[Senate Hearing 115-242]
[From the U.S. Government Publishing Office]
S. Hrg. 115-242
THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE FEDERAL RESERVE'S SEMIANNUAL REPORT TO CONGRESS ON
MONETARY POLICY AND THE STATE OF THE ECONOMY
__________
MARCH 1, 2018
__________
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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
JERRY MORAN, Kansas DOUG JONES, Alabama
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
Joe Carapiet, Senior Counsel
Travis Hill, Senior Counsel
Elisha Tuku, Democratic Chief Counsel
Corey Frayer, Democratic Professional Staff Member
Amanda Fischer, Democratic Professional Staff Member
Dawn Ratliff, Chief Clerk
Cameron Ricker, Deputy Clerk
James Guiliano, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, MARCH 1, 2018
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 41
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Prepared statement....................................... 41
WITNESS
Jerome H. Powell, Chairman, Board of Governors of the Federal
Reserve System................................................. 4
Prepared statement........................................... 42
Responses to written questions of:
Senator Scott............................................ 45
Senator Sasse............................................ 47
Senator Schatz........................................... 49
Senator Cortez Masto..................................... 51
Additional Material Supplied for the Record
The February 2018 semiannual Monetary Policy Report.............. 66
American Banker article, ``SIFI Hike Could Kick-Start Bank M&A,''
submitted by Senator Brown..................................... 124
(iii)
THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS
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THURSDAY, MARCH 1, 2018
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:01 a.m. in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. The hearing will now come to order.
Welcome, Chairman Powell, for your first appearance before
this Committee as Chairman of the Federal Reserve Board of
Governors. Congratulations on your confirmation.
Today's hearing is an important opportunity to examine the
current state of monetary and regulatory policy.
Over the past few years, the Humphrey-Hawkins hearing has
often served as an opportunity for Members of this Committee to
review the new regulations imposed in the wake of the financial
crisis.
While I did not always agree with former Chairman Bernanke
and former Chair Yellen, I appreciated their willingness to
engage with the Committee and to discuss possible improvements
to the regulatory regime.
These discussions were helpful in building common ground
for our banking bill, Senate bill 2155, particularly for
provisions like the threshold for enhanced standards under
Section 165 of Dodd-Frank.
This bipartisan bill now has 13 Republican and 13
Democratic and Independent co-sponsors. The bill was the result
of a thoughtful, deliberative process over several years that
included hearings, briefings, meetings, and written submissions
from hundreds of commentators and stakeholders.
The primary purpose of the bill is to make targeted changes
to simplify and improve the regulatory regime for community
banks, credit unions, mid-size banks, and regional banks to
promote economic growth.
Economic growth has been a key priority for this Committee
and this Administration and for this Congress.
The U.S. economy has failed to grow by more than 3 percent
annually for more than a decade, by far the longest stretch
since GDP has been officially calculated. But now there are
widespread expectations that growth is finally picking up.
According to the January FOMC meeting minutes, the Federal
Reserve increased its expectations for real GDP growth going
forward after fourth quarter growth exceeded expectations.
The Fed cited the recently enacted tax reform legislation
as among the reasons economic growth is expected to rise.
In addition to tax reform, President Trump's recently
released Budget and Economic Report both emphasize that
regulatory reform is a key component of rising productivity,
wages, and economic growth.
By right-sizing regulation, the Committee's economic growth
bill will improve access to capital for consumers and small
businesses that help drive our economy.
Now that many are predicting a pickup in growth, a number
of commentators have expressed sudden concerns about the
economy overheating.
While the Federal Reserve should remain vigilant in
monitoring inflation risks, we must also continue to pursue
common-sense, pro-growth policies that will lead to increased
innovation, productivity, and wages.
With respect to monetary policy, I am encouraged that the
Federal Reserve is continuing on its gradual path to monetary
policy normalization.
The Fed has begun to reduce its balance sheet by steadily
decreasing the amount of principal it reinvests as assets as
its portfolio matures.
I look forward to hearing more about the Fed's monetary
policy outlook as part of Chairman Powell's testimony today.
I also look forward to hearing about the Federal Reserve's
ongoing efforts to review, improve, and tailor existing
regulations.
I know that you are working with Vice Chairman for
Supervision Randy Quarles on all those issues, Mr. Chairman.
Vice Chairman Quarles has done an excellent job so far, and
I urge Congress to confirm him for his full term on the Board
as soon as possible.
With that, Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. And welcome to your
first one of these, Mr. Chair. Nice to see you.
Welcome back to the Committee. You are leading the Federal
Reserve at a crucial time in our Nation's history as the Fed
normalizes interest rates and shrinks the balance sheet.
The country is in its ninth year of economic recovery,
though, as we know, 2017 marked the worst year for job creation
since 2010. And the recovery has not reached everyone. Wage
growth has been slow and labor force participation has barely
improved since 2014. Nine years of job growth have still not
done much to narrow income inequality or address employment
disparities.
Nationwide, the unemployment rate for African American
workers is double that for whites workers--equal to the gap at
the start of the civil rights movement. Looking more broadly,
labor force participation is down for all minorities.
Statistics show that large pockets of people are waiting to
share in the benefits from the recovery. Instead of addressing
their
problems, Republicans are working hard to make sure that Wall
Street banks rake in even bigger profits.
Despite the fact that we are 9 years removed from the
recession, the Administration has embarked on a substantial
fiscal stimulus, permanently slashing the corporate tax rate,
and providing the largest benefits to the wealthiest Americans.
Over time, 81 percent of the benefits of that tax cut goes to
the wealthiest 1 percent.
Of course, Wall Street, which is making record profits,
will do well.
Instead of fighting for workers and making sure labor
market opportunities are shared among those who have been
struggling, Republicans push for tax cuts for corporations and
the wealthy.
Those tax cuts are not free. As you know, Mr. Chairman,
they will add over $1 trillion dollars to the deficit. The once
and future deficit hawks on the other side of the aisle were
more like marshmallow Peeps when confronted with tax cuts for
the wealthy.
The ink was barely dry when we began to hear calls for
spending cuts that will hurt families across the country.
Eighty-one percent of the benefits going to the wealthiest 1
percent, then, alas, there is a budget deficit we have to
address. Let us look at ``entitlement reform'' that everyone
should understand means cuts to Medicare, Medicaid, and Social
Security. It is the same playbook we have seen for years.
The claim was that it would all be worth it because workers
would benefit.
I am happy for any Ohioan who gets a bonus or a raise, but
we have seen how banks and corporations have responded to the
tax cuts, and the numbers are staggering. In January, Wells
Fargo--they have been in front of this Committee a number of
times, and we have spent lots of time talking about their
illegal behavior. Wells Fargo in January announced a $22
billion stock buyback--288 times what it will spend on pay
raises for workers. A lot of discussion, a lot of news coverage
on the benefits to workers on the bonuses or the pay raises,
but 288 times that number went to stock buybacks for
executives.
Companies this year will start disclosing CEO-to-worker pay
ratios, as required under the Wall Street Reform Act. Honeywell
announced an $8 billion stock buyback in December and just
disclosed that its CEO is getting a 61-percent pay raise and
makes 333 times the average worker's pay.
It is pretty simple: For each pay raise or bonus for
workers, companies are spending 100, 150, 200 times as much on
stock buybacks and executive compensation.
And it gets worse.
While the biggest banks lavish pay raises and stock
giveaways on their executives, they continue to violate the law
and abuse their customers. The Federal Reserve recently imposed
an unprecedented--if belated--penalty on Wells Fargo following
several scandals, including the opening of millions of fake
accounts and improperly charging borrowers--even after that
scandal was disclosed, charging borrowers for auto insurance
they did not need.
The Fed told Wells Fargo it cannot grow until it has
demonstrated that it has improved board oversight and risk
management. It sounds like the Fed has come to the conclusion
many of us on this Committee reached a year and half ago: Wells
Fargo, simply put, is ``too big to manage.'' I will be closely
watching to make sure the new team at the Fed does not lift
these penalties, as the Consumer Bureau did, without the bank
making real changes.
It is not just Wells Fargo. Last week, Citigroup announced
it illegally overcharged 2 million credit card accounts for
over 5 years; it will refund $335 million to consumers.
Though Wall Street cannot seem to go a month without a new
scandal, the Senate is set to take up a bill that would roll
back critical financial stability protections and limit
watchdogs' ability to police the largest banks.
We can expect the banks to spend any savings from less
oversight the way they spent their tax cuts: more dividends,
share buybacks, and mergers.
Many of us in this body are concerned about this
deregulation bill that I mentioned a moment ago, especially
when it comes to foreign banks, those banks that are huge, but
their assets in this country are under $250 billion. They are
both troubled and troubling banks in their international
operations, yet Secretary Mnuchin sat at that table and said he
plans to deregulate some of these banks, like Deutsche Bank and
Santander. And we know the fines that they have paid and the
problems that they have caused internationally.
Chair Powell, Wall Street may be focused on whether there
are three or four rate hikes this year. I think your focus
needs to be on ensuring the Fed does not once again permit the
buildup of risk in the market and hubris at the Fed. The Great
Moderation turned out to be not so great. We forget that lesson
at our peril.
The Fed needs to take the side of consumers, making sure
the financial system stays strong and regulations are enforced.
I look forward to your testimony.
Chairman Crapo. Thank you very much.
Chairman Powell, once again we appreciate you being here.
We look forward to your opening statement, and you may proceed.
STATEMENT OF JEROME H. POWELL, CHAIRMAN, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Powell. Thank you very much, Chairman Crapo, Ranking
Member Brown, Members of the Committee. I am pleased to present
the Federal Reserve's semiannual Monetary Policy Report to
Congress today.
On the occasion of my first appearance before this
Committee as Chairman of the Federal Reserve, I want to express
my appreciation for my predecessor, Janet Yellen, and her
important contributions. During her term as Chair, the economy
continued to strengthen, and Federal Reserve policymakers began
to normalize both the level of interest rates and the size of
the balance sheet. Together, Chair Yellen and I have worked to
ensure a smooth leadership transition and provide for
continuity in monetary policy.
I also want to express my appreciation for my colleagues on
the Federal Open Market Committee. And, finally, I want to
affirm my continued support for the objectives assigned to us
by the
Congress--maximum employment and price stability--and for
transparency about the Federal Reserve's policies and programs.
Transparency is the foundation of our accountability, and I am
committed to clearly explaining what we are doing and why we
are doing it. Today I will briefly discuss the current economic
situation and outlook before turning to monetary policy.
The U.S. economy grew at a solid pace over the second half
of 2017 and into this year. Monthly job gains averaged 179,000
from July through December, and payrolls rose an additional
200,000 in January. This pace of job growth was sufficient to
push the unemployment rate down to 4.1 percent, about three-
quarters of a percentage point lower than a year earlier and
the lowest level since December of 2000. In addition, the labor
force participation rate remained roughly unchanged, on net, as
it has for the past several years, and that is a sign of job
market strength, given that retiring baby boomers are putting
downward pressure on the participation rate.
Strong job gains in recent years have led to widespread
reductions in unemployment across the income spectrum and for
all major demographic groups. For example, the unemployment
rate for adults without a high school education has fallen from
about 15 percent in 2009 to 5 \1/2\ percent in January of this
year, while the jobless rate for those with a college degree
has moved down from 5 percent to 2 percent over the same
period. In addition, unemployment rates for African Americans
and Hispanics are now at or below rates seen before the
recession, although they are still significantly above the rate
for whites. Wages have continued to grow moderately, with a
modest acceleration in some measures, although the extent of
the pickup likely has been held back in part by the weak pace
of productivity growth in recent years.
Turning from the labor market to production, inflation-
adjusted GDP rose at an annual rate of 2.8 percent in the
second half of 2017, nearly a full percentage point faster than
its pace in the first half of the year. Economic growth in the
second half was led by solid gains in consumer spending,
supported by rising household incomes and wealth and upbeat
sentiment. In addition, growth in business investment stepped
up sharply last year, which should support higher productivity
growth in time. The housing market has continued to improve
slowly. Economic activity abroad has also been solid in recent
quarters, and the associated strengthening in the demand for
U.S. exports has provided considerable support to our
manufacturing industry.
Against this backdrop of solid growth and a strong labor
market, inflation has been low and stable. In fact, inflation
has continued to run below the 2 percent rate that the FOMC
judges to be most consistent over the longer run with our
congressional mandate. Overall consumer prices, as measured by
the price index for personal consumption expenditures, or
``PCE,'' as we call it, increased 1.7 percent in the 12 months
ending in December, about the same as 2016. The core PCE price
index, which excludes the prices of energy and food items and
is a better indicator of future inflation, rose 1.5 percent
over the same period, somewhat less than in the previous year.
And we continue to view that some of the shortfall in inflation
last year was likely reflecting transitory influences that we
do not expect will repeat. And consistent with this view, the
monthly readings were a little bit higher at the end of the
year than in earlier months.
After easing substantially in 2017, financial conditions in
the United States have reversed a bit of that easing, and at
this point we do not see these developments as weighing heavily
on the outlook for economic activity, the labor markets, and
inflation. Indeed, the economic outlook remains strong. The
robust job market should continue to support growth in
household incomes and consumer spending, solid economic growth
among our trading partners should lead to further gains in U.S.
exports, and upbeat business sentiment and strong sales will
likely continue to boost business investment. Moreover, fiscal
policy has become more stimulative. In this environment, we
anticipate that inflation on a 12-month basis will move up this
year and stabilize around the FOMC's 2 percent objective over
the medium term. Wages should increase at a faster pace as
well. The Committee views the near-term risks to the economic
outlook as roughly balanced but will continue to monitor
inflation developments closely.
I will turn now to monetary policy. The Congress has
assigned us the goals of promoting maximum employment and
stable prices. Over the second half of 2017, the FOMC continued
to gradually reduce monetary policy accommodation.
Specifically, we raised the target range for the Federal funds
rate by a quarter percentage point at our December meeting,
bringing that target rate to a range of 1 \1/4\ percent to 1
\1/2\ percent. In addition, in October we initiated a balance
sheet normalization program to gradually reduce our securities
holdings. That program has been proceeding smoothly. These
interest rate and balance sheet actions reflect the
Committee's view that gradually reducing monetary policy
accommodation will sustain a strong labor market while
fostering a return of inflation to 2 percent.
In gauging the appropriate path for monetary policy over
the next few years, the FOMC will continue to try to strike a
balance between avoiding an overheated economy and bringing PCE
price inflation to 2 percent on a sustained basis. While many
factors shape the economic outlook, some of the headwinds the
U.S. economy faced in previous years have turned into
tailwinds. In particular, fiscal policy has become more
stimulative and foreign demand for U.S. exports is on a firmer
trajectory. Despite the recent volatility, financial conditions
remain accommodative. At the same time, inflation remains below
our 2 percent longer-run objective. In the FOMC's view, further
gradual increases in the Federal funds rate will best promote
attainment of both of our objectives. As always, the path of
monetary policy will depend on the economic outlook as informed
by incoming data.
In evaluating the stance of monetary policy, the FOMC
routinely consults monetary policy rules that connect
prescriptions for the policy rate with variables associated
with our mandated objectives. Personally, I find these
prescriptions helpful. Careful judgments are required about the
measurement of the variables used, as well as about the
implications of the many issues these rules do not take into
account. And I would note that this Monetary Policy Report
provides further discussion of monetary policy rules and their
role in our policy process, extending the analysis we
introduced in July.
Thank you again. I look forward to our discussion.
Chairman Crapo. Thank you, Mr. Chairman.
I am going to focus my questions on Senate bill 2155, which
I referenced in my introductory remarks, but first, Mr.
Chairman, you are familiar with that legislation, correct?
Mr. Powell. Yes, I am.
Chairman Crapo. In past hearings former Chair Yellen,
former Federal Reserve Governor Tarullo, and former Comptroller
of the Currency, among others, have all expressed support for
changing the $50 billion threshold for enhanced prudential
standards. Building on that feedback, Senate bill 2155 raises
the threshold from $50 billion to $250 billion and requires the
Fed to tailor regulations to a bank's business model and risk
profile.
I would like to ask you some questions about this bill if
it does become law, and there are five or six of them, so I
would like to have you respond as briefly as you can, but fully
answer the questions.
Is it accurate that the Federal Reserve would still be
required to conduct a supervisory stress test for any bank with
total assets between $100 billion and $250 billion to ensure
that it has enough capital to weather economic downturns?
Mr. Powell. Yes, it is.
Chairman Crapo. And is it accurate that the Federal Reserve
would still have sufficient authority to apply prudential
standard to a bank with between $100 billion and $250 billion
in total assets if the Fed determined that was appropriate?
Mr. Powell. Yes, that is true.
Chairman Crapo. Is it accurate that this provision does not
weaken oversight of the largest globally systemic banks?
Mr. Powell. That is correct.
Chairman Crapo. Is it accurate that the Federal Reserve
applies enhanced standards to international banks based on
their global total consolidated assets, meaning this provision
would not exempt banks such as Deutsche Bank and Santander from
Section 165 of Dodd-Frank?
Mr. Powell. That is correct.
Chairman Crapo. Is it accurate that this provision does not
in any way restrict the Fed's supervisory, regulatory, and
enforcement authorities to ensure the safety and soundness of
financial institutions?
Mr. Powell. Yes.
Chairman Crapo. And, finally, is it accurate that nothing
in this provision would restrict the Fed's ability to ensure
that large financial institutions are well capitalized?
Mr. Powell. Yes.
Chairman Crapo. Thank you. And to go on a little bit, as
you know, the Dodd-Frank Act included a provision known as the
Volcker rule, which placed restrictions on banks that trade for
their own profit, otherwise known as ``proprietary trading,''
and on certain relationships with certain private funds. As you
also know, financial companies have incurred significant costs
attempting to comply with the rule. Do you support addressing
this confusion by exempting community banks with less than $10
billion in total assets and who are engaged in a small amount
of trading activity?
Mr. Powell. I think that is a sensible thing to do, yes.
Chairman Crapo. All right. Thank you. And some have
expressed concerns that this exemption would allow a community
bank to purchase a hedge fund. Is it accurate that the Federal
Reserve could use its existing authority to address any safety
and soundness concerns arising from such an action?
Mr. Powell. We would still apply all of our safety and
soundness supervisory activities to that bank, and we would be
looking for things like that and find them.
Chairman Crapo. All right. Thank you. Finally--and I am
shifting gears away from the legislation right now--I also
mentioned in my opening statement that Randy Quarles has been
confirmed as Vice Chairman for Supervision of the Federal
Reserve but has not been confirmed for his full term as a
Governor yet. I believe it is very critical that we do that
confirmation and confirm Governor Quarles for his full term. Do
you agree? And if you do, why is it critical for the Senate to
confirm Vice Chairman Quarles as soon as possible?
Mr. Powell. Thank you for raising this, Mr. Chairman. I
absolutely agree. It is very important that Vice Chair Quarles
get his full term. At this point he is working on an expired
underlying Governor term, but he has a 4-year Chair term, and I
think to have him fully installed, it is very important that he
have this underlying Governor term.
Chairman Crapo. All right. Thank you. I appreciate your
emphasis on that, and hopefully that will help to encourage the
full Senate to move more expeditiously on that nomination.
Senator Brown.
Senator Brown. Thank you. I appreciate my friend and
colleague Chairman Crapo's skillful, narrow, and leading
questions about his legislation. I think it is important to
point out that the question particularly about foreign banks,
Deutsche Bank and Santander and those banks that have been both
troubled and troubling, will be mostly deregulated under this
bill because they are under 250. That is not really my
question. I want to get to questions. But I also want to point
out, in spite of this Chair of the Federal Reserve's general
satisfaction with this bill, there have been serious, serious,
serious questions raised against it, raised about it by former
Fed Chair Volcker, by former Fed Governor and Deputy Treasury
Secretary Sarah Bloom Raskin, but Bush appointee former FDIC
Chair Sheila Bair, by former Counselor to the Treasury
Secretary Antonio Weiss, and by the former Deputy Governor of
the Bank of England Paul Tucker. And I think it is important to
note that it is not all candy and roses here.
Let me talk about a couple other things. The unemployment
rate has been steady at 4 percent, 4.1 percent; wage growth, as
you know, Mr. Chair, has been slow to improve. At your
confirmation hearing in November, you mentioned that labor
force participation for prime-age workers was also lagging. I
would like to see improvement across the board, as I know you
would.
Two questions related to that. Do you think it is possible
to achieve further improvement in wages and employment among
workers that have been left behind without causing higher
inflation? And will you commit to looking at all the data and
considering the workers who have struggled the most so as to
avoid
raising rates preemptively and cutting off the chances for
broader
economic gains?
Mr. Powell. Thank you, Senator. As you mentioned, there are
a couple places where it looks like there may be additional
slack in the labor force, and the biggest of those is that
participation by prime-age workers is a full percentage point
below where it was before the crisis. We do not see any strong
evidence yet of a decisive move up in wages. We see wages by a
couple of measures trending up a little bit, but most of them
continuing to grow at about 2 \1/2\ percent. So nothing in that
suggests to me that wage inflation is at a point of
acceleration, and so I would expect that some continued
strengthening in the labor market can take place without
causing inflation. We will, of course, be monitoring that, and
I think the risks are much more two-sided than they were 2 or 3
years ago when there was a great deal of slack in the labor
market.
Senator Brown. I appreciate, as I told you in person, your
interest and commitment to both mandates of inflation and
employment. One Fed nominee that is still in abeyance, may or
may not have the votes on the floor, does not take that
position. Your position there is crucial, as Chair Yellen
understood, as Chairman Bernanke understood.
Second question: Morgan Stanley and other Wall Street
analysts have said that only 13 percent of the reduced taxes
under the tax bill being paid by companies will go to workers'
pay; 18 percent will go to mergers. If that ratio holds up for
banks--18 percent will go to mergers, 13 percent for worker
pay. If that ratio holds up for banks, whether it is the tax
bill or the Chairman's bill he talked about, shouldn't we
expect even more bank consolidation?
Mr. Powell. First, I would say we do not really know yet
how that will shake out, but taking your hypothetical, would it
add to more consolidation among the banks? You know, bank
consolidation has been going on for 30-plus years. It has got a
lot to do with smaller banks and economic activity moving out
of the rural areas into the city and interstate banking and
things like that. I am not sure this would tend to change the
trend.
Senator Brown. I appreciate what you just said because I
certainly heard the deregulators in this body, those that
suffer this collective amnesia about what happened a decade
ago, always blaming bank consolidation on Dodd-Frank when, as
you point out, it has been going on for years.
Mr. Chairman, here is an American Banker article from
November that discusses your bill. The title is ``SIFI hike
could kick-start bank M&A,'' and I ask to enter that in the
record.
Chairman Crapo. Without objection.
Senator Brown. Thank you.
Senator Brown. Last question. Most of the Wall Street--the
big Wall Street bank offenders have--most of the Wall Street
banks have been repeat offenders since the crisis. The Fed and
other regulators have fined them. You were part of this, $243
billion in combined penalties, money laundering, market
manipulation, deceiving customers, you name it. The Chairman's
bank deregulation bill would mandate that the Fed further
tailor rules for the largest banks. Meanwhile, Vice Chair
Quarles is talking about the Fed's plans to make living wills
less frequent, to reduce leverage rules to weaken the Volcker
rule.
Why should big banks that have consistently failed to
follow the rules benefit from statutory or regulatory
rollbacks?
Mr. Powell. I would just say that our focus is very much on
the smaller and medium-size banks. We want the post-crisis
regulatory initiatives like higher capital, higher liquidity,
stress testing, resolution, we want those to apply in their
strongest form to the largest institutions. We want to make
sure we are doing that efficiently. And there are some changes
we can make in that regard, but most of what we are doing
really applies to banks----
Senator Brown. Well, I hear you, but I sat with Senator
Crapo and a number of others that are in this room on the
Finance Committee, and I heard Republican after Republican say
the tax cut was all about the middle class, yet 81 percent of
the benefits went to the wealthiest 1 percent. I heard you and
I hear the push for this S. 2155 being all about the community
banks, but we know much of it is driven by what happens for the
larger banks, the weaker stress tests, the periodic stress
tests, what we are doing, instead of annual, what we are doing
for the foreign banks. So I hear your talk about your interest
primarily is the smaller banks, but I guess the question still
stands. Why should anything in this bill--why should we do
anything for the largest banks? As this bill does, why should
we do anything for banks that have consistently failed to
follow the rules? Why should they benefit from statutory and
regulatory rules rollback?
Mr. Powell. As I see the parts of the bill that I am
familiar with, they really apply to banks 250 and under. And
when you say ``largest banks,'' I think you are talking about
either the eight SIFIs--by the way, one of which is below $250
billion in assets, so we are very capable of reaching below 250
to apply enhanced prudential standards when it is appropriate.
But it is really those institutions that I would call the large
and complex institutions, and the focus there, again, is on
sustaining the four pillars that I mentioned of post-crisis
regulation and maybe looking at making them more efficient.
They do not need to be--they should not be more burdensome than
they need to be, but----
Senator Brown. I agree with that.
Mr. Powell.----we are looking to strengthen and hold onto
those.
Senator Brown. Well, I hope in your conversations with the
Chair of Supervision, Mr. Quarles, that you will insist that
this is about the banks under 250 and insist on that, that it
is not about the banks over 250, as some on this podium have
suggested.
Thank you.
Chairman Crapo. Thank you.
Senator Shelby. And I do remind our colleagues that we need
to stick to the 5-minute rule.
Senator Shelby. That is prospective, isn't it, Mr.
Chairman?
[Laughter.]
Senator Shelby. Chairman Powell, you referred to price
stability just a few minutes ago as one of the mandates for the
Fed in your job. Let us talk a little about price stability and
unemployment being real low. Prices, you mentioned earlier that
inflation is, I assume, under control, whatever that is. You
have got your eyes and you have got your hands on it, so to
speak. But a lot of people believe that you will continue to
raise interest rates at incremental levels in the future. Is
that because of your concern about the specter of inflation,
that being full employment, so to speak, you know, mostly,
pressure on wages? Or where is it coming from, in other words?
Or is it all of it?
Mr. Powell. Senator, where we are now is we have got
unemployment, as you know, at 4.1 percent, which is sort of at
or near or even below most estimates of the natural rate of
unemployment. But we have inflation that is still a little bit
below, so by continuing to gradually raise interest rates over
time, we are trying to balance those two things and, you know,
achieve inflation moving up to target, but also make sure that
the economy does not overheat.
Now, there is not a lot of evidence that--there is no
evidence that the economy is currently overheating, but that is
really the path that we have been on, and my expectation is
that that will continue to be the appropriate path as long as
the economy performs this way.
Senator Shelby. Well, I think that is a substantive path,
too. I agree with you.
Do you believe that there is going to be a push for higher
wages? You know, you see a little of it now. The economy is
good. People seem to be doing well. The tax cuts come in, which
is probably going to help. We see that it is going to help at
least confidence and everything in the economy. What do you see
there?
Mr. Powell. It is interesting. Unemployment has declined
from 10 percent at the worst part of the crisis--and, actually,
well after the crisis--down to 4.1 percent now, and wages have
only really gradually started to track up. The increases are
now up at about 2 \1/2\ percent if you blend the various
measures we look at, and we look at a bunch of them. And I will
be honest. I would have thought that you would see more wage
increases by this point, and I do expect that we will see more
wage increases. We have got an economy with strong momentum. We
have got strong job creation as a result of it. We have got low
unemployment. And I do think you will begin to see wages coming
up, but we have been feeling that way, and that is kind of what
we are waiting to see. I hope we see it soon, expect to see it.
Senator Shelby. How important to the economy and to the
monetary policy is price stability?
Mr. Powell. Price stability is one of our two mandates, at
the very heart of what we do.
Senator Shelby. It is key, isn't it? One of the keys.
Mr. Powell. Absolutely at the very heart of what we do.
Senator Shelby. OK. I would like to switch over to your
other job, and that is, dealing with regulatory issues. Cost-
benefit analysis unit, it is my understanding that the Fed has
announced
recently its intention to create what they call a ``Policy
Effectiveness and Assessment Unit'' to conduct cost-benefit
analysis on regulations. If that is so, I applaud that effort.
A lot of us on this
Committee have pushed that for years, believing that there
should be an analysis, a real cost-benefit analysis to every
regulation. What is the status of this group's development, Mr.
Chairman? And what do you hope will come out of this?
Mr. Powell. As you know, Senator, we always try to
implement regulations in the way that is least burdensome and
also faithful to the intent of Congress. In this particular
case, we are trying to raise our game here by having a specific
group of, you know, quantitatively oriented people who are
focusing just on that. We have lately published cost-benefit
analysis on specific regulations like the SIFI surcharge, the
long-term debt, and things like that. So, you know, we are
trying to raise our game here.
By the way, whenever we go out for comment on a reg, we
also ask for the public's view on costs and benefits. So it is
really important to us, and as I said, as you pointed out, we
are trying to raise our game.
Senator Shelby. A lot of it, though, is letting the public
know what all of this is about and what the costs will be to
them as well as to the economy, is it not?
Mr. Powell. It is, and that is our obligation, is to be
transparent about those things.
Senator Shelby. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Tester.
Senator Tester. Yes, thank you, Mr. Chairman and Ranking
Member Brown. I appreciate you having this hearing. And
welcome, Governor Powell. It is great to have you here.
There has been a perception being floated by some that the
largest foreign banking organizations, such as Barclays, UBS--
Deutsche Bank has been talked about today already--will be
released from enhanced prudential standards under the economic
package brought forward called S. 2155. I fundamentally
disagree with that. I think those views are a myth, and
certainly not the text that is in S. 2155. But I am a dirt
farmer, OK? I just kind of read things as they are and do not
read a lot of extra stuff into it. You are the man on the Fed,
and so I need to know your opinion. Does S. 2155 require the
Federal Reserve to weaken any of the Dodd-Frank enhanced
prudential standards for the FBO such as Deutsche Bank, UBS, or
Barclays?
Mr. Powell. It does not, according to my reading of the
text.
Senator Tester. Can you elaborate, briefly if possible, on
how those standards are applied to the largest FBOs?
Mr. Powell. Well, currently what the bill does is it moves
up to 250 for these institutions, but it looks at their global
consolidated capital. We now have intermediate holding company
requirements for these companies, and none of those would be
affected by this. And what that means is that they are required
to keep capital and liquidity here in the United States that is
commensurate with their activities. They are also subject to
living wills and things like that. So, it is a range of
enhanced prudential standards. The intermediate holding company
thing is an extra one that we gave them.
Senator Tester. OK. Thank you.
I am also frustrated that some are jumping to conclusions
about how or what might happen regarding international holding
company requirements. So just to clarify, from your
perspective, the creation of the IHS was not included in Dodd-
Frank, correct?
Mr. Powell. That is right. That was something that we added
on independent of Dodd-Frank.
Senator Tester. And the legislative language in S. 2155,
the bill that we have been talking about this morning a lot,
does not require any change to the IHC, correct?
Mr. Powell. It does not.
Senator Tester. OK. Thank you for clearing that up.
Now, I asked you this question during your confirmation
right around the time that S. 2155 was released, and it has
been nearly 3 month, and that bill has made its way through
this Committee and has overwhelming bipartisan support and
hopefully will see the floor next week. What I asked you at
that juncture was: Do you believe S. 2155 puts our financial
system at risk? At that moment in time you said no. So now you
have had a little more time to get your feet on the ground. Do
you continue to believe that?
Mr. Powell. I do.
Senator Tester. OK. Last--go ahead, go ahead.
Mr. Powell. I can elaborate if you want.
Senator Tester. Sure. Have at it.
Mr. Powell. OK. The essence, probably the most significant
piece of it is that you raise the threshold for enhanced
prudential standards to 250, but you give us the ability to
look below 250. We will publish a framework that addresses--and
we will put it out for comment--that addresses how we will
think about that. We have not been shy about reaching below
250. One of the eight SIFIs, in fact, is below $250 billion in
assets. So I think it gives us the tools that we need to
continue to protect financial stability.
Senator Tester. Thank you. Last, I think it is important
that folks remember that the Federal Reserve and Chairman
Powell have a number of tools in their toolbox when it comes to
regulating our financial institutions well beyond that we even
created in Dodd-Frank. I think it is important to remember that
things like advanced approaches, CCAR, and Basel were not
created by Dodd-Frank, and if I am not mistaken, advanced
approaches and CCAR were put in place during a Republican
administration.
So I guess my question for you, Chairman Powell, is this:
Can you remind folks what your safety and soundness authority
means to the Federal Reserve and what authority it gives to
you?
Mr. Powell. Except in places where Congress has addressed
particular areas, we have broad safety and soundness authority
to do capital requirements of various kinds, liquidity
requirements and things like that, and look after the safety
and soundness of all depository institutions.
Senator Tester. Thank you. I just want to close by saying
that I do not for a second think that Dodd-Frank was the only
reason we are seeing consolidation in banking. I think
technology plays a big role in that, and population shifting
plays a big role in that. On this Committee I can deal with
Dodd-Frank.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Corker.
Senator Corker. Thank you. Welcome, Mr. Chairman. It is
good to have you here, and congratulations on your
confirmation.
You have talked about the accommodative fiscal policy that
is in place right now, and just out of curiosity--I know people
predict you all are going to raise rates four times this year.
You are definitely going to raise rates some. How much of the
tax bill that was put in place, how much of that is affecting
your desire or your likelihood of raising rates over this year?
Mr. Powell. I would not single it out, Senator. I would
say----
Senator Corker. No, no. I am not trying to single it out.
But just out of curiosity, it is, in fact, something that is
going to be stimulative, so how much of a factor is it in
looking at raising rates?
Mr. Powell. Fiscal policy is one of many, many factors. As
you know, we are looking at stable prices and maximum
employment. That is what we are looking at. And everything that
happens in the economy and financial conditions and fiscal
policy affects that. We cannot really isolate one thing, you
know, like fiscal policy. But I think, you know, I would expect
that fiscal policy this year is going to add meaningfully to
demand, and that is going to put upward pressure on inflation
and downward pressure on unemployment. It is hard to quantify,
but it would not be the main factor. The economy is strong, and
it is even stronger now.
Senator Corker. So then as it relates to growth, you said
it was going to increase demand. How much of a factor is it in
your growth projections, the passage of the tax legislation?
Mr. Powell. As I mentioned, I think it will add
meaningfully to growth for at least the next couple of years.
The real question is: How much will it add to--and the amount
of that is subject to very different estimates by different
approaches, but I guess the bigger question is: How much will
it add to longer-run growth? There are a couple channels
through which that might happen. Higher investment should lead
to higher productivity, which would raise potential growth.
Lower tax rates on individuals should increase labor supply.
These are highly, highly uncertain, but we hope the effects are
meaningful there as well.
Senator Corker. You know, we have been through a decade
now, I guess, since the crisis, and many of us were here during
that time. It was a pretty heady time trying to resolve those
issues. And yet we went through periods of time when we were
worried about deflation. Obviously, we had really accommodative
monetary policy during that time. And here we are again at 4.1
percent unemployment, down from 10, as you mentioned, the
economy is strong, and yet still, let us face it, 2 percent
inflation--I know you all are combating anything getting out of
control. Elaborate on the factors that in this day and age--in
this economy in this world situation, what is it that is
keeping inflation at such a low rate?
Mr. Powell. It is a global phenomenon, and we do not
perfectly understand it, but I would say since the crisis, a
big factor that has been weighing down inflation has been just
the weakness in the economy. You have had a lot of slack, and
the economy has not been tight, and so it makes sense that that
would press downward on inflation. We also had, you know, the
strong dollar and lower oil prices in 2014 and 2015. That
pushed down. So more lately, we would have expected inflation
to come up by a few more tenths than it has, and we see
identifiable idiosyncratic factors. There are other stories,
though. There is the Amazon effect story. There is global
slack, the idea that slack around the world is affecting, you
know, the tightness of the U.S. labor market. It is really hard
to tie those down from an empirical standpoint, but that may be
having some sort of an effect on inflation as well. It is a
global phenomenon, though, so it is not just tied to domestic
factors.
Senator Corker. I know that my friends on the other side
tend to focus a lot on the tax bill, and there is hope that
growth is going to overcome any kind of deficits there. It may
or may not occur. But we are, in fact, getting ready to spend
$2 trillion more that we do not have by passing the bill we
just passed. We have got an omnibus coming up. Over the next 10
years, it is a minimum of $2 trillion in additional spending,
almost twice what the President requested, and we have $21
trillion in debt today.
How much does the deficit picture for our country come into
play relative to the Federal Reserve? And how concerning is it
to you that we continue just to party like there is no time
ending here in Congress?
Mr. Powell. We are not on a sustainable fiscal path. We
need to get on one. This is a good time to be doing that when
the economy is strong. But that is a longer-run problem. It is
not really--it is not a problem for today's monetary policy or
economy. It becomes a problem gradually over time as we spend
more and more of our expenditures on serving--on interest rate,
on debt service, and we have less and less to do the things
that we really need to do and as we pass along bills to future
generations. But the unsustainability of our fiscal path is not
something that has too much of an effect in the near term on
our policies.
Senator Corker. Thank you.
Mr. Chairman, thank you.
Chairman Crapo. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. Welcome,
Chairman Powell. Good to see you.
I want to follow up on some questions that my colleagues
Senators Brown and Shelby asked you about. Inflation is
continuing to run below the Fed's 2 percent target, which has
prompted a majority of the regional Federal Reserve Bank
Presidents to urge a study of the current inflation framework.
And while we have seen significant economic gains since the
worst days of the recession, most hardworking families are
still waiting to see their paychecks rise. Real median wages
increased by only 14 percent from 1979 to 2017, and any recent
acceleration in wages is accruing to high-paid executives and
managers with production and nonsupervisory workers simply not
seeing those gains.
The Fed is projecting a minimum of three interest rate
increases in 2018, and after your testimony on Tuesday, the
markets are now anticipating as many as four hikes.
Do you agree that the achievement of full employment should
be associated with strong and broad-based wage growth for
average workers, not just increases for executives and
managerial pay?
Mr. Powell. I do, Senator.
Senator Menendez. And if so, doesn't that argue for
consideration of a monetary policy path that would allow wages
to continue to grow prior to the Fed's pumping the brakes?
Mr. Powell. I agree that it does, and I believe that is, in
fact, the path we are on. These are gradual rate increases, and
we do expect wages to move up.
Senator Menendez. What would the cost to the economy of
overshooting inflation in the 2 to 3 percent range versus the
cost to the economy of choking off growth if the Fed continues
to tighten without a clear indication that inflation is going
to exceed its target be?
Mr. Powell. The risk, one of the risk we are trying to
avoid, I think as I mentioned earlier, the risks are more
balanced than they used to be. For many years, it was clear
there was a lot of slack in the economy, and, you know, I for
one supported accommodative policy. At this point we have 4.1
percent unemployment, and the thing we do not want to avoid--
that we do not want to have happen is to get behind the curve,
have inflation move up, and have to raise rates too quickly,
cause a recession. And recessions, they hit the most vulnerable
groups, you know, the hardest, and so that is where
unemployment goes up the fastest and that kind of thing. So to
prolong the recovery, the Committee's view is that we should
continue on this gradual path of rate increases which balances
lower inflation and low wages against the need to make sure
that we do not run too far past the natural rate of
unemployment.
Senator Menendez. Well, I hope you will continue to look at
wage growth as part of your calibrations.
Let me ask you this: During the confirmation hearing--and I
was pleased to vote for you--I asked you about the economic
risks of adding an additional $1.5 trillion to the deficit, and
I just heard your responses to my colleague from Tennessee that
we are not on a sustainable path, we need to get one.
Obviously, we were not on a sustainable path before we added
$1.5 trillion to the debt in the tax cuts that were generated.
And you then said in response, and I quote, ``I think we need
to be concerned with fiscal sustainability over the long
term.'' And in the same hearing, you agreed with Senator Van
Hollen when he asked you--you said adding $1.5 trillion to the
deficit would make a bad situation worse.
Now, your predecessor previously testified before this
Committee when she said, ``I am personally concerned about the
U.S. debt situation. Taking what is already a significant
problem and making it worse is a concern to me.''
Do you agree with former Chairman Yellen that there is
reason to be concerned about mounting deficits and growing
national debt?
Mr. Powell. I do, and I will follow what my predecessors
have done and not get too much into the details of fiscal
policy, but I will say a couple things.
One is that, as I mentioned, we need to get on a
sustainable fiscal path in the longer run. We know that we are
not in the longer run.
The second thing is when we do fiscal policy, when you do
fiscal policy, I think it is important to keep in mind measures
that would increase the productive capacity of the United
States of the economy, things that would increase productivity,
that foster investment in people, in education and training, in
R&D, and in plant and equipment as well. Those kinds of
policies can help the whole economy grow faster on a
sustainable basis.
Senator Menendez. I agree with you. I would suggest that
stock buybacks do not quite do that.
Let me ask you a last question. In January, the New York
Federal Reserve Bank president said that tax legislation is
likely to generate frictional costs that will mitigate its
effects on growth, namely disparate impacts regionally. In
particular, president Dudley was pointing out the gutting of
the State and local income and property tax deduction, which
would raise the cost of ownership and adversely affect prices
and construction activity in States like New Jersey.
Do you agree with president Dudley's analysis that States
like New Jersey will see regional economic disparities as a
result of the tax bill?
Mr. Powell. Senator, I hope you will allow me to say that I
would rather not get into the particular details of any
particular fiscal bill as Chairman, and I think that is--I am
happy to talk about things at a high level, but getting into
commenting on particular sections in a fiscal bill which is not
our responsibility for me is probably not a good idea.
Senator Menendez. Your president of the New York Reserve
made that observation, so I would hope that we would look at
the consequences to regional growth as part of your overall
growth path. The region that I am from generates nearly 20 to
25 percent of GDP for the entire Nation. If we are going to
have policies that ultimately affect the ability to be that
engine for part of economic growth of the country, we should be
considering that as well.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Cotton.
Senator Cotton. Thank you, Mr. Chairman. And, Mr. Powell,
welcome in your first appearance as Chairman, first of many. I
am sure you have them all circled on your calendar and look
forward to them with eagerness, as a child does to Christmas,
right?
Mr. Powell. Indeed.
Senator Cotton. I want to talk about the labor market, in
particular wage growth for America's workers. An article in the
Harvard Business Review last October discussed wage trends
since the 1970s and found that wage gains have mostly accrued
to top earners while wages have declined or been stagnant for
the bottom half of the income distribution. The bottom half of
the income distribution is comprised of many Americans who do
not have a 4-year degree, many who do not even have a high
school diploma. Research from the Economic Policy Institute
shows that American workers without a high school education
have seen their wages decline by 17 percent since 1979 adjusted
for inflation, and for workers with a high school education but
no college, wages have declined by 2 percent.
The chart to my left displays this, shows what I am talking
about. You can see the massive wage growth for those with a
college degree or an advanced degree and wage declines in real
terms for those with a high school degree or less. One of my
top priorities is to ensure that hardworking Arkansans can
share in the
economic prosperity that we see in our country in ways that
they have not over the course of my lifetime.
Mr. Chairman, you write--or I should say the entire Board
writes on page 2 and 3 of the Monetary Policy Report,
``Although there is no way to know with precision, the labor
market appears to be near or a little beyond full employment at
present.'' What is your personal assessment of this matter? Is
the economy at full employment today?
Mr. Powell. As we say in our statement of longer-run goals
and policy strategy, we look at a number of--there is no place
you can directly observe. We look at a range of indicators, and
I would say most of those indicators say that we are either at
or beyond full employment. There are a couple that suggest
maybe we are not. I would point to wages and I would point to
labor force participation by prime-age males. This is a long
answer. It is hard to give a really clear answer, but we do not
actually know precisely where full employment is. Put it all in
the blender, it seems to me we are very close to full
employment.
I would add that is not the case in every region.
Senator Cotton. To pick up on your point about labor force
participation, while our unemployment rate is a bit of good
news at 4.1 percent and jobless claims seem to be continuing to
trend downward, it is somewhat surprising, given those economic
conditions, that over the last year labor force participation
continued to decline from 62.9 percent in January of 2017 to
62.7 percent in January of 2018. Even if you account for
demographic change, for the aging of the baby-boom generation,
many estimates say that 2 million workers are still missing
from our economy.
I also would note that job growth continues to outpace
population growth, which suggests that there is still slack in
the labor market. And a lot of the slack appears to be in part
on the lower end of the economic scale of those workers who
have a high school degree or less than that.
Would you agree with that assessment?
Mr. Powell. Generally, yes. Labor force participation has
been essentially flat since the back half of 2013, so a little
more than 4 years, and the downward trend might be 25 basis
points a year. So I look at us as having made up probably the
slack that emerged--probably fully made up the slack that
emerged as part of the crisis.
Senator Cotton. And the wage growth we have seen over the
last year, while good, I would suggest is still not good
enough, especially as long as we have those missing workers. So
I would hate to see--putting aside all the other reasons why
you might see rate increases in the coming months ahead, rate
increases because of continued increases in wages, especially
for working-class Americans. And the labor market, like any
other market, is a market that is driven by supply and demand,
correct?
Mr. Powell. Yes.
Senator Cotton. So if the supply of labor exceeds the
demand of labor, then you would see downward pressure on wages.
That is one reason why I and some other Senators, like Senator
Perdue, have been so focused on our immigration system. You
know, if you could magically convert a million high school
graduates in this country to a million Stanford graduates that
could go to work in our high-tech industry, then presumably
that would be good for the wages of working-class Americans.
Well, that is essentially what we do every single year in
reverse as we bring in a million unskilled and low-skilled
workers that are competing against the very people who have not
shared in prosperity and, for that matter, competing against
the previous generation of immigrants. I do not think that is
good for American citizens. I do not think that is good for our
economy, and I will continue to work hard to make sure that
those workers share in the prosperity that all Americans in the
upper-income brackets, college educated and more, have shared
in the past.
Thank you.
Chairman Crapo. Senator Schatz.
Senator Schatz. Thank you. Chairman, thank you for being
here, and thank you for being willing to serve.
I want to talk about student loan debt. There is currently
$1.4 trillion in outstanding student loan debt, the highest
category of consumer debt behind mortgages. It is also the most
delinquent, with 11 percent of borrowers seriously delinquent
or in default. The Fed estimates that this number is likely
closer to 22 percent once you take into account the number of
borrowers who are in forbearance.
In contrast, at the height of the financial crisis,
mortgage delinquency was just under 5 percent, and currently
that rate is around 1 percent. According to the Federal
Reserve's data, high levels of student debt have contributed to
lower rates of home ownership and new business starts.
So, in your view, does the high level of student debt
create a drag on the economy?
Mr. Powell. On student loan debt, I think it is important
that people be able to borrow to make what may be the most
important investment of their lives, which is in their
education. So, overall, I think borrowing to invest in yourself
is something we should foster, subject to a couple of important
caveats.
First, it is very important that people understand the
nature of the borrowing and the risk that they are taking and
the possible payoffs and that sort of thing so that they make
informed decisions.
The second thing is I think alone among all kinds of debt,
we do not allow student loan debt to be discharged in
bankruptcy.
Senator Schatz. Right.
Mr. Powell. I would be at a loss to explain why that should
be the case. So it is something--and this is fiscal policy.
This is something for you, not something for the Fed. But we do
see and Fed research shows and other research shows you do
start to see longer-term negative effects on people who cannot
pay off their student loans. It hurts their credit rating. It
impacts the entire path of their economic life.
Senator Schatz. So that is the public policy argument for
us to do something about student loan debt and the way we
structure higher education financing. My question for you is:
Do you see this as a macroeconomic risk?
Mr. Powell. It will over time. It is not something you can
pick up in the data right now, but as this goes on and as
student loan continues to grow and becomes larger and larger,
then it absolutely could hold back growth.
Senator Schatz. OK. Thank you. And I want to thank you for
your willingness to have an open mind on the question of the
economic impacts of climate change. I appreciated your answers
in the questions for the record, and so I am glad you are
willing to talk about it. Your position is that the Fed is only
concerned with, and I will quote, ``short- and medium-term
developments that may change materially over quarters in a
relatively small number of years rather than decades associated
with the pace of climate change.''
Now, there are experts within the Government that would
strongly disagree that the problem of climate change is
measured in decades. They would say we are seeing the economic
impacts now. NOAA reported 16 separate billion-dollar climate
events in 2017. Combined, these events cost the United States
economy $300 billion, 1.5 percent of GDP. Two-thousand
seventeen was a record-breaking year, but according to NOAA's
science, it will get worse. The number and cost of these events
has more than doubled over the last decade, and it has
increased eightfold in the last 30 years.
So I understand that your aperture is short- and medium-
term. That is sort of a premise of how you operate. What I am
not accepting as a premise of how you operate is the assumption
that climate change belongs in the long-term category because I
think you are--you are analysts. You believe in data. And what
I would like for you to do is challenge that assumption that
climate only belongs in the long-term category, because the
Federal Government scientists are starting to indicate that
that is not the case.
So the question is: Are you willing to relook at that basic
assumption that climate is just outside of your window, to sit
down with our office and with Federal Government researchers to
at least examine the question of whether or not as you do your
planning, it continues to belong in this long-term category
which is outside of your aperture?
Mr. Powell. Senator, as we discussed in your office, I
guess last fall, you know, climate change is something that is
entrusted to other agencies. We have particular
responsibilities and particular tools: interest rate
supervision, looking out for the financial system. It is just
not clear that it is really in our ambit as opposed to in the
ambit of other parts of the Government. But we are obviously
always going to be willing to discuss it with you, but I do not
know exactly how it would fit into what we do with our tools.
Senator Schatz. I guess the question--I mean, I understand
what you are saying, but I am trying to figure out why a 1.5
percent hit to GDP last year and the agency that knows about
such things is telling us to expect more and more of it, why
that wouldn't be in your ambit? That is the first time I have
ever used that word.
[Laughter.]
Mr. Powell. Well, our ambit involves, you know, moving
interest rates up and down and supervising financial
institutions, so I do not know--I am not sure how it would
enter into that.
Senator Schatz. OK. I look forward to continuing the
discussion. Thank you.
Mr. Powell. As do I. Thanks.
Chairman Crapo. Senator Perdue.
Senator Perdue. Thank you, Mr. Chairman. I am Googling
``ambit'' over here in the meantime. Sorry.
[Laughter.]
Senator Perdue. Chairman, thank you for being here again. I
have a question. You mentioned in your opening comments that
foreign demand for U.S. exports is up, and I happen to believe
that if we are going to be north of 3 percent GDP growth, we
have got to grow our exports. And I think you have made those
comments publicly as well.
But the low interest rate environment over the last decade
has shown a proliferation of new lending, really a binge of new
debt issuance in the Third World, or developing world, let me
say that. And just this year--and a lot of that is short term,
so this year alone, there is some almost $2 trillion of that
developing world debt coming due this year, and about 15
percent of that is denominated in U.S. dollars.
Do you see that as we normalize rates here in the United
States, with the U.S. dynamics that we are talking about
between inflation and unemployment, that the impact that that
could have on the developing world could in effect have some
systemic risk on not only the global economy but on our own
recovery?
Mr. Powell. Senator, what we can do is we can be
transparent, we can be predictable, and the markets can,
therefore, understand what we are doing and be ready for it.
And I think if we do that, we use our tools to achieve stable
prices and maximum employment here in the United States, and
financial stability, and so what we try to do for the world
financial markets is be really clear about what we are doing,
predictable, transparent.
As I look at the state of the emerging market countries and
their financial markets and financial regulation, they are in a
much better place than they were 10, 15 years ago, even 5 years
ago. There is not as much dollar-denominated debt, foreign
currency-denominated debt. They have better institutions--not
everywhere, but it is a much better picture than it was 20
years ago, let us say.
Senator Perdue. So following up on that, you talked earlier
about reducing the size of your balance sheet, and that has
been an ongoing effort even before you took office, as I
understand it. So the question is: The four big central bank--
China, Japan, United States, and the European Union--all have
similar sized balance sheets, somewhere between $4 and $5
trillion. As you normalize or as you begin to consider taking
our balance sheet down to a more normal level, what actions do
you monitor of these other central banks? Or is it totally
independent when you make those decisions?
Mr. Powell. Well, we monitor all financial conditions and
economic conditions in what we do. The normalization plan that
we adopted through the summer and then put into place in the
fall has been accepted very well by the markets. There is no
obvious reaction at all. It is a gradual decline. We have said
we are not interested in deviating from that unless, you know,
unusual circumstances arise. And I think that should be the
path, and I think we get to a more normal balance sheet size
within about 4 years, give or take a year, let us say.
The other large central banks that are talking about
normalizing their balance sheets, they are behind that
schedule. Our economy recovered sooner. We are raising rates
sooner. So, you know, there is going to be some--it is not
going to be a synchronized thing. It is going to be something
that is happening more seriatim. But we will be watching that
very carefully. We are very mindful of the issue that you
raise.
Senator Perdue. Good. Thank you. One last question. It is a
technical question, but it has to do with the leverage capital
ratio that requires banks to hold capital against all assets,
regardless of the risk of those individual assets, an operation
that has created kind of a risk-blind rule. And I understand
the overall rationale behind creating this risk-blind rule. But
the question I have is ultimately I have a hard time
understanding why assets like Treasury securities and funds on
deposit in the Federal Reserve are also in that calculation.
Can you defend that and answer the question if you are
reviewing that practice?
Mr. Powell. Sure. My view is that the binding capital
requirement should be the risk-based capital requirement, and
that would take into account Treasurys and reserves and how
risky they are. The issue is that over time banks have figured
out ways to game risk-based capital, so we want a hard
backstop, and that hard backstop should be high and hard. It
should be the leverage ratio. We do not want the leverage ratio
to be the binding constraint most of the time because that,
frankly, encourages people to take more risk. If you are bound
by the leverage ratio, it is really saying you could probably
use some riskier assets. So we like leverage--particularly
risk-based capital has been vastly improved since the crisis.
So that is how we think about it.
Senator Perdue. So how would you view right now, in the few
seconds we have got left, just very quickly, what is your view
of the general health of the entire banking industry in the
United States, the capital formation arm of our economic effort
in a free enterprise system? What is your assessment of the
health of that industry today?
Mr. Powell. I think our banking system is quite healthy. I
think we have high capital, high liquidity. We have banks that
are much more aware of and capable of managing the risks that
they face. They are much more ready to face failure if they do
because they have living wills, and I think we are seeing
profitability. We are seeing returns on capital. And I think it
is a good time in our system.
Senator Perdue. Thank you, sir.
Thank you, Mr. Chairman.
Senator Brown. [Presiding.] Senator Cortez Masto.
Senator Cortez Masto. Thank you, Ranking Member and Chair
for this Committee. And welcome, Chairman Powell. It is good to
see you again.
I want to follow up on the conversation that you had with
one of my colleagues, Senator Shelby, on the Policy
Effectiveness and Asset Unit that you have created. Can you
speak to how many
people will work in the unit and how the importance of data
will inform the decisions you make?
Mr. Powell. I think it is five or six people now. I do not
know how big it will be, but it is going to be something in
that range, maybe a little bigger. But the idea is that we will
have, you know, a strong quantitative approach that is tightly
focused on cost-benefit analysis. I would stress we already do
cost-benefit analysis in everything we do, but we hear outside
that there is interest in doing more of that, and we are
actively pursuing it.
Senator Cortez Masto. And the reason why you are doing this
is so that it can inform your enforcement and policy decisions,
correct?
Mr. Powell. Well, yes. And the calibration of our
regulations, you know, we want to be able to implement
regulations in the least burdensome way we can, consistent
with, you know, safety and soundness.
Senator Cortez Masto. And the data is key for your ability
to do so, correct?
Mr. Powell. Very much so.
Senator Cortez Masto. And so I am glad to hear you speak
about the importance of data collection. I always support that,
and that is critical to the work of the Federal Reserve. As I
am sure you are aware, the legislation that we have been
talking about that is pending in the Senate, it would exempt 85
percent of depository institutions from full reporting of loan
data under the Home Mortgage Disclosure Act. Can you speak to
how this might impact the ability of the Federal Reserve to
properly conduct its obligations under the Community
Reinvestment Act and whether the loss of this data might hinder
CRA supervisory exams?
Mr. Powell. I will be glad to. As I understand it, the CFPB
writes the HMDA rules and regulations, and we use that data in
what we do, in supervising the banks we supervise, which is a
smaller group. In addition to that, we--sorry. I lost my train
of thought.
What Dodd-Frank did was that it took the base of historical
data collection and it significantly increased that. So my
understanding is that what is being looked at in a bill is to
create a broader exemption just from the Dodd-Frank additions.
And so, you know, I think we traditionally get almost
everything we need from the historical data, and I think we can
continue to work on that basis.
Senator Cortez Masto. Right, and that is my concern. The
more data, the better. I mean, you are creating a data unit
because data is key to your decisionmaking, and my
understanding is that the data that is used in the CRA
supervisory exams seems to exclude relevant data points. Loans
under $1 million are designated small business loans, even if
they were not loans administered to small businesses. There is
no analysis made whatsoever of whether lending is occurring in
communities of color, despite easing accessible data via the
Home Mortgage Disclosure Act.
And so my question is: Has the Fed considered broadening
that criteria in its CRA supervisory exams? And what factors do
you think would be helpful in determining whether small
businesses, communities of color, and low-income areas are
truly receiving the support that the law intended?
Mr. Powell. Are we still talking about HMDA data?
Senator Cortez Masto. Correct.
Mr. Powell. Again, HMDA data is really an issue for the
CFPB. They were given authority under Dodd-Frank to write the
HMDA regulations, and we generally defer to them in terms of
what their view is on that.
Senator Cortez Masto. So you do not think that data is
going to be informative in what you do with the Community
Reinvestment Act and the oversight of that to ensure that that
Act is being enforced under the law to protect communities of
color, to make sure there is no discrimination, to make sure
that the loans are being sent to small businesses, and ensure
that the money gets where it needs to go? That data is not
going to be helpful for you?
Mr. Powell. I do not say that it would not be helpful. What
I would say is that, first of all, that is an issue that the
CFPB actually has the lead authority on. In addition, we will
still have--my understanding is that we will still have under
this bill the information that we have traditionally relied
upon for just about everything we do under HMDA. So we may not
have the additional data from some institutions, but we think
we will be able to function.
Senator Cortez Masto. Well, let me just tell you--and my
time is running out, so I do not have enough time to ask the
additional questions that I want to ask you. But let me just
say this: As a former Attorney General in the State of Nevada,
my concern was discrimination against certain communities of
color, and the reason why we increased that data criteria is to
ensure there was no discrimination and ensure that the money
was going to where it was supposed to be going under the Act
and Federal authorities. And so I do not understand why we are
rolling back that data and those data criteria if we need--you
have said it yourself--to be better informed. You are creating
a data unit for analytical purposes to create and collect data.
It informs us in everything we do. And so my concern is just
that. How can we say we do not want the data when we know it
informs every decision that we are making, particularly to
ensure the money is going where it is going and there is no
discrimination?
Mr. Powell. We have been talking about data. Let me take a
step back and say that any kind of discrimination by race or
gender or any other unfair basis in lending is completely
unacceptable, and we are committed as an institution to finding
it and using all of our tools to stop it.
Senator Cortez Masto. Thank you. I know my time has run
out. Thank you very much.
Senator Brown. Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman. Good morning, Mr.
Chairman.
Mr. Powell. Good morning.
Senator Kennedy. Do stock buybacks contribute to economic
growth?
Mr. Powell. Well, if I can trace that out, when you buy
back your stock, the money goes to the shareholder. They lose
their stock. They could take that money, and they do with it
what they will. They can spend it. They can reinvest it. It
does not disappear. So there should be some effect. I have
asked this question. It is
essentially impossible to really track that on a micro basis,
but I would think intuitively it would go back into the economy
and either be spent or reinvested.
Senator Kennedy. Well, if a company buys back its stock and
the value of the stock goes up, then somebody has extra money,
right?
Mr. Powell. That is right. There would be a wealth effect
as well, as you point out.
Senator Kennedy. And they could invest that money?
Mr. Powell. They could. They could spend it, invest it, and
you are right, there would be a wealth effect from higher stock
prices, too.
Senator Kennedy. And the stock going up is better than the
stock going down in terms of economic growth.
Mr. Powell. It is, although I am a little hesitant to--you
know, I would want to say that it is not our job, as you know,
to stop people from losing money or making money in the stock
market.
Senator Kennedy. Right. In the last 60 days, the bond
market has been going down a little bit. What is that telling
you?
Mr. Powell. Well, I think longer-term interest rates have
been going up, and, you know, there are probably many reasons
behind that, and I would just offer a couple in my thinking. It
is the expectation of higher growth. It is probably the
expectation of inflation moving up a little bit closer to our
target. It is probably also a realization that growth around
the world is quite strong. So we have strong recovery in
continental Europe and in Asia, and so, you know, we are not
the only game in town now. If money goes to other kinds of safe
assets, that will tend to mean higher rates here. But these are
all generally positive signs.
Senator Kennedy. Could it be a sign of inflation?
Mr. Powell. It could be a sign of slightly higher
inflation, and we seek slightly higher inflation. Inflation has
been below our target since I joined the Fed almost 6 years
ago.
Senator Kennedy. You talked about us being at or near full
employment. We are not at or near the optimum labor
participation rate, though, are we?
Mr. Powell. The truth is we are not far from the longer-run
trend. We have models that--papers published 8 or 10 years ago,
and they pretty much tell you that the labor force
participation rate will be right about here. That is not really
the answer to your question. Labor force participation by
prime-age males, for example, has been declining for 60 years.
And there may be some good reasons for that, but there are a
significant number of reasons that are not good reasons for
that. So we as a country----
Senator Kennedy. What are good reasons for that?
Mr. Powell. So we may be on our longer-run trend, but the
trend is not a great trend. You know, there are many prime-age
males, and women, out of the labor force whose lives would be
better if they were in the labor force. And, you know, these
are not--we do not have the tools to really address that, but
it would be----
Senator Kennedy. In 2008, the labor force participation
rate was a tad over 66 percent. Today it is a tad over 62
percent. That is not good for the economy, right?
Mr. Powell. It would be great to have labor force
participation at a higher level, as most advanced economy
countries do. Our labor force participation rate is now, you
know, not even at the median of comparably wealthy countries.
Senator Kennedy. Right. And why is that?
Mr. Powell. It really is this trend of prime-age workers
leaving the labor force. A lot of that burden has been borne,
as Senator Cotton was pointing out, by people with high school
educations and below, the less skilled and lower-wage jobs. And
it has been going on a long, long time. It is, as I said, a 60-
year decline.
Senator Kennedy. But why, in your opinion?
Mr. Powell. I think it probably has to do with, you know,
the evolution of technology. It certainly has to do with the
flattening out in the U.S. educational attainment. U.S.
educational attainment went up for many, many years, and then
it started flattening out in the 1970s. And right about that
time, U.S. wages flattened out, and labor force participation
starts to get weak. So we kind of reached a point as a country
where we could not increase educational attainment, and really
many things started happening right about then, the stagnation
of median incomes, for example.
Senator Kennedy. If we could jack the rate up to pre-2008
levels, that would be an enormous stimulus to the economy,
would it not?
Mr. Powell. It would. And, of course, there is an
underlying trend, too, of the aging of the population. So even
though older people work more than they used to after the
crisis, older people still work less than younger people. So as
the population ages, that is going--that is why labor force
participation goes down 25 basis points each year.
Senator Kennedy. Thank you, Mr. Chairman. Thank you, sir.
Chairman Crapo. [Presiding.] Senator Warren.
Senator Warren. Thank you, Mr. Chairman. And it is good to
see you again, Chairman Powell.
As you know, a few weeks ago, on Chair Yellen's last day in
charge, the Fed issued a consent order against Wells Fargo
prohibiting the bank from growing any larger until it made
certain improvements. Now, the Fed also effectively forced
Wells to remove an additional four board members this year. I
have pushed the Fed for real accountability on Wells Fargo and
its board for repeatedly cheating its customers, and I was glad
to see the Fed take action. But I want to understand how the
Fed intends to enforce the consent order now that you are in
charge.
The Fed requires Wells to submit two plans for approval by
early April: one on improving the effectiveness of the board
and one on improving the board's risk management practices.
This is not clear from the order. Will the Fed Board of
Governors vote on whether to accept these plans?
Mr. Powell. So we have delegated that approval, I believe,
to the head of Supervision, but, of course, that will----
Senator Warren. Your staff?
Mr. Powell. But that will take place--I assure you that
will take place in serious consultation with the Board.
Senator Warren. Consultation, but the Board is not going to
vote on this?
Mr. Powell. That is not the plan.
Senator Warren. Well, you know, I do not understand this.
The Fed has issued a major unprecedented consent order against
one of the biggest banks in the world, and the Fed Board, the
people who are actually appointed by the President and
confirmed by the Senate, are not going to vote on whether the
order is actually being followed?
Mr. Powell. Well, of course, we did vote unanimously on the
measures themselves.
Senator Warren. No. Whether or not the order is actually
being followed, because that is the big question here. In my
view, staff is not good enough, Chairman Powell. Fed Board
members are supposed to make the big decisions, and Fed Board
members are supposed to be accountable for these decisions.
Will you consider requiring a vote of the Fed Board before
these plans are approved?
Mr. Powell. Yes.
Senator Warren. Good. Thank you. I appreciate it.
The next steps it that an independent third party must
review Wells' implementation of these plans by the end of
September. Will you commit to making that independent review
public, redacting any confidential supervisory information that
is necessary? I think the public deserves a chance to
understand how Wells is working to fix the mistakes that it has
committed.
Mr. Powell. I cannot make that commitment to you without
discussing it with my colleagues and with staff who are
implementing this thing.
Senator Warren. Will you----
Mr. Powell. I will look into it, yes.
Senator Warren. Will you look into it? Will you urge your
colleagues to consider making this public?
Mr. Powell. If it can be made public----
Senator Warren. I am fine about redacting confidential
supervisory information. But my view here is that the American
public, given all that Wells has done, the American public has
a right to see it, and all of those Wells customers who were
cheated have a right to see whether or not Wells is actually
following through on its promises. You can see why some people
might lack a little confidence in that?
Mr. Powell. Right, so we will--I will look at that, and if
there is a way to do it that is faithful to our obligations and
our practices, then----
Senator Warren. Thank you. Good. And, last, the consent
order says that the growth restriction remains in effect until
Wells Fargo ``adopts and implements'' the plans that were
approved by the Fed. So I want to be really clear on this. To
lift the growth restriction, the Fed needs to see that the
plans have been fully implemented, right? It is not enough that
Wells has taken some preliminary steps toward implementing the
plans. Is that right?
Mr. Powell. No. I do not think that is right. I think the
thought was that once we have approved the plans and they begin
to implement them, we see them on track, the growth restriction
could then be addressed. No guarantee there, but we would then
be prepared to look at it.
Senator Warren. You know, I am actually--then tell me, how
much progress along that line is enough to remove the growth
restriction?
Mr. Powell. Well, I think, again, we will have to be happy
with the plan itself. We will have to be assured that the
company has made these really significant measures and
suffered, you know, a significant period of growth cap. And,
you know, we will not lightly lift it, but I think that is our
understanding of how we are going to do it.
Senator Warren. You know, the growth restriction is your
really big stick here, and I hope that you will not consider
lifting it just because Wells makes some marginal progress.
Wells should fix its problems before it is permitted to grow
any bigger. The consent order sent a powerful message to big
banks that there could be real consequences, including
consequences for senior officials if they break the law. But
that message will be lost if the Fed does not enforce the order
strictly and show the public and the banking industry that they
mean business. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Tillis.
Senator Tillis. Thank you, Mr. Chairman. Chairman Powell,
welcome. Thank you, and our congratulations on your
confirmation.
Can you just explain--because I was watching a lot of the
hearing in my office before I came up here, and you talked
about global slack a couple of times. Can you explain to me
what that really means?
Mr. Powell. The thought is that it has become over the last
30, 40 years during our adult lifetime possible to make just
about anything just about anywhere. Technology has enabled
that, and rising living standards and capabilities in emerging
market countries has created that opportunity. And the thought
is that that capacity outside the United States is in a sense a
form of slack so that if you are, for example, a worker
bargaining for higher wages, you are held back by this overhang
of knowing that, you know, you can lose your job in that kind
of thing.
The issue is that, you know, globalization, most measures
of globalization sort of plateaued out at about the time of the
crisis, and yet it does not--that story makes a lot of
intuitive sense, but it does not actually link up very well
with the path of wages over the past few years. So it is
something we have looked at, and it gets written about a lot.
Senator Tillis. Actually, I think that is a very important
point because there is a lot of latent productivity that could
be globally deployed that, as we talk about wages and we want
to do a good job of moving wages in the right direction, they
reach a certain point to where we could plateau again because
that capability to deliver could go outside of our
jurisdiction. I think that is a very important point.
On productivity, a couple of years ago I met with former
Chair Greenspan, and he was talking about--the one thing that
he was most concerned with at this time was the kind of static
growth in capital investment, and he was saying, you know, a
healthy percentage of GDP is somewhere around 8 percent, and we
were trending down in the 4 percent range. Do you view that as
a key indicator that we have to increase? And what, if any,
trends are you seeing that give you some sense that we are
getting to a healthy percentage of capital investment as a
percentage of GDP?
Mr. Powell. We do not know how to predict productivity
growth very well, but we do think it links up over time with
things like investment, investment in people but also
investment in plant and equipment, R&D, and that kind of thing.
Unfortunately, what the financial crisis did was it
generated very weak demand conditions for a long time, and that
created weak investment, and that itself then furthers weak
demand. So it is kind of a bad, self-reinforcing cycle that we
had there for a while. That is why it is so heartening to see
investment, business investment, moving up last year and
perhaps continuing a strong performance this year, is our
expectation. It is ultimately only productivity that raises
living standards, and investment is one of the keys, not just
investment in plant and equipment, but certainly in the skills
and aptitudes of our people as well.
Senator Tillis. Do you get a sense that what we have done
with tax reform is a potential positive contributor to seeing
that investment move up?
Mr. Powell. I do think it is a potential positive
contributor in the sense that when you lower the corporate tax
rate, you lower the user cost of capital. You know, like you, I
have spent a lot of time working with private sector companies,
and that is one of the factors they consider. It is not the
only factor. But lower user cost of capital is something that
should spur more investment over time, and that should add to
productivity. Hard to quantify, but I think it is there.
Senator Tillis. You and I talked about this once or twice
in my office, and in my remaining time, I would like for you to
talk a little bit about the job that Mr. Quarles has and post-
crisis regulatory right-sizing, I would be interested in your
thoughts on Basel IV and regulatory tailoring. I know people
asked you--I was watching in my office. On the Committee I
think some asked you about the banking regulatory reform bill
that passed out of here, which provides some regulatory and I
think responsible regulatory relief for a portion of our
banking sector. But what more can we expect to see that are
within your lanes and within your authorities on right-sizing
regulations?
The other thing I remember with Mr. Greenspan, he said the
most troubling job creation growth that he saw at that time--
this was 2 or 3 years ago, post-crisis, about 300,000 jobs that
had been created under the tide of regulatory reform, which in
my world that is by definition a nonproductive job. So I am
kind of curious to see what kind of--how are we going to get to
a more tailored--I think Senator Perdue asked this question.
How are we going to get to a more tailored, more reasonable
regulatory burden on this industry that still manages the risks
that you have to be concerned with?
Mr. Powell. I think our concern is to maintain and
strengthen but make more efficient the big improvements we
think we made after the crisis--that is, higher capital, higher
liquidity, stress
testing, and resolution planning--and those are going to apply
and continue to apply to the largest, most complex institutions
in the strongest form. Our effort then is to tailor that at
every level as we move down and make sure--and we did a lot of
tailoring along the way, but we are now going back through each
level to make sure that we have got that tailoring just about
right. Not
everything that we need the eight systemically important
institutions to do needs to be done by every bank, and many of
them have much simpler business models that are much more
traditional banking, and different regulatory strictures should
apply to those companies. So it is something we are working on.
Senator Tillis. Mr. Chairman, the only thing I would say,
as somebody who worked in a firm that helped prepare CCAR and
stress tests results, it still is unimaginable to me how a
properly tailored environment could result in 60,000- and
100,000-page submissions. There has got to be a better way to
do it, even at the high end of the spectrum, and I just look
forward to you all continuing to look at it and manage the risk
but right-size it.
Chairman Crapo. Senator Jones.
Senator Jones. Thank you, Mr. Chairman. Chairman Powell,
thank you for being here and welcome.
I would like to go back to a couple questions. I think it
is pretty obvious that folks on the Committee are concerned
about wage growth in addition to unemployment. You said in your
testimony that with the economy growing the way it is, you
expect to see wage growth continue, but that has been on a
fairly modest trend over the last few years. So you see that
wage growth increasing over the next couple of years as opposed
to the very modest trend that we have seen?
Mr. Powell. That is my expectation, Senator. As we have
moved from 10 percent unemployment down to 4.1 percent, we have
seen some gradual increase in wages, but, frankly, not what I
would have seen. I think as you look back over the last 3 or 4
years, you can kind of tell the story about why that was the
case. Now we are at 4.1 percent unemployment, labor force
participation is higher relative to trend than it was, and I
guess I would have expected to see higher wages now. And I do
continue to expect them to rise as the labor market continues
to tighten.
Senator Jones. Well, assuming the economy continues to grow
as you expect, are there factors that we need to be on the
lookout for that could prevent the wage growth that you would
anticipate as opposed to the very kind of--not flat but very,
very modest wage growth? Are there factors that we need to be
concerned about or looking about in the future?
Mr. Powell. I think ultimately sustainable wage growth is a
function of productivity. Wages should equal, you know,
inflation plus productivity. And so to get wages to go up
sustainably over a long period of time, we need higher
productivity. That is a function of investment in people,
investment in plant and equipment, R&D, all those things that
drive us to be more productive. That is really the only way to
have sustainable wage growth.
Senator Jones. OK. Well, that kind of leads me to another
area, and I do not want to misrepresent your testimony of the
other day, so if I characterize something wrong, just please
tell me. It will not be the first time I have been told I am
wrong about things. But I think you said on Tuesday to some
extent that limiting immigration could limit our productivity
growth in the coming years. Chairman Yellen, your predecessor,
also told this Committee in the past that limits on immigration
could limit GDP growth. And so without putting you on the spot
to try to get you to wade into very specific hot-button issues
that we have got here, can you talk a little bit about why
immigration may boost productivity and GDP growth?
Mr. Powell. So to go back to what I was saying, you can
think of growth being a function of growth in the labor force
plus productivity. Those are really the only two ways the
economy can grow--more hours worked and more output per hour.
Now, if you look at our labor force growth, it used to be
2, 2 \1/2\ percent, you know, 25 years ago, 30 years ago. Now
it is about 0.5 percent as the population ages, and some part
of that 0.5 percent is immigration. So I think those of you who
have the decision rights around immigration, this is a factor
that you ought to consider. It does not directly affect
productivity, but it affects potential growth through the labor
force.
Senator Jones. All right. And I do not know if this would
be an appropriate question, but is our current immigration
policy in any way contributing to the lack of wage growth, as
you see it today?
Mr. Powell. You know, immigration is one of those issues
that we do not really have authority over, and, you know, I can
speak to it as it relates to things like potential growth, but
I am loath to get into current policy and things like that. I
think I will follow my predecessors in sticking to our knitting
on that.
Senator Jones. All right. I kind of thought that would be
the answer, but I was going to ask anyway.
Going back to wage growth, what can we do, as wage growth
continues, to try to decrease the disparities that women have
in the labor force, that the minority population, you know,
whether they be Hispanic or the African American population,
have in the labor force?
Mr. Powell. Any kind of discrimination in our society, in
our labor force, is, of course, unacceptable and not something
that we can tolerate. Having said that, you know, we do not
have the tools, broadly speaking, to address those things.
The tools we do have, though, the biggest thing we can do
is to take seriously our statutory mandate of maximum
employment. As you can see, when we go into a recession, it is
the most vulnerable populations whose unemployment rates go up
the fastest and the highest, and you can see that they come
down the most in the recovery. They tend to not get down as low
as people with college degrees and things like that. But at the
same time, that is really how we can contribute.
Senator Jones. All right. Last, there were comments made in
your testimony on the House side concerning the appropriations
process and potentially having Congress appropriate your
budgets for nonsupervisory type activities of the Fed, and I
would like your quick opinion on that, and also how a potential
Government shutdown might affect that should you have that
appropriations--I have been fairly critical of the way that the
budgetary process here has been taking place, and so we have
had five--you know, we have had a couple of shutdowns in the
last couple of weeks. How would that have affected your ability
to supervise?
Mr. Powell. Legislatures all around the world, governments
all around the world have seen fit to give central banks an
independent source of funding, and I would say that that is a
wise decision. The things that we do may not always be
politically popular, and I think it is wise to give us just a
little bit of degree of separation. Of course, we are
transparent; of course, we are accountable. And that is not
just for monetary policy. Here in the United States, all three
of the bank regulatory agencies have an independent source of
funding. This is a decision for Congress, that Congress has
made for the last 40 years. It has not stopped Congress from
providing, you know, appropriate oversight of our activities
and regulations. So I would just say that I do not see what
problem we are solving here.
Senator Jones. It seems to be working. If it is not broken,
do not fix it.
Thank you, Mr. Chairman. I appreciate that.
Chairman Crapo. Thank you. And before I turn to Senator
Moran, I would note to our Members we have a series of three
votes being started in about 5 or 6 minutes, and we have four
speakers left here. If you are all very concise and stick to
your 5 minutes, I think we can probably wrap this up at the
tail end of the first vote and go over. So please pay attention
to the clock. We will not be able to go over and come back
because of the three votes.
Senator Moran.
Senator Moran. I am glad I am next, Mr. Chairman.
[Laughter.]
Chairman Crapo. Five minutes.
Senator Moran. Mr. Chairman, thank you very much for
joining us today. You are new at your job. I would tell you
that, listening to you in previous settings and today, you are
reassuring, seemingly competent, perhaps exactly the right
thing we need at the Federal Reserve in today's economic and
political world. So thank you very much for your service to the
country. I hope I do not have to change my comments about you
in the future, so we look forward to working with you.
Let me go through three things. A Treasury report recently
indicated that the current exposure method, CEM, may not
appropriately measure the economic exposure of a listed options
contract, and that a risk-adjusted approach for valuing options
for purpose of capital rules such as weighing the options by
their delta might be in order. I think this issue need a
quicker fix, and perhaps there is a long-term fix, but are you
in a position to make the changes that you at least at times
have said it is important to make?
Mr. Powell. Yes, we are, Senator. I think we are in the
middle of a changeover from CEM to SACCR, which is the other
way to do it, and we are also looking at the calibration of the
enhanced leverage ratio. Both of those things should help.
Senator Moran. What kind of timeframe do you believe you
are on?
Mr. Powell. I would be loath to give you an exact date. Why
don't we come back to your office on that? But this is an
active thing, I think fairly soon.
Senator Moran. Very good. I would welcome the follow-
through. Tomorrow I will meet with Esther George at the Kansas
City Fed, and I look forward to that conversation. Part of what
I will talk to her about is agriculture and particularly the
rural economies of our region. Let me highlight for you
something that I think is important for you in your regulatory
role to remember.
Farmers and ranchers often come to me and ask about the
safety net that comes from a farm bill. Farm policy is designed
to help farmers and ranchers in difficult times, generally
difficult economic times. We are experiencing those times now.
The challenge is significant for someone trying to earn a
living in agriculture. But there is a safety net that I think
is often forgotten, and that is the relationship between the
lender in their community, a relationship banker, a financial
institution, and that family farmer. And I just want to
highlight once again the importance that we do not get to the
circumstance in which the examiners, the regulations prohibit
bankers from making decisions about lending or access to credit
by agriculture based upon some very restrained, restrictive
method. Let the issue of character, relationship, history
between what is often a family owned bank and a family farm
continue. That is one of the most important safety nets in
difficult times, the relationship between our lenders and our
bankers, and where I see the threat of that diminishing or
being eliminated is through the regulatory process in which a
bank is written up for making a decision that they feel
comfortable with but a regulator may not.
Any response to that?
Mr. Powell. I will just take that very much to heart,
Senator.
Senator Moran. Thank you very much.
And then, finally, let me ask a question about education.
If we are looking for economic growth, it seems that a highly
motivated, trained, and educated workforce is a significant
component of that. Do you have in your understandings of the
circumstance that we face in the employment market where we
should be focusing our support for education or where we should
be emphasizing for students and adults--those two things are
not different--for those who need an education and additional
training, where we ought to be focusing our resources to meet
the economy's needs for that highly motivated, educated, and
trained workforce?
Mr. Powell. You know, I am probably not the right person to
get down into the details of exactly where to focus. I will
just say, though, that my view is that in the long run the only
way we can sort of win in the international competition is by
having the best educated, most productive workforce in the
world. There is really no way to hide from that requirement,
and that is education. It is also training. It is not just
college education. It is also, you know, apprenticeship
programs and that kind of thing, which also can be very
successful.
Senator Moran. Tax rates are an important component in
making business decisions, but meeting workforce requirements
is there as well. Is that true?
Mr. Powell. Yes.
Senator Moran. Thank you.
Mr. Chairman, thank you.
Chairman Crapo. Thank you.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman. Let the record
show your timeliness in starting meetings meant that me being 6
minutes late really was----
Chairman Crapo. I noted that and felt bad for you.
Senator Warner. It was quite a challenge. But I wanted to
stay because I wanted to ask the Chairman two very important
questions. Let me preface this by saying, you know, in my first
year here, one of the most important pieces of legislation I
have ever worked on was the Dodd-Frank legislation. I think
Dodd-Frank, for all its challenges, has made our system
remarkably stronger. But we are 8 years later, and there is a
broad, bipartisan group of us who are going to debate on the
floor next week legislation that would make some modifications.
In this legislation, S. 2155, we have not changed the
requirements that the Fed perform annual Dodd-Frank stress
tests on banks above $250 billion. I think that is terribly
important to maintain. We do give the Fed, after an appropriate
period to do a rulemaking, the ability to look at those banks
between $100 and $250 billion--and this is very important--to
continue to undergo stress tests on a periodic basis. My view
is that stress testing is the most important prudential
standard and that frequent stress tests are some of the best
tools we have to prevent another financial crisis.
Can you give us your views on stress testing, including how
rigorous they should remain and how frequent they should
remain, on banks between $100 and $250 billion in assets if
this legislation passed?
Mr. Powell. I would be glad to. Let me just echo what you
said. We do believe that supervisory stress testing is probably
the most successful regulatory innovation of the post-crisis
era. We are strong believers in this tool, including for
institutions of $100 to $250 billion. So it would be our
intent, if this bill is enacted, to continue, that these
institutions would continue to have meaningful, strong,
regular, periodic stress tests, frequent stress tests. And,
again, we see it as a very important tool for these
institutions.
Senator Warner. I hope, again, folks will be listening to
this. We are not touching anything on the largest institutions
in terms of the annual stress test on folks above 250, and as
the Chairman of the Fed has indicated, even amongst those banks
between 100 and 250, we are still going to have frequent,
periodic stress tests that are still going to be strong, and
the legislation lays out in some detail some of the
requirements that we would have in those stress tests.
My last question is this: In terms of overall enhanced
prudential standards, we do move in this legislation from $50
billion to $100 billion. But we give you then in the group of
institutions between $100 and $250 billion an 18-month period
to essentially tailor those standards more appropriately. And
as you have indicated, we already have an institution below
$250 billion that still qualifies as a SIFI. So I would just
like to say again for the record, for folks who are watching
and who will watch the debate next week, that you will take
this responsibility of this 18-month rulemaking and do a
thorough examination of the banks that fall in that category,
and those that are claiming that somehow all enhanced
prudential regulations of banks that fall into that category
are going to suddenly magically disappear sure as heck is not
the intent of this
individual in terms of that legislation and I hope is not the
intent of the Fed.
Mr. Powell. What I see us doing is creating a framework--we
will be looking at all the institutions that are in that area
and all the risks that might arise in banks between 250 and
100, and we will create a framework for assessing where
systemic risk might be, where there might be regional risks. We
will look at everything. And that framework will then be in
place in 18 months, and if there are institutions that are
currently in that population or that over time become
systemically risky or even risky to themselves, the way the
legislation gives us a lot of flexibility to do that, then we
will have that in place. And as you point out, we have not been
shy about finding systemic risk under 250. We are perfectly
happy to do that. So we will feel comfortable doing this job, I
believe.
Senator Warner. Listen, I look forward to a fair and
spirited debate next week. A lot of Members have different
views. But I think it is very, very important when people go
about talking about doing away with stress tests or eliminating
any kind of enhanced prudential regulations, that is not our
intent. There may be some tailoring that goes on in this new
category, but particularly for the larger institutions, status
quo is going to remain.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you. And Senator Heitkamp is next. I
will let our Senators know we are 5 minutes on our way to the
vote, so we have got to really go.
Senator Heitkamp.
Senator Heitkamp. Thank you. I just want to follow up a
little bit on HMDA and clarify what--I was not able to attend
because I had other hearings, but what I understand has been
discussed has been a clarification from you that nothing in
this bill that will be debated next week undermines the Fed's
ability to enforce fair lending laws. Is that correct, Mr.
Chairman?
Mr. Powell. That is generally right. CFPB really writes
these rules, and you should seek comment from them, if you
like.
Senator Heitkamp. But you would acknowledge that our bill
preserves the traditional HMDA data collection on race?
Mr. Powell. It does, yes.
Senator Heitkamp. So while the bill does not undermine fair
lending, it does meaningfully reduce substantial costs imposed
on small lenders from HMDA data collection. I think this is the
motivation. These costs can reach into the hundreds of
thousands of dollars per year. One small institution estimates
that the cost of HMDA quality assurance for their bank equals
approximately $400,000 per year and involves five associates.
So when it comes to regulation, we have to look at the benefits
and the costs.
One of the things that I think I just want to impress on
people is that when you do not respond to these kinds of
concerns, legitimate concerns from small lenders, there is a
resentment to the overall policy that, you know, we tend to
throw the baby out with the bath water because of the level of
frustration.
Wouldn't you agree that we could, in fact, reduce costs to
small lenders and still maintain the protections provided by
HMDA?
Mr. Powell. Yes, I do agree.
Senator Heitkamp. So when we are looking at going forward,
I think it is important that we have a very spirited debate
about this, but I think it also is very important that we put
it in perspective and that we not exaggerate the results here
or the purpose of this bill. And so, Chairman Powell, just one
question, and I know you have been answering a lot of questions
about the economy, writ large, but I wanted to just get your
sense of economic growth as we look at--again, no big surprise
I am going to ask a question about trade. I know you guys do
not always like answering those questions. But it seems to me
that we are now looking at a potential of tariffs being imposed
on aluminum and steel for which there will be retaliation. We
have, in fact, retreated somewhat from the commitments on
NAFTA, and we no longer have a pathway into TPP.
How concerned are you about the impacts of this trade
policy of this Administration on our opportunity for economic
growth long term?
Mr. Powell. I will not comment directly on the
Administration's policies, but I will say about trade that I
think the record is clear that over long periods of time for
many, many countries, trade is a net positive. It spreads
productivity. It forces our companies to compete. It gives
businesses and people the ability to buy and sell things in the
world market. So, overall, the studies all show and theory
would suggest that it is a good thing.
But the benefits do not fall equally. There can be
communities, there can be individuals who are negatively
affected by trade, and we have seen a fair amount of that. I
think it is more of that than probably was expected. And I
think it is important that we address that as well so that you
can sustain public support for trade.
I think, you know, as Chairman Bernanke said, the tariff
approach is not the best approach there. The best approach is
to deal directly with the people who are affected rather than
falling back on tariffs, but, again, these are not measures
that are consigned to us. They are really for you and for the
Administration.
Senator Heitkamp. But I think that these are measures that
are going to have an effect on the kind of economic analysis
that you do that is going to lead to monetary policy. I do not
think there is any doubt that trade will have a dramatic impact
on economic growth, and I am very, very concerned about making
sure that our trade policy is consistent with economic growth
and also very concerned about the speed at which systems today
can react to trade policy as opposed to maybe 20 or 30 years
ago when it was kind of, you know, plodding along. It was OK if
the WTO took 10 years. Today I do not think that is true, and I
do not think it is true that it is OK that it takes 10 years to
get back into TPP. I think things will move a lot quicker, and
they are going to have--it is going to have a dramatic effect
on our ability to be competitive in this country and to
encourage investment and growth.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman. And
thank you, Mr. Chairman, for being here today.
One of the things that we have noticed over the last many
years is the decline in workforce participation of prime-age
men. In fact, the Kansas City Fed has done a lot of good
analytical work on this. One reason is automation. Those are
particularly the types of jobs, it seems, that are easily
replaced by some type of technology--machines and computers, et
cetera. As we go forward, I would assume that that trend will
continue, and it raises the question of how does the Fed plan
to forecast these effects of automation with your mandate for
full employment? We could find ourselves technically at full
employment but with millions of Americans who are out of luck
and out of jobs and technically not in the workforce. How are
you going to deal with that?
Mr. Powell. The long history of this, as I am sure you
know, is technology comes in and it can displace people, but
ultimately if society--if the people in society have the skills
and aptitudes to benefit from technology, then the advent of
technology lifts all boats. So for 200 years really, since the
Industrial Revolution, we have faced this problem, and over
longer periods of time, it has always been the case that
technology lifts all boats in a way.
Now, I do not think there is any law of nature that says
that that has to continue, and the reason--the part of it that
we control is skills and aptitude of our labor force. To the
extent people have the skills and aptitudes to benefit from
technology, to operate technology, then they will benefit from
it. And to the extent they do not, it is people with the high
school degree and less who have really experienced the worst of
this. You know, that is where wages are low, that is where
labor force participation is low, all those things.
So it is a really easy thing to say and a really hard thing
to do, but it comes down to education.
Senator Reed. Do you think we are doing enough in terms of
education, in terms of Federal, State, local investment? We
just saw West Virginia shut down for 2 days because their
teachers felt they were not being compensated well enough, and
we have a situation I think in Oklahoma where they are only
going to school 4 days a week because of budget problems. So I
agree with you, education is a key. We just do not seem to get
that message.
Mr. Powell. There is nothing in the productivity data or
any other economic data that suggests we are handling this
problem well. All around the world, others are catching up and
passing.
Senator Reed. And exceeding us.
Mr. Powell. Yes.
Senator Reed. Yes. One other point, and this is sort of a
passionate issue with me, and that is the Military Lending Act.
The Federal Reserve has the responsibility among many agencies
to enforce it. The Department of Defense promulgated
regulations in 2015 which I think are tougher. It essentially
says you cannot charge someone in uniform over 36 percent
interest. That seems to me a pretty fair rule. And having just
come back from Somalia and being with Special Forces people and
their families back home, I think this has to be enforced
aggressively. Can you tell me what you are doing to make sure
that your responsibilities under this rule are vigorous and
proactive and relentless?
Mr. Powell. Well, we share your view about the importance
and value of enforcing this, I assure you, and this is one
where--as I think we have discussed, this is a very important
regulation, and it will get aggressive enforcement from us.
Senator Reed. And you will get the message out to your
regulated entities that this is really at the top of your list?
Mr. Powell. Yes, we will.
Senator Reed. Thank you, sir.
Chairman Crapo. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. And welcome,
Mr. Chairman. Good to have you here in the Banking Committee in
your official capacity.
I know there has been some discussion about stock buybacks.
Stock buybacks are primarily a way for corporations to increase
the share price. Isn't that right?
Mr. Powell. Yes. I mean, it works in that way, yes. It is a
way for companies to distribute cash to shareholders as well.
Senator Van Hollen. Exactly. So I do think it is worth
pointing out that since the tax bill was passed, which was in
large part advertised as a way to dramatically increase wages
of workers--in fact, the predictions were $4,000-a-year pay
increases. We have seen the overwhelming amount of the money
that has gone to corporations used for stock buybacks, in fact,
$200 billion of stock buybacks just in the first 2 months of
this year alone, including a $20 billion stock buyback from
Wells Fargo, a major financial institution that we have had a
lot of discussion about in this Committee, primarily because of
a violation of consumer protection issues.
I do think it is also worth pointing out that over 35
percent of the stock owned is actually owned by foreigners and
foreign entities, which is why the Prime Minister of Norway,
when she visited a short time ago, thanked President Trump for
the tax bill because it dramatically boosted the stock value of
the Norwegian Government and its holdings. But it means money
not going into the economy, generally speaking, direct
investment by those corporations.
I wanted to ask you about the issue of cybersecurity and
the impact of cyber attacks on our overall economy. We have
seen big banks that have been victims of cyber attacks like
JPMorgan. I believe the Fed in the past has been the victim of
some cyber intrusions. And the Council for Economic Advisers
just put out a report indicating that malicious cyber activity
cost the economy between $57 billion and $109 billion in 2016--
a big number--and the Chairman of the Committee has spent a lot
of time focusing on this issue, and we had a hearing
specifically on the Equifax breach.
This evening, I am going to be teaming up with our Maryland
State Attorney General, Brian Frosh, to have a forum on
consumer protection. Seven hundred people have already signed
up for this, and we expect many of them to have been victims of
the Equifax breach.
My understanding is there has been reporting, first of all,
just this morning, that Equifax found an additional 2.4 million
people impacted by the breach, and there was also a February
4th report saying that U.S. consumer protection official puts
Equifax probe on ice, and the article says that the CFPB, under
the leadership of Mr. Mulvaney, has ``rebuffed bank regulators
at the Federal
Reserve, the FDIC, and the OCC when they offered to help with
onsite exams of credit bureaus in connection with the Equifax
investigation.''
Can you confirm whether or not the Consumer Financial
Protection Bureau has rebuffed offers by the Fed to help them
get to the bottom of the Equifax----
Mr. Powell. No, I cannot. I had not heard that.
Senator Van Hollen. If you could get back to us--I mean,
this is a publicly reported document. Would you be willing to
get back to us and let us know, confirm or say one way or
another?
Mr. Powell. Sure.
Senator Van Hollen. I appreciate that very much.
In terms of the impact on banks, you have the direct
impact--banks are also impacted when those that have less cyber
protections--you know, Target, for example--are hacked, and as
a result of that, the banks have to pay the credit card cost
directly to consumers. And then they have got to go recoup that
money from other entities. And so one of the things I have been
focused on and the Committee has talked about is to try to get
the SEC to increase its oversight with respect to cyber attacks
and especially their responsibilities to disclose to the public
in a timely manner. And I would just ask you if you could work
with us and the other regulators in trying to come up with
disclosure requirements that provide the public with adequate
notice of these cyber breaches so they can protect themselves
from the cost, not just the public but banks and others as
well. I would appreciate that if you could do that.
Mr. Powell. We would be glad to.
Senator Van Hollen. Thank you.
Mr. Powell. Thanks.
Chairman Crapo. Thank you. And, Chairman Powell, Senator
Brown has said----
Senator Brown. I will be very brief, respecting your time
and our getting to the vote. I heard you say a number of times
in response to questions that there will be no relaxing of the
rules for foreign banks, and I want to just--I just do not
agree with that. A Treasury report last year, the
Administration made it clear it wanted to lower standards.
Secretary Mnuchin testified, sitting where you are right now,
in January that he believed the bill would accomplish the goal.
Paul Volcker has said it does. Sarah Bloom Raskin said that
there will be less regulation of the foreign banks. Antonio
Weiss said the same.
I had an amendment during the markup on that issue, and it
was defeated. Foreign banks lobbied against that amendment. The
bill's supporters rejected it.
I have three very related questions. I will ask the three
consecutively, and you can either answer them now or get them
in writing to me, if you would. Promises she will push back
against foreign bank lobbyists and Secretary Mnuchin to ensure
that no foreign bank with more than $50 billion in U.S. assets
will benefit from any deregulation. I would like that promise
from you that you will push back against foreign bank lobbyists
and Secretary Mnuchin.
I would like to know what you plan to do when a foreign
bank sues the Fed for not treating it equally to a U.S.-based
bank that falls in that 50 to 250 category.
And I guess my final question: Wouldn't it better to amend
this bill to avoid litigation and make sure it does not benefit
large foreign banks? So if you want to respond now, or you can
respond in writing.
Mr. Powell. Why don't we take those under advisement and
give you a clear response in writing quickly.
Senator Brown. Fair enough. OK.
Thank you, Mr. Chairman.
Chairman Crapo. All right. Thank you. And that does
conclude the questioning. Again, I want to thank you, Chairman
Powell, for being here and for the service you are giving to
our country.
For Senators who wish to submit questions for the record,
those questions are due on Thursday, March 8th, and I encourage
you, Chairman Powell, if you receive additional questions, to
respond to them promptly.
I also apologize that because of the pressure we have on
the vote I am going to have to conclude this hearing and then
run to the floor, so I will not be able to visit with you
privately or more personally after your testimony, but we will
have plenty of opportunities to do so.
With that, the hearing is adjourned.
Mr. Powell. Thank you, Mr. Chairman.
[Whereupon, at 12:06 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
Welcome, Chairman Powell, for your first appearance before this
Committee as Chairman of the Federal Reserve Board of Governors, and
congratulations on your confirmation.
Today's hearing is an important opportunity to examine the current
state of monetary and regulatory policy.
Over the past few years, the Humphrey-Hawkins hearing has often
served as an opportunity for Members of this Committee to review the
new regulations imposed in the wake of the financial crisis.
While I did not always agree with former Chairman Bernanke and
former Chair Yellen, I appreciated their willingness to engage with the
Committee and discuss possible improvements to the regulatory regime.
These discussions were helpful in building common ground for our
banking bill, S. 2155, particularly for provisions like the threshold
for enhanced standards under Section 165 of Dodd-Frank.
This bipartisan bill now has 13 Republican and 13 Democratic and
Independent co-sponsors.
The bill was the result of a thoughtful, deliberative process over
several years that included hearings, briefings, meetings and written
submissions from hundreds of commentators and stakeholders.
The primary purpose of the bill is to make targeted changes to
simplify and improve the regulatory regime for community banks, credit
unions, midsize banks and regional banks to promote economic growth.
Economic growth has been a key priority for this Committee and this
Administration this Congress.
The U.S. economy has failed to grow by more than 3 percent annually
for more than a decade, by far the longest stretch since GDP has been
officially calculated.
But now, there are widespread expectations that growth is finally
picking up.
According to the January FOMC meeting minutes, the Federal Reserve
increased its expectations for real GDP growth going forward, after 4th
quarter growth exceeded expectations.
The Fed cited the recently enacted tax reform legislation as among
the reasons economic growth is expected to rise.
In addition to tax reform, President Trump's recently released
Budget and Economic Report both emphasize that regulatory reform is a
key component of rising productivity, wages and economic growth.
By right-sizing regulation, the Committee's economic growth bill
will improve access to capital for consumers and small businesses that
help drive our economy.
Now that many are predicting a pickup in growth, a number of
commentators have expressed sudden concerns about the economy
overheating.
While the Federal Reserve should remain vigilant in monitoring
inflation risks, we also must continue to pursue commonsense, pro-
growth policies that will lead to increased innovation, productivity,
and wages.
With respect to monetary policy, I am encouraged that the Federal
Reserve is continuing on its gradual path to monetary policy
normalization.
The Fed has begun to reduce its balance sheet by steadily
decreasing the amount of principal it reinvests as assets in its
portfolio mature.
I look forward to hearing more about the Fed's monetary policy
outlook as part of Chairman Powell's testimony today.
I also look forward to hearing about the Federal Reserve's ongoing
efforts to review, improve and tailor existing regulations.
I know that you are working with Vice Chairman for Supervision
Randy Quarles on those issues.
Vice Chairman Quarles has done an excellent job so far, and I urge
Congress to confirm him for his full term on the Board as soon as
possible.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Chairman Crapo, thank you for holding this hearing.
Chair Powell, welcome back to the Committee, and for the first time
in your new role. You are leading the Federal Reserve at a crucial
time, as the Fed normalizes interest rates and shrinks its balance
sheet.
The country is in its ninth year of economic recovery, though 2017
marked the worst year for job creation since 2010. And the recovery has
not reached everyone. Wage growth has been slow and labor force
participation has barely improved since 2014. Nine years of job growth
have still not done much to narrow income inequality or address
employment disparities.
Nationwide, the unemployment rate for black workers is double that
for whites-equal to the gap at the start of the civil rights movement.
Looking more broadly, labor force participation is down for all
minorities.
Statistics show that large pockets of people are waiting to share
in the benefits from the recovery. Instead of addressing their
problems, Republicans are working hard to help Wall Street banks that
are raking in profits.
Despite the fact that we are 9 years removed from the recession,
this Administration has embarked on a substantial fiscal stimulus,
permanently slashing the corporate tax rate and providing the largest
benefits to the wealthiest Americans. Of course, Wall Street, which is
making record profits, will do well.
Instead of fighting for workers and making sure labor market
opportunities are shared among those who have been struggling,
Republicans would rather push for tax cuts for corporations and the
wealthy.
Those tax cuts are not free-they will add over a trillion dollars
to the deficit. The once and future deficit hawks on the other side of
the aisle were more like marshmallow Peeps when confronted with tax
cuts for the wealthy.
The ink was barely dry when we began to hear calls for spending
cuts that will hurt families across the country-the so-called
``entitlement reform'' that everyone should understand means cuts to
Medicare, Medicaid, and Social Security.
The claim was that it would all be worth it, because workers would
benefit.
I'm happy for any Ohioan who gets a raise, but we have seen how
banks and corporations have responded to the tax cuts, and the numbers
are staggering. In January, Wells Fargo announced a $22.5 billion stock
buyback-288 times what it will spend on pay raises for its workers.
This year, companies will start disclosing CEO-to-worker pay
ratios, as required under the Wall Street Reform Act. Honeywell, which
announced an $8 billion stock buyback in December, just disclosed that
its CEO is getting a 61 percent pay raise and makes 333 times the
average worker's pay.
It's pretty simple--for each pay raise or bonus for workers,
companies are often spending a hundred or two hundred times as much on
stock buybacks and executive compensation.
It gets worse.
While the biggest banks lavish pay raises and stock giveaways on
their executives, they continue to violate the law and abuse their
customers. The Fed recently imposed an unprecedented-if belated-penalty
on Wells Fargo following several scandals, including the opening of
millions of fake accounts and improperly charging borrowers for auto
insurance they didn't need.
The Fed told Wells Fargo it can't grow until it demonstrates that
it has improved board oversight and risk management. It sounds like the
Fed has come to the conclusion many of us on this Committee reached a
year and half ago-Wells Fargo is ``too big to manage''. I'll be closely
watching to make sure the new team at the Fed doesn't lift these
penalties, without the bank making real changes.
And, it's not just Wells Fargo. Last week, Citigroup announced it
illegally overcharged nearly two million credit card accounts for over
5 years, and that it will refund $335 million to customers.
Though Wall Street can't seem to go a month without a new scandal,
the Senate is set to take up a bill that would roll back critical
financial stability protections and limit watchdogs' ability to police
the largest banks.
We can expect the banks to spend any savings from less oversight
the same way they spent their tax cuts-more dividends, share buybacks,
and mergers.
Chair Powell, Wall Street may be focused on whether there are three
or four rate hikes this year, but I think your focus needs to be on
ensuring the Fed doesn't once again permit the buildup of risk in the
market and hubris at the Fed. The Great Moderation turned out to be not
so great, and we forget that lesson at our peril.
The Fed needs to take the side of consumers-making sure the
financial system stays strong and regulations are enforced. Chair
Powell, I look forward to your testimony.
Thank you, Mr. Chairman.
______
PREPARED STATEMENT OF JEROME H. POWELL
Chairman, Board of Governors of the Federal Reserve System
March 1, 2018
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
I am pleased to present the Federal Reserve's semiannual Monetary
Policy Report to the Congress.
On the occasion of my first appearance before this Committee as
Chairman of the Federal Reserve, I want to express my appreciation for
my predecessor, Chair Janet Yellen, and her important contributions.
During her term as Chair, the economy continued to strengthen and
Federal Reserve policymakers began to normalize both the level of
interest rates and the size of the balance sheet. Together, Chair
Yellen and I have worked to ensure a smooth leadership transition and
provide for continuity in monetary policy. I also want to express my
appreciation for my colleagues on the Federal Open Market Committee
(FOMC). Finally, I want to affirm my continued support for the
objectives assigned to us by the Congress--maximum employment and price
stability--and for transparency about the Federal Reserve's policies
and programs. Transparency is the foundation for our accountability,
and I am committed to clearly explaining what we are doing and why we
are doing it. Today I will briefly discuss the current economic
situation and outlook before turning to monetary policy.
Current Economic Situation and Outlook
The U.S. economy grew at a solid pace over the second half of 2017
and into this year. Monthly job gains averaged 179,000 from July
through December, and payrolls rose an additional 200,000 in January.
This pace of job growth was sufficient to push the unemployment rate
down to 4.1 percent, about \3/4\ percentage point lower than a year
earlier and the lowest level since December 2000. In addition, the
labor force participation rate remained roughly unchanged, on net, as
it has for the past several years--that is a sign of job market
strength, given that retiring baby boomers are putting downward
pressure on the participation rate. Strong job gains in recent years
have led to widespread reductions in unemployment across the income
spectrum and for all major demographic groups. For example, the
unemployment rate for adults without a high school education has fallen
from about 15 percent in 2009 to 5 \1/2\ percent in January of this
year, while the jobless rate for those with a college degree has moved
down from 5 percent to 2 percent over the same period. In addition,
unemployment rates for African Americans and Hispanics are now at or
below rates seen before the recession, although they are still
significantly above the rate for whites. Wages have continued to grow
moderately, with a modest acceleration in some measures, although the
extent of the pickup likely has been damped in part by the weak pace of
productivity growth in recent years.
Turning from the labor market to production, inflation-adjusted
gross domestic product rose at an annual rate of about 3 percent in the
second half of 2017, 1 percentage point faster than its pace in the
first half of the year. Economic growth in the second half was led by
solid gains in consumer spending, supported by rising household incomes
and wealth, and upbeat sentiment. In addition, growth in business
investment stepped up sharply last year, which should support higher
productivity growth in time. The housing market has continued to
improve slowly. Economic activity abroad also has been solid in recent
quarters, and the associated strengthening in the demand for U.S.
exports has provided considerable support to our manufacturing
industry.
Against this backdrop of solid growth and a strong labor market,
inflation has been low and stable. In fact, inflation has continued to
run below the 2 percent rate that the FOMC judges to be most consistent
over the longer run with our congressional mandate. Overall consumer
prices, as measured by the price index for personal consumption
expenditures (PCE), increased 1.7 percent in the 12 months ending in
December, about the same as in 2016. The core PCE price index, which
excludes the prices of energy and food items and is a better indicator
of future inflation, rose 1.5 percent over the same period, somewhat
less than in the previous year. We continue to view some of the
shortfall in inflation last year as likely reflecting transitory
influences that we do not expect will repeat; consistent with this
view, the monthly readings were a little higher toward the end of the
year than in earlier months.
After easing substantially during 2017, financial conditions in the
United States have reversed some of that easing. At this point, we do
not see these developments as weighing heavily on the outlook for
economic activity, the labor market, and inflation. Indeed, the
economic outlook remains strong. The robust job market should continue
to support growth in household incomes and consumer spending, solid
economic growth among our trading partners should lead to further gains
in U.S. exports, and upbeat business sentiment and strong sales growth
will likely continue to boost business investment. Moreover, fiscal
policy is becoming more stimulative. In this environment, we anticipate
that inflation on a 12-month basis will move up this year and stabilize
around the FOMC's 2 percent objective over the medium term. Wages
should increase at a faster pace as well. The Committee views the near-
term risks to the economic outlook as roughly balanced but will
continue to monitor inflation developments closely.
Monetary Policy
I will now turn to monetary policy. The Congress has assigned us
the goals of promoting maximum employment and stable prices. Over the
second half of 2017, the FOMC continued to gradually reduce monetary
policy accommodation. Specifically, we raised the target range for the
Federal funds rate by \1/4\ percentage point at our December meeting,
bringing the target to a range of 1 \1/4\ to 1 \1/2\ percent. In
addition, in October we initiated a balance sheet normalization program
to gradually reduce the Federal Reserve's securities holdings. That
program has been proceeding smoothly. These interest rate and balance
sheet actions reflect the Committee's view that gradually reducing
monetary policy accommodation will sustain a strong labor market while
fostering a return of inflation to 2 percent.
In gauging the appropriate path for monetary policy over the next
few years, the FOMC will continue to strike a balance between avoiding
an overheated economy and bringing PCE price inflation to 2 percent on
a sustained basis. While many factors shape the economic outlook, some
of the headwinds the U.S. economy faced in previous years have turned
into tailwinds: In particular, fiscal policy has become more
stimulative and foreign demand for U.S. exports is on a firmer
trajectory. Despite the recent volatility, financial conditions remain
accommodative. At the same time, inflation remains below our 2 percent
longer-run objective. In the FOMC's view, further gradual increases in
the Federal funds rate will best promote attainment of both of our
objectives. As always, the path of monetary policy will depend on the
economic outlook as informed by incoming data.
In evaluating the stance of monetary policy, the FOMC routinely
consults monetary policy rules that connect prescriptions for the
policy rate with variables associated with our mandated objectives.
Personally, I find these rule prescriptions helpful. Careful judgments
are required about the measurement of the variables used, as well as
about the implications of the many issues these rules do not take into
account. I would like to note that this Monetary Policy Report provides
further discussion of monetary policy rules and their role in the
Federal Reserve's policy process, extending the analysis we introduced
in July.
Thank you. I would be pleased to take your questions.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM JEROME H.
POWELL
Q.1. Unemployment is at 4.1 percent. Wages are up 2.9 percent
compared to a year ago--that's the biggest hike since June
2009. The economy's growing at a healthy rate--3.2 percent
during Q3 and 2.6 percent in Q4. Tax reform is going to boost
that number back above 3 percent. Despite all the positive
indicators, the market had several down days last month. Most
of them were around your swearing in. If look back at the
recent past, the Federal Reserve and your predecessors have
cited stock market volatility as a reason to not raise interest
rates. The Fed backed down so many times that this became
learned behavior: stock market volatility means no hike in
interest rates. Congress says to seek maximum employment and
stable prices . . . no more and no less. Please answer the
following with specificity:
Q.1.a. Is a rising stock market a pillar of monetary policy?
A.1.a. My colleagues on the Federal Open Market Committee
(FOMC) and I set monetary policy with the sole purpose of
achieving and sustaining our statutory objectives of maximum
employment and price stability. Because monetary policy affects
the economy and inflation with a lag, we need to be forward
looking in
setting policy. That is why, each time the FOMC meets, we
assess the implications of incoming information, including
information about financial conditions broadly defined, for the
economic outlook. Our current assessment, based on all
available information, is that further gradual increases in our
target for the Federal funds rate will prove most appropriate
for achieving and sustaining the objectives the Congress has
assigned to the FOMC. We do not have a target for asset prices
and we recognize that asset price fluctuations do not
necessarily alter the economic outlook. Moreover, financial
conditions are only one of many factors that can affect the
outlook for the economy.
Q.1.b. Has recent stock market volatility deterred you from
your plan to raise rates later this year?
A.1.b. After carefully considering all available information
necessary to assess where the economy stood relative to the
goals of maximum employment and price stability, and how it was
likely to evolve, the FOMC concluded, on March 21, that it
would be appropriate to raise the target range for the Federal
funds rate by a further 25 basis points. Moreover, FOMC
participants generally saw the economic outlook as somewhat
stronger than was the case in December, and continued to judge
that further gradual increases in the Federal funds rate are
likely to be warranted if the economy continues to evolve as
expected. Indeed most participants anticipated that, in light
of the stronger outlook, the Federal funds rate might rise
slightly more, in coming years, than they had
anticipated in December. Please bear in mind that we do not
have a fixed plan for the path of the Federal funds rate. We
will be watching how the economy evolves in the months and
years ahead relative to our maximum employment and price
stability objectives. If the outlook changes, we will adjust
monetary policy appropriately.
Q.2. I sold insurance for over 20 years, and I've said it many
times: our State-based system of insurance regulation is the
best in the world. The President's Executive order on financial
regulation and other Administration reports favor a deferential
approach by the Fed to working with primary financial
regulators. When it comes to the business of insurance that
means State-based insurance regulators. Please answer the
following with specificity:
How will you and the Federal Reserve integrate State-based
insurance regulators into your work?
A.2. The State-based system of insurance regulation provides an
invaluable service in protecting policyholders. The Federal
Reserve's principal supervisory objectives for all of the
insurance holding companies that we oversee include protecting
the safety and soundness of the consolidated firms and
protecting any subsidiary depository institution, which
encompasses protecting the depositors and taxpayer-backed
deposit insurance fund. The Federal Reserve also undertakes
supervision, through reporting, examination, and other
engagement, of entities in an insurance enterprise that are not
subject to financial regulation in order to protect against
extant or emerging threats to the consolidated enterprise's
safety and soundness.
The Federal Reserve's consolidated supervision thus is
complementary to, and supplements, existing entity-level
supervision by the primary functional regulators, with a
perspective that considers the risks across the entire firm. We
conduct our consolidated supervision of all insurance firms in
coordination with State departments of insurance (DOIs), who
continue their established oversight of the insurance
subsidiaries. In order to maximize efficiencies and eliminate
supervisory duplication or ``layering,'' we rely upon the work
and supervisory findings of the State DOIs to the greatest
extent possible. We intend to continue to do so. Federal
Reserve supervisors regularly meet, share supervisory
information, and collaborate with State DOIs. We remain open to
input from supervised firms, State DOIs, and other interested
parties on how we can further tailor and better coordinate our
supervision while achieving our supervisory objectives.
Moreover, in the ongoing development of a Federal Reserve
capital standard for savings and loan holding companies
significantly engaged in insurance activities (described as the
Building Block Approach (BBA) in the Federal Reserve's advance
notice of proposed rulemaking of June 2016), Federal Reserve
staff have
engaged, and continues to engage, with State regulators and the
National Association of Insurance Commissioners in their
development of the group capital calculation, a capital
assessment that is structurally similar to the BBA. This
ongoing dialogue aims to achieve harmonious frameworks to the
greatest extent possible and minimize burden upon insurance
firms supervised by both the States and Federal Reserve.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE FROM JEROME H.
POWELL
Q.1. As you know, the Administration has invoked Section 201 of
the Trade Act of 1974 to impose significant tariffs on solar
panels and washing machines.
Q.1.a. As Federal Reserve Chairman, your job is to stay abreast
on the state of our economy. These tariffs will almost
certainly impact our economy, I believe for the worse. What
economic indicators are you consulting to evaluate the economic
impact of these tariffs?
Q.1.b. What has been the international response to these
tariffs and the initial economic impact of these tariffs?
A.1.a.-b.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 Congress and the Administration.
Although the implemented trade actions do have consequences
for specific industries, these trade actions are targeted
enough that they are likely to have small effects on aggregate
price stability and national employment. Federal Reserve staff
closely monitor data on U.S. trade flows as well as domestic
price developments, both of which could be affected by tariff
rate increases.
The international response has been consistent with World
Trade Organization (WTO) rules. Canada, China, the European
Union, Japan, South Korea, and Taiwan have been holding
consultations with the United States under the World Trade
Organization rules to protest the measures. China has claimed
the right to suspend tariff concessions immediately equal to
the amount of trade affected, and did so the week of April 2.
The affected countries will likely proceed with the filing of
WTO cases against the United States.
Q.2. The Administration has announced that it will impose 25
percent tariffs on steel and 10 percent tariffs on aluminum
under Section 232 of the Trade Expansion Act of 1962.
Q.2.a. Can you identify any historical examples where tariffs
have helped the United States economy or otherwise fixed the
problem it was intended to address?
Q.2.b. Based on the record of the Bush administration's 2002-
2003 steel tariffs and other historical examples, how would you
expect this 25 percent tariff on steel and aluminum to impact
the U.S. economy?
Q.2.c. Would this answer change if countries responded with
economic retaliation against the United States, such as through
tariffs? For example, I hear constantly from Nebraskan
agriculture and manufacturing stakeholders of their concern
that other countries will respond to the potential trade
barriers by retaliating against agriculture.
Q.2.d. Historically, what industries would be most impacted by
this economic retaliation? For example, would agriculture be
impacted?
Q.2.e. In 12 months, what economic data would you consult to
evaluate the net economic impact of these tariffs in the United
States?
A.2.a.-e. International trade, facilitated by low barriers to
trade, is likely beneficial to the U.S. economy on net. History
has shown that countries that are open to trade often are more
productive and grow faster than countries that are relatively
closed to trade. The challenge is that the gains from trade are
not guaranteed to be distributed as to make everyone better
off. It is important to realize that openness to trade can
cause dislocation and impose costs on some industries and
workers. In part because of these costs, effort should be taken
to ensure that trade occurs on a level playing field.
Higher tariffs on products such as steel and aluminum would
tend to reduce imports of these products, and shift demand
toward U.S.-produced steel and aluminum. Although U.S.
producers may benefit from increased domestic demand, other
U.S. firms likely would have to pay more for these products
when used as an intermediate input, increasing their production
costs. Currently, most of the major exporters of steel and
aluminum to the United States are subject to exemptions from
the tariffs, including Canada, the European Union, and Mexico.
As such, the effects may be muted.
The granted exemptions are more extensive than in past
episodes. For example, during the 2002 safeguard tariffs on
steel, the European Union, a significant supplier of steel to
the United States, was not excluded. Even so, the effects on
employment and inflation from the 2002 measures were fairly
muted.
If countries retaliate by increasing their tariffs on U.S.
goods, this will likely hurt exporting industries in the United
States by reducing their competitiveness and demand for their
products. Retaliation is typically equivalent in size to the
affected sales to the United States.
China's announcement of retaliatory tariffs on products
such as fruit and pork on April 1 were in direct response to
the steel and aluminum tariffs, and the total amount subject to
tariffs was picked to match the total amount of Chinese exports
of these products (about $3 billion). China also has threatened
to retaliate against a larger list of products, depending on
what measures the United States Government takes in response to
its investigation under section 301 of the Trade Act of 1974
into China's policies related to technology transfer,
intellectual property, and innovation.
In calibrating retaliation, foreign countries often target
industries in which the United States has a comparative
advantage, such as agriculture. In part, this reflects that the
United States tends to export more from sectors in which it is
relatively productive. In addition, agriculture can make an
appealing target for retaliation as agricultural products tend
to be relatively homogenous, allowing the retaliating country
to shift purchases away from the United States toward
alternative producers with less disruption to local consumers.
The Federal Reserve looks at a wide range of data to assess
the state of the economy. Data which might be used to evaluate
the effects of the tariffs would include import and export
data, as well as the prices of imports and exports. In
addition, domestic employment and overall retail prices might
be informative.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM JEROME H.
POWELL
Q.1. I would like to follow up on our ongoing conversation on
the economic impacts of climate change. I understand that the
Federal Reserve's mandate and tools are entirely focused on
monetary policy. However, the Federal Reserve's implementation
of monetary policy is informed by its assessment of the U.S.
economy, including future economic trends and risks. According
to your answer to a question I posed during your confirmation,
your position is that the Federal Reserve is only concerned
with ``short- and medium-term developments that may change
materially over quarters and a relative small number of years,
rather than the decades associated with the pace of climate
change.''
Q.1.a. How did you arrive at the determination that there are
no short- or medium-term impacts of climate change?
Q.1.b. Have you or your staff considered or reviewed data from
our Government's scientific agencies about the rate of climate
change?
Q.1.c. In 2017, NOAA reported 16 separate billion-dollar
climate events. Combined, these events cost the U.S. economy
over $300 billion--roughly 1.5 percent of U.S. GDP. Do you
think that severe weather events that cost the equivalent of
1.5 percent of GDP qualify as short- and medium-term
developments that the Federal Reserve should be concerned
about?
Q.1.d. Will you commit to having a staff-level conversation
about these data sources to consider whether they should be a
resource the Federal Reserve uses when assessing the national
economic outlook and future economic risks?
A.1.a.-d. Each and every severe weather event reported by the
National Oceanographic and Atmospheric Administration (NOAA) is
consequential 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.
In that sense, severe weather events do have important short-
term effects on economic conditions. And in assessing current
economic conditions, such as our published statistics on
industrial production, we take into account information on the
severity of weather events. For example, we relied on
information from the Federal Emergency Management Agency and
the Department of Energy to gauge the disruptions to oil and
gas extraction, petroleum refining, and petrochemical and
plastic resin production caused by last fall's hurricanes.
Likewise, we frequently use daily measures of temperatures and
snowfall at weather stations throughout the country from the
NOAA to assess the short-run economic impact associated with
unusually large snowfall events.
However, severe weather events are difficult to predict
very far in advance. Moreover, the historical regularity has
been that these type of events 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. In
contrast, monetary policy has
broad-based effects on the U.S. economy and tends to influence
macroeconomic conditions with a lag. As a result, monetary
policy is not well suited to address the economic disruptions
associated with severe weather events. 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.
My staff is available to discuss these issues further if
you would find that helpful.
Q.2. There is currently $1.4 trillion in outstanding student
loan debt, the highest category of consumer debt behind
mortgages. It is also the most delinquent, with 11 percent of
borrowers seriously delinquent or in default. The Federal
Reserve Board of New York estimates this number is likely twice
that rate, once borrowers who are in forbearance are taken into
account. At the hearing, you agreed that student loan debt
could create a drag on the economy as student loan debt
continues to grow.
Q.2.a. What indicators should we track to determine when
student loan debt is starting to have a real impact on the
economy?
Q.2.b. What are the ways in which student loan debt could hold
back the economy and how much of an effect do you think it
could have?
A.2.a.-b. Student loan debt can potentially hold back the
economy through several mechanisms. First, high levels of
student loan debt (and the financial burden associated with
repaying such debt) may hold back student loan borrowers'
savings and therefore affect decisions such as home purchases,
investment, marriage, and starting a family. Second, high
levels of student loan debt may increase debt-to-income ratios
or reduce credit scores, leaving some borrowers with more
limited access to mortgage, auto, and credit card loans. In
addition, unlike other types of household debt, student loans
are not dischargeable in bankruptcy, which can make these loans
more burdensome in times of financial hardship. Third, if
student loan debt becomes exceedingly burdensome, students may
be discouraged from taking loans to go to college, thereby
dampening human capital accumulation in the economy.
One important caveat to underscore is that if student loan
borrowers earn more over their lifetimes as a result of
obtaining more education, student loans would likely help
strengthen the economy, instead of holding it back.
Accordingly, there are several indicators one could track
to gauge the possible impact of student loan debt on the
economy. Such indicators include auto purchases, home ownership
and household formation rates, as well as savings and
investment behavior, especially among young adults with student
loan debt. In addition, one could track the credit performance
of student loan borrowers, not only on their student debt, but
also on other types of debt.
Q.3. So far, companies benefiting from the recent tax cuts have
announced over $200 billion in stock buybacks. In contrast,
companies have announced only $6 billion in worker bonuses and
raises.
Q.3.a. As far as possible investments go, do you think stock
repurchases offer the greatest potential for boosting
productivity and economic growth?
Q.3.b. How do they compare to investments in capital,
innovation, or worker compensation in terms of the potential
for increases in productivity and economic growth?
Q.3.c. If companies put the vast majority of their gains from
the new tax law into stock repurchases, would you expect to see
an increase in economic growth and wages from the tax law?
A.3.a.-c. Investments in new capital equipment or innovative
technologies are important factors for improving productivity
and economic growth. Similarly, increased worker compensation
can be a factor in encouraging individuals to join or remain in
the labor force and to develop new skills, which can further
increase productivity and growth. Comparing the economic
effects of these investments to the eventual effects of stock
buybacks is difficult because we cannot be sure where the gains
from buybacks will ultimately turn up. When a company buys back
its shares or pays higher dividends, the resources do not
disappear. Rather, they are redistributed to other uses in the
economy. For instance, shareholders may decide to invest the
windfall in another company, which may in turn make
productivity-enhancing investments. Or they may decide to spend
the windfall on goods and services that are produced by other
companies, who may in turn hire new workers. In these ways,
stock repurchases would also be likely to boost economic
growth.
Companies themselves are the best judges of what to do with
their after-tax profits, whether it is to invest in their
business, raise worker compensation, or increase returns to
shareholders through dividends or share buybacks.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
JEROME H. POWELL
Q.1. The Federal Reserve has the responsibility for monetary
policy. The Congress has the responsibility for fiscal policy.
In the past few months, Congress spent more than a trillion
dollars. The majority did not spend it on investments to build
our outdated bridges, roads or electrical grids. The majority
did not spend it on transit to reduce gridlock and reduce
pollution and improve our air quality. The trillions of dollars
did not provide housing for families struggling to pay rent. Or
subsidies to help parents afford the cost of child care. Nor
did we invest in pre-K education. Or research and development.
Instead, multi-national corporations will see their incomes
go up substantially: Warren Buffet's Berkshire Hathaway will
make $29 billion more in profit. The seven largest banks will
increase their income by 12 percent or more. Meanwhile, some
families will see big tax increases because they can't deduct
their alimony payments or all of their property and State
income taxes.
Our national debt is already twice the historic average and
higher than it has been at any time in history since World War
II. Today, it consumes more than 77 percent of the economy. The
President's proposed budget would increase that level to as
much as 93 percent of our entire economy by 2028 according to
the Committee for a Responsible Federal Budget.
If we had chosen to invest $1.5-$2.3 trillion in rebuilding
our infrastructure, investing in research and development and
in our children and families, what is the Federal Reserve's
estimates of the effect on wages, productivity and economic
growth?
A.1. The Federal Reserve has not prepared an estimate of the
economic effects of a large investment of the kind that you
describe. Any such estimate would depend critically on the
particular assumptions one made about the allocation of the
investment among the purposes that you describe, as well as the
efficiency with which investments could be targeted to high-
rate-of-return projects. The Congressional Budget Office is
well situated to provide economic analysis of this kind.
Q.2. I appreciated your statements opposing discrimination in
mortgage lending during your testimony. However, I remain
concerned that if the Economic Growth, Regulatory Relief, and
Consumer Protection Act, (S. 2155), becomes law the Federal
Reserve will not have adequate information on the quality of
mortgage loans made by 85 percent of the banks and credit
unions in the United States. At the hearing, you told me the
Federal Reserve relies primarily on historical Home Mortgage
Disclosure Act data but that data does not include specific
information on mortgage loan quality or borrower
characteristics. In the run up to the Financial Crisis, the
Federal Reserve and other regulators missed rampant
discrimination in the mortgage market; African Americans and
Latinos were more than twice as likely as a white family to
receive a subprime mortgage. Even if Latinos and African
Americans had higher incomes and credit scores, they still
received worse loans.
The Federal Reserve has oversight authority of banks with
fewer than $10 billion in assets.
LHow will you ensure that those banks are not
engaged in redlining or other types of discrimination
if you do not have information about the loan
characteristics, the borrower's credit score or other
information in the expanded HMDA requirements?
A.2. With respect to fair lending, the Fair Housing Act (FHA)
and Equal Credit Opportunity Act are critical to ensuring
consumers are treated fairly when offered financial products
and services. Discrimination has no place in a fair and
transparent marketplace. Discriminatory practices can close off
opportunities and limit consumers' ability to improve their
economic circumstances, including through access to home
ownership and education.
The Federal Reserve's fair lending supervisory program
reflects our commitment to promoting financial inclusion and
ensuring that the financial institutions under our jurisdiction
fully comply with applicable Federal consumer protection laws
and regulations. For all State member banks, we enforce the
FHA, which means we review all Federal Reserve-regulated
institutions for potential discrimination in mortgages,
including potential redlining, pricing, and underwriting
discrimination. For State member banks of $10 billion dollars
or less in assets, we also enforce the Equal Credit Opportunity
Act, which means we review these State member banks for
potential discrimination in any credit product. Together, these
laws prohibit discrimination on the basis of race, color,
national origin, sex, religion, marital status, familial
status, age, handicap/disability, receipt of public assistance,
and the good faith exercise of rights under the Consumer Credit
Protection Act (collectively, the ``prohibited basis'').
We evaluate fair lending risk at every consumer compliance
exam based on the risk factors set forth in the interagency
fair lending examination procedures. The procedures include
risk factors related to potential discrimination in redlining,
pricing, and underwriting. While we find that the vast majority
of our institutions comply with the fair lending laws, we are
committed to identifying and remedying violations when they
have occurred. Pursuant to the Equal Credit Opportunity Act, if
we determine that a bank has engaged in a pattern or practice
of discrimination, we refer the matter to the U.S. Department
of Justice (DOJ). Federal Reserve referrals have resulted in
DOJ public actions in critical areas, such as redlining and
mortgage pricing discrimination. For example, in our redlining
referrals, the Federal Reserve found that the banks treated
majority-minority areas less favorably than nonminority areas,
such as through Community Reinvestment Act (CRA) assessment-
area delineations, branching, lending patterns, and marketing.
For our mortgage-pricing discrimination referrals, the Federal
Reserve found that the banks charged higher prices to African
American or Hispanic borrowers than they charged to similarly
situated non-Hispanic white borrowers and that the higher
prices could not be explained by legitimate pricing
criteria.\1\
---------------------------------------------------------------------------
\1\ See, e.g., DOJ public fair lending settlements with Midwest
BankCentre; SunTrust Mortgage Inc.; and Countrywide Financial
Corporation. The public actions were based on referrals from the
Federal Reserve, and can be found at: https://www.justice.gov/crt/
housing-and-civil-enforcement-section-cases-1#lending. More information
about recent referrals to the DOJ can be found in the Federal Reserve's
annual report at www.federalreserve.gov/publications/2016-ar-consumer-
and-community-affairs.htm#14890.
---------------------------------------------------------------------------
We also work proactively to support financial institutions
in their efforts to guard against fair lending risks through
outreach efforts that actively promote sound compliance
management practices and programs. The outreach efforts include
Consumer Compliance Outlook, a widely subscribed Federal
Reserve System publication focused on consumer compliance
issues, and its companion webinar series, Outlook Live.\2\ For
example, in 2017, we sponsored an interagency webinar on fair
lending supervision with almost 6,000 registrants. Several of
the webinars and articles described the key risk factors
related to redlining and pricing discrimination, as well as
information about what banks should do to mitigate those risks.
---------------------------------------------------------------------------
\2\ See https://www.consumercomplianceoutlook.org/ and https://
www.consumercompliance
outlook.org/outlooklive/.
---------------------------------------------------------------------------
With respect to potential discrimination in the pricing or
underwriting mortgages, if warranted by risk factors, the
Federal Reserve will request data beyond the public Home
Mortgage Disclosure Act (HMDA) data, including any data related
to relevant pricing or underwriting criteria, such as applicant
interest rates and credit scores. The analysis then
incorporates the additional data to determine whether
applicants with similar characteristics received different
pricing or underwriting outcomes on a prohibited basis (for
example, on the basis of race), or whether legitimate pricing
or underwriting criteria can explain the differences.\3\
---------------------------------------------------------------------------
\3\ A recent study of publicly available HMDA data conducted by The
Center for Investigative Reporting and published by Reveal News
concluded that African Americans, Latinos, and other individuals of
color were more likely to be denied loans for home purchases and home
remodeling than white borrowers. See Aaron Glantz and Emmanuel
Martinez, ``Kept Out,'' Reveal News, Feb. 15, 2018, available at:
https://www.revealnews.org/article/for-people-of-color-banks-are-
shutting-the-door-to-homeownership/. Studies such as these put much-
needed focus on racial disparities and Federal Reserve staff carefully
review them. However, as noted, HMDA data have limitations. These data
do not include important underwriting criteria, such as credit scores
and loan-to-value ratios. If concerns arise regarding a Federal
Reserve-regulated institution, we will request additional data beyond
the publicly available HMDA data to fully evaluate whether applicants
with similar characteristics received different underwriting outcomes
on a prohibited basis (for example, on the basis of race), or whether
legitimate underwriting criteria can explain the differences.
---------------------------------------------------------------------------
With respect to potential redlining discrimination, the
current data analysis does not rely on an evaluation of the
additional data fields, but rather the number of HMDA mortgage
applications and originations generated in majority-minority
tracts by the bank and similar lenders. More specifically, the
analysis reviews whether the bank's record of HMDA mortgage
applications and originations in majority-minority tracts \4\
shows statistically significant disparities when compared with
the lending record of similar lenders. Thus, although
additional fields from the exempted institutions could enhance
the data analysis, provisions in the recently enacted bill, S.
2155, related to HMDA data collection requirements would not
impact the Federal Reserve's ability to fully evaluate the risk
of redlining discrimination. Moreover, as explained further
below, the data analysis is only one aspect of the redlining
analysis.
---------------------------------------------------------------------------
\4\ Majority-minority tracts are defined as census tracts that are
more than 50 percent African American and Hispanic.
Q.3. Historical HMDA data does not collect information on
certain racial and ethnic populations at a finer level of
granularity. For instance, expanded HMDA requirements that
would be rolled back by S. 2155 require reporting within the
Asian community (Asian Indian, Chinese, Filipino, Japanese,
Korean, and Vietnamese, among others) and within the Hispanic
or Latino communities (Mexican, Puerto Rican, among Cuban,
---------------------------------------------------------------------------
among others).
Q.3.a. How will you monitor and ensure that banks are not
engaged in redlining specifically against some of these
subgroups without collecting this data?
Q.3.b. With historic HMDA data only, do you have the capacity
to discern whether lenders are charging single female borrowers
higher interest rates or more expensive points and fees on
mortgages compared to single men?
A.3.a.-b. Consistent with the interagency fair lending
examination procedures, the Federal Reserve's redlining review
evaluates whether the bank treated majority-minority census
tracts less favorably with respect to the following risk
factors:
LCRA assessment area,
Lbranching strategy,
Llending record for HMDA-reportable mortgage
applications and originations,
Lmarketing and outreach, and
Lcomplaints.
With respect to the lending record, the data analysis
reviews the HMDA-reportable mortgage applications and
originations generated in majority-minority census tracts. The
definition of majority-minority tract is based on the census
data classifications for the race and/or ethnicity of the
residents of the census tract, rather than on HMDA data
classifications. Thus, although the additional data fields from
the exempted institutions could enhance the data analysis,
provisions in the recently enacted bill, S. 2155, related to
HMDA data collection requirements would not impact the Federal
Reserve's ability to fully evaluate the risk of redlining
discrimination.
Also consistent with the interagency fair lending
examination procedures, the Federal Reserve's pricing review
evaluates the following key risk factors:
Lfinancial incentives to charge higher prices,
Lloan originator discretion to determine pricing
criteria and set the price,
Ldisparities in pricing on a prohibited basis, and
Lcomplaints.
The analysis of potential pricing disparities includes the
review of potential disparities in the annual percentage rate,
interest rate, and fees. Although not included in the public
HMDA data, if warranted by risk factors, the Federal Reserve
will request these data as well as any other data related to
relevant pricing criteria, such as the interest rate and credit
score.
Also, the Federal Reserve analyzes the disparity on a
prohibited basis, including potential discrimination for single
females. The current HMDA data classifications allow for an
analysis of potential discrimination against single females.
Thus, provisions in the recently enacted bill, S. 2155, related
to HMDA data collection requirements would not impact the
Federal Reserve's ability to fully evaluate the risk of
mortgage pricing discrimination, including for single females.
Please also see the response to question 2.
Q.4. In your testimony, you stated that data collected under
HMDA's original requirements was adequate for the Federal
Reserve when examining financial institutions for compliance
with the Community Reinvestment Act. Wall Street Reform's
expansion of HMDA requirements included a number of critical
requirements that were motivated by the financial crisis,
including quality of loan, interest rate and providing the
legal entity identifier (LEI) of the lender.
Without the expanded requirements under Wall Street Reform,
how is the Federal Reserve examining the quality of the loans
being given to borrowers, particularly female borrowers and
borrowers of color?
A.4. To determine the risk of potential pricing or underwriting
discrimination in mortgages on a prohibited basis (such as,
sex, race, color, or national origin), the Federal Reserve
evaluates State member banks for compliance with the FHA (and
the Equal Credit Opportunity Act for State member banks with
$10 billion or less in assets). Although not included in the
public HMDA data, if
warranted by risk factors, the Federal Reserve will request any
data related to relevant pricing and underwriting criteria,
such as the interest rate and credit score. Thus, provisions in
the recently enacted bill, S. 2155, related to HMDA data
collection requirements for certain institutions would not
impact the Federal Reserve's ability to fully evaluate the risk
of mortgage pricing or underwriting discrimination, including
for female borrowers or borrowers of color.
While we find that the vast majority of institutions
regulated by the Federal Reserve comply with the fair lending
laws, we sometimes find violations of the laws and regulations.
If we determine that a bank has engaged in a pattern or
practice of discrimination, we refer the matter to the DOJ,
pursuant to the Equal Credit Opportunity Act. We also take
evidence of discrimination into account when assigning consumer
compliance ratings and CRA ratings, consistent with regulations
and supervisory guidance.
Please also see the response to questions 2 and 3.
Q.5. Wall Street Reform also expanded on requirements when
reporting ethnicity. For example, for Asian American Pacific
Islander, lenders should also provide an ethnic breakdown.
Without this specific data of race and ethnicity, will the
Federal Reserve be able to identify discrimination against
specific ethnic groups, such as Filipino or Hmong?
A.5. Reviews of potential pricing or underwriting
discrimination based on the race or ethnicity of the borrower
may be impacted by HMDA data classifications, but other risk
factors can be used to evaluate potential discrimination, such
as loan policies and procedures, marketing, and complaints.
Please also see the response to question 2.
Q.6. A 2014 analysis of OneWest Bank--which was then owned by
Treasury Secretary Steve Mnuchin--found that the Bank had a
``low satisfactory'' on its last CRA evaluation; that only 15
percent of the banks' branches were located in low- and
moderate-income census tracts; and that the majority of ``small
business'' loans made by OneWest were to businesses with more
than $1 million in revenue.
Q.6.a. What recourse does the Community Reinvestment Act give
to the Federal Reserve and other regulators when banks have
this kind of record?
Q.6.b. How can banks that consistently receive low ratings for
their lending to small businesses and communities of color be
better incentivized to improve their record?
A.6.a.-b. The CRA regulations define the ratings and recognize
that a ``low satisfactory'' rating under the CRA lending test
and/or service test is indicative of ``adequate'' performance
in responding to the credit needs in its assessment areas(s),
taking into account the number and amount of home mortgage,
small business, small farm, and consumer loans, as well as an
adequate geographic distribution of loans in its assessment
area(s).
The CRA ratings are publicly available, which motivates
some institutions to seek to improve their rating. Regulators
encourage and support banks in this aim by pointing out ways
they can
improve their CRA performance, which would meet supervisory
expectations and enhance how their record is viewed by the
public. Further, an overall CRA rating of less than
satisfactory can be an impediment to favorable action on an
application or notice submitted to the Federal Reserve.
Q.7. I agree with you that sound data is critically important
in informing the policy and enforcement decisions you'll be
making. However, I am very concerned that such analysis fails
to capture the human and economic cost of massive financial
system failure. For example, in 2009, when I was Attorney
General, Nevada had 165,983 people unemployed. Also that year,
in a State of 3 million people, we had 28,223 personal
bankruptcies, 366,606 mortgage delinquencies and 421,445 credit
card delinquencies.\5\ In addition, 121,000 Nevada children's
lives and educations were disrupted by the foreclosure crisis.
And, we had more than 219,000 foreclosures between 2007-2016.
---------------------------------------------------------------------------
\5\ See Center for American Progress. ``10 Years Later: The
Financial Crisis State by State.'' February 22, 2018. Available at:
https://www.americanprogress.org/issues/economy/news/2018/02/22/447031/
10-years-later-financial-crisis-state-state/.
Q.7.a. Do you agree the Fed underestimated the human costs of
---------------------------------------------------------------------------
the financial crisis prior to 2008?
A.7.a. The recent financial crisis took a devastating toll on
consumers, families, and businesses, as well as revealing
weaknesses in our financial system. The fragilities that arose
in the U.S. financial system by the mid-2000s resulted in the
worst U.S. recession since the Great Depression and a painfully
slow economic recovery.
We have worked hard in the aftermath of the crisis to make
sure we have a financial system that is safer, sounder, has
more capital, higher quality capital, and is less prone to
crises. Financial crises are immensely costly to the well-being
of households, families, individuals, and businesses. It is
important to make sure we do everything we can to reduce the
odds of another devastating crisis.
Q.7.b. How will your analysts accurately ensure you'll get it
right this time?
A.7.b. The Federal Reserve has substantially increased its
efforts to assess risks to financial stability on an ongoing
basis, in conjunction with other U.S. agencies (through, for
example, discussions at the Financial Stability Oversight
Council). These efforts may provide insight into the buildup of
risks and allow the appropriate regulatory agencies to take
steps to mitigate risks to financial stability.
At the same time, we are aware of the challenges facing
anyone trying to predict rare events such as financial crises.
In part because of these challenges, the Federal Reserve has
focused on increasing the resilience of the financial system,
so that when detrimental, unforeseen events occur, the system
absorbs, rather than amplifies, them. An important part of
increased resilience is a set of higher standards for key
institutions. These standards are higher for the largest, most
systemic firms and include capital regulation, liquidity
regulation, steps to enhance the resolvability of large bank-
holding companies, and stress testing of large bank-holding
companies.
We have implemented these standards as a response to the
increased awareness among economists of the risks and costs of
financial crises. Research, including research by staff within
the Federal Reserve System, has documented the large adverse
effects of financial crises and the benefits associated with
regulatory standards that raise the resilience of the financial
system.\6\
---------------------------------------------------------------------------
\6\ For example, the following research paper discusses these
issues and related research: Firestone, Simon, Amy Lorenc, and Ben
Ranish (2017). ``An Empirical Economic Assessment of the Costs and
Benefits of Bank Capital in the U.S.,'' Finance and Economics
Discussion Series 2017-034. Board of Governors of the Federal Reserve
System (U.S.).
Q.7.c. What concerns do you have that cost-benefit analysis
requirements allow financial institutions the ability to sue
---------------------------------------------------------------------------
regulators to avoid regulation?
A.7.c. The Federal Reserve Board (Board) takes seriously the
importance of evaluating the costs and benefits of its
rulemaking efforts.
Under the Board's current practice, consideration of costs
and benefits occurs at each stage of the rule or policymaking
process. Before the Board develops a regulatory proposal, the
Board often collects information directly from parties that it
expects will be affected by the rulemaking through surveys of
affected parties and meetings with interested parties and their
representatives. In the rulemaking process, the Board also
specifically seeks comment from the public on the costs and
benefits of the proposed approach as well as on a variety of
alternative approaches to the proposal. In adopting the final
rule, the Board seeks to adopt a regulatory alternative that
faithfully reflects the statutory provisions and the intent of
Congress while minimizing regulatory burden. The Board also
provides an analysis of the costs to small depository
organizations of our rulemaking consistent with the Regulatory
Flexibility Act and computes the anticipated cost of paperwork
consistent with the Paperwork Reduction Act. Increasingly, the
Board has published quantitative analyses in connection with
its rulemakings. Recent examples include the global
systemically important banks surcharge rule, the single-
counterparty credit limit rule, and the long-term debt rule. To
further these efforts, the Board recently established an office
and hired additional staff to focus on analyzing the costs and
benefits associated with its rulemakings.
The Administrative Procedure Act (APA), which the Board
follows, provides for judicial review of final regulations.
Affected firms have the right to challenge the actions of an
administrative agency under the APA, including whether the
agency has engaged in reasoned decisionmaking. Litigation, of
course, imposes certain costs on the litigants including an
agency and delays the rulemaking process.
Q.8. I am very concerned about forcing more than 800,000 men
and women--Dreamers--out of the country. It is a cruel betrayal
of the promises we've made to them. In Nevada, we have more
than 13,000 Dreamers. If our neighbors, friends, and colleagues
are deported, some estimate that Nevada would lose more than
$600 million in annual economic growth.
Q.8.a. Organizations, on both sides of the spectrum, estimate
that detaining and deporting DACA recipients could cost the
U.S.
economy between $280 and $460 billion a year. The United States
Chamber of Commerce called ending DACA ``a nightmare for
America's economy.''
Q.8.b. Has the Federal Reserve published any information on how
the deportation of the Dreamers will affect our Nation's
economy?
Q.8.c. What do you think the economic impact of deporting
800,000 Dreamers--90 percent or about 720,000 of whom are
employed--would be on labor force participation, economic
growth and productivity?
A.8.a.-c. Over long periods of time, economic growth generally
reflects the trend rate of growth of the population, the trend
in labor force participation, and the trend in productivity
growth. A large deportation of individuals currently living in
the United States would probably reduce the level of economic
output, for the simple reason that the population--and hence
the workforce--would be smaller. That being said, the Federal
Reserve has not published information pertaining to your
questions. The manner in which economic output per capita would
be affected is a more difficult question; the answer would
depend on such factors as how the labor-force participation of
the deported individuals compared with that of the remaining
population; how the productivity of the deported individuals
compared with that of the remaining population; and the
question of whether problems of job matching would arise (if,
for example, deported individuals were concentrated in
particular industries, occupations, or geographic areas, and
whether nondeposited individuals were available and willing to
fill the resulting vacancies).
Q.9. Neel Kashkari, the president of the Federal Reserve Bank
of Minneapolis recently wrote an op-ed in the Wall Street
Journal on why immigration is the key to economic growth. The
Minneapolis Fed estimates that boosting legal immigration by
one million people a year would grow the economy by at least
0.5 percent a year, even under the most conservative
assumptions.
Do you agree with the president of the Federal Reserve of
Minneapolis that increasing legal immigration will grow our
economy?
A.9. Growth in the labor force is all important determinant of
the longer-run growth rate of the U.S. economy. Because many
legal immigrants actively participate in the workforce,
challenges in the pace of immigration can affect economic
growth. Having said that, however, the issue of immigration is
well outside of the remit of the Federal Reserve System, and it
would be more prudent for others to decide how best to address
that issue.
Q.10. I represent Nevada, which is within the San Francisco
Federal Reserve District. We are one of the most diverse
districts in the Nation--with many Latino and Asian Pacific
American families.
We value that diversity because it leads to innovation,
economic growth and stronger connections with other nations in
our globally connected world.
A recent report by Fed Up, Working People Still Need a
Voice at the Fed: 2018 Diversity Analysis of Federal Reserve
Bank Directors, found that there is inadequate diversity at the
Federal
Reserve. It specifically cited the San Francisco Federal
Reserve as one of system's least diverse regional banks. The
report states, ``Despite covering some of the most
demographically diverse counties in the United States, 100
percent of the San Francisco Fed's Board of Directors come from
the banking and financial sector. The directors are 78 percent
white and 78 percent male.''
Q.10.a. How will you work with Director Clark to improve the
gender and racial diversity of the Board of Directors at the 12
regional Reserve Banks? And specifically the San Francisco Fed?
Q.10.b. How will you work to end the outsized representation
and influence of the banking and business sectors among the
Regional Bank Boards of Directors?
Q.10.c. Have you identified directors with nonprofit, academic,
and labor backgrounds that could also serve?
A.10.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 wide range
of backgrounds and voices around the table. I assure you that
diversity is a high priority objective for the Federal Reserve.
The Federal Reserve Board (Board) focuses particular
attention on increasing gender, racial, and sector diversity
among directors because we believe that the System's 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 thoroughly vets all candidates for Class C and
Board-appointed Branch director vacancies, taking into
consideration factors such as professional experience,
leadership skills, and community engagement. The Board also
evaluates a candidate's ability to contribute meaningful
insights into economic conditions of significance to the
District and the Nation as a whole. As part of this process,
the Board focuses considerable attention on whether a candidate
is likely to provide the perspective of historically
underrepresented groups, such as consumer/community and labor
organizations, minorities, and women.
Although there is room for improvement, the System has made
significant progress in recent years in recruiting highly
qualified women and minorities for director positions. For
example, in 2018, approximately 56 percent of all System
directors are diverse in terms of gender and/or race (with a
racially diverse woman counted only one time), which represents
a 16 percentage point increase in the share of directors since
2014. With respect to the San Francisco District, 21 of 37
directors, or approximately 57 percent of all
Reserve Bank and Branch directors, are diverse. On the Reserve
Bank's head-office board, 4 of 9 directors, or approximately 44
percent of Reserve Bank directors, are diverse. We also have
numerous directors who represent consumer/community and labor
organizations serving on boards throughout the System. In
addition, we gain invaluable insight and perspective from
directors who are affiliated with other types of organizations,
including major health care providers, universities and
colleges, and regional chambers of commerce, among others.
Q.11. Chair Yellen was the first chair in Federal Reserve
history to share data with this Committee about racial economic
disparities during her semi-annual testimony. When she
presented that data, she touted significant progress, and
indeed, black unemployment fell from 11.8 percent at the
beginning of her term to the current historically low figure of
6.8 percent.
Q.11.a. What do you attribute this trend to?
Q.11.b. Do you think the attention that Chair Yellen paid to
this issue and the policies of the Federal Reserve deserve some
credit for the progress that has been made?
A.11.a.-b. The improvement in the black unemployment rate in
recent years reflects the general strengthening in labor-market
conditions during that time period; and the credit for the
general strengthening, in turn, goes to the millions of
individuals who go to work day in and day out and work hard,
and to those who run businesses, take risks, and generate
creative new ideas and new products.
Chair Yellen deserves great credit for shining light on the
important differences in economic well-being across different
segments of the population; I intend to continue that practice.
As a Nation, we have a long way to go before we will have
achieved the objective of full economic inclusion of all
segments of the population.
Q.12. At that same testimony where Janet Yellen presented
information about racial economic disparities, she said, quote
``it is troubling that unemployment rates for these minority
groups remain higher than for the Nation overall, and that the
annual income of the median African American household is still
well below the median income of other U.S. households.''
Though African American unemployment is lower today, Chair
Yellen's point remains true.
Q.12.a. Do you think the recent progress is sufficient?
Q.12.b. What more can be done to ensure that unemployment among
African Americans is equal to white unemployment?
Q.12.c. And, how do you plan to respond to reports that African
Americans with a college degree have lower employment and
wealth than whites with the less education? African American
women and Latinos are graduating from college in record numbers
but are still having a harder time finding a job.
A.12.a.-c. I do not think that recent progress has been
sufficient. As I noted earlier, we have a long way to go before
we will have achieved the objective of full economic inclusion
of all segments of the population. The steps that will be
necessary to attain full
economic inclusion span virtually the entire spectrum of
economic policy areas. These are important issues for Congress'
consideration.
Q.13. For years, many of my colleagues have suggested that the
Fed is unfairly hurting savers through low interest rates. On
the subject of seniors, savers, and depositors, I want to ask
about a proposal by a nominee to the Board of Governors, Marvin
Goodfriend. For decades, Mr. Goodfriend promoted the Fed to
incentivize spending by placing a tax on currency. He does
admit that ``the regressivity of the tax'' is a concern.
If Mr. Goodfriend's proposal were to be implemented, can
you estimate what the impact would be on savers and low-income
depositors?
A.13. Nominations to serve on the Board of Governors are made
by the President and require consent of the Senate. It is up to
the President and Senate to evaluate the views and
qualifications of potential members of the Board. I do not want
to comment on a specific nominee.
The Federal Reserve has not considered and is not planning
to consider a tax on U.S. currency. Our Nation's currency plays
an important role as a means of payment and store of value
worldwide and taking any action that could diminish its role in
the domestic or global economy would need to be very carefully
thought through after a thorough review and analysis of
relevant data.
Q.14. Chair Powell, at your nomination hearing, you told me
that you supported strong consumer protections. Since that
time, the Consumer Financial Protection Bureau has endured new
leadership that is hostile to its mission.
Q.14.a. If the Bureau continues to drop lawsuits against
predatory online loan companies, like Golden Valley Lending or
drop investigations against companies like World Acceptance
Corporation, one of the biggest payday lenders, will the
Federal Reserve's consumer protection staff pick up the slack
and protect people from fraud and abuse?
Q.14.b. If the Consumer Financial Protection Bureau's
leadership refuses to ask for adequate funding, will you let us
know if predatory and deceptive practices start going
unaddressed by a weaker Consumer Financial Protection Bureau?
Q.14.c. Has the Federal Reserve weighed in on the impact from
the Consumer Bureau's decision to weaken fair lending
enforcement, suspend the civil penalties fund and stop
investigating the hack of 145 million people's information held
by Equifax?
Q.14.d. What have you shared with the leadership of the Bureau?
A.14.a.-d. While the Board plays a consultative role in CFPB
rulemakings and coordinates in the examinations as appropriate,
we do not have any oversight of the CFPB organizational or
structural design, which is defined in statute, nor of CFPB
enforcement priorities. By statute, the organizational
structure and prioritization of the CFPB's fair lending work is
up to the CFPB's director to decide.
For our part, the Federal Reserve continues to carry out
our supervisory and enforcement responsibilities for the
financial institutions and for the laws and regulations under
our authority.
We remain committed to ensuring that the financial institutions
under our jurisdiction fully comply with all applicable Federal
consumer protection laws and regulations. For example, in the
last few years, the Federal Reserve has addressed unfair and
deceptive practices through public enforcement actions that
have collectively benefited hundreds of thousands of consumers
and provided millions of dollars in restitution. In addition,
our examiners evaluate fair lending risk at every consumer
compliance exam. Pursuant to the Equal Credit Opportunity Act,
if we determine that a bank has engaged in a pattern or
practice of discrimination, we refer the matter to the DOJ.
Federal Reserve referrals have resulted in DOJ public actions
in critical areas, such as redlining and mortgage-pricing
discrimination.
With respect to the Equifax data breach, the Federal
Reserve's authority is limited. The Board, the Federal Deposit
Insurance
Corporation, and the Office of the Comptroller of the Currency
(agencies) have authority to examine and regulate bank service
companies under the Bank Service Company Act (BSCA).\1\
Additionally, the BSCA provides the agencies with limited
authority to regulate and examine the activities of other films
that provide certain services to the institutions we
supervise.\2\ The three largest credit reporting agencies in
the United States (Equifax, Experian, and TransUnion) are not
owned by insured depository institutions and are thus not bank
service companies. Accordingly, any authority the agencies have
under the BSCA with respect to the activities of these
companies would arise under the BSCA in so far as insured
depository institutions (or their subsidiaries or affiliates)
are outsourcing services authorized under the BSCA. To date,
none of the agencies has concluded that the credit reports that
credit reporting agencies sell to the institutions we supervise
are services within the scope of the BHCA.
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\1\ See 12 U.S.C. 1867(a). A ``bank service company'' is defined
as a company that is organized to provide services authorized under the
BSCA and that is owned exclusively by one or more insured depository
institutions. 12 U.S.C. 1861(b)(2).
\2\ Whenever an insured depository institution, or any subsidiary
or affiliate of such insured depository institution, causes to be
performed for itself services authorized under the BSCA, such
performance is subject to regulation and examination to the same extent
as if such services were being performed by the insured depository
institution itself on its own premises. 12 U.S.C. 1867(c).
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However, the Federal Reserve expects financial institutions
to follow vendor management guidance issued by the Board and
the Federal Financial Institutions Examination Council, which
includes conducting an assessment of the relationships with
third parties and their handling and protection of sensitive
personal information of individuals. As such, the Federal
Reserve holds the institutions we supervise accountable for
conducting appropriate due diligence and risk management with
respect to their relationships with third-parties, including
credit reporting agencies. Our examiners regularly assess
banking organizations' programs for due diligence, contract
management, ongoing monitoring, and overall risk management of
third-party and vendor relationships as part of Federal Reserve
examinations. In addition, the Board, along with the other
banking agencies and the Federal Trade Commission have jointly
issued rules under the Fair Credit Reporting Act that require
financial institutions to maintain identity theft prevention
programs. These programs must include policies and procedures
for detecting, preventing, and mitigating identity theft, and
we examine the banks we supervise for compliance with these
rules. Finally, under the Gramm-Leach-Bliley Act, the Board and
other banking agencies have issued guidelines to institutions
containing standards for safeguarding their customers' data.
Q.15. In recent years, Federal Reserve policymakers have warned
that we should raise interest rates to counter asset bubbles
destabilizing the financial system. Board of Governor nominee
Marvin Goodfriend has suggested replacing liquidity coverage
ratios and a host of other regulations with tighter monetary
policy.
Q.15.a. Do you believe that the blunt tool of monetary policy
can be a substitute for sound financial protections? What is
your reading of the historical evidence surrounding the
relationship between monetary policy and asset bubbles?
A.15.a. As stated above, it is up to the President and Senate
to evaluate the views and qualifications of potential members
of the Board. I do not want to comment on a specific nominee.
Strong regulatory and supervisory standards are critical
for financial stability. In the years leading up to 2007-2008,
excessive leverage and maturity transformation left the U.S.
and global economy vulnerable to a deterioration in the U.S.
housing market and an increase in investor concerns regarding
the solvency and liquidity of large, interconnected financial
institutions. Reforms since that time, enacted by Congress and
implemented by the appropriate agencies, have raised loss-
absorbing capacity within the financial sector and reduced the
susceptibility of the financial system to destabilizing runs.
Monetary policy, already tasked with the goals of price
stability and full employment, should not be considered a
substitute for strong financial and supervisory standards.
Moreover, asset-price swings owe to many factors, and monetary
policy has not generally been a prime factor in historical
episodes involving large movements in asset prices.
Q.15.b. Besides monetary policy, what other tools are available
to temper asset bubbles?
A.15.b. It is difficult to identify whether an asset price has
reached an unsustainably high (or low) level. For this reason,
it is important to monitor asset price developments and to
consider whether, for example, unusually rapid increases in
asset prices are leading to vulnerabilities in the U.S. economy
that could jeopardize financial stability, price stability, or
full employment. If a rapid increase in nonfinancial borrowing,
leverage in the financial sector, or maturity transformation
accompanied a rapid rise in asset prices, tools aimed directly
at mitigating such vulnerabilities could be appropriate. For
example, the Countercyclical Capital Buffer is a regulatory
tool that requires the largest, most systemic bank-holding
companies to build additional loss absorbing capacity when the
Board identifies a need for such additional resilience.
However, the difficulties associated with the detection of
vulnerabilities as they emerge highlight the need for strong
regulatory and supervisory standards at all times. The capital
and liquidity regulations and supervisory policies adopted by
the
Federal Reserve, including stress testing, represent such an
approach to maintaining resilience at a level that limit
excessive risk.
Q.15.c. Isn't it true that countries with tighter monetary
policy than the United States also experienced housing bubbles
in the early 2000s?
A.15.c. The housing boom during the early 2000s was global in
nature, with house prices rising across most advanced
economies. Although the availability of mortgage financing at
favorable rates coincided with strong housing markets in some
countries, there were particularly rapid house price gains in
several economies whose key monetary policy rates never
declined below 3 \1/2\ percent, including Australia, New
Zealand, Norway, and the United Kingdom. Each of those
economies experienced house price declines, to varying degrees
of severity, during the global financial crisis that followed.
Subsequent studies, including at the International Monetary
Fund, have found that the stance of monetary policy is not
generally a good leading indicator of future house price
bubbles and busts.
Q.15.d. Can you speak to the scale of interest rate increases
that would be needed to rein in an asset bubble?
A.15.d. As noted in the second answer to question 15, it is
difficult to detect whether an asset price has reached an
unsustainable level. A corollary of this challenge is that it
is hard to determine what factors are driving unsustainable
asset-price movements. The condition of markets is one of many
factors that could influence the underlying economy, but
efforts to influence asset prices in a manner that is not
consistent with the Federal Reserve's employment and price-
stability objectives could compromise the achievement of those
objectives.
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