[Senate Hearing 115-366]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 115-366

 
        FEDERAL RESERVE'S SECOND MONETARY POLICY REPORT FOR 2018

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

                                HEARING

                               before the

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

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                                   ON

      OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU- 
       ANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978

                               __________

                             JULY 17, 2018

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban Affairs
  
  
  
                                
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                 Available at: http: //www.fdsys.gov /
                 
                 
                 
                 
                         _______________

                 U.S. GOVERNMENT PUBLISHING OFFICE
                   
32-517 PDF               WASHINGTON : 2018                       
                 
                 
                 


            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

                      Joe Carapiet, Chief Counsel

              Kristine Johnson, Professional Staff Member

                 Elisha Tuku, Democratic Chief Counsel

            Laura Swanson, Democratic Deputy Staff Director

               Phil Rudd, Democratic Legislative Assistan

                       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

                              ----------                              

                         TUESDAY, JULY 17, 2018

                                                                   Page

Opening statement of Chairman Crapo..............................     1
    Prepared statement...........................................    37

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2
    Prepared statement...........................................    37

                                WITNESS

Jerome H. Powell, Chair, Board of Governors of the Federal 
  Reserve System                                                      4
    Prepared statement...........................................    39
    Responses to written questions of:
        Senator Brown............................................    41
        Senator Corker...........................................    58
        Senator Cotton...........................................    59
        Senator Rounds...........................................    62
        Senator Scott............................................    64
        Senator Tillis...........................................    66
        Senator Reed.............................................    69
        Senator Menendez.........................................    70
        Senator Warner...........................................   122
        Senator Cortez Masto.....................................   125
        Senator Jones............................................   141

              Additional Material Supplied for the Record

Monetary Policy Report to the Congress dated July 13, 2018.......   146
Article submitted by Senator Brown...............................   212


        FEDERAL RESERVE'S SECOND MONETARY POLICY REPORT FOR 2018

                              ----------                              


                         TUESDAY, JULY 17, 2018

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:01 a.m., in room SH-216, Hart 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. This hearing will now come to order.
    Today we welcome Chairman Powell back to the Committee for 
the Federal Reserve's Semiannual Monetary Policy Report to 
Congress.
    This hearing provides the Committee an opportunity to 
explore the current state of the U.S. economy and the Fed's 
implementation of monetary policy and supervision and 
regulatory activities.
    Since our last Humphrey-Hawkins hearing in March, Congress 
passed, with significant bipartisan support, and the President 
signed into law S. 2155, the Economic Growth, Regulatory 
Relief, and Consumer Protection Act.
    The primary purpose of this 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.
    A key provision of the bill provides immediate relief from 
enhanced prudential standards to banks with $100 billion in 
total assets or less.
    The bill also authorizes the Fed to provide immediate 
relief from unnecessary enhanced prudential standards to banks 
with between $100 billion and $250 billion in assets. It is my 
hope that the Fed promptly provides relief to those within 
these thresholds.
    By rightsizing regulation, the bill will improve access to 
capital for consumers and small businesses that help drive our 
economy. And the banking regulators are already considering 
this bill in some of their statements and rulemakings.
    Earlier this month, the Fed, FDIC, and OCC issued a joint 
statement outlining rules and reporting requirements 
immediately impacted by the bill, including a separate letter 
issued by the Fed that was particularly focused on those 
impacting smaller, less complex banks. But there is still much 
work to do on the bill's implementation.
    As the Fed and other agencies revisit past rules and 
develop new rules in conjunction with the bill, it is my 
expectation that such rules will be developed consistent with 
the purpose of the bill and the intent of the Members of 
Congress who voted for the bill.
    With respect to monetary policy, the Fed continues to 
monitor and respond to market developments and economic 
conditions.
    In recent comments at a European Central Bank Forum on 
Central Banking, Chairman Powell described the state of the 
U.S. economy, saying, ``Today most Americans who want jobs can 
find them. High demand for workers should support wage growth 
and labor force participation . . . Looking ahead, the job 
market is likely to strengthen further. Real gross domestic 
product in the United States is now reported to have risen 2.75 
percent over the past four quarters, well above most estimates 
of its long-run trend . . . Many forecasters expect the 
unemployment rate to fall into the mid-3s and to remain there 
for an extended period.''
    According to the FOMC's June meeting minutes, the FOMC 
meeting participants agreed that the labor market has continued 
to strengthen and economic activity has been rising at a solid 
rate. Additionally, job gains have been strong and inflation 
has moved closer to the 2-percent target.
    The Fed also noted that the recently passed tax reform 
legislation has contributed to these favorable economic 
factors. I am encouraged by these recent economic developments 
and look forward to seeing our bill's meaningful contribution 
to the prosperity of consumers and households.
    As economic conditions improve, the Fed faces critical 
decisions with respect to the level and trajectory of short-
term interest rates and the size of its balance sheet.
    I look forward to hearing more from Chairman Powell about 
the Fed's monetary policy outlook and the ongoing effort to 
review, improve, and tailor regulations consistent with the 
Economic Growth, Regulatory Relief, and Consumer Protection 
Act.
    Senator Brown.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. Welcome, Mr. Chair. 
It is nice to see you again.
    This week the President of the United States went overseas 
and sided with President of Russia while denigrating critical 
American institutions, including the press, the intelligence 
community, and the rule of law.
    Our colleague Senator McCain expressed clearly what every 
patriotic American thought: ``No prior President has ever 
abased himself more abjectly before a tyrant. Not only did 
President Trump fail to speak the truth about an adversary; but 
speaking for America to the world, our President failed to 
defend all that makes us who we are--a republic of free people 
dedicated to the cause of liberty at home and abroad. American 
Presidents must be the champions of that cause if it is to 
succeed.'' The words of the 2008 Republican Presidential 
nominee.
    With our democratic institutions under threat, we cannot 
ignore what happened in Helsinki yesterday. But we must not 
lose sight of the other special interest policies of this 
Administration, including the rollback of the rules put in 
place to prevent the next economic crisis.
    Just last week, a Federal Reserve official said, ``There 
are definitely downside risks, but the strength of the economy 
is really pretty important at the moment. The fundamentals for 
the U.S. economy are very strong.''
    That may be true for Wall Street, but for most of America 
workers have not seen a real raise in years, young Americans 
are drowning in student loan debt, families are trying to buy 
their first home. For most of America, the strength of the 
economy is an open question.
    Last month former Fed Chair Ben Bernanke was very clear 
about the long-term impact of the tax cut and the recent bump 
in Federal spending when he said, ``in 2020 Wile E. Coyote is 
going to go off the cliff.''
    Last week the San Francisco Fed released a study finding 
that the rosy forecasts of the tax bill are likely ``overly 
optimistic.'' It found that the bill's boost to growth is 
likely to be well below projections--or even as small as zero. 
It suggested that these policies could make it difficult to 
respond to future economic downturns and manage growing Federal 
debt.
    And it is not just the tax bill. The economic recovery has 
not been evenly felt across the country. Not even close. Mr. 
Chairman, I would like to enter into the record an article from 
the New York Times this weekend which talks about those 
families still struggling from the lack of meaningful raises 
and other job opportunities.
    Chairman Crapo. Without objection.
    Senator Brown. Thank you, Mr. Chairman.
    While hours have increased a bit over the past year for 
workers as a whole, real hourly earnings have not. For 
production and nonsupervisory workers, hours are flat; pay has 
actually dropped slightly, according to the Bureau of Labor 
Statistics.
    The number of jobs created in 2017 was smaller than in each 
of the previous 4 years. Not what we hear in the mainstream 
media, perhaps. Some of the very companies that announced 
billions in buybacks and dividends are now announcing layoffs, 
shutting down factories, and offshoring more jobs.
    Some of the biggest buybacks, as we know in this Committee, 
are in the banking industry, assisted in part by the Federal 
Reserve's increasingly lax approach to financial oversight.
    Earlier this month, as part of the annual stress tests, the 
Fed allowed the seven largest banks to redirect $96 billion to 
dividends and buybacks. This money might have been used, as the 
President and members of the majority party liked to promise 
during the tax bill, this money might have been used to pay 
workers, to reduce fees for consumers, to protect taxpayers 
from bailouts, or be deployed to help American businesses.
    Three banks--Goldman, Morgan Stanley, and State Street--all 
had capital below the amount required to pass the stress tests, 
but the Fed gave them passing grades anyway.
    The Fed wants to make the tests easier next year. Vice 
Chair Quarles has suggested he wants to give bankers more 
leeway to comment on the tests before they are administered. I 
guess it is OK in Washington to let students help write the 
exam.
    The Fed is considering dropping the qualitative portion of 
the stress tests altogether--even though banks like Deutsche 
Bank and Santander and Citigroup and HSBC and RBS have failed 
on qualitative grounds before.
    That does not even include the changes the Fed is working 
on after Congress passed S. 2155 to weaken Dodd-Frank, making 
company-run stress tests for the largest banks ``periodic'' 
instead of annual and exempting more banks from stress tests 
altogether.
    And, oh, yeah, Vice Chair Quarles has also made it clear 
that massive foreign banks can expect goodies, too.
    And on and on and on it goes. The regulators loosen rules 
around big bank capital, dismantle the CFPB, ignore the role of 
the FSOC, undermine the Volcker Rule, and weaken the Community 
Reinvestment Act.
    When banks make record profits, we should be preparing the 
financial system for the next crisis. We should buildup 
capital, we should invest in workers, we should combat asset 
bubbles.
    And we should be turning our attention to bigger issues 
that do not get enough attention, like how the value that we 
place on work has declined in this country, how our economy 
increasingly measures success only in quarterly earning 
reports.
    Much of that is up to Congress to address. Over the last 6 
months, tragically, I have seen the Fed moving in the direction 
of making it easier for financial institutions to cut corners, 
and I have only become more worried about our preparedness for 
the next crisis.
    I look forward to the testimony, Mr. Chairman. And welcome, 
Mr. Chairman.
    Chairman Crapo. Thank you, Senator Brown. And, again, 
Chairman Powell, welcome. We appreciate you testifying today, 
and we look forward to your opening statement. You may proceed.

STATEMENT OF JEROME H. POWELL, CHAIR, BOARD OF GOVERNORS OF THE 
                     FEDERAL RESERVE SYSTEM

    Mr. Powell. Thank you and good morning. Good morning 
Chairman Crapo, Ranking Member Brown, and other Members of the 
Committee. I am happy to present the Federal Reserve's 
semiannual Monetary Policy Report to the Congress today.
    Let me start by saying that my colleagues and I strongly 
support the goals that Congress has set for monetary policy: 
maximum employment and price stability. We also support clear 
and open communication about the policies we undertake to 
achieve these goals. We owe you, and the public in general, 
clear explanations of what we are doing and why we are doing 
it. Monetary policy affects everyone and should be a mystery to 
no one.
    For the past 3 years, we have been gradually returning 
interest rates and the Fed's securities holdings to more normal 
levels as the economy has strengthened. We believe that this is 
the best way we can help set conditions in which Americans who 
want a job can find one and in which inflation remains low and 
stable.
    I will review the current economic situation and outlook, 
and then I will turn to monetary policy.
    Since I last testified here in February, the job market has 
continued to strengthen and inflation has moved up. In the most 
recent data, inflation was a little above 2 percent, the level 
that the Federal Open Market Committee thinks will best achieve 
our price stability and employment objectives over the longer 
term. The latest figure was boosted by a significant increase 
in gasoline and other energy prices.
    An average of 215,000 net new jobs per month were created 
each month in the first half of this year. That number is 
somewhat higher than the monthly average of 2017. It is also a 
good deal higher than the average number of people who enter 
the workforce each month on net. The unemployment rate edged 
down 0.1 percent over the first half of the year to 4.0 percent 
in June, near the lowest level of the past two decades. In 
addition, the share of the population that either has a job or 
has looked for one in the past month--what we call the ``labor 
force participation rate''--has not changed much since late 
2013, and this development is another sign of labor market 
strength. Part of what has kept the participation rate stable 
is that more working-age people have started looking for a job, 
which has helped make up for the large number of baby boomers 
who are retiring and leaving the labor force.
    Another piece of good news is that the robust conditions in 
the labor market are being felt by many different groups. For 
example, the unemployment rates for African Americans and 
Hispanics have fallen sharply over the past few years and are 
now near their lowest levels since the Bureau of Labor 
Statistics began reporting these data in 1972. Groups with 
higher unemployment rates have tended to benefit the most as 
the job market has strengthened. But jobless rates for these 
groups are still higher than those for whites. And while three-
fourths of whites responded in a recent Fed survey that they 
were doing at least OK financially, only two-thirds of African 
Americans and Hispanics responded that way.
    Incoming data show that, alongside the strong job market, 
the U.S. economy has grown at a solid pace so far this year. 
The value of goods and services produced in the economy--or 
GDP--rose at a moderate annual rate of 2 percent in the first 
quarter after adjusting for inflation. However, the latest data 
suggest that economic growth in the second quarter has been 
considerably stronger than in the first. The solid pace of 
growth so far this year is based on several factors. Robust job 
gains, rising after-tax income, and optimism among households 
have lifted consumer spending in recent months. Investment by 
businesses has continued to grow at a healthy rate. Good 
economic performance in other countries has supported U.S. 
exports and manufacturing. And while housing construction has 
not increased this year, it is up noticeably from where it 
stood a few years ago.
    Turning to inflation, after several years in which 
inflation ran below our 2-percent objective, the recent data 
are more encouraging. The price index for personal consumption 
expenditures, or PCE inflation--an overall measure of prices 
paid by consumers--increased 2.3 percent over the 12 months 
ending in May. That number is up from 1.5 percent a year ago. 
Overall or headline inflation increased partly because of 
higher oil prices, which caused a sharp rise in gasoline and 
other energy prices paid by consumers. Because energy prices 
move up and down a great deal, we also look at core inflation. 
Core inflation excludes energy and food prices and generally is 
a better indicator of future overall inflation. Core inflation 
was 2.0 percent for the 12 months ending in May, compared to 
1.5 percent a year ago. We will continue to keep a close eye on 
inflation with the goal of keeping it near 2 percent.
    Looking ahead, my colleagues on the FOMC and I expect that, 
with appropriate monetary policy, the job market will remain 
strong and inflation will stay near 2 percent over the next 
several years. This judgment reflects several factors. First, 
interest rates, and financial conditions more broadly, remain 
favorable to growth. Second, our financial system is much 
stronger than before the crisis and is in a good position to 
meet the credit needs of households and businesses. Third, 
Federal tax and spending policies likely will continue to 
support the expansion. And, fourth, the outlook for economic 
growth abroad remains solid despite greater uncertainties in 
several parts of the world. What I have just described is what 
we see as the most likely path for the economy. Of course, 
economic outcomes that we experience often turn out to be a 
good deal stronger or weaker than our best forecast. For 
example, it is difficult to predict the ultimate outcome of 
current discussions over trade policy as well as the size and 
timing of the economic effects of the recent changes in fiscal 
policy. Overall, we see the risk of the economy unexpectedly 
weakening as roughly balanced with the possibility of the 
economy growing faster than we currently anticipate.
    Over the first half of 2018, the FOMC has continued to 
gradually reduce monetary policy accommodation. In other words, 
we have continued to dial back the extra boost that was needed 
to help the economy recover from the financial crisis and the 
Great Recession. Specifically, we raised the target range for 
the Federal funds rate by a quarter percentage point at both 
our March and June meetings, bringing the target to its current 
range of 1\3/4\ to 2 percent. In addition, last October we 
started gradually reducing the Fed's holdings of Treasury and 
mortgage-backed securities, and that process has been running 
smoothly. Our policies reflect the strong performance of the 
economy and are intended to help make sure that this trend 
continues. The payment of interest on balances held by banks in 
their accounts at the Federal Reserve has played a key role in 
carrying out these policies, as the current Monetary Policy 
Report explains. Payment of interest on these balances is our 
principal tool for keeping the Federal funds rate in the FOMC's 
target range. This tool has made it possible for us to 
gradually return interest rates to a more normal level without 
disrupting financial markets and the economy.
    As I mentioned, after many years of running below our 
longer-run objective of 2 percent, inflation has recently moved 
close to that level. Our challenge will be to keep it there. 
Many factors affect inflation--some temporary and others longer 
lasting. So inflation will at times be above 2 percent and at 
times below. We say that the 2-percent objective is 
``symmetric'' because the FOMC would be concerned if inflation 
were running persistently above or below our 2-percent 
objective.
    The unemployment rate is low and expected to fall further. 
Americans who want jobs have a good chance of finding them. 
Moreover, wages are growing a little faster than they did a few 
years ago. That said, they still are not rising as fast as in 
the years before the crisis. One explanation could be that 
productivity growth has been low in recent years. On a brighter 
note, moderate wage growth also tells us that the job market is 
not causing high inflation.
    With a strong job market, inflation close to our objective, 
and the risks to the outlook roughly balanced, the FOMC 
believes that--for now--the best way forward is to keep 
gradually raising the Federal funds rate. We are aware that, on 
the one hand, raising interest rates too slowly may lead to 
high inflation or financial market excesses. On the other hand, 
if we raise rates too rapidly, the economy could weaken and 
inflation could run persistently below our objective. The 
Committee will continue to weigh a wide range of relevant 
information when deciding what monetary policy will be 
appropriate. As always, our actions will depend on the economic 
outlook, which may and will change as we receive new data.
    For guideposts on appropriate policy, the FOMC routinely 
looks at a range of monetary policy rules that recommend a 
level for the Federal funds rate based on the current rates of 
inflation and unemployment. The July Monetary Policy Report 
gives an update on monetary policy rules and their role in our 
policy discussions. I continue to find these rules helpful, 
although using them requires careful judgment.
    Thank you, and I will now be happy to take your questions.
    Chairman Crapo. Thank you for your statement, Chairman 
Powell.
    The first question I have will relate to CCAR. As you know, 
the Fed recently released the results of the 2018 Comprehensive 
Capital Analysis and Review, the CCAR, stress test. This year 
the Fed issued conditional nonobjections to certain banks, 
which, as you are aware, some have criticized. What details can 
you share about the Fed's decision to issue the conditional 
nonobjections while allowing those firms to maintain capital 
distributions at recent levels?
    Mr. Powell. Thank you, Mr. Chairman. So the CCAR 
supervisory test is and will remain an important part of our 
supervisory framework, particularly for the largest and most 
systemically important firms. And I guess I would start by 
saying that this year's test was by a good margin the most 
stringent test yet. Hypothetical losses for 2018 were $85 
billion higher than during the 2017 stress test, and the 
hypothetical decline in the capital ratio was 110 basis points 
higher this year than last year; so a very significantly severe 
test, and it will result in a material increase in the effect 
of aggregate capital requirement of the firms subject to the 
test.
    So, you know, we carefully evaluated the results. We voted 
on them on June 20th, and the next day the firms received a 
call from our staff, which informed them of the results and 
their options. This is the standard operating procedure that we 
follow every year. There is no negotiation, there is no 
haggling. The decision has been made the day before by the 
Board, and they are just informed of their options, and they 
deal with them as they are.
    Almost all the firms finished above the required poststress 
minimums, which is a sign of how well capitalized the industry 
is. Two firms that did not were required to restrict their 
distributions to past years' levels. That has always been the 
penalty for failing to meet the poststress minimums, and that 
will require the firms to build capital this year, these two 
firms. The third firm was required to take certain steps 
regarding the management and analysis of its counterparty 
exposures under stress. So the same exact penalty was paid. We 
labeled these as conditional nonobjects rather than objecting 
straight out to the plan, and we have done that over a period 
of years many times, and we thought that it was appropriate 
here.
    When we fail a firm, when we actually fail them and send--
what we do is we send the plan back and say that your capital 
planning process is deficient, please take this plan back, 
please fix it and bring it back to us, and we will look at it 
again. So that sends a signal that we believe that the capital 
planning processes of the firms are deficient in some serious 
way.
    As I mentioned, in a number of cases we have gone with sort 
of an intermediate sanction, and we felt that that was 
appropriate here. One reason for that is the timing of the tax 
bill, as we mentioned, and firms plan, of course, well in 
advance so that they will have enough capital to pass the test. 
This particular bill passed, was signed into law on December 
22nd. We used fourth quarter capital levels for the test, so 
the TCJA resulted in a significant decrease in the level of 
capital these firms have. But, of course, they do not benefit 
from what in the longer term will be a lower tax effect on 
their earnings. So I think whereas any analyst would look at 
that law and say that it is positive for banks and for their 
ability to earn money, it was strictly a negative in this test. 
So we looked at that, and among other factors we decided to use 
the conditional nonobject.
    I will stop there, Mr. Chairman.
    Chairman Crapo. All right. I appreciate that explanation, 
and essentially what I am hearing you say is that the same--in 
fact, even a stricter test was applied, and the same standards 
of review were used in your analysis and in the consequences 
that were applied.
    Mr. Powell. That is right, and I just would reiterate our 
commitment to this particular supervisory stress test. It is a 
very important thing for us, and we will make sure to keep it 
stringent.
    Chairman Crapo. All right. Thank you.
    Chairman Powell, moving to regulation, the recently enacted 
Economic Growth, Regulatory Relief, and Consumer Protection Act 
received significant bipartisan support, as you know. In 
addition to several provisions providing regulatory relief to 
community and midsize banks, a key provision of the bill raises 
the threshold for the application of the enhanced prudential 
standards from $50 billion to $250 billion.
    What is the Fed's process for quickly implementing S. 2155, 
including its process for ensuring that the financial companies 
with total assets between $100 billion and $250 billion 
promptly receive similar relief to the relief provided for the 
financial institutions with less than $100 billion in total 
assets?
    Mr. Powell. So our intention and our practice is going to 
be to implement the bill as quickly as we possibly can. As you 
probably know, I am sure you know, we released a statement the 
Friday of July 4th week laying out our plans to move ahead with 
some things. And, again, we will do them as quickly as 
possible, and we indicated that we will try to move that along 
very quickly.
    Chairman Crapo. All right. Thank you.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Mr. Chairman, I have a number of questions. I hope your 
answers can be brief. Thank you for our phone call the other 
day. I know you know this: In real terms wages have not budged 
recently. Last week BLS reported that hours for production and 
nonsupervisory workers are flat and pay has actually dropped 
over the past year. Of course, we should focus on real wages 
rather than nominal wages. By that measure, is the typical 
worker really better off this year than he or she was a year 
ago?
    Mr. Powell. Yes. Yes, I would say that the labor market has 
strengthened. The labor report will show that wages went up 2.7 
percent. That is significantly higher than trend inflation. 
There is a bit of a bump from gas prices going up and consumers 
do pay that, but I would say that overall workers are better 
off because----
    Senator Brown. I would partially contradict that and say 
that nonsupervisory workers, four out of five workers have seen 
nominal wages go up but real wages have not by those same BLS 
statistics.
    Let me move to another. You have called stress testing 
``the most successful regulatory innovation of the postcrisis 
era''--you said that some time ago--but the actions the Fed has 
taken during your tenure undercut that effect when the Fed gave 
Goldman, Morgan, and State Street passing grades this year even 
though they failed to meet capital requirements in CCAR, the 
first time that has ever happened in CCAR history. The Fed 
proposes to weaken the leverage constraint, and CCAR reportedly 
may drop the qualitative portion of the test, wants to give 
bankers more leeway to influence the Fed's models, and may soon 
adjust Dodd-Frank stress tests to make them less stressful and 
less frequent, hence the ``periodic.''
    Stress test tests were adopted in 2009 to provide 
confidence to the public that the banks could weather economic 
shocks. How is the public supposed to trust the stress test 
when the Fed proposes all of those ways to weaken them?
    Mr. Powell. So we are strongly committed to using stress 
tests. We really developed the supervisory stress test at the 
Fed, and as you know, we think it is a very important tool. It 
was one of the main ways that we used to raise capital, 
particularly among the largest firms, and we are committed to 
continuing stress testing as one of the three or four most 
important innovations, along with higher capital, higher 
liquidity, and resolution. It is one of the big four pillars 
for us.
    The program has to continue to evolve. We want to 
strengthen it. We want to make it more transparent. We want to 
improve it over time. And all of our actions are designed to do 
that, and I think if you look at the state of the banking 
system and the fact that this test will require higher capital, 
then I think you will see that is consistent with--that our 
words are consistent with our actions.
    Senator Brown. Well, I think the message coming out 
emanating from the business press--and those are not, you know, 
Democratic, liberal newspapers; they are the Wall Street 
Journal, the Financial Times, the New York Times business 
section--speaks to the fact that these stress tests are getting 
weaker.
    Let me ask another question. Vice Chair Quarles has given 
two speeches outlining how the Fed wants to recalibrate the 
rules for large foreign banks. You gave an answer, a carefully 
worded answer, I thought, to obscure the fact that large 
foreign banks may receive less oversight as a result of S. 
2155. The public is getting mixed messages from the Fed.
    For the record, can foreign banks with more than $50 
billion in U.S. assets--Deutsche, Santander, Credit Suisse, the 
others--can foreign banks with more than $50 billion in U.S. 
assets expect to get regulatory relief during your tenure?
    Mr. Powell. You know, I think I can say that S. 2155, it is 
not clear to me how it provides regulatory relief to those 
firms. I mean, all of the banks that have $50 billion in U.S. 
assets have more than $250 billion in global assets. So I do 
not think there really will be much effect. I will not say that 
we will never do anything to provide regulatory relief to a 
group during my tenure, but----
    Senator Brown. So your position seems to be that if they 
are between--if they are over 50 in the U.S., under 250 as 
those are, but much, much, much bigger with all the----
    Mr. Powell. Globally.
    Senator Brown. Globally, that you do not expect any 
regulatory relief for them?
    Mr. Powell. Well, the main thing is the $50 billion 
threshold for internal holding companies will remain the same. 
We are not looking at that. And I think they will not see much 
difference.
    Senator Brown. Physical commodities. The Fed proposed a 
physical commodities rule for 2016. You are moving presumably 
to finalize it. The Fed responded to questions for the record 
saying that the Board continues to consider this proposal. When 
can we expect action on it, Mr. Chairman?
    Mr. Powell. I do not have a date for you on that. I know 
that we received extensive comments on it, and we are 
considering them.
    Senator Brown. Do you feel some urgency on it?
    Mr. Powell. I will have to go back and look and see where 
that is in the line.
    Senator Brown. If you would please respond in writing to 
that.
    And a last question, Mr. Chairman. The Administration and 
some in Congress pushed through tax cuts and bank deregulation 
under the guise that it would trickle down to American families 
in the form of more loans. Loan growth has slowed in the last 
quarter. It was less than half the growth rate than during the 
last year of the Obama administration. The four largest banks, 
as you know, redirected record levels of profits into dividends 
and stock buybacks. The four big banks' CEOs got an average 
raise of 26 percent.
    My question is simple: When, if ever, do you expect to be 
able to come before this Committee and demonstrate to us in 
this Committee, as Chair of the Fed, demonstrate to us how tax 
cuts and deregulation have actually benefited the real economy 
in the forms of more lending?
    Mr. Powell. I guess I see my role as reporting about the 
overall economy rather than the effect of any particular law, 
although I will be happy to take questions on that.
    Senator Brown. OK. Thank you, Mr. Chairman.
    Chairman Crapo. Senator Scott.
    Senator Scott. Thank you, Mr. Chairman. And good morning, 
Chairman Powell. Thank you for being with us today.
    Mr. Powell. Good morning, Senator.
    Senator Scott. It certainly is difficult to find negative 
news as it relates to our economic reality. The truth of the 
matter is that we are in the third largest economic expansion 
since 1854--not 1954--1854. An 18-year low in our unemployment 
rates. African American unemployment for the first time in 
recorded history below 6 percent at 5.9 percent. Hispanic 
unemployment at 4.6 percent, lowest recorded as well. Wage 
growth 2.7 percent, the highest level since 2009. And the 
Atlanta Federal Reserve suggests that we could have a 5-percent 
GDP growth in the second quarter. And the good news just keeps 
on coming.
    Small businesses said they have not been this optimistic in 
45 years. That has got to be a record. Beyond a doubt, tax 
reform combined with responsible regulations have resulted in 
more Americans have more money in their pockets. And another 
great example of the economic reality that we face today is 
that the core prime-age labor force participation rate has 
stabilized since 2013 and is starting to climb in the right 
direction.
    My question for you, Chair Powell, is: What has been the 
overall impact of the economic growth for the long-term 
unemployed? And can we read into the prime-age labor force 
participation rate's increase really positive news for those 
long-term unemployed?
    Mr. Powell. Yes, so prime-age labor force participation, 
Senator, as you pointed out, has been climbing here in the last 
couple of years. That is a very healthy sign because prime-age 
labor force participation is really--you know, it has been 
weak, and it has been weak in the United States compared to 
other countries. So it is very troubling, and the fact that 
that is coming back up is a very positive thing. We really hope 
it is sustained, and we hope that these gains in participation 
can be sustained. We have a long box in our Monetary Policy 
Report that talks about that.
    The other thing, you mentioned the long-term unemployed.
    Senator Scott. Yes.
    Mr. Powell. So the number of long-term unemployed has come 
down dramatically since, I do not know, maybe 2010. I want to 
say the numbers were between 6 and 7 million, and unless I get 
this wrong, I think the current number of longer-term 
unemployed is around 1.5 million. So the people who are on the 
very edges of the labor force like those people, those are the 
ones who have benefited the most.
    Senator Scott. Thank you. With all that economic heat 
coming our way in a positive way, the prices seem to be going 
up, so the CPI rose 2.9 percent, the fastest pace since 2012. 
Those rising prices could negate some of the wage growth that I 
just talked about if left unchecked.
    In the past we have discussed, you and I, the Fed role 
according to the congressional mandate seeking stable prices 
being one of those specific mandates. We have also talked about 
the downsides of low interest rates for extended periods of 
time. What do you see in the prices for energy, housing, health 
care, and transportation? And how is that going to impact your 
thinking moving forward?
    Mr. Powell. Inflation has been below our 2-percent 
objective since I joined the Board of Governors in May of 2012 
just until last month. For the first time, we have 12 months of 
core inflation being at 2 percent. So that is a very positive 
thing. We want to see overall inflation continue to come up so 
that it is sort of symmetrically around 2 percent. I would say 
we are just shy of achieving that. But we want inflation to 
remain right around 2 percent and be as likely to be a little 
above as a little below. I would say we are on the--and I think 
our monetary policy is really designed to help us continue to 
achieve that. So we are gradually moving up rates, and that we 
think is the policy that will help us get inflation to 2 
percent sustainably.
    Senator Scott. Thank you. Just two more areas for you. 
South Carolina, my home State's economy is built on trade. You 
name it, we make it. We grow it and we ship it. Cars, cotton, 
tires, jets, peaches, soybeans, turbines, solar panels, and the 
list goes on and on.
    What has generally happened in the past to economic growth 
when we have raised tariffs?
    Mr. Powell. I have to start by saying that, you know, I am 
really firmly committed to staying in our lane and, you know, 
our lane is the economy. Trade is really the business of 
Congress, and Congress has delegated some of that to the 
executive branch. But, nonetheless, it has significant effects 
on the economy, and I think when there are long-run effects, we 
should talk about it and talk in principle. And I would say in 
general countries that have remained open to trade, that have 
not erected barriers, including tariffs, have grown faster. 
They have had higher incomes, high productivity. And countries 
that have, you know, gone in a more protectionist direction 
have done worse. I think that is the empirical result.
    Senator Scott. I only have about 5 seconds left, so let me 
use my time wisely. As you know, I have a background in the 
insurance industry, and I am seriously a fan of a State-based 
system of insurance regulations. I think it is the best in the 
world. As the Fed participates in developing the ICS with the 
IAIS, I strongly urge you to shape a final product that 
protects the U.S. system of insurance regulation, and I would 
appreciate you and I having a conversation in the near future.
    Mr. Powell. Thank you, Senator.
    Senator Scott. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman. Welcome, 
Chairman Powell.
    The issue of wages has been discussed by several of my 
colleagues and yourself. In 2000, the last time we were at this 
situation where we were touching 4 percent unemployment, the 
share of national income by corporations was about 8.3 percent, 
and the share of wages was 66 percent. Today we are once again 
reaching that point of about 4 percent unemployment, yet 
corporate profits account for about 13.2 percent of national 
income. They have gone up significantly. Wages as a share of 
national income have gone down from 66 percent to 62 percent. 
If those trends continue, we are in a situation where working 
men and women are not going to get their fair share of growth. 
What are you trying to do at the Fed to ensure that they get 
their fair share of growth?
    Mr. Powell. The decline in labor share of profits--labor 
share of profits was generally, you know, oscillating fairly 
constant for a number of decades and right around the turn of 
the century began to drop precipitously and continued to do so 
for more than a decade. It is very troubling. We want an 
economy that works for everyone. And that happened, by the way, 
in essentially all advanced economies, and probably a range of 
factors are responsible for that.
    In the last 5 years or so, labor share of profits has been 
sideways. This is very much akin to the flattening out of 
median incomes over the last few decades. So it has got to do 
with a number of global factors.
    The thing that we can do is to take seriously your 
congressional order that we seek maximum employment, so in 
tight labor markets, workers are more likely going to be paid 
well and paid their share. I would say most of the factors that 
have driven down labor share of profits are really not under 
the control of the Fed. And so those are issues that we do not 
have control over.
    Senator Reed. But would you say that the tax bill did not 
affect those downward trends in wages positively, that, in 
fact, it has done nothing to reverse what you have seen as a 
decade or more of decreases?
    Mr. Powell. I think wages are set in the marketplace 
between workers and companies, and they are affected by a range 
of factors. I think it would be early to be looking for a bill 
that was signed into law less than a year ago to be able to 
visibly be affecting much of anything at this point, really. 
These things, big changes in fiscal policy, take quite a while 
to affect wages.
    Senator Reed. So none of this good news we are talking 
about today is a result of this tax bill, it is too early?
    Mr. Powell. It is very hard to isolate the--I mean, I would 
say wages have moved up meaningful over the last 5 years. It 
has been quite gradual. And, you know, we certainly think it 
would be fine for them to move up more.
    Senator Reed. Do you think the European Union is a foe of 
the United States?
    Mr. Powell. No, I do not.
    Senator Reed. Thank you.
    As we look ahead to some of the potential obstacles--and 
having, both of us, lived through 2008 and 2009, it looked good 
and then it looked real bad. In retrospect, we saw some signs 
of the danger. What are the signs of danger that you are sort 
of focusing on? There are huge deficits, both Government 
deficits, private deficits worldwide. You have got a trade 
battle brewing. And you have got things like Brexit that could 
complicate our life dramatically. So what are the two or three 
things that you think could throw us off this track?
    Mr. Powell. There is a difference between the longer term 
and the short term. So in the near term, things look good. You 
know, we look very carefully at a range of financial conditions 
and financial stability vulnerabilities, we feel that those are 
at sort of normal, moderate levels right now, although there 
are some areas that are elevated, some assets prices are high, 
and there is an elevated level of debt in the nonfinancial 
corporate sector. More broadly, banks are well capitalized. 
Households are in much better shape. So financial stability I 
do not worry about too much at this point, although we keep our 
eye on that very carefully after our recent experience.
    You mentioned trade. It is hard to say what the outcome 
will be. Really, there is no precedent for this kind of broad 
trade discussions. In my adult life, I have not seen where 
essentially all of our major trading partners--hard to know how 
that comes out. If it results in lower tariffs for everyone, 
that would be a good thing for the economy. If it results in, 
you know, higher tariffs across a broad range of traded goods 
and services that remain that way for a longer period of time, 
that will be bad for our economy and for other economies, too.
    Senator Reed. Thank you very much, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman.
    Chairman Powell, first of all, I want to thank you for 
being here today. Before I get into the questions, I would just 
like to take note of the two rules that were announced this 
spring: the new stress capital buffer and the proposed changes 
to tailor the enhanced supplementary leverage ratio. I do 
appreciate the Federal Reserve's efforts, and I hope we can 
continue an open dialogue on these changes as you move forward.
    I am just curious. You indicated with regard to Senator 
Reed's question, based on the tax bill, clearly there is an 
improvement in GDP growth over the last couple of years. Was it 
anticipation of the tax bill being passed? I would like to 
flesh that out just a little bit, because most certainly I 
think a lot of truly believe that that tax bill is a key 
component in the development of an improvement in our GDP. Your 
thoughts?
    Mr. Powell. I was really answering about whether you could 
see it in wages right now. That is hard to do. So growth 
averaged around 2 percent for 8 years, and then in 2017, I 
think the current estimate is 2.6 percent. And you saw 
significant improvements in household and business confidence 
levels. Overall confidence about the economy, you saw that 
coming on in 2017. Some of that was probably in anticipation of 
the passage of what finally passed. So probably that was 
already in the growth rate. I think it is hard to say, but I 
suspect that some anticipation of tax cuts and tax reform was 
already in the growth in 2017.
    Going forward--and we have said this--we expect--there are 
a range of estimates on this, but we would expect that the tax 
bill and the spending bill would provide meaningful support to 
demand for at least the next 2 or 3 years, maybe 3 years, and 
also might have, you know, effects on the supply side as well. 
To the extent you are encouraging more investment, you are 
going to get higher productivity. So it is very--these 
estimates are subject to tremendous uncertainty both as to 
amount and as to timing. But I think we look at the range of 
estimates, and that is certainly where we broadly come out.
    Senator Rounds. I just want to be clear. That tax bill had 
a positive impact, even if it is the anticipation of the tax 
bill. It has a positive impact on our GDP growth, correct?
    Mr. Powell. Yes, I think, so this year, maybe last year, 
too.
    Senator Rounds. OK. Let me ask you this: With regard to 
trade, you make notes specifically in your comments on trade 
and the fact that there are some things up in the air right 
now. There is perhaps some instability or some questions on the 
part of not only our businesses but businesses around the 
world. Are businesses looking for stability with regard to 
trade compacts? Or are they looking for opportunity and 
instability?
    Mr. Powell. Well, they would clearly be looking for 
stability.
    Senator Rounds. OK. And then I would look to associate 
myself--and I support what Senator Scott indicated earlier with 
regard to the insurance issues and the fact that our State-
based regulatory system for insurance I think is critical. I 
think it is a positive thing for consumers when it is as close 
to that State regulatory process as possible.
    When you came here before the Committee earlier this year, 
you discussed capital requirements in the options market and 
mentioned that the Federal Reserve was working on a rule to 
transition from the risk-insensitive Current Exposure Method, 
or CEM, to the internationally agreed upon Standardized 
Approach for Counterparty Credit Risk, SA-CCR. I am supportive 
of these efforts, but I remain concerned about the timeline for 
implementation. I noted with concern in a letter to Vice Chair 
Quarles last year, in response to my request that the Federal 
Reserve used its reservation of authority to grant interim 
relief, Vice Chair Quarles asserted that the Fed lacks such 
authority in this context. I originally raised this issue when 
Vice Chair Quarles was testifying at his confirmation hearing 
last July. Unfortunately, it has been a year since that time, 
and the Fed has yet to take meaningful action.
    I remain concerned about this because the longer we wait 
for American regulators to implement SA-CCR, the more market 
makers will exit the options market entirely, making our 
financial system more vulnerable to economic shocks and less 
competitive compared to our international peers.
    I noted in the Basel Committee's last progress report from 
April of 2018 that 22 of the 27 Basel member countries have 
either implemented SA-CCR or made substantially more progress 
at implementation compared to the United States. I am a 
particularly strong supporter of risk-based capital standards, 
particularly in this context in options markets. Can you 
provide an update on when the rulemaking from CEM to SA-CCR 
will be released?
    Mr. Powell. I know that we are working on it now. I know 
that we think it is good policy. And I cannot give you an exact 
date, but I know we are actively directing a rule. By not being 
able to provide interim relief, all we meant was we actually 
have to amend the rule. So we will be putting a rule out for 
proposal and get comments, and then it will go final. It is in 
train, but these things take time. We are working on it.
    Senator Rounds. OK. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Senator Menendez.
    Senator Menendez. Thank you. Thank you, Chairman Powell, 
for being here.
    Lately we have heard a near constant refrain from the 
Administration, the President himself, corporate media outlets, 
and even from you that ``the economy is doing very well'' and 
``it has never been better.''
    Now, if we take a narrow view of the unemployment rate and 
corporate profits, then, sure, it is a real rosy picture. But 
take a wider lens to what working families are seeing, and the 
view is one of great contrast.
    Over the last year, despite falling unemployment, working 
families actually saw their real wages fall. By comparison, 
after-tax corporate profits increased by 8.7 percent just in 
the last quarter.
    There is something fundamentally wrong in our economy when 
workers are seeing their pay cut while corporations are 
benefiting from a $2 trillion tax giveaway. Working families 
not only cannot get ahead, but they are actually falling 
behind.
    I can tell you, families in New Jersey cannot keep up with 
the surge in costs, particularly for prescription drugs and 
health care. I just heard from a constituent in Glendora, New 
Jersey, who told me that even with his Medicare and secondary 
insurance, he cannot afford to pay for his insulin and diabetes 
equipment, and that is pretty unconscionable.
    So my question to you, Mr. Chairman, is: When will the 
benefits of this ``booming economy'' reach working families?
    Mr. Powell. Thank you, Senator. I think we are aware and I 
am aware that while the aggregate numbers are good and 
unemployment is low and surveys overall of households are very 
positive about the job market, not everybody is experiencing 
the recovery. Not every demographic group, not every place are 
experiencing this. So we call that out in every FOMC meeting 
and in all of our public communications, as I did in my 
testimony this morning. And, you know, we understand that we 
have to take maximum employment seriously, and we do. We have 
been supporting a strong labor market for a long time. Despite 
many calls for us to raise interest rates much more quickly, I 
am glad that we stayed in longer than that, and I think 
gradually raising rates is the way for us to extend this 
expansion. Nothing hurts working families and people at the 
margin of the labor markets more than a recession.
    Senator Menendez. Well, you are probably going to have a 
couple more interest rates. What specific steps then are you 
taking to foster broad-based wage growth so that the average 
worker, not just managers and executives, are reaping the 
benefits? I cannot accept that wages are growing when the 
Bureau of Labor Statistics points out that production and 
nonsupervisory workers saw their wages fall two-tenths of a 
percent, and that is despite increasing their average work week 
to make up for it. So they are getting squeezed.
    Mr. Powell. So the latest Government report was that wages 
went up 2.7 percent for production, nonsupervisory workers, and 
supervisory workers over the last 12 months. And that is 
higher. That is moving up. It also happens that inflation has 
moved up and that sort of a bump in energy prices is passing 
through the headline inflation number. So I think overall, 
though, you see inflation at about a 2-percent trend. You see 
wages at 2.7 percent. So I think those trends are healthy, and 
I think they are reflected in what are pretty positive surveys 
among workers generally.
    Senator Menendez. Let me ask you this: These working 
families we are talking about are the first to feel the impact 
when banks, big banks, and corporations take risky bets with no 
accountability. When we passed Dodd-Frank, we included language 
to ban incentive-based compensation practices that reward 
senior executives for irresponsible risk taking. Regulators 
issued a proposal in 2016, but more than 2 years later, nothing 
has been finalized. In the meantime, Wall Street bonuses jumped 
17 percent last year to an average of more than $184,000--the 
most since 2006, and that is bonuses alone.
    Now, you have made time to weaken Wall Street oversight by 
revisiting capital rules, revisiting leverage rules, proposing 
changes to the Volcker Rule, all of which were finalized after 
years of deliberation, public comments, and input from other 
regulators, and all of which protect our economy from another 
financial crisis. How is it, Mr. Chairman, that you have not 
made time to finish the incentive-based compensation rulemaking 
for the first time? And can you give me a commitment today as 
to a timeline for when this will be done?
    Mr. Powell. We tried for many years--it is a multiagency 
rule, the incentive comp rule. We tried--we were not able to 
achieve consensus over a period of many years between the 
various regulatory agencies that need to sign off on that. But 
that did not stop us from acting, you should know. Particularly 
for the large institutions, we do expect that they will have in 
place compensation plans that do not provide incentives for 
excessive risk taking. And we expect that the Board of 
Directors will make sure that that is the case. And so it is 
not something that we have not done. We have, in fact, moved 
ahead through supervisory practice to make sure that these 
things are better than they were, and they are substantially 
better than they were. You see much better compensation 
practices here focusing mainly on the big firms where the 
problem really was.
    Senator Menendez. Well, that does not have the power of a 
rule. I hope we can get to a rule-based purpose, because at the 
end of the day we seem to have revisited everything that was 
already completed, but yet we cannot get this one going.
    Thank you, Mr. Chairman.
    Chairman Crapo. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. And, Mr. Chairman, 
thank you for being here. I was remarking to our staff 
yesterday, as we talked a little bit about this meeting, that 
because of the way that you are handling yourself, which I 
think is in a very positive way, following the Fed is getting 
really boring these days. But hopefully that will continue. I 
know that is your goal. We appreciate some of the transparency 
efforts that you have put forth.
    I think I heard you earlier talk about inflation, and 
obviously we are, you know, at full employment. Hopefully there 
will be additional people participating in the workforce that 
have not in the past, and I am glad to see those numbers are 
rising. But if I understand correctly what you are saying, the 
predictive stat for people who are watching the Fed today will 
be core inflation. In other words, that will be the 
determinative factor as it relates to rate increases in the 
future.
    Mr. Powell. So we, of course, look at headline inflation, 
too, and that is our legal mandate. We look at core inflation 
when we are thinking about the path of future inflation, 
though, because it is just a better predictor. Many of the 
things that affect headline inflation do not actually send much 
of a signal about future inflation.
    Senator Corker. But for people who are trying to see where 
things are going, now that the labor issue is where it is 
today, the predictive matter as it relates to future increases 
and the amount of those is really going to be inflation.
    Mr. Powell. Inflation is going to be really important. You 
know, I think we are--for quite a while here, we have been in 
the range of achieving our maximum employment goal, and we are 
only just getting there with inflation. I would not declare 
victory on that yet, either.
    Senator Corker. Yeah, it has really been difficult, I 
think, for many Western countries to get to a place that they 
are comfortable in inflation, which brings me to the wage 
issue.
    Look, like my colleagues, I am very concerned about wage 
stagnation, and I am not in any way trying to offload that 
issue to you. We all have responsibilities to put in place 
policies that will hopefully cause all Americans' wages to 
increase. But what we are seeing here and what we are seeing 
actually, let us face it, in Western countries around the world 
is people are not--the anticipation that people had relative to 
where they were going to be in life is not being achieved, 
which is creating some extremes as it relates to the political 
environment--actually, in some ways beginning to destabilize, 
because people are, rightly so, concerned about the fact that 
they are not really increasing the ability to raise their 
families as they wish.
    Let us talk a little bit about that. What is it from your 
perspective that is causing us to be in this place where the 
economy is growing, but for the last 30 years, Americans really 
have not seen the wage gains that they would like to see? Could 
you just lay out--not in any way to take responsibility at the 
Fed solely yourself, but what is driving that?
    Mr. Powell. You know, the stagnation of middle-class 
incomes, the relatively low mobility that we have, the 
disappointing level of wages over a long period of time, it is 
all of a piece, and it all does go to that. And I think the 
causes of these things are really deep. It is not something we 
can address really successfully over time with monetary policy, 
as you say. So, I mean, I think it is----
    Senator Corker. What are those deep causes?
    Mr. Powell. So I think, you know, part of it is, in our 
case, in the case of the United States, stagnation of 
educational achievement, the leveling out of educational 
attainment. When U.S. educational attainment was rising, 
technology was coming in; it was asking for more skills on the 
part of people. They had those skills, and so you had 
productivity rising, you had incomes rising, you had inequality 
declining over a long period of time.
    U.S. educational attainment flattened out in the 1970s, and 
everywhere else in the world it has been going up. We really 
had a lead. We were the first country to have gender-blind, you 
know, secondary education universally. So that is a big thing. 
Really the only way for incomes to go up over a long period of 
time is through higher productivity. Real incomes go up over a 
long period of time because of higher productivity. Higher 
productivity is a function of, in part, the educational and 
skills and aptitude of the workforce. It is also, you know, 
partly the evolution of technology and investment.
    I think right now in particular we had a number of years of 
very weak investment after the crisis because there was no need 
to invest. That weak investment period is casting a shadow over 
productivity right now, which is one of the main factors that 
is holding down wages. These are deep, hard problems, but 
education is really at the bottom of the pile.
    Senator Corker. And I am glad you alluded to that, and my 
time is up, I know. But we have had--we actually have had 
productivity growth without wage growth.
    Mr. Powell. Over long periods of time, the only way wages 
can go up sustainably is with productivity growth. They do not 
necessarily match all the time. I mean, since the crisis ended, 
productivity growth has been--output per hour has been very, 
very weak. Increases have been very, very weak.
    Senator Corker. Thank you, Mr. Chairman.
    Chairman Crapo. Senator Tester.
    Senator Tester. Thank you, Chairman Crapo and Ranking 
Member Brown. And thank you for being here, Chairman Powell. I 
want to run over some stuff that has been run over already just 
real quick.
    You had answered in a previous question that the stress 
tests continue. Is that correct? Stress tests continue on the 
banks?
    Mr. Powell. Absolutely. Every year.
    Senator Tester. And you said you were going to try to 
improve them, make them more transparent, which, by the way, I 
applaud that. Would you also add to that list that you are 
trying to weaken the stress tests?
    Mr. Powell. No, absolutely not.
    Senator Tester. You are still making them do what they need 
to do to prove that their soundness is there?
    Mr. Powell. The 2018 stress test was by a margin the most 
stringent stress test we have done yet.
    Senator Tester. OK. Folks also continue to be concerned 
that S. 2155 allowed foreign megabanks like Deutsche Bank, UBS, 
Barclays to see their enhanced prudential standards weakened. 
You have agreed--and you have said it again today--that S. 2155 
does not do that. Do you have any plans to weaken standards on 
the largest FBOs that I mentioned?
    Mr. Powell. No. No, sir.
    Senator Tester. OK. In your testimony you said, ``Good 
economic performance in other countries has supported U.S. 
exports and manufacturing.'' What other countries are you 
talking about? Would that include the EU? Would that include 
Canada and Mexico, the other countries, I am talking about, 
that have good economic performance? Would that include China? 
Those other countries----
    Mr. Powell. It would include all those countries, yes.
    Senator Tester. All those countries? And I know you said 
that the tariff situation and the trade situation is something 
that Congress deals with that you do not deal with, but it 
would appear to me--and I just want to get your opinion on this 
because I value it. It would appear to me that all this stuff 
about getting out of NAFTA and putting tariffs on folks and not 
being at the table when TPP was finally signed is a net 
negative on our economy. Would you agree with that long term--
short term and long term?
    Mr. Powell. I am going to try to walk that line that I 
mentioned earlier and not comment on any particular policy, but 
in principle, open trading is good. We do not want countries to 
have barriers to trade or, you know, tariffs being a barrier to 
trade.
    Senator Tester. Both directions.
    Mr. Powell. In both directions. We want to have an 
international, you know, rules-based system in which countries 
can get together and any country that violates that can face 
the other countries, and that system has served us very well. 
Tariffs have come down steadily over the years. Until recently, 
they were at their all-time low level. But the thing is we do 
not know how this goes. This process we are in right now, the 
Administration says it is going for broadly lower tariffs. If 
that happens, that is good for the economy. That would be very 
good for the economy--our economy and others' too, by the way. 
On the other hand, if we wind up with higher tariffs, then not 
so good.
    Senator Tester. That is correct. And in the meantime, just 
as a sidebar, if it cuts off foreign markets for grains, for 
example, there is going to be a lot of people in family farm 
agriculture that are put out of business. And that is my 
concern. You do not need to comment on that.
    I realize that you do not play a central role in our 
housing finance system, but you do play a central role in our 
economy, and the Fed does have a sizable balance sheet with 
billions of dollars' worth of mortgage-backed securities on the 
books.
    In March it was announced that Fannie Mae and Freddie--no, 
not Freddie, but Fannie Mae would need $4 billion from its line 
of credit at the Treasury Department. How concerning is this to 
you and the Fed given the size of mortgage-backed securities 
that are on your books?
    Mr. Powell. The mortgage-backed securities that we have are 
guaranteed by the Federal Government. There is no credit risk 
there. I would say more generally, if this is responsive, I 
think that the housing finance system, the GSEs, remains one of 
the big unfinished pieces of business postfinancial crisis, and 
I think it would be healthy for the economy and for the housing 
finance system to see that move forward.
    Senator Tester. You answered my second question. So you 
think that Congress' inability to address Fannie Mae and 
Freddie Mac in the end could harm our economy?
    Mr. Powell. I think it is really important for the longer 
run that we get the housing finance system off the Federal 
Government's balance sheet and using market forces and some of 
the things that are already in place and carry forward some 
kind of a reform. I think it is very important for the economy 
longer term.
    Senator Tester. OK. Thank you, Chairman Powell, and I 
appreciate your being here. I have got a couple other questions 
for the record that I would love to have you answer.
    Thank you very much.
    Mr. Powell. Thanks.
    Chairman Crapo. Senator Toomey.
    Senator Toomey. Thanks, Mr. Chairman. Thank you, Chairman 
Powell, for joining us.
    I just had a quick follow-up on this wage discussion. I 
think the most recent numbers we had were the month of June. 
Comparison to the previous June, 2.7 percent I think was the 
nominal growth in the wage number, so obviously a positive 
number. I think we would all like to see a bigger real growth. 
I think there is no question we would like to see that. But I 
would suggest that there is something peculiar about just the 
arithmetic of this sometimes, and maybe you could just briefly 
comment on this.
    As our economic growth has coincided with a significant 
growth in entry-level jobs and people coming into the workforce 
at entry-level wages, since those wages are at the low end of 
the wage spectrum, isn't it the case that the nature of 
arithmetic is that the average wage will reflect to some degree 
the fact that new entrants naturally come in at the low end of 
the spectrum and it would mask the growth in wages of people 
who have been continuously employed?
    Mr. Powell. Yes, that is right. There can be compositional 
effects, is what we call them, so younger people coming in, 
lower wages; older people, higher wages, retirement can be an 
effect. I am not sure it is right now, but I can check on that.
    Senator Toomey. I think that is likely to be the case as we 
have increasing workforce participation. I think that is a 
likely consequence.
    You made a very important point, I think, earlier that 
sustained wage growth absolutely requires sustained 
productivity growth. It is not possible to have the former 
without the latter. We all know that productivity growth is 
driven by several things, but one of the principal contributing 
factors is capital expenditure. It is new tools and equipment 
and technology in the hands of workers that make them more 
productive.
    The June FOMC minutes included a disturbing observation, 
and I will quote very briefly. It says, ``Some districts 
indicated that plans for capital spending had been scaled back 
or postponed as a result of uncertainty over trade policy.'' So 
the FOMC is saying that there is already adverse consequence in 
the form of scaled back investment as a result of uncertainty 
in trade policy. If there is more uncertainty--and we have 
threats of additional tariffs hanging over the markets right 
now--doesn't it follow that this is a threat to wage growth 
because the continuum includes a reduction in capital 
expenditure, lower productivity growth than we would otherwise 
have in a corresponding relative weakness in wage growth?
    So, in other words, isn't all this trade uncertainty a 
threat to wage growth?
    Mr. Powell. It may well be. We do not see it in the numbers 
yet, but we have heard a rising chorus of concern which now 
begins to speak of actual cap ex plans being put on ice for the 
time being.
    Senator Toomey. Yeah, which is really disturbing. The 
Senator from Tennessee's question about what causes stagnant 
wages, well, it corresponded to an extended period of very low 
productivity growth, which itself corresponded to very low 
capital expenditure growth. We broke that with the incentives 
in the tax reform that caused a big surge in cap ex. And it 
would be a tremendous pity to jeopardize that because of the 
trade policy.
    Let me move on to a somewhat technical matter regarding the 
Fed's balance sheet. As you know, historically the Fed has 
manipulated just overnight rates, the discount rate and Fed 
funds rate, and let the markets decided all other interest 
rates. That all changed with quantitative easing when the Fed 
became the biggest market participant in the purchase of 
Treasurys. And it changed in an explicit way when the Fed 
decided that it would intentionally manipulate the shape of the 
yield curve with Operation Twist, which was very consciously 
and willfully designed to change the shape of the curve.
    My understanding is now, to the extent that you make 
purchases of Treasurys, which you do when payments come back to 
the Fed in excess of what you want to run off, you do so 
basically as a set proportion of what the Treasury is issuing 
without regard to where on the curve they are issuing.
    So while this is happening, the yield curve is flattening 
and in a pretty dramatic way, right? Twos, tens were like a 
hundred basis points a year ago. Today they are, I do not know, 
25 basis points. Some people are concerned that a flattening 
curve or an inverted curve correlates with economic slowdown 
and recession.
    Here is my question: Does a dramatic change in the shape of 
the yield curve in any way influence the trajectory that you 
guys are on with respect to normalizing interest rates and the 
balance sheet?
    Mr. Powell. Sorry. In other words, are we going to change 
our balance sheet policies due to the--is that what you are 
asking--due to the changing shape of the curve?
    Senator Toomey. Yeah, does the changing shape of the curve 
weigh into your considerations at all?
    Mr. Powell. You know, I think what really matters is what 
the neutral rate of interest is, and I think population look at 
the shape of the curve because they think that there is a 
message in longer-run rates, which reflects many things, but 
that longer-run rates also tell us something, along with other 
things, about what the longer-run neutral rate is. That is 
really, I think, why the slope of the yield curve matters. So I 
look directly at that rather than--in other words, if you raise 
short-term rates higher than long-term rates, you know, then 
maybe your policy is tighter than you think, or it is tight, 
anyway.
    So I think the shape of the curve is something we have 
talked about quite a lot. Different people think about it 
different ways. Some people think about it more than others. I 
think about it as really the question being what is that 
message from the longer-run rate about neutral rates.
    Senator Toomey. Yeah, I think that makes a lot of sense.
    I see my time has expired. Thank you, Mr. Chairman.
    Chairman Crapo. Let me check.
    Senator Warner. I got in under----
    Chairman Crapo. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. Chairman Powell, 
it is great to see you again. Part of the challenge coming this 
late in the hearing is a lot of my questions have been 
answered. I want to follow up a comment at least on what 
Senator Toomey was addressing. I was going to cite the minutes 
of the Fed June meeting as well in terms of you say you have 
not seen these effects in the economy yet, but there has been a 
slowing of cap ex because of concerns about what I think is the 
President's kind of ill-thought-through trade war. I strongly 
believe we ought to take into consideration and have a fair and 
balanced trading system. I think China is the worst offender, 
particularly in the theft of intellectual property and other 
items. I was actually applauding the President when he moved 
strongly at first for a day or two on ZTE and before he folded 
at the first pushback from President Xi. And I would argue that 
we would be in a stronger position vis-a-vis citizenship if we 
had been about to actually rally other nations around the 
world, nations that are our allies. Instead, he is engaged in 
trade practices with them. No need to comment on that.
    Senator Tester raised an issue I wanted to raise as well, 
indicating foreign banks that have relatively small U.S. 
subsidiaries but large overall international assets are still 
going to be subject to stress tests. As a matter of fact, 
wasn't it correct that at least, since there are a variety of 
stress tests, the CCAR stress tests still applies to 
institutions that have assets at any level or relatively any 
level, and that there was recently a foreign bank with $900 
billion of total assets but only $86 billion in U.S. assets 
that the CCAR stress test still applied to? Is that not 
correct?
    Mr. Powell. I believe that is correct.
    Senator Warner. OK. I think you have addressed that, and 
there are some tensions here between--the Chairman is a good 
friend of mine and all. I think there may be appropriate 
regulatory relief for some regional banks, but I want to make 
sure--and I think you have addressed this with Senator Tester--
that for those banks in that 100 to 250 range, you can have a 
thorough process and rulemaking process that stress tests are 
going to continue on a regular basis, and that these banks that 
fall into this category are going to be strictly reviewed 
before they might receive some of this regulatory relief to 
make sure that they--you know, size alone may not be the only 
indicator of significance to the overall market, and there may 
be some institutions that fall in that category but still need 
the enhanced SIFI diagnosis.
    Mr. Powell. Right, so the bill gives us all the authority 
we need, frankly, to reach below 250 down to 100 and apply any 
prudential standard we want, either on the grounds of financial 
stability or just the safety and soundness of banking 
companies. We will published--we are thinking about it 
carefully now. We are going to publish for public comment the 
range of factors that we can consider. And, again, the bill is 
very generous in letting us consider all the factors that we 
think are relevant.
    Senator Warner. But one of the reasons that I was 
supportive of the legislation was testimony that you had given 
prior to the passage that this was not going to be some blanket 
dismissal of these institutions, that you were going to go 
through a thorough rulemaking process and make an evaluation 
before those regulations were relaxed. Is that still your 
position?
    Mr. Powell. We will, absolutely. In fact, there is one 
institution now that is designated as a SIFI that is less than 
250. So we are not shy about finding financial stability risk 
when we find it.
    Senator Warner. We think, again, the lines are always 
arbitrary here, but it is up to you and the Fed to make sure 
that institutions, particularly based upon their business 
practices that may be overall economically significant, that 
they still will have that determination, as you indicated, even 
if they fall below 250.
    Mr. Powell. Yes, a wide range of factors it will be.
    Senator Warner. Let me move to a different topic. I 
recently sent you a letter with a number of my Democratic 
colleagues on the Community Reinvestment Act, and I think the 
renewal of that act is very important. And I am concerned that 
the OCC has proposed a policy that will ``only consider 
lowering component performance test ratings of a bank if 
evidence of discrimination or illegal credit practices directly 
relates to the institution's CRA lending activities.''
    The way I read that would mean that under the OCC's 
proposal, which I think is inappropriate, you could end up with 
a bank still getting a good CRA rating, even though they had 
discriminatory practices, but simply those discriminatory 
practices fell outside of its CRA lending processes. So my hope 
would be for those banks that fall under the Fed's review that 
we will not see a relaxing of those CRA standards.
    Mr. Powell. You have correctly stated what our policy is, 
and I have every reason to think that it will continue to be 
that. We am not looking to change it.
    Senator Warner. I would hope so, and I want to make sure we 
will follow up with additional letters and requests on that 
subject.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Van Hollen.
    Senator Van Hollen. Thank you, Mr. Chairman. Mr. Chairman, 
welcome. Good to have you here.
    A couple questions that relate to the tax bill, because 
much has been said about that. Senator Toomey mentioned that it 
has resulted in increased investment. What I have seen is a 
huge whopping increase in stock buybacks. In fact, as of today, 
the number is $600 billion in stock buybacks. Those are 
corporations that have decided not to invest the money back 
into their workers or their plant or their equipment, but give 
it to stockholders, which included, I should say, one-third of 
the stock holdings in this country are foreign stockholders. So 
it is a great windfall for the accounts of foreign 
stockholders.
    Much has also been claimed about the economic impact. I am 
looking at the most recent projection that the Fed had for 
median long-term growth. As of your June 13th report, I see it 
is 1.8 percent, is that correct, for the current long-term 
growth median projection?
    Mr. Powell. Yes, it is.
    Senator Van Hollen. Are you aware of what the projection 
was a year ago before the tax bill was passed?
    Mr. Powell. I am going to say 1.8 percent.
    Senator Van Hollen. It was 1.8 percent. I mean, the reality 
is, despite all the hype around here, it is not really going to 
have an impact on our long-term growth. Surprisingly, a lot of 
us did think there was going to be a sugar high. When you dump 
$2 trillion into the economy, you would think there would be 
some sugar high, and maybe there will be some sugar high. But I 
was interested in an analysis that came out of the San 
Francisco Fed. I do not know if you saw it. Two economists 
there actually said that the 2017 tax law is likely to give 
maybe not even a sugar high. Have you had a chance to review 
that analysis?
    Mr. Powell. I have, and I would just say that, you know, 
there is a wide range of estimates of the effects of the recent 
fiscal changes, and, you know, they are talking about the 
possibility--I think their point was late in the cycle when you 
are near full employment, the effects might be less. You know, 
they might or they might not be. I think there is a lot of 
uncertainty.
    One of the great things about the Fed is we get a range of 
views, which is a healthy thing.
    Senator Van Hollen. But it does stand to reason, right, 
that you would have a smaller impact late in a cycle? I mean, 
that is why most fiscal policy in this country over the years 
has said that we want to provide stimulus during the really 
tough times when a lot of people are out of work, but you do 
not necessarily want to provide stimulus sugar high when the 
economy is clicking on all cylinders. And I think that is the 
point these economists made, is we are actually in the ninth 
year of growth.
    So when you are talking about some increase in real wages, 
not nearly what we want--I mean, that is over the 9-year 
period. Is that right?
    Mr. Powell. I am sorry. Your question?
    Senator Van Hollen. When you talk about some small uptick 
in real wages, that is over the period of recovery, right?
    Mr. Powell. I was really talking about nominal wages, and 
what I was talking about was if you look at 2012, 2013, 2014, 
all of our main wage things sort of were around 2 percent, 
measures around 2 percent. Now they are close to 3 percent. So 
it was not an overnight thing, overnight sensation. It was a 
gradual increase. But you have seen a meaningful increase.
    Senator Van Hollen. Right. And isn't a fact that real wage 
increases were higher during the last term of the Obama 
administration than during the Trump administration?
    Mr. Powell. I would really have to go back and look at 
that.
    Senator Van Hollen. I have the advantage, Mr. Chairman, of 
having your detailed Fed analysis and the Bureau of Labor 
Statistics. And what it shows is that, in fact, real wage 
increases were higher during the last term of the Obama 
administration. The point here really is not play make-believe, 
as we sometimes hear around here, that this tax bill somehow 
miraculously helped a lot of people out. The reality is, as we 
heard, real wages are pretty flat. I understood your testimony 
about oil price increases. We do not know how long they will be 
with us. But we also know that real wage increases were higher 
during the 4 years of the Obama administration than so far in 
the Trump administration with the tax cut and everything else.
    So I hope that my colleagues will bring more of a 
discussion based--a reality-based discussion to this. The one 
thing we do know that tax bill did, the one thing we did know 
is it is going to add about $2 trillion to our national debt, a 
debt that will have to be paid off by everybody in this room 
and their kids and grandkids. And at the same time, the Fed 
projection shows no change in the long-term growth projections. 
So we just blew $2 trillion. A lot of it is already going to 
stock buybacks, and I just hope we will sort of end the happy 
talk about what this tax cut did.
    Thank you.
    Chairman Crapo. Senator Heitkamp.
    Senator Heitkamp. Thank you, Mr. Chairman. And thank you, 
Chairman Powell, for once again coming before the Committee and 
being willing to answer our questions.
    I want to just make a point about wages, and you do not 
need to comment on this. Almost 20 percent of the people in our 
country who are wage earners earn less than $12.50 an hour. I 
do not know how many of you think you can live on $12.50 an 
hour, but I think--given that you are working a 40-hour week. 
Thirty-two percent earn between $12.50 and $20 an hour. Twenty 
dollars an hour is just barely $40,000 a year. And the next 30 
percent is $22 to $30, much of it heavily weighted on the light 
end. In fact, I have seen one survey that has told us that two-
thirds of all wage earners in this country earn less than $20 
an hour, hourly wage earners.
    If you do not think that that presents economic challenges 
if that does not change, we are wrong. I think that there is 
optimism. Optimism is leading to taking on more consumer debt. 
I think we are seeing that. The response, and I think 
appropriate, that you have on interest rates is going to drive 
increased costs. We have targeted or linked the student loan 
rate to what you do, thereby exacerbating those people who are 
attempting to take that next leap forward. So I just want to 
make the point that where your job is to look at macro, we 
visit with people every day in our States who are struggling, 
struggling to make ends meet.
    And I want to transition to the next place for me on North 
Dakota struggles, and that is trade. You know, I have been 
asking questions about trade for 2 years now. So if you look at 
the minutes of the Fed meeting, which I think Senator Toomey 
talked about, businesses across the country from steel and 
aluminum to farming have been telling Fed officials about plans 
to pull back their investments in their business or offshore 
their business. We have now pork producers talking about moving 
their pork production offshore to basically avoid what has been 
happening in the pork industry.
    These industries I think have good reason to be concerned. 
Economists across the spectrum, including economists in the 
private sector, Morgan Stanley and Goldman Sachs, European 
Central Bank, the IMF, they are all raising alarms with trade 
tensions looming.
    So if the President's trade policies continue to result in 
escalating tariffs by our trading partners, I think this is 
going to have serious damage to the economy and, in particular, 
to producers and consumers in my State.
    Now, just to give you a number, North Dakota is the ninth 
most dependent on imported steel. That surprises people, but 
you think about our base industry. What is one of the primary 
inputs in drilling and in moving oil? It is steel. What is one 
of the primary inputs in large equipment manufacturing? It is 
steel. And I have heard from my equipment manufacturers that 
what amount they got in tax savings has been gobbled up in the 
first 2 or 3 months of this fiscal year.
    Then we are not even talking about farmers with the double 
whammy of getting hit with steel tariffs--they are large steel 
users--and seeing their commodity prices being challenged.
    You offered a view last week that the President's trade war 
results in other countries actually lowering their trade 
barriers. Then that would be a positive outcome. I do not 
disagree. However, the historic and economic evidence suggests 
the opposite is likely to occur. In fact, if you look at 
efforts such as Smoot-Hawley--we can go all the way back 
there--we know and I believe history will tell you that it 
contributed significantly to the depth of the Great Depression. 
I do not say it causes it, but it certainly did not assist in 
early recovery.
    So would you agree with former Chairman Ben Bernanke when 
he said in a 2007 speech on trade that restricting trade by 
imposing tariffs, quotas, or other barriers is exactly the 
wrong thing to do for the economy?
    Mr. Powell. I would, assuming you are talking about them 
remaining in place over a sustained period of time. Absolutely.
    Senator Heitkamp. Well, you know, I get a little frustrated 
by this short-term pain for long-term gain. I think that we are 
going to have long-term consequences in agriculture because I 
think we are going to have emerging markets in the competitive 
space that we have not before. We already see the Chinese are 
subsidizing their farmers to grow soybeans. We see that Brazil 
and Argentina are amping up their soybeans and, arguably, could 
be, in fact, buying American soybeans, marking them up and 
enjoying our market with the markup as we struggle.
    So in that same speech, then-Chair Bernanke cites studies 
which show that the effects of protectionist policies almost 
invariably lead to lower productivity in U.S. firms and lower 
living standards for U.S. consumers. Is there any reason to 
believe that these studies are no longer valid?
    Mr. Powell. None that I know of.
    Senator Heitkamp. OK. Chair Powell, I make the point on 
Bernanke's comments and historic record because we cannot 
afford to put our head in the sand and ignore the facts about 
the impact of the Administration's trade policies on our 
economy. I think it is clear--I have been probably one of the 
most outspoken critics of the President's trade policy here, 
certainly on this side of the aisle. And if we want to improve 
trade, the right way to do it is to expand trade agreements, in 
my opinion, not impose reciprocal tariffs.
    And so I am deeply concerned--and I know that at this point 
you are taking a watchful eye. But I am deeply concerned about 
the long-term ramifications of this so-called short-term 
policy. And certainly if we see the next tranche, the $200 
billion, and then beyond that we see tariffs on automobiles, we 
will, in fact, be in a full-on, escalated, damaging trade war. 
And I do not know where that ends. And if this is a game of who 
blinks first, the best thing to do would be to get to the 
negotiating table.
    Now--oh, I am over my time.
    Chairman Crapo. Yes.
    Senator Heitkamp. I am sorry. But I want to make the point 
that I am going to stay on this. I am going to stay on the 
macro effects of this trade policy, because this is not good 
for our economy, and we are going to look back at this time 
perhaps in a year and say that is the point at which we turned 
the corner and the economy started taking a downturn.
    Chairman Crapo. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman. And good to see 
you again, Chairman Powell.
    Before the financial crisis, banks loaded up on risky loans 
while regulators just looked the other way. And when those 
loans went bad, taxpayers were left holding the bag because big 
banks did not have enough capital to stay afloat.
    Dodd-Frank included two major reforms to make sure that 
this never happens again: first, rules that make big banks meet 
higher capital standards so they are better equipped to handle 
losses; and, second, rules that make the banks take annual 
stress tests to ensure that they are not taking on too much 
risk.
    But since you have taken over, Chairman Powell, the Fed has 
rolled back on both of these reforms, and I just want to 
explore what that means for our economy.
    In April the Fed proposed an amendment that lowers the 
enhanced supplementary leverage ratio. That is the special 
capital requirement for the too-big-to-fail banks. The FDIC 
claims that this reform will allow the banks to maintain $121 
billion less in capital, but the Fed disagrees with the FDIC's 
assessment. Why is that?
    Mr. Powell. We actually think that the effect of that 
proposed change which is under consideration--we are looking at 
the comments--would be pretty close to zero as it relates to 
the firm itself. And, also, we think--in other words, if you 
look at the entire entity, it would be less than $1 billion. I 
will not say zero, but I think our estimate was $400 million.
    Senator Warren. So you just think the FDIC's $121 billion 
estimate is made up?
    Mr. Powell. They are talking about the bank; whereas, we 
are talking about the whole firm. Within the whole firm, at the 
firm level----
    Senator Warren. But the banks we have to worry about are 
the banks that get bailed out here.
    Mr. Powell. Yeah, and the enhanced supplemental leverage 
ratio, the problem with this is that we do not want a leverage 
ratio to be the binding capital requirement because it actually 
calls upon--if you are bound by that, you are actually called 
upon to take more risk. So we would rather not have the bank 
bound by that.
    Senator Warren. So let us take a look at this in terms of 
trying to strengthen the banks so that we do not have to be in 
a position to bail them out. The second thing you have done is 
you have put a lot of stock in stress tests, and last week you 
called the stress tests ``the most successful postcrisis 
innovation for bank regulation.'' But under your leadership, 
the Fed has weakened the stress test regime.
    Here is one example. Results of this year's exercise 
recently became public and reportedly three banks--Goldman 
Sachs, State Street, and Morgan Stanley--had capital levels 
that were too low to pass the test. I wrote to you about these 
banks a few weeks ago, and I appreciate your response on this. 
But just to be clear, after they flunked, did you give those 
too-big-to-fail banks a failing grade?
    Mr. Powell. We gave them what we call a ``conditional 
nonobject,'' which is something we have done----
    Senator Warren. OK, but that is not a failing grade, right? 
They did not flunk.
    Mr. Powell. They suffered the same penalty, which was to 
have to limit their distributions to the prior years.
    Senator Warren. Well, that is what I want to ask. If you 
did not flunk them, did you at least follow the Fed guidelines 
and make those banks submit new capital plans that would pass 
the test?
    Mr. Powell. No. In fact, when we do the conditional 
nonobject, we do not require them to resubmit----
    Senator Warren. So you do not require them to actually meet 
the criteria.
    Mr. Powell. In the many times we have used that tool over 
the years, we have not required that.
    Senator Warren. In other words, the Fed looked the other 
way. You let these banks off with what you call a conditional 
nonobjection, letting them distribute capital to their 
shareholders instead of keeping it on their books. In fact, 
because of your action, Morgan Stanley and Goldman Sachs 
investors took home about $5 billion more than they otherwise 
would have. That is nice gift to the bank, Mr. Chairman.
    On top of that, the Fed also proposed a rule in April that 
would make the stress tests less severe, effectively reducing 
capital requirements at the eight largest banks by a total of 
about $54 billion, according to a Goldman Sachs analysis.
    So, Chairman Powell, by your own account, the economy is 
doing well. We all know that bank profits are gigantic. The 
banks just got huge tax breaks. Three Fed Presidents--President 
Rosengren, President Mester, and President Evans--have 
suggested it is an ideal time to raise capital requirements to 
strengthen the banks instead of siphoning off cash to 
shareholders. So why is the Fed under your leadership 
persistently seeking to reduce capital requirements and weaken 
stress tests?
    Mr. Powell. With respect, Senator, we are not doing either 
of those things. In fact, the stress test in 2018 was 
materially more stressful--the amount of the loss and the 
amount of required capital to pass the test was the highest by 
far of any test.
    Senator Warren. Look, I do not know what to say. The FDIC 
does not see it that way. Goldman Sachs does not see it that 
way. The data do not seem to back you up on this. The Fed's 
capital requirements and the stress test are like a belt and 
suspenders. You can loosen the belt and rely on the suspenders, 
or you can take off the suspenders and rely on the belt. But if 
you do both, your pants will fall down. And, Chairman Powell, 
we learned in 2008 that when the big banks' pants fall down, it 
is the American economy, American taxpayers, American workers 
who get stuck pulling them back up. So it looks like to me the 
Fed is headed in the wrong direction here.
    Thank you, Mr. Chairman.
    Chairman Crapo. Senator Schatz.
    Senator Schatz. Thank you, Mr. Chairman. Chairman Powell, 
thank you for your service, and thank you for being willing to 
engage. I understand the need for you to stay in your lane, so 
I am going to ask a question, and I want to have as 
constructive of an exchange as possible, knowing that some of 
this ground has been covered, and I do not want to turn this 
into a partisan conversation.
    Banks are doing well. They had record-breaking profits in 
the years 2016 and 2017, and it looks like 2018 is going to be 
another gangbuster year. Across the board, banks increased 
their dividends by 17 percent in 2017, 12 percent in 2018. 
Community banks' earnings are also up. Household credit is up.
    In April, after your speech to the Economic Club of 
Chicago, you said, and I quote, ``As you look around the world, 
U.S. banks are competing very, very successfully. They are very 
profitable. They are earning good returns on capital. Their 
stock prices are doing well. So I am looking for the case for 
some kind of evidence that regulation is holding them back, and 
I am not really seeing that case as made at this point.''
    The data backs up your statement. Banks are the most 
profitable that they have ever been. So what is the motivation 
for weakening Dodd-Frank rules like the Volcker Rule?
    Mr. Powell. I think we want regulation to be as efficient 
as well as effective as it can possibly be. Regulation is not 
free. Regulation, good regulation, has very positive benefits--
avoiding financial crises, avoiding consumer harm, and things 
like that. But nobody benefits when regulation is inefficient. 
And so we have taken the job, particularly for the smaller 
institutions going back and looking at everything we have done 
over the last decade, to make sure that we are doing it in the 
most efficient way possible. That is what we are doing. We want 
the strongest, toughest regulation to apply to the biggest 
banks, particularly the eight SIFIs. And then we want to make 
sure that we have tailored appropriately as we move down into 
regionals and subregionals and then large community banks and 
then smaller ones.
    Senator Schatz. OK. A fair answer. What would you say to 
someone back home who says, ``Why would the Fed focus on this? 
Why would the Banking Committee focus on this? Why would the 
Federal legislative branch focus on making life easier for the 
banks given income inequality, given that these are literally 
the most profitable institutions in American history?'' I get 
that it is always better to make things more efficient. It just 
seems like you have limited resources and we have limited 
political capital to spend on priorities for the Fed. What do I 
say to someone back home who says, ``Why are you taking care of 
these guys who seem to be feeding at the trough pretty 
nicely?''
    Mr. Powell. I think you have to distinguish between 
different kinds of institutions. You know, I do not think that 
the smaller community banks are maybe feeling quite as healthy 
as you are saying. I think they are healthy. But I think, you 
know, we want them to be devoting their efforts to making loans 
and investing in their communities, supporting economic 
activities in communities, not----
    Senator Schatz. But lending is up, right? And profitability 
is at least somewhat of a proxy for the efficiency of the 
regulations. I will not belabor this. I take your answer in 
good faith.
    In a recent interview with Marketplace, you were asked what 
keeps you up at night. This is one of the things I enjoy about 
you, is you are frank in your responses while trying to stay in 
your lane. And you said, ``We face some real longer-term 
challenges, again, associate with how fast the economy can grow 
and also how much the benefits of that growth can be spread 
through the population. I look at things like mobility. If you 
judge the United States against other similar well-off 
countries, we have relatively low mobility. So if you are born 
in the lower end of the income spectrum, your chances of making 
it to the top or even to the middle are actually lower than 
they are in other countries.''
    Understanding that the Fed cannot address these issue 
squarely, can you talk a little bit about income inequality and 
what ought to be done? And then my final question around income 
inequality is whether, to the extent that you have expressed 
this view, a tax cut that provides about $33,000 for 
individuals in the top 1 percent of earners and about 40 bucks 
to the poorest of the poor, whether or not that helps or hurts 
in terms of income inequality.
    Mr. Powell. There are a range of--the question I was 
answering in that interview and that you are really asking is 
really these are issues that the Fed does not have the tools or 
the mandate to fix, but they, nonetheless, involve significant 
longer-term economic challenges. So I just would--you know, I 
pointed out low mobility, which is the research of Raj Chetty, 
who is a professor back at Harvard now, and also just the 
stagnation of median incomes for a long time. And if you look 
at things like labor force participation among prime-age males, 
you have seen a decline over 60 years.
    These are unhealthy trends in the U.S. economy that we do 
not have the tools to fix. You do. These are things for the 
legislature to work on. And, you know, it comes down to things 
that are easy to say and hard to do, like improve education, 
deal with the opioid crisis, things like that. And I also 
think, you know, balanced regulation plays a role in this and 
in enabling capital to be allocated freely and people to move 
from job to job. All those things go into it. But these are 
long-run important issues, particularly--another one is the 
potential growth rate of the country, which looks like it has 
slowed down because of aging, really, and demographics and 
things like that.
    So these are big issues. We cannot really affect them with 
monetary policy.
    Senator Schatz. Thank you.
    Chairman Crapo. Senator Cortez Masto.
    Senator Cortez Masto. Thank you. Chairman Powell, thank you 
for being here, and thank you for also answering our questions. 
I appreciated your comments earlier in the introduction, and 
noting what you admitted that the aggregate numbers do look 
good.
    But I also noted in your presentation that there is a quote 
that you say, and it is this: ``And while three-fourths of 
whites responded in a recent Federal Reserve survey that they 
were doing at least OK financially'' in 2017--``at least OK, 
only two-thirds of African Americans and Hispanics responded 
that way'' when it comes to financially whether they were doing 
OK. And I think that is what this comes down to. It comes down 
to those individuals who are living out there who are 
struggling, how much money is in their pocket, how much it can 
pay for.
    I notice you talked about the wages are up 0.27 percent, 
price index increased 2.3 percent. So in response to Senator 
Menendez's question about the steps that you were taking for 
broad-based wage growth, you answered several things. But let 
me ask you this: Is it your opinion that it is the Fed's 
responsibility or role to do something about wage growth, 
broad-based wage growth to play a role there?
    Mr. Powell. I think, you know, what you have assigned us is 
literally maximum employment and stable prices, and also 
financial stability, we have an overall responsibility for 
that. Maximum employment, the sense of that is it is not just 
one measure. It is a broad range of measures, and I think we 
have really--you know, we have worked hard to provide support 
for the labor markets.
    Senator Cortez Masto. And that would include wage growth 
then?
    Mr. Powell. It would. Wage growth comes into really both of 
those things. It comes into maximum employment. It also comes 
into inflation.
    Senator Cortez Masto. Good. I am glad you said that because 
here is the other thing that you said that concerned me, and 
you said one way to address and increase wage growth was 
incomes need to go up, and they only go up with higher 
productivity. And that is what you said needs to occur.
    But let me ask you this, because I have looked at some of 
the economists and studied some of the reports in the last 30 
years or so, and I know that was true probably from 1950 to the 
1970s, that they were both going up together. But we also have 
studies that show from 1973 to 2016 it was just the opposite. 
They are divergent, that productivity went up by 73.7 percent, 
but the hourly pay went up 12.5 percent, only 12.5 percent. 
That is 5.9 times more, more productivity than pay.
    So knowing that, how can you say that we need to focus on 
higher productivity because that will also increase wages?
    Mr. Powell. So what I said was that over a long period of 
time, wages cannot go up sustainably without productivity also 
increasing. It is a different thing to say that higher 
productivity guarantees higher wages. I did not say that, and I 
do not think that is true. I know very well the charts you are 
talking about.
    Senator Cortez Masto. So then what tools--then what are you 
doing to address wage growth to ensure that we are increasing 
wages? Because here is what is happening--and you know this. If 
you are in your community--and I am hoping you are--and you are 
talking to people across America, you know that wages have been 
flat since 1973. That means that the people when I go home--and 
me and my family and Nevadans in general who are struggling, 
they do not have enough money to pay for housing costs, for 
health care, for education, for prescription drugs. And what do 
I tell them that you are doing to look out for their interests 
to help them and improve their lives with the tools that you 
have?
    Mr. Powell. The tool that we have is monetary policy, and 
we can and we have----
    Senator Cortez Masto. No, I appreciate that. Let me ask you 
this: Can you just put it in terms if you are talking to a 
constituent in my State to explain to them what you are doing--
now, remember, Nevada was a place where we had the foreclosure 
crisis. People lost their homes, and they lost their jobs. We 
had 15 percent unemployment at one point in time, underwater in 
their homes. What would you say to those individuals that you 
are doing to ensure, one, it does not happen again and, two, 
improve the wage growth for them?
    Mr. Powell. We are doing everything we can with our tools 
to make sure that if you want a job, you can have one, and we 
are also----
    Senator Cortez Masto. But having a job and having a livable 
wage are two different things.
    Mr. Powell. Over the long term, we do not have those tools. 
You have those tools. Congress has the tools to assure stronger 
wage growth over time. We really do not have that with--we can 
move interest rates around to support activities, support 
hiring. We do not have the tools to support higher 
productivity, for example, which tends to lead to higher wages 
without guaranteeing them.
    Senator Cortez Masto. As an economist, you can work with us 
and tell us the tools or the things that can be done, like 
increasing the minimum wage, that might improve livable wages 
for individuals, correct?
    Mr. Powell. I would say principally over long periods of 
time investing in education and in skills are the single--that 
is the single best thing we can do to have a productive 
workforce and share prosperity widely, which is what we all 
want.
    Senator Cortez Masto. And I know my time is up, and I 
appreciate that. But I am concerned. Is that based on your own 
individual opinion, or is that research or data or information 
that you know that shows that?
    Mr. Powell. It is a lot of research.
    Senator Cortez Masto. OK. Thank you.
    Chairman Crapo. Senator Donnelly.
    Senator Donnelly. Thank you, Mr. Chairman. And thank you, 
Mr. Chairman.
    Mr. Powell, I am worried about farmers in my State. I 
checked about an hour ago. Soybean prices are $8.40 a bushel, 
well below the cost of production right now. Corn is $3.48 a 
bushel, well below the cost of production. In the last couple 
of weeks, I have visited with a number of Hoosier farmers and 
groups like the Indiana Corn and Soybean Alliance and the 
Indiana Farm Bureau to hear their growing concerns with falling 
commodity prices and uncertain trade policies, which are 
already harming Hoosier farmers in rural communities.
    Let me tell you a conversation I had last Friday. It was 
with a businessman who is also a farmer, and he was telling me 
about he just bought 140 acres from another farmer. And he 
said, ``Joe, I told the farmer, `I do not want to buy this from 
you right now because I know you are struggling. And I know you 
do not want to sell this. And I do not want to take advantage 
of you.' ''
    And the farmer who was selling it said, ``If I do not sell 
this, I could start losing everything else, and so you are 
actually helping me out.'' This is where our rural economy is 
going right now.
    I have also heard from local businesses dealing with 
canceled orders because of the tariffs. The price of soybeans, 
as I mentioned, it is a 10-year low--a 10-year low--due largely 
to the Chinese tariffs on U.S. exports. This current policy, 
what I worry about is that it has already damaged foreign 
export markets that took decades and decades to build. And so 
what I am asking you is: What would be the long-term impact of 
falling commodity prices and reduced agriculture exports on 
rural communities, which are struggling in so many ways 
already?
    Mr. Powell. Well, I think we know it would be very bad, and 
we have seen periods in American history where that has 
happened, and it can be extremely tough on farmers and rural 
communities.
    Senator Donnelly. And if they lose the markets that they 
have developed--I was over in China talking to some of their 
defense leaders a few years ago about North Korea, and I was 
walking through the airport, and there was a group just by 
coincidence--it was a flight back home, the flight to Chicago 
and then go back home to Indiana. It was a group of Indiana 
soybean farmers who were traveling the country, developing the 
market. What happens to rural communities if China just looks 
up and says, you know, ``we found more reliable suppliers''?
    Mr. Powell. As we discussed, it can be very tough.
    Senator Donnelly. So as Fed Chairman, what would you say to 
all those farmers who are really nervous, really concerned 
about what their future will be? They look to us for smart 
policies, for reasonable policies. Is there anything you can 
say about this trade war that is going on right now?
    Mr. Powell. I should again start by saying that it is 
really not the Fed's role. We do not do trade policy. That is 
Congress and the Administration.
    But, you know, I think if the current process of 
negotiation back and forth results in lower tariffs, that would 
be a good thing for the economy. If it results in higher 
tariffs, then I think--you know, I hardly need to tell you what 
higher tariffs would do for agricultural producers. Agriculture 
is an area where we lead the world in productivity and we are 
great exporters, and, you know, you would be very hard hit by 
these tariffs.
    Senator Donnelly. If this goes on for a couple more years, 
what would be the impact on our rural communities?
    Mr. Powell. I think certainly it would be very tough on the 
rural communities and, you know, I think we would feel that at 
the national level, too.
    Senator Donnelly. Let me also ask you about opioids, which 
you have mentioned, and workforce participation. My State has 
been deeply impacted by the opioid crisis. Last summer, during 
one of her final appearances before Congress, I spoke with 
former Chair Janet Yellen about the opioid epidemic and its 
connection to not just health outcomes but also economic and 
employment outcomes, the impact of opioids on the labor 
participation rate, which has declined from 66 to 63 percent 
over the last decade. She agreed there was a connection and 
noted surveys suggest that many prime-age individuals who are 
not actively participating in the labor market are involved in 
prescription drug use.
    You know, I look at these people we have lost, the next 
doctors, the next electricians, the next nurses. What do you 
see is the impact of the opioid epidemic on our workforce 
participation and, in general, the economy?
    Mr. Powell. You know, it is a terrible human tragedy for 
many communities, certainly for the individuals and their 
families involved. I think from an economic standpoint, some 
high percentage of the prime-age people who are not in the 
labor force, particularly prime-age males who are not in the 
labor force, are taking painkillers of some kind. I think the 
number that Alan Krueger, who is a professor, came up with is 
44 percent of them. So it is a big number. It is having a 
terrible human tool on our communities, and also it matters a 
lot for labor force participation and economic activity in our 
country.
    Senator Donnelly. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Donnelly.
    That concludes the questioning, but Senator Brown wants----
    Senator Brown. Thirty seconds, Mr. Chairman. Thank you. A 
number of colleagues have talked about productivity and 
nonsupervisory pay, that pay has gone up 27 percent and--I am 
sorry, 2.7 percent, but it is important--from June to June, I 
think, was what one of my colleagues said. But it is important 
to recognize that CPI has gone up 3 percent in that period. So 
we should really never talk about nominal pay. We should talk 
about real dollar pay.
    Thank you, Mr. Chairman.
    Chairman Crapo. Understood. All right. Thank you. And thank 
you, Mr. Chairman, again for being here. We appreciate your 
work and also your taking the time to come here and respond to 
our questions.
    For Senators wishing to submit questions for the record, 
those questions are due in 1 week, on Tuesday, July 24th, and, 
Chairman Powell, we ask that you respond as promptly as you can 
to the questions that may come in.
    Again, we thank you for being here. This is very good 
timing. We have got a vote underway right now, so we appreciate 
you helping to steer this hearing to a good conclusion.
    With that, the hearing is adjourned.
    Mr. Powell. Thank you.
    [Whereupon, at 11:53 a.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
    Today, we welcome Chairman Powell back to the Committee for the 
Federal Reserve's Semiannual Monetary Policy Report to Congress.
    This hearing provides the Committee an opportunity to explore the 
current state of the U.S. economy, and the Fed's implementation of 
monetary policy and supervision and regulation activities.
    Since our last Humphrey-Hawkins hearing in March, Congress passed, 
with significant bipartisan support, and the President signed into law, 
S. 2155, the Economic Growth, Regulatory Relief, and Consumer 
Protection Act.
    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.
    A key provision of the bill provides immediate relief from enhanced 
prudential standards to banks with $100 billion in total assets or 
less.
    The bill also authorizes the Fed to provide immediate relief from 
enhanced prudential standards to banks with between $100 billion and 
$250 billion in assets.
    It is my hope that the Fed promptly provides relief to those within 
those thresholds.
    By right-sizing regulation, the bill will improve access to capital 
for consumers and small businesses that help drive our economy.
    And, the banking regulators are already considering this bill in 
some of their statements and rulemakings.
    Earlier this month, the Fed, FDIC and OCC issued a joint statement 
outlining rules and reporting requirements immediately impacted by the 
bill, including a separate letter issued by the Fed that was 
particularly focused on those impacting smaller, less complex banks.
    But, there is still much work to do on the bill's implementation.
    As the Fed and other agencies revisit past rules and develop new 
rules in conjunction with the bill, it is my expectation that such 
rules be developed consistent with the purpose of the bill and intent 
of the members of Congress who voted for the bill.
    With respect to monetary policy, the Fed continues to monitor and 
respond to market developments and economic conditions.
    In recent comments at a European Central Bank Forum on Central 
Banking, Chairman Powell described the state of the U.S. economy, 
saying, ``Today, most Americans who want jobs can find them. High 
demand for workers should support wage growth and labor force 
participation . . . Looking ahead, the job market is likely to 
strengthen further. Real gross domestic product in the United States is 
now reported to have risen 2.75 percent over the past four quarters, 
well above most estimates of its long-run trend . . . Many forecasters 
expect the unemployment rate to fall into the mid-3s and to remain 
there for an extended period.''
    According to the FOMC's June meeting minutes, the FOMC meeting 
participants agreed that the labor market has continued to strengthen 
and economic activity has been rising at a solid rate.
    Additionally, job gains have been strong and inflation has moved 
closer to the 2 percent target.
    The Fed also noted that the recently passed tax reform legislation 
has contributed to these favorable economic factors.
    I am encouraged by these recent economic developments, and look 
forward to seeing our bill's meaningful contribution to the prosperity 
of consumers and households.
    As economic conditions continue to improve, the Fed faces critical 
decisions with respect to the level and trajectory of short-term 
interest rates and the size of its balance sheet.
    I look forward to hearing more from Chairman Powell about the Fed's 
monetary policy outlook and the ongoing effort to review, improve and 
tailor regulations consistent with the Economic Growth, Regulatory 
Relief and Consumer Protection Act.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR SHERROD BROWN
    Thank you, Mr. Chairman. This week, the President went overseas, 
and sided with President Putin while denigrating critical American 
institutions, including the press, the intelligence community, and the 
rule of law.
    Our colleague Senator John McCain expressed clearly what every 
patriotic American thought, ``No prior president has ever abased 
himself more abjectly before a tyrant. Not only did President Trump 
fail to speak the truth about an adversary; but speaking for America to 
the world, our president failed to defend all that makes us who we 
are--a republic of free people dedicated to the cause of liberty at 
home and abroad. American presidents must be the champions of that 
cause if it is to succeed.''
    With our democratic institutions under threat, we cannot ignore 
what happened in Helsinki yesterday. But we must not lose sight of the 
other policies of this Administration--including the rollback of the 
rules put in place to prevent the next economic crisis.
    Mr. Powell, thank you for appearing before the Committee to discuss 
these policies.
    Just last week, a Federal Reserve official said, ``There are 
definitely downside risks, but the strength of the economy is really 
pretty important at the moment. The fundamentals for the U.S. economy 
are very strong.''
    That may be true for Wall Street, but for most of America workers 
haven't seen a real raise in years, young Americans drowning in student 
loan debt, families trying to buy their first home--the strength of the 
economy is an open question at best.
    Last month, former Fed Chair Ben Bernanke was very clear about the 
long-term impact of the tax cut and the recent bump in Federal spending 
when he said, ``in 2020 Wile E. Coyote is going to go off the cliff.''
    Last week, the San Francisco Fed released a study finding that the 
rosy forecasts of the tax bill are likely ``overly optimistic.'' It 
found that the bill's boost to growth is likely to be well below 
projections--or as small as zero. It also suggested that these policies 
could make it difficult to respond to future economic downturns and 
manage growing Federal debt.
    And it's not just the tax bill--the economic recovery hasn't been 
evenly felt across the country, either. Mr. Chair, I'd like to enter 
into the record an article from the New York Times this weekend which 
talks about those families still struggling from the lack of meaningful 
raises and other job opportunities.
    While hours have increased a bit over the past year for workers as 
a whole, real hourly earnings have not. \1\ And for production and 
nonsupervisory workers, hours are flat and pay has actually dropped 
slightly, according to the Bureau of Labor Statistics.
---------------------------------------------------------------------------
     \1\ https://www.bls.gov/news.release/realer.nr0.htm
---------------------------------------------------------------------------
    The number of jobs created in 2017 was smaller than in each of the 
previous 4 years. Some of the very companies that announced billions in 
buybacks and dividends are now announcing layoffs, shutting down 
factories, and offshoring more jobs.
    Some of the biggest buybacks are in the banking industry, assisted 
in part by the Federal Reserve's increasingly lax approach to financial 
oversight.
    Earlier this month, as part of the annual stress tests, the Fed 
allowed the seven largest banks to redirect $96 billion to dividends 
and buybacks. This money might have been used to pay workers, reduce 
fees for consumers, protect taxpayers from bailouts, or be deployed to 
help American businesses.
    Three banks--Goldman Sachs, Morgan Stanley, and State Street--all 
had capital below the amount required to pass the stress tests, but the 
Fed gave them passing grades anyway.
    The Fed wants to make the tests easier next year. And Vice Chair 
Quarles has suggested he wants to give bankers more leeway to comment 
on the tests before they're administered--that's like letting the 
students help write the exam.
    The Fed is considering dropping the qualitative portion of the 
stress tests all together--even though banks like Deutsche Bank, 
Santander, Citigroup, HSBC, and RBS have failed on qualitative grounds 
before.
    That doesn't even include the changes the Fed is working on after 
Congress passed S. 2155 to weaken Dodd-Frank, making company-run stress 
tests for the largest banks ``periodic'' instead of annual, and 
exempting more banks from stress tests altogether.
    Vice Chair Quarles has also made it clear that massive foreign 
banks can expect goodies, too.
    And on and on and on it goes. The regulators are loosening rules 
around big bank capital, dismantling the CFPB, ignoring the role of the 
FSOC, undermining the Volcker Rule, and weakening the Community 
Reinvestment Act.
    When banks are making record profits, we should be preparing the 
financial system for the next crisis, building up capital, investing in 
workers, and combating asset bubbles.
    And we should be turning our attention to bigger issues that don't 
get enough attention, like how the value placed on work has declined in 
this country, and how our economy increasingly measures success only in 
quarterly earnings reports.
    Much of that is up to Congress to address, but over the last 6 
months, I have only seen the Fed moving in the direction of making it 
easier for financial institutions to cut corners, and I have only 
become more worried about our preparedness for the next crisis.
    I look forward to your testimony. Thank you.
                                 ______
                                 
                 PREPARED STATEMENT OF JEROME H. POWELL
        Chair, Board of Governors of the Federal Reserve System
                             July 17, 2018
    Good morning. Chairman Crapo, Ranking Member Brown, and other 
Members of the Committee, I am happy to present the Federal Reserve's 
semiannual Monetary Policy Report to the Congress.
    Let me start by saying that my colleagues and I strongly support 
the goals the Congress has set for monetary policy--maximum employment 
and price stability. We also support clear and open communication about 
the policies we undertake to achieve these goals. We owe you, and the 
public in general, clear explanations of what we are doing and why we 
are doing it. Monetary policy affects everyone and should be a mystery 
to no one. For the past 3 years, we have been gradually returning 
interest rates and the Fed's securities holdings to more normal levels 
as the economy strengthens. We believe this is the best way we can help 
set conditions in which Americans who want a job can find one, and that 
inflation remains low and stable.
    I will review the current economic situation and outlook and then 
turn to monetary policy.
Current Economic Situation and Outlook
    Since I last testified here in February, the job market has 
continued to strengthen and inflation has moved up. In the most recent 
data, inflation was a little above 2 percent, the level that the 
Federal Open Market Committee, or FOMC, thinks will best achieve our 
price stability and employment objectives over the longer run. The 
latest figure was boosted by a significant increase in gasoline and 
other energy prices.
    An average of 215,000 net new jobs were created each month in the 
first half of this year. That number is somewhat higher than the 
monthly average for 2017. It is also a good deal higher than the 
average number of people who enter the work force each month on net. 
The unemployment rate edged down 0.1 percentage point over the first 
half of the year to 4.0 percent in June, near the lowest level of the 
past two decades. In addition, the share of the population that either 
has a job or has looked for one in the past month--the labor force 
participation rate--has not changed much since late 2013. This 
development is another sign of labor market strength. Part of what has 
kept the participation rate stable is that more working-age people have 
started looking for a job, which has helped make up for the large 
number of baby boomers who are retiring and leaving the labor force.
    Another piece of good news is that the robust conditions in the 
labor market are being felt by many different groups. For example, the 
unemployment rates for African Americans and Hispanics have fallen 
sharply over the past few years and are now near their lowest levels 
since the Bureau of Labor Statistics began reporting data for these 
groups in 1972. Groups with higher unemployment rates have tended to 
benefit the most as the job market has strengthened. But jobless rates 
for these groups are still higher than those for whites. And while 
three-fourths of whites responded in a recent Federal Reserve survey 
that they were doing at least okay financially in 2017, only two-thirds 
of African Americans and Hispanics responded that way.
    Incoming data show that, alongside the strong job market, the U.S. 
economy has grown at a solid pace so far this year. The value of goods 
and services produced in the economy--or gross domestic product--rose 
at a moderate annual rate of 2 percent in the first quarter after 
adjusting for inflation. However, the latest data suggest that economic 
growth in the second quarter was considerably stronger than in the 
first. The solid pace of growth so far this year is based on several 
factors. Robust job gains, rising after-tax incomes, and optimism among 
households have lifted consumer spending in recent months. Investment 
by businesses has continued to grow at a healthy rate. Good economic 
performance in other countries has supported U.S. exports and 
manufacturing. And while housing construction has not increased this 
year, it is up noticeably from where it stood a few years ago.
    I will turn now to inflation. After several years in which 
inflation ran below our 2 percent objective, the recent data are 
encouraging. The price index for personal consumption expenditures, 
which is an overall measure of prices paid by consumers, increased 2.3 
percent over the 12 months ending in May. That number is up from 1.5 
percent a year ago. Overall inflation increased partly because of 
higher oil prices, which caused a sharp rise in gasoline and other 
energy prices paid by consumers. Because energy prices move up and down 
a great deal, we also look at core inflation. Core inflation excludes 
energy and food prices and generally is a better indicator of future 
overall inflation. Core inflation was 2.0 percent for the 12 months 
ending in May, compared with 1.5 percent a year ago. We will continue 
to keep a close eye on inflation with the goal of keeping it near 2 
percent.
    Looking ahead, my colleagues on the FOMC and I expect that, with 
appropriate monetary policy, the job market will remain strong and 
inflation will stay near 2 percent over the next several years. This 
judgment reflects several factors. First, interest rates, and financial 
conditions more broadly, remain favorable to growth. Second, our 
financial system is much stronger than before the crisis and is in a 
good position to meet the credit needs of households and businesses. 
Third, Federal tax and spending policies likely will continue to 
support the expansion. And, fourth, the outlook for economic growth 
abroad remains solid despite greater uncertainties in several parts of 
the world. What I have just described is what we see as the most likely 
path for the economy. Of course, the economic outcomes we experience 
often turn out to be a good deal stronger or weaker than our best 
forecast. For example, it is difficult to predict the ultimate outcome 
of current discussions over trade policy as well as the size and timing 
of the economic effects of the recent changes in fiscal policy. 
Overall, we see the risk of the economy unexpectedly weakening as 
roughly balanced with the possibility of the economy growing faster 
than we currently anticipate.
Monetary Policy
    Over the first half of 2018 the FOMC has continued to gradually 
reduce monetary policy accommodation. In other words, we have continued 
to dial back the extra boost that was needed to help the economy 
recover from the financial crisis and recession. Specifically, we 
raised the target range for the Federal funds rate by \1/4\ percentage 
point at both our March and June meetings, bringing the target to its 
current range of 1\3/4\ to 2 percent. In addition, last October we 
started gradually reducing the Federal Reserve's holdings of Treasury 
and mortgage-backed securities. That process has been running smoothly. 
Our policies reflect the strong performance of the economy and are 
intended to help make sure that this trend continues. The payment of 
interest on balances held by banks in their accounts at the Federal 
Reserve has played a key role in carrying out these policies, as the 
current Monetary Policy Report explains. Payment of interest on these 
balances is our principal tool for keeping the Federal funds rate in 
the FOMC's target range. This tool has made it possible for us to 
gradually return interest rates to a more normal level without 
disrupting financial markets and the economy.
    As I mentioned, after many years of running below our longer-run 
objective of 2 percent, inflation has recently moved close to that 
level. Our challenge will be to keep it there. Many factors affect 
inflation--some temporary and others longer lasting. Inflation will at 
times be above 2 percent and at other times below. We say that the 2 
percent objective is ``symmetric'' because the FOMC would be concerned 
if inflation were running persistently above or below our objective.
    The unemployment rate is low and expected to fall further. 
Americans who want jobs have a good chance of finding them. Moreover, 
wages are growing a little faster than they did a few years ago. That 
said, they still are not rising as fast as in the years before the 
crisis. One explanation could be that productivity growth has been low 
in recent years. On a brighter note, moderate wage growth also tells us 
that the job market is not causing high inflation.
    With a strong job market, inflation close to our objective, and the 
risks to the outlook roughly balanced, the FOMC believes that--for 
now--the best way forward is to keep gradually raising the Federal 
funds rate. We are aware that, on the one hand, raising interest rates 
too slowly may lead to high inflation or financial market excesses. On 
the other hand, if we raise rates too rapidly, the economy could weaken 
and inflation could run persistently below our objective. The Committee 
will continue to weigh a wide range of relevant information when 
deciding what monetary policy will be appropriate. As always, our 
actions will depend on the economic outlook, which may change as we 
receive new data.
    For guideposts on appropriate policy, the FOMC routinely looks at 
monetary policy rules that recommend a level for the Federal funds rate 
based on the current rates of inflation and unemployment. The July 
Monetary Policy Report gives an update on monetary policy rules and 
their role in our policy discussions. I continue to find these rules 
helpful, although using them requires careful judgment.
    Thank you. I will now be happy to take your questions.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                     FROM JEROME H. POWELL

Q.1. In response to questions at your confirmation hearing on 
Federal Reserve efforts to increase diversity in the System, 
you said, ``I assure you that diversity will remain a high 
priority objective for the Federal Reserve. Reserve banks, 
working closely with the Board, have also been looking at ways 
to further develop a diverse pool of talent in a thoughtful, 
strategic fashion, readying them for leadership roles through 
the Federal Reserve System.''
    Since you have become chair, what specific steps have you 
taken to encourage more diversity in the Federal Reserve 
System?

A.1. The Federal Reserve System (System) needs people with a 
variety of personal and professional backgrounds to be fully 
effective in discharging its responsibilities, and we have 
observed that better decisions are made when there are many 
different perspectives represented around the table. Since 
2016, my colleagues and I on the Federal Reserve Board (Board) 
have implemented a framework to better understand and discuss a 
range of Board and System efforts that address diversity and 
inclusion as well as research on economic inclusion and 
economic disparities in the economy. Since becoming the 
Chairman in February, I have worked with Board staff to refresh 
the framework and prioritize our focus on diversity and 
economic inclusion initiatives both at the Board and elsewhere 
in the System and have ongoing discussions with staff, 
including the Board's Office of Minority and Women Inclusion 
(OMWI) Director, on ways to support various efforts.
    I continue to stress to Federal Reserve leaders and staff 
the importance of having a diverse workforce and providing an 
inclusive work environment to our people. System leaders have 
fostered a range of diversity and inclusion initiatives, 
including the development of leadership pipelines and ongoing 
engagements with our own staff and with the financial services, 
economic, and academic communities more broadly. Of the various 
efforts, I would like to highlight the following:

    The System launched a leadership development 
        initiative to provide a structured way to share 
        information about our talent pool and to find 
        opportunities throughout the System to more rapidly 
        grow our talent and prepare them to take on expanded 
        roles.

    Through the Financial Services Pipeline Initiative, 
        \1\ the Federal Reserve Bank of Chicago is working to 
        increase the representation of people of color in the 
        financial services industry in the Chicago region. Over 
        the last several months, the Reserve Bank of Chicago 
        has hosted events designed to develop leadership skills 
        for high-performing people of color.
---------------------------------------------------------------------------
     \1\ For more information about the Financial Services Pipeline 
initiative, go to: https://www.fspchicago.org/.

    Researchers throughout the System continue to 
        produce cutting-edge research on how and why 
        disparities exist for different demographic groups in 
        their experiences in employment, education, and health, 
        and in the housing and credit markets. In addition, 
        seminars and panels about diversity and inclusion 
        topics are being fostered by local leadership and 
        employee resource networks and are shared across the 
---------------------------------------------------------------------------
        System.

    Through the Opportunity & Inclusive Growth 
        Institute, \2\ the Reserve Bank of Minneapolis is 
        conducting research on structural barriers that limit 
        full participation in economic opportunity and 
        advancement in the country. The Institute looks beyond 
        aggregate economic indicators in order to examine how 
        national policies impact diverse communities of people 
        within the U.S. economy.
---------------------------------------------------------------------------
     \2\ For more information about the Opportunity & Inclusive Growth 
Institute, go to: https://www.minneapolisfed.org/institute.

    The Board cosponsored a Gender and Career 
        Progression \3\ conference with the European Central 
        Bank and the Bank of England in May of this year. There 
        were about 140 people in attendance, including 
        participants from central banks, academia, think tanks, 
        private industry, as well as a number of local 
        students. The topics and papers from the conference 
        focused on gender diversity in economics, finance, and 
        central banking, including gender-based discrimination, 
        the benefits of increased diversity, the role of 
        culture, and the approaches that could be used to 
        improve gender diversity. We continue to explore ways 
        to leverage the knowledge gained from this event for 
        the Board, the System, and the broader economic 
        community. The Board subsequently held a panel 
        discussion for its employees sharing key insights from 
        the conference.
---------------------------------------------------------------------------
     \3\ The conference program and discussion materials are available 
on the Bank of England's website at: https://www.bankofengland.co.uk/
events/2018/may/gender-and-career-progression.

    Throughout the System, we continue to increase our 
        outreach to local universities, with a particular focus 
        on outreach to under-represented groups. The Board will 
        soon be hosting Exploring Careers in Economics, \4\ an 
        event for high school and college students, in October. 
        Organized to broaden awareness of careers in economics 
        and to further develop a diverse pool of talent 
        interested in the field, Exploring Careers in Economics 
        will offer students a chance to learn about and discuss 
        opportunities in economics generally, and learn about 
        mentoring opportunities, resources, and career 
        opportunities within the System. The agenda includes a 
        discussion of why inclusion and diversity matter for 
        economics. In addition to welcoming students to the 
        Board in Washington, students from around the country 
        will participate in this event via webcast.
---------------------------------------------------------------------------
     \4\ For more information about the Exploring Careers in Economics 
event, go to https://www.federalreserve.gov/newsevents/pressreleases/
other20180823a.htm.

    The Board's OMWI Office, in collaboration with the 
        OMWI Directors from the Office of the Comptroller of 
        the Currency (OCC), Federal Deposit Insurance 
        Corporation (FDIC), National Credit Union 
        Administration (NCUA), and Consumer Financial 
        Protection Bureau (CFPB) (collectively, the Agencies), 
        hosted a Diversity and Inclusion Summit (Summit) on 
        September 13 at the Federal Reserve Bank of New York 
        for the institutions regulated by each regulatory 
        agency. The primary purpose of the Summit was for the 
        Agencies' OMW is to provide feedback on submissions 
        received from regulated entities responding to the 
        questionnaire developed through the Policy Standards 
        for Assessing Diversity Policies and Practices pursuant 
        to section 342 of the Dodd-Frank Wall Street Reform and 
        Consumer Protection Act (Dodd-Frank Act). Additionally, 
        an important aspect of the Summit was the dialogue and 
        insights between representatives from the regulated 
        entities and the OMWI Directors on leading diversity 
---------------------------------------------------------------------------
        practices.

Q.2. In your role as the head of the Reserve Bank Affairs 
Committee and now as Chair of the Board of Governors of the 
Federal Reserve System, did you ever ask the search committees 
in Atlanta, Richmond, or New York for a lists of candidates 
under consideration? At any point did you urge the search 
committees at any of the Banks to broaden their searches to 
include more women or minority candidates?

A.2. As the Chair of the Reserve Bank Affairs Committee, I had 
worked closely with the search committees to ensure a strong 
and transparent process that identifies a broad and diverse 
slate of qualified candidates for president searches. Now as 
Chairman of the Board, I continue to work closely with my 
colleague Lael Brainard, Chair of the Reserve Bank Affairs 
Committee, to exercise the Board's oversight responsibility and 
stress the importance of conducting a broad search throughout 
the search process. We also recognize that the appointment of a 
president is, as a legal matter, a responsibility of the Class 
Band Class C directors.
    During the recent Reserve Bank president searches, the 
search committees proactively sought out candidates from a 
variety of sources. The search committees have also carried out 
extensive outreach programs intended to solicit input and 
candidate recommendations from a range of constituencies across 
the districts. These engagement efforts were done with the goal 
of having as broad and diverse of candidate pools as possible 
for the searches. Throughout the search process, the chair of 
the search committee typically provides status updates, 
including information about the candidate pools, and discusses 
potential candidates with the Chair of the Reserve Bank Affairs 
Committee.

Q.3. What is your role, directly and indirectly, in the San 
Francisco Federal Reserve Bank's search to select its next 
President?

A.3. The San Francisco Fed announced the appointment of Mary 
Daly as its new president on September 14. As Chairman of the 
Board, I stayed abreast of the search through the Chair of the 
Reserve Bank Affairs Committee. When the search committee 
settled on the finalist, my colleagues and I at the Board 
interviewed Ms. Daly. Upon final approval by all Class B and 
Class C directors of the Federal Reserve Bank of San Francisco, 
my colleagues and I at the Board voted on the Bank board's 
request for approval of the appointment of Ms. Daly as the new 
president for the Reserve Bank.

Q.4. Recently proposed legislation would override the 
Securities and Exchange Commission's (SEC) 2014 reforms to 
money market funds. Specifically, that legislation would permit 
sponsors of money market funds that satisfy certain conditions 
to utilize a stable net asset value, or NAV. In addition, the 
proposal would exempt those funds from the liquidity fee 
requirements in the SEC's rules.
    As you know, the SEC's 2014 reforms require institutional 
money market funds investing in corporate or municipal debt 
securities to use a floating NAV and provide nongovernment 
money market fund boards with new tools--liquidity fees and 
redemption gates--to prevent runs. Those mechanisms are 
intended to prevent runs on money market funds and the freezing 
of the short-term liquidity market that occurred during the 
financial crisis.
    Nellie Liang, who served for 11 years in senior roles at 
the Federal Reserve in the Division of Financial Stability and 
the Division of Research and Statistics, recently wrote an 
article titled, ``Why Congress shouldn't roll back the SEC's 
money market rules'' (attached).
    Ms. Liang's article explains the market dislocation that 
occurred during the crisis that led to the SEC's implementation 
of the 2014 reforms. Ms. Liang highlights several important 
improvements to the structure of money funds, explaining that 
during the crisis ``there was no doubt that the structure of 
prime MMF's amplified losses and spread problems to many 
companies when their investors ran.'' She concludes that the 
``post crisis rules aim not only to prevent a repeat of the 
last crisis but to reduce the probability and costs of the next 
one,'' and that, ``reverting to precrisis rules would risk a 
return to high levels of private short-term liabilities and 
another destabilizing run on money market funds, and threaten 
stability in the financial system and the economy as a whole''.
    Do you agree with Ms. Liang's concerns that reverting to 
precrisis rules could create vulnerabilities in the stability 
of the financial system?

A.4. Susceptibility of money market funds (MMFs) to runs was a 
significant vulnerability and flashpoint in the U.S. financial 
system during the financial crisis and afterwards. The run on 
MMFs in September 2008 destabilized wholesale funding markets 
used by banks, dealers, nonfinancial firms, and municipalities 
for short-term financing. The Securities and Exchange 
Commission's (SEC) reforms were designed to mitigate these 
risks. In part due to these regulatory changes, funding markets 
have undergone significant shifts; while markets have largely 
adjusted to these shifts, considering additional changes at 
this moment would likely be unhelpful to the funding markets.

Q.5. In your testimony, you noted that the banking industry is 
well-capitalized. Recent research from the Fed system suggests 
that large banks may hold less capital than is optimal in terms 
of balancing the cost of another financial crisis with any 
incremental increase in bank lending rates. \5\
---------------------------------------------------------------------------
     \5\ Former Fed Chair Yellen cited research noting that ``research 
points to benefits from capital requirements in excess of those 
adopted.'' See remarks by Chair Janet L. Yellen. ``Financial Stability 
a Decade After the Onset of the Crisis''. Speech at the ``Fostering a 
Dynamic Global Recovery'' Symposium Sponsored by the Federal Reserve 
Bank of Kansas City, Jackson Hole, Wyoming, August 25, 2017. Available 
at: https://www.federalreserve.gov/newsevents/speech/
yellen20170825a.htm; Firestone, Simon, Amy Lorenc, and Ben Ranish, ``An 
Empirical Economic Assessment of the Costs and Benefits of Bank Capital 
in the U.S.'', Board of Governors of the Federal Reserve System, 2017. 
Available at: https://www.federalreserve.gov/econres/feds/files/
2017034pap.pdf; Federal Reserve Bank of Minneapolis, ``The Minneapolis 
Plan To End Too Big To Fail'', December 2017. Available at: https://
www.minneapolisfed.org/-/media/files/publications/studies/endingtbtf/
the-minneapolis-plan/the-minneapolis-plan-to-end-too-big-to-fail-
final.pdf?la=en.
---------------------------------------------------------------------------
    What do you think of this research? Do G-SIBs need to hold 
additional capital?

A.5. Maintaining the safety and soundness of the largest U.S. 
banks is critical to maintaining the stability of the U.S. 
financial system and the broader economy. These firms must be 
well-capitalized in order to be considered safe and sound. 
Accordingly, the U.S. banking agencies have substantially 
strengthened regulatory capital requirements for large banking 
firms, thereby improving the quality and increasing the amount 
of capital in the banking system. From before the crisis to 
today, large U.S. banking firms have roughly doubled their 
capital positions, making them significantly more resilient, as 
well as able to support lending and financial intermediation in 
times of financial stress.
    Firestone et al., the staff working paper that you cite, 
analyzes aggregate capital levels across the U.S. banking 
sector and does not address targeted capital requirements that 
apply to specific banks. A firm identified as a global 
systematically important bank (G-SIB) is currently subject to 
more stringent capital requirements than those required of 
other, less systemic firms.
    Under the Federal Reserve's final G-SIB surcharge rule, a 
G-SIB is required to hold an additional amount of risk-based 
capital that is calibrated to its overall systemic risk as well 
as an additional supplementary leverage ratio buffer of 2 
percent above the 3 percent minimum in order to avoid 
restrictions on distributions and certain discretionary bonus 
payments. G-SIBs, together with certain other large banks, also 
are subject to annual examination of capital planning practices 
through the Federal Reserve's Comprehensive Capital Analysis 
and Review (CCAR) and to a supervisory stress test. Finally, G-
SIBs are required to maintain minimum levels of unsecured, 
long-term debt and total loss-absorbing capacity (TLAC), which 
is made up of both capital and long-term debt, in order to 
further help reduce the systemic impact of the failure of a G-
SIB. The purpose of these more stringent requirements is to 
increase a G-SIB's resiliency in light of the greater threat it 
poses to U.S. financial stability. This capital regulatory 
framework is designed to ensure that G-SIBs, as well as the 
banking industry as a whole, maintain strong capital positions.

Q.6. When asked at the July 17 hearing about your plans to 
implement S. 2155, you said it is your intention ``implement 
the bill as quickly as we possibly can.'' Does that mean you 
are going to move to the rulemakings and implementation of S. 
2155 before you finish the remaining unfinished rulemakings 
required by the Wall Street Reform and Consumer Protection Act 
enacted 8 years ago?

A.6. Many of Economic Growth, Regulatory Relief, and Consumer 
Protection Act's (EGRRCPA) changes require amendments to 
existing rules. The Board is working expeditiously on these 
rulemakings and plans to solicit public comment on the proposed 
rule changes. EGRRCPA includes a number of statutory deadlines 
for implementing certain sections of the law. It is our 
intention to prioritize rulemakings with statutory deadlines in 
order to ensure that the Board's rules are compliant with the 
law in the timeframe mandated by Congress.
    The Board has implemented the majority of its assigned 
provisions from the Dodd-Frank Act. Sections of EGRRCPA, along 
with the remaining unimplemented sections of the Dodd-Frank 
Act, which do not have statutory deadlines, may take longer to 
complete.

Q.7. Does the Fed view any provisions in S. 2155 as providing a 
statutory requirement to revisit or recalibrate the enhanced 
prudential standards applicable to bank holding companies with 
more than $250 billion in total consolidated assets?

A.7. One of the fundamental lessons from the financial crisis 
was that the largest, most interconnected financial firms 
needed to maintain substantially more capital, take 
substantially less liquidity risk, and face an effective 
orderly resolution regime if they fail. Firms with assets of 
$250 billion or more can present a range of safety and 
soundness and financial stability concerns. Therefore, the 
Board has tailored, and will continue to tailor, as 
appropriate, our regulations to the risk profiles of the firms 
subject to those regulations.
    In light of EGRRCPA's amendments, and consistent with the 
Board's ongoing refinement and evaluation of its supervisory 
program, the Board is evaluating whether any changes to the 
enhanced prudential standards applicable to bank holding 
companies with more than $250 billion in total consolidated 
assets are appropriate. In doing so, the Board will consider 
individual firms' capital structure, riskiness, complexity, 
financial activities (including the financial activities of 
their subsidiaries), size, and any other risk-related factors 
that the Board deems appropriate, as provided in EGRRCPA.

Q.8. Either pursuant to S. 2155 or pursuant to other authority 
conferred to the Fed, does the Board intend to alter the 
threshold at which foreign banking organizations must establish 
a U.S. Intermediate Holding Company? Does the Fed intend to 
provide any regulatory relief to foreign banking organizations 
that have more than $50 billion in domestic assets? If so, what 
regulatory relief is the Fed planning to propose?

A.8. Pursuant to the Board's regulations, foreign bank 
organizations (FBOs) with global assets of at least $100 
billion and U.S. nonbranch assets of at least $50 billion are 
required to establish or designate a U.S. intermediate holding 
company (IHC). In our supervisory experience, the requirement 
to establish an IHC has worked effectively, providing for 
appropriate application of capital, liquidity, and other 
prudential requirements across the U.S. nonbranch operations of 
the FBO, as well as a single nexus for risk management of those 
U.S. nonbranch operations. The Board presently sees no reason 
to modify this threshold. We continue to review our regulatory 
framework to improve the manner in which we deal with the 
particular risks of FBOs in light of the distinct 
characteristics of such institutions.

Q.9. Does the Fed have any economic evidence suggesting that 
the recently enacted tax bill, S. 2155, or any deregulation 
finalized by regulators since 2017 has benefited the overall 
economy through increased lending?

A.9. Economic conditions remain strong. Gross domestic product 
growth thus far this year is estimated to have averaged a 
little above 3 percent at an annual rate. Households and 
businesses have been able to obtain the financing needed to 
support this growth. Financial institutions are well-positioned 
to meet the needs of borrowers. However, it is too early to 
determine the economic effects of the tax bill or recently 
implemented changes in regulation. Generally speaking, it is 
difficult to isolate the effects of such changes given the 
myriad factors influencing the economy.

Q.10. Does the Fed intend to revisit the calculation of the G-
SIB surcharge? If so, when and in what ways?

A.10. The Board's capital rules have been designed to reduce 
significantly the likelihood and severity of future financial 
crises by reducing both the probability of failure of a large 
banking organization and the consequences of such a failure, 
were it to occur. Capital rules and other prudential 
requirements for large banking organizations should be set at a 
level that protects financial stability and maximizes long-
term, through-the-cycle, credit availability and economic 
growth. Consistent with these principles, the Board originally 
calibrated the G-SIB surcharge so that--given the circumstances 
of the financial system--each G-SIB would hold enough capital 
to lower its probability of failure so that the expected impact 
of its failure on the financial system would be approximately 
equal to that of a large non- G-SIB.
    The bulk of the postcrisis regulation is largely complete, 
with the exception of the U.S. implementation of the recently 
concluded Basel Committee agreement on bank capital standards. 
It is therefore a natural and appropriate time to step back and 
assess those efforts. The Board is conducting a comprehensive 
review of the regulations in the core areas of postcrisis 
reform, including capital, stress testing, liquidity, and 
resolution. The objective of this review is to consider the 
effect of those regulatory frameworks on the resiliency of the 
financial system, including improvements in the resolvability 
of banking organizations, and on credit availability and 
economic growth.
    In general, I believe overall capital for our largest 
banking organizations is at about the right level. Critical 
elements of our capital structure for these organizations 
include stress testing, the stress capital buffer, and the 
enhanced supplementary leverage ratio. Work is underway to 
finalize the calibration of these fundamental building blocks, 
all of which form part of the system in which the G-SIB 
surcharge has an effect. In this regard, I would note that the 
G-SIB surcharge rule does not take full effect until January 
2019.

Q.11. When does the Fed intend to finalize a 2016 proposed 
rulemaking related to bank holding companies' allowable 
activities in physical commodities markets?

A.11. The Board undertook a review of the physical commodities 
activities of financial holding companies after a substantial 
increase in these activities during the financial crisis. In 
January 2014, the Board invited public comment on a range of 
issues related to these activities through an advance notice of 
proposed rulemaking. In response, the Board received a large 
number of comments from a variety of perspectives.
    The Board considered those comments in developing the 
proposed rulemaking that was issued in September 2016. The 
proposed rulemaking would address the potential catastrophic, 
legal, and reputational risks of financial holding companies' 
(FHC) physical commodities activities by applying additional 
risk-based capital requirements to some of these activities; 
tightening some of the existing limitations on physical 
commodities trading by FHCs; and establishing new reporting 
requirements for physical commodities holdings and activities 
of FHCs. Under the proposal, FHCs would be permitted to 
continue to engage in a number of physical commodities trading 
activities with end users subject to new limits on physical 
commodities trading activities.
    After providing an extended comment period (150 days) to 
allow comm enters time to understand and address the important 
and complex issues raised by the proposal, the Board again 
received a large number of comments from a variety of 
perspectives, including Members of Congress, academics, users 
and producers of physical commodities, and banking 
organizations. The Board continues to consider the proposal in 
light of the many comments received.

Q.12. At the July 17 hearing, when asked when the Fed will 
finalize the rulemaking required under Dodd-Frank related to 
incentive-based compensation at large bank holding companies, 
you stated that the interagency regulators have been unable to 
reach consensus and that the Fed has accomplished some of the 
goals of the rulemaking through the supervisory process.
    Please provide specific examples.

A.12. Section 956 of the Dodd-Frank Act \5\ prohibits 
incentive-based compensation arrangements that encourage 
inappropriate risks. Federal Reserve staff have worked with 
firms in the implementation of the 2010 Federal Banking Agency 
Guidance on Sound Incentive Compensation Policies, \6\ a core 
principle of which is that incentive compensation should 
appropriately balance risk and reward. In so doing, Federal 
Reserve staff have observed improvement in incentive 
compensation practices in the following areas:
---------------------------------------------------------------------------
     \5\ Public Law 111-203, 124 Stat. 1376 (2010).
     \6\ 75 Federal Register 36395.

    Risk adjustment: Firms have increasingly begun 
        adjusting compensation to more appropriately take into 
        account the risk an employee's activities may pose to 
        the organization, including through use of deferral and 
        forfeiture features in compensation arrangements. Firms 
        also have increasingly focused on nonfinancial risk 
        (e.g., compliance failures, misconduct, and operational 
---------------------------------------------------------------------------
        challenges) in risk adjustment decisions.

    Involvement of risk management and control 
        personnel: Risk management and control personnel 
        generally play a greater role in the design and 
        operation of incentive compensation programs than 
        before the financial crisis.

    Director oversight: Boards of directors are now 
        increasingly focused on the relationship between 
        incentive compensation and risk. For example, at the 
        board level, finance and audit committees generally 
        work together with compensation committees with the 
        goal of promoting prudent risk-taking.

    Policies and procedures: Firms have increasingly 
        developed written policies and procedures to guide 
        managers in making appropriate risk adjustments.

Q.13. What is the your view on the Fed's role as the 
consolidated Federal regulator for insurance companies that 
have a savings and loan holding company?

A.13. The Federal Reserve is charged with consolidated 
supervision of savings and loan holding companies to promote 
the safety and soundness of the subsidiary insured depository 
institution (IDI) and the holding company. Our principal 
supervisory objectives for consolidated supervision of 
insurance savings and loan holding companies (ISLHCs) are to 
ensure that they operate in a safe-and-sound manner so that the 
subsidiary insured depository institution is protected from 
risks related to nonbanking activities, including insurance, as 
well as intercompany transactions between the parent and IDI, 
and to ensure that the IDI is not adversely affected. To avoid 
duplication, we rely on the State insurance departments to the 
greatest extent possible, including their supervision of the 
business of insurance. In applying our consolidated 
supervision, we work to ensure that regulations, supervisory 
guidance, and expectations are appropriately tailored to 
account for the unique complexities and characteristics of 
ISLHCs. We remain committed to tailoring our supervision of 
ISLHCs to the firms and their insurance operations, as well as 
conducting our consolidated supervision of these firms in 
coordination with State insurance regulators. Moreover, the 
Board continues to welcome feedback from ISLHCs and other 
interested parties on the potential impact of our supervision 
and proposed rulemakings in the context of ISLHCs' business and 
practices.

Q.14. Vice Chair Quarles recently gave a speech suggesting that 
the Fed should ``consider scaling back or removing entirely 
resolution planning requirements for most of the firms'' in the 
$100 billion to $250 billion total consolidated asset range. 
Please describe further the Fed's plans in this regard, along 
with any cost-benefit analysis suggesting that the economy 
would benefit from such a change.
    How does the Fed view the directive in S. 2155 that 
company-run and certain supervisory stress tests be made 
``periodic'' rather than semi-annual or annual? Does the Fed 
anticipate changing the frequency of stress tests for banks 
with more than $250 billion in total consolidated assets?

A.14. Consistent with the Economic Growth, Regulatory Relief, 
and Consumer Protection Act (EGRRCPA), the Board is considering 
the application of enhanced prudential standards, including 
resolution planning requirements, to firms in the $100 billion 
to $250 billion total consolidated assets range. Resolution 
planning is especially critical to ensure that the largest, 
most complex, and most interconnected banking firms structure 
their operations in ways that make it more possible for them to 
be resolved upon failure without causing systemic risks for the 
broader economy. The Board therefore anticipates focusing 
resolution planning requirements on these firms. Firms with 
total assets between $100 billion and $250 billion, especially 
those that are less complex and less interconnected, do not 
pose a high degree of resolvability risk. Therefore, we should 
consider no longer imposing the resolution planning requirement 
on at least a subset of the firms with total assets between 
$100 billion $250 billion. The Board will solicit feedback, 
including feedback on costs and benefits, on any proposed 
changes to the applicability of resolution planning 
requirements through the public notice and comment process.
    The provisions of EGRRCPA are generally consistent with the 
Board's view that supervision and regulation should be 
appropriately tailored to the risks posed by firms to the 
financial system. The Board also recognizes that the complexity 
of banks can vary significantly from bank to bank, even for 
institutions within the $100 billion to $250 billion group. 
Those banks, which provide a significant amount of credit to 
the economy, range from large regional banks to an institution 
that has been designated a systemically important financial 
institution given its size and complexity. That suggests we may 
need to consider factors beyond size when we consider whether 
it is appropriate to reduce the frequency of the stress test.
    Pursuant to the provisions of EGRRCPA, the Board will 
assess the necessary and appropriate frequency of supervisory 
and company-run stress tests to effectively ensure the safety, 
soundness, and resiliency of the financial system while 
concurrently minimizing regulatory burden. In general, firms 
that pose limited risk to financial stability would be expected 
to be subject to less frequent supervisory and company-run 
stress tests than those with a large systemic footprint. Of 
course, we would invite public comment on any proposal to 
change the frequency of the stress test.

Q.15. Does the Fed intend to exempt any firms from the 
requirement to calculate risk-weighted assets according to 
Advanced Approaches?

A.15. The Board is currently focused on ways to simplify the 
existing capital rules and to reduce any unwarranted complexity 
of the applicable capital requirements overall, rather than on 
considering exemptions for particular firms. The Board believes 
there is room to simplify the capital framework, while 
preserving the stringency of the overall capital requirements. 
The Board is also actively reviewing the requirements 
applicable to firms with more than $250 billion in total assets 
to make sure they are appropriately tailored to the firms to 
which they are applied.

Q.16. How does the Fed's planned rulemaking regarding ``reach 
back'' application of enhanced prudential standards anticipate 
expeditiously capturing quickly growing firms whose risk to the 
economy may rapidly escalate? For example, Countrywide grew 
from $26 billion in total consolidated assets in 2000 to $211 
billion in 2007, and posed systemic threat to the economy.

A.16. EGRRCPA tailors supervisory requirements to the size and 
complexity of banking organizations. As is reflected in 
EGRRCPA, regulations should be the most stringent for the 
largest and most complex institutions. Rulemakings proposed by 
the Board to tailor existing requirements would be designed to 
maintain a safe, sound, and stable banking system that supports 
economic growth without imposing unnecessary costs. Under this 
principle, if a bank grows in size and complexity, the Board's 
regulatory framework would apply increasingly stringent 
requirements to that banking organization commensurate with the 
organization's size and complexity.

Q.17. In what ways, if any, does the Fed intend to revamp the 
Community Reinvestment Act (CRA)?

A.17. The Federal Reserve supports modernizing the Community 
Reinvestment Act (CRA) regulations so that they better reflect 
structural and technological changes in the banking industry 
and strengthen the rules to help address the credit needs of 
low- and moderate-income communities. We think an Advance 
Notice of Proposed Rulemaking (ANPR) is a good starting point 
to gather input on the impact of the significant advancements 
in technology and other changes in the financial services 
marketplace since the regulations were last revised. We value 
input from all stakeholders on the impact of the significant 
advancements in technology and other changes in the financial 
services marketplace since the regulations were last revised. 
We look forward to reviewing suggestions that result from the 
OCC's ANPR on possible refinements to CRA regulations.
    While there are many positive aspects of the current 
regulations, we believe that there are opportunities to improve 
clarity and consistency through modernization efforts, which 
would benefit both banks and the communities they serve. The 
Board also believes that revised regulations should recognize 
that banks vary widely in size and business strategy and serve 
communities with different credit needs. An interagency 
modernization process is also an opportunity to define ways to 
evaluate a bank's CRA performance in light of its size, 
business strategy, capacity, and constraints, as well as its 
community's demographics, economic conditions, and credit needs 
and opportunities. To this end, more metrics could provide 
clarity. It is important that the use of metrics is 
sufficiently responsive to local credit needs and account for 
differences in performance expectations based on a bank's size, 
business model, and strategy.
    The Board values the interagency process, and we look 
forward to working with the OCC and the FDIC on any regulatory 
revisions that would promote consistency in the implementation 
of CRA across the industry, as well as offer the greatest 
impact to benefit reinvestment in local communities, consistent 
with the spirit and intent of the law.

Q.18. Assessment Areas under CRA are geographical areas where 
bank performance is evaluated on CRA exams. Currently, these 
areas include bank branches and deposit-taking ATMs. Many banks 
are making loans outside of branch networks, using alternative 
delivery channels including the Internet.
    Has the Federal Reserve given thought to changing the 
definition of Assessment Areas to reflect the changing 
landscape of banking?

A.18. Yes. The central focus of the law is on a bank's 
affirmative obligation to meet the credit needs of the 
communities it serves, including low- and moderate-income 
communities, consistent with safe-and-sound lending. The Board 
believes it is time to modernize the regulations, including 
making changes to the definition of a bank's ``assessment 
area,'' in which its CRA performance is evaluated.
    The banking environment has changed significantly since 
CRA's enactment and since the current CRA regulation was 
adopted. The regulation focuses on assessing performance where 
banks have branches, but many banks may now serve consumers in 
areas far from their physical branches. Therefore, the Board 
agrees that it is sensible for the agencies to consider 
expanding the assessment area definition to reflect the various 
ways a bank can serve local communities, while retaining the 
core focus on place.

Q.19. Comptroller Otting, during Committee testimony in June, 
suggested reducing CRA performance measurement to a simple 
formula system comparing the sum of CRA activities to bank 
assets. Making this ratio the totality of a CRA exam would 
abandon current examination weights which judge certain 
activities as more important than others, based on local needs.
    Do you support this single ratio approach?

A.19. We support updating the CRA regulations to make them more 
effective in making credit available in low- and moderate-
income areas. In enforcing CRA, we have identified principles 
to guide our work. For example, the Board believes that revised 
regulations should be tailored recognizing that banks vary 
widely in size and business strategy and serve communities with 
widely varying needs. We believe this can be done while 
retaining the flexibility to evaluate a bank's CRA performance 
in light of its size, business strategy, capacity, and 
constraints as well as its community's demographics, economic 
conditions, and credit needs and opportunities.
    We recognize the importance of considering the ways in 
which a bank's business strategy, no matter its size, 
influences the types of activities it undertakes to meet its 
CRA obligations.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
                     FROM JEROME H. POWELL

Q.1. The Federal Housing Finance Agency (FHFA) has proposed a 
new regulatory capital framework for the Federal National 
Mortgage Association and the Federal Home Loan Mortgage 
Corporation (each, an ``enterprise''). See Proposed Rule, 
Enterprise Capital Requirements (83 Federal Register 33,312) 
(Jul. 17, 2018). FHFA's proposed rule contemplates that the 
credit risk transfers (CRT) of the enterprises would provide 
capital relief. Id. at 33,356. According to FHFA, with respect 
to capital relief for CRT, ''the proposed approach is analogous 
to the Simplified Supervisory Formula Approach (SSFA) under the 
banking regulators' capital rules applicable to banks, savings 
associations, and their holding companies.'' Id. at 33,358. But 
FHFA also acknowledges that ``the proposed approach deviates 
from the SSFA in that it: (i) [p]rovides for a more refined 
view of risk differentiation across transactions by accounting 
for differences in maturities between the CRT and its 
underlying whole loans and guarantees, and (ii) docs not 
discourage CRT transactions by elevating aggregate post-
transaction risk-based capital requirements above risk-based 
capital requirements on the underlying whole loans and 
guarantees.'' Id.
    What are the material differences between (i) the rules 
governing the capital relief afforded a CRT of an enterprise 
under FHFA's proposed rule and (ii) the rules governing the 
asset credit, liability reduction or other capital relief 
afforded a similar transaction of a banking organization under 
the rules of the Board of Governors of the Federal Reserve 
System (the Board)?

A.1. The Federal Housing Finance Agency's (FHFA) proposal on 
``Enterprise Capital Requirements'' recognizes the risk 
mitigation effects of credit risk transfers (CRTs). CRTs are 
transfers of credit risk from Fannie Mae and Freddie Mac on a 
portion of their loan portfolio to private sector investors. If 
CRTs meet certain qualifying criteria, Fannie Mae and Freddie 
Mac are able to reduce the amount of capital held against those 
portfolios.
    The treatment for CRTs proposed by the FHFA is tailored for 
two types of products: single-family home loans and multifamily 
loans. These products have standardized characteristics that 
are incorporated in the FHFA's proposed approach for risk 
weighting these exposures.
    The regulatory capital rule, adopted by the Federal Reserve 
Board of Governors, the Office of the Comptroller of the 
Currency, and the Federal Deposit Insurance Corporation 
(collectively, ``banking agencies''), similarly recognizes 
credit risk mitigation effects of credit risk transfers and 
allows a banking organization to assign a lower risk weight to 
an exposure. However, relative to the approach proposed by the 
FHFA, the banking agencies' capital rule recognizes credit risk 
mitigation for a much broader variety of exposures.
    The banking agencies' approach for recognizing credit risk 
transfer through a securitization needs to be flexible enough 
to accommodate a wide variety of securitized asset classes 
without standardized characteristics. The approach may require 
more capital on a transaction-wide basis than would be required 
if the underlying assets had not been securitized, in order to 
account for the complexity introduced by the securitization 
structure. Furthermore, the banking agencies' capital rule 
requires banking organizations to meet certain operational 
requirements. An inability by a banking organization to meet 
these operational requirements may lead to higher risk 
weighting, relative to the FHFA's proposed approach.

Q.2. Does the Board expect to consider FHFA's approach to 
capital relief for CRT, and also the experience of the 
enterprises with CRT, when the Board next reviews its own rules 
governing the capital relief afforded to banking organizations 
for CRT and similar transactions?

A.2. The FHFA's proposal is specifically designed for Fannie 
Mae and Freddie Mac and their specialized lending purposes. The 
FHFA has calibrated its proposed capital requirements and 
tailored its credit risk mitigation rules to two specific 
categories of exposures: single-family home loan and 
multifamily loan portfolios.
    Banks have a wider variety of exposures than Fannie Mae and 
Freddie Mac. Thus, banks require a different calibration of 
capital requirements and a more general set of rules governing 
the recognition of credit risk mitigation.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
                     FROM JEROME H. POWELL

Q.1. International Organizations. Background: The Federal 
Reserve has membership in several international standard-
setting bodies. Among them are the Bank for International 
Settlements (BIS) and the Financial Stability Board (FSB). 
These standard-setting bodies provide opportunities to push 
U.S. interests and greater regulatory harmonization globally. 
The level of participation by the Federal Reserve going forward 
is unclear. The question is intended to give Chairman Powell an 
opportunity to describe his vision for the Federal Reserve's 
participation in these international organizations.
    Chairman Powell, the Federal Reserve has traditionally 
played an important and active role in international standard-
setting bodies such as the Bank for International Settlements 
(BIS) and the Financial Stability Board (FSB). This has been 
important for both representing the interests of the United 
States and promoting policies that benefit the global financial 
system. In the Treasury Department's first report to the 
President on financial regulatory reform, it advocated for 
robust U.S. engagement in international financial regulatory 
standard-setting bodies as a way to ``promote financial 
stability, level the playing field for U.S. financial 
institutions, prevent unnecessary regulatory standard-setting 
that could stifle financial innovation, and assure the 
competitiveness of U.S. companies and markets . . . .'' The 
Treasury Department recommended in its report that U.S. 
regulators advocate for international regulatory standards that 
are aligned with U.S. interests.
    As Chairman, what will be your top priorities when 
representing the United States in international standard-
setting bodies such as BIS and FSB?

A.1. One of our top priorities in international standard 
setting bodies is to consolidate the financial reform gains we 
have achieved globally. These include a responsible increase in 
bank capital standards, introduction of liquidity standards, 
recovery and resolution planning for the most globally active 
and systematically important banks, and mandates to increase 
incentives for financial firms to centrally clear derivatives. 
As we get further from the financial crisis, it will become 
easier to forget the reasons for which we took actions to 
strengthen significantly the prudential framework for banks and 
global financial stability. Therefore, it is important that the 
United States, with its large number of globally active 
financial firms, continue to play a central role in reenforcing 
this message at the international level.
    At the same time, we believe now is an appropriate time to 
evaluate the reforms to ensure that they are working as 
efficiently and effectively as they can and do not give rise to 
adverse incentives. The evaluation work, already underway, may 
lead us to adjust various standards to achieve these objectives 
while maintaining the strength and resiliency of the system.

Q.2. Can you describe the work you hope to accomplish or new 
initiatives you hope to pursue in BIS, FSB and other relevant 
international standard-setting bodies?

A.2. One priority is to finalize the bank capital framework for 
trading activities. Strong standards are necessary for these 
activities as trading activities facilitated many of the 
riskier bank practices that led to the crisis. At the same 
time, it is important to ensure that these standards are well-
crafted in order to avoid adverse effects on market liquidity. 
The international standard-setters are also working to build up 
financial firms' resiliency to operational risks, including 
those emanating from cyber-risks. These risks are some of the 
most important risks that financial firms face today. These 
international efforts are aimed at ensuring that we have common 
terminology to discuss these risks and have a common set of 
expectations for firms' resiliency in the face of operational 
risk incidents.

Q.3. EU. Background: Legislative bodies in Europe are 
considering draft revisions to the European Market 
Infrastructure Regulation (EMIR) that would bring U.S.-based 
and other third-country central counterparties (CCPs) under the 
regulation and supervision of the EU for the first time. The 
proposed changes would expand the European Securities and 
Markets Authority's (ESMA) and the European System of Central 
Banks' supervisory authority over third-country CCPs, including 
U.S. CCPs, that are recognized to do business in Europe. EMIR's 
stated purpose for making these changes is to address the 
potential risks that third-country CCPs could pose to the EU's 
financial system. These changes could also reopen a 2016 
equivalence agreement for derivatives clearinghouse supervision 
between the CFTC and the EU authorities. CFTC Chairman 
Giancarlo has expressed significant concerns regarding the 
potential impact this proposed legislation could have on U.S. 
CCPs. In recent testimony before the U.S. Senate Agriculture 
Committee, Chairman Giancarlo stated that ``regulatory and 
supervisory deference needs to remain the key principle 
underpinning cross border supervision of CCPs. Deference 
continues to be the right approach to ensure that oversight 
over these global markets is effective and robust without 
fragmenting markets and trading activity.'' The question is 
intended to determine how Chairman Powell's intends to address 
this issue and whether his views align with that of other U.S. 
regulators.
    The European Union is considering legislation that, for the 
first time, would permit EU regulators, including the European 
Central Banks, to directly supervise systemically important 
U.S.-based and other third-country CCPs, including U.S. CCPs in 
the securities and derivatives markets. This approach itself 
could pose risks and potentially interfere with the Federal 
Reserve's ability to ensure its policies are being effectuated 
without interference by EU supervisors. The U.S. Congress and 
regulators have chosen to not take this approach and instead 
adhere to the long-standing principal of regulatory deference.
    How do you plan to address this situation as Chair?
    The proposed legislation (EMIR 2.2) would subject U.S. CCPs 
to overlapping EU regulation and supervision without deferring 
to U.S. regulators that oversee these entities; namely, the 
Federal Reserve, SEC, and CFTC. Do you share CFTC Chairman 
Giancarlo's concerns about this proposal? If so, are you 
coordinated in your position and messaging to the EU?

A.3. The U.S. central counterparties (CCPs) that may 
potentially fall within the scope of the proposed European 
Union (EU) legislation to amend the European Market 
Infrastructure Regulation include those designated as 
systemically important financial market utilities (DFMUs) by 
the Financial Stability Oversight Council under Title VIII of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act). The Commodity Futures Trading Commission and 
the Securities and Exchange Commission are the supervisory 
agencies with primary responsibility for supervising and 
regulating these firms. The Federal Reserve Board (Board) plays 
a secondary role in the oversight of these CCPs under Title 
VIII of the Dodd-Frank Act. The proposed EU legislation has 
more direct implications for the primary supervisors of these 
firms, and those agencies are actively involved in a dialogue 
with EU authorities. To date, Board staff has worked to educate 
EU authorities on the legal framework created by Title VIII, 
explained the nature of the Board's role in the oversight of 
DFMUs, pointed out differences considered in the proposed EU 
legislation, and expressed support for cooperation among 
authorities.
    The Board has a long-standing policy objective to foster 
the safety and efficiency of payment, clearing, and settlement 
systems and to promote financial stability, more broadly. \1\ 
In that policy, the Board has set out its views, and related 
standards, regarding the management of risks that financial 
market infrastructures, including CCPs, present to the 
financial system and the Federal Reserve Banks. It has also 
described how it will engage cooperatively with authorities 
with direct responsibility for particular CCPs located outside 
of the United States.
---------------------------------------------------------------------------
     \1\ See, Federal Reserve Policy on Payment System Risk: https://
www.federalreserve.gov/paymentsystems/files/psr_policy.pdf.
---------------------------------------------------------------------------
    As a central bank, the Federal Reserve has a particular 
interest in liquidity issues. As far as liquidity risks are 
concerned, it is immaterial whether a CCP is based in the 
United States or abroad so long as it clears U.S. dollar 
denominated assets and makes and receives U.S. dollar payments. 
The current EU legislative proposal outlines that the European 
Commission, in consultation with the European Securities and 
Markets Authority and the relevant EU member central bank, may 
determine a third country CCP to be of such systemic importance 
to the EU that the only way to mitigate the risks posed would 
be for that CCP to establish its clearing business within the 
EU. This aspect of the proposed legislation presents a risk of 
splintering central clearing by currency area, which could 
fragment liquidity and reduce netting opportunities. Given the 
extensive cross-border nature of the firms potentially covered 
by the proposed EU legislation, we support the EU and U.S. 
authorities' efforts to search for cooperative solutions to 
these issues that promote CCP resilience while upholding the 
aims of both U.S. and international authorities.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
                     FROM JEROME H. POWELL

Q.1. Supervising large, globally active banking organizations--
such as those covered by the Federal Reserve's Large 
Institution Supervision Coordinating Committee (LISCC)--are 
among your agency's most important responsibilities. While 
LISCC supervision traditionally relates to areas such as 
lending, credit risk, and capital and liquidity risk, many of 
the strategic and operational risks that larger banks manage 
are in areas unrelated to traditional banking services and 
functions.
    My concern is that as these areas become a larger potential 
source of risk, supervisory teams may not have the technical 
expertise to properly oversee these complex financial 
institutions and may in fact be tempted to substitute their 
judgement rather than apply bright line regulations. In fact, 
if regulators without technical expertise begin to substitute 
their judgement for that of bank management in these areas, 
this could lead to increased systemic risk.
    How do you make certain that your field supervisory teams 
possess the requisite amount of technical experience in areas 
like cybersecurity, technology, incentive compensation 
planning, and human resources management to oversee banks in 
the LISSC portfolio?
    Do you agree that supervisory staff should not substitute 
their judgment on such matters of general corporate strategy, 
especially when they do not have the requisite technical 
expertise?

A.1. As you note, supervising Large Institution Supervision 
Coordinating Committee (LISCC) firms is one of the most 
important responsibilities of the Federal Reserve. The purpose 
of this supervision is to ensure that these firms operate in a 
safe-and-sound manner, consistent with U.S. financial 
stability. The Federal Reserve conducts supervision of LISCC 
firms by assessing the adequacy of firms' capital and liquidity 
positions, effectiveness of resolution and recovery planning, 
the strength of risk management, governance and controls, and 
compliance with laws and regulations, including those related 
to consumer protection. All areas of supervision--including 
quantitative assessments--require some amount of judgment. 
Supervisors undergo extensive training to ensure that this 
judgment is exercised in a fair and consistent manner that 
furthers the safety and soundness of the supervised firms.
    While the Federal Reserve has significant experience in 
evaluating lending, credit risk, and capital and liquidity 
risk, it also has a depth of experience in evaluating strategic 
and operational risks. We assess these risks by considering the 
effectiveness of boards of directors, senior management 
oversight, reporting quality, independent risk management, and 
internal audits, among others. As needed, the Federal Reserve 
develops or hires personnel with the necessary expertise.
    In all technical areas, the Federal Reserve uses both 
quantitative and qualitative analysis to assess the strength of 
firms' practices. \1\ We also use cross-firm comparative 
analysis, commonly referred to as horizontal analysis, to 
ensure that our assessments reflect the range of practices that 
constitute safety and soundness standards; furthermore, this 
tool allows for a more consistent application of supervisory 
standards.
---------------------------------------------------------------------------
     \1\ Other technical areas include, for example, trading and 
counterparty credit risk management, stress testing, and credit 
underwriting, and risk management monitoring models.
---------------------------------------------------------------------------
    To ensure the appropriateness of supervisory findings, 
material supervisory judgments and assessments of LISCC firms 
are subject to a rigorous internal governance process, which 
includes oversight by committees of individuals from different 
parts of the Federal Reserve System. This process is designed 
to bring the collective expertise and perspective of the 
Federal Reserve to bear on assessments of LISCC firms.
    A key objective of LISCC supervision, and in fact, 
supervision for all firms, is to ensure that a firm's 
governance, risk management activities, and internal controls 
adequately support the firm's current risk taking and strategic 
objectives. To this end, the Federal Reserve has well-defined 
and controlled processes that are appropriate for technical and 
specialized activities.

Q.2. For several years, banking organizations that provide 
services such as safekeeping and custody to asset managers, 
have engaged with the Federal Reserve on the critical need to 
refine exposure measurement calculations for use in capital 
rules and credit exposure limits. These discussions have led to 
the inclusion of technical changes to these capital rules in 
the finalization of the Basel Committee's postcrisis capital 
reforms agreed to by the Federal Reserve in December 2017.
    One of the most important portions of this agreement 
relates to securities lending which provides a critical source 
of revenue to pension funds, mutual funds, endowments, and 
other institutional investors. Given the importance of 
securities lending to these asset managers which include 
pension funds, such as the South Dakota Retirement System, 
enacting these technical changes to the capital rules for 
securities financing transactions is an urgent matter. I hope 
the Federal Reserve will consider separating these targeted, 
technical changes from the rest of the Basel IV package and 
begin domestic implementation.
    Is there an opportunity for the Federal Reserve to propose 
rules to implement these technical changes, and perhaps others, 
separately and ahead of its longer range plan to solicit public 
input on the broader and more substantive capital changes later 
this year through the Advanced Notice of Proposed Rulemaking 
(ANPR) process?

A.2. The Federal Reserve Board (Board) understands the concerns 
with respect to the capital rules' treatment of securities 
financing transactions, and Board staff participated with their 
international colleagues on the technical changes provided by 
the Basel Committee in December 2017. These changes would 
provide a more risk-sensitive treatment of such products, 
including to better account for diversification and 
correlation. Board staff, in coordination with the other 
Federal banking agencies, are evaluating this new standard as 
well as other standards adopted by the Basel Committee at the 
end of 2017 to determine whether and how best to incorporate 
them into the capital rules.
    In addition, the Board has been tailoring its regulations 
regarding the treatment of securities lending and, more 
generally, securities financing transactions. On June 14, 2018, 
the Board finalized the Single-Counterparty Credit Limits rule. 
The final rule applies to the largest banking firms, placing 
limits on a firm's credit exposures to a single counterparty. 
These limits address the risks to the economy that are created 
when large firms are highly interconnected.
    During the public comment period, commenters argued that 
the measurement methodology for exposures resulting from 
securities financing transactions would not create proper 
incentives for risk reduction and would not accurately measure 
the actual exposures associated with securities lending 
activities. In order to address this concern, the final rule 
allows a firm to use any methodology that it is authorized to 
use under the Board's risk-based capital rules to measure 
exposure resulting from securities financing transactions. This 
approach is consistent with other Board regulations, including 
the capital rules.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                     FROM JEROME H. POWELL

Q.1. I appreciate your timely response to my written questions 
from your March 1, 2018, appearance for this Committee. In your 
reply, you wrote that ``the State-based system of insurance 
regulation provides an invaluable service in protecting 
policyholders.'' I could not agree more--and believe that the 
U.S. system of insurance regulation is the best in the world.
    That is why I'm concerned that recent International 
Association of Insurance Supervisors (IAIS) negotiations on the 
International Capital Standard (ICS) in Kula Lumpur (KL) 
suggest an embrace of a European-centric approach to insurance 
capital standards. For example, in the KL agreement, it was 
decided that the reference ICS shall have European-like capital 
requirements (Prescribed Capital Requirement) and use a 
European accounting method (Market Adjusted Valuation).
    In the past, the Federal Reserve has stated that the IAIS 
does not have any authority to impose enforceable obligations 
on U.S. insurance firms and that there is no way that IAIS 
negotiations could result in the application of a capital 
standard on U.S. insurance firms that is inconsistent with U.S. 
laws and regulations. However, if U.S. negotiators agree to a 
standard at the IAIS that does not formally recognize the U.S. 
insurance regulatory system or, worse, requires that the U.S. 
change its regulatory system to match the agreed upon standard 
and we do not change our laws, then the EU or other 
jurisdictions could penalize U.S. firms operating in said 
jurisdictions.
    Please answer the following with specificity: What 
positions will you take during upcoming IAIS negotiations on 
the ICS to ensure the protection of the U.S. system of 
insurance regulation?

A.1. I agree that, in order for an Insurance Capital Standard 
(ICS) being developed through the International Association of 
Insurance Supervisors (IAIS) to be implementable, it cannot be 
unsuited or inappropriate for the United States, which remains 
the world's largest insurance market. As such, an overly 
European-centric ICS would face challenges to being readily 
implementable in the United States. As the Federal Reserve 
Board (Board) has suggested in relation to insurance firms 
supervised by the Board, such a framework may not adequately 
account for U.S. Generally Accepted Accounting Principles 
(GAAP), may introduce excessive volatility, and may involve 
excessive reliance on supervised firms' internal models. \1\ 
Indeed, the Board strongly supports the U.S. State-based 
insurance supervisory system, which has proven its strength and 
resilience for well over a century.
---------------------------------------------------------------------------
     \1\ See Advance Notice of Proposed Rulemaking, Capital 
Requirements for Supervised Institutions Significantly Engaged in 
Insurance Activities, 81 Federal Register 38631, 38637 (June 14 2016).
---------------------------------------------------------------------------
    Among other things, this motivates our advocacy of an 
aggregation alternative, and the use of the GAAP-plus valuation 
method, in the ICS. We continue to advocate, and contribute to 
developing, the GAAP-plus valuation method for inclusion in the 
ICS. In addition, we support the collection of information 
through the monitoring period on an aggregation-based approach.
    We also participate along with the other U.S. members, 
together with other jurisdictions including Canada, Hong Kong, 
and South Africa, in the development of such an approach 
through the IAIS. Furthermore, the Federal Reserve continues to 
develop the Building Block Approach, an aggregation-based 
approach that, together with the Group Capital Calculation of 
the National Association of Insurance Commissioners (NAIC), can 
be used to advocate the aggregation method. Through field 
testing and monitoring, we will advocate that an aggregation 
method provides comparable outcomes in supervisory actions and 
insurance company results relative to the standard calculation 
method for ICS that is emerging from the IAIS.
    As a member of the IAIS, the Federal Reserve, in 
partnership with the NAIC and Federal Insurance Office, remains 
committed to pursuing an engaged dialogue to achieve outcomes 
that are appropriate for the United States. As a general 
proposition, we believe in the utility of having effective 
global standards for regulation and supervision of 
internationally active financial firms. When implemented 
consistently across global jurisdictions, such standards help 
provide a level playing field for global financial 
institutions. Further, consistent global regulatory standards 
can help limit regulatory arbitrage and jurisdiction shopping, 
as well as promote financial stability. While we would refrain 
from agreeing to any international standard that is 
inappropriate for the United States, it is important to recall 
that the IAIS has no ability to impose requirements on any 
national jurisdiction, and any standards developed through this 
forum are not self-executing or binding upon the United States 
unless adopted by the appropriate U.S. lawmakers or regulators 
in accordance with applicable domestic laws and rulemaking 
procedures.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
                     FROM JEROME H. POWELL

Q.1. Chairman Powell, I'd like to turn to S. 2155 
implementation. Many of us are hoping that you and Vice 
Chairman Quarles will be taking a robust role in crafting the 
rules to implement the newly enacted law. What role are you 
currently playing in the implementation of S. 2155?

A.1. The Federal Reserve Board (Board) is working in an 
expeditious manner to implement the recently enacted Economic 
Growth, Regulatory Relief, and Consumer Protection Act 
(EGRRCPA). The Board has a well-established governance process 
for implementing rulemakings and ensuring that such rulemakings 
are compliant with the law, including statutory deadlines set 
by Congress. Draft rulemakings are carefully reviewed and 
considered by the Board's Committee on Supervision and 
Regulation, which is chaired by Vice Chairman Quarles. I meet 
with staff on a regular basis to discuss regulatory proposals 
and provide direction. The Committee's proposals for amendments 
to the Board's regulations are finalized only after a vote by 
the full Board of Governors.

Q.2. Many of your staff are the same staff that helped write 
the implementing rules for the Dodd-Frank Act. In some sense, 
the new law mandates they revise their own prior work. From 
experience, I would say that such a mandate will take robust 
oversight on your part and on our part--do you agree? Can you 
give us some insight into how you and Vice Chair Quarles are 
managing these workstreams and orchestrating the workstreams?

A.2. As I mentioned above, the Board is working in an 
expeditious manner to implement the recently enacted EGRRCPA. 
The highest priority of the Federal Reserve is to implement the 
laws that we have been entrusted to administer and to work to 
protect and enhance the safety and soundness of financial firms 
and the financial stability of the U.S. financial system. The 
Board has a well-established governance process for 
implementing rulemakings and ensuring that such rulemakings are 
compliant with the law. I meet with staff on a regular basis to 
discuss regulatory proposals and provide direction. Of course, 
Vice Chairman Quarles has a statutory obligation to develop 
policy recommendations for the Board regarding supervision and 
regulation of depository institution holding companies and 
other firms we supervise. He is actively involved in the 
development of proposals to implement EGRRCPA from the initial 
design through finalization.
    I would also note that, in general, Board staff regularly 
revisits, revises, and tailors previously approved rulemakings. 
Through the rule implementation process, the Board receives 
feedback from affected banking organizations and other 
interested parties. The Board also learns from the experience 
of the on-the-ground Reserve Bank examiners. Because of this 
continuous dialogue, the Board may conclude that aspects of a 
regulation require amendment or streamlining.

Q.3. One area where I would hope that congressional intent is 
followed is with respect to the SIFI threshold in Section 401 
of the bill. My view is that all banks under $250 billion in 
assets are out of the enhanced prudential standards and that 
those above $250B are able to take advantage of the mandated 
robust tailoring so that the larger regional banks are not 
treated like the money center banks and that we are taking 
business model and risk into account when applying enhanced 
regulations. Is this your view?

A.3. Section 401 of the EGRRCPA raised the threshold for 
automatic application of enhanced prudential standards for bank 
holding companies from $50 billion to $250 billion in total 
consolidated assets. Under this section, the Board has the 
discretion to apply enhanced prudential standards to bank 
holding companies with total consolidated assets between $100 
billion and $250 billion, based on consideration of various 
factors, such as capital structure, riskiness, complexity, 
financial activities, size, and any other risk-related factors 
that the Board deems appropriate.
    The core reforms put in place after the financial crisis--
stronger capital and liquidity requirements, stress testing, 
and resolution planning--have made our financial system more 
resilient. Firms with assets of $100 billion or more can 
present a range of safety and soundness and financial stability 
concerns, depending on their risks and systemic profile. These 
concerns typically increase for firms with assets of $250 
billion or more. Therefore, the Board has tailored, and will 
work to continue to appropriately tailor, our regulations to 
the risk profiles of the films subject to those regulations.
    The Board is carefully considering the statutory criteria 
under the EGRRCPA for determining which enhanced prudential 
standards should continue to apply to firms with $100 billion 
to $250 billion in total consolidated assets. The Board is also 
evaluating whether any changes to the enhanced prudential 
standards applicable to bank holding companies with more than 
$250 billion in total consolidated assets are appropriate.
    Board staff have begun working on proposals to amend these 
aspects of our rules and we look forward to hearing feedback 
through the public notice and comment process in the coming 
months.

Q.4. I also expect the agencies to take a look at all of the 
regulations where they used $50 billion as the asset threshold 
for application, including those outside of DFA Section 165, 
and raise the number accordingly. What are your thoughts?

A.4. As part of its implementation of EGRRCPA, the Board is 
considering which of its regulations require changes given the 
amended applicability thresholds in the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act), including 
section 165, as well as section 11 of the Federal Reserve Act. 
In addition, in light of EGRRCPA's amendments to section 165 
and consistent with the Board's ongoing refinement and 
evaluation of its supervisory program, the Board is evaluating 
whether any other changes to the prudential standards 
applicable to large banking organizations are appropriate.
    The Board's capital plan rule utilizes a $50 billion asset 
threshold and was not affected by the changes made to section 
165. Per the Board's public statement on July 6, 2018, the 
Board will not take action to require bank holding companies 
with total consolidated assets greater than or equal to $50 
billion but less than $100 billion to comply with the capital 
plan rule.

Q.5. Chairman Powell, the Federal Reserve and the Office of 
Financial Research have studied systemic risk and have 
determined that banks under $250BB do not pose a systemic risk 
and Congress passed and the President signed S. 2155 to raise 
the threshold to $250BB for the application of enhanced 
prudential standards. I believe that the FED should 
expeditiously follow this directive and should follow the will 
of Congress, and not wait 18 months. Will you commit to me that 
you will direct Fed staff to effectuate this new threshold and 
then move on to tailoring above the $250BB threshold?

A.5. As stated above, the core reforms put in place after the 
financial crisis--stronger capital and liquidity requirements, 
stress testing, and resolution planning--have made our 
financial system more resilient, and I would not want to see 
any material weakening of these reforms. The Board has the 
discretion under the EGRRCPA to apply enhanced prudential 
standards to firms with total consolidated assets between $100 
billion and $250 billion. When doing so, the enacted 
legislation requires us to consider various factors, such as 
capital structure, riskiness, complexity, financial activities, 
size, and any other risk-related factors that the Board deems 
appropriate.
    The Board is carefully considering the statutory criteria 
under the EGRRCPA and is evaluating whether any changes to the 
enhanced prudential standards applicable to bank holding 
companies with more than $250 billion in total consolidated 
assets are appropriate.
    Board staff have begun working on proposals to amend these 
aspects of our rules and we look forward to hearing feedback 
through the public notice and comment process in the coming 
months.

Q.6. The relief in S. 2155 is not immediate, and without prompt 
action, the relief will not come until Nov. 24, 2018, 18 months 
after enactment. Do you plan to take action immediately?

A.6. There are a number of provisions in EGRRCPA that provided 
relief immediately upon enactment. The Board, along with the 
other Federal banking agencies, have taken action to address 
the EGRRCPA changes that took effect immediately. As described 
in the Board's July 6, 2018, statements, the Board will not 
take action to enforce existing regulatory and reporting 
requirements in a manner inconsistent with EGRRCPA. For 
example, the Board will not take action to require bank holding 
companies with less than $100 billion in total consolidated 
assets to comply with certain existing regulatory requirements. 
These requirements include the enhanced prudential standards in 
the Board's Regulation YY, the liquidity coverage ratio 
requirements in the Board's Regulation WW, and the capital 
planning requirements in the Board's Regulation Y. The Board's 
statement and interagency statements also discuss other changes 
that took effect upon enactment and the interim positions that 
will be taken until the relevant regulations are amended to 
conform with EGRRCPA, including the treatment of high 
volatility commercial real estate exposures and certain 
municipal securities in the context of liquidity regulations.
    EGRRCPA also raised the threshold for automatic application 
of enhanced prudential standards for bank holding companies 
from $50 billion to $250 billion in total consolidated assets. 
Under this section, the Board has the discretion within 18 
months of enactment to apply enhanced prudential standards to 
bank holding companies with total consolidated assets between 
$100 billion and $250 billion based on consideration of various 
factors. The Board is carefully considering the statutory 
criteria under the EGRRCPA for determining which enhanced 
prudential standards should continue to apply to firms with 
$100 billion to $250 billion in total consolidated assets.
    In addition, in light of EGRRCPA's amendments, and 
consistent with the Board's ongoing refinement and evaluation 
of its supervisory program, the Board is evaluating whether any 
changes to the enhanced prudential standards applicable to bank 
holding companies with more than $250 billion in total 
consolidated assets are appropriate.
    Board staff have begun working on proposals to amend these 
aspects of our rules and we look forward to hearing feedback 
through the public notice and comment process in the coming 
months.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                     FROM JEROME H. POWELL

Q.1. If changes are made to the Community Reinvestment Act that 
lead to financial institutions, including those that have an 
online presence, to take deposits from communities but actually 
make less of an effort to reinvest in these same communities, 
would you consider that to be a good or bad outcome?

A.1. I would view revisions to the regulation that cause 
financial institutions to make less of an effort to 
reinvestment in these communities as an undesirable outcome. In 
addition, a successful update to the Community Reinvestment Act 
(CRA) regulations should encourage banks to spread their 
community investment activities across the areas they serve and 
encourage them to seek opportunities in areas that are 
underserved.
    Currently, a bank's performance in its major markets is 
evaluated most closely and weighs most heavily in its CRA 
rating. This emphasis has resulted in what banks and community 
organizations refer to as credit ``hot spots'' where there is a 
high density of banks relative to investment opportunities. 
Meanwhile, other areas have a difficult time attracting capital 
because they are not in a bank's major market, if they are 
served by a bank at all.
    We believe that any new set of regulations should eliminate 
such market distortions and avoid creating new ones. No matter 
how we define a bank's assessment area in the future, new 
regulations need to be designed and implemented in a way that 
encourages performance throughout the areas banks serve.
                                ------                                


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

Q.1. In response to my question about the joint agency 
rulemaking required by Section 956 of Dodd-Frank, you said, 
``We tried--we were not able to achieve consensus over a period 
of many years between the various regulatory agencies that need 
to sign off on that. But that didn't stop us from acting, you 
should know. We--particularly, for the largest institutions, we 
do expect that they will have in place compensation plans 
that--that do not provide incentives for excessive risk-taking. 
And we expect that the board of directors will make sure that 
that's the case. And so, it's not something that we haven't 
done. We've, in fact, moved ahead through supervisory practice 
to--to make sure that these things are better than they were 
and they're substantially better than they were. You see much 
better compensation practices here, focusing mainly on the big 
firms where the problem really was.'' \1\
---------------------------------------------------------------------------
     \1\ https://plus.cq.com/doc/congressionaltranscripts-5358712?4
---------------------------------------------------------------------------
    Your response suggests that the relevant agencies have 
ceased work on this rulemaking.
    Is that correct?

A.1. After the Federal Reserve Board (Board), Office of the 
Comptroller of the Currency, Federal Deposit Insurance 
Corporation, Securities Exchange Committee, National Credit 
Union Association, and the Federal Housing Finance Agency (the 
agencies), jointly published and requested comment on the 
revised proposed rule in June 2016, the agencies received over 
one hundred comments. These comments raised many important and 
complicated questions. The agencies continue to consider the 
comments.
    The Federal Reserve believes that supervision of incentive 
compensation programs at financial institutions can play an 
important role in helping safeguard financial institutions 
against practices that threaten safety and soundness, provide 
for excessive compensation, or could lead to material financial 
loss. In particular, supervision can help address incentive 
compensation practices that encourage inappropriate risk-
taking, which may have effects on not only the institution in 
question, but also on other institutions or the broader 
economy.
    Additionally, The Federal Reserve continues to work with 
firms to improve incentive compensation practices and promote 
prudent risk-taking at supervised entities.

Q.2. Please provide a detailed explanation of how the Federal 
Reserve is either limiting or prohibiting incentive-based 
compensation practices that encourage excessive risk-taking 
through supervision.

A.2. The Federal Reserve, along with the other Federal banking 
agencies, issued Guidance on Sound Incentive Compensation 
Policies (Guidance) in June 2010. The interagency guidance is 
anchored by three principles:

    Balance between risks and results: Incentive 
        compensation arrangements should balance risk and 
        financial results in a manner that does not encourage 
        employees to expose their organizations to imprudent 
        risks;

    Processes and controls that reinforce balance: A 
        banking organization's risk-management processes and 
        internal controls should reinforce and support the 
        development and maintenance of balanced incentive 
        compensation arrangements; and

    Effective corporate governance: Banking 
        organizations should have strong and effective 
        corporate governance to help ensure sound incentive 
        compensation practices, including active and effective 
        oversight by the board of directors.

    The Guidance explains how banking organizations should 
develop incentive compensation policies that take into account 
the full range of current and potential risks, and are 
consistent with safe-and-sound practices. Relevant risks would 
vary based on the organization, but could include credit, 
market, operational, liquidity, interest rate, legal, conduct, 
and related risks. The Guidance also discusses the importance 
of considering compliance risks (including consumer compliance) 
when evaluating whether incentive compensation arrangements 
balance risk and rewards.
    Currently, supervisory oversight focuses most intensively 
on large and complex banking organizations, which warrant the 
most intensive supervisory attention because they are 
significant users of incentive compensation arrangements and 
because flawed approaches at these organizations are more 
likely to have adverse effects on the broader financial system.

Q.3. Please provide any guidance issued to regulated 
institutions or materials provided to bank examiners on 
incentive-based compensation practices.

A.3. Attached to this response are:

    Guidance on Sound Incentive Compensation Policies, 
        issued by the Federal banking agencies in June 2010; 
        \2\ and
---------------------------------------------------------------------------
     \2\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg201000621a.htm

    A Report on the Horizontal Review of Practices at 
        Large Banking Organizations, issued by the Board in 
        October 2011. \3\
---------------------------------------------------------------------------
     \3\ https://www.federalreserve.gov/publications/other-reports/
incentive-compensation-report-201110.htm

Q.4. What metrics, thresholds, and standards is the Federal 
Reserve using to evaluate incentive-based compensation 
---------------------------------------------------------------------------
practices?

A.4. The Federal Reserve's approach is principles-based, and 
recognizes that organizations have unique incentive 
compensation practices that vary depending on the firm's 
organizational model and operating structure. The supervisory 
process focuses on assessing how firms have integrated their 
approaches to incentive compensation arrangements with their 
risk-management and internal control frameworks to better 
monitor and control the risks these arrangements may create for 
the organization. Supervision also considers whether 
appropriate personnel, including risk-management personnel, 
have input into the organization's processes for designing 
incentive compensation arrangements and assessing their 
effectiveness in restraining imprudent risk-taking.

Q.5. Which institutions are subject to the Federal Reserve's 
supervision of incentive-based compensation practices?

A.5. The Guidance, issued by the Federal banking agencies in 
June 2010, applies to global consolidated operations of all 
U.S.-headquartered banking organizations and to the U.S. 
operations of foreign banking organizations with a branch, 
agency, or commercial lending company in the United States that 
use incentive compensation. Because of the size and complexity 
of their operations, Federal Reserve supervision focuses on 
large banking organizations, those with the most significant 
use of incentive compensation, and those with the most complex 
operations.

Q.6. Were those institutions selected for supervision by asset 
size or some other factor?

A.6. The principles-based Guidance issued by the Federal 
banking agencies in June 2010, applies regardless of size; 
however, the Federal Reserve focuses supervisory oversight on 
the largest banking organizations, those with the most 
significant use of incentive compensation, and those with the 
most complex operations.
    The banking organizations involved in the horizontal 
reviews \4\ were selected based on asset size and complexity of 
operations.
---------------------------------------------------------------------------
     \4\ For additional information on the Federal Reserve's horizontal 
reviews of compensation practices, see: ``Incentive Compensation 
Practices: A Report on the Horizontal Review of Practices at Large 
Banking Organizations'', October 2011, available at: https://
www.federalreserve.gov/publications/other-reports/incentive-
compensation-report-201110.htm.

Q.7. If there is no rule clearly delineating prohibited 
practices, how are you ensuring consistency across regulated 
---------------------------------------------------------------------------
institutions?

A.7. Supervision of incentive compensation by the Federal 
Reserve is governed by the Guidance, which is integrated into 
the Bank Holding Company Supervision Manual. Federal Reserve 
understanding of incentive compensation practices was developed 
through the information collected during the horizontal 
reviews. With that understanding, the Federal Reserve has 
integrated incentive compensation in ongoing supervisory 
reviews, whether targeted (such as sales incentives or 
compliance reviews) or within individual lines of business 
(such as mortgage lending operations, or trading). A team at 
the Board monitors these reviews to encourage constituency.
    To foster implementation of improved incentive compensation 
practices, the Federal Reserve initiated multidisciplinary, 
horizontal reviews of incentive compensation practices at 
larger banking organizations. The primary goal was to 
consistently guide firms in implementing the interagency 
guidance.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Q.8. Many economists, including President Trump's Chair of the 
Council of Economic Advisers, have long advocated for less 
restrictive immigration policies to help grow the U.S. labor 
force, especially in light of an aging population and low birth 
rate. According to the Pew Research Center, without a steady 
stream of a total of 18 million immigrants between now and 
2035, the share of the U.S. working-age population could 
decrease to 166 million. \5\
---------------------------------------------------------------------------
     \5\ http://www.pewresearch.org/fact-tank/2017/03/08/immigration-
projected-to-drive-growth-in-us-working-age-population-through-at-
least-2035/
---------------------------------------------------------------------------
    What repercussions would restrictive immigration policies 
have on our workforce and economy?

A.8. Immigration is an important contributor to the rise in the 
U.S. population, accounting for roughly one-half of population 
growth annually. And population growth, in turn, affects the 
growth rate of the labor force as well as the growth of the 
overall economy. Thus, from an economic growth standpoint, 
reduced immigration would result in lower population growth and 
thus, all else equal, slower trend economic growth. However, 
immigration policy is not the purview of the Federal Reserve 
but rather is the responsibility of the Congress and the 
Administration.
                                ------                                


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

Q.1. Alternative Reference Rate: Some underappreciated work 
that you have guided at the Federal Reserve is that of the 
Alternative Reference Rate Committee. Global regulators have 
acknowledged that at the end of 2021, banks will no longer be 
required to submit to the panel that determines LIBOR, meaning 
that the rate could stop publication at that time. LIBOR is 
currently critical to the smooth functioning of our financial 
system, as it underlies $200 trillion in notional value, or ten 
times U.S. GDP, including a significant amount of floating-rate 
mortgages. As the FSOC's annual report highlighted, if LIBOR 
disappears without a liquid market in the replacement rate, the 
effects could be catastrophic. Yet a switch to an alternative 
rate, the secured overnight financing rate, requires tremendous 
collaboration by the private sector and the official sector and 
the creation of financial markets that would facilitate the 
arbitrage between LIBOR and the secured rate, and the creation 
of new products in the new secured rate.
    Do you believe end users will demand products in the new 
secured rate sufficient to build a deep and liquid market in 
the secured rate before the end of 2021, even though first 
movers in this space are likely to pay a premium for the 
product before the market is fully developed? Why?

A.1. As you note, the Financial Stability Oversight Council 
(FSOC) has highlighted the potential risks to U.S. financial 
stability from the London Interbank Offered Rate (LIBOR) since 
2014. These concerns led the Federal Reserve to convene the 
Alternative Reference Rates Committee (or ARRC) at that time. 
The ARRC is a diverse group of private sector firms and 
institutions that has widespread support from the U.S. official 
sector. In addition to the Federal Reserve Board, the Consumer 
Financial Protection Bureau, the Commodity Futures Trading 
Commission (CFTC), the Federal Deposit Insurance Commission 
(FDIC), the Federal Housing Finance Authority, the Federal 
Reserve Bank of New York, the Office of the Comptroller of the 
Currency (OCC), the Office of Financial Research, the 
Securities and Exchange Commission (SEC), and the U.S. Treasury 
Department (U.S. Treasury) all act as ex officio members of the 
ARRC. The ARRC's work in identifying the secured overnight 
financing rate (SOFR) as a recommended alternative to U.S. 
dollar LIBOR and developing a plan to promote use of SOFR on a 
voluntary basis has unquestionably been necessary in helping to 
make sure that the financial stability risks identified by the 
FSOC do not materialize.
    I have been greatly encouraged by the response of the 
private sector since SOFR began publication in April of this 
year. Even in this short period of time, we have already seen 
evidence that SOFR can and will be used by a wide range of 
market participants. The Chicago Mercantile Exchange is 
offering futures contracts on SOFR, and trading activity has 
already risen to above 5,000 contracts (or about $15 billion) 
per day with a total open interest of $75 billion. SOFR futures 
already have far more daily transactions underlying them than 
LIBOR. In addition, the London Clearing House group has begun 
offering clearing of SOFR swaps. And importantly, we have 
already seen two recent issuances of debt tied to SOFR. Both of 
these issuances were met with high demand and were 
oversubscribed, indicating that there is a robust pmt of the 
market that recognizes that SOFR instruments have value to 
them.
    There are several reasons that I believe we will see 
liquidity in SOFR instruments continue to grow. First, as a 
fully transactions-based, International Organization of 
Securities Commissions compliant benchmark based on the 
overnight U.S. Treasury repo market--the largest rates market 
in the world--SOFR really does represent a robust alternative 
to U.S. dollar LIBOR. Because so many firms are active in the 
Treasury repo market, they naturally have incentives to trade 
SOFR instruments. Second, many market participants have come to 
realize that the risks the FSOC has pointed to in LIBOR are 
quite likely to materialize, and I believe they see that it is 
in their own interest to move away from LIBOR and toward SOFR. 
The ARRC and the official sector will 'need to continue to 
educate market participants about the risks to LIBOR, and work 
to make sure that this transition is a smooth one.

Q.2. Foreign banks and prudential rules: I noticed that in the 
single-counterparty credit limit (SCCL) final rule, the Fed 
applied limitations on domestic bank holding companies that 
have $250 billion or more in total assets and the intermediate 
holding companies of foreign banks with at least $50 billion in 
total assets. And in the recent CCAR results, the Fed exempted 
three U.S. banks with assets between $50 billion and $100 
billion, but continued to apply CCAR to the intermediate 
holding company of one foreign bank that has nearly $900 
billion in total assets but only $86 billion in the U.S.
    Can you describe the philosophy guiding the Fed's decisions 
to keep foreign banks' U.S. holding companies covered by these 
important prudential rules?

A.2. In 2014, recognizing that the U.S. operations of foreign 
banking organizations (FBOs) had become more complex, 
interconnected, and concentrated, the Board adopted a final 
rule that established enhanced prudential standards for large 
U.S. bank holding companies (BHCs) and FBOs to help increase 
the resiliency of their operations. These standards include 
liquidity, risk management and capital, and require a FBO with 
a significant U.S. presence to establish an intermediate 
holding company (IHC) over its U.S. subsidiaries to facilitate 
consistent supervision and regulation of the U.S. operations of 
the foreign bank. The standards applied to the U.S. operations 
of FBOs are broadly consistent with the standards applicable to 
U.S. bank holding companies. However, the standards can also 
take into account the combined footprint of FBOs' U.S. 
operations, including their branches and agencies.
    Accordingly, the 2018 final rule to implement single-
counterparty credit limits (SCCL) for large U.S. bank holding 
companies tailors the application of SCCL to U.S. IHCs such 
that U.S. IHCs of similar size to U.S. BHCs covered under the 
rule are subject to the same SCCL, but the final rule also 
takes into account the IHC's role as one portion of a 
significantly larger banking organization.
    Similarly, the Board's annual Comprehensive Capital 
Analysis and Review (CCAR) applies more stringent standards to 
an IHC based on whether it is large and complex, meaning it (1) 
has average total consolidated assets over $250 billion or (2) 
has average total nonbank assets of $75 billion or more, and 
(3) is not a U.S. global systemically important firm.
    The Board monitors the impact of its regulations after 
implementation to assess whether the regulations continue to 
function as intended. In implementing enhanced prudential 
standards for FBOs with a large U.S. presence, the Board sought 
to ensure that FBOs hold capital and liquidity in the United 
States and have a risk management infrastructure commensurate 
with the risks in their U.S. operations. In general, FBOs with 
$50 billion in U.S. subsidiary assets are among the largest and 
most interconnected foreign banks operating in the United 
States. As a result of the IHC requirement, these films have 
become less fragmented, hold capital and liquidity buffers in 
the United States that align with their U.S. footprint, and 
operate on more equal regulatory footing with their domestic 
counterparts. I believe our current IHC framework with the 
current threshold is working well.

Q.3. Volcker Rule: The policy behind the Volcker Rule is to 
reduce risky activities in banks, in particular high risk 
proprietary trading. I've long been a supporter of the Volcker 
Rule, and I think this is a worthy goal, as we never want banks 
to go back to that type of risky trading. The rule aims to 
achieve this in part by prohibiting banks from investing in 
hedge funds and private equity funds. I've heard, however, that 
the current definition has captured investments that seem far 
removed from the statute's original concern--such as an 
incubator for women-run businesses--and prohibits bank 
investments in funds where banks are permitted to make the 
investment directly. The proposed rulemaking seems focused on 
easing compliance burdens that have been associated with the 
subjective intent test under the current rule, but it provides 
little clarity on the agencies' thinking on the covered fund 
side.
    Can you describe how the Federal Reserve is thinking about 
changes to the covered fund rules?

A.3. The Board, along with the OCC, FDIC, CFTC, and SEC (the 
agencies) adopted regulations to implement section 13 of the 
BHC Act, the ``Volcker Rule'', in 2013. These regulations 
included a definition of ``covered fund'' that, in the 
agencies' view, was consistent with the statutory purpose of 
the Volcker Rule to limit certain investment activities of 
banking entities. Subsequently, and based on experience with 
the Volcker Rule regulations, the agencies identified 
opportunities for improvement and proposed amendments to the 
Volcker Rule regulations in June 2018.
    The proposal requests comment on how to tailor the 
regulations governing a banking entity's covered fund 
activities. For example, the proposal asks whether a different 
definition of ``covered fund'' would be appropriate. In 
addition, the proposal requests comment on potential exemptions 
for particular types of funds, or funds with particular 
characteristics.
    Since proposing the amendments in June, the agencies have 
held meetings with and received comments from interested 
patties regarding the treatment of covered funds. The agencies 
expect to meet with and receive comments from interested 
parties throughout the comment period, and will carefully 
consider each comment to determine whether any changes to the 
covered fund regulations would be appropriate.
                                ------                                


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

Q.1. Home Mortgage Disclosure Act. I remain concerned about 
discrimination in mortgage lending, especially as we no longer 
have publicly available data on loan quality for 85 percent of 
the banks and credit unions. This means we need to rely on the 
staff of regulators to ensure banks comply with the Equal 
Credit Opportunity Act and the Fair Housing Act.
    How will you make sure that your bank examiners are looking 
at credit scores, loan-to-value ratios, interest rates, and 
other indicators of loan quality to ensure African Americans, 
Latinos, and single women are not getting lower quality 
mortgage loans?

A.1. 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 
Fair Housing Act, which means we can 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 can 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. Relevant to an evaluation 
of loan quality, those procedures include risk factors related 
to potential discrimination in pricing, underwriting, and 
steering. With respect to potential discrimination in the 
pricing or underwriting of 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. This data can be 
requested from any Board-supervised institution, including the 
institutions that were exempted from reporting additional HMDA 
data by the Economic Growth, Regulatory Relief, and Consumer 
Protection Act (EGRRCPA). \1\ 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.
---------------------------------------------------------------------------
     \1\ See ``Economic Growth, Regulatory Relief, and Consumer 
Protection Act'', Public Law 115-174, S. 2155 104(a) (May 24, 2018).
---------------------------------------------------------------------------
    At every examination, the Federal Reserve evaluates whether 
a lender might be discriminatorily steering consumers towards 
certain loans. An institution that offers a variety of lending 
products or product features, either through one channel or 
through multiple channels, may benefit consumers by offering 
greater choices and meeting the diverse needs of applicants. 
Greater product offerings and multiple channels, however, may 
also create a fair lending risk that applicants will be 
illegally steered to certain choices based on prohibited 
characteristics. The distinction between guiding consumers 
toward a specific product or feature and illegal steering 
centers on whether the institution did so on a prohibited 
basis, rather than based on an applicant's needs or other 
legitimate factors. If warranted by risk factors, the Federal 
Reserve will request additional data, such as consumers' credit 
scores and loan-to-value ratios, to determine that consumers 
would not have qualified for conventional loans.

Q.2. Is it your expectation that the Fed will have the time and 
resources to proactively monitor these banks, without the 
required reporting in place?

A.2. Provisions in the recently enacted bill, EGRRCPA, related 
to HMDA data collection requirements for certain institutions 
will not impact the Federal Reserve's ability to fully evaluate 
the risk of mortgage pricing or underwriting discrimination. 
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. The Federal Reserve's practice 
of requesting data relevant to pricing and underwriting 
criteria where warranted by risk factors predates EGRRCPA's 
enactment, and the practice will continue.

Q.3. How many additional staff will it take to proactively 
monitor the more than 5,000 banks now exempted from reporting 
requirements?

A.3. With respect to HMDA, the Federal Reserve supervises 
approximately 800 State member banks. Recently enacted EGRRCPA 
exempts certain institutions from reporting the additional HMDA 
data fields required by the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act). However, institutions 
exempted by EGRRCPA that meet HMDA's data reporting threshold 
\2\ must continue to report the HMDA data fields that are not 
the additional fields required by the Dodd-Frank Act. As noted 
above in response subpart (b), the Federal Reserve's practice 
of requesting data relevant to pricing and underwriting 
criteria, where warranted by risk factors, predates EGRRCPA's 
enactment, and the practice will continue. The Federal Reserve 
continually evaluates its workload and staffing needs to ensure 
that we are fulfilling our supervisory responsibilities.
---------------------------------------------------------------------------
     \2\ In general, if a financial institution has assets exceeding 
$45 million and originated at least 25 closed-end mortgage loans in 
each of the two preceding calendar years, or originated at least 500 
open-end lines of credit in each of the two preceding calendar years, 
it must meet the HMDA reporting requirements for its asset size. See 
``A Guide to HMDA Reporting: Getting it Right!'', Federal Financial 
Institutions Examination Council (Eff. Jan. 1, 2018), https://
www.ffiec.gov/Hmda/pdf/2018guide.pdf.

Q.4. Volcker--Postpone the Deadline for Comment. Congress 
passed the Volcker Rule to prevent taxpayer backed banks from 
gambling with insured deposits, destabilizing the financial 
system and failing or requiring bailouts. Recently, the SEC, 
CFTC, Federal Reserve, the OCC, and the FDIC have issued a new 
Volcker Rule proposal. However, I am concerned that regulators 
have only allowed for a 60-day comment period to respond to a 
689 page rule. That rule includes 342 enumerated questions, 
dozens of additional questions on the costs or benefits of 
aspects of the proposal, and invitations to comment on numerous 
technical concepts and provisions. A limited 2 month comment 
period may not allow for outside groups, academics and 
researchers the full time needed to analyze the proposal.
    Will you extend the comment period by an additional 90 
days?

A.4. In early June 2018, the Board of Governors of the Federal 
Reserve System, the Office of the Comptroller of the Currency, 
the Federal Deposit Insurance Corporation, the Securities and 
Exchange Commission, and the Commodity Futures Trading 
Commission (together, the ``agencies'') proposed revisions to 
the rules implementing section 13 of the Bartle Holding Company 
Act (12 U.S.C. 1851), also known as the Volcker Rule. The 
proposal's comment period was for 60 days after publication in 
the Federal Register on July 17, 2018. On September 4, 2018, in 
response to requests from commenters, the agencies announced an 
extension of the comment period for an additional 30 days, 
until October 17, 2018. The extension will allow interested 
persons additional time to analyze the proposal and prepare 
their comments. The agencies will carefully consider all 
comments in formulating the final rule.

Q.5. Wage Stagnation. For the past 8 years, we have added jobs 
every quarter. However, wages are not going up. In fact, worker 
pay in the second quarter dropped nearly one percent below its 
first-quarter level, according to the PayScale Index, one 
measure of worker pay. When accounting for inflation, the drop 
is even steeper. Year-over-year, rising prices have eaten up 
still-modest pay gains for many workers, with the result that 
real wages fell 1.4 percent from the prior year, according to 
PayScale. The drop was broad, with 80 percent of industries and 
two-thirds of metro areas affected.
    Meanwhile, many corporate profits have never been stronger. 
Banks are making record profits. Companies spent more than $480 
billion buying their own stocks. The increased profits are not 
going to workers' salaries. Additionally, productivity has 
increased by 73.7 percent from 1973 to 2016.
    Please expand on your views about the connection between 
wages and productivity.

A.5. Over long periods of time, I believe that the best way to 
get faster sustainable wage growth (adjusted for inflation) is 
to raise productivity growth. The linkage between real wages 
and productivity is well-grounded in economic theory and both 
tended to rise together in the several decades following World 
War II. However, wage growth and productivity growth do not 
necessarily track closely over shorter periods, and even over a 
longer period of time, higher productivity growth does not 
guarantee a faster rise in real wages, as there are other 
factors that influence wages as well. This was evident between 
1990 and 2010, when real wage growth for the average worker 
lagged despite a pickup in productivity growth. \3\ That said, 
in recent years, both productivity growth and wage growth have 
been disappointing, and my sense is that efforts to boost 
productivity growth will be needed to support a faster 
sustained pace of real wage gains.
---------------------------------------------------------------------------
     \3\ This pattern is evident in many other industrialized countries 
as well. Economists have been actively researching this issue, but thus 
far have not come to a consensus about the cause. Plausible 
explanations include the rapid advances in information and computing 
technologies during that period, increased international trade and 
outsourcing, and increased product market concentration among firms. 
But this is clearly an issue that warrants further study.

Q.6. At the hearing, you said that investment in education and 
skills were ``the single best'' way to increase wages for 
workers. But many have found that connection to be overstated. 
For example, Thomas Picketty, author of Capitalism in the 21st 
Century, wrote in a blogpost: \4\
---------------------------------------------------------------------------
     \4\ Brinker, Luke. ``Thomas Picketty Slams Jeb Bush on Education 
and Inequality: `I Think There's a Lot of Hypocrisy.' '' Salon. March 
11, 2015. Available at: https://www.salon.com/2015/03/11/thomas-
piketty-slams-jeb-bush-on-education-and-inequality-i-think-theres-a-
lot-of-hypocrisy/.

        ``there's a lot of hypocrisy' in the rhetoric of 
        conservatives who condemn inequality while failing to 
        support policies like an increased minimum wage and 
        ramped-up infrastructure spending . . . You're saying 
        let's tax the top and invest that money into education 
---------------------------------------------------------------------------
        for all.

        [Jeb Bush] is a proponent of school choice, of giving 
        schools vouchers so they can attend public school or 
        private school, whatever they want. Is this a good 
        solution in terms of dealing with what he calls the 
        opportunity gap?'' Ball asks Piketty.

        ``From what I can see, he doesn't want to invest more 
        resources into education. He just wants more 
        competition . . . there's limited evidence that this is 
        working. And I think most of all what we need is to put 
        more public resources in the education system. Again, 
        if you look at the kind of school, high school, 
        community college that middle social groups in America 
        have access to, this has nothing to do with the very 
        top schools and universities that some other groups 
        have access to,'' Piketty replies. ``[I]f we want to 
        have more growth in the future and more equitable 
        growth in the future, we need to put more resources in 
        the education available to the bottom 50 percent or 80 
        percent of America. So it's not enough just say it, as 
        Jeb Bush seems to be saying, but you need to act on it, 
        and for this you need to invest resources,'' he says. 
        Asked about claims by Bush and other conservatives that 
        a so called ``skills gap'' is responsible for the 
        growth in inequality, Piketty dings that narrative as 
        simplistic. ``The minimum wage today is lower than it 
        was 50 years ago, unions are very weak, so you need to 
        increase the minimum wage in this country today. The 
        views that $7 and hour is the most you can pay low-
        skilled worker in America today . . . I think is just 
        wrong--it was more 50 years ago and there was no more 
        unemployment 50 years ago than there is today. So I 
        think we could increase the minimum wage,'' Piketty 
        says, adding that the U.S. should also invest in 
        ``high-productivity jobs that produce more than the 
        minimum wage.'' Education is important, Piketty 
        acknowledges, but education alone is not enough to 
        ameliorate inequality. ``You need wage policy and you 
        need education policy,'' he says. ``And in order to 
        have adequate education policy, you also need a proper 
        tax policy so that you have the proper public resources 
        to invest in these public services. Also you need 
        infrastructure. Many of the public infrastructure in 
        this country are not at the level of what the very 
        developed should have. You cannot say, like many of the 
        Republicans are saying, we can keep cutting tax on 
        these top income groups who have already benefited a 
        lot from growth and globalization over the past 30 
        years.'' Data from the Survey of Consumer Finances 
        indicates that, even when accounting for educational 
        and racial disparities, black households headed by a 
        college graduate are still less wealthy than less-
        educated white ones. \5\
---------------------------------------------------------------------------
     \5\ Reeves, Richard V., and Katherine Guyot. ``Black Women Are 
Earning More College Degrees, but That Alone Won't Close Race Gaps''. 
Brookings. December 4, 2017. Available at: https://www.brookings.edu/
blog/social-mobility-memos/2017/12/04/black-women-are-earning-more-
college-degrees-but-that-alone-wont-close-race-gaps.

    Please provide citations for your argument that education 
is the main driver for falling wages.
    How do you respond to analysis from other economists that 
say other reasons--tax policies, weakening unions, regulations 
that benefit the financial sector--are a stronger predictor for 
wage stagnation?
    Can you further elaborate on the wage inequities between 
racial and educational disparities?

A.6. I would like to start by noting two good references 
detailing the important link between education and wages are: 
The Race Between Education and Technology by Claudia Goldin and 
Lawrence F. Katz; \6\ and ``The Polarization of Job 
Opportunities in the U.S. Labor Market: Implications for 
Employment and Earnings'' by David Autor. \7\ The book by 
Goldin and Katz traces the coevolution of educational 
attainment and the wage structure in the United States through 
the twentieth century. They argue, in particular, that the 
demand for educated workers outpaced the supply beginning in 
about 1980, and that this supply-demand imbalance resulted in a 
rise in the wage premium for college-educated workers. In 
addition, both resources note that increases in educational 
attainment have not kept pace with rising educational returns, 
suggesting that the slowing pace of educational attainment has 
contributed to the rising gap between college and high school 
earnings. And, although the college wage premium has leveled 
off in recent years, it remains large. \8\
---------------------------------------------------------------------------
     \6\ Claudia Goldin and Lawrence F. Katz, ``The Race Between 
Education and Technology'', Belknap Press, 2010.
     \7\ David Autor, ``The Polarization of Job Opportunities in the 
U.S. Labor Market: Implications for Employment and Earnings'' 
Brookings, April 2010, https://www.brookings.edu/wp-content/uploads/
2016/06/04jobs_autor.pdf.
     \8\ A recent paper by Robert Valletta estimates that the wage 
premium for a college-educated worker (relative to a high school 
graduate) rose from about 30 percent in 1980 to 57 percent in 2010 and 
has leveled off since then. See Robett Valetta, ``Recent Flattening in 
the Higher Education Wage Premium: Polarization, Skill Downgrading, or 
Both?'' Working Paper No. 2016-17, Federal Reserve Bank of San 
Francisco, August 2016.
---------------------------------------------------------------------------
    Of course, education is not the only factor that influences 
wage growth. For example, the paper by David Autor points out 
that the rise in the relative earnings of college graduates 
reflected both rising real earnings for college workers and 
falling real earnings for noncollege workers. He attributes 
these trends to the polarization of job growth, with job 
opportunities concentrated in relatively high-skill, high-wage 
jobs and low-skill, low-wage jobs, and cites the automation of 
routine work and the increased globalization of labor markets 
through trade and outsourcing as the primary influences on this 
trend. He acknowledges that changes in labor market 
institutions, in particular, weaker labor unions and a falling 
real minimum wage, may also play a role but argues that these 
factors are less important, in part because these wage trends 
are evident in many industrialized countries.
    With regard to racial disparities in wages, research by 
economists at the Federal Reserve Bank of San Francisco shows 
that African American men and women earn persistently lower 
wages compared with their white counterparts and that these 
gaps cannot be fully explained by differences in age, 
education, job type, or location. \9\ I agree with their 
conclusion that these disparities are troubling and warrant 
greater attention by policymakers.
---------------------------------------------------------------------------
     \9\ Mary C. Daly, Bart Hobijn, and Joseph H. Pedtke, 
``Disappointing Facts About the Black-White Wage Gap'', FRBSF Economic 
Letter No. 2017-26, Federal Reserve Bank of San Francisco.

Q.7. Regulation. Chair Powell, at your nomination hearing, you 
told me that you supported strong consumer protections.
    Please name at least five issues areas where the Federal 
Reserve will continue to lead in consumer protection.

A.7. The Federal Reserve has a strong commitment to promoting a 
fair and transparent financial services marketplace. We conduct 
consumer-focused supervision and enforcement; conduct research 
and policy analysis; develop and maintain relationships with a 
broad and diverse set of stakeholders; and work to foster 
community development.
    Our consumer protection efforts include investigating 
consumer complaints, assuring consumers' fair and equal access 
to credit and treatment in financial markets, assessing the 
trends shaping consumers' financial situations, and offering 
consumer help via tools and resources developed by Reserve 
Banks and other agencies. Examples of the range of our consumer 
protection priorities and efforts are described below.
    As part of our supervisory outreach, our Reserve Banks have 
various consumer and community advisory councils. Additionally, 
the Board meets semiannually with its Community Advisory 
Council (CAC) as well as with a wide range of consumer and 
community groups throughout the year. The CAC is a diverse 
group of experts and representatives of consumer and community 
development organizations and interests. This important line of 
communication provides the Board with broad perspectives on the 
economic circumstances and financial services needs of 
consumers and communities, with a particular focus on the 
concerns of low- and moderate-income populations.
    With regard to our enforcement of fair lending laws and 
unfair or deceptive acts or practices (UDAP) laws, our 
supervisory program is rigorous and we are clear in our 
communications with firms about our expectations when we find 
weakness in their compliance management systems or violations 
of consumer laws. When we find consumer hmm, we make sure that 
consumers are provided any appropriate restitution, and when 
the situations warrant, we also impose civil money penalties.
    Fair lending violations may cause significant consumer harm 
as well as legal, financial, and reputational risk to the 
institution. The Federal fair lending laws--the Equal Credit 
Opportunity Act (ECOA) and the Fair Housing Act (FHA)--prohibit 
discrimination in credit transactions, including transactions 
related to residential real estate. The ECOA, which is 
implemented by the Board's Regulation B (12 CFR part 202), 
prohibits discrimination in any aspect of a credit transaction. 
It applies to any extension of credit, including residential 
real estate lending and extensions of credit to small 
businesses, corporations, partnerships, and trusts. Lending 
acts and practices that are specifically prohibited, permitted, 
or required are described in the regulation.
    Official staff interpretations of the regulation are 
contained in Supplement I to the regulation. The FHA, which is 
implemented by regulations promulgated by the U.S. Department 
of Housing and Urban Development, \10\ prohibits discrimination 
in all aspects of residential real estate-related transactions.
---------------------------------------------------------------------------
     \10\ See 24 CFR part 100.
---------------------------------------------------------------------------
    The Board is committed to ensuring that every bank it 
supervises complies fully with Federal financial consumer 
protection laws, including the fair lending laws. A specialized 
Fair Lending Enforcement Section at the Board works closely 
with Reserve Bank staff to provide guidance on fair lending 
matters and to ensure that the fair lending laws are enforced 
consistently and rigorously throughout the Federal Reserve 
System (System). Fair lending risk is evaluated at every 
consumer compliance examination. Additionally, examiners may 
conduct fair lending reviews outside of the usual supervisory 
cycle, if warranted by elevated risk.
    Section 5 of the Federal Trade Commission Act (FTC Act) 
prohibits UDAP and applies to all persons engaged in commerce, 
including banks, and the law extends to bank arrangements with 
third parties. The Federal Reserve has the authority to take 
appropriate supervisory or enforcement action when unfair or 
deceptive acts or practices are discovered at institutions 
under the Federal Reserve's jurisdiction, regardless of asset 
size. We apply longstanding standards when weighing the need to 
take supervisory and enforcement actions and when seeking to 
ensure that unfair or deceptive practices do not recur. 
Examples of practices the Federal Reserve has found to be 
unfair or deceptive include certain practices related to 
overdrafts and student financial products and services.
    With respect to these and other UDAP issues, the Federal 
Reserve's enforcement actions have collectively benefited 
hundreds of thousands of consumers and provided millions of 
dollars in restitution.
    In addition to carrying out enforcement actions, we provide 
training, direction and support to Reserve Bank examiners in 
assessing institutions' compliance with applicable laws and 
regulations.
    On the consumer level, the System also has a robust process 
for responding to consumer complaints about the banks we 
supervise. We investigate every complaint of an institution 
under our supervisory jurisdiction and refer them to the 
appropriate agency if it involves an institution that we do not 
supervise. Reserve Banks must respond in writing in a timely 
manner.
    For the financial institutions we regulate, we develop and 
offer guidance to help reduce risk to consumers that supports 
our desire to ensure equitable treatment of all consumers, 
including those in underserved and economically vulnerable 
populations.
    We collect and analyze risk data and trends in the 
financial services sector affecting consumers and the financial 
institutions that we supervise, and we identify emerging 
consumer protection issues and promote compliance by 
highlighting these areas in publications, webinars, and other 
outreach. Examples include our recently launched Consumer 
Compliance Supervision Bulletin, which provides to banks and 
others high-level summaries of pertinent supervisory 
observations related to consumer protections, as well as our 
Consumer Compliance Outlook, a System publication focused on 
consumer compliance issues, and its companion webinar series, 
Outlook Live, both of which are targeted to the industry to 
support banks' compliance efforts.
    Another example is our annual Survey of Household Economic 
Decisions (SHED). The SHED is designed to enhance our 
understanding of how adults in the United States are faring 
financially, and the results of the survey are posted on our 
public website. Other areas include research particularly 
focused on the housing market, small business access to credit, 
and rural economic development issues.
    Through a number of events and on a variety of matters, we 
provide outreach to consumer advocacy and community development 
organizations that outlines the risks in consumer financial 
product markets. Examples of such programs have focused on auto 
lending, FinTech/marketplace lending, and student lending.

Q.8. Monetary Policy. If the Fed usually cuts the Federal funds 
rate by 5 percentage points to fight a recession and the 
neutral rate is around 2.5 percent, what steps can the Federal 
Reserve currently take to offset a recession? \11\ Expand the 
balance sheet by buying treasuries?
---------------------------------------------------------------------------
     \11\ Bosley, Catherine. ``Summers Warns Next U.S. Recession Could 
Outlast Previous One'', Bloomberg. February 28, 2018. Available at: 
https://www.bloomberg.com/news/articles/2018-02-28/summers-warns-next-
u-s-recession-could-outlast-the-previous-one.

A.8. The possibility that the Federal funds rate could be 
constrained by the effective lower bound in future economic 
downturns appears larger than in the past because of an 
apparent decline in the neutral rate of interest in the United 
States and abroad. Several developments could have contributed 
to such a decline, including slower growth in the working-age 
populations of many countries, smaller productivity gains in 
the advanced economies, a decreased propensity to spend in the 
wake of the financial crises around the world since the late 
1990s, and perhaps a paucity of attractive capital projects 
worldwide.
    In any case, the Federal Reserve has a number of tools that 
it can use in the event that the Federal funds rate is 
constrained by the effective lower bound. One such tool is 
explicit forward guidance about the path of future policy. By 
announcing that it intends to keep short-term interest rates 
lower for longer than might have otherwise been expected, the 
Federal Reserve can put significant downward pressure on 
longer-term borrowing rates for American families and 
businesses. Another tool is large-scale asset purchases, which 
can also put downward pressure on longer-term borrowing rates 
and ease financial conditions. These tools have been an 
important part of the Federal Reserve's efforts to support 
economic recovery over the past decade. Studies have found that 
these tools eased financial conditions and helped spur growth 
in demand for goods and services, lower the unemployment rate, 
and prevent inflation from falling further below the Federal 
Open Market Committee's (FOMC) 2 percent objective. The Federal 
Reserve is prepared to use its full range of tools if future 
economic conditions were to warrant a more accommodative 
monetary policy than can be achieved solely by reducing the 
Federal funds rate.
Q.9. Many Federal Reserve officials--including most recently 
outgoing New York Fed President Bill Dudley--have talked about 
the need for Congress to beef up fiscal stabilizers that can 
react automatically to a downturn.
    Do you agree that Congress should be working on this? If 
so, which stabilizers do you think are most effective? \12\
---------------------------------------------------------------------------
     \12\ ``Officials on Record: Automatic Stabilizers'', Dudley, 
William C. ``Speech: Important Choices for the Federal Reserve in the 
Years Ahead'', The Federal Reserve in the Years Ahead. April 18, 2018. 
Available at: https://www.newyorkfed.org/newsevents/speeches/2018/
dud180418a.

A.9. The current monetary policy tools available to the Federal 
Reserve can provide significant accommodation in the event of 
an economic downturn, although we recognize that there are 
limits stemming importantly from the effective lower bound on 
the nominal Federal funds rate. As a matter of prudent 
planning, we continue to evaluate potential monetary policy 
options in advance of an episode in which our primary policy 
tool is constrained by the effective lower bound. Since 
monetary policy is not a panacea, countercyclical fiscal policy 
actions are a potentially important tool in addressing a future 
economic downturn. In particular, automatic fiscal stabilizers 
have been and continue to be helpful in providing timely 
accommodation and thus tempering the extent of a downturn. A 
range of fiscal policy tools and approaches could enhance their 
effectiveness in helping to provide cyclical stability to the 
economy. However, it is appropriate that the details of fiscal 
---------------------------------------------------------------------------
policy changes be left to the Congress and the Administration.

Q.10. At your most recent press conference you said--``we can't 
be too attached to these unobservable variables.'' If that's 
the case, do you think it is possible that the United States 
could sustain a long period of unemployment at 3 percent or 
even lower? Japan's unemployment has fallen to 2.7 percent and 
Germany is at 3.4 percent.

A.10. Monetary policy necessarily involves making judgments 
about aspects of the economy that cannot be measured directly 
but instead must be inferred. One of those aspects is the level 
of the unemployment rate that can be sustained in the longer 
term without generating either upward or downward pressure on 
inflation. That level is sometimes referred to as the natural 
rate of unemployment. Economic modelers have only a limited 
ability to estimate the natural rate of unemployment at any 
given moment; moreover, there is every reason to believe that 
the natural rate can and does change over time. For both of 
these reasons, policymakers must always be vigilant in looking 
for evidence that might cause them to revise their existing 
estimates of parameters such as the natural rate of 
unemployment.
    As of today, most estimates of the natural rate of 
unemployment in the United States range between 4 percent and 5 
percent. Other countries will have different rates of 
unemployment that are sustainable in the longer run (sometimes 
markedly so), depending on the characteristics of the 
workforces in those countries (such as age and education), the 
geographic mobility of jobs and workers, and structural labor 
market policies, to name a few factors.

Q.11. At the last hearing you described the risks to the 
economy as balanced, but it seems like the Fed has much more 
room to tighten policy--by raising rates and running down the 
balance sheet--than it does to loosen policy. Doesn't that 
change the balance of risks? If you hike interest rates too 
fast, you have limited tools to address an economic slowdown. 
If you hike too slowly, you have ample tools to address the 
overheating.

A.11. The FOMC recognizes that the effective lower bound (ELB) 
on the Federal funds rate can impose a significant constraint 
on the conduct of monetary policy. This is one of the reasons 
that the Committee has normalized the stance of monetary policy 
at a gradual pace during the current economic expansion. That 
said, the Federal Reserve has other tools at its disposal to 
provide economic stimulus when the Federal funds rate is 
constrained by the ELB, including explicit forward guidance 
about the path of Federal funds rate and large-scale asset 
purchases. Moreover, with strong labor market conditions, 
inflation close to 2 percent, and the level of the Federal 
funds rate at a bit below 2 percent, the risk of returning to 
the ELB has diminished substantially since earlier in the 
recovery. Overall, the FOMC currently sees the risks to its 
economic outlook as roughly balanced.
    History has shown that moving interest rates either too 
quickly or too slowly can lead to bad economic outcomes. If the 
FOMC raises interest rates too rapidly, the economy could 
weaken and inflation could run persistently below the FOMC's 
objective. Conversely, there are risks associated with raising 
interest rates too slowly. Waiting too long to remove policy 
accommodation could cause inflation expectations to begin 
ratcheting up, driving actual inflation higher and making it 
harder to control. Moreover, the combination of persistently 
low interest rates and strong labor market conditions could 
lead to undesirable increases in leverage and other financial 
excesses. While the Federal Reserve has tools to address such 
developments, these circumstances could require the FOMC to 
raise interest rates rapidly, which could risk disrupting 
financial markets and push the economy into recession.

Q.12. Fed Governance, Diversity, and the San Francisco Fed 
Vacancy. At your confirmation hearing, you expressed your 
support for more diversity among the Federal Reserve's 
leadership, saying, ``We make better decisions when we have 
diverse voices around the table, and that's something we're 
very committed to at the Federal Reserve.'' \13\ You also 
commented on the role that the Board of Governors plays in 
approving new Reserve Bank presidents, and assured the Senate 
Banking Committee that there is always a ``diverse pool'' in 
searching for candidates to fill those positions. However, the 
December selection of Thomas Barkin as the president of the 
Richmond Fed gives reason for doubt. \14\ Press reports note 
that you were very involved in vetting candidates. \15\
---------------------------------------------------------------------------
     \13\ CNBC. ``Jerome Powell: I'm a big supporter of diversity.'' 
November 28, 2017. Available at: https://www.cnbc.com/video/2017/11/28/
jerome-powell-im-a-big-supporter-of-diversity.html.
     \14\ Sebastian, Shawn. ``Fed Up Blasts Process, Outcome of 
Richmond Federal Reserve Presidential Appointment'', The Center for 
Popular Democracy. Available at: https://populardemocracy.org/news-and-
publications/fed-blasts-process-outcome-richmond-federal-reserve-
presidential-appointment.
     \15\ Condon, Christopher. ``Fed Documents Show Powell's Hand in 
Richmond President Search'', Bloomberg. July 16, 2018. Available at: 
https://www.bloomberg.com/news/articles/2018-07-16/fed-documents-show-
powell-s-hand-in-richmond-president-search.
---------------------------------------------------------------------------
    Then, in April, John Williams was announced as the new New 
York Fed president. A source close to the process said that the 
New York Fed search committee just could not find qualified 
candidates who were interested in this position, even though 
community groups had given a list of qualified and diverse 
candidates to the New York Fed board in January. \16\
---------------------------------------------------------------------------
     \16\ Guida, Victoria, and Aubree Eliza Weaver. ``In Defense of the 
NY Fed Search Committee'', Politico. March 30, 2018. Available at: 
https://www.politico.com/newsletters/morning-money/2018/03/30/in-
defense-of-the-ny-fed-search-committee-154624. Guida, Victoria. 
``Warren Leads Crusade for Diversity at Fed'', Politico. April 2, 2018. 
Available at: https://www.politico.com/story/2018/04/02/federal-
reserve-diversity-elizabeth-warren-452122.
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    Can you explain why these candidates were not considered?

A.12. It is crucial for us to conduct search processes that are 
transparent and open to public input, and that encourage 
interest and applications from qualified candidates with as 
wide a variety of personal and professional backgrounds as 
possible. The Federal Reserve System needs such diversity to be 
fully effective in discharging its responsibilities, and we 
have observed that better decisions are made when there are 
many different perspectives represented around the table. I am 
firmly committed to conducting each president search in as open 
a manner as possible. However, I also recognize the importance 
of maintaining the privacy of candidates and the 
confidentiality of the composition of the candidate pool in 
order to encourage as many qualified individuals to apply as 
possible. Therefore, it is not appropriate for me to comment on 
the qualification of individual candidates.
    During the recent Reserve Bank president searches, the 
search committees proactively sought out candidates from a 
variety of sources. More specifically, in addition to engaging 
the search firm Spencer Stuart, the Federal Reserve Bank of New 
York (FRBNY) search committee engaged Bridge Partners, which 
has a specific expertise in the identification of diverse 
talent. The FRBNY search committee itself also undertook an 
extensive program of outreach intended to solicit input and 
views from a range of constituencies across the district:

    The search committee sent approximately 400 letters 
        soliciting feedback on the attributes that would enable 
        success in the role of FRBNY president, as well as 
        specific names for consideration.

    Members of the search committee met with the 
        FRBNY's standing advisory committees, including the 
        Advisory Council on Small Business and Agriculture, the 
        Community Advisory Group (comprised of nonprofit 
        organizations), the Economic Advisory Panel (comprised 
        of academic economists), and the Upstate New York 
        Regional Advisory Board.

    The search committee also held two meetings at the 
        FRBNY with ad hoc groups of invitees, one focused on 
        labor and advocacy organizations and the other on 
        business and industry.

    Out of these large candidate pools, the search committees 
identified candidates who not only had the desired experiences 
and key attributes but also confirmed their interests in the 
president positions. The FRBNY search committee, at the 
conclusion of its search process, published the process 
timeline and the characteristics of the candidate pool. \17\
---------------------------------------------------------------------------
     \17\ For more information about the FRBNY's president search 
timeline, see https://www.newyorkfed.org/aboutthefed/presidential-
search-timeline.

Q.13. Former Honeywell CEO David Cote served as a banker-
elected member of the New York Fed board and search committee, 
but abruptly stepped down in mid-March. We later learned he had 
resigned this position to take a job with Goldman Sachs. \18\ 
According to the New York Fed, the search committee had already 
settled on John Williams by the time that Cote resigned from 
the board. The outgoing New York Fed president was formerly 
Goldman Sachs' chief economist, and there have been many 
reported instances of an overly cozy relationship between the 
Fed and Goldman Sachs, including tapes that leaked in 2014 
showing that the New York Fed was very lenient in supervising 
Goldman. \19\
---------------------------------------------------------------------------
     \18\ Campbell, Dakin. ``Goldman Sacks Teaming up With Former 
Honeywell CEO Cote To Strike an Unusual Acquisition'', Business 
Insider. Accessed July 16, 2018. Available at: http://
www.businessinsider.com/goldman-sachs-and-former-honeywell-ceo-cote-
teaming-up-to-buy-an-industrial-company-filing-2018-5.
     \19\ Haedtler, Jordan. ``Why Do Former Golden Sachs Bankers Keep 
Landing Top Slots at the Federal Reserve?'' The Nation. November 30, 
2015. Available at: https://www.thenation.eom/article/why-do-former-
goldman-sachs-bankers-keep-landing-top-slots-at-the-federal-reserve/. 
Bernstein, Jake. ``The Carmen Segarra Tapes'', ProPublica. November 17, 
2014. Available at: https://www.propublica.org/article/the-carmen-
segarra-tapes.
---------------------------------------------------------------------------
    Do you think it is appropriate that one of the people 
responsible for choosing a top Wall Street regulating position 
was negotiating a job with Goldman Sachs at the very moment he 
was making the decision about who the next New York Fed 
president should be?
    Does this event raise concerns that the financial industry 
has too much influence on regional Reserve Banks boards?

A.13. The process for selecting a Federal Reserve Bank 
president is set forth in the Federal Reserve Act. Subject to 
the approval of the Board of Governors, a Reserve Bank 
president is appointed by that Bank's Class Band Class C 
directors. These are the directors who are not affiliated with 
banks or other entities supervised by the Federal Reserve. 
Class A directors, who are bankers, are not involved in the 
search process.
    Since 2014, Mr. Cote served on the board of the FRBNY and 
on the search committee as a Class B director, representing the 
public. Mr. Cote brought to the board his background in the 
manufacturing and represented the industry while serving as a 
director. Mr. Cote promptly resigned his position on the FRBNY 
board of directors, recognizing that pursuing new business 
opportunities in the banking sector would affect his 
eligibility to serve as a Class B director. \20\
---------------------------------------------------------------------------
     \20\ For more information about our policies governing the 
directors, see https://www.federalreserve.gov/aboutthefed/directors/
policy-governing-directors.htm.

Q.14. A recent analysis by the Center for Popular Democracy 
found that although there has been an increase in the gender 
and racial diversity of the Federal Reserve Bank's directors, 
the Fed is still falling short of true public 
representativeness. \21\ Williams' selection has opened up a 
vacancy at the San Francisco Federal Reserve Bank. The twelfth 
Federal Reserve district is the largest and most diverse in the 
country, including a significant Latino population. Latinos 
comprise 30 percent of the district. There has never in the 
Fed's history been a Latino Federal Open Markets Committee 
participant, either as a governor or as a Reserve Bank 
president.
---------------------------------------------------------------------------
     \21\ Fed Up. ``New Report Analyzes Diversity at the Federal 
Reserve in 2018'', The Center for Popular Democracy. February 14, 2018. 
Available at: https://populardemocracy.org/blog/new-report-analyzes-
diversity-federal-reserve-2018.
---------------------------------------------------------------------------
    Do you think it would be valuable for you and your 
colleagues to hear the perspective of a Latino FOMC 
participant?

A.14. As I have said, we make better decisions when we have 
diverse voices around the table, and that is something we are 
very committed to at the Federal Reserve. The Federal Reserve 
seeks diversity in personal and professional backgrounds to be 
more effective in discharging its responsibilities. We value a 
broad representation of perspectives, and are working hard 
towards greater diversity at all levels of the Federal Reserve. 
Recognizing that the appointment of a Reserve Bank president 
is, as a legal matter, the responsibility of the Class B and 
Class C directors who are by definition not affiliated with 
financial institutions in the district, we at the Board worked 
closely with the search committee to ensure a strong and 
transparent process that identified a broad and diverse slate 
of qualified candidates.
    As you know, the Federal Reserve Bank of San Francisco 
(FRBSF) recently selected Mary Daly as its next president. The 
processes of the FRBSF search committee were fair, transparent, 
and inclusive. \22\ The FRBSF search committee included 
eligible directors from its board who brought diverse 
backgrounds and experiences to the process. Further, the search 
committee partnered with Diversified Search, the largest 
female-founded and owned firm that specializes in identifying 
candidates from diverse backgrounds. The search committee 
carried out an extensive outreach program, both in person and 
virtually, with a range of constituencies across the district, 
to gain their input on the search process, obtain their views 
on the most important attributes for the Bank president role, 
and solicit their recommendations of potential candidates.
---------------------------------------------------------------------------
     \22\ For more information about the San Francisco search, go to: 
https://www.frbsf.org/our-district/press/news-releases/2018/mary-c-
daly-named-federal-reserve-bank-of-san-francisco-president-and-chief-
executive-officer/?utm_source=frbsf-home-in-the-news&utm_medium=frbsf&
utm_campaign=in-the-news.
---------------------------------------------------------------------------
    At the conclusion of its search process, the FRBSF 
published additional information about the outreach conducted, 
timeline, and characteristics of the candidate pool. The FRBSF 
noted that of 283 prospective candidates 33 percent were from a 
minority background and 33 percent were female.

Q.15. Inflation Target. In a paper that was recently presented 
to Atlanta Fed President Raphael Bostic, economist Dean Baker 
argued that the Fed should consider removing the shelter 
component from its core inflation indexes. \23\ The reason is 
that higher housing costs, particularly in a handful of 
metropolitan areas, are significantly outpacing other measures 
of inflation--and that these increases stem from a lack of 
supply. Baker further argues that continued interest rate 
increases from the Fed might have the perverse effect of 
sapping housing construction, thereby exacerbating the very 
problem (rising inflation) that the Fed is trying to address. 
What do you make of this analysis?
---------------------------------------------------------------------------
     \23\ Baker, Dean, ``Measuring the Inflation Rate: Is Housing 
Different?'' Center for Economic and Policy Research. June 2018. 
Available at: http://cepr.net/publications/reports/measuring-the-
inflation-rate-is-housing-different.

A.15. We interpret the Federal Reserve's price-stability 
mandate as applying to a broad measure of the price of goods 
and services purchased by consumers. Shelter makes up a large 
component of consumers' expenditures, and a price index that 
excludes shelter would provide a highly incomplete measure of 
the cost of living.
    To be sure, because monetary policymakers need to be 
forward looking in setting policy, we also pay attention to 
less-comprehensive inflation measures to help gauge whether a 
particular inflation movement is likely to persist. For 
example, we examine price indexes excluding food and energy 
items, as food and energy prices often exhibit large transitory 
movements. But idiosyncratic price movements are by no means 
limited to food and energy, and they could well occur in 
shelter prices at times; we need to be attentive to whether 
such movements might be providing a misleading signal about 
inflation's likely future course. My fellow policymakers and I 
will continue to factor such judgments into our analyses, even 
as we remember that overall consumer price inflation must be 
the ultimate focus of our policy.

Q.16. Immigration. Neel Kashkari, the chief of the Minneapolis 
Fed, stated that immigration has a net benefit on economic 
growth. He said slowing down immigration may slow down job 
growth and the U.S. economy as a whole.
    Do you agree with President Kashkari?

A.16. Immigration is an important contributor to the rise in 
the U.S. population, accounting for roughly one-half of 
population growth annually. And population growth, in turn, 
affects the growth rate of the labor force as well as the 
growth of the overall economy. Thus, from an economic growth 
standpoint, reduced immigration would result in lower 
population growth and thus, all else equal, slower trend 
economic growth. However, as you know, immigration policy is 
for Congress and the Administration to decide.

Q.17. SIFI Designation. As a voting member of FSOC, you and 
your fellow members are tasked with the mission of identifying 
and responding to risks that threaten the financial stability 
of the United States, particularly in the shadowy nonbank 
ecosystem that required numerous massive bailouts following the 
2008 financial crisis. Despite the large number of bail-outs 
conferred, only four nonbanks were designated as systematically 
significant by the FSOC.
    As you considering whether to reduce monitoring and 
oversight of one of those institutions?
    What about the financial state or inherent systemic risk of 
large nonbank institutions has changed since FSOC made the 
considerations that warrants removing any enhanced prudential 
oversight?

A.17. The financial crisis showed that the distress of large 
and systemic nonbank financial companies could imperil the 
financial stability of the United States, ultimately putting 
the American economy at risk. The Dodd-Frank Wall Street Reform 
and Consumer Protection Act (Dodd-Frank Act) gave regulators 
new tools to address this problem, including authorizing the 
Financial Stability Oversight Council (FSOC) to determine that 
a nonbank financial company's material financial distress would 
threaten the financial stability of the United States. If such 
a determination is made, such firms are then subject to 
supervision by the Federal Reserve Board (Board). The Dodd-
Frank Act authorizes the Board, in consultation with the FSOC, 
to establish enhanced prudential requirements and to supervise 
nonbank financial companies that have been designated as 
systemically important. Further, the Dodd-Frank Act requires 
the FSOC to reevaluate each determination of a nonbank 
financial institution as systemically important on at least an 
annual basis. The FSOC is also responsible for making the 
determination to retain or rescind the designation of a nonbank 
financial institution.
    Financial vulnerabilities, such as high leverage levels and 
maturity mismatches between assets and liabilities, are not at 
the elevated levels they were prior to the crisis. Regulators 
have developed a deeper understanding of the ways in which 
nonbank financial institutions differ from banks, particularly 
in terms of their vulnerability to runs and the potential 
systemic impact this may have on the U.S. financial system. 
Further, several nonbank financial institutions have made 
significant changes to the organizational structure of their 
firms as well as the markets that they participate in, which 
has further reduced their overall risk to the U.S. financial 
system.
    However, the regulatory community has learned from the 
experience of the financial crisis that it is important to 
focus on potential regulatory gaps and to deal with 
vulnerabilities that may build in nonbank financial 
institutions before the risks become material. In this context, 
it is important to continue to monitor large nonbank financial 
firms to ensure that, should they encounter distress, the 
functioning of the broader economy is not threatened. Finally, 
the possibility of de-designation provides an incentive for 
designated firms to significantly reduce their systemic 
footprint.

Q.18. Stock Buybacks. The Fed's 2018 CCAR cycle allowed the 22 
largest banks to payout $170 billion in dividends and buybacks, 
around a quarter more than 2017. Banks subject to the CCAR 
process are likewise paying out close to 102 percent in 
buybacks and dividends as a percentage of forecasted earnings. 
\24\
---------------------------------------------------------------------------
     \24\ Larkin, Michael. ``All Banks Clear Stress Test--But This Big 
Name's Payout Plan at Risk'', Investor's Business Daily. June 21, 2018. 
Available at: https://www.investors.com/news/stress-test-results-
federal-reserve-bank-dividends-buybacks//.
---------------------------------------------------------------------------
    In the wake of the Federal Reserve's annual stress testing, 
Wells Fargo announced plans to buy back up to $24.5 billion in 
stock, and boost its quarterly dividend. Twenty-eight other 
firms were also allowed to proceed with additional proposals to 
boost stock buybacks and dividends. \25\
---------------------------------------------------------------------------
     \25\ Bloomberg. ``Wells Fargo Plans $24.5 billion in Stock 
Buybacks After Passing Fed Stress Test''. Los Angeles Times. June 28, 
2018. Available at: http://www.latimes.com/business/la-fi-wells-fargo-
stock-buyback-20180628-story.html.
---------------------------------------------------------------------------
    In your testimony before the Committee, you noted that 
investments in training and education were ``the single best 
thing we can do to have a productive workforce.''
    What does research suggest about whether dividends and 
buybacks raise wages for American workers?
    Does the Fed have any researching suggesting the impact on 
economic growth if a larger percentage of bank earnings instead 
went to raise wages of nonmanagerial and/or frontline bank 
workers?

A.18. Productivity growth is a key determinant of wage growth, 
and investments in new capital equipment or innovative 
technologies are important factors for improving productivity 
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 wage growth. However, comparing the 
economic effects of these uses of a company's earnings to the 
eventual economic effects of stock buybacks is difficult 
because we do not know where the gains from buybacks will 
ultimately turn up. In particular, 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. Ultimately, companies themselves are the best judges of 
what to do with their profits, whether it is to invest in their 
business or increase returns to shareholders through dividends 
or share buybacks.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR JONES
                     FROM JEROME H. POWELL

Q.1. In the Federal Reserve's 2018 Report on the Economic Well-
Being of U.S. Households, the report finds that 40 percent of 
Americans do not have the sources to cover an unexpected $400 
expense.
    While the number of Americans responding in this manner has 
shrunk since 2013, as noted in the report, it is still an 
alarmingly high number.
    The report notes that the most common response among those 
who could not cover an expense is to place the purchase on a 
credit card.
    Are there broader economic implications of such a reliance 
on potentially high-priced consumer credit?

A.1. According to the survey, conducted in the fourth quarter 
of 2017, 18 percent of U.S. adults report that they would pay a 
hypothetical $400 emergency expense with a credit card that 
they then pay off over time. \1\ In the initial survey in 2013, 
this fraction was 17 percent. The fraction of adults who said 
they would not be able to meet a $400 expense by any means 
declined to 12 percent in 2017 from 19 percent in 2013.
---------------------------------------------------------------------------
     \1\ For the survey and report, see the Federal Reserve Board's 
Survey of Household Economics and Decision Making at 
www.federalreserve.gov/consumerscommunities/shed.htm.
---------------------------------------------------------------------------
    Broader implications of such responses are difficult to 
gauge. The costs of financing such an expense would add 
financial burden on these households, relative to paying in 
cash. However, for some households, such credit access may act 
as a relief valve of sorts, allowing them to meet the emergency 
or avoiding even costlier forms of credit such as payday loans.

Q.2. Does the Federal Reserve have further context on this 
response--how does the number of Americans unable to cover a 
$400 expense compare to previous decades, or to other advanced 
economies?

A.2. The Federal Reserve first asked how individuals would 
handle a $400 unexpected expense in 2013. While we do not have 
an exact comparison in prior decades or in other countries, the 
Federal Reserve Board's triennial Survey of Consumer Finances 
(SCP) reports that the share of households with easily 
accessible savings remains low and has changed little in recent 
decades. \2\ Liquid savings, such as cash, checking or saving 
accounts, are the least costly and easiest assets to use for 
unexpected expenses. The 2016 SCP reports that nearly half of 
all families did not have $3,000 in liquid savings, almost the 
same fraction since 1989 in inflation-adjusted terms.
---------------------------------------------------------------------------
     \2\ For more information, see reports and research on the Federal 
Reserve Board's Survey of Consumer Finance at www.federalreserve.gov/
econres/scfindex.htm.

Q.3. Does this inability to cover expenses increase 
dramatically across certain groups for example, seniors, young 
---------------------------------------------------------------------------
people, or minorities?

A.3. Yes, financial security and the ability to cover expenses, 
differs across demographic groups. As one example, in 2017, 
one-quarter of white adults without education beyond a high 
school degree did not expect to pay their current month's bills 
in full. Among African Americans and Hispanics with the same 
education level, that fraction was 41 percent and 35 percent 
respectively.
    Financial security is more common with more education, but 
a gap by race and ethnicity remains. As a second example, only 
half of young adults (under the age of 30) would use cash or 
its equivalent to cover an unexpected $400 expense, versus 57 
percent of middle-aged adults (ages 30 to 64) and 71 percent of 
seniors (age 65 and older). Even with such differences by age, 
race, and education, the economic recovery has improved the 
finances across many groups.

Q.4. I am concerned that for Americans that live paycheck to 
paycheck, the United States' payment system can, at times, fall 
short. In particular, I believe there is great need for faster 
payments, including quicker access to consumer funds after 
deposit. When consumers do not access to their own funds, they 
often resort to and rely on high-cost products that are outside 
of the traditional banking system.
    The Federal Reserve has acknowledged the need to help 
foster a faster payments system with its work and creation of 
the Faster Payments Task Force. What are the next steps and 
future priorities for the Task Force?

A.4. In July 2017, the Faster Payments Task Force (FPTF) 
concluded its work upon release of its final report. The FPTF's 
Final Report reflected the task force's perspectives on 
challenges and opportunities with implementing faster payments 
in the United States, outlined its recommendations for next 
steps, and included the proposals and assessments for the 16 
participants that opted to be included in the final report. \3\ 
The FPTF recommendations identified the need for ongoing 
industry collaboration to address infrastructure gaps; to 
develop models for governance, rules, and standards; and to 
consider actions and investments that will contribute to a 
healthy and sustainable payments ecosystem. A number of 
recommendations called for Federal Reserve support to 
facilitate this ongoing collaboration.
---------------------------------------------------------------------------
     \3\ Faster Payments Task Force, ``Final Report Part One: The 
Faster Payments Task Force Approach'', January 2017, and ``Final Report 
Part Two: A Call To Action'', July 2017. Available at https://
fasterpaymentstaskforce.org/.
---------------------------------------------------------------------------
    Following up on the work of the FPTF and other efforts to 
advance the Federal Reserve's desired outcomes (focused on 
speed, security, efficiency, international payments, and 
collaboration) for the payment system, the Federal Reserve 
published, in September 2017, a paper presenting refreshed 
strategies and tactics that the Federal Reserve is employing in 
collaboration with payment system stakeholders. \4\
---------------------------------------------------------------------------
     \4\ The desired outcomes are outlined in the Federal Reserve 
System's ``Strategies for Improving the U.S. Payment System'', January 
26, 2015. Available at https://fedpaymentsimprovement.org/wp-content/
uploads/strategies-improving-us-payment-system.pdf. The refreshed 
strategies and tactics are outlined in the Federal Reserve System's 
``Strategies for Improving the U.S. Payment System: Federal Reserve 
Next Steps in the Payments Improvement Journey'', September 6, 2017. 
Available at https://fedpaymentsimprovement.org/wp-content/uploads/
next-step-payments-journey.pdf.
---------------------------------------------------------------------------
    The Federal Reserve kicked off these refreshed strategies 
and tactics in the summer of 2017, by facilitating the 
industry's work to address the FPTF recommendations related to 
governance, directories, rules, standards, and regulations. In 
addition, consistent with the FPTF recommendations, the Federal 
Reserve has been assessing the needs and gaps to enabling 
24x7x365 settlement in support of a future ubiquitous real-time 
retail payments environment.
    Further, the Federal Reserve has started to explore and 
assess the need, if any, for any other operational roles to 
support ubiquitous, real-time retail payments. These efforts 
are being pursued in alignment with Federal Reserve's 
longstanding principles and criteria for the provision of 
payment services.

Q.5. As you know, new accounting standards, based on a 
``current expected credit loss'' (CECL) model, developed by the 
Financial Accounting Standards Board (FASB) will go into effect 
in 2020. While the new accounting standards underwent multiple 
years of study, the implementation of these standards will 
result in one of the larger changes to banking accounting in 
recent memory.
    The CECL standard is likely to affect bank capital in 
uncertain and potentially volatile ways, especially as banks 
begin the transition process to this new accounting standard. 
Did FASB consult with the Federal Reserve for how these changes 
might impact bank capital?

A.5. The Federal Reserve Board (Board) along with the other 
U.S. Federal financial institution regulatory agencies have 
supported the Financial Accounting Standards Board's (FASB) 
efforts to improve the accounting for credit losses and provide 
financial statement users with more decision-useful information 
about the expected credits losses on loans and certain other 
financial instruments.
    Throughout the development of the current expected credit 
loss (CECL), the FASB conducted extensive outreach with a 
diverse group of stakeholders, including the Federal Reserve 
System. Stakeholders provided input and feedback through the 
public comment letters and participation in public forums. The 
FASB did not specifically consult the Board regarding CECL's 
impact to bank capital since their mandate is to establish and 
improve financial accounting and reporting standards to provide 
decision-useful information to investors and other users of 
financial reports.
    In response to CECL, the Board, with the Office of the 
Comptroller of the Currency (OCC) and the Federal Deposit 
Insurance Corporation (FDIC) (together, ``the agencies''), 
recently issued a joint proposal that would address the 
forthcoming changes. In particular, the proposal would provide 
firms the option to phase in the day-one regulatory capital 
effects of CECL over a 3-year period.
    The agencies intend for this transition provision to 
address films' challenges in capital planning for CECL 
implementation, particularly due to the uncertainty of economic 
conditions at the time a film adopts CECL.
    The agencies are currently reviewing comments to the 
proposal in preparation for finalizing it. In addition, the 
agencies will continue to monitor the effects of CECL 
implementation on regulatory capital and bank lending practices 
to help determine whether any further changes to the capital 
rules are warranted.

Q.6. Is the Federal Reserve taking into these rule changes as 
it continues to implement capital rules created by the Dodd-
Frank financial reform law?

A.6. The Board is indeed taking into consideration the impact 
of CECL in connection with the Board's ongoing regulatory and 
supervisory functions. For example, the agencies, earlier this 
year issued a joint proposal entitled Implementation and 
Transition of the Current Expected Credit Losses Methodology 
for Allowances and Related Adjustments to the Regulatory 
Capital Rules and Conforming Amendments to Other Regulations. 
\5\ In the joint proposal, the agencies proposed to amend the 
regulatory capital rules of the agencies to address changes to 
U.S. generally accepted accounting principles (GAAP) resulting 
from the FASB's issuance of CECL. The proposal would provide 
firms subject to the capital rules with the option to phase in, 
over a 3-year period, the day-one adverse regulatory capital 
effects of CECL that may result from the adoption of the new 
accounting standard. This transition period is intended to 
address the potential challenges in planning for CECL 
implementation, including the uncertainty of economic 
conditions at the time that a firm adopts CECL. In addition, 
the proposal identifies certain credit loss allowances under 
the new accounting standard that would be eligible for 
inclusion in regulatory capital.
---------------------------------------------------------------------------
     \5\ 83 Federal Register 22312 (May 14, 2018).
---------------------------------------------------------------------------
    The agencies are currently reviewing comments received from 
the public on the proposal. The Board will continue to monitor 
the effects of CECL implementation on firms supervised by the 
Board and on the U.S. financial system.

Q.7. As the CECL requirements go into effect in 2020, the first 
tests of how they impact bank capital may come during annual 
CCAR process.
    Will the Federal Reserve be taking into account these rule 
changes as it undertakes the 2019 and 2020 CCAR process?

A.7. In May 2018, the Board published a joint notice of 
proposed rulemaking with the OCC and FDIC to address changes to 
U.S. GAAP associated with CECL, issued by FASB in June 2016. 
Under the proposal, the Board would not incorporate CECL into 
the supervisory stress tests, and would not require a firm to 
incorporate CECL into its stress tests, until the 2020 cycle. 
If a banking organization were to adopt CECL for the first time 
in 2021, it would not be required to include provisioning for 
credit losses under the new standard until the 2021 stress test 
cycle.
    This proposal avoids ``pulling forward'' the effect of 
CECL, by aligning the dates that firms are expected to include 
CECL in their comprehensive capital analysis and review 
projections with the actual date of implementation for those 
firms implementing in 2020 and 2021.
    In advance of CECL implementation, the Federal Reserve is 
considering feedback received during outreach discussions with 
industry representatives, developing approaches for 
incorporating provision for credit losses in its supervisory 
models, and preparing for parallel testing of those models.
              Additional Material Supplied for the Record
              
              
MONETARY POLICY REPORT TO THE CONGRESS DATED JULY 13, 2018
       
       
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




   ARTICLE SUBMITTED BY SENATOR BROWN
   
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]