
size of our balance sheet to gradually shrink. However, while we 
endeavor to make the path of policy as predictable as possible, the 
future cannot be known with certainty. So we must retain the 
flexibility to adjust our policies in response to economic 
developments. Above all, even as we draw on the lessons of the past, we 
must be prepared to respond decisively and with appropriate force to 
new and unexpected threats to our Nation's financial stability and 
economic prosperity--the original motivation for the Federal Reserve's 
founding.
    As a regulator and supervisor of banking institutions, in 
collaboration with other Federal and State agencies, we must help 
ensure that our financial system remains both stable and efficient. Our 
financial system is without doubt far stronger and more resilient than 
it was a decade ago. Our banks have much higher levels of capital and 
liquid assets, are more aware of the risks they run, and are better 
able to manage those risks. Even as we have worked to implement 
improvements, we also have sought to tailor regulation and supervision 
to the size and risk profile of banks, particularly community 
institutions. We will continue to consider appropriate ways to ease 
regulatory burdens while preserving core reforms--strong levels of 
capital and liquidity, stress testing, and resolution planning--so that 
banks can provide the credit to families and businesses necessary to 
sustain a prosperous economy. In doing so, we must be clear and 
transparent about the principles that are driving our decisions and 
about the expectations we have for the institutions we regulate.
    To conclude, inside the Federal Reserve, we understand that our 
decisions in all these areas matter for American families and 
communities. I am committed to making decisions objectively and based 
on the best available evidence. In doing so, I would be guided solely 
by our mandate from the Congress and the long-run interests of the 
American public.
    Thank you. I would be happy to respond to your questions.
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

 RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JEROME H. 
                             POWELL

Q.1. Secretary Mnuchin said that the Trump administration could 
accomplish 80 percent of the bank deregulation listed in 
Treasury's June report without any help from Congress.\1\ 
Before this Committee in June, you called the Treasury report 
on bank deregulation, a ``mixed bag.''
---------------------------------------------------------------------------
    \1\ https://www.reuters.com/article/us-usa-banks-regulation/u-s-
treasury-unveils-financial-reforms-critics-attack-idUSKBN1932KQ.

Q.1.a. If you are confirmed, what will you do to oppose the 
recommendations you believe would be harmful to financial 
---------------------------------------------------------------------------
stability, consumers, and safety and soundness?

Q.1.b. Randy Quarles is now in the role as Vice Chair for 
Supervision at the Federal Reserve. If you are confirmed as 
Chair, how do you see your role in relation to the Vice Chair 
of Supervision's when it comes to regulatory policy?

A.1.a.-b. The Treasury report acknowledged that regulatory 
policies since the financial crisis have improved the safety 
and soundness of the financial system, and it noted that the 
U.S. banking system is significantly better capitalized as a 
result of post-crisis regulatory capital requirements and 
stress testing. The report also made a series of 
recommendations for the U.S. regulatory agencies to consider in 
order to reduce regulatory burden on the banking system.
    The Federal Reserve is committed to continuing to evaluate 
the effects of regulation on financial stability and on the 
broader economy, and to make adjustments as appropriate. As we 
do that, however, I would reiterate that we should preserve the 
core pillars of regulatory reform that I discussed in my 
testimony before the Senate Committee on Banking, Housing, and 
Urban Affairs on June 22, 2017--capital, liquidity, stress 
testing, and resolvability. Moreover, I believe that we should 
continue to tailor our rules to the different risks of 
different firms and, in particular, work to reduce
unnecessary burden on community banks.
    As for my role as Federal Reserve Board (Board) Chair vis-
a-vis the Vice Chairman for Supervision, if I were to be 
confirmed, I expect that the Vice Chairman will be the Board's 
primary point person on regulatory and supervisory matters and 
will lead the committee that is responsible for formulating 
recommendations to the Board on such matters. Decisions about 
regulations and material supervisory policies are made by all 
of our Board members, however, rather than by any one person.

Q.2. In a 2015 Bloomberg Television interview, Randy Quarles 
said the following about Dodd-Frank, ``The macro issue is that 
the Government should not be a player in the financial sector. 
It should be a referee. And the practice, and the policy, and 
the legislation that resulted from the financial crisis tended 
to make the Government a player. They put it on the field as 
opposed to simply reffing the game.''

Q.2.a. While we can all agree that the Federal Government 
should be a referee when it comes to supervision, do you agree 
with Governor Quarles' view on the role of the Government in 
the financial sector following the crisis?

A.2.a. In response to questions for the record on this topic, 
Vice Chairman Quarles stated, ``My approach to policymaking, 
and particularly to regulation, has been that the discretion of 
policymakers, and particularly of regulators, should be as 
constrained as possible. Where discretion remains, regulators 
should be as clear as possible about how they will exercise it 
in the future so that their actions are predictable and there 
is less uncertainty as to what the policy will be.'' I share 
that general approach to regulatory and supervisory 
policymaking.

Q.2.b. In your confirmation hearing, you noted that you and 
Vice Chair Randal Quarles are ``very well aligned on [your] 
approach to supervision.'' Are there any areas on bank 
supervision policy where you and Vice Chair Quarles disagree?

A.2.b. I am pleased that Vice Chairman Quarles is now leading 
our efforts in this area and will not only be building on the 
work underway, but will be bringing a fresh perspective to many 
issues. I believe that we share the foundational objectives to 
post-crisis regulatory reform--preserving the core measures of 
capital, stress testing, liquidity, and resolvability. Vice 
Chairman Quarles will bring his perspective on how to best 
achieve those objectives. We both agree that we need a 
resilient, well-capitalized, well-regulated financial system 
that is strong enough to withstand even severe shocks and 
support economic growth by lending through the economic cycle.
    The financial crisis was devastating--the worst economic 
downturn since the Great Depression. The work that has been 
underway at the Board to calibrate regulation and supervision 
aims to achieve and build on the strength and systemic 
resilience that we currently enjoy with greater efficiency. If 
confirmed for this position, I look forward to working with all 
my colleagues on the Board, who bring a diversity of viewpoints 
to these very important issues.

Q.3. Vice Chair Quarles in his maiden speech at the Federal 
Reserve earlier this month said that, ``changing the tenor of 
supervision will probably actually be the biggest part of what 
it is that I can do.''\2\ He said this to note that near-term 
changes in banking rules would be difficult, but that day-to-
day changes in regulators' tone was more immediately 
achievable.\3\
---------------------------------------------------------------------------
    \2\ http://www.wsj.com/articles/feds-quarles-changes-to-bank-
stress-tests-on-front-burner-1510080513.
    \3\ Ibid.

Q.3.a. Do you agree that Federal Reserve supervisors need to 
change their ``tenor?'' If so, please elaborate on what this 
---------------------------------------------------------------------------
means.

A.3.a. I feel strongly that, as public servants, we can best 
fulfill our mission by being transparent in our processes and 
open to a range of perspectives. An open dialogue between 
supervisors and supervised firms can foster safety and 
soundness because both parties can be more willing to discuss 
difficult but important issues that need to be addressed. I 
believe that conducting supervision in a mutually respectful 
way best furthers our goal of ensuring the resiliency of our 
financial system, the availability of credit, economic growth, 
and financial market efficiency.

Q.4. At the time Countrywide was teetering and was bought by 
Bank of America, it had $211 billion in assets and originated 
around one in five mortgages in the country.
    In hindsight, would it have been useful for a large lender 
like Countrywide to have been subject to enhanced capital or 
liquidity standards, stress tests, or to have prepared a living 
will?

A.4. Banking organizations of all sizes have benefited from the 
stronger regulatory standards that were implemented after the 
financial crisis. Prior to the crisis, many large banking firms 
operated with excessive leverage, inadequate and low-quality 
capital, and insufficient liquidity, and did not have effective 
systems to identify and manage their risks. Banks generally 
viewed mortgages as a relatively low-risk asset and did not 
consider the possibility of a nationwide decline in house 
prices. A change in that view would have led to wider 
recognition of Countrywide's and the industry's needs for 
additional capital and liquidity as well as greater ability to 
foresee and manage their risks.
    Following the financial crisis, the Federal Reserve 
overhauled its regulatory and supervisory regime to focus on 
improving the resiliency of large banking organizations, as 
well as to reduce the risks to the system in the event that 
these firms experienced distress or failure. Under the Federal 
Reserve's current regulatory and supervisory regime, large 
financial institutions are expected to maintain capital 
planning and liquidity risk management processes to determine 
the amount of capital and liquidity needed to continue 
operations through a range of conditions. Stress tests are an 
important element of this regime. Large financial institutions 
are also required to conduct recovery and resolution planning. 
And as I have said publicly, we also recognize the need to 
further tailor regulation to the size and risk profile of 
institutions.
    Congress principally addressed the Countrywide problem in 
the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) by eliminating the Office of Thrift 
Supervision and reassigning supervisory and regulatory 
authority over thrifts to the Office of the Comptroller of the 
Currency, and supervisory and regulatory authority over thrift 
holding companies to the Federal Reserve.

Q.5. Legislation this Committee will soon consider quintuples 
the threshold at which enhanced financial stability rules apply 
to banks.
    If confirmed, will you commit to not raising it further 
using the Federal Reserve's existing authority upon a 
recommendation from the FSOC?

A.5. I have supported raising the $50 billion asset threshold 
for application of enhanced prudential standards. An increase 
in the Dodd-Frank Act statutory thresholds, while also 
providing flexibility for the Federal Reserve to apply such 
standards to firms
between $100 billion and $250 billion in total assets, along 
the lines provided for in the bill under consideration by the 
Senate Committee on Banking, Housing, and Urban Affairs, would 
help produce a supervisory and regulatory framework that is 
better tailored to the size, systemic footprint, and risk 
profile of banking firms. Passage of legislation to raise the 
threshold would make it less likely that the Financial 
Stability Oversight Council (FSOC) would take up such a 
recommendation.

Q.6. Legislation this Committee will soon consider would 
deregulate banks with up to $250 billion in assets from 
financial stability rules.

Q.6.a. Would you believe that every bank up to $250 billion in 
assets--if it failed--no longer needs a living will?

A.6.a. Resolution planning has been helpful for gaining a 
greater understanding of resolution options for large banking 
organizations, particularly for banking firms with significant 
nonbank operations, critical operations, or cross-border 
operations. Resolution planning requirements should also be 
tailored to the size and complexity of the firm, with the most 
complex firms subject to the highest standards. Smaller and 
less complex firms likely do not need the same frequency of, 
and detail in, their living wills as larger and more complex 
firms, because their plans for resolution are less susceptible 
to becoming obsolete due to changes in their businesses and 
business models. In addition, as demonstrated in the financial 
crisis, complex and crossborder operations may complicate a 
firm's resolution, posing risk to the financial system more 
broadly.

Q.6.b. Are you confident that each of these banks could be 
resolved through bankruptcy, without any taxpayer support?

A.6.b. The bankruptcy of a banking organization with less than 
$250 billion in assets would present significantly less 
potential risk to U.S. financial stability than the failure of 
the largest, most interconnected banking organizations. 
Therefore, the Board has tailored its efforts to focus on 
improving the resolvability of the largest, most interconnected 
banking organizations, which generally have more than $250 
billion in consolidated assets. For example, the Board's 
resolution-related rules requiring minimum total loss-absorbing 
capacity and stays of early termination rights in qualified 
financial contracts apply only to global systemically important 
banking organizations (GSIBs). Through the resolution planning 
process, the Board and the Federal Deposit Insurance 
Corporation (FDIC) have also provided substantially more 
extensive direction to the U.S. GSIBs and certain non-U.S. 
GSIBs to improve their resolvability than to their smaller and 
less complex counterparts.

Q.7. At your confirmation hearing when asked if we ``still have 
banks that are ``too-big-to-fail,'' you said, ``I would have to 
say no to that.'' In addition, when asked if there is any rule 
that you believe should be made stronger, you responded, ``I 
think they are tough enough.'' While I agree with you that 
Dodd-Frank has led
to a substantially stronger banking system, the money center 
banks remain very large, complex institutions. As we have seen 
time and time again, even their own boards and CEOs do not 
fully
understand what is going on within them. I am concerned that 
your comments implied that we shouldn't be worried about the 
largest banks because efforts to date have been sufficient.
    Do you care to elaborate on either of these answers?

A.7. My comments reflect my belief that the statutory framework 
established by Congress and the efforts of the U.S. regulators 
have made the largest banking firms more resilient and have 
significantly improved their resolvability. In particular, for 
the largest, most systemically important firms, we have 
increased the quantity and quality of capital that they 
maintain, have established capital surcharges that are scaled 
to each firm's systemic risk footprint, and have required them 
to carry long-term debt that can be converted to equity as part 
of a resolution.
    Through Title I of the Dodd-Frank Act, Congress established 
a process for the Federal Reserve and the FDIC to identify 
resolution weaknesses at firms, to provide clarity about what 
actions need to be taken, and to follow through should 
weaknesses remain. The agencies are currently reviewing firms' 
resolution plans and I cannot speak for the Federal Reserve 
Board or the FDIC Board as to the outcome of that review. 
Notwithstanding, firms have clearly made substantial progress 
in improving their resolvability since the agencies' 
determinations in April 2016, as highlighted in our feedback 
letters and explained in their public filings.
    It may be useful to clarify what it means to ask whether 
any firm remains ``too-big-to-fail.'' By my answer, I intended 
to convey my view that we have made enough progress that the 
failure of one of our most systemically important financial 
institutions, while undoubtedly posing a severe shock to the 
economy, could more likely than not be resolved without 
critically undermining the financial stability of the United 
States. As I also said, we expect our most systemically 
important firms to continue to make steady progress toward 
assuring the achievement of that goal. Finally, I would add 
that higher levels of capital and liquidity and stress testing 
substantially reduce the likelihood that one of our most 
systemically important financial institutions would fail.
    In addition, progress toward becoming more resolvable may 
not be permanent. The resolvability of firms will change as 
markets evolve and as firms' activities, structures, and risk 
profiles change. Firms must remain vigilant in confronting the 
resolution consequences of their day-to-day management 
decisions. It is therefore important to have a credible, 
ongoing process for the agencies to identify and address 
resolution weaknesses. The resolvability standard set by 
Congress and applied by the agencies accomplishes that, and as 
such I believe it is ``tough enough.'' Of course, there may be 
areas identified by the agencies where more work by the firms 
needs to be done. In my view, that would be consistent with the 
statutory framework and standard currently in place.
    As for the question of rules that may need improvement or 
toughening, I would add that there are a number of post-crisis 
regulations that are not yet finalized, and that we continue to 
advance. These include, for example, the net stable funding 
ratio and single-counterparty credit limits for large banking 
firms.

Q.8. Studies of capital other than those funded by industry, 
including some by Federal Reserve economists, suggest that 
modest increases in capital for the Nation's largest banks are 
still warranted.
    Do you agree?

A.8. My view is that risk-based capital requirements for our G-
SIBs are neither too low nor too high.
    Since the financial crisis, bank capital requirements have 
been strengthened considerably to substantially improve both 
the quality and quantity of capital. Moreover, a robust stress 
testing regime is now the binding capital requirement for many 
of the largest and most systemically important banks.
    A number of studies have examined the relative costs and 
benefits of bank capital requirements. These studies use data 
and assumptions on the cost and severity of financial crises 
and the costs of increasing capital requirements to estimate 
the level of capital requirements that results in the largest 
net benefit to the economy. Such studies have been conducted by 
economists affiliated with the Basel Committee on Banking 
Supervision (2010), The Bank of England (2015), the Federal 
Reserve Bank of Minneapolis (2016), as well as economists at 
the Federal Reserve Board (2017). Some of these studies produce 
results that are consistent with current levels of capital for 
the G-SIBs, while others call for more capital. This range in 
capital levels among the different studies reflects varying 
assumptions and data sources.
    A different and perhaps preferable way to assess capital 
adequacy is through stress testing. Our G-SIBs should be able 
to survive a shock at least as severe as the Global Financial 
Crisis while still meeting their capital requirements, and 
thereby retain the confidence of the markets. With all of the 
G-SIBs now passing the quantitative test in Comprehensive 
Capital Analysis and Review, that requirement is arguably met.

Q.9. At your confirmation hearing, you stated that stress 
testing is ``a really important post-crisis innovation, maybe 
the single most successful, and the banks will say that to you 
privately.'' You further explained that your ``strong 
preference'' for banks between $100 billion and $250 billion in 
total consolidated assets would be to ``have meaningful stress 
testing for them.'' For ``systemically important banks,'' you 
added, ``we really want the most stringent things to be 
happening,'' and ``the most stringent stress tests in 
particular.''

Q.9.a. Do you believe that it is important for regulators to 
subject banks with over $250 billion in total consolidated 
assets to stress tests on at least an annual basis?

A.9.a. Yes, I believe it is important to continue to subject 
banks with total consolidated assets greater than $250 billion 
to stress tests on an annual basis. Large banks' risks may 
evolve rapidly, and conducting stress tests annually helps us 
to incorporate those changes in risks and ensure large banks 
continue to have sufficient capital to weather a severe stress 
and continue to lend.
    Stress testing is a critical tool to help us ensure the 
safety and soundness of large banks and the financial stability 
of our overall economy. Our stress tests have significantly 
strengthened these firms by better ensuring that they have 
enough capital to survive a severe economic downturn and 
continue lending to households and businesses. Our stress tests 
also provide public visibility into the risks faced by these 
large banks, which was sorely lacking before the financial 
crisis and can help enhance market discipline.
    The results of the most recent stress tests indicate that 
the banking system is strongly capitalized, which is good for 
the U.S. economy because it means banks have the ability to 
lend and support economic activity, even during a severe 
recession.

Q.9.b. How often should stress tests be conducted for banks 
with between $100 billion and $250 billion in total 
consolidated assets?

A.9.b. Banks' capital positions have improved significantly 
since the crisis, in part due to stress tests that have been 
conducted annually. Banks with between $100 billion and $250 
billion in total consolidated assets are an important source of 
credit to consumers and businesses. As a result, it is 
important that they continue to maintain sufficient capital to 
enable them to lend even in the event of a severe stress.
    The dynamic nature of banks and the risks they face could 
render the results of stress tests stale within a short 
timeframe. Accordingly, we believe there are safety and 
soundness and financial stability benefits in conducting 
capital stress tests on a periodic basis based on a bank's size 
and complexity. If Congress granted us the flexibility to 
conduct stress tests at a different frequency than annually, we 
would consider the tradeoff between potentially less current 
information about banks' risks against the reduced burden of 
less frequent stress tests.

Q.10. Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act established additional oversight of 
entities designated as Systemically Important Financial Market 
Utilities (SIFMUs), such as clearinghouses, by authorizing the 
Federal Reserve Bank to provide SIFMUs with deposit accounts, 
as well as discount and borrowing privileges during unusual and 
exigent circumstances.

Q.10.a. Do you agree that Title VIII provides important 
financial stability tools for regulators in the form of 
enhanced oversight, deposit accounts, and discount and 
borrowing privileges during unusual and exigent circumstances?

A.10.a. Title VIII creates an enhanced framework for the 
supervision of financial market utilities (FMUs), including 
central counterparties, that have been designated as 
systemically important by the FSOC. This enhanced supervision 
framework allows the Securities and Exchange Commission (SEC), 
Commodity Futures Trading Commission (CFTC), and the Board 
(together, the agencies) to prescribe enhanced risk management 
standards for FMUs and provides mechanisms for information-
sharing and coordination among the supervisory agencies. It 
provides the Board with the ability to obtain a certain level 
of insight across all designated FMUs through examination 
participation and notification of material rule changes and 
also provides the Board with certain limited enforcement 
authority.
    Effective risk management of FMUs enhances the stability of 
the financial system. It is important that FMUs be overseen 
consistently, and in a manner that focuses on the safety of the 
system as a whole and not just its individual components. The 
role given to the Board under Title VIII allows for such a 
systemic view of FM Us and assists the supervisory agencies in 
promoting consistency across the various designated FMUs.
    The agencies have adopted regulations that have materially 
raised the expectations to which systemically compliant FMUs 
are held and that have improved FMUs' credit and liquidity risk 
management frameworks and enhanced their operational 
resilience. Further, the CFTC, SEC, and Board's respective 
requirements for FMUs designated under Title VIII require these 
firms to manage their risks by relying on private-sector 
resources only, without any assumption of reliance on public 
funds during times of market stress.

Q.10.b. Would eliminating the Federal Reserve's authority to 
provide accounts for customer margin and access to liquidity 
facilities during a financial crisis increase the potential for 
market instability during a crisis?

A.10.b. Title VIII permits the Board to authorize a Federal 
Reserve Bank to establish an account for and provide services 
to a designated FMU. Conducting settlements using central bank 
money, where available, is consistent with strong risk 
management practices. It is likely that the provision of 
accounts and services to certain designated FMUs has reduced 
risk in the system by minimizing credit and liquidity risk 
associated with holding margin payments and contingent 
liquidity resources in commercial bank accounts.

Q.11. In June, I asked you about the status of the Board's work 
to incorporate the GSIB surcharge into the stress tests. At the 
time you said, that it was ``the plan'' to move forward and 
were currently ``working on it.''

Q.11.a. Six months later, what progress has been made?

Q.11.b. When do you anticipate completion of the Board's work 
on incorporating the surcharge?

A.11.a.-b. We have made significant progress toward the 
completion of a package that would simplify the Board's capital 
regime by more closely integrating the regulatory capital rule 
and stress testing. A key element of the proposal would be the 
introduction of a stress capital buffer that would be sized 
based on the results of the stress test.
    Staff is working to finalize the proposal, including an 
analysis of its potential impact, after which the Board would 
consider the full proposal. While I cannot predict the timing 
or outcome of the Board's consideration, if the Board were to 
approve the proposal, it would then be issued for notice and 
comment.

Q.12. Several Federal Reserve rulemakings required under the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 
2010 remain uncompleted. Additionally, there remain several 
other rulemakings initiated by the Federal Reserve that are 
likewise not complete. Please indicate if you intend to 
complete the rulemakings cited below, and if so, on what 
timetable.

Q.12.a. Board of Governors of the Federal Reserve System, 
Complementary Activities, Merchant Banking Activities, and 
Other
Activities of Financial Holding Companies Related to Physical 
Commodities, 79 Fed. Reg. 12,414.

Q.12.b. Board of Governors of the Federal Reserve System, 
Capital Requirements for Supervised Institutions Significantly 
Engaged in Insurance Activities, 81 Fed. Reg. 38,631.

Q.12.c. Office of the Comptroller of the Currency, Board of 
Governors of the Federal Reserve System, Federal Deposit 
Insurance Corporation, National Credit Union Administration, 
Federal Housing Finance Agency & Securities and Exchange 
Commission, Incentive-based Compensation Arrangements, 81 Fed 
Reg. 37,670.

Q.12.d. Office of the Comptroller of the Currency, Board of 
Governors of the Federal Reserve System & Federal Deposit 
Insurance Corporation, Net Stable Funding Ratio: Liquidity Risk 
Measurement Standards and Disclosure Requirements, 81 Fed Reg. 
35,124.

Q.12.e. Board of Governors of the Federal Reserve System, 
Single-Counterparty Credit Limits for Large Banking 
Organizations, 81 Fed. Reg. 14,328.

A.12.a.-e. Board staff is actively engaged in reviewing the 
public comments received on these proposed rulemakings. With 
regard to the interagency rulemakings listed above, we also are 
working with staff from the other agencies. While I cannot 
provide an exact schedule, I expect that we will work 
diligently to address the public comments received on these 
rulemakings and finalize the rules as appropriate.

Q.13. As Chair of the Fed's Committee overseeing the Federal 
Reserve Banks' operations including the Presidential search 
processes, we have seen some improvement in the diversity of 
the regional bank presidents, the Boards of Directors, the 
Banks' workforces, and better interactions with advocacy groups 
in the Banks' communities.

Q.13.a. If confirmed, what more will you do to increase the 
diversity of the leadership, workforce and opinions in the 
Federal Reserve System?

A.13.a. Diversity is a critical aspect of all successful 
organizations, and I am committed to fostering diversity and 
inclusion throughout the Federal Reserve System. In my 
experience, we make better decisions when we have a wide range 
of backgrounds and voices around the table.
    The Federal Reserve recognizes the value of a diverse 
workforce at all levels of the organization. We are committed 
to achieving further progress, and to better understanding the 
challenges to improving and promoting diversity of ideas and 
backgrounds. This has been an ongoing objective, and, if I am 
confirmed, I assure you that diversity will remain a high 
priority objective for the Federal Reserve.
    As Administrative Governor and Chair of the Committee on 
Board Affairs, I have supported and encouraged the Board's 
efforts to enhance diversity. In my role as Chair of the 
Committee on Federal Reserve Bank Affairs, I have worked with 
the Reserve Banks to promote diversity throughout the System. 
Recognizing the value of diversity at all levels of the System, 
including at the highest levels, I have worked closely with the 
Reserve Banks to assure that they have a diverse slate of 
qualified candidates for president searches. The Reserve Banks, 
working closely with the Board, have also been looking at ways 
to further develop a diverse pool of talent in a thoughtful, 
strategic fashion, readying them for leadership roles 
throughout the Federal Reserve System.
    To foster diversity more broadly, a long-term holistic plan 
is necessary with a focus on doing the utmost to recruit and 
bring people in and provide them paths for success. That means 
having an overall culture and organization that is focused on 
diversity and demonstrates its ongoing commitment at all 
levels, starting at the top. For example, we have an internal 
work stream at the Board to coordinate economic inclusion and 
diversity efforts that is comprised of the Office of Minority 
and Women Inclusion Director, Division Directors, senior staff 
and Board Members. It focuses on initiatives not just at the 
Board, but also more broadly throughout the System. I am part 
of this team, as are other Board members, and we meet regularly 
to discuss initiatives and progress.

Q.13.b. Do you believe the dual mandate is a critical part of 
monetary policy?

A.13.b. Yes. The Congress established the Federal Reserve more 
than a century ago to provide a safer and more flexible 
monetary and financial system. And, almost exactly 40 years 
ago, it assigned us monetary policy goals: maximum employment, 
meaning people who want to work either have a job or are likely 
to find one fairly quickly; and price stability, meaning 
inflation is low and stable enough that it need not figure into 
households' and businesses' economic decisions.
    I have had the great privilege of serving under Chairman 
Bernanke and Chair Yellen, and, like them, I will do everything 
in my power to achieve those goals while preserving the Federal 
Reserve's independent and nonpartisan status that is so vital 
to their pursuit.
    In 2012, the Federal Open Market Committee (FOMC) published 
a statement discussing its longer-term goals and the monetary 
policy strategy it follows to achieve them; this statement is 
reaffirmed each January. At our meetings, FOMC policymakers 
evaluate economic conditions and the outlook, and we decide on 
the monetary policy that we think will be most likely to 
deliver maximum employment and price stability over the medium 
term.

Q.14. According to former Chair Bernanke's memoir ``Courage to 
Act,'' in 2013, he wanted to continue asset purchases at their 
elevated level because of the continued fiscal austerity and 
gridlock in Congress. But, in order to achieve unanimity on the 
Board of Governors, he slowed asset purchases in order to 
respond to concerns raised by you and two other Governors. Some 
suggest that this announcement caused the so-called ``taper 
tantrum'' in which investors suddenly withdrew their money from 
the bond market.

Q.14.a. Did you think the economic recovery was sufficient at 
that time to reduce the Fed's support for the economy? What do 
you believe caused the ``taper tantrum''?

A.14.a. When the FOMC agreed to undertake a new asset purchase 
program in September 2012, we indicated that the purchases 
would continue until there was a substantial improvement in the 
outlook for the labor market, but that we would also take 
account of the efficacy and costs of the purchases. At the 
FOMC's May 2013 meeting, shortly before the taper tantrum, I 
voted along with other policymakers to continue purchases of 
Treasury and mortgage-backed securities--the unemployment rate 
was at that time around 7 \1/2\ percent and other indicators of 
the labor market suggested that considerable slack remained.
    The market reaction began in late May 2013 after Chairman 
Bernanke mentioned the possible tapering of our asset purchase 
program for the first time during congressional testimony; 
longer-term yields rose further following the June press 
conference when he mentioned tapering again. These remarks seem 
to have been interpreted as a message not only about the course 
of our asset purchases, but also about how soon we might raise 
our target range for the Federal funds rate from its effective 
lower bound. The rise in yields of around 100 basis points was 
too large to have been plausibly explained by balance sheet 
effects alone, and is more consistent with the perception that 
our monetary policy stance had become less accommodative. One 
of the lessons we learned was the need to clearly distinguish 
in our communications between the Federal funds rate and asset 
purchases.

Q.14.b. What communication practices from the Fed might prevent 
incidents like the taper tantrum from occurring again?

A.14.b. Monetary policy is complicated, particularly when the 
FOMC is using both the policy rate and the balance sheet as 
tools. Communicating about one of the tools can have unintended 
consequences for the other--as we experienced during the taper
tantrum. One of the lessons we learned is that it is important 
to clearly distinguish between the two tools. This year, we 
have increased the target range for the Federal funds rate on 
two occasions and initiated a program to gradually reduce the 
Federal Reserve's balance sheet. We began discussing options 
for tapering the reinvestments of maturing Treasury and agency 
securities last spring and informed the public about these 
discussions through the FOMC meeting minutes. In June, we 
updated our normalization principles and plans to outline how 
our redemption program would work. At our September meeting, we 
agreed that the time had come to begin to implement this 
program. We used a sequence of communications about the change 
to our reinvestment policy because we wanted to separate our 
actions on the Federal funds rate from the winding down of our 
securities holdings. In addition, we wanted to give financial 
market participants time to understand and plan for the effects 
of our redemptions. Our communications were well received in 
financial markets and the commencement of our redemption 
program has progressed very smoothly.

Q.15. At your confirmation hearing, you mentioned several times 
the impact of the opioid crisis on the labor force 
participation rate especially for prime age men. In September, 
Senator Donnelly and I sent a letter to Chair Yellen asking her 
to devote resources to Fed research into this issue and to 
encourage the Federal Reserve Banks to work with their 
community leaders to find ways to address this crisis. She 
committed that the Fed would continue to
explore this issue.
    Do you think there is more the Fed can do to try to 
understand the impact of the opioid crisis on the economy? If 
so, what?

A.15. The opioid epidemic is a crisis that goes well beyond its 
effects on the economy. It has resulted in a sharp increase in 
the rate of drug deaths in the United States since 2000, and it 
has had devastating effects on too many individuals and their 
families, as well as on many communities. As Anne Case and 
Angus Deaton have documented, this crisis has spread 
extensively over the past 20 years and is now evident in 
virtually all parts of the United States.
    In terms of its economic effects, the opioid epidemic has 
likely contributed to the downward trends in the labor force 
participation rates of prime-age men and women and reduced 
worker productivity, while adding to healthcare expenditures 
and the costs of the criminal justice system. With employers 
now finding it more difficult to fill their open positions with 
qualified and productive workers, the effects of the opioid 
crisis are likely constraining the potential growth rate of the 
U.S. economy, although it is difficult to quantify how large 
those effects might be.
    We will continue to engage with researchers on this 
important issue, as well as look for ways in which we can 
contribute to a better understanding of its effects on local 
communities.

Q.16. The Fed's long-term growth projection from September was 
1.8 percent. Earlier this week several prominent economists 
suggested that tax changes could increase growth by 0.1 percent 
or less. The Joint Committee on Taxation's recent estimate 
shows an annual increase of less than 0.08 percent. You 
indicated at your confirmation hearing that they Fed has not 
done modeling that tries to anticipate the impact on the 
economic growth rate of Federal fiscal policy, including 
possible tax changes, because it is too speculative.

Q.16.a. Does this mean that the Fed's economists only look at 
existing law when modeling potential GDP growth?

Q.16.b. If not, could you describe their approach?

A.16.a.-b. In preparing their individual forecasts that feed 
into the Summary of Economic Projections (issued quarterly in 
conjunction with the Chair's press conferences), FOMC 
participants are free to make their own judgments about the 
likely future evolution of fiscal policy. And indeed, views 
among FOMC participants have differed this year about what 
fiscal effects should be built into their forecasts; I am among 
those who have assessed the situation as too uncertain to 
warrant building in the effects of fiscal-policy changes; 
others have assessed the odds on passage of some fiscal action 
as sufficiently high as to warrant making some allowance in 
their projections. Participants are not constrained to consider 
only current law with regard to fiscal policy.
    While it is not possible for me to speak for any other FOMC 
participant in this regard aside from myself, in general the 
issue you are raising is a judgment call. Some of the factors 
that affect my thinking are:

   LLikelihood of enactment: How likely is the given 
        change to be enacted, and in exactly what form?

   LWhat are the likely effects of a given change in 
        fiscal policy on the future evolution of the economy? I 
        would take into account what the economics literature 
        has to say about particular changes for aspects of the 
        economy that are most relevant for the Federal Reserve. 
        This assessment can be highly uncertain, and the 
        uncertainty around these estimates may have increased 
        the reluctance of some FOMC participants to factor a 
        change in fiscal policy into their outlook.

   LTiming: Will the contemplated change in fiscal 
        policy affect the performance of the macroeconomy 
        within the next 2-3 years, which is the timeframe most 
        relevant for operational near-term decisions about 
        monetary policy?

I should emphasize that FOMC participants strive to take a 
comprehensive approach in their assessment of the outlook, and 
fiscal policy is only one of the many factors that bear on the 
outlook. l should also emphasize that our congressional mandate 
is very clear about what we should focus on--maximum employment 
and price stability. We assess various factors for their 
implications for those variables. Other agencies, of course, 
are responsible for assessing other implications of various 
fiscal actions.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM JEROME H. 
                             POWELL

Q.1. The Dodd-Frank Act instructed the Fed to develop enhanced 
prudential standards for bank holding companies (BHCs) with 
more than $50B in total consolidated assets. That number was 
far too low and the hard cutoff was very problematic. There is 
no reason to consider a bank that grows from $49B to $50B as 
suddenly a threat to financial stability. I applaud Chairman 
Crapo and the bipartisan group of Banking Committee Members who 
have agreed to increase the threshold. However, I remain 
concerned that a $250B threshold suffers from the same weakness 
as the $50B threshold. That is, a bank's systemic risk profile 
does not suddenly change when it grows from $249B to $250B in 
assets.
    In fact the Dodd-Frank Act makes very clear that enhanced 
prudential standards should still be tailored in their 
application. It states that the Board may ``differentiate among 
companies . . . taking into consideration their capital 
structure, riskiness, complexity, financial activities, size, 
and any other risk-related factors . . . ''
    Will you use your authority under Dodd-Frank to right size 
regulation for all regulated institutions--from community banks 
to midsize, regional, and even the largest banks?

A.1. The Federal Reserve has been working for many years to 
make sure that our regulation and supervision is tailored to 
the size, systemic footprint, and risk profile of individual 
institutions. I believe that it is not only appropriate to 
recognize the different levels of risk and types of risk that 
different institutions in the system pose, but that it also 
makes for better and more efficient regulation. Efficient 
regulation allows the financial system to more efficiently 
support the real economy. If I were to be confirmed, I would be 
committed to the Federal Reserve continuing to tailor its 
supervisory and regulatory framework to the size, systemic 
footprint, and risk profile of the different classes of banking 
firms in our economy.
    The failure or distress of a large bank can harm the U.S. 
economy. The recent financial crisis demonstrated that 
excessive risk-taking at large banks makes the U.S. economy 
vulnerable. The crisis led to a deep recession and the loss of 
nearly nine million jobs. Our regulatory framework must reduce 
the risk that bank failures or distress will have such a 
harmful impact on economic growth in the future. As we do so, 
effective and efficient regulation should take into account the 
risk of the institution.
    While the Federal Reserve Board (Board) currently has some 
authority to tailor the enhanced prudential standards included 
in section 165 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act), the Board generally 
cannot eliminate the application of these standards to covered 
firms. In particular, Congress required that certain enhanced 
prudential standards must apply to firms with $10 billion or 
more in total assets, with other standards beginning to apply 
at $50 billion in total assets. I am aware that Congress is 
currently considering whether and how to raise existing 
statutory thresholds in the Dodd-Frank Act, and I have 
expressed support for increasing these thresholds. I also 
understand that Congress is considering an alternative to 
simply raising the thresholds that would entail the use of a 
more complex, multi-factor approach to decide which firms are 
subject to enhanced prudential standards. If I were to be 
confirmed, I would stand ready to continue working with Members 
on this issue.
    It is important to note that the Federal Reserve already 
tailors its regulation and supervision of firms above $250 
billion. For example, firms with more than $250 billion in 
total assets that are not considered to be global systemically 
important banks (GSIBs) are not subject to risk-based capital 
surcharges, the enhanced supplementary leverage ratio, or total 
loss-absorbing capacity and long-term debt requirements to 
facilitate orderly resolution. I fully expect that we would 
continue to tailor the application of regulations for such 
firms if Congress were to raise the threshold. We are looking 
at ways we might better tailor liquidity regulations, for 
example, to maintain resilience with greater efficiency.

Q.2. Interest on excess reserves has become a key tool of 
monetary policy for the Fed. In Chairwoman Yellen's words, 
``Paying interest on reserve balances enables the Fed to break 
the strong link between the quantity of reserves and the level 
of the Federal funds rate and, in turn, allows the Federal 
Reserve to control short-term interest rates when reserves are 
plentiful.''

Q.2.a. Do you expect interest on excess reserves to remain a 
key tool in implementing monetary policy, or would you like to 
return the pre-crisis monetary policy toolkit?

A.2.a. The payment of interest on excess reserves contributes 
to effective implementation of monetary policy by helping to 
manage the level of the Federal funds rate and other short-term 
interest rates. Most major central banks have the authority to 
pay interest on excess reserves and have used this authority to 
help manage the level of short-term interest rates. In the 
current circumstances,
interest on excess reserves is essential to the Board's ability 
to
manage the level of short-term interest rates even with a very 
elevated level of reserve balances in the system.
    The Federal Reserve's authority to pay interest on reserves 
is an important tool to reduce the burdens on banks associated 
with reserve requirements and to manage the level of short-term 
interest rates, both in normal times and during periods of 
financial stress. Even if the Federal Reserve ultimately 
returned to an operating system very similar to that in place 
prior to the crisis, the ability to pay interest on reserves 
would enhance the effectiveness of monetary policy 
implementation.

Q.2.b. Do you see any risks associated with breaking the strong 
link between the quantity of reserves and the level of the 
Federal funds rate?

A.2.b. The payment of interest on reserves provides flexibility 
for the Federal Reserve to implement monetary policy in a 
variety of settings. In the current circumstances, the level of 
reserves in the banking system is very large as a result of the 
large scale asset purchase programs conducted by the Federal 
Reserve to support economic recovery and stem disinflationary 
pressures in the aftermath of the crisis. In this environment, 
even sizable changes in the quantity of reserves do not affect 
the level of interest rates, and the ability to pay interest on 
reserves is the essential tool that allows the Federal Reserve 
to implement monetary policy effectively.
    The Federal Open Market Committee (FOMC) has initiated its 
program for normalizing the size of the Federal Reserve's 
balance sheet and has noted that it expects the long-run level 
of reserves in the banking system will be significantly smaller 
than at present. In the longer-run, the FOMC could choose to 
continue to operate in a so-called ``floor system'' in which 
policy implementation is implemented primarily through changes 
in the interest rate on reserves. Alternatively, the FOMC could 
return to a ``corridor system'' with a much smaller quantity of 
reserves in the banking system than at present. In that type of 
system, the Federal Reserve would again manage the level of 
short-term interest rates through frequent open market 
operations aimed at fine tuning the quantity of reserves in the 
banking system. Even in this framework, interest on reserves 
would be a useful tool to help keep the Federal funds rate 
close to the target established by the FOMC. Either type of 
operating system would allow the FOMC to conduct monetary 
policy effectively to promote its long run goals of maximum 
employment and stable prices.

Q.3. In 2008, Chairwoman Yellen, then the President of the 
Federal Reserve Bank of San Francisco, stated: ``As Japan found 
during its quantitative easing program, increasing the size of 
the
monetary base above levels needed to provide ample liquidity to 
the banking system has no discernible economic effects aside 
from those associated with communicating the Bank of Japan's 
commitment to the zero interest rate policy.''

Q.3.a. Do you agree with Chairwoman Yellen's 2008 assessment 
that increasing the size of the monetary base above levels 
needed to provide ample liquidity has no discernible economic 
effects?

A.3.a. In my view, it is not the increase in the monetary base, 
or alternatively in banks' reserves at the central bank, per se 
that has beneficial effects for the economy. Those effects are 
mostly determined by what types of assets the central bank 
acquires with the reserves it creates. In the case of our asset 
purchases, these were long-maturity Treasury securities and 
agency mortgage-backed securities. These purchases put downward 
pressure on longer-term interest rates and helped to make 
overall financial conditions more accommodative. These changes 
in financial conditions, in turn, helped to foster economic 
recovery and stem disinflationary pressures in the aftermath of 
the crisis.

Q.3.b. Even with multiple rounds of quantitative easing, 
inflation has consistently been below the Fed's target. Why do 
you think that is the case?

A.3.b. While it is true that inflation has generally fallen 
short of the Committee's 2 percent objective over the past 
several years, that shortfall has for the most part been 
explicable by economic conditions, with good reason to view it 
as temporary. During the early years of the recovery from the 
Great Recession, inflation was held down by slack in resource 
utilization. Later on, in 2015 and into 2016, inflation was 
held down by a sharp rise in the dollar, falling import prices, 
and falling energy prices. More recently, the softness in 
inflation seems to have been exaggerated by what look like one-
off reductions in some categories of prices, including, for 
example, a large decline in quality-adjusted prices for 
wireless telephone services. These factors appear to be largely 
behind us.
    Given the ongoing strengthening in labor markets, and with 
measures of longer-term inflation expectations broadly stable, 
I expect inflation to move higher next year. Most of my 
colleagues on the FOMC agree with this assessment. In the 
September Summary of Economic Projections, the median forecast 
anticipated personal consumption expenditure price inflation 
moving back to 2 percent by 2019. However, monetary policy will 
adjust in response to incoming news, and we will be closely 
monitoring inflation developments to see whether this outlook 
is validated in the time ahead.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM JEROME H. 
                             POWELL

Q.1. Is free trade always a net-gain for the U.S. economy? How 
would this view impact your tenure as Federal Reserve Chairman?

A.1. The Federal Reserve is entrusted to achieve its 
congressionally mandated objectives of price stability and 
maximum sustainable employment. Matters of trade policy are the 
responsibility of the Congress and the Administration.
    In general, trade and access to global markets provide many 
benefits for businesses and firms, including larger and deeper 
markets for their products and a wider selection of inputs for 
production. Consumers also benefit in terms of greater variety 
of goods and more competitive prices. Because of these and 
other benefits, more open and globalized economies generally 
have been faster growing, more productive, and more dynamic. 
However, the economic shifts brought on by trade have costs, 
and the loss of jobs in some industries or professions has been 
very painful for those affected. Policymakers and economists 
alike are increasingly cognizant of the need to design policies 
to support workers and families so that the benefits of 
globalization and trade can be more widely and evenly shared.

Q.2. Is the measure of the United States's trade deficit with 
another country a useful metric to consult to evaluate whether 
trade with that country hurts or helps our economy? If not, 
what are some useful metrics?

A.2. The overall U.S. trade balance is the most useful measure 
for evaluating the impact of trade on the U.S. economy. That 
balance is affected by many factors, including savings and 
investment in the United States, economic conditions abroad, 
and movements in exchange rates. Bilateral trade deficits are 
less informative. For example, U.S. workers and businesses 
could benefit when the United States runs a deficit with one 
country by importing goods that we use as inputs to produce 
goods to sell to another country. In this example, a focus on 
the bilateral deficit would obscure the net effect on the U.S. 
trade balance and the overall benefit to the economy.

Q.3. Is there any instance where the United States would 
benefit from a trade war with a large country like China? How 
should the Federal Reserve respond to such a trade war?

A.3. As noted in the answer to question 1, openness to trade 
has many benefits for the U.S. economy. A trade war with 
another large country could be quite disruptive and reduce the 
benefits we experience from trade.
    China is an important U.S. trading partner. The Chinese 
economy is also an important source of demand for commodities 
and other products from the United States and other countries. 
What happens to China matters for the U.S. and global 
economies. At the same time, it is important for trade and 
financial relations to be arranged so that countries operate on 
a level playing field.
    How the Federal Reserve would respond to these 
circumstances would depend on how it affected the U.S. economy 
and, in particular, progress toward the Federal Reserve's 
congressionally mandated objectives of price stability and 
maximum sustainable
employment. It is difficult to predict those impacts and the 
appropriate monetary response.

Q.4. How would you evaluate the economic impact of NAFTA's 
dissolution, all things being equal? How should the Federal 
Reserve respond to the dissolution of NAFTA?

A.4. If the United States were to withdraw from North American 
Free Trade Agreement (NAFTA), an earlier free-trade agreement 
with Canada would still be in force, while trade barriers 
between the United States and Mexico would revert to the 
moderate, Most Favored Nation (MFN), levels consistent with 
current international trade rules. Academic studies estimate 
that the effect of implementing NAFTA on U.S. output was 
positive, but small in magnitude, mostly because only a few 
sectors, like textiles, were highly protected in Mexico prior 
to the agreement. These studies could be interpreted to imply 
only a small, negative effect in the long run from leaving 
NAFTA and increasing tariffs to MFN levels.
    Nonetheless, the near-term effects of a NAFTA withdrawal 
could be significant. In particular, North American automotive 
supply chains have been built on tariff-free cross-border trade 
in automotive parts and could be disrupted. Additionally, U.S. 
agricultural exports to Mexico would likely face higher MFN 
import tariffs.

Q.5. How would you evaluate the economic impact of the U.S.-
South Korean Free Trade Agreement, all things being equal? How 
should the Federal Reserve respond to the dissolution of the 
U.S.-Korean Free Trade Agreement?

A.5. As noted in question 4, most of the academic literature 
studying the effects of trade agreements (such as NAFTA) has 
found modest positive effects for the United States, and the 
same would likely be true for the U.S. trade agreement with 
South Korea. In addition, South Korea accounts for a much 
smaller share of U.S. trade (about 3 percent) than does Canada 
and Mexico, so the direct effects of that agreement are likely 
even more limited.
    As noted in question 3, monetary policy decisions should be 
based on an assessment of realized and expected progress toward 
the Federal Reserve's employment and price stability 
objectives. International trade is an important part of the 
U.S. economy, so trade developments should be one aspect of 
that assessment. However, trade policy is only one among 
several factors that could affect the outlook for trade, with 
other factors including movements in currency and commodity 
markets as well as prospects for economic growth abroad.

Q.6. What were the economic impacts of the U.S.'s failure to 
ratify TPP?

A.6. Specific trade decisions are the province of Congress and 
the Administration. As a general rule, most research finds that 
open trade and capital flows provide benefits for U.S. 
businesses, including larger markets for U.S. products and a 
wider selection of inputs for production. Consumers also 
benefit from a greater variety of goods and more competitive 
prices. However, increased trade can cause dislocations, 
including the loss of jobs in some industries. Policymakers and 
economists alike are increasingly cognizant of the need to 
design policies to support workers and families so that the 
benefits of globalization can be more widely and evenly shared.

Q.7. How would you evaluate the economic impact of a 25 percent 
tariff on Mexican or Chinese goods, all things being equal? How 
should the Federal Reserve respond to such a tariff?

A.7. A higher tariff on either Chinese goods or Mexican goods 
would tend to shift demand both toward U.S.-produced goods and 
also to imports originating elsewhere. Although some U.S. 
businesses may benefit from increased domestic demand, U.S. 
firms would also likely have to pay more for imported 
intermediate inputs, increasing production costs. An additional 
effect would be to raise prices for goods consumed by U.S. 
households.
    The benefits that U.S. business receive from increased 
domestic demand would also be reduced by lower demand from the 
targeted country. The targeted country's demand for U.S. 
exports would
decline not only because a U.S. tariff would reduce the 
targeted country's own income, but also because the targeted 
country might
retaliate by increasing its tariffs on U.S. goods.
    In particular with regards to Mexico, the negative effects 
of higher tariffs on the Mexican economy could result in 
additional indirect spillovers to the U.S. economy, given the 
interconnected supply chains that currently tie together U.S. 
and Mexican production.

Q.8. Has the United States's threats to withdraw from NAFTA and 
failure to otherwise robustly defend free trade already damaged 
the economy? What about Mexico's efforts to find other trading 
partners for goods like corn, in likely response to the United 
States's threats to withdraw from NAFTA?

A.8. Market expectations about trade policy developments have, 
at times, affected some financial market variables, such as the 
exchange value of the dollar against the Mexican peso, but I am 
not aware of broader effects on the U.S. economy.
    Mexico is the third-largest market for U.S. agricultural 
exports and the largest market for U.S. exports of corn, with 
U.S. corn exports to Mexico valued at $2.6 billion in 2016. 
Each year, the United States exports about 14 percent of its 
corn crop.
    Although there have been reports of efforts by Mexico to 
diversify the sourcing of its imports of corn and other goods, 
actual Government policy actions have not yet been implemented. 
In addition, U.S. corn exports to Mexico, after being weak 
earlier this year, have stepped up in recent months. Through 
September, the value of corn exports to Mexico is now slightly 
higher than over the same time period in 2016.
    A sizable reduction in Mexican demand for U.S. corn would 
force U.S. farmers to find other markets for their corn 
exports. Doing so could be difficult, especially in the short 
run, as other trading relationships would have to be developed 
or expanded. In addition, corn exports may become less 
profitable, after accounting for the increased shipping costs 
to reach farther away destinations. However, those same 
considerations raise questions over the ease with which Mexico 
could reduce its U.S. corn imports. That said, Brazil and 
Argentina are major corn exporters, who compete worldwide with 
U.S. exporters for market share, and are potential alternative 
sources for Mexican corn imports if the Mexican government were 
to enact to discourage demand for U.S. corn.

Q.9. What economic sectors benefit the most from free trade and 
what--if any--sectors are hurt by free trade? For example, does 
free trade help the United States's agricultural sector?

A.9. Sectors where the United States is particularly productive 
relative to its trading partners, such as agriculture, are ones 
that likely benefit most from openness to trade. For example, 
the value of U.S. agricultural exports has nearly tripled 
(increasing 182 percent) since 2002 as U.S. agricultural 
producers have exported a larger quantity of goods at higher 
prices.
    Sectors that are likely to be hurt are those where our 
trading partners are particularly productive or low-cost, such 
that domestic production is displaced by growing imports from 
overseas. For example, there is a growing consensus among 
economists that the rise of China as an exporter contributed to 
job losses, higher unemployment, and lower wages for U.S. 
manufacturing workers in manufacturing industries that compete 
with imports from China, including apparel, furniture, and 
electronics. However, cheaper Chinese imports may have helped 
lower costs and boost employment in other industries, as well 
as providing cheaper goods to
consumers.

Q.10. It has been said that trade has destroyed large segments 
of the manufacturing-based economy. Is that true? How much of 
the damage to that sector has actually resulted from other 
factors such as automation?

A.10. Research suggests that, overall, increased trade has 
benefited the United States, both by expanding supply chains 
and access to new markets for U.S. exporters, and by providing 
U.S. households with a greater choice of goods at lower costs. 
That said, the U.S. manufacturing sector has been facing a 
number of long-term structural challenges, including the 
relative costs of labor and investment in producing 
domestically versus abroad. As a result, some industries within 
the U.S. manufacturing sector have experienced long-term 
declines stemming from globalization. It is very difficult to 
parse out with any precision responsibility for the decline of 
the manufacturing sector to the various possible underlying 
causes.

Q.11. What--if anything--should be done to help those sectors 
that may be left behind by free trade and automation?

A.11. These are important issues that the Congress should 
consider. Technological change is inevitable, and in my view it 
would be a damaging mistake to stand in its way. And as I 
indicated earlier, the bulk of economic research suggests that, 
overall, increased trade has benefited the United States. 
However, research also indicates that automation and trade have 
tended to reduce the demand for lower-skilled workers, 
especially those in jobs that involve routine tasks, either 
physical or cognitive. This, in turn, has contributed to the 
increased inequality of incomes that has been in train for 
several decades, and it can help explain the ongoing decline in 
labor force participation of men 25-54 years old, which has 
been most concentrated among those with a high-school degree or 
less. Some communities have also suffered disproportionately 
because of the geographically concentrated nature of some of 
the job losses that have resulted from trade and automation. I 
have no prescription about exactly what an effective policy 
approach should be, but would broadly point to education and 
job training as among the things that the Congress could 
reasonably consider in trying to address these issues.

Q.12. What risk does cybersecurity pose to the economy and 
what--if anything--should the Federal Reserve do about it?

A.12. As I stated during my confirmation hearing, cybersecurity 
risk is one of the most important risks faced by U.S. financial 
and Government institutions. The U.S. economy has a heightened 
level of exposure to cyber risk due to the high degree of 
information technology (IT)-intensive activities and the ever-
increasing interconnection between entities operating in its 
various sectors. In
particular, firms in the financial services sector are highly 
interconnected and have considerable dependency on critical 
service
providers. The presence of active, determined, and sometimes
sophisticated adversaries means that malicious cyber attacks 
are often difficult to identify or fully eradicate, and may 
propagate rapidly through the financial sector, with 
potentially systemic
consequences.
    To reduce the threat to U.S. financial stability, the 
Federal Reserve has been taking steps to promote effective 
cybersecurity risk management at the institutions we supervise 
and strengthen their resilience to prepare for, withstand, and 
rapidly recover from a cyber-related disruption. The Federal 
Reserve evaluates the cyber and IT risk management practices of 
these institutions and provides critical feedback and guidance 
to better enable them to prepare for and rapidly recover from 
cyber-attacks. However, to combat the dynamic cyber threat and 
strengthen the resiliency of the financial sector, the Federal 
Reserve believes the public sector and private entities need to 
work closely together.
    To this end, the Federal Reserve engages in interagency and 
industry collaboration with the Federal Financial Institutions 
Examination Council, Financial and Banking Information 
Infrastructure Committee (FBIIC), Financial Services Sector 
Coordinating Council (FSSCC), Financial Services Roundtable, 
and various other groups to improve the cyber and IT resiliency 
of the financial sector. In addition, the Federal Reserve 
established the Secure Payments Task Force, comprised of a 
diverse group of 170 industry participants, to collaborate on 
the industry's most pressing payments system security issues, 
including identity management, data protection, fraud, and risk 
information-sharing payment security.
    We appreciate the perspective of these groups, which is 
complementary to achieving our safety and soundness and 
financial stability goals. We strongly believe that the 
continuation of these partnerships and their expansion into 
other areas is necessary to effectively combat the cyber 
threat.

Q.13. What is the cause of the increasing geographic 
concentration of economic growth in larger cities? What--if 
anything--should the Federal Reserve do about it?

A.13. Since the end of the Great Recession, labor markets in 
larger cities have recovered substantially more than those in 
smaller cities and nonmetropolitan (or rural) areas, and this 
divergence has become even more pronounced in the past few 
years. Several factors may help explain why larger cities have 
been growing more quickly in recent years. For example, larger 
cities tend to have more diversified economies, which 
contributes to greater resiliency in the face of adverse 
economic shocks. In contrast, rural areas tend to be more 
dependent on a single industry or employer, and have been hit 
harder by the loss of manufacturing jobs, perhaps prompted by 
technical change or greater exposure to international trade. As 
well, some highly educated people and fast-growing high-
technology and medical-science firms seem to be attracted to 
larger cities because of the greater opportunities and 
amenities they provide. Although the Federal Reserve is not 
well positioned to target particular industries or regions, 
pursuing our dual mandate of maximum employment and price 
stability can help foster broad-based economic growth, thereby 
improving prospects in all areas.

Q.14. What is the cause of the increasing consolidation of the 
financial services sector? What are the downsides of this 
consolidation? What--if anything--should the Federal Reserve do 
about it?

A.14. The banking industry has been consolidating at a 
relatively steady pace for more than 30 years, resulting in a 
steady decline in the number of banks. The causes cited for 
this trend include changes in legislation that permitted 
interstate branching,
demographic shifts in population from rural to urban centers, 
and rapid improvements in technology that have made it possible 
for banks to serve a broader geographic range of customers. 
Bankers also have increasingly cited an increase in regulatory 
burden as contributing to the decline in the number of small 
banks.
    Research conducted over many years has concluded that 
community banks provide distinct advantages to their customers 
compared to larger banks. Because of their smaller size and 
less complex organizational structure, community banks are 
often able to respond with greater agility to lending requests 
than their large national competitors. In addition, community 
banks often have close ties to the communities they serve and 
detailed knowledge of their customers, which enables them to 
meet the needs of their local communities and small business 
and small farm customers in a more customized and flexible way 
than larger banks. Consequently, a decline in the number of 
community banks can adversely affect local and regional 
economic conditions.
    The Federal Reserve believes it is important to maintain a 
diversified and competitive banking industry that comprises 
banking organizations of many sizes and specializations, 
including a healthy community banking segment. To help support 
this diversity, the Federal Reserve has taken a number of steps 
in recent years to reduce regulatory burden on community banks. 
These have included reducing the time devoted to the 
examination of lower-risk activities at supervised community 
banks, tailoring regulatory expectations depending on the size 
and complexity of banks, and completing more examination work 
offsite to reduce the disruption to day-to-day business that 
can be caused by the examination process. The Federal Reserve 
has also worked with the other banking regulators to streamline 
regulatory reporting requirements for small banks, increase the 
dollar threshold for commercial real estate loans requiring 
appraisals, and simplify certain aspects of the regulatory 
capital rules that community banks have found problematic. We 
will continue to work to identify further opportunities to 
adjust regulatory requirements to ensure that unnecessary 
regulatory burden is minimized for these banks.

Q.15. I'd like to ask about the Federal Reserve's 
implementation of Section 165 of Dodd-Frank, which provides for 
enhanced prudential standards for banks with $50 billion in 
assets or higher. As you know, Congress is considering raising 
this threshold to $250 billion.

Q.15.a. Should a bank's asset size be dispositive in assessing 
a bank's risk profile for the purposes of imposing prudential 
regulations? For example, does a bank with less than $500 
billion
regional banks pose the same systemic risk and have the same 
complexity as large banks with around three times the asset 
size? According to Basel Systemic Risk Indicators from 2015, 
the systemic risk score of most banks with less than $500 
billion in assets is 4 times less than banks with more than 
$500 billion in assets.

Q.15.b. Are there costs to relying upon arbitrary asset 
thresholds to impose prudential regulations, instead of 
independently analyzing the risk profile of financial 
institutions?

Q.15.c. If Congress raised the Section 165 threshold to $250 
billion, should the Federal Reserve still tailor these 
prudential standards for banks above that threshold? If so, 
how?

A.15.a.-c. You ask whether the Federal Reserve would continue 
to tailor enhanced prudential standards if the Dodd-Frank Wall 
Street Reform and Consumer Protection Act section 165 threshold 
is raised to $250 billion by Congress. It is important to note 
that the Federal Reserve already tailors its regulation and 
supervision of firms above this threshold. For example, firms 
with more than $250 billion in total assets, that are not 
considered to be global systemically important banks, are not 
subject to risk-based capital surcharges, the enhanced 
supplementary leverage ratio, or total loss-absorbing capacity 
and long-term debt requirements to facilitate orderly 
resolution. I fully expect that we would continue to tailor the 
application of regulations for such firms if Congress were to 
raise the threshold.
    In all of our efforts, our goal is to establish a 
regulatory framework that helps ensure the resiliency of our 
financial system, the availability of credit, economic growth, 
and financial market efficiency. The Federal Reserve has been 
working for many years to make sure that our regulation and 
supervision is tailored to the size and risk posed by 
individual institutions. I believe that it is not only 
appropriate to recognize the different levels of risk and types 
of risk that different institutions in the system pose, but 
that it also makes for better and more efficient regulation. 
Efficient regulation allows the financial system to more 
efficiently support the real economy.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JEROME 
                           H. POWELL

Q.1. With rising levels of household debt, widening inequality, 
and the neutral interest rate at historically low levels, it's 
critical that the Federal Reserve have the ability to respond 
in the event of another economic decline.

Q.1.a. What signs do you see of inflation coming close to the 
Fed's 2 percent target, let alone exceeding it by dangerous 
amounts?

A.1.a. While inflation has generally fallen short of the 
Federal Open Market Committee's (FOMC) 2 percent objective over 
the past several years, that shortfall has for the most part 
been explicable by economic conditions, with good reason to 
view it as temporary. During the early years of the recovery 
from the Great Recession, inflation was held down by slack in 
resource utilization. Later, in 2015 and into 2016, inflation 
was held down by a sharp rise in the dollar, falling import 
prices, and falling energy prices. More recently, the softness 
in inflation seems to have been exaggerated by what look like 
one-off reductions in some categories of prices, including, for 
example, a large decline in quality-adjusted prices for 
wireless telephone services. These factors appear to be largely 
behind us.
    Given the ongoing strengthening in labor markets, and with 
measures of longer-term inflation expectations broadly stable, 
I expect inflation to move higher next year. Most of my 
colleagues on the FOMC agree with this assessment. In the 
September Summary of Economic Projections, the median forecast 
anticipated personal consumption expenditures (PCE) price 
inflation moving back to 2 percent by 2019. However, monetary 
policy will adjust in response to incoming news, and we will be 
closely monitoring inflation developments to see whether this 
outlook is validated by incoming data.

Q.1.b. What would be the cost to the economy of slightly 
overshooting inflation versus the cost to the economy of 
choking off growth if the Fed were to continue tightening 
without a clear indication that inflation is reaching or 
exceeding its target?

A.1.b. The FOMC has said that the 2 percent PCE inflation 
objective is symmetrical, in the sense that the Committee would 
be concerned about inflation running persistently above or 
below 2
percent. For a number of years after the end of the Global 
Financial Crisis, the economy was far from reaching either 2 
percent inflation or full employment, which called for 
accommodative monetary policy. With unemployment at 4.1 percent 
and some other indicators suggesting that we are near full 
employment, the Committee has been gradually returning monetary 
policy settings to more normal levels. Since monetary policy 
works with a lag, the Committee acts based on forecasts of the 
path of inflation and employment. As shown in the September 
2017 Summary of Economic Projections, most members of the 
Committee forecast that inflation will return to the 2 percent 
objective over the next 2 years. Although a temporary, slight 
overshooting of the inflation target might not be a serious 
problem, it would be possible for this process to run too far, 
and for the FOMC to get behind the curve in preventing a 
serious overheating of the economy. In particular, waiting too 
long to tighten monetary policy could require the FOMC to 
eventually raise interest rates rapidly, which could risk 
disrupting financial markets and pushing the economy into a 
recession. That is why we have been on a path of gradually 
adjusting the stance of policy to promote the longevity of the 
expansion. Of course, monetary policy is not on a preset 
course: We will continue to respond to incoming information 
about the tightness of the labor market and the pace of 
inflation, and will adjust our policy accordingly.

Q.2. Compensation practices at large financial firms prior to 
the crisis incentivized excessive risk-taking and created a 
business environment with no guard rails where banks played 
fast and loose with the savings and investments of hard-working 
families. Ultimately those same families paid the cost when the 
crisis hit and they lost their homes to foreclosure and saw 
their savings wiped away in the blink of an eye. In response, 
we passed a law requiring the financial regulators to prohibit 
payment practices that encourage inappropriate risk taking at 
the largest banks. In a January 2015 speech you gave at the 
Brookings Institution, you noted that the Federal Reserve Board 
strongly encouraged reforms to compensation practices at large 
banks and financial institutions--reforms which you said would 
be ``codified and strengthened'' by pending rulemakings.

Q.2.a. Understanding that it is a joint rulemaking requiring 
input from other agencies, will you commit to doing everything 
in your power to finalize the Section 956 incentive-based 
compensation rulemaking?

A.2.a. Incentive compensation is an important tool to attract 
qualified employees and executives to financial institutions. 
It also is important that compensation programs at banking 
firms provide incentives for employees to act in the long-term 
interest of the firm. The supervision of incentive compensation 
can play a role in helping safeguard financial institutions 
against practices that threaten safety and soundness or could 
lead to material financial loss. In particular, supervision can 
help address incentive compensation practices that encourage 
inappropriate risktaking at an institution, which may also have 
effects on other institutions or the broader economy.
    The Federal banking agencies, Federal Housing Finance 
Agency, the Securities and Exchange Commission, and National 
Credit Union Administration published a proposed incentive 
compensation rule in response to the requirements of section 
956 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) in June 2016. The agencies 
received over 150 comment letters on the proposal. If 
confirmed, I will support Vice Chairman Quarles' work with 
Federal Reserve staff and the other five Federal agencies to 
consider the comments received on the 2016 proposed rule. In 
addition, I support efforts to continue to evaluate incentive 
compensation practices at banking firms as a part of ongoing 
supervision.

Q.3. Governor Powell, expanding diversity at the Federal 
Reserve, at other financial regulatory agencies, and in the 
financial services industry is essential--the quest for 
diversity is an issue of fairness, opportunity, and it is a 
realization by all that our economic strength is tied to our 
inclusivity. I worked to include a provision in the Wall Street 
Reform Act to establish Offices of Minority and Women Inclusion 
at the Federal financial regulators, including at the Fed. Both 
in the financial industry and the Federal Government, I firmly 
believe institutions are stronger when they are built on a 
foundation of more diverse backgrounds and viewpoints. In order 
to be successful, diversity efforts absolutely require 
commitment and attention from top leadership, and full 
integration into human resources, contracting, and other 
relevant processes.
    How do you plan to enhance diversity and inclusion, and can 
I have your commitment to make it a priority to improve 
diversity both at the Fed and among regulated institutions?

A.3. Diversity is a critical aspect of all successful 
organizations, and I am committed to fostering diversity and 
inclusion throughout the Federal Reserve System. In my 
experience, we make better decisions when we have a wide range 
of backgrounds and voices around the table.
    The Federal Reserve recognizes the value of a diverse 
workforce at all levels of the organization. We are committed 
to achieving further progress, and to better understanding the 
challenges to improving and promoting diversity of ideas and 
backgrounds. This has been an ongoing objective, and, if 
confirmed, I assure you that diversity will remain a high 
priority objective for the Federal Reserve.
    As Administrative Governor and Chair of the Committee on 
Board Affairs, I have supported and encouraged the Federal 
Reserve Board's (Board) efforts to enhance diversity. In my 
role as Chair of the Board Committee on Federal Reserve Bank 
Affairs, I have worked with the Reserve Banks to promote 
diversity throughout the System. Recognizing the value of 
diversity at all levels of the System, including at the highest 
levels, I have worked closely with the Reserve Banks to assure 
that they have a diverse slate of qualified candidates for 
president searches. The Reserve Banks, working closely with the 
Board, have also been looking at ways to further develop a 
diverse pool of talent in a thoughtful, strategic fashion, 
readying them for leadership roles throughout the Federal 
Reserve System.
    To foster diversity more broadly, a long-term holistic plan 
is necessary with a focus on doing the utmost to recruit and 
bring people in and provide them paths for success. That means 
having an overall culture and organization that is focused on 
diversity and demonstrates its ongoing commitment at all 
levels, starting at the top. For example, we have an internal 
work stream at the Board to coordinate economic inclusion and 
diversity efforts that is comprised of the Office of Minority 
and Women Inclusion Director, Division Directors, senior staff 
and Board Members. It focuses on initiatives not just at the 
Board but also more broadly throughout the System. I am part of 
this team, as are other Board members, and we meet regularly to 
discuss initiatives and progress.
    As you know, section 342 of the Dodd-Frank Act charged the 
Board with developing standards for equal employment 
opportunity and the racial, ethnic, and gender diversity in our 
workforce and senior management, as well as for increased 
participation of minority-owned and women-owned businesses in 
programs and contracts. With regard to contracting, the Federal 
Reserve has utilized national and local organizations 
advocating for minority companies as a method to connect 
directly with qualified companies and we participate in 
numerous outreach events that provide a platform for Federal 
Reserve staff to discuss the procurement process with potential 
vendors while also providing information on future procurement 
opportunities.
    I believe it is important to continue to build on these 
efforts. Continued collaboration with advocacy groups will help 
the Federal Reserve better understand the challenges minority 
businesses face as well as help the firms better navigate the 
Federal Reserve's acquisition process.
    The Federal Reserve also was required to develop standards 
for assessing the diversity policies and practices of the 
entities we regulate. The standards provide a framework for 
regulated institutions to assess and establish or strengthen 
their diversity policies and practices, and are intended to 
promote transparency and awareness of diversity policies and 
practices within the institutions. The Federal Reserve has 
encouraged and continues to strongly encourage the institutions 
we regulate to provide their policies, practices, and self-
assessment information and to maximize transparency, to 
disclose on their websites their diversity policies and 
practices, and to share information related to their self-
assessments.

Q.4. As you may know, the National Oceanic and Atmospheric
Administration's National Centers for Environmental Information 
tracks U.S. weather and climate events that have significant
economic impacts, specifically those disasters or events where 
the overall damage costs reach or exceed $1 billion dollars. 
From 1980-2016, the annual average number of billion-dollar 
plus events was 5.5, but for the most recent 5 years (2012-
2016), the annual average nearly doubled to 10.6 events 
exceeding $1 billion in damages, including Superstorm Sandy 
which caused $65 billion in damages. In 2017, we've already 
seen 15 weather and climate events exceeding $1 billion. 
Obviously, local economies impacted by these storms see both 
short- and longer-term impacts including destruction of 
capital, labor market shifts, and reconstruction efforts. As we 
see the number of these storms increase I think it is critical 
that we understand the economic impacts and potential risks.

Q.4.a. In your view, does the increasing frequency of 
economically significant natural disasters and climate-related 
events pose a potential risk to the long-term economic outlook 
and to the Nation's financial stability?

Q.4.b. Do you believe that it is in the economic interest of 
the United States to take steps to mitigate the worst impacts 
of climate change?

A.4.a.-b. The potential implication of climate change for the 
U.S. economy is an important issue that warrants further study. 
However, this issue is well outside of the remit of the Federal 
Reserve System, and I will leave it to others to decide how 
best to address that issue. That said, the implications of 
climate change and its effects on the economy are likely to be 
more relevant for various
aspects of fiscal policy and the longer-run growth trend of the 
economy than they are for the short-term evolution of the 
business cycle.

Q.5. In January, the Minneapolis Federal Reserve published a 
report estimating that if the Federal Open Market Committee had 
been required to follow the Taylor Rule for the last 5 years, 
2.5 million more Americans would be out of work today.
    Do you accept the analysis that suggests strictly following 
the Taylor Rule would undermine the Federal Reserve's ability 
to achieve its full employment mandate?

A.5. John Taylor's well-known 1993 rule, and the many variants 
on that rule sparked by his research, represent an important 
contribution to the vast literature concerning the conduct of 
monetary policy. That said, the 1993 rule called for raising 
the Federal funds rate above its effective lower bound in 
2012--a year when the unemployment rate averaged more than 8 
percent. The rule calls for a funds rate about 100 basis points 
higher than today's rate. A range of models of the economy 
suggest that these significantly higher rates would have led to 
slower progress in reducing unemployment.

Q.6. In a recent speech, FDIC Chair Gruenberg said that 
improved cushions of capital and liquidity at large U.S. 
banking organizations are not a source of competitive weakness 
relative to banks in other jurisdictions, rather they are a 
competitive strength.

A.6. Do you agree with the view that because of post-crisis 
capital, stress testing, liquidity, and resolvability reforms, 
our financial
institutions are better positioned to play a stabilizing role 
in the next downturn rather than contributing to deeper 
economic contraction?
    Our financial system is stronger and more resilient than it 
was a decade ago, in large part as a result of stronger levels 
of high quality capital and liquidity in the system. Stronger 
risk-based capital and liquidity regulations, together with our 
stress testing program, help ensure that large U.S. banks are 
better positioned to continue lending through periods of 
economic stress and market turbulence.
    Although U.S. banks are subject to high regulatory capital 
and liquidity standards, U.S. banks have been successful 
competitors in the global financial markets in recent years. 
Internationally active U.S. banks are meaningfully more 
profitable than their largest foreign bank peers and have much 
higher price-to-book ratios and returns on equity. U.S. banking 
organizations have also been able to expand lending while 
maintaining high capital and liquidity buffers required by the 
Federal Reserve.
    U.S. banking organizations have also taken important steps 
in recent years to improve their resolvability, including 
meaningful adjustments to their structure, operations and 
internal allocation of loss absorbing capacity and liquidity 
resources. These changes help reduce the potential impact of a 
large banking organization's failure on U.S. financial 
stability.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR WARNER FROM JEROME H. 
                             POWELL

Q.1. Growth in productivity is the ultimate driver of a higher 
standard of living for Americans. There has been considerable 
discussion in recent years about why productivity rates have 
been below historical trend levels. Some believe that we are 
not accurately measuring productivity, and that productivity is 
actually growing more than the rates we've seen over the last 
decade would suggest. Others believe that productivity has been 
weak because of a lack of business investment. We've seen an 
uptick in business investment recently, which is promising.

Q.1.a. Are we accurately measuring productivity?

A.1.a. Productivity is notoriously difficult to measure. 
However, it has always been so, and research has not uncovered 
evidence that would support dismissing the substantial 
productivity slowdown as merely an artifact of mismeasurement. 
There have been astounding innovations in many fields in recent 
years, from energy to medicine, often underpinned by ongoing 
advances in information
technology. These emerging technologies do augur well for 
productivity growth going forward. But as has happened in the 
past, such productivity gains may appear only slowly--perhaps 
over a very long timeframe--as new firms emerge to exploit new 
technologies and as incumbent firms invest in new vintages of 
capital and restructure their businesses.

Q.1.b. Do you think that businesses until recently had little 
incentive to invest because of loose labor markets? In other 
words, because wage inflation has been weak, have businesses 
been able to increase output by bringing more workers into the 
workforce and not by increasing capital investment? Do you 
believe this trend has been shifting recently as the labor 
market tightens, attributing for the uptick in investment?

A.1.b. When businesses are making decisions about hiring new 
workers or purchasing new capital equipment, the relative cost 
of those two factors is an important consideration. However, 
even with the sluggish pace of wage gains in recent years, the 
ratio of wages to the marginal cost of investing in new capital 
has continued to rise at a fairly steady pace since the 
recession. In other words, firms continue to face incentives to 
substitute capital investment for hiring where they can. The 
pace of investment can vary considerably from quarter to 
quarter and even from year to year. One factor that probably 
has contributed to the relatively sluggish growth of investment 
during the current economic expansion is the slowdown in the 
growth of the labor force, which itself has importantly been 
driven by the aging of the population.

Q.1.c. Projections show that U.S. Government debt will continue 
to rise significantly over the coming years, even assuming a 
current policy baseline. Are you concerned that the resulting 
rise in Government borrowing rates will crowd out private 
investment?

A.1.c. A large and growing Federal Government debt, relative to 
the size of the economy, over the coming decades would have 
negative effects on the economy. In particular, a rising 
Federal debt burden would reduce national saving and put upward 
pressure on longer-term interest rates. Those effects would 
restrain private investment, which, in turn, would tend to 
reduce productivity and overall economic growth.

Q.1.d. Would incentives for companies to invest in improving 
their human capital, much like we incentivize businesses to 
improve their physical capital, could help encourage 
productivity gains?

A.1.d. As is the case for physical capital, improvements in the 
quality of the workforce tend to increase productivity. Thus, 
incentives for businesses to invest in the quality of their 
workforces would encourage productivity gains. Of course, it 
would be important for the Congress to weigh the costs and 
benefits of policy steps in this direction.

Q.1.e. Does pressure on companies to meet short-term financial 
targets detracts from their ability to implement a long-term 
vision that may result in innovations that increase 
productivity?

A.1.e. Although the question of whether American business is 
overly focused on short-term financial targets has been a focus 
of concern for a very long time, the question still hasn't been 
clearly
settled. One reason for this is that different measures give 
different answers. For instance, the share of capital spending 
in GDP is currently well below the level reached at similar 
points in the previous two business cycles. However, the share 
of R&D spending, perhaps a better measure of firms' willingness 
to focus on the future, is at an all-time high. Some research 
indicates that executives do feel pressure to meet key short-
term metrics, such as earnings per share. On the other hand, 
shareholders play an important role in providing the market 
discipline that is necessary in a capitalist economy. Overall, 
the economics literature doesn't provide a clear answer, but 
given the importance of capital investment and good corporate 
stewardship to productivity, the recent wave of new research on 
this topic is a welcome development.

Q.2. In Chair Yellen's testimony before the Banking Committee, 
she said that the ``neutral rate'' is low by historical 
standards, but that it should rise slowly over the next several 
years.
    What is behind the current lower neutral Federal funds rate 
target, and do you think these forces will abate, and if so, 
why?

A.2. It's important to be humble and admit that our 
understanding of the factors determining the neutral Federal 
funds rate is limited. There are a few factors that we can 
point to. One is the aging of the population, which increases 
the supply of savings and reduces the demand for investment 
because the labor force is growing more slowly. This factor 
will almost certainly be with us for many years to come. 
Another is the slow pace of productivity growth in the 
aftermath of the recent recession. I am hopeful that in coming 
years we will see a pickup in the pace of productivity growth 
to historically more normal levels, but we need to watch the 
incoming data. Another factor that restrained the neutral rate 
for several years was weak economic performance in many foreign 
economies. This factor seems to be lifting, with solid 
synchronized growth across the major economies.

Q.3. The FOMC has begun to normalize the Fed balance sheet. At 
the same time, the European Central Bank has signaled that its 
support of the European government bond market will decrease, 
and the Bank of Japan has also indicated it may begin to slow 
its asset purchases. And U.S. Government deficit projections 
increase significantly over the coming years.

Q.3.a. Will the resulting material drop in Fed demand for 
longer-dated Treasuries and agency debt, when combined with the 
increased U.S. Government debt supply, significantly push up 
U.S. bond rates?

A.3.a. All else equal, reductions in demand for longer-term 
securities from major central banks and the potential for 
increases in debt supply stemming from wider fiscal deficits 
would be expected to put some upward pressure on longer-term 
yields. For example, some studies have suggested that the 
Federal Reserve's asset purchases may be depressing longer-term 
Treasury yields now by something on the order of 1 percentage 
point. This effect would be expected to gradually fade over 
time as the Federal Reserve normalizes the size of its balance 
sheet. Of course, longer-term yields may be affected by many 
other factors including the evolution of the outlook for 
economic activity and inflation, perceptions of
economic and financial risks, and longer-term forces such as 
aging populations and slowing productivity growth. On balance, 
most forecasts have longer-term Treasury yields rising 
gradually over time but to a long-run level that is fairly low 
by historical standards. For example, in the economic 
projections prepared by the Congressional Budget Office earlier 
this year, the 10-year Treasury yield was projected to rise 
gradually over time to a long-run level of about 3 \3/4\ 
percent.

Q.3.b. Have you been able to quantify how much you think long-
end U.S. rates could move up as a result of these U.S. and 
global forces?

A.3.b. As noted above, the normalization of the stance of 
monetary policy and the size of the Federal Reserve's balance 
sheet would be expected to put some upward pressure on the 
level of long-term interest rates over time. Many other factors 
could affect longer-term yields as well. Most economic 
forecasts have longer-term Treasury yields rising gradually 
over time but to a long-run level that is relatively low by 
historical standards. For example, in the economic projections 
prepared by the Congressional Budget Office earlier this year, 
the 10-year Treasury yield was projected to rise gradually over 
time to a long-run level of about 3 \3/4\ percent.

Q.3.c. As a result, do you think there could be a significant 
negative effect on U.S. mortgage rates and the housing recovery 
at a time when the housing sector still has room to grow 
compared to historic norms?

A.3.c. Mortgage rates are still low in historical terms, and 
are likely to remain low for some time, which will provide 
support for the housing market. In addition, higher household 
formation is creating a need for more housing than we are 
currently building, whether for rental or for ownership by 
occupants, and with job creation continuing at a solid pace, 
conditions are favorable for some further recovery in this 
sector.

Q.4. Dodd-Frank Act supervisory stress testing is a forward-
looking quantitative evaluation of the impact of stressful 
economic and financial market conditions on BHCs' capital. 
Under current law, banks with over $50 billion are subject to 
enhanced prudential standards.
    Do you view stress tests as an essential part of the 
enhanced prudential standards?

A.4. Yes, stress tests are one of the core post-crisis 
regulatory reforms. They allow us to assess whether firms hold 
enough capital to withstand a severe stress while still being 
able to function and support lending to households and 
businesses. Unlike traditional capital requirements, stress 
tests provide a forward-looking assessment of losses banks may 
incur under adverse economic scenarios. In doing so, the stress 
tests help determine firms' capital needs when they will be 
needed most--in a serious economic downturn.
    To maintain the efficacy of our stress testing regime, we 
have made regular improvements to them in response to feedback 
from banks and the public. These improvements--which have 
included tailoring our stress testing regime to be less 
burdensome for smaller institutions and most stringent for the 
largest, most systemically important firms--have helped our 
regulatory and supervisory program for the largest firms remain 
relevant and effective. Our guiding principle in modifying our 
stress testing regime is that any changes should enhance the 
resilience of the most systemically important U.S. firms in the 
most efficient and effective manner possible. We will continue 
to consider whether additional tailoring of our stress testing 
regime is merited in order to achieve that objective.

Q.5. On October 21, 2016--over 1 year ago--the Federal Reserve 
Board announced plans to enter negotiations with FINRA to 
potentially act as the collection agent of U.S. Treasury 
securities secondary market transactions data for trades done 
by banks. You stated at the time that, ``(t)he collection of 
data would allow the U.S. official sector a more complete view 
of Treasury securities trading in the secondary market.''
    When will the Fed come out with a proposed rule to collect 
data on bank transactions in Treasuries?

A.5. The collection of data on secondary market transactions in 
Treasury securities was a major recommendation of the 
Interagency Working Group's Joint Staff Report on the market 
events of October 15, 2014, and is a key policy goal. The 
Financial Institution Regulatory Authority's (FINRA) collection 
of data from broker-dealer reporting of Treasury secondary 
market transactions on its Trade Reporting and Compliance 
Engine (TRACE), begun in July, is already providing valuable 
insights into the market, although the data collection is still 
in an early phase. As shown by the events of October 14, 2014, 
the overall objective of collecting Treasury market 
transactions data on a regular basis is a sound one; until 
recently, U.S. authorities have had far more information on 
equities and corporate bond trading than we do on trading in 
Government bonds.
    While depository institution trading activity currently 
appears to be a small proportion of overall activity in this 
market, collecting this information from depository 
institutions would allow a more complete analysis of the 
Treasury trading data and could help identify and address 
potential anomalies in the secondary market for Treasury 
securities. Allowing depository institutions to report through 
the FINRA TRACE system will save significant costs and 
resources. In addition, to properly monitor markets, the data 
collected under the Federal Reserve Board's (Board) authority 
would need to be combined with the broker-dealer data to be 
collected by FINRA, so direct reporting by the banks to FINRA 
seems to be the most efficient method.
    Accordingly, over the past year, Federal Reserve Board 
staff have entered in negotiations with FINRA to act as the 
Board's collection agent for depository institution 
transactions data in secondary market transactions in Treasury 
securities. Under such an agreement, the collection of 
depository institution data by FINRA on the Board's behalf 
would mirror FINRA's data collection from broker-dealers to the 
closest extent possible. Certain details of a potential 
agreement are still being worked out, including issues such as 
information technology security, cost, access to the data, and 
agency confidentiality and use. Once the feasibility of a FINRA 
collection on behalf of the Board has been conclusively 
established, the Board would plan to request comment on a 
requirement for the reporting by banks. Among the issues that 
the Board would seek comment on is the specification of cutoff 
rules for a reporting requirement in order to avoid placing a 
burden on smaller banks that are unlikely to have significant 
transactions in this market. The Board is hopeful that 
negotiations with FINRA can be concluded soon and that a 
request for comment can be published in the near future.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR WARREN FROM JEROME H. 
                             POWELL

Q.1. In June of this year, The Treasury Department released a 
report entitled ``A Financial System that Creates Economic 
Opportunities: Banks and Credit Unions.''\1\ The report 
contained dozens of recommendations for rolling back financial 
regulations. These recommendations closely resembled the wish 
lists created by big bank lobbying groups.\2\ The attached 
summary lists all of the recommendations that fall into the 
Federal Reserve's jurisdiction.
---------------------------------------------------------------------------
    \1\ https://www.treasury.gov/press-center/press-releases/Documents/
A%20Financial%20
System.pdf.
    \2\ http://ourfinancialsecurity.org/wp-content/uploads/2017/06/The-
Trump-Treasury-And-The-Big-Bank-Agenda.pdf.
---------------------------------------------------------------------------
    For each listed recommendation in the Fed's jurisdiction, 
please state briefly whether you agree or disagree with the 
recommendation, and explain why.

A.1. We must not forget the severity of the financial crisis 
and its material adverse impact on families, businesses, and 
the broader economy. The core reform--capital, liquidity, 
stress testing, and resolvability--put in place since the 
crisis are necessary if we are to have a more resilient 
financial system. But, at the same time, we are looking at ways 
to better tailor some of the new financial regulations to 
achieve similar levels of systemic resilience with greater 
efficiency.
    It is seldom true that complex systems are constructed 
perfectly on the first try. For example, there are areas where 
it might be appropriate to make adjustments to more narrowly 
focus financial stability reforms on larger, more systemically 
important banking firms.
    The Federal Reserve Board (Board) has not taken a position 
on many of the recommendations in the report. There are a 
number of recommendations in the report that I would support 
and that, in fact, the Board had already begun to implement 
before the report was published. For example, I believe that we 
should continue to further tailor statutory and regulatory 
requirements based on the risks presented by firms. I also 
believe that we should continue to streamline regulation of 
community banks, including simplifying capital requirements.
    However, I also believe that we must maintain strong 
capital and liquidity requirements for large, complex financial 
institutions. Having strong capital and liquidity requirements 
for the global systemically important banks that constrains 
their leverage and risk-taking, for example is an intended 
consequence of the post-crisis reforms and should be 
maintained. Any changes to the regulatory
regime for these firms should be narrowly targeted at specific 
aspects of regulations that are having an unintended effect.
    In all our efforts, the Federal Reserve's goal is to 
establish a regulatory framework that helps ensure the 
resiliency of our financial system, the availability of credit, 
economic growth, and financial market efficiency. As we 
consider the recommendations in the Treasury report, that is 
the lens through which the Board would view any future 
regulatory changes. If I were to be confirmed, I would look 
forward to continuing to work with our fellow regulatory 
agencies and with Congress to achieve these important goals.

Q.2. In 2013, then-Fed Chairman Bernanke reportedly responded 
to concerns expressed by you and two other Governors that it 
was time to slow the Fed's rate of asset purchases.\3\ Chair 
Bernanke wanted to continue asset purchases at their elevated 
level because of the continued fiscal austerity and gridlock 
being imposed by Congress at the time, but in order to achieve 
unanimity on the Board of Governors, he announced intentions to 
slow asset purchases. It has been speculated that this 
announcement caused the so-called ``taper tantrum'' in which 
investors suddenly withdrew their money from the bond market.
---------------------------------------------------------------------------
    \3\ https://sites.google.com/site/kocherlakota009/home/policy/
thoughts-on-policy/2-6-16.

---------------------------------------------------------------------------
Q.2.a. Can you explain your role in the taper tantrum?

A.2.a. A novel feature of the asset purchase program started in 
late 2012 was its open-ended nature. We said at the time that 
we would continue this program until we saw a substantial 
improvement in the outlook for the labor market. I supported 
this open-ended approach, but was concerned that we needed to 
have a plan for exiting the program even if such an improvement 
did not occur because our asset purchases were found to be 
ineffective. As reflected in the meeting minutes, the Federal 
Open Market Committee (FOMC) discussed the efficacy of our 
asset purchases in depth during that period. By the spring of 
2013, we began to see signs that the outlook for the labor 
market was improving, as we had hoped. The taper tantrum had, 
in my view, less to do with changes in market expectations for 
our asset purchases as it had with changes in expectations for 
the path of the Federal funds rate. The rise in yields of 
around 100 basis points was too large to have been plausibly 
explained by balance sheet effects alone and is more consistent 
with the perception that our policy stance had become less 
accommodative. These changes were not intended by Chairman 
Bernanke's communications. Subsequent FOMC communications were 
successful in clarifying that the prospective reduction in the 
pace of our asset purchases did not imply a change to our 
intentions for the path of the Federal funds rate.

Q.2.b. Did you think the economic recovery was sufficient at 
that time to reduce the Fed's support for the economy?

A.2.b. The tapering of our asset purchases began only in 
December 2013. At that time I thought it was appropriate to 
reduce the pace at which the FOMC was adding accommodation. It 
is important to note that tapering did not imply tightening 
monetary policy, as Chairman Bernanke emphasized throughout the 
summer and fall of 2013. To use a car analogy, tapering did not 
mean tapping the brakes, but merely easing off a little bit of 
the accelerator. The challenge during the taper tantrum episode 
was that our intention to slow the pace of asset purchases 
later in 2013 was initially misunderstood as an intention to 
raise interest rates sooner. Subsequent communications were 
successful at aligning the public's expectations for the 
Federal funds rate better with the FOMC's intentions.

Q.2.c. What communication practices from the Fed might prevent 
incidents like the taper tantrum from occurring again?

A.2.c. Communicating about the course of monetary policy when 
operating with multiple tools is inherently challenging. The 
communications earlier this year in the run-up to our 
announcement of our plan to reduce the size of our balance 
sheet illustrate some lessons learned from the taper tantrum 
episode. In particular, the FOMC informed the public through 
the minutes of its meetings well before any decisions were 
made. Moreover, in the addendum to our Normalization Principles 
and Plans that the FOMC issued in June, we emphasized that, in 
current circumstances, the Federal funds rate would be the 
primary means for adjusting the stance of monetary policy. This 
statement was intended to clarify that our actions regarding 
the balance sheet at this time should not be interpreted as a 
decision to alter the stance of monetary policy. The very muted 
financial market response to our announcements and actions 
suggests that the public understood our intentions.

Q.3. At your confirmation hearing, you stated that you believed 
that there no U.S. banks that were too big to fail. When Lehman 
Brothers failed in 2008, sparking the financial crisis, it had 
$639 billion in assets. As of now, JPMorgan Chase has roughly 
four times that amount of assets.
    Do you honestly believe that if JPMorgan Chase failed 
tomorrow, taxpayers would not need to bail the bank out to stop 
another financial crisis?

A.3. It may be useful to clarify what it means to ask whether 
any firm remains ``too-big-to-fail.'' By my answer, I intended 
to convey my view that we have made enough progress that the 
failure of one of our most systemically important financial 
institutions, while undoubtedly posing a severe shock to the 
economy, could more likely than not be resolved without 
critically undermining the financial stability of the United 
States. As I also said, we expect our most systemically 
important firms to continue to make steady progress toward 
assuring the achievement of that goal. Finally, I would add 
that higher levels of capital and liquidity and stress testing 
substantially reduce the likelihood that one of our most 
systemically important financial institutions would fail. 
During the financial crisis, large financial institutions were 
unprepared to be resolved. As demonstrated by Lehman Brothers, 
firms had not been required, nor seen the need, to take 
specific actions to prepare themselves for resolution. This 
lack of preparedness contributed to the disruption that the 
failure of Lehman ultimately generated.
    Since the financial crisis, the statutory framework 
established by Congress and the efforts of the U.S. regulators 
have made the largest banking firms more resilient and have 
significantly improved their resolvability. In particular, for 
the largest, most systemically important firms, we have 
increased the quantity and quality of capital that they 
maintain, have established capital surcharges that are scaled 
to each firm's systemic footprint, and have required them to 
issue long-term debt that can be converted to equity as part of 
a resolution.
    Through Title I of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Congress established a process for the 
Federal Reserve and the Federal Deposit Insurance Corporation 
to identify resolution weaknesses at firms, to provide clarity 
about what actions need to be taken, and to follow through on 
penalties should weaknesses remain. This process is designed to 
foster resolution planning and enables the agencies to assess 
whether a firm could be resolved under bankruptcy without 
severe adverse consequences for the financial system or the 
U.S. economy.
    Specifically, the resolution planning process requires 
firms to demonstrate that they have adequately assessed the 
challenges that their structure and business activities pose to 
resolution and that they have taken action to address those 
issues. They must also confront the resolution consequences of 
their day-to-day management decisions on a continual basis, 
particularly those related to structure, business activities, 
capital and liquidity allocation, and governance.
    For all these reasons, the financial system today is 
substantially more able to absorb the shocks that would result 
from the material financial distress of failure of a large, 
complex financial firm.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR PERDUE FROM JEROME H. 
                             POWELL

Q.1. As you know, Federal law allows for banking regulators to 
impose temporary consent orders on financial institutions to 
address deficiencies at these organizations. I understand that 
there are several inter-agency consent orders in place for 
companies that,
despite having met the obligations of their consent orders for 
some time, have not had the consent orders lifted due to 
inaction on the part of the Federal Reserve Board. As the 
Treasury Department's June Report (A Financial System That 
Creates Economic Opportunities: Banks and Credit Unions) 
outlined, the regulatory agencies need to improve this. 
Specifically, the reports states ``A greater degree of inter-
agency cooperation and coordination pertaining to regulatory 
actions and consent orders should be encouraged, in order to 
improve the transparency and timely resolution of such 
actions.'' This is an achievable task and should be adopted 
swiftly, particularly as it pertains to the remaining inter-
agency consent orders that appear to be unnecessarily left in 
place.
    Could you please provide me with an update on existing 
consent order statuses and what the Federal Reserve is doing to 
give these the appropriate level of attention so companies can 
avoid being left in limbo for an indeterminate timeframe?

A.1. In some limited cases the Federal Reserve Board (Board)
enters into formal enforcement actions against regulated 
institutions where other banking regulators are parties to the 
same action. In these cases, we coordinate closely with the 
other regulators that are parties to the action. In deciding 
whether any enforcement action should be terminated, the 
Board's consistent practice is to require that the institution 
subject to the action show that all corrective measures 
required by the action have been properly implemented, and 
these corrections have been sustained for an appropriate period 
and are expected to be sustainable in the future. The Board is 
committed to lifting enforcement actions on a timely basis when 
these conditions are met, and Board staff is reviewing our 
policies and practices in this area and assessing ways to 
increase interagency coordination for actions shared by 
multiple banking regulators.

Q.2. Governor Powell, the global financial crisis of 2007-2012 
created the term SIFI systematically important financial 
institution. Globally, the Basel Committee created a 
methodology to identify Globally Systemically Important Banks 
(G-SIB). Beyond the G-SIBs, Dodd-Frank gave the Federal Reserve 
the power to impose enhanced supervision on bank holding 
companies over $50 billion. Meanwhile in Europe, the European 
Banking Authority uses an activity based test to identify their 
Other Systemically Important Institutions (O-SIIs).
    Is the size of a financial institution a sufficient 
assessment of its risk to the financial system or is there 
merit in the European model (O-SII) that takes into account a 
more comprehensive list of factors including size, 
substitutability, complexity, interconnectedness, and global 
cross-jurisdictional activity?

A.2. The Federal Reserve has been working for many years to 
make sure that our regulation and supervision is tailored to 
the size, risk profile, and systemic footprint of individual 
institutions. I believe that it is not only appropriate to 
recognize the different levels of risk and types of risk that 
different institutions in the system pose, but that it also 
makes for better and more efficient regulation. Efficient 
regulation allows the financial system to more efficiently 
support the real economy.
    While the Board currently has some authority to tailor the 
enhanced prudential standards included in section 165 of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act), the Board generally cannot eliminate the 
application of these standards to covered firms. In particular, 
Congress required that certain enhanced prudential standards 
must apply to firms with $10 billion or more in total assets, 
with other standards beginning to apply at $50 billion in total 
assets.
    I am aware that Congress is currently considering whether 
and how to raise existing statutory thresholds in the Dodd-
Frank Act, and I have expressed support for increasing these 
thresholds. I also understand that Congress is considering an 
alternative to simply raising the thresholds that would entail 
the use of a more complex, multi-factor approach to decide 
which firms are subject to enhanced prudential standards. As I 
have indicated previously, I am comfortable with both of these 
approaches for further tailoring of section 165 of the Dodd-
Frank Act. More specifically, I think that an increase in the 
Dodd-Frank Act statutory thresholds, combined with authority to 
apply enhanced prudential standards below the new threshold, 
along the lines provided for in the bill under
consideration by the Senate Committee on Banking, Housing, and 
Urban Affairs, would help produce a supervisory and regulatory 
framework that is better tailored to the size, systemic 
footprint, and risk profile of banking firms. If I were to be 
confirmed, I would stand ready to continue working with Members 
on this issue.

Q.3. Governor Powell, we've had 3 rate hikes in the past year 
yet we haven't seen an exact replication on yield rates. In 
fact, as seen below, the rates on U.S. notes and bonds (2-10 
years and 30 years) have not moved at all or seen a dip.



Q.3.a. Do you believe this is a reflection of general global 
instability and the growth of risk within the pricing of bonds?

A.3.a. The yields on Treasury securities with maturities out to 
2 years have responded to the policy firming of the Federal 
Reserve over the past year largely as one would expect. For 
example, 1- and 2-year Treasury yields have moved up about 75 
basis points and 60 basis points, respectively, since the end 
of last year. Longer term Treasury yields have not increased by 
as much as one might expect based on historical relationships. 
For example, 10- and 30-year yields have declined by about 10 
and 30 basis points, respectively, since the end of last year. 
Market participants have pointed to a number of factors as 
contributing to the decline in longer-term Treasury yields over 
the last year including some scaling back in the expectations 
for fiscal stimulus, reduced concerns that inflation could move 
sharply higher, an increase in demand for longer-term assets by 
institutional investors, and asset purchase programs by central 
banks. Longer-term yields in many advanced countries have edged 
lower over the last year, suggesting that global forces may be 
contributing to the low level of long-term yields.

Q.3.b. Do you believe this is a temporary situation or a new 
global norm?

A.3.b. The level of longer-term interest rates around the world 
can be expected to rise gradually over time as the global 
economy recovers further and central banks normalize the stance 
of monetary policy. However, many analysts have suggested that 
the so-called ``equilibrium'' level of interest rates may be 
lower now than in the past. Indeed, the median long-run level 
of the Federal funds rate in projections prepared by Federal 
Open Market Committee participants in September stood at 2.8 
percent--almost a percentage point lower than comparable 
projections prepared 2 years ago. Analysts have pointed to a 
number of factors that could be contributing to a lower 
equilibrium level of interest rates including aging populations 
and slower productivity growth in many advanced economies, 
changes in regulation, and increased caution on the part of 
businesses in their investment spending.

Q.4. Governor Powell, as a continuation of our conversation on 
bitcoin during the hearing.

Q.4.a. Do you have concerns that bitcoin is a significant asset 
bubble and if asset prices were to correct, would this create a 
regional, super-regional, or national economic crisis?

Q.4.b. What would the contagion effect be?

Q.4.c. Are there any weaknesses in our global financial 
structure that would be susceptible to operation risks?



A.4.a.-c. The use of digital currencies has expanded. But from 
the standpoint of analysis, the ``currency'' or asset at the 
center of some of these systems is not backed by other secure 
assets, has no intrinsic value, is not the liability of a 
regulated banking institution, and in leading cases, is not the 
liability of any institution at all.
    Asset prices can be volatile, and it is quite difficult to 
make reliable assessments about the right level for any given 
asset class. The problem is even more difficult with digital 
currencies, because they are so new and there are so many 
questions about the factors that drive their value and their 
status as a new asset class. As a result, it is difficult to 
say whether there is currently an asset bubble in the price of 
bitcoin. However, the price of bitcoin has been quite volatile 
throughout its existence, and recently bitcoin has experienced 
losses of more than 20 percent of its value in just a few 
hours. Those experiences give us some confidence that even if 
there were a more significant correction in the price of 
bitcoin in the near term, there would be limited spillover to 
regional, super-regional, or nation economies. Recent 
experience also suggests that contagion has been limited to 
prices of other digital currencies.
    While these digital currencies may not pose major concerns 
at their current levels of use, more serious financial 
stability issues may result if they achieve wide-scale usage. 
Risk management can act as a mitigant, but if the central asset 
in a payment system cannot be predictably redeemed for the U.S. 
dollar at a stable exchange rate in times of adversity, the 
resulting price risk and potential liquidity and credit risk 
pose a large challenge for the system. A related issue is 
operational risk, if there are large surges in the number of 
transactions as holders of an asset try to settle purchases and 
sales of transactions in a concentrated window of time.
    During times of crisis, the demand for liquidity can 
increase significantly, including the demand for the central 
asset used in settling payments. Even private-sector banks and 
certainly nonbanks can have a hard time meeting large-scale 
demands for extra liquidity at the very time when their balance 
sheets may be in question. Moreover, this inability to meet the 
demand for extra liquidity can have spillover effects to other 
areas of the financial system.
    Nonetheless, at this time, I do not see bitcoin as having 
sufficient scale in volume or value to make the overall global 
financial structure susceptible to operational or other 
disruptions.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR HEITKAMP FROM JEROME 
                           H. POWELL

Q.1. Before I dive into some of my larger economic policy 
questions, I do want to get you on the record regarding the 
bipartisan regulatory reform proposal which my colleagues and I 
introduced last week.

Q.1.a. A simple yes or no will do: Would anything in this bill 
hamper the Fed's ability to adequately monitor and regulate 
systemic risk of financial institutions?

Q.1.b. Would anything in this bill increase the risk to the 
safety and soundness of the U.S. financial system?

A.1.a.-b. I am still familiarizing myself with the bill, and I 
understand that it is scheduled to be marked up this week and 
is still subject to change. Based on my review thus far, I 
believe that the bill preserves the Federal Reserve's ability 
to adequately monitor and regulate systemic risk of financial 
institutions as well as our ability to regulate firms for 
safety and soundness objectives. I certainly share the goal of 
tailoring regulation and supervision according to the size, 
complexity, and risk to the financial system posed by banks. An 
increase in the Dodd-Frank Wall Street Reform and Consumer 
Protection Act statutory thresholds combined with provisions 
that allow the Federal Reserve to apply enhanced prudential 
standards to firms below the new threshold, along the lines 
provided for in the bill under consideration, would help 
produce a supervisory and regulatory framework that is better 
tailored to the size, systemic footprint, and risk profile of 
banking firms.

Q.2. One of the things that I think is critical for the Fed 
Chair to engage on is how policy choices will impact the larger 
economic picture. And one of the biggest policy choices 
confronting us today is what to do about trade. The answer to 
how we handle our trade relationships will have a huge impact 
on our economy and specifically will greatly impact North 
Dakota's economy, which is driven by commodity exports.
    The Fed historically has been willing to engage on large 
macroeconomic policy issues such as trade. For example, in 
2007, then Fed Chair Bernanke gave a speech entitled: 
``Embracing the Challenge of Free Trade: Competing and 
Prospering in a Global Economy.''

Q.2.a. Do you agree with then former Fed Chair Bernanke's 
statement that ``restricting trade by imposing tariffs, quotas, 
or other barriers is exactly the wrong thing to do''?

A.2.a. The Federal Reserve is entrusted to achieve its 
congressionally mandated objectives of price stability and 
maximum sustainable employment. Matters of trade policy are the 
responsibility of the Congress and the Administration.
    In general, trade and access to global markets provide many 
benefits for businesses and firms, including larger and deeper 
markets for their products and a wider selection of inputs for 
production. Consumers also benefit in terms of greater variety 
of goods and more competitive prices. Because of these and 
other benefits, more open and globalized economies generally 
have been faster growing, more productive, and more dynamic. 
However, the economic shifts brought on by trade have costs, 
and the loss of jobs in some industries or professions have 
been very painful for those affected. Policymakers and 
economists alike are increasingly cognizant of the need to 
design policies to support workers and families so that the 
benefits of globalization and trade can be more widely and 
evenly shared.

Q.2.b. Do you share Mr. Bernanke's view that a response to the 
dislocations that may result from trade--such as a retreat into 
protectionism and isolationism--would be ``self-defeating and, 
in the long run, probably not even feasible''?

A.2.b. U.S. exporters have benefited from access to foreign 
markets. To the extent that we raise our barriers to foreign 
goods, we should expect to face increased barriers overseas. 
Such developments would harm U.S. firms through a number of 
channels. Not only would U.S. exporters face increased costs in 
selling their goods in foreign markets, but U.S. producers 
could have higher input costs and U.S. consumers would likely 
pay higher costs for some products as well. Overall, a decrease 
in the openness of trade is likely to reduce the 
competitiveness of U.S. producers.

Q.2.c. Do you believe that the United States can achieve its 
targeted economic growth rate of 3-4 percent by adopting 
protectionist and isolationist trade policies?

A.2.c. I will not comment or speculate on individual policies. 
Overall effects would depend on the specifics of trade 
policies. In general, increased trade barriers should induce 
some U.S. firms and consumers to switch expenditures away from 
foreign goods and toward U.S. produced goods. However, this 
benefit may be offset by U.S. producers having to adapt to 
higher costs for intermediate inputs, and by households having 
to pay more for their purchases. In addition, there may be 
reduced demand for U.S. exports if other countries retaliate by 
imposing increased restrictions or tariffs on U.S. goods. 
Another consideration is that reduced trade and competition 
could lead to slower productivity growth in the U.S. economy.

Q.3. As you're well aware, the Senate is preparing to vote on a 
massive tax package that the Joint Committee on Taxation and 
other independent experts expect to add at least $1.5 trillion 
to the national debt. By the time you respond to these 
questions, that tax bill could have already been voted on.

Q.3.a. Would you recommend raising interest rates more quickly 
under a scenario where tax cuts marginally boost short-term 
growth while increasing long-term deficits?

A.3.a. The Federal Open Market Committee (FOMC) makes decisions 
about the stance of monetary policy so as to achieve the 
congressional mandate of maximum employment and price 
stability. Because monetary policy affects the economy only 
with some lag, the FOMC is focused on the outlook for the labor 
market and inflation. Fiscal policy affects this outlook, but 
is only one among many factors. Moreover, the effects of fiscal 
policy depend on the size and composition of a given fiscal 
package, and on its effects on aggregate demand versus supply.

Q.3.b. How would an increase in deficits potentially impact the 
U.S. trade deficit? Could that foreseeably lead to off-shoring?

A.3.b. Generally speaking, stimulative fiscal policies tend to 
boost the exchange value of the dollar, which in turn would 
lead to higher imports into the United States and raise the 
cost of our exports to foreigners, thereby increasing the trade 
deficit. The net effect on manufacturing would depend on the 
magnitude of this effect relative to the boost to production 
from the stimulus to domestic demand associated with the tax 
cut. As of this writing, the final shape of what will be 
enacted is still uncertain. Even once that is known, it would 
likely be difficult or impossible to cleanly separate the 
effect of the tax package from other factors affecting the 
trade deficit.

Q.3.c. Today we have the strongest labor market in a decade, a 
4.4 percent unemployment rate, yet wages are rising barely 
faster than inflation--Do you believe corporate tax cuts can 
lead to higher wage growth? What evidence is there to support a 
direct relations hip between corporate rate reductions and 
higher wages?

A.3.c. While there is a consensus among economists that 
corporate tax reform can potentially induce greater business 
investment and boost economic output, productivity, and the 
demand for labor, there is no consensus on the magnitude of 
those effects nor the distribution of those benefits. In 
addition, a complete analysis would have to take into account 
other provisions in the tax package, as well as the method of 
financing the tax package. Assessing the net effects of all 
these changes is very challenging and subject to considerable 
uncertainty.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM JEROME H. 
                             POWELL

Q.1. What are your views on whether climate change will have a 
material impact on our economy?

A.1. The potential impact of climate change on the U.S. economy 
is an important issue that warrants further study. However, 
this issue is well outside of the remit of the Federal Reserve 
System. Moreover, as important as climate change may ultimately 
prove to be, it will play out over a much longer timeframe than 
the one that is most relevant for monetary policy 
decisionmaking; in our conduct of monetary policy, we are more 
concerned with short- and medium-term developments that may 
change materially over quarters and a relatively small numbers 
of years rather than the decades associated with the pace of 
climate change.

Q.2. When the Federal Reserve Board formulates monetary policy, 
it takes a broad look at the economy and identifies short- and 
medium-run risks and trends. In the minutes from the FOMC's 
most recent meeting, there is a brief discussion of the 
economic impact of hurricane-related disruptions as well as 
dislocation from wildfires in California. But the minutes note 
that these sorts of severe weather events have only had a 
temporary impact in the past.
    Our own Government's data show that the intensity and 
frequency of major weather events are increasing. Hurricanes, 
flooding, droughts, wildfires--they are happening more often 
and they are causing more damage than ever.

Q.2.a. How many events do you think it would take to have a 
material impact on the economy?

Q.2.b. Has the Federal Reserve considered what that number 
would be, in terms of number of events or the total cost of the 
damage?

A.2.a.-b. Each and every disaster of the kind that you describe 
represents a catastrophe for the individuals and communities 
that are directly affected. The most severe of these events can 
seriously damage the lives and livelihoods of many individuals 
and families, devastate local economies, and even temporarily 
affect national economic statistics such as GDP and employment. 
However, the historical regularity has been that events of this 
kind have not materially affected the business-cycle trajectory 
of the national economy, both because the disruptions to 
production have tended to be relatively short-lived and because 
such events tend to affect specific geographic areas rather 
than the United States as a whole. That said, the most severe 
of these events have imposed a significant drain on public 
resources. If such events become much more frequent or more 
severe, the fiscal cost would likely mount, and that would be 
an important issue for the Congress to consider.

Q.2.c. Have you or the Federal Reserve's staff been in 
communication with NOAA about the likelihood of the number of 
severe weather events increasing?

Q.2.d. At what point should the Federal Reserve begin to factor 
into its analyses the downside risks of not having policies in 
place to combat climate change?

A.2.c.-d. As I indicated above, the pace of climate change--and 
the change in frequency of major weather events that might 
result--is commonly denominated in terms of decades or even 
longer, and thus is much slower-moving than is monetary policy 
decisionmaking. The issues of climate change and its associated 
effects on the economy are likely to be more relevant for 
various aspects of fiscal policy and the longer-run growth 
trend of the economy than they are for the short-term evolution 
of the business cycle.

Q.3. The Treasury Department has put out a number of reports 
that detail its proposals for deregulating the financial 
industry. You have stated that Treasury's recommendations are a 
``mixed bag'' and that there are ``some ideas [you] would not 
support.''

Q.3.a. What are the regulations you would not want to see 
undermined? Please be as specific as possible.

A.3.a. The June 2017 Treasury report on financial regulation 
acknowledged that regulatory policies since the financial 
crisis have improved the safety and soundness of the financial 
system, and noted that the U.S. banking system is significantly 
better capitalized as a result of post-crisis regulatory 
capital requirements and stress testing. The report also made a 
series of recommendations for the U.S. regulatory agencies to 
consider in order to reduce regulatory burden on the banking 
system.
    The Federal Reserve Board (Board) has not taken a position 
on many of the recommendations in the report. There are a 
number of recommendations in the report that I would support 
and that, in fact, the Board had already begun to implement 
before the report was published. For example, I believe that we 
should continue to further tailor statutory and regulatory 
requirements based on the risks presented by firms. I also 
believe that we should continue to streamline regulation of 
community banks, including simplifying capital requirements.
    However, I also believe that we must maintain strong 
capital and liquidity requirements for large, complex financial 
institutions. Having strong capital and liquidity requirements 
for the global systemically important banks that constrain 
their leverage and risk-taking, for example, is an intended 
consequence of the post-crisis reforms and should be 
maintained. Any changes to the regulatory regime for these 
firms should be narrowly targeted at specific aspects of 
regulations that are having an unintended effect.
    The Federal Reserve is committed to continuing to evaluate 
the effects of regulation on financial stability and on the 
broader economy, and to make adjustments as appropriate. As we 
do that, however, I would reiterate that we should preserve the 
core tenets of regulatory reform that were designed to 
significantly reduce the likelihood and severity of future 
financial crises. As I discussed in my testimony before the 
Senate Committee on Banking, Housing, and Urban Affairs on June 
22, 2017, there are four key elements of the post-crisis 
regulatory reforms that I believe should remain substantially 
in place to achieve this aim: regulatory capital, stress 
testing, liquidity, and resolution planning. Moreover, I 
believe that we should continue to tailor our rules to the 
different risks of different firms and, in particular, work to 
reduce unnecessary burden on community banks.
    In all our efforts, the Federal Reserve's goal is to 
establish a regulatory framework that helps ensure the 
resiliency of our financial system, the availability of credit, 
economic growth, and financial market efficiency. As we 
consider the recommendations in the Treasury report, that is 
the lens through which the Board would view any future 
regulatory changes. If I were to be confirmed, I look forward 
to continuing to work with our fellow regulatory agencies and 
with Congress to achieve these important goals.

Q.3.b. As the Federal Reserve Chairman, how would you assess 
whether rolling back a particular regulation would introduce 
risks into the financial system?

A.3.b. The activities of financial firms can pose risks to the 
financial system. For example, an excessive reliance on short-
term wholesale funding, excessive leverage, and deficiencies in 
risk management at large financial firms, as well as at many 
firms outside the regulated banking sector, led to a 
devastating financial crisis. The reforms to regulation and 
supervision that have been put in place are intended to help 
prevent another crisis. As we consider possible changes to the 
post-crisis structure of regulation and supervision, we should 
look at ways we might better tailor supervision and regulation 
to be more efficient while maintaining the resilience of the 
financial system. Changes to regulation should take into 
account a range of factors. When adopting regulations, we 
should consider our own analyses, as well as public comments, 
and aim to maximize the long-term net economic benefits, while 
taking account of regulatory burden.

Q.4. At a hearing with the current CEO of Wells Fargo, I asked 
why the OCC should not review and possibly revoke the bank's 
charter because of its egregious violations of consumer 
protection laws. Mr. Sloan answered that Wells Fargo provides 
banking services to 1-in-3 households in America, which sounds 
to me like he thinks Wells Fargo is too big to be held 
accountable.

Q.4.a. Do you think there are institutions that are too big to 
be held accountable?

Q.4.b. Do you think there is a point at which a bank, 
regardless of how plain-vanilla it is, can be so big that its 
officers and board members are unable to manage risk and truly 
oversee all operations?

Q.4.c. What should the Federal Reserve do in those cases?

A.4.a.-c. I also have been very distressed to see large banking 
organizations with problems complying with consumer laws and 
preventing fraud. All banking organizations--regardless of 
their size--are expected to comply with applicable laws and 
regulations and operate in a safe and sound manner. All banking 
organizations need to have effective, firm-wide compliance risk 
management programs that enable firms to identify, assess, and 
control their compliance risks. Banking organizations--
especially the largest, most complex institutions--must 
appropriately design these programs for the activities in which 
they engage and ensure that they have sufficient systems and 
resources to effectively operate the programs on an ongoing 
basis.
    The Federal Reserve's program for supervising large banking 
organizations is focused on whether the firms maintain 
sufficient capital to absorb stress and continue to operate, 
maintain sufficient liquidity to withstand an acute funding 
shock, conduct effective recovery and resolution planning, and 
maintain sufficient governance and controls to ensure all 
aspects of their business are well managed and operate in a 
safe and sound manner. Banking organizations that do not meet 
these standards or fail to comply with laws and regulations are 
subject to supervisory actions, including ratings downgrades 
and enforcement actions. The severity of an
enforcement action is calibrated to the materiality of the 
legal violation or supervisory issue. Banking organizations 
that fail to
address weaknesses over a prolonged period of time may be 
subject to restrictions or limitations on their business.
    We expect to see robust policies and procedures in place to 
help ensure that employees are acting in a legal and ethical 
manner, and that the incentives that are put in place in these 
organizations are appropriate and do not foster behaviors that 
could harm consumers. This has been and will be a focus of our 
supervision for all banking organizations.

Q.5. According to a letter that FDIC Vice Chairman Thomas 
Hoenig sent to this Committee, ``10 bank holding companies in 
the United States will distribute, in aggregate, 99 percent of 
their net income . . . [in the form of dividends and stock 
buybacks].'' For 2017, these institutions will pay out over 
$116 billion. He goes on to note that ``if the 10 largest U.S. 
bank holding companies were to retain a greater share of their 
earnings earmarked for dividends and share buybacks in 2017 
they would be able to increase loans by more than $1 trillion, 
which is greater than 5 percent of annual U.S. GDP.'' In his 
view, ``such massive distributions of capital provide no base 
for their future growth that would benefit our national 
economy.''

Q.5.a. Do you think it is good or bad for the economy that 
banks are putting so much capital toward shareholder payouts?

Q.5.b. This trend of aggressive shareholder payouts can be seen 
across major industries in our economy. Do you think the share 
of net income going to shareholder payouts, as opposed to other 
investments--such as R&D, wages, workforce development, and 
capital investments--plays any role in the disappointing 
productivity that the Federal Reserve has observed in the U.S. 
economy?

A.5.a.-b. As a percentage of corporate earnings, payouts from 
U.S. corporations to shareholders in the form of share buybacks 
and dividends have been unusually high over the past couple of 
years. But establishing a direct connection between the strong 
shareholder payout activity and the lackluster capital 
investment and productivity growth of the economy is difficult. 
Indeed, prior to 2016, payouts to shareholders as a share of 
earnings had been running close to their average pace of the 
past three decades, including times with faster productivity 
growth. Moreover, economists tend to view the high payouts more 
as a consequence, rather than a cause, of the relatively modest 
pace of investment amidst high profitability.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR VAN HOLLEN FROM JEROME 
                           H. POWELL

Q.1. While your predecessors were careful not to wade into the 
specifics of the fiscal decisions made by Congress, they did 
express concerns about rising debts.

Q.1.a. Are you concerned about rising debt?

A.1.a. Yes, I am concerned. If current budget policies do not 
change, the Congressional Budget Office projects that the 
further aging of the population, rising healthcare costs, and 
growing interest payments on the debt will all contribute 
importantly to rising budget deficits and an unsustainable 
trend in the ratio of the
Federal debt to GDP. A large and growing Federal Government 
debt, relative to the size of the economy, over the coming 
decades would have negative effects on the economy. In 
particular, a rising Federal debt burden would reduce national 
saving, all else equal, and put upward pressure on longer-term 
interest rates. Those effects would be likely to restrain 
private investment, which, in turn, would tend to reduce 
productivity and overall economic growth.

Q.1.b. How do you believe adding $1.5 trillion to the national 
debt will impact the Federal Reserve's monetary policy 
decisions and the economy overall?

A.1.b. Fiscal policy in general, and the size of the national 
debt in particular, are only some of the many factors affecting 
the overall economic environment in which we will be conducting 
monetary policy. In my answer immediately above, I outlined 
some of the longer-term effects that a larger national debt 
might have on the national economy. While those effects may 
ultimately prove to be important, they will mostly play out 
only slowly, over long periods of time. In general, in the day-
to-day and month-to-month conduct of monetary policy, we can be 
more tactical, in that we can respond quickly to unfolding 
developments. Indeed, we will respond to many changing factors 
over coming years.

Q.1.c. Do you know of any credible analysis that indicates that 
this tax cut would ``pay for itself?''

A.1.c. Because the Federal Reserve is not assigned a role in 
estimating the budgetary effects of changes in fiscal policy, 
it would not be appropriate for me to comment on any specific 
tax proposal. But generally speaking, changes in tax policy 
would have to generate sizable and persistent increases in 
economic growth in order for the revenues lost from tax cuts to 
be offset by the revenues gained because taxable incomes and 
profits are higher.

Q.2. This past March, you spoke at West Virginia University 
College of Business and Economics about the History and 
Structure of the Federal Reserve. In that speech you discussed 
how the Federal Reserve needs ``to have diversity in gender and 
race both at the Board and at the Reserve Banks.'' Please 
discuss how you will prioritize diversity at the Federal 
Reserve should you become Chair. You have previously 
recommended in your annual letter to Reserve Banks that they 
look beyond the corporate and financial sector to labor and 
community organizations for Reserve Bank directors.

Q.2.a. Do you think the Reserve Banks have been receptive to 
your recommendations?

Q.2.b. How will you continue to prioritize diversity of 
industry and sector representation throughout the Federal 
Reserve System?

Q.2.c. Please provide an assessment of the Federal Reserve's 
progress on diversity.

A.2.a.-c. Diversity is a critical aspect of all successful 
organizations, and I am committed to fostering diversity and 
inclusion throughout the Federal Reserve System. In my 
experience, we make better decisions when we have a range of 
backgrounds and voices around the table.
    The Federal Reserve recognizes the value of a diverse 
workforce at all levels of the organization. We are committed 
to achieving further progress, and to better understanding the 
challenges to improving and promoting diversity of ideas and 
backgrounds. This has been an ongoing objective, and, if 
confirmed, I assure you that diversity will remain a high 
priority objective for the Federal Reserve.
    As Administrative Governor and Chair of the Committee on 
Board Affairs, I have supported and encouraged the Federal 
Reserve Board's (Board) efforts to enhance diversity. In my 
role as Chair of the Board Committee on Federal Reserve Bank 
Affairs, I have worked with the Reserve Banks to promote 
diversity throughout the System. Recognizing the value of 
diversity at all levels of the System, including at the highest 
levels, I have worked closely with the Reserve Banks to assure 
that they have a diverse slate of qualified candidates for 
president searches. The Reserve Banks, working closely with the 
Board, have also been looking at ways to further develop a 
diverse pool of talent in a thoughtful, strategic fashion, 
readying them for leadership roles throughout the Federal 
Reserve System.
    To foster diversity more broadly, a long-term holistic plan 
is necessary with a focus on doing the utmost to recruit and 
bring people in and provide them paths for success. That means 
having an overall culture and organization that is focused on 
diversity and demonstrates its ongoing commitment at all 
levels, starting at the top. For example, we have an internal 
work stream at the Board to coordinate economic inclusion and 
diversity efforts that is comprised of the Office of Minority 
and Women Inclusion Director, Division Directors, senior staff 
and Board Members. It focuses on initiatives not just at the 
Board but also more broadly throughout the System. I am part of 
this team, as are other Board members, and we meet regularly to 
discuss initiatives and progress.
    The Board focuses considerable attention on increasing 
gender, racial, and sector diversity among directors because we 
believe that Reserve Bank boards function most effectively when 
they are constituted in a manner that encourages a variety of 
perspectives and viewpoints. Monetary policymaking also 
benefits from having directors who effectively represent the 
communities they serve because we rely on directors to provide 
meaningful grassroots economic intelligence. Because all 
directors serve in this role, we believe it is important to 
consider the characteristics of both Reserve Bank and Branch 
boards.
    Each year, the Board carefully reviews the demographic 
characteristics of Reserve Bank and Branch boards. This 
information is shared with Reserve Bank leadership, including 
the current Chair and Deputy Chair of each board, and areas for 
improvement are highlighted. The Board's Bank Affairs Committee 
regularly discusses this topic with Reserve Bank leadership 
during the annual Bank evaluation meetings.
    Although there is surely room for further improvement, the 
Federal Reserve has made significant progress in recent years 
in
recruiting highly qualified women and minorities for director 
positions. For example, we anticipate that in 2018:

   Lsix of the 12 Reserve Banks boards of directors 
        will be chaired by a woman, and three of those Banks 
        will have a woman serving as both Chair and Deputy 
        Chair;

   Lfive Reserve Banks will have a racially diverse 
        Chair or Deputy Chair, and one additional Bank will 
        have a racially diverse director in both roles; and

   L50 percent of Reserve Bank Chairs and 67 percent of 
        Deputy Chairs will be diverse in terms of gender and/or 
        race (with a racially diverse woman counted only one 
        time).

The System's directors represent a wide variety of industries 
and sectors, and we have seen significant improvement in 
increasing representation from historically underrepresented 
groups, including consumer/community and labor leaders. For 
example, in 2017 every Reserve Bank except one has a consumer/
community or labor representative serving on its board. In 
addition, consumer/community and labor directors serve on 
numerous Branch boards throughout the System. In addition, 
other Board-appointed directors are affiliated with 
organizations that allow them to provide unique and invaluable 
insights into their communities and regional economies.
    As you know, section 342 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act charged the Board with 
developing standards for equal employment opportunity and the 
racial, ethnic, and gender diversity in our workforce and 
senior management, as well as for increased participation of 
minority-owned and women-owned businesses in programs and 
contracts. With regard to contracting, the Board has utilized 
national and local organizations advocating for minority 
companies as a method to connect directly with qualified 
companies and we participate in numerous outreach events that 
provide a platform for the Board's staff to discuss the 
procurement process with potential vendors while also providing 
information on future procurement opportunities.
    I believe it is important to continue to build on these 
efforts. Continued collaboration with advocacy groups will help 
the Fed better understand the challenges minority businesses 
face as well as help the firms better navigate the Fed's 
acquisition process.

Q.3. In response to the financial crisis, the Federal Reserve 
instituted the Comprehensive Capital Analysis and Review 
(CCAR). This annual exercise has helped ensure that 
institutions have well-defined and forward-looking capital 
planning processes that
account for unique risks of the institution and sufficient 
capital to continue operations through times of economic and 
financial stress.

Q.3.a. Please describe how you believe the CCAR has benefited 
our financial system.

A.3.a. The Comprehensive Capital Analysis and Review (CCAR) was 
designed to address critical weaknesses at the largest banks 
that threatened their viability and, in turn, the stability of 
the U.S. financial system during the recent financial crisis. 
At that time, these banks were:

   LUnable to understand the adverse effects they could 
        suffer under extreme stress or the impact of such 
        effects upon their financial condition;

   LUnable to gather basic data necessary to accurately 
        determine their own exposures, including determining 
        their total exposure to particular counterparties 
        across their firm and the location and value of the 
        collateral they held;

   LReluctant to cut their distributions--particularly 
        dividends--even as stress was growing, lest they signal 
        weakness to the markets; and

   LSignificantly undercapitalized as a result of being 
        unable to understand the material risks to which they 
        were exposed.

CCAR and stress testing have prompted improvement in capital 
adequacy and capital planning at the largest U.S. banks in the 
years since the crisis. U.S. firms have substantially increased 
their capital since the first round of stress tests led by the 
Federal Reserve in 2009. The common equity capital ratio--which 
compares high-quality capital to risk-weighted assets--of the 
34 bank holding companies in the 2017 CCAR has more than 
doubled from 5.5 percent in the first quarter of 2009 to 12.5 
percent in the first quarter of 2017. This reflects an increase 
of more than $750 billion in common equity capital to a total 
of $1.25 trillion during the same period.
    CCAR has also required firms to steadily improve their risk 
management and capital planning practices. As a result, some of 
the firms are now close to meeting our supervisory expectations 
for capital planning. It will continue to be important to 
assess the capital planning practices of these firms, given the 
dynamic nature of banks and the risks that they face.

Q.3.b. Do you believe the Economic Growth, Regulatory Relief 
and Consumer Protection Act, as it is written provides the 
Federal Reserve with any implicit or explicit signals to alter 
the way and frequency with which it administers the CCAR?

A.3.b. I am still familiarizing myself with the bill. I 
understand that it is scheduled to be marked up this week and 
is still subject to change, but in general I support the 
overall framework of the legislation. One provision of the bill 
under consideration would increase the $50 billion asset 
threshold for supervisory stress testing to $100 billion. If 
the threshold for supervisory stress testing were raised, and a 
supervisory stress test were no longer done for some firms, an 
adjustment to the CCAR quantitative assessment would be 
appropriate for these firms as well.
    Another provision of the bill would change the required 
frequency of supervisory stress testing from ``annual'' to 
``periodic'' for firms with between $100 billion and $250 
billion of total assets. Banks with between $100 billion and 
$250 billion in total consolidated assets are an important 
source of credit to consumers and businesses. As a result, it 
is important that they continue to maintain sufficient capital.
    We believe there are safety and soundness and financial 
stability benefits in conducting capital stress tests on a 
periodic basis based on a bank's size and complexity. If 
Congress granted us the flexibility to conduct stress tests at 
a different frequency than annually, we would consider the 
tradeoff between potentially less current information about 
banks' risks against the reduced burden of less frequent stress 
tests.

Q.3.c. Does the Federal Reserve plan on altering the frequency 
by which it administers the CCAR within the next 2 years?

A.3.c. Under current law, we have no plan to reduce the 
frequency of CCAR within the next 2 years.

Q.4. One of the hallmarks of the Federal Reserve is its 
independence as an agency that is ultimately accountable to the 
public and the Congress.

Q.4.a. How would you respond to efforts by members of the 
executive branch to exert influence over the Federal Reserve's 
monetary and regulatory policy?
A.4.a. The independence that Congress granted the Federal 
Reserve is a hallmark of our institution and allows us to 
pursue policies--both monetary and regulatory--that are 
appropriate for the health and safety of the U.S. economy and 
its banking system, but which could be politically unpopular or 
difficult. Our highly trained staff conducts objective analysis 
that allows Board members and Federal Open Market Committee 
participants to make decisions so as to achieve maximum 
employment, price stability, and a stable financial system. I 
intend to preserve the Federal Reserve's independence, which I 
see as essential for us to achieve our congressionally mandated 
goals.

Q.4.b. What will you do as Chair to maintain the Federal 
Reserve's independence?

A.4.b. Historical studies and economic research have shown the 
importance of independence in enabling the Federal Reserve to 
achieve its mandated goals. If confirmed, I plan to continue 
our tradition of independence and nonpartisanship by fostering 
an environment that supports objective analysis and research, 
and promoting a culture in which policymakers express their 
viewpoints and achieve consensus. I will also continue my 
predecessors' commitment to transparent communications with the 
Congress and the public, so that the Federal Reserve can be 
held accountable for its performance.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                        JEROME H. POWELL

Q.1. The Fed recently released a proposal seeking to minimize 
bank Boards of Directors' engagement with bank examiners on 
supervisory issues, instead relying more on bank managers to 
flag items for the Board that require attention. This moves in 
precisely the wrong direction after the Wells Fargo scandal.
    Why should the Fed's proposal on bank boards apply to 
recidivist firms like Wells Fargo?

A.1. The Proposed Guidance on Supervisory Expectation for 
Boards of Directors \1\ seeks to focus the directors and our 
supervisory staff on key attributes of effective boards and 
their role in overseeing institutions. The proposed guidance 
clarifies that expectations for boards of directors are 
distinct from expectations for management. Rather than 
minimizing examiner engagement with directors, that distinction 
allows our examiners to spotlight the core responsibilities of 
effective boards, one of which is to ensure the independence 
and stature of the risk management and internal audit 
functions. The proposed guidance would make boards accountable 
for supporting a risk management function that is valued for 
identifying risks and escalating concerns about controls. As I 
have said publicly, the failure to ensure the independence of 
these functions from the revenue generators and risk takers has 
been shown to be dangerous, and this is something for which the 
board is accountable.\2\ The proposal also states that an 
effective board will hold senior management accountable for a 
variety of key actions, including the development and 
implementation of performance management and compensation 
programs that encourage prudent risk-taking behaviors and 
business practices, which emphasizes the importance of 
compliance with laws and regulation, including consumer 
protection.
---------------------------------------------------------------------------
    \1\ See ``Proposed Guidance on Supervisory Expectation for Boards 
of Directors,'' 82 FR 37219 (August 9, 2017).
    \2\ See ``The Role of Boards at Large Financial Firms,'' remarks by 
Governor Jerome H. Powell at the Large Bank Directors Conference, 
August 30, 2017. https://www.federalreserve.gov/newsevents/speech/
powell20170830a.htm.

Q.2. Both you and Vice Chair Quarles have stated a desire to 
provide more ``granular'' information to banks about stress 
tests.
    If you make more information about the tests public, how do 
you anticipate preventing big banks from gaming the system by 
rigging their portfolios to match the models you reveal?

A.2. As I have stated previously, the Federal Reserve is 
committed to increasing the transparency of the stress testing 
process, but I also believe the benefits of increased 
transparency must be carefully weighed against the potential 
downsides of providing the firms subject to the stress test 
with full details about the models.
    For example, complete knowledge of the models could lead to 
a ``model monoculture'' in which all firms have similar 
internal stress testing models, which could increase the 
correlation of risk in the system, and miss key idiosyncratic 
risks faced by the firms.
    Federal Reserve staff has developed and will be seeking 
public comment on a proposal that aims to enhance the 
understanding of the Federal Reserve's models through 
disclosure of information about the range of loss rates 
produced by our models for given asset types. That proposal 
will be published in the Federal Register soon. These proposed 
enhanced model disclosures would provide more insight into how 
the Federal Reserve's supervisory models treat different types 
of loans than has previously been provided.
    The enhanced model disclosures strive to strike an 
appropriate balance between transparency and the continued 
effectiveness of our models, and we will seek comments on the 
proposal from the public.

Q.3. In your testimony, you said that stress testing is ``maybe 
the single most successful'' post-crisis innovation.
    Can you guarantee that less frequent or rigorous stress 
testing would be as successful as under current law?

A.3. Capital stress tests, which played a critical role in 
bolstering confidence in the capital positions of U.S. firms in 
the wake of the 2007 to 2009 financial crisis, have become one 
of the most important features of our supervisory program. 
Stress tests play a
critical role in ensuring that firms have sufficient capital to 
continue lending through periods of economic stress and market 
turbulence, and that their capital is adequate in light of 
their risk profiles. If we do make changes to the stress 
testing program, we would seek to do so in a way that does not 
undermine the program's aim of keeping firms well capitalized 
and, in turn, safe and sound.
    The dynamic nature of banks and the risks they face could 
render the results of stress tests stale within a short 
timeframe. Accordingly, we believe there are safety and 
soundness and financial stability benefits in conducting the 
tests annually for large and complex U.S. banking 
organizations. If Congress granted us the flexibility to 
conduct stress tests at a different frequency than annually for 
smaller and less complex firms, we would consider the tradeoff 
between potentially less current information about banks' risks 
against the reduced burden of less frequent stress tests.