    [House Hearing, 116 Congress]
    [From the U.S. Government Publishing Office]

                            MONETARY POLICY AND THE
                              STATE OF THE ECONOMY

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

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               FEBRUARY 27, 2019

                                   __________

           Printed for the use of the Committee on Financial Services

                                Serial No. 116-5

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                                   __________

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     MAXINE WATERS, California, Chairwoman

    CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina,
    NYDIA M. VELAZQUEZ, New York             Ranking Member
    BRAD SHERMAN, California             PETER T. KING, New York
    GREGORY W. MEEKS, New York           FRANK D. LUCAS, Oklahoma
    WM. LACY CLAY, Missouri              BILL POSEY, Florida
    DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
    AL GREEN, Texas                      BILL HUIZENGA, Michigan
    EMANUEL CLEAVER, Missouri            SEAN P. DUFFY, Wisconsin
    ED PERLMUTTER, Colorado              STEVE STIVERS, Ohio
    JIM A. HIMES, Connecticut            ANN WAGNER, Missouri
    BILL FOSTER, Illinois                ANDY BARR, Kentucky
    JOYCE BEATTY, Ohio                   SCOTT TIPTON, Colorado
    DENNY HECK, Washington               ROGER WILLIAMS, Texas
    JUAN VARGAS, California              FRENCH HILL, Arkansas
    JOSH GOTTHEIMER, New Jersey          TOM EMMER, Minnesota
    VICENTE GONZALEZ, Texas              LEE M. ZELDIN, New York
    AL LAWSON, Florida                   BARRY LOUDERMILK, Georgia
    MICHAEL SAN NICOLAS, Guam            ALEXANDER X. MOONEY, West Virginia
    RASHIDA TLAIB, Michigan              WARREN DAVIDSON, Ohio
    KATIE PORTER, California             TED BUDD, North Carolina
    CINDY AXNE, Iowa                     DAVID KUSTOFF, Tennessee
    SEAN CASTEN, Illinois                TREY HOLLINGSWORTH, Indiana
    AYANNA PRESSLEY, Massachusetts       ANTHONY GONZALEZ, Ohio
    BEN McADAMS, Utah                    JOHN ROSE, Tennessee
    ALEXANDRIA OCASIO-CORTEZ, New York   BRYAN STEIL, Wisconsin
    JENNIFER WEXTON, Virginia            LANCE GOODEN, Texas
    STEPHEN F. LYNCH, Massachusetts      DENVER RIGGLEMAN, Virginia
    TULSI GABBARD, Hawaii
    ALMA ADAMS, North Carolina
    MADELEINE DEAN, Pennsylvania
    JESUS ``CHUY'' GARCIA, Illinois
    SYLVIA GARCIA, Texas
    DEAN PHILLIPS, Minnesota

                       Charla Ouertatani, Staff Director

                               C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        February 27, 2019............................................     1
    Appendix:
        February 27, 2019............................................    57

                                   WITNESSES
                          Wednesday, February 27, 2019

    Powell, Jerome H., Chairman, Board of Governors of the Federal
      Reserve System.................................................     4

                                    APPENDIX

    Prepared statements:
        Powell, Jerome H.............................................    58

                  Additional Material Submitted for the Record

    Beatty, Hon. Joyce:
        Data Brief of the Center for Popular Democracy entitled,
          ``The Urgent Need for a More Publicly Representative Fed:
          2019 Diversity Analysis of Federal Reserve Bank
          Directors,'' dated February 2019...........................    65
    Powell, Hon. Jerome H.:
        ``Monetary Policy Report of the Board of Governors of the
          Federal Reserve System,'' dated February 22, 2019..........    83
        Written responses to questions for the record submitted by
          Representative Barr........................................   152
        Written responses to questions for the record submitted by
          Representative Budd........................................   153
        Written responses to questions for the record submitted by
          Representative Garcia......................................   157
        Written responses to questions for the record submitted by
          Representative Gonzalez....................................   160
        Written responses to questions for the record submitted by
          Representative Lynch.......................................   161
        Written responses to questions for the record submitted by
          Representative Posey.......................................   163
        Written responses to questions for the record submitted by
          Representative Steil.......................................   167
        Written responses to questions for the record submitted by
          Representative Stivers.....................................   168
        Written responses to questions for the record submitted by
          Representative Tipton......................................   171

                            MONETARY POLICY AND THE
                              STATE OF THE ECONOMY

                                  ----------

                          Wednesday, February 27, 2019

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10:08 a.m., in
    room 2128, Rayburn House Office Building, Hon. Maxine Waters
    [chairwoman of the committee] presiding.
        Members present: Representatives Waters, Velazquez,
    Sherman, Meeks, Green, Cleaver, Perlmutter, Himes, Foster,
    Beatty, Heck, Vargas, Gottheimer, Gonzalez of Texas, Lawson,
    San Nicolas, Tlaib, Porter, Axne, Casten, Pressley, Wexton,
    Dean, Garcia of Illinois, Garcia of Texas, Phillips; McHenry,
    Lucas, Posey, Luetkemeyer, Huizenga, Duffy, Stivers, Barr,
    Tipton, Williams, Hill, Emmer, Zeldin, Loudermilk, Davidson,
    Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, Steil,
    Gooden, and Riggleman.
        Chairwoman Waters. The Committee on Financial Services will
    come to order.
        Without objection, the Chair is authorized to declare a
    recess of the committee at any time.
        Today's hearing is entitled, ``Monetary Policy and the
    State of the Economy.'' And I will now recognize myself for 4
    minutes to give an opening statement.
        Chairman Powell, welcome back to the committee. I am
    concerned about some of the actions of President Trump and his
    Administration, and perhaps you may be asked some questions
    today about whether or not it is affecting the Federal
    Reserve's (Fed's) decisions.
        President Trump has manufactured the longest government
    shutdown in our nation's history, which beyond the needless
    harm inflicted on effective government employees, contractors,
    and other businesses, also hurt our economy and outlook.
        However, this President declared a trade war on allies and
    enemies alike, leveling tariffs on steel and aluminum, and
    threatening to rip up other deals. His trade war is bringing
    down consumer and business sentiment.
        His tax scam, which was a giveaway to the wealthy and to
    corporate America, is slated to reduce government revenue by
    $1.8 trillion over the next 10 years. Each of these actions by
    the Trump Administration were noted in the minutes of the Fed's
    January policy meetings and may have weighed in on the Fed's
    decision to pause for the interest rate increases.
        In the midst of what some fear is slowing growth, the
    Administration's economic policies are fueling the fire of a
    possible downturn. It is critical that the Federal Reserve
    remain vigilant in protecting this economy.
        The last matter I want to raise pertains to the Federal
    Reserve's apparent efforts to modify the Dodd-Frank Act's
    (Dodd-Frank) safeguards that Congress and your predecessors at
    the Fed put in place following the financial crisis.
        In particular, I am concerned that the Fed is following
    some of the Trump Treasury Department's deregulatory roadmap to
    weaken the capital and liquidity buffers on some of the largest
    banks. This is particularly troubling given that many
    economists, including many at the Federal Reserve, believe that
    bank capital levels are at the lower end of where they should
    be to weather another downturn.
        Banks earned a record $236.7 billion in annual profits in
    2018. The largest 6 banks alone raked in over $120 billion.
    Given these record profits, I do not believe there is a need
    for the Fed to further require capital and liquidity
    requirements. If anything, given your concerns about the
    economy, now is not the time to take the guardrails off of this
    industry.
        The Fed should also be concerned with the growing economic
    inequality in this country. In 2016, the Fed survey of consumer
    finances stated that the top 1 percent of U.S. families own
    38.6 percent of the wealth. The Minneapolis Federal Reserve
    Bank reported that over the last 70 years, virtually no
    progress has been made in reducing income and wealth
    inequalities between black and white households.
        So I would urge you and the Federal Reserve to work to
    tackle the scourge of economic inequality. I know that we just
    had a moment to talk about some of these issues, and you have
    some information you shared with us just recently about some of
    the concerns that I have raised, and you may want to talk about
    those a little bit today.
        So I look forward to your testimony and to discussing these
    matters with you.
        The Chair now recognizes the ranking member of the
    committee, the gentleman from North Carolina, Mr. McHenry, for
    4 minutes for an opening statement.
        Mr. McHenry. Thank you. Thank you, Chairwoman Waters.
        And thank you, Chairman Powell.
        Since his confirmation last year as Fed Chairman, Mr.
    Powell has prioritized outreach to Members of Congress and
    public disclosure of Fed activities, and Members and the public
    have benefited from that outreach and that public-facing
    interaction.
        I am hopeful that the Chairman will continue to pursue this
    approach, as it is important for the long-term integrity of the
    institution and highlights the open-book approach to Fed policy
    that is necessary for long-term market stability and
    understanding of Fed policymaking.
        The economy over the last 2\1/2\ years has witnessed
    remarkable growth, and unemployment has reached lows that many
    once believed were impossible. Republican-led efforts for tax
    relief and regulatory reform have supported these trends with
    millions of Americans benefiting as a result of those policies,
    and millions more seeing their wages grow as a result of that
    regulatory rightsizing and tax relief.
        The Fed's interest in undertaking targeted rulemaking to
    provide regulatory rightsizing will help continue that trend.
    And it is important to economic growth and stability for the
    pace to be picked up.
        At the same time, I share the Fed's concerns that global
    economic uncertainty could prove challenging here at home. As
    the minutes of the last Federal Open Market Committee (FOMC)
    meeting made clear, Europe and China in particular represent
    risks the Fed should continue to monitor and, where
    appropriate, work to mitigate.
        In Europe, the specter of a no-deal Brexit not only impacts
    the EU-U.K. trading relationship, but it also entails spillover
    effects that may implicate domestic and financial institutions
    here at home. Further afield, chronic weakness in Italy remains
    a threat to eurozone economies, and new movements have emerged
    that seek to disrupt the continent's post-war politics as well.
        As for China, the days of double-digit growth appear to be
    gone, but not Beijing's misguided, state-run economic
    management. China continues to suffer from the politicized
    allocation of capital, the cynicism towards international
    economic governance standards, opaque channels for
    decisionmaking, and, of course, the absence of the rule of law.
        In sum, China poses a massive risk, but a risk that defies
    conventional forms of assessment because its regime lacks
    conventional forms of accountability and transparency. In both
    China and Europe, we are facing systemic risks that have few
    historic analogies.
        China's growth is expected to decline to its lowest point
    since 1990, and European Union membership has only expanded,
    never shrunk, since its origins more than a half century ago.
    These are different times we are living through and different
    challenges certainly for the Fed and for the Fed Chair.
        That means that the rearview mirror will be of limited
    usefulness for policymakers in the years ahead. We will need to
    confront new sources of uncertainty with new insights and
    ideas, and the Fed will be essential in detecting and
    interpreting these challenges.
        While some of Mr. Powell's predecessors developed a
    reputation for ambiguity, I am hopeful that he will pursue a
    different path, and it is certain that he already has. As he
    himself noted last month, greater uncertainty calls for more
    clarity from the Fed, not less. In the face of risks that we
    have yet to fully understand, our central bank must be all the
    more articulate and predictable.
        Chairwoman Waters. The Chair now recognizes the
    subcommittee chair, Mr. Cleaver, for 1 minute.
        Mr. Cleaver. Thank you, Madam Chairwoman.
        And thank you, Mr. Chairman, for being here today.
        Some of what I would like to focus on in this short amount
    of time is what I have spoken about with you in casual
    conversations, but I intend to say it quite openly today, and
    it is this: The imperative that the Federal Reserve remain
    independent as it works to fulfill its mandate of maximum
    employment and price stability is key.
        I do hope that the Fed is able to resist the clamor of
    political murmurings and not allow that to drown out the
    critical deliberations that the Fed must have in order to head
    up our monetary policy in this country. The level of
    politicization and explicit pressure that you, the Federal
    Reserve members, have received is unprecedented and
    unnecessary.
        Madam Chairwoman, thank you. I yield back the balance of my
    time.
        Chairwoman Waters. Thank you.
        The Chair now recognizes the subcommittee ranking member,
    Mr. Stivers, for 1 minute.
        Mr. Stivers. Thank you, Chairwoman Waters, for holding this
    hearing.
        And Chairman Powell, thank you for being here today. We are
    all looking forward to your testimony. It is a really important
    time, as you know, for your dual mandate. And we finally,
    through some policies of tax cuts and regulatory reform,
    achieved an economic growth rate in the 3 to 4 percent range.
    We have unemployment at about 4 percent.
        But I have a gift for you to remind you of your dual
    mandate. Mark is going to bring it to you. It is a 100,000
    Venezuelan bolivar note. And as you know, their inflation rate
    is about 65,000 percent, or was, and it is still growing. And
    they have people starving in one of the most resource-rich
    countries in the world.
        We and 300 million Americans are depending on you to
    continue your hard work to give us full employment and stable
    prices, Mr. Chairman. And I look forward to talking to you
    today.
        Chairwoman Waters. I would now like to welcome to the
    committee our distinguished witness, Jerome Powell, Chairman of
    the Board of Governors of the Federal Reserve System. He has
    served on the Board of Governors since 2012 and as its Chair
    since 2017. Mr. Powell has testified before the committee
    before, so I do not believe he needs any further introduction.
        Mr. Powell, you are now recognized to present your oral
    testimony, and without objection, your written statement will
    be made a part of the record.

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

        Mr. Powell. Thank you, and good morning.
        Chairwoman Waters, Ranking Member McHenry, 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 Congress has set for monetary policy: maximum
    employment; and price stability. We are committed to providing
    transparency about the Federal Reserve's policies and programs.
        Congress has entrusted us with an important degree of
    independence so that we can pursue our mandate without concern
    for short-term political considerations. We appreciate that our
    independence brings with it the need to provide transparency so
    that Americans and their Representatives in Congress understand
    our policy actions and can hold us accountable.
        We are always grateful for opportunities such as today's
    hearing to demonstrate the Fed's deep commitment to
    transparency and accountability. Today, I will review the
    current economic situation and outlook before turning to
    monetary policy. I will also describe several recent
    improvements to our communications practices to enhance our
    transparency.
        The economy grew at a strong pace on balance last year, and
    employment and inflation remain close to the Federal Reserve's
    statutory goals. Based on the available data, we estimate that
    gross domestic product rose a little less than 3 percent last
    year following a 2.5-percent increase in 2017. Last year's
    growth was led by strong gains in consumer spending and
    increases in business investment.
        Growth was supported by increases in employment and wages,
    optimism among households and businesses, and fiscal policy
    actions. In the last couple of months, some data have softened
    but still point to spending gains this quarter. While the
    partial government shutdown created significant hardship for
    government workers and many others, the negative effects on the
    economy are expected to be fairly modest and to largely unwind
    over the next several months.
        The job market remains strong. Monthly job gains averaged
    223,000 in 2018, and payrolls increased an additional 304,000
    in January. The unemployment rate stood at 4 percent in
    January, a very low level by historical standards, and job
    openings remain abundant.
        Moreover, the ample availability of job opportunities
    appears to have encouraged some people to join the workforce
    and some who otherwise might have left to remain in the
    workforce. As a result, the labor force participation rate for
    people in their prime working years, that is ages 25 to 54, who
    are either working or actively looking for work, has continued
    to increase over the past year. And in another welcome
    development, we are seeing signs of stronger wage growth.
        The job market gains in recent years have benefited a wide
    range of families and individuals. Indeed, recent wage gains
    have been strongest for lower-skilled workers. That said,
    disparities persist across various groups of workers in
    different parts of the country.
        For example, unemployment rates for African Americans and
    Hispanics are still well above the jobless rates for whites and
    Asians. Likewise, the percentage of the population with a job
    is noticeably lower in rural communities than in urban areas,
    and that gap has widened over the past decade. The February
    Monetary Policy Report provides additional information on
    employment disparities between rural and urban areas.
        Overall, consumer price inflation, as measured by the 12-
    month change in the price index for personal consumption
    expenditures, is estimated to have been 1.7 percent in December
    held down by recent declines in energy prices. Core PCE
    inflation, which excludes food and energy prices and tends to
    be a better indicator of future inflation, is estimated at 1.9
    percent. At our January meeting, my colleagues and I generally
    expected economic activity to expand at a solid pace, albeit
    somewhat slower than in 2018, and the job market to remain
    strong. Recent declines in energy prices will likely push
    headline inflation further below the FOMC's longer-run goal of
    2 percent for a time, but aside from those transitory effects,
    we expect that inflation will run close to 2 percent.
        While we view current economic conditions as healthy and
    the economic outlook as favorable, over the past few months we
    have seen some crosscurrents and conflicting signals. Financial
    markets have become more volatile toward year end, and
    financial conditions are now less supportive of growth than
    they were earlier last year. Growth has slowed in some major
    foreign economies, particularly China and Europe, and
    uncertainty is elevated around several unresolved government
    policy issues, including Brexit and ongoing trade negotiations.
    We will carefully monitor these issues as they evolve.
        In addition, our nation faces important longer-run
    challenges. For example, productivity growth, which is what
    drives rising real wages and living standards over the longer
    term, has been too low. Likewise, in contrast to 25 years ago,
    labor force participation among prime age men and women is now
    lower in the United States than most other advanced economies.
    Other longer-run trends, such as relatively stagnant incomes
    for many families and a lack of upward economic mobility among
    people with lower incomes, also remain important challenges.
    And it is widely agreed that Federal Government debt is on an
    unsustainable path. As a nation, addressing these pressing
    issues could contribute greatly to the longer-run health and
    vitality of the United States economy.
        Over the second half of 2018, as the labor market kept
    strengthening and economic activity continued to expand
    strongly, the FOMC gradually moved interest rates toward levels
    that are more normal for a healthy economy. Specifically, at
    our September and December meetings, we decided to raise the
    target range for the Federal funds rate by one quarter
    percentage point at each, putting the current range at 2\1/4\
    to 2\1/2\ percent.
        At our December meeting, we stressed that the extent and
    timing of any further rate increases would depend on incoming
    data and the evolving outlook. We also noted that we would be
    paying close attention to global economic and financial
    developments and assessing their implications for the outlook.
    In January, with inflation pressures muted, the FOMC determined
    that the cumulative effect of these developments, along with
    ongoing government policy uncertainty, warranted taking a
    patient approach with regard to future policy changes. Going
    forward, our policy decisions will continue to be data-
    dependent and will take into account new information as
    economic conditions and the outlook evolve.
        For guideposts on appropriate policy, the FOMC routinely
    looks at monetary policy rules that recommend a level for the
    Federal funds rate based on measures of inflation and the
    cyclical position of the U.S. economy. The February Monetary
    Policy Report gives an update on monetary policy rules. I
    continue to find these rules to be helpful benchmarks, but, of
    course, no simple rule can adequately capture the full range of
    factors the Committee must assess in conducting policy. We do,
    however, conduct monetary policy in a systematic manner to
    promote our long-run goals of maximum employment and stable
    prices. As part of this approach, we strive to communicate
    clearly about our monetary policy decisions.
        We have also continued to gradually shrink the size of our
    balance sheet by reducing our holdings of Treasury and agency
    securities. The Federal Reserve's total assets declined about
    $310 billion since the middle of last year and currently stand
    at close to $4 trillion. Relative to their peak in 2014, banks'
    reserve balances with the Federal Reserve have declined by
    around $1.2 trillion, a drop of more than 40 percent.
        In light of the substantial progress we have made in
    reducing reserves, and after extensive deliberations, the
    Committee decided at our January meeting to continue over the
    longer run to implement policy with our current operating
    procedure. That is, we will continue to use our administered
    rates to control the policy rate with an ample supply of
    reserves so that active management of reserves is not required.
    Having made this decision, the Committee can now evaluate the
    appropriate timing and approach for the end of balance sheet
    runoff. I would note that we are prepared to adjust any of the
    details for completing balance sheet normalization in light of
    economic and financial developments. In the longer run, the
    size of the balance sheet will be determined by demand for
    Federal Reserve liabilities, particularly currency and bank
    reserves. The February Monetary Policy Report describes these
    liabilities and reviews the factors that influence their size
    over the longer run.
        I will conclude by mentioning some further progress we have
    made in improving transparency. Late last year, we launched two
    new publications: the first, our Financial Stability Report,
    shares our assessment of the resilience of the U.S. financial
    system; and the second, the Supervision and Regulation Report,
    provides information about our activities as a bank supervisor
    and regulator. Last month, we began conducting press
    conferences after every FOMC meeting instead of every other
    one. The change will allow me to more fully and more frequently
    explain the committee's thinking. Last November, we announced a
    plan to conduct a comprehensive review of the strategies,
    tools, and communications practices we use to pursue our
    congressionally assigned goals for monetary policy. This review
    will include outreach to a broad range of stakeholders across
    the country. The February Monetary Policy Report provides
    further discussion of these initiatives.
        Thank you very much. I will be happy to respond to your
    questions.
        [The prepared statement of Chairman Powell can be found on
    page 58 of the appendix.]
        Chairwoman Waters. Thank you very much, Mr. Powell.
        Last Congress, I and other Democrats warned that S.2155,
    which Republicans claimed to be a bill to benefit community
    banks, was in fact a broader deregulatory giveaway to large
    banks that would fuel mergers, accelerate industry
    consolidation, and make it more difficult for community banks
    to compete.
        Now, we have SunTrust and BB&T proposing to merge and
    become the sixth largest bank. Furthermore, even though banks
    made record profits of $237 billion last year, you said
    yesterday implementing S.2155 was your highest priority, and
    the Fed has made several proposals that would reduce bank
    capital and liquidity reserves for our largest banks.
        Board Governor Brainard voted against these proposals,
    noting that the Fed's tailoring proposal would reduce high-
    quality liquid assets held by large banks by about $70 billion.
    The FDIC originally opposed the Fed's leverage proposal as it
    would reduce bank capital by more than $120 billion.
        The Fed is also looking at making stress testing more
    transparent, which could undermine the purpose of the test. And
    former Fed Chair Fischer has called these deregulatory efforts,
    ``something I find extremely worse.''
        So, Chairman Powell, please explain, will easing big bank
    capital and liquidity requirements as the Treasury Department
    has proposed, and your agency appears to be following through
    with, not undermine safeguards that have been carefully built
    up over the last decade to protect our economy and which made
    the U.S. framework the gold standard that others around the
    world follow?
        Should we expect to see further industry consolidation if
    deregulating big banks is a top priority for the Federal
    Reserve? It was discussed in the Senate Banking Committee
    yesterday how the Fed has accelerated its merger reviews and
    appears to be rubber-stamping them.
        SunTrust-BB&T claim their proposed merger will be approved
    by September. But can you assure us that the Fed will not rush
    the process, will consult with all affected parties, will hold
    field hearings, and will focus on the public's interest, even
    if it means rejecting the application?
        The Office of the Comptroller of the Currency (OCC)
    unilaterally released an Advance Notice of Proposed Rulemaking
    (ANPRM) to modernize the Community Reinvestment Act, or CRA.
    The Fed and the FDIC did not join in that release. I was
    troubled to see that Comptroller Otting recently said that if
    he could not reach agreement with your two agencies, the OCC
    would go on its own with CRA reform. Would that be a good
    outcome? Could two different CRA regimes lead to regulatory
    arbitrage of our banks?
        And, lastly, a minute on diversity. I believe diversity in
    the Federal Reserve's leadership, including at the Reserve
    Banks, is crucial because it is hard to stay committed to all
    communities in the country when the leadership lacks an
    understanding of those communities that comes from experience.
    That is why I, and so many on this side of the aisle, have
    encouraged you to continually push to diversify in order to
    more closely represent the American public.
        The Center for Popular Democracy recently found that the
    current Board Directors are 76 percent banking or business, 74
    percent white, and 62 percent male. They also cite that, in
    2013, 12 of the 105 Board Directors were African American. That
    number has increased to 22 out of 108 today. This is an
    improvement, but it still does not look good.
        Federal Reserve Governor Brainard recently spoke about
    increasing diversity efforts through a better pipeline at the
    inaugural Sadie T.M. Alexander Conference for Economics over
    the weekend.
        Right now, even before a search is underway for new
    Directors, how is the Federal Reserve trying to build the
    pipeline for more diverse candidates? When you lead with
    Reserve Bank leaderships, how are you encouraging a focus on
    increasing director diversity? Why do you believe increasing
    diversity is a challenge?
        In your testimony, again, you stated that current economic
    conditions were healthy and the economic outlook favorable but
    noted that over the past few months, ``uncertainty is elevated
    around several unresolved government policy issues.''
        I won't put it as delicately as you have. President Trump's
    policies are damaging our economy, and are challenging growth.
    This is why you have had to pause rate hikes. This lack of an
    economic agenda that changes with the wind is presenting market
    volatility and incredible consumer and business uncertainty.
        Just yesterday, you said that uncertainty is the enemy of
    business. That is why former Federal Reserve Chair Janet Yellen
    says the President doesn't understand macroeconomic policy. If
    he did, he would understand that only a stable, inclusive,
    economic agenda will support an even economic expansion.
        So, Chairman Powell, the President is engaged in a trade
    war with an uncertain outcome that seems to change every other
    week. He has also forced the longest government shutdown in our
    nation's history. How are these actions affecting the U.S.
    economy, in your estimation? How can you continue to achieve
    full employment and stable prices if this erratic economic
    agenda persists?
        Lastly, on monetary policy, in the minutes released for the
    January 29th and 30th FOMC policy meeting, participants
    discussed moving forward with monetary policy while having a
    large balance sheet. In what can be seen as a course change
    from the gradual balance sheet reduction that began in October
    2017, the FOMC now noted that it is likely to stop reducing the
    balance sheet which now stands at approximately $3.9 trillion.
        I believe--and correct me if I am wrong--the thought is to
    allow the gradual reduction to continue until the FOMC is
    comfortable with the size of the still elevated balance sheet
    later in the year. In an interest rate environment where the
    Fed funds rate is still low, between 2.25 and 2.50 percent, how
    is the FOMC likely to use a large balance sheet as a monetary
    policy tool in the case of an unexpected downturn?
        For instance, San Francisco Federal Reserve Bank President
    Mary Daly has suggested that you could use your balance sheet
    as a monetary policy tool. Does this mean that QE could become
    routine in this low-interest-rate environment? If so, does this
    entail buying securities as the Fed did during the financial
    crisis and at a similar size and pace, or could you consider
    smaller scale purchases and types of securities?
        With that, I will now recognize the distinguished ranking
    member, Mr. McHenry, for 5 minutes for questions.
        Mr. McHenry. Good morning.
        Chairman Powell, I have a series of questions for you, and
    I would love to have your answers on these questions. You
    testified yesterday regarding the bank's balance sheet, which
    stands at roughly $4 trillion, and you gave an answer about
    sort of normalizing the balance sheet and what your view of
    that normalization looks like. And you referenced the demand
    for reserves as a reference point for that. Can you elaborate
    on that?
        Mr. Powell. Sure, I would be glad to.
        So, before the financial crisis, the size of the Fed's
    balance sheet was a function of demand for our liabilities,
    principally currency and, to a far less extent, reserves.
    Quantitative easing comes along. We hit the zero lower bound.
    The Fed buys a lot of assets. That was about buying assets.
        And the size of the balance sheet as a percent of GDP went
    from 6 percent to 25 percent, and that was really driven by a
    desire to buy longer-term credit assets or rather Federal
    Government debt and drive down longer-term interest rates.
        So now we are normalizing the balance sheet, and
    normalizing it really means going back to a situation where the
    size of the balance sheet is driven by demand for our
    liabilities, which has evolved, so currency and reserves
    mainly.
        What has happened is demand for currency has grown--
    currency outstanding has grown much faster than the economy,
    and demand for reserves is now much higher than it was because
    really we require banks to hold very high levels of high-
    quality liquid assets, and they choose to hold reserves.
        We can't go back to that very small balance sheet. So what
    we think is that--the Committee has been working on this
    carefully for the last three FOMC meetings and devising a plan.
    We are close to agreeing on a plan which would lay out--would
    sort of light the way to the end of the process.
        Mr. McHenry. And do you plan to communicate that?
        Mr. Powell. Very much.
        Mr. McHenry. That plan?
        Mr. Powell. Yes, we do. When it is agreed upon. We found it
    is good to be very careful with the balance sheet and--
        Mr. McHenry. But your reference point was about $1 trillion
    in bank reserves at the Fed would be the reference point for
    when you sort of end the reduction of the balance sheet. Do you
    have a timeframe on that?
        Mr. Powell. Yes. There is a lot of uncertainty around the
    actual level. What I did was I cited public estimates and said
    those appear reasonable. We actually don't know when the
    equilibrium demand will be. We are going to have to find it
    over time. And my guess is we will be announcing something
    fairly soon.
        Mr. McHenry. So, in light of yesterday's housing figures,
    in which housing starts fell to the lowest number in more than
    2 years, what impact do those housing figures from yesterday
    have on your timing on holding rates steady, or do they have
    any impact?
        Mr. Powell. In terms of what we said is we are going to be
    patient and watch as the economy evolves and also as the
    evolving risk picture changes and how that affects the--will
    affect the outlook. And we will be looking at a full range of
    data. It would include housing starts. It would include
    anything that could affect our achievement of the dual mandate,
    principally growth and then, of course, the labor markets and
    inflation. So we will be looking at a wide range of data. That
    is one piece of it, but it is one of many pieces.
        Mr. McHenry. So, related to that, housing finance reform,
    you know, Fannie Mae and Freddie Mac are more than a decade
    into nationalization. You are a major holder. The Fed is a
    major holder of these assets. Do you think it is important for
    Congress to prioritize housing finance reform for the American
    economy?
        Mr. Powell. I do. I very much do. This is a big, unfinished
    piece of business for sort of the post-crisis era, and I think
    it will be good for the economy to move to a system where a lot
    of private capital is there supporting housing risk again, and
    it is not just all winding up on the Federal balance sheet.
        Mr. McHenry. Okay. Pivoting to a result of some recent
    statements, there are a lot of crosscurrents, conflicting
    signals in the terminology the Fed has used in the U.S. economy
    and global economy. How do you respond to those who say you are
    making financial market stability an unofficial mandate to the
    Fed's decisionmaking?
        Mr. Powell. No, I wouldn't say that is what we are doing.
    First, I think financial stability has been part of the Fed's
    role, and in fact, it really was our original role. Central
    banks generally evolved out of a desire to support the
    stability of the financial system. It has always been something
    that we have done.
        Our mandate from you is maximum employment and stable
    prices. That is the mandate. We also look after financial
    stability and particularly as it supports the dual mandate.
        Mr. McHenry. Financial stability but not necessarily stock
    market stability?
        Mr. Powell. No. By financial stability, we are really
    talking about the capacity of the financial system,
    particularly banks but also other aspects of the financial
    system, to perform their role and intermediate between savers
    and borrowers and support economic activity.
        Mr. McHenry. So what do you say to those folks who claim
    there is a now a ``Powell Put'' in the market.
        Mr. Powell. Anything that matters for the dual mandate
    matters for us. And financial conditions--our tools work
    through financial conditions. So I would say that when there
    are major changes in broader financial conditions, as you point
    out, not any one market or set of markets, but when there are,
    for a sustained period, important changes in broader financial
    conditions, that matters for the macro economy. It matters for
    achievement of the dual mandate, and we will, of course, take
    that into account.
        Mr. McHenry. You mentioned the headwinds internationally,
    the softening in the EU, the softening in the Chinese economy,
    the risk of Brexit. We see what is happening internationally
    for global terror and things of that sort, but I want to talk
    specifically about China and ask you, how does China's use of
    state-run banks to allocate credit affect financial stability
    for the rest of the world?
        Mr. Powell. I don't know that there are important
    implications for global financial stability. It is a part of
    their system. I know they are trying to move to a more market-
    based system over time, and that is a challenging transition.
        Mr. McHenry. More to this point, it is an opaque market. So
    getting numbers and getting a solid understanding of that
    allocation of capital is much more difficult in China than it
    is in the rest of the first world, is it not?
        Mr. Powell. That is right. In addition, so much of their
    economic activity in effect has the backing of the central
    government.
        Mr. McHenry. Let me just wrap up with a broader question.
    You mentioned our national debt. The debt and deficit challenge
    is a real one. I firmly believe we have to right-size our
    spending, commensurate with long-run obligations that we have
    to the American people. But fundamentally, our deficit does
    have an impact on your dual mandate, does it not?
        Mr. Powell. I would say in the longer run.
        Mr. McHenry. In the longer run. And our national debt too
    in the longer run has an impact in Fed policymaking as it
    results in stability and full employment, does it not?
        Mr. Powell. You know, I would say the unsustainable path of
    the Federal Government is a longer-run problem. It doesn't
    really affect--most of our thinking is about business cycle
    frequencies and supporting the economy when it is weak and
    holding it back when it is overheating.
        But that is just in general and not so much about fiscal
    unsustainability. But we worry about in the longer run what
    will happen is we will wind up spending our money on interest
    payments rather than on the things we really need.
        Mr. McHenry. I yield back.
        Chairwoman Waters. Thank you very much.
        Mr. Chairman, as you answer the questions, they will be
    overlapping. Feel free to expound on some of the questions that
    I put before you. I took up all the time, and I didn't give you
    an opportunity to answer those questions. But as you answer
    questions from the others, feel free to include in those
    answers some of those concerns.
        Now, the gentlelady from New York, Ms. Velazquez, is
    recognized for 5 minutes.
        Ms. Velazquez. Thank you, Madam Chairwoman.
        Chairman Powell, thank you so very much for being here
    today.
        I have heard from several constituents who have expressed
    concern about the impact the current expected credit loss
    methodology could have on lending to consumers and small
    businesses. They tell me the proposal, while well-intended,
    could be more procyclical than the current incurred loss
    method, especially in a downturn, and would disproportionately
    impact consumer lending and LMI borrowers, who, as you know,
    can least afford an increase in the cost of credit or a
    complete loss altogether.
        Much of the talk thus far has been about accounting policy,
    but what about economic policy? Has the Fed conducted a review
    of the economic impact of current expected credit losses (CECL)
    particularly in a downturn?
        Mr. Powell. So we have tried to think carefully about the
    questions that have been raised by banks about this, and we
    have thought a lot about this over time. We have tried to work
    with banks so that they will be able to implement this FASB
    decision in ways that are not too disruptive and too expensive
    and too complicated.
        We have also allowed banks to start a 3-year phase-in of
    this beginning, I guess, next year. So we are doing everything
    we can to avoid a big change that is disruptive to lending. And
    in addition, we will be watching carefully to see what the
    actual results are.
        Ms. Velazquez. But, Mr. Chairman, I am not concerned about
    how the banks will be handling this. I am concerned about the
    economic impact that it could have on mortgages for a segment
    of our population who is already--who have been not
    participating in capital access, such as low-income borrowers
    or small businesses. Have you conducted any economic impact on
    that? Because I know that the Financial Stability Oversight
    Council (FSOC), at their December meeting, they discussed this
    issue.
        Mr. Powell. Yes.
        Ms. Velazquez. How do you--
        Mr. Powell. We are aware of those concerns, and we will be
    watching to see whether there is any such effect. We don't
    expect that there will be such an effect, but we will be
    watching carefully to see.
        Ms. Velazquez. Chairman Powell, you recently gave a speech
    at Mississippi Valley State University that addressed economic
    development challenges in rural areas. While New York City is
    certainly not rural, I believe many of the challenges you spoke
    about could also apply to urban centers, particularly those of
    color.
        In that speech, you noted the importance of workforce
    training due to the loss of key industries and the resulting
    mismatch between the skill of local workers and those demanded
    by new employers. As Federal banking regulators contemplate
    updating CRA regulations, should banks receive CRA credit for
    supporting or participating in such workforce development
    programs?
        Mr. Powell. That is a good question, and I don't know how--
    I don't know whether that would get CRA credit or not. It is
    certainly--I was speaking at a conference that was looking at
    basically broad measures to alleviate poverty, and I will check
    into that and get back to you.
        Ms. Velazquez. Thank you.
        Recently, and the Chair already alluded to this,
    Comptroller Otting said that he was hopeful that all three bank
    regulators will join the proposed CRA reforms by the summer.
    But he also indicated that if you were not all able to agree,
    the OCC will be willing to propose the reforms on its own. This
    is counter to statements made recently by Governor Brainard
    when she stated that Federal regulators should speak with one
    voice on CRA. What is your view?
        Mr. Powell. I think ideally we would like to have a unified
    view. It would be better to have one agreed-upon framework for
    CRA. That is obviously the best outcome, and we are going to be
    working toward that. But I want to add, though, that we are
    very committed at the Fed to the mission of CRA, and we are
    looking to make it more effective.
        Ms. Velazquez. Should there be a joint rulemaking, and do
    you believe the Fed will ultimately sign onto the OCC's
    proposal?
        Mr. Powell. We will have to see. I think it would be ideal
    for the three regulators to get together, and we are working
    with the other two agencies on that. I think the goal is to get
    to a joint answer.
        Ms. Velazquez. I yield back.
        Chairwoman Waters. The gentleman from Oklahoma, Mr. Lucas,
    is recognized for 5 minutes.
        Mr. Lucas. Thank you, Madam Chairwoman.
        Chairman Powell, thank you for being here today. And I
    believe that my colleagues will do an outstanding job of
    covering the broader issues and with a number of inquiries. So,
    as has been my custom in recent years, I would like to focus in
    on some particular issues, and if we could once again converse
    about the joys of derivatives, so to speak.
        My questions will deal with those issues that are within
    the Fed's role. First, turning to an issue I have raised
    several times, which is inter-affiliate margin, as you know,
    transactions between affiliates are risk management tools and
    do not expose counterparties to each other's risks.
        I have pushed with my colleagues on the Agriculture
    Committee to exempt those inter-affiliate transactions from
    initial margin requirements. The CFTC and European regulators
    agree with me, and yet the Fed hasn't changed its policy to be
    consistent with those regulations when it comes to bank swap
    dealers.
        I understand these issues predate your tenure, but, Mr.
    Chairman, I would like to know if you intend to
    administratively pursue a more risk-reflective approach on
    initial margin for inter-affiliate swaps.
        Mr. Powell. I know we haven't made a decision on that, but
    we are looking at the inter-affiliate margin question, and we
    will get back to you on that.
        Mr. Lucas. And hopefully that is something in the near view
    as opposed to the longer view, perhaps, Mr. Chairman?
        Mr. Powell. Yes, sir.
        Mr. Lucas. I think that is a leading question, so to speak.
        Mr. Powell. That is a ``yes.''
        Mr. Lucas. Thank you, sir.
        Speaking frankly, I hear a lot of good things from both you
    and Mr. Quarles on this issue, and I appreciate that very much.
    But the lack of formal action still concerns me, and I think it
    is time to quickly move onto this. These rules currently
    capture a whopping $38.8 billion for capital in transactions
    that are not inherently risky, and I would certainly ask you
    and your staff to move forward soon on this please.
        Now, moving to something else I raised with Mr. Quarles
    last year in this space, you are currently engaged in a joint
    comment period with the OCC and the FDIC about the Standardized
    Approach for Counterparty Risks (SA-CCR) proposal. That
    framework asked to hear from other industry stakeholders about
    the need for an offset for client margin in the supplemental
    leverage ratio.
        If I may, I would like to offer you a few thoughts here.
    The number of firms providing clearing services has declined
    from 88 to 55. This affects farmers and ranchers and other end
    users in derivative markets. They are steadily losing options
    for clearing activity. This part of the SLR contributes to the
    closing of these markets to folks I mentioned. For what it is
    worth, the CFTC Commissioners agree with me and have submitted
    a joint comment raising the same concerns.
        Now, Mr. Chairman, I know I can't ask you to comment on any
    action now considering the recent extension of the comment
    period, but as you proceed through this comment period, I would
    like to make sure you know about those concerns and that you
    would be able to take my concerns into consideration as you
    move through that joint comment process.
        Mr. Powell. We are in the process of reviewing the
    comments, as you point out.
        Mr. Lucas. Thank you. I have one more note, Mr. Chairman,
    on the SA-CCR proposal. I understand that the framework would
    significantly raise the capital requirements for over-the-
    counter on-margin swaps. As you know, Congress was very
    explicit in allowing nonfinancial end users to continue trading
    in the OTC market. We were this explicit in making hedging
    affordable to the enemies. I am concerned that a significant
    increase in capital requirements associated with these swaps
    will make them far more expensive, and this would, of course,
    frustrate congressional intent.
        In particular, it is my understanding that the capital
    requirements will essentially be high for commodity
    derivatives, such as those uses to hedge oil and natural gas
    cost. Where I am from, access to risk-management products for
    the energy and agriculture sectors are critical, and I want to
    make sure that we don't come under pressure by way of excessive
    requirements imposed on those bank counterparties.
        Mr. Chairman, I have spent a lot of time on these issues,
    as you know, and I would very much appreciate it if you would
    be willing to bear these concerns in mind, which are shared by
    the end-user community as we move forward. I have always found
    you would be a practical person, and I like to think that I use
    my time and efforts to address practical issues that impact not
    only my economy back home in Oklahoma but the whole country.
        And, with that, unless you have a thought, Mr. Chairman, I
    will yield back the balance of my time.
        Mr. Powell. Thanks.
        Mr. Lucas. I yield back, Madam Chairwoman.
        Chairwoman Waters. Thank you very much.
        Mr. Sherman, the gentleman from California, is recognized
    for 5 minutes.
        Mr. Sherman. First, in responding to the ranking member, I
    think it is important that Fannie and Freddie continue to be
    what they have become, perhaps accidentally, and that is
    Federal Government agencies. We need a Federal backstop in
    terms of credit risk, but never again should we have a semi-
    public, semi-private agency where taxpayers take the risk and
    shareholders try to reap the profit.
        Mr. Chairman, I appreciate your patience on not raising
    rates. You have a twin mandate, but I am going to ask you to
    also consider an additional factor, not as important as your
    twin mandate, and that is the profit that you create is a
    byproduct of your efforts, at times turning over to the
    Treasury as much as $100 billion or nearly $100 billion in a
    single year.
        And I want you, in your decisions, to reflect on the fact
    that that is not just a dry accounting entry. It is life and
    death. We have limited amounts of money that we can spend here
    in Congress on cancer research, on body armor for our troops
    and research to make it better, on opioid programs.
        So people will live or die based upon whether you are able,
    as you have in the past, to turn over nearly $100 billion of
    unintended profit. And I realize that it is not your mandate,
    but it is life and death.
        We talked at another meeting about wire transfer fraud, and
    I will get you some background material on that. But I do want
    to just focus the committee on the fact that people are being
    tricked through the internet to wire their funds into a
    particular numbered account thinking they are sending the money
    to, say, the person they are buying a house from, and instead,
    it is going somewhere else. So, if we have a confirmation of
    payee system like the British, we can avoid much of that.
        As to your balance sheet shrinkage, that diminishes your
    profit that you can turn over. It also, as you sell off or
    allow to run off your mortgage-backed securities, you are
    raising mortgage costs for people.
        Your testimony said that we have a good job market. It is
    not good until there is a labor shortage that drives wages up
    to make up for the 20 years of stagnant wages that we have had
    over the last 2 decades. So I hope you would aspire for more
    than just a 4-percent unemployment rate.
        I do have a question for you here, and that is, in your
    statement you comment on the Federal debt. You say the Federal
    Government debt is on an unsustainable path. Of course, fiscal
    policy is outside your purview but it affects what you do.
        We also have a trade deficit, about a half a trillion
    dollars a year, kind of similar in size to the budget deficit.
    And so every year we borrow another half trillion dollars to
    finance that as a country borrowing from abroad. I wonder if
    you could say that the U.S. trade deficit of over half a
    trillion dollars a year is on an unsustainable path?
        Mr. Powell. Yes, I mean, I don't think I would say that.
    The current account deficit is really set by the difference
    between savings and investment. And the reason the Federal
    budget is on an unsustainable path is that the debt as a
    percentage of GDP is at a high level, but much more important
    than that, it is growing faster than GDP. So debt cannot grow
    faster than GDP forever, whereas I don't know that I would say
    that about the current account balance.
        Mr. Sherman. The accumulated trade deficit where every year
    we borrow over half a trillion dollars just adds to our foreign
    debt.
        But I want to go on. Some of my colleagues find these
    hearings kind of dry and so they have urged me to spice things
    up by asking an accounting principles question. We have CECL,
    the proposal for the current expected credit loss system, being
    proposed by FASB. The effect of this may be to increase
    reserves, but you and the other bank regulators are supposed to
    determine the size of reserves. We shouldn't increase or
    decrease reserves because of an esoteric accounting theory
    discussion which has gone awry.
        And so I wonder whether you believe that we should make
    this major accounting change for banks that will deter, lending
    particularly in economic downturns, without a quantitative
    impact study. Have you had a chance to look at this issue and
    how it will affect the banks that you regulate?
        Mr. Powell. Yes. So we don't think that it will have that
    effect, but we will be watching carefully. And, we will be
    looking at this, and it has really been under discussion for a
    decade now. It is a decision that FASB made and that we are
    just implementing. And if we find that it does have effects
    like that, then we will take appropriate action.
        Mr. Sherman. Thank you.
        Chairwoman Waters. Thank you very much. The gentleman's
    time has expired.
        The gentleman from Florida, Mr. Posey, is now recognized
    for 5 minutes.
        Mr. Posey. Thank you very much, Madam Chairwoman, and Mr.
    Ranking Member, for holding this hearing.
        And, Chairman Powell, thank you for being here to present
    your semiannual report. I would like to think that everyone in
    this room at one level or another is enjoying the success that
    we are seeing continue in this country right now. And I want to
    thank you for the contributions that you have made to that.
        It is also great to have a Chairman here who answers
    questions so directly, and we appreciate that.
        I saw recently some trends in banking indicating that,
    since 2008, we have seen a decline in the number of FDIC-
    insured banks of about 38 percent, from 7,870 banks to 4,909
    banks on the spreadsheet that I saw.
        Over the same period of time, assets grew by 80 percent,
    from $10 trillion to $18 trillion. Mergers have been going on
    at a very brisk pace, as you are no doubt aware. And I would
    like you to share what your research shows about the economic
    implications of increasing concentration in the banking
    industry and how that might restrict or perhaps enhance the
    availability of credit to those who take the risk on
    investments to grow our economy.
        Mr. Powell. Thank you. The number of banks has been
    decreasing pretty steadily now for more than 30 years. I
    remember 14,000 was the number, I think, when I was in the
    government 25--30 years ago. And it is a range of factors. It
    is people leaving rural areas. It is also allowing interstate
    banking and things like that. But for whatever reason, you have
    seen a long-run process.
        Now, we know that when a small bank goes out of business in
    a rural county or a small town, that is not a good thing. And
    that is bad for the country. It is bad for that town, bad for
    the social fabric. So we try not to add to the problems of
    community banks through excessive regulatory burden. We try to
    be mindful of their important role in society.
        Actually, the number of mergers last year, 2018, was the
    lowest in quite a long time. I asked the staff to go back and
    look. It is the lowest in at least 15 years. So mergers and
    consolidation are actually at a pretty low level.
        The last thing I will say is I think we need banks of all
    different sizes. We need small banks. We need banks across the
    spectrum at different business models serving different
    communities. We want a diverse ecosystem of banks out there to
    have a healthy economy.
        Mr. Posey. Okay, related to that same question, could you
    share the criteria that the Fed uses in evaluating bank merger
    applications?
        Mr. Powell. I would be glad to. It is quite detailed. There
    is a Federal Reserve Act section that lays out a lot of detail,
    and there is also plenty of guidance on that issue. Actually, I
    have a picture of it here. So we look at competitive factors,
    banking community factors, managerial resources.
        We look at compliance with consumer and fair lending laws
    and CRA record and that kind of thing. We look at the combined
    financials, of course, of the two companies. We also invite
    public comment. We have a pretty thorough, carefully worked out
    process. We go through this process carefully for mergers and
    look at all those factors and then make a decision.
        Mr. Posey. Okay. Thank you very much.
        I wasn't going to dwell in this realm until we had a series
    of slides up here overhead and somebody else mentioned Fannie
    and Freddie. And so I am curious if you could give us an update
    on the amount of tax dollars that have been spent to date on
    defending the crooks who mismanaged Fannie and Freddie and
    nearly bankrupted the whole operation.
        The last time we got a report, I am thinking it was about 8
    years ago, that we had already spent over $600 million of
    taxpayer dollars defending these guys from stockholder suits.
    Can you give us an update on that?
        Mr. Powell. I don't actually have an update on that for
    you. I can check into that, though.
        Mr. Posey. I know. Okay. If you would communicate that to
    us, I would appreciate it very much. And I yield back the
    balance of my time. Thank you.
        Chairwoman Waters. Thank you very much. The gentleman from
    New York, Mr. Meeks, is recognized for 5 minutes.
        Mr. Meeks. Thank you, Madam Chairwoman.
        Good morning, Mr. Chairman.
        Mr. Powell. Good morning.
        Mr. Meeks. Let me ask you a question. There was a study
    that was done by the New York Fed that found that Americans are
    borrowing more for cars while borrowing less for houses. And
    the reason why the statistic caught my eye is because of my
    strong belief in home ownership and that it is the best value
    for low- and moderate-income households to build wealth over a
    long period of time.
        And I often have said I would want individuals to rent the
    car and own the home as opposed to owning the car and renting
    the home. And in a separate report, the Federal Reserve
    described a link between rising student debt and an acute
    decline in home ownership, particularly among young Americans.
        So my question is, what does declining home ownership
    rates, especially among young people saddled with student debt,
    say about the overall health of the United States economy?
        Mr. Powell. I think the overall household picture of debt,
    if I can start with that, is basically a healthy one. There are
    a couple of areas of concern. And you touched on the main one,
    which I think is student debt. And there is a growing body of
    research that shows that students who borrow for their
    education and wind up not getting the kind of value they
    thought they would get so that their incomes are lower than
    they expected, can't pay the debt back. That debt can hang over
    their economic and personal lives for many years, meaning lower
    levels of home ownership and other sort of measures of economic
    success. So we are seeing more and more evidence of that as
    student debt grows.
        Mr. Meeks. And on I guess a different column the same way,
    you have identified that debt is also high among low-rated or
    unrated nonfinancial firms, and that underwriting has
    deteriorated in lending to highly indebted businesses. I am
    switching from the individual to the business, this leveraged
    lending. And obviously, we want to encourage prudent lending to
    American businesses, even those with existing debt, but I don't
    want to go back to 2008.
        So does the Fed believe that increased credit risk in the
    leveraged loan market poses systemic vulnerabilities,
    particularly in the event of an economic downturn?
        Mr. Powell. This is an important supervisory focus. And the
    headline answer to your question is we don't believe it poses
    systemic kinds of risks, but we do think it poses a
    macroeconomic risk, particularly in the event of an economic
    downturn. These are companies that have borrowed in good times
    and borrowed high amounts of debt. And if there is a downturn,
    they will be less able to carry out their roles in the economy
    and that may have an amplification effect on a downturn.
        Our supervision of banks indicates that the banks do not
    have excessively high exposures to these highly leveraged
    nonfinancial corporations and also don't have excessively large
    pipelines of commitments that they have made. Those are two
    things that they did have before the financial crisis that they
    don't have now.
        So the actual--the banks--and that is our window into this
    is largely through bank supervision. The banks have really
    changed the way they manage their involvement in this business
    in a way that puts the risk out in the holder's hands rather
    than the bank's hands.
        Mr. Meeks. So we tried to--and we came up with Dodd-Frank
    to deal with the mortgage crisis back in 2008. And we try to
    make sure that we are now watching with reference to living
    wills and other things to prevent--do you think we are prepared
    and we have enough regulators are watching closely enough so
    that we can avoid leveraged lending ending up being the next
    bubble that bursts and that causes us to have the same kind of
    financial crisis that we had in 2008?
        Mr. Powell. Yes. I think our financial system is so much
    better capitalized and has so much more liquidity. It has a
    better sense of its risks and a better ability to manage those
    risks. Stress tests require banks to take a forward-looking--
    particularly the largest banks--assessment of their capital
    adequacy. They have also done resolution planning.
        So our banking system is so much more resilient and so much
    stronger than it was before the financial crisis, so that it
    should be able to withstand the kinds of shocks that we are
    talking about.
        If there were, for example, unexpectedly high credit losses
    among nonfinancial corporates, then yes, the banks should have
    plenty of capital and liquidity to absorb those losses. It
    doesn't mean there wouldn't be disruptions and losses, because
    there would be in the economy, but it would not be, we don't
    think, the kind of thing that we saw in 2008.
        Mr. Meeks. So, by and large, Dodd-Frank did a lot to help
    us, and there may be other avenues that I think that we may
    need to include therein to continue to protect ourselves. Is
    that correct?
        Mr. Powell. I think Dodd-Frank and the whole broader
    regulatory program, which went way beyond Dodd-Frank, did serve
    its purpose in strengthening our financial system, yes.
        Chairwoman Waters. The gentleman from Missouri, Mr.
    Luetkemeyer, is recognized for 5 minutes.
        Mr. Luetkemeyer. Thank you, Madam Chairwoman.
        Chairman Powell, welcome. It's good to see you again.
    Before I get to my questions, I would like to bring up one
    issue related to guidance. I have consistently fought to ensure
    that the difference between guidance and rule is clear. You and
    I have had a number of conversations on this, in fact, in this
    committee before.
        However, just last week I saw a letter from Senators Tillis
    and Crapo to the Comptroller General regarding the Large
    Institution Supervision Coordinating Committee (LISCC). From
    reading this letter, it appears that the Fed, throughout the
    Obama Administration, created a regulatory and advisory regime
    that forced banks to meet numerous requirements related to
    liquidity and capital without going through the rule-making
    process. If this is true, the Fed has to take a second look at
    the guidance issued in relation to LISCC and ensure that the
    proper rule-making process is followed.
        I just want to give you a heads-up. I am going to be
    watching this issue very carefully and I appreciate your
    attention to this matter.
        With regards to my good colleague from Oklahoma, Mr. Lucas,
    I just want to add my thoughts to his with regard to inter-
    affiliate margin. This is also an issue I want to watch very
    carefully, and I want to watch your actions. I think it is
    important that we take action on this issue. So I am looking
    forward to working with you on that as well.
        The issue that is of most concern to me this morning is
    CECL. We talked about this a number of times earlier this
    morning with a number of my colleagues. There seems to be a
    growing concern from more and more, not only bankers but
    consumers, whether it is the realtors, the mortgage bankers,
    the Chamber, the home builders, as they begin to understand the
    costs that are associated with this.
        I know you indicated a minute ago that you didn't think it
    is going to have much effect, but, my colleague across the
    aisle a minute ago said that she is not concerned about how it
    is going to affect banks. So I am desperately and very, very
    concerned about how it is going to affect banks, because how it
    affects banks is going to affect consumers.
        If banks have to raise their cost of being able to make a
    loan, that is going to cause people to no longer have the
    ability to have home loans. We had in this committee back in
    December home builders testify that for every thousand dollars
    worth of increased cost, it deprives 100,000 people people
    across this country of the opportunity to have a home loan.
    And, of course, those are going to be the low- to moderate-
    income folks. This is very concerning to me.
        And when you look at the banks having to either pass that
    cost along or eat it and, therefore, ensure that they spread
    the cost out against other costs, other incomes they have, or
    they just curtail their lending activities altogether, which in
    some cases has happened. In my district, I have banks that no
    longer make home loans because of increased cost.
        So I guess my question to you this morning, Mr. Chairman,
    is, this to me is going to have a devastating effect on the
    home lending market, especially when you start to talk about
    the GSEs. And when we start having a dramatic effect on the
    government-sponsored enterprises (GSEs), which no longer have--
    if we lose 100,000 homeowners, that is going to affect the
    economy. You already talked about the building that is not
    going to go on, about all the sales of materials that are not
    going to go on. This is going to have a devastating effect on
    our economy, which is directly in your purview.
        So in conversations with Chairman Otting, who now oversees
    Freddie and Fannie, he gave me some figures, which I am trying
    to get him to verify in a written letter request that are going
    to be out of this world of how he is going to have to reserve
    for this and have to pass those costs along.
        So can you tell me, from just this conversation I am having
    here with you, what your thoughts would be along those lines?
    Would you have concerns about the GSEs having to pass those
    costs along and the inability of consumers to have access to
    credit as a result of that?
        Mr. Powell. Sorry. Were you tying that back to CECL?
        Mr. Luetkemeyer. Yes.
        Mr. Powell. You are, okay. Well, yes, I think we know that
    regulation does have a cost and that is why we try to make it
    as efficient as we can and no more burdensome than it needs to
    be.
        Again, I think on CECL, we have tried--we put a lot of
    resources toward trying to understand how it will affect the
    behavior of banks, and we are going to be watching that very
    carefully. Again, for our banks, we have allowed a 3-year
    phase-in that doesn't even start until next year. So we are
    going to be seeing it coming in gradually, and we are going to
    be watching very carefully to see whether these effects happen.
        Mr. Luetkemeyer. Well, I know in talking with banks from
    Wall Street to Main Street, especially small guys, nobody likes
    this rule. And it is going to be--and to me, what was told by
    FASB is the original reason for it was to have better
    transparency, understanding risk on the balance sheet with
    regards to home loans. But if you are an investor investing in
    a limitly held bank or a credit union or a a single individual
    owning a bank, there is no need for this sort of risk exposure
    and, therefore, it is unnecessary.
        So I am very concerned about this and, as I said, there is
    a growing groundswell of concern out there and I hope that you
    take this into consideration.
        I yield back.
        Chairwoman Waters. The gentleman from Texas, Mr. Green, is
    recognized for 5 minutes.
        Mr. Green. Thank you, Madam Chairwoman. And I thank
    Chairman Powell for being here with us today. I am honored to
    be in your company again.
        I have great respect for your intellectual prowess. And I
    say this because you have had to deal with a level of inanity
    that most Fed Chairs don't have to deal with. I would like for
    you to hear now the words of the President of the United
    States. He indicated, ``I am doing deals and I am not being
    accommodated by the Fed.'' That would be you. ``I am not happy
    with the Fed. They are making mistakes because I have a gut and
    my gut tells me more sometimes than anybody's brain can ever
    tell me.''
        You have access to some of the greatest minds in the world.
    You do research. I assume that when you are setting the Federal
    funds rate that you rely on that research and not on the
    President's gut. I assume that you do this because you
    understand the impact that it can have on the economy. And I
    would just like for the record, would you indicate that you do
    have the level of research necessary to make these decisions
    without the benefit of the President's gut?
        Mr. Powell. I think we have quite adequate resources at the
    Fed. We have terrific people, and we have a very strong culture
    more than anything, which is a culture of commitment to making
    these decisions for the benefit of all Americans, based on our
    best thinking, diverse perspectives, and without considering
    political factors. That is our culture, and it is a strong one.
        Mr. Green. Thank you. And you do quite a bit of research in
    various and sundry areas. You have done research in terms of
    African-American unemployment, unemployment of teenagers. Is
    that a fair statement?
        Mr. Powell. Oh, yes, quite a bit.
        Mr. Green. I would like to ask you, if I may, if the stock
    market is a fair acid test for the health of the economy?
    Should we rely solely on the stock market? It seems that the
    President does.
        Mr. Powell. We, of course, look at a wide range of
    financial conditions, credit market conditions. The stock
    market is one of many factors.
        Mr. Green. One of many, but not the sole factor?
        Mr. Powell. No. It is simply one of many.
        Mr. Green. Not the one that supercedes others?
        Mr. Powell. No. It is one of many.
        Mr. Green. One of many. Why is it so important for the Fed
    to be independent?
        Mr. Powell. I think it is important because you have given
    us an important job, which is to achieve maximum employment and
    stable prices, and we need to do that in a way that is strictly
    nonpolitical. You have given us long terms. You have given us
    protection from sort of shorter-term political considerations,
    and you have kind of ordered us to do our business that way.
    And the record is that central banks that are independent, that
    have a degree of independence from the rest of the government
    do a better job at serving the general public.
        Mr. Green. Would it also have a little bit to do with the
    fact that you want people to rely on what you do and you want
    people to assume that what you do is not predicated upon the
    whims of some political personality?
        Mr. Powell. It is very important that the public understand
    who we are and how we do our business, which is strictly
    nonpolitical and based on the best thinking we can muster.
        Mr. Green. Now, let me get to the question that I really
    wanted to ask, and it is this: Invidious discrimination. You
    have done many studies. You have acknowledged it. You have
    acknowledged that you have some of the best minds in the world.
    I want you, Mr. Powell, to do a study to determine the impact
    that invidious discrimination--that would be racism; sexism;
    homophobia; Nativism; anti-Semitism--has on the economy. This
    is a question that will help us to better assure that you can
    meet the mandates that have been accorded you.
        It is unfortunate that we try our best to change the
    circumstance, but we have been doing it without the benefit of
    this intelligence. How soon do you think you can help me with
    this intelligence, please?
        Mr. Powell. I will speak to some of my research colleagues
    and get back to you. I will get back to you quickly.
        Mr. Green. I will look forward to hearing from you. Thank
    you.
        Mr. Powell. Great. Thank you.
        Chairwoman Waters. Thank you. The gentleman from Michigan,
    Mr. Huizenga, is recognized for 5 minutes.
        Mr. Huizenga. Thank you, Madam Chairwoman.
        And, Chair Powell, it is good seeing you here today. I have
    four areas I want to quickly go over: the Volcker Rule;
    options, specifically exchange listed options; a Fed inflation
    target increase discussion, if at all possible; and then
    workforce participation that you had brought up in your opening
    statement.
        First on the Volcker Rule, as ranking member of the Capital
    Markets Subcommittee, I have been very concerned about the
    Volcker Rule and how the rule has been detrimental to U.S.
    capital markets. And last October, myself, Chairman Luetkemeyer
    and Chairman Hensarling at the time sent you a letter dated
    October 16th. I don't believe we have actually received a
    response as of yet.
        But in this, it was concerning, we raised concerns that the
    Volcker Rule unnecessarily restricts a bank's ability to make
    long-term investments in small businesses as a result of the
    covered funds provisions. And as you know, such funds provide
    the same type of financing that a bank is authorized to do on
    its own balance sheet, but the Volcker Rule prohibits a bank
    from performing this activity through fund structures.
        Previously, you have recognized that a bank's long-term
    investments in covered funds generally do not threaten safety
    and soundness, and said regulators would look for ways to
    encourage this important activity within the language and
    intent of the statute.
        Now, the letter was addressed to Secretary Mnuchin,
    yourself, Chair Clayton, Comptroller Otting, Chair McWilliams,
    and Chair Giancarlo at the time--this has been referred to at
    various times as the ``five-headed hydra,''--and I am wondering
    when you are planning to address this issue?
        Mr. Powell. I think we received quite extensive comments on
    that proposal, and you mentioned the covered funds part of it.
    I will just say we are looking carefully at ways to address
    some of the concerns that were raised on that and also on the
    accounting part.
        Mr. Huizenga. How quickly can we expect clarity?
        Mr. Powell. I don't have a date for you, but I can get you
    a better sense of that quickly and get back to your office.
        Mr. Huizenga. That would be helpful.
        And last May, the Federal Reserve issued a proposal that
    would focus compliance and application of the Volcker Rule on
    the size of a banking firm's market trading business rather
    than on the size of the bank's assets. The two are not always
    the same, as we know. And when do you envision finalizing that
    proposed tailoring rule?
        Mr. Powell. This is S.2155? That one, so, again, we have
    comments. I think we have a dozen rules out for comment and
    back.
        Mr. Huizenga. That was last May that you issued a proposal.
        Mr. Powell. If you are talking about the overall tailoring
    proposal or are you talking about--this isn't the Volcker Rule.
    This is the Volcker part of the--
        Mr. Huizenga. Correct. It is dealing with the size of the
    firm's trading business rather than the size of its assets.
        Mr. Powell. I will get back to you with a time.
        Mr. Huizenga. Okay, I would appreciate that.
        Options. As you know, for the centrally cleared exchange
    listed options market, the Current Exposure Method has
    negatively impacted liquidity and has increased cost to
    customers. Last Congress, the Options Market Stability Act
    received unanimous support. And I know America doesn't believe
    us when we actually say we can agree on something on occasion,
    but I believe it would have solved some of these issues.
        Thankfully, the Federal Reserve, along with the OCC and the
    FDIC, issued a proposal in October of last year to replace the
    Current Exposure Method proposed for purposes of exchange-
    listed options with a more risk-sensitive methodology to be
    applied, known as the standardized approach for calculating
    counterparty risk.
        Can you indicate when the banking agencies intend to
    finalize this rulemaking?
        Mr. Powell. I know that is another one for which we have
    comments out. I think that is coming soon. I will get back to
    you with a particular date.
        Mr. Huizenga. All right. I am looking forward to that. It
    sounds like we are going to have a long meeting after this one.
        In my remaining minute here, the Fed inflation target
    increase--and by the way, the dual mandate has been brought up,
    and I have never quite understood why it is called the ``dual
    mandate'' when it says, ``from 1977, Congress mandated that the
    Fed, promote effectively the goals of maximum employment,
    stable prices, and moderate long-term interest rates.'' We
    somehow forget that third part all the time when we have this
    discussion.
        But last week, news reports indicated that the Fed may be
    considering a higher inflation target rather than the 2-percent
    that has been adopted, not mandated but adopted. And I am
    concerned that the Fed, frankly, is going to be rushing into
    some new approaches when we are not necessarily understanding
    what we are living with right now. And I wonder if you can
    comment on that.
        Mr. Powell. We are not looking at a higher inflation
    target, full stop.
        Mr. Huizenga. Okay, excellent.
        Mr. Powell. What we are looking at is a way to more
    credibly achieve our existing symmetric--
        Mr. Huizenga. Two percent.
        Mr. Powell. A 2 percent inflation target.
        Mr. Huizenga. Great. And then, in the remaining seconds,
    why is the labor participation rate for ``prime age workers,''
    as you had said in your opening statement, falling? We are
    seeing older workers, those labor rate increasing, but seeing
    prime age.
        Mr. Powell. That is a longer conversation and a really
    important one. And I think it is a range of things. It is
    people who--it is largely in younger workers. It has to do with
    globalization. It has to do with technology. It has to do with
    the opioid crisis. It has to do with the flattening out of U.S.
    educational attainment over the years. So this is an incredibly
    important issue, and I would love to talk more about it, but--
        Mr. Huizenga. I look forward to our next meeting.
        Mr. Powell. Thanks.
        Chairwoman Waters. The gentleman from Missouri, Mr.
    Cleaver, is recognized for 5 minutes.
        Mr. Cleaver. Thank you, Madam Chairwoman.
        Mr. Chairman, I think at this very moment, the U.S. Trade
    Representative is testifying before the Ways and Means
    Committee. And one of the issues they are going to raise is
    U.S.-China trade issues. And according to the U.S. Trade
    Representative, in 2016, about 85,000 workers in Missouri were
    employed because of our trade. That trade is very critical
    because of the employment. And then, in 2017, the Trade
    Representative reported that about $14 billion a year in
    agricultural exports actually promoted the employment situation
    in Missouri, 85,000 jobs.
        I don't want you to get into policy, but how do you weigh
    the uncertainty in trade with the Fed actually trying to create
    healthy monetary policy?
        Mr. Powell. So, as you know, we have this thing called the
    Beige Book, where we accumulate the comments of our vast array
    of economic and other contacts around the country. And really
    for the last year or so, a principal feature of those comments
    has been uncertainty around trade. We have companies say that
    they are concerned about higher prices, because they are
    importing materials as part of their product. And some of them
    saying that they are delaying investments of various kinds and
    hiring of various kinds. We can't really see through to what
    the effect of it is. Probably at the aggregate level, it is not
    big. Individual companies, of course, can be very much
    affected.
        So there is a lot of uncertainty out there, and it would be
    good to have trade issues resolved. That said, of course we
    don't have a role in trade.
        Mr. Cleaver. Right.
        Mr. Powell. We don't advise the Administration, and we
    don't comment on particular policies, as you indicated.
        Mr. Cleaver. That $14 billion that comes into our State to
    support these jobs, much of that comes from my congressional
    district. Saline County, for example, is one of the top spots
    in the nation for the export of beans to China. And the farmers
    are--just to--actually what you just said, the farmers, some of
    them are even saying, ``Maybe we should just leave our beans in
    the ground. Why go through the whole process?''
        And even though they have been getting a little
    compensation from the Federal Government, they are saying, ``We
    want trade, not aid.''
        And so there is a serious issue.
        But the U.S. deficit and fiscal concerns as it relates to
    the tax bill are something that you have heard us speak about.
    And, again, I want to try to ask a question so that it doesn't
    require you to get into policy. But it would be interesting to
    know what the economic impact of the tax package has been and
    may continue to impact our economy. Is there any data available
    that would give us an idea about that impact of the tax
    package?
        Mr. Powell. I think CBO would be the best source to sort of
    score what is happening to the economy from a particular law.
    We look at the aggregate economy and the effects of the tax
    package are mixed in with everything else that is happening,
    from our standpoint.
        Mr. Cleaver. Okay. So the Fed wouldn't speak to that?
        Mr. Powell. We had estimates, but with a $20 trillion
    economy, we don't spend a lot of time trying to look back. That
    is really not what we do. We made estimates at the beginning,
    and I think we have adjusted them along the way.
        Mr. Cleaver. Thank you, Mr. Chairman.
        Thank you, Madam Chairwoman.
        Chairwoman Waters. Thank you very much.
        The gentleman from Wisconsin, Mr. Duffy, is recognized for
    5 minutes.
        Mr. Duffy. Thank you, Madam Chairwoman.
        Welcome, Mr. Chairman, it's good to see you. Just a quick
    question on insurance before we go to other topics. I think you
    have indicated that the U.S. insurance regulatory model has
    provided for strong solvency, our insurance companies are well-
    capitalized, but now the IAIS is developing a new international
    capital regime. I think your colleague, Mr. Quarles, indicated
    that it would be a challenge for us to implement that new
    regime in the United States.
        And so my question for you is, as you are part of these
    negotiations, is the U.S. going to agree to a new insurance
    capital set of regulations, or are we going to provide some
    pushback and try to get formal recognition of our U.S.-based
    model?
        Mr. Powell. My understanding is that we are working with
    that group internationally to make sure that whatever they do
    adopt in the end works for our system, which we think is a good
    system. So we are, of course, not going to implement something
    that doesn't work for us. And we are working with that
    international group to make sure that what is ultimately
    adopted does work for us.
        Mr. Duffy. Okay, fair enough. In 2018, you said the U.S.
    GDP growth was what?
        Mr. Powell. It looks like it is just a tiny bit under 3
    percent. It might turn out being 3 percent. It might be 2.9
    percent.
        Mr. Duffy. Pretty good. When is the last time we hit 3
    percent growth for a year?
        Mr. Powell. 2006, I believe.
        Mr. Duffy. 2006. So it has been over 10 years.
        Mr. Powell. Twelve years.
        Mr. Duffy. I think some other people had indicated that the
    U.S. economy could never hit 3 percent again. What happened?
    Why are we hitting 3 percent? We are pretty long into this
    recovery, right? This is one of the longest expansions that we
    have had since the Great Depression. Fair enough?
        Mr. Powell. It is one of the longest in U.S. history.
        Mr. Duffy. So, at the end of the expansion, you should see
    this petering out, but you didn't. You have actually seen some
    of the highest growth in the whole expansion in over 12 years.
    What happened?
        Mr. Powell. Well, it was a good year. There are a lot of
    things that happened.
        Mr. Duffy. I know it was a good year. What happened?
        Mr. Powell. Well, a lot of things did. And I think that the
    tax cuts and spending increases, the fiscal package certainly
    supported demand in a meaningful way.
        Mr. Duffy. So lower taxes actually contributed to growth?
        Mr. Powell. Yes, they supported demand. I think the real
    hope, though, would be that there would be supply side effects
    over time. And that is something we hope will be big, but that
    takes longer. It takes more time to work its way through the
    system.
        Mr. Duffy. And so tax cuts have contributed to 3 percent
    growth. Has any kind of regulatory reform from the
    Administration helped with that growth as well?
        Mr. Powell. It is really hard to isolate that. That is a
    question that people really struggle with. The way I think
    about it is we really don't want regulation to be any more
    costly or burdensome than it needs to be to get the job done.
        Mr. Duffy. And so 3 percent growth. And did you make some
    commentary about the unemployment rates of whites, Latinos, and
    African Americans?
        Mr. Powell. I did.
        Mr. Duffy. What are they? Is unemployment higher today, or
    is it lower for those individuals?
        Mr. Powell. I think for Blacks and Latinos and Latinas, we
    are at historic lows, since the data haven't been kept for more
    than the last 40, 50 years. You are near historic lows there.
        Mr. Duffy. So, more people are working. And if we want to
    look at all of the races, everyone is working more, right?
        Mr. Powell. Yes. The labor market is very healthy.
        Mr. Duffy. Very healthy. And their wages, did you testify
    was what? Their wages are going down or their wages are going
    up?
        Mr. Powell. Wages have been moving up nicely in the last
    year or so.
        Mr. Duffy. They are making more money, right?
        Mr. Powell. Particularly for people at the lower end of the
    labor force.
        Mr. Duffy. So more people are working. More people are
    making more money. And more people I think you indicated with
    the lower education or lower skill sets are making more money.
    Is that correct?
        Mr. Powell. Yes, that is right.
        Mr. Duffy. So I find it fascinating that some of my
    colleagues across the aisle bash the tax cuts. They bash the
    President and the economic policies that have come from this
    Administration and a Republican Congress. But the net end
    result has been that more people work, more people make more
    money. The economy grows at 3 percent.
        And when all those great things are happening for all of
    these Americans, no matter whether you are a Republican or a
    Democrat, whether you are African American, you are white, you
    are Hispanic, you are Latino, everybody is doing better under
    these policies, but all the same, my friends across the aisle
    try to tap me down as they also bash the President on policies
    that have helped every single American. I think that is
    shameful.
        I yield back.
        Chairwoman Waters. Thank you.
        The gentleman from Illinois, Mr. Foster, is recognized for
    5 minutes.
        Mr. Foster. Thank you, Madam Chairwoman.
        And along the same vein, I think if you look at figure 1 in
    the report that you gave us, you look at the rate of job
    creation. And I think it is remarkable how constant it has
    been, with no visible change as a result of any of the policies
    of the last 2 years, and I think that is the relevant
    observation there.
        Now, this Saturday, March 2nd, the currently suspended debt
    limit, ceiling on the debt limit is going to come back into
    effect unless we pass legislation or do something about it.
    Now, we have some runway on various extraordinary measures that
    can be done by the Treasury and others.
        Do you have a feeling, first off, on how much runway we
    have before Congress has to deal with the debt limit, and can
    you say a little bit about what the implications of defaulting
    on that would be?
        Mr. Powell. I think that there is real uncertainty about
    when the actual date that the government will run out of cash
    and not be able to pay all bills when they are due will come,
    but it will be later this year. It could be late in the summer.
    It could be in the fall. I think it remains to be seen at this
    point.
        And, I think the main thing is we have never failed to pay
    all of our bills when and as due, and I think that can never
    happen. That is just not something we can allow to happen. I
    think our credit rating and our credit as a country is such an
    important asset that we need to stop short of letting that
    happen. I think it could have very hard to predict but possibly
    quite bad consequences if we were to default on our payments.
        Mr. Foster. In the past, when we have come close to
    defaulting and sort of walked up to the cliff on that, what
    have been the effects to markets, credit ratings, what were the
    implications for the general economy? Any way to quantify that?
        Mr. Powell. It's very, very hard to quantify it. I know, in
    2011, we were downgraded as a consequence of this. And I know
    that financing costs went up for a period right at the height
    of the crisis, and there was significant cost imposed on the
    taxpayer for that.
        Mr. Foster. Now, a few days ago, the President proudly
    announced that he had reached a currency manipulation deal with
    China, which I understand you indicated you consult with the
    Administration on this. Have you been told what that deal is?
    Has the Federal Reserve been informed?
        Mr. Powell. I think our staff is--basically, our point is--
    we don't handle currency. That is really the Treasury's job.
    The thing that is our concern is that we be allowed to conduct
    monetary policy with a free hand.
        Mr. Foster. But have you been informed of what that deal
    is?
        Mr. Powell. At the staff level, I think people are in
    contact and made sure that that limited interest has been
    addressed.
        Mr. Foster. Was that a yes or no or--
        Mr. Powell. Yes.
        Mr. Foster. So you have been informed. So people in the Fed
    know what that deal is, although I understand you might not--
        Mr. Powell. As it relates to our interest, I believe so,
    yes.
        Mr. Foster. Okay. Are there other tail risks that you think
    we should be worrying about, things like hard Brexit? What are
    your top few sources of tail risk that you think we should be
    thinking about in Congress?
        Mr. Powell. I think the outlook for the U.S. economy is a
    positive one. And I think that I would start with slowing
    global growth. We have seen global growth, particularly in
    China and Europe, through the course of 2018 and right into
    2019. Growth in 2017 was a real tailwind for the United States
    economy. It was synchronized global growth around the world.
        As the global economy slows outside the United States, it
    becomes a headwind. So we are feeling that. Brexit is just an
    event, and it may pass without much implication for the United
    States, but it is unprecedented and so it is hard to say
    exactly what the implications--of course, we are monitoring it
    very carefully.
        Mr. Foster. Now, late last year, the comment period closed
    on considerations you had for developing a real-time interbank
    settlement system. And can you say a little bit about--just
    give us an update on what your current thoughts are on that,
    the schedule we might be looking at?
        Mr. Powell. Yes. We put this proposal out for comment. We
    have gotten a lot of comments. We are reviewing them. And the
    idea is that central banks can really provide immediate final
    settlement, real-time payments, and really--
        Mr. Foster. And some do internationally.
        Mr. Powell. Many do internationally. And the question is,
    should we take this on? And I think it is a question we have to
    evaluate under our existing statute, and we will take our time
    in doing that. We have to conclude that it is economically
    viable, that we can charge for it in other words, and also that
    it is something that the private sector can't adequately
    handle.
        So we are going to look at that. We think, clearly, it
    could support real-time payments, which we think would be a
    positive thing. On the other hand, it has to work under our
    statute.
        Mr. Foster. Thank you.
        Mr. Powell. Thank you.
        Mr. Foster. I yield back.
        Chairwoman Waters. The gentleman from Ohio, Mr. Stivers, is
    recognized for 5 minutes.
        Mr. Stivers. Thank you, Madam Chairwoman.
        Chairman Powell, thank you for being here. I want to follow
    up on some questions that the gentleman from Wisconsin, Mr.
    Duffy, was talking to you about. Obviously, 3 percent economic
    growth, 4 percent unemployment, real wage growth is growing. It
    was a pretty good year for the American people and the American
    worker, correct?
        Mr. Powell. Yes, it was a good year.
        Mr. Stivers. One of the things that you talked about with
    Mr. Duffy as a result of the tax cuts, one of the things that
    we would all like to see is some supply-side growth over time.
    Can you help us understand what that would mean? It would mean
    capital investment, which would grow productivity and then make
    the economy grow even faster, correct?
        Mr. Powell. Yes. I think a couple of things. The first
    would be the one you mentioned, which is if you give more
    favorable treatment to capital expenditures in the Tax Code,
    over time you ought to see more capital expenditures. Capital
    expenditures drive productivity, and productivity is what
    drives the rising of living standards.
        But I think with supply-side initiatives, it takes time. It
    has to work its way into the thinking of businesses and into
    the capital stock, and I just think--we hope those effects are
    large, but we will have to be patient to see them come in.
    There is also a smaller possible effect in lower tax rates on
    individuals, which could call forth more labor supply. So these
    are highly uncertain supply-side effects and they will take
    longer to emerge, but we hope--
        Mr. Stivers. And can I ask you about the beginning parts of
    what we are seeing on that? We have seen new people enter the
    labor market in the last 6 months, who had given up on working
    or staying in the market and were starting to leave. Isn't that
    correct?
        Mr. Powell. Yes. The test of--so what we don't know is how
    much of that is cyclical, in other words, because the labor
    market is so tight right now.
        Mr. Stivers. And the second question, we have seen capital
    expenditures go up in the last 6 months, but we have not seen
    those pay off yet?
        Mr. Powell. Well, we saw--so capital expenditures were very
    strong in the early part of 2018. They petered out a little
    bit, and it may be because of--
        Mr. Stivers. But in the total year, they were up, correct?
        Mr. Powell. Yes. And we expect them to continue to be at a
    healthy level.
        Mr. Stivers. Great. And so hopefully what we have done on
    tax cuts will continue to pay dividends into the future, but I
    wanted people to understand how that works.
        Second, quickly on monetary policy, it seems that there has
    been a change in the way that monetary policy has worked. The
    Federal funds markets for non-GSEs is at a 40-year low of
    volume. And so it seems that the interest on excess reserves is
    getting to be a more important part of what you do. Can you
    talk about that shift since 2008?
        Mr. Powell. Yes. So pre-crisis, there was a small amount of
    reserves, and we could manage the Federal funds rate by making
    relatively small adjustments in the quantity of reserves. In
    the current era, where the demand for reserves is so high and,
    frankly, a little bit volatile too, trying to do that, trying
    to manage scarcity in that kind of a very large pool, we would
    have to have a very large presence in the markets on an ongoing
    basis.
        We don't think that is a good--that is not something we--so
    we think--we have decided to continue to use our existing
    framework, which is to use our administered rate, administered.
    So the interest on excess reserves is very fundamental for the
    way we manage our policy now, and it seems to work very well.
        Mr. Stivers. Thank you. Great. And two more quick
    questions. One is, hopefully you can answer quickly, but there
    is a new sort of focus on modern monetary theory that says
    taxes can better fight inflation than monetary policy. Do you
    have a basic philosophical view of that?
        Mr. Powell. So that aspect of it would be a complete
    change. I would say the reason why the Fed does that is that we
    can move quickly with our tools. And to give the legislature
    that responsibility, in principle, you could do that, but we
    have a system that has lots of checks and balances.
        Mr. Stivers. So let's assume for a second those two tools
    work equally. Who can move faster, the Federal Reserve or
    Congress?
        Mr. Powell. We can move immediately.
        Mr. Stivers. Much faster. Thank you. And that is assuming
    they are equally effective, which I would argue that monetary
    policy is far superior as well.
        Quickly, one last thing on real-time payments, something
    you said that I hope you will stay focused on is whether the
    free market and the private sector can actually provide a real-
    time payment system, because if they can, there is no need for
    the Federal Reserve to do it.
        Mr. Powell. That is part of the thing we have to look at
    under the Monetary Control Act.
        Mr. Stivers. Thank you.
        Mr. Powell. Thank you.
        Mr. Stivers. I yield back the balance of my time, Madam
    Chairwoman.
        Chairwoman Waters. Thank you.
        The gentleman from Washington, Mr. Heck, is recognized for
    5 minutes.
        Mr. Heck. Thank you, Madam Chairwoman.
        Mr. Chairman, I always ask the same question of the Chair
    of the Federal Reserve Board, which is, when does America get a
    raise? I may have to revise that slightly, because, obviously,
    we are beginning to see some evidence of that, which I think is
    an indication of the full employment objective mandate that you
    have. So, good job. In fact, I commend you for your hitting the
    patience button of late.
        But I am looking at these payroll gains of, I think you
    indicated an average of north of 200,000 jobs added every
    month, and I don't think that yet looks like full employment,
    month in and month out. And, as Minnesota Fed President
    Kashkari has noted, the share of income going to labor isn't
    really reversing its long-term slide.
        So, when the FOMC is being patient and watching the data,
    what are you looking for in the labor market? How much slack do
    we have left?
        Mr. Powell. We look at a very broad range of indicators.
    With inflation, we can look at one indicator, and, actually, we
    think central banks control that. The labor market is
    different. So we look at the unemployment rate. We also look at
    labor force participation. We look at wages. We look at job
    openings. I could go on. There are 20 or 30 things.
        Mr. Heck. And how much slack do we have left?
        Mr. Powell. You never know precisely, and you are learning
    in real time. So I think we have learned from the performance
    of labor force participation over the last few years and
    particularly the last year that there are more people out there
    who will come back into the labor force. And that creates more
    slack.
        Mr. Heck. More slack to come?
        Mr. Powell. We hope so. We don't really know. There is a
    long-run aging trend in our country by which, you know, my
    generation is now retiring. And so you are going to have lower
    labor force participation compared to what you would have had.
    But the very strong labor market seems to be pulling people in
    and holding people in from leaving. So it is a very, very
    positive development. We hope it continues.
        Mr. Heck. So, once we get to full employment, the
    definition of which you will acknowledge has been a moving
    target on the part of the Fed, are you willing to let wage
    growth climb to 4 percent, either to begin to recover some of
    the decline that we have experienced over labor's share of
    income or, alternatively, an idea that I don't think is
    discussed often enough, to see if tight labor markets
    themselves can improve or boost productivity? Are you willing
    to let wage growth hit 4 percent?
        Mr. Powell. We are really targeting price inflation, not
    wage inflation. So, wages should equal to it in the aggregate.
        Mr. Heck. Okay.
        Mr. Powell. Inflation plus productivity.
        Mr. Heck. As a follow-up, I have a couple of charts. Do we
    have them? These are your two mandates, obviously, full
    employment and price stability. You referenced the price
    stability. My second slide focuses just on it. So can we go to
    the second slide or not? The second slide. I am burning
    daylight. Evidently, we can't go to the second slide.
        This shows the record over the last 25 years with respect
    to the Fed's price stability target of 2 percent. I think what
    is important to note is that we have underperformed 85 months
    versus overheating 2 months--213 months within a half a percent
    of target, and good on you for that as well. But, clearly, the
    long-term record of the Fed has been to underperform.
        So there is a relationship between wage growth and price
    stability. And on the issue of price stability, the Fed has
    been underperforming way more, a multiple of I don't know how
    many, than overheating. And this speaks, obviously, to the
    issue of, when are we going to get wage growth that begins to
    compensate for years and years of decline?
        I know you are engaged in a healthy exercise to review the
    tools and communications. Frankly, sir, what I would hope is
    that it would be taken into account, frankly, some more
    transparent advancing of the historic record as a means of
    informing policy going forward because I think this data speaks
    very clearly that we have a need to place a greater emphasis on
    wage growth and the factors that it affected.
        Thank you, Madam Chairwoman.
        Mr. Powell. If I can just say, you are absolutely right
    about the inflation data, and I think a number of us have
    commented on that recently. So I like your charts.
        Chairwoman Waters. Thank you.
        The gentleman from Kentucky, Mr. Barr, is recognized for 5
    minutes.
        Mr. Barr. Chairman Powell, welcome back to the committee.
    And I will note that when you were first confirmed, you did
    make a commitment to improve Fed communications. And I want to
    compliment you and thank you for our conversations. And I think
    you have fulfilled, by and large, that commitment to improve
    Fed communications, but I suppose it is my job to hold the Fed
    accountable and so I am going to press you on a few issues here
    today, the first of which is the Fed's negative net worth.
        The former CEO of the Chicago Federal Home Loan Bank, Alex
    Pollock, recently observed that the Federal Reserve is
    insolvent on a mark-to-market basis. You may have read his
    commentary on this. Pollock's analysis is that, as of the end
    of September, the Federal Reserve had $66 billion in unrealized
    losses on its portfolio of long-term mortgage securities and
    bonds. This equates to 170 percent of the Fed's capital and
    means that on a mark-to-market basis, the Fed had a net worth
    of negative $27 billion. If interest rates continue to rise,
    the unrealized loss will keep getting bigger and the mark-to-
    market net worth will keep getting more negative.
        Chairman Powell, does it matter that the Federal Reserve is
    insolvent?
        Mr. Powell. No, it doesn't matter at all for any purpose.
    The unrealized losses have no effect whatsoever on our ability
    to conduct monetary policy. You will recall that we have been
    giving close to $100 billion every year in our profits back to
    the Treasury at the end of the year or during the course of the
    year.
        So, really, in no sense are we functionally insolvent.
        Mr. Barr. Does the mark-to-market negative net worth make
    it more difficult to raise the Federal funds rate?
        Mr. Powell. Absolutely not.
        Mr. Barr. Okay. Next question is another discussion on the
    balance sheet and the balance sheet reduction program. In your
    testimony, you stated that the Fed had made ``substantial
    progress on reducing reserves'' and that the Fed is ``prepared
    to adjust the balance sheet normalization program.'' This does
    seem to be a shift from your comments in December when you said
    you believed that the runup of the balance sheet has been
    smooth and has served its purpose, and I don't see us changing
    that.
        I think I heard you explain that banks' demand for reserves
    have increased, and I recognize that currency has doubled from
    about $850 billion to $1.7 trillion, but please explain what
    caused the shift in the Fed's balance sheet reduction plan and
    give us a better understanding, if you can, of the final
    destination between the $4 trillion size right now and the $1.7
    trillion currency level.
        Mr. Powell. In our November meeting--I should go back
    another meeting. We began a series of meetings to engage on
    just this set of issues and what is balance sheet normalization
    going to look like? And, I didn't want to get ahead of the
    committee in December. And also, I think the markets became
    much more sensitive to these issues. They had been pretty
    insensitive to them for some years.
        So the truth is we have now had three consecutive meetings
    on the balance sheet, and we have worked out, I think, the
    framework of a plan that we hope to be able to announce soon
    that will light the way all the way to the end of balance sheet
    normalization and that will result in the end of asset runoff
    sometime later this year.
        Mr. Barr. Well, thank you, and thanks for that explanation.
    I would just urge you and your colleagues to remain mindful of
    the fact that there are critics out there who continue to
    express concern about the size and the composition of the
    balance sheet as remaining fairly unconventional and the risk
    that that could pose.
        My final question is related to a regulatory matter, the G-
    SIB surcharge. In July, I sent a letter with 28 of my
    colleagues to Vice Chair Quarles regarding the G-SIB surcharge.
    We expressed our concern in that letter that that surcharge
    puts U.S. banks at a disadvantage when it comes to
    international competitiveness. The surcharge is more stringent
    than the one adopted by the international Basel Committee and
    was adopted before many of the measures to increase resiliency
    and resolvability were fully implemented.
        Yesterday, before the Senate Banking Committee, you stated
    that the financial system has much higher capital, much higher
    liquidity, better risk management, and the stress tests have
    really helped banks understand managing their risks, and you
    said that our banking system is strong and resilient.
        Given these enhancements to resiliency and resolvability,
    would it be appropriate to reexamine the calculation of the G-
    SIB surcharge since it was originally formulated in 2015, prior
    to the aforementioned improvements?
        Mr. Powell. I think that the overall level of our capital,
    particularly at the largest firms, is about right. I am open to
    evidence that there are problems with that. I don't see U.S.
    banks having difficulty competing, particularly
    internationally. They seem to be competing very well. They seem
    to be profitable. Their stock prices seem to be fine.
        But in terms of the surcharge in particular, it is one of a
    bunch of pieces, but I would say the overall level I think is
    just about right.
        Mr. Barr. I appreciate your testimony. Thank you.
        Chairwoman Waters. The gentleman from Illinois, Mr. Casten,
    is recognized for 5 minutes.
        Mr. Casten. Thank you, Madam Chairwoman.
        And thank you, Chairman Powell. You mentioned in your
    introductory remarks that a significant amount of the recent
    growth we have seen is due to consumer spending and business
    investment, and I would like to focus on the second of those
    and specifically on the impact of energy prices. I want to read
    a couple of quotes from you in a recent article.
        The chief economist at UBS Securities has said that the
    increase in oil prices was responsible for much of the rebound
    in fixed investment in 2017, noting specifically how oil and
    gas shale plays now make us very dependent on the price of oil
    to drive U.S. fixed investment. Alexander Arnon of the Penn
    Wharton Budget Model has gone further, to say that firmer oil
    prices ``accounted for almost all of the growth in investment
    in 2018.'' The article goes on to mention how several of the
    Fed offices have been concerned with the softening of oil
    prices and what it reflects.
        The first question is, do you agree that the rise in oil
    prices over the prior year and a half have been a meaningful
    contributor to capital investment in the United States?
        Mr. Powell. Yes. As oil prices go up, that makes it more
    economic for more drilling and you see more capital expenditure
    (CapEx.) I don't know that it accounts for--certainly, that was
    very much the case in 2017. I would want to go back and look at
    2018. I thought that CapEx went up more broadly in 2018.
        Mr. Casten. Okay. Well, the oil prices certainly started to
    fall late last year, I think from $70 and now they are down in
    the 40s or so, I believe.
        You had mentioned in your forward growth forecast that you
    expect inflation to be lower than planned, in part, because
    energy costs are down and so you are sort of adjusting for
    energy there. Does that not apply in reverse, that if we were
    looking at prior growth being higher, are we treating energy
    cost fluctuation the same when we look at explanations of prior
    growth as we are when we are discounting inflation growth going
    forward because of energy price volatility going the other
    direction?
        Mr. Powell. I'm sorry; I didn't get your question. Say that
    again?
        Mr. Casten. So, if I understood your commentary correctly,
    you were saying that going forward, inflation is going to be
    below target, but that is largely driven by energy. And if I am
    following what is written here, the prior growth was driven in
    part by energy prices being more positive.
        So are we treating the impact of energy prices on the
    economy the same in a positive direction as we are in a
    negative direction?
        Mr. Powell. Yes. Yes, we are. Sorry. So, if oil prices are
    flat, then they are not adding anything to inflation, and if
    they grow at 2 percent--so that is why we have core. We
    obviously exclude energy and food because they are volatile. We
    look through to the core for that reason.
        Mr. Casten. Are we also factoring the impact of those
    prices on business investment?
        Mr. Powell. More broadly, yes, absolutely.
        Mr. Casten. Madam Chairwoman, I would ask unanimous consent
    to enter this article into the record.
        Chairwoman Waters. Without objection, it is so ordered.
        Mr. Casten. My final question is: I just came here from--I
    am bouncing between two hearings today in the Science Committee
    about ocean sea level rise and, again, ties to the energy
    markets. I listened to scientists explain how over the course
    of the next century and much sooner than that based on current
    CO2 levels and based on current temperatures, we have very
    realistic expectations of 3 to 8 feet of sea level rise, with
    fairly significant impacts on the elimination of coastal
    communities, the collapse of housing, and significant migration
    inland.
        As we think about financial markets going forward and, in
    particular, 30-year mortgages, are we factoring that into the
    value? When I put that question to them, they said that there
    is going to be a significant diminution of that value long
    before the houses are flooded because it is going to be pretty
    obvious what is coming.
        My question is, as you think about forward rates and how we
    think about housing policy in general, how should we be
    thinking about what at this point is largely inexorable?
        Mr. Powell. It is a good question. So, in our supervision
    of financial institutions, we do take into account, for
    example, if you are a bank that is lending, that is in the Gulf
    area, let's say, and you are subject to climate events--or not
    climate events, but weather events and natural disasters, then
    we are going to supervise you to make sure that you have the
    ability to understand and manage those risks as part of your
    business. That is how it enters into--that is how this subject
    enters into our work.
        I think in terms of broader macroeconomic consequences, it
    is hard to do, it because it is such a long run. You are
    talking about climate change, right?
        Mr. Casten. My question is the interest rate on a 30-year
    mortgage in an area that is on the coast and in any reasonable
    scenario may well be underwater before that mortgage is fully
    recovered.
        Mr. Powell. Again, we supervise our banks to have them take
    into account that risk of having--but do we have it exactly
    right? I am sure we don't.
        Mr. Casten. Thank you, Chairman Powell.
        Chairwoman Waters. The gentleman from Colorado, Mr. Tipton,
    is recognized for 5 minutes.
        Mr. Tipton. Thank you.
        Chairman Powell, it's good to see you again.
        The U.S. Chamber of Commerce released a report last fall
    that found that bank lending to small businesses has not kept
    up with the needs of the economy, suggesting small business
    loans remain down 13 percent from 2008.
        The report goes on to point out that several regulatory
    actions have contributed to the slow growth in small business
    loans and particularly pinpoints that U.S. regulators have
    imposed substantially more stringent standards on our largest
    institutions than what is required under the Basel III
    international standards.
        As a former small business owner out of Colorado, I can
    testify that the ability of a small business to be able to
    access capital is vital not only in my district but nationwide.
    As you have acknowledged, the banking system today is well-
    capitalized and highly liquid, and there have been significant
    improvements to the risk management and resolvability.
        Given that, wouldn't it be appropriate to recalibrate some
    of the international standards that have been gold-plated in
    the U.S. so that the excess capital tied up by those
    regulations can be deployed back into the economy to support
    small businesses and/or consumers?
        Mr. Powell. As I mentioned, I think that the capital levels
    we have in our banks are about right, and I am open to evidence
    that that is not the case. But I do see our banks competing
    successfully and being profitable and also being resilient to
    the eventual downturns that will inevitably come. So I think I
    would like to see more evidence before we start lowering
    capital standards. I think we ought to hold them where they are
    for now.
        Mr. Tipton. Okay. I appreciate your comments on that. It is
    my understanding that we had not only met but exceeded under
    Federal regulations the Basel standards. Our European
    counterparts have not done the same. And the goal is is to be
    able to make sure that we are keeping the robust economy and
    job growth going and opportunity and hope that is something
    that you will continue to keep in mind.
        Mr. Chairman, we have talked a lot today about some of the
    CECL requirements that are going to be coming into place with
    the accounting method, and I do want to express that I have
    heard concerns that implementation will be expensive and that
    inevitable mistakes are going to be made after the
    implementation that will also be expensive. I have also heard
    concerns about how CECL standards will interact with the
    ongoing stress testing.
        Mr. Chairman, with the implementation of CECL on the
    horizon, is the Fed preparing to incorporate CECL into its
    supervisory stress tests before it applies it to all banks in
    2022?
        Mr. Powell. I think the answer is, we are not incorporating
    CECL at least for the next couple of cycles in the stress
    tests. The stress tests are already forward-looking, of course.
    They have forward-looking losses that are assumed to happen, so
    eventually we will incorporate it but not for the time being.
        Mr. Tipton. Do you feel that the regulators are well
    positioned giving some of the implementations, inevitably some
    of the challenges that are going to come out of that
    implementation, to be able to respond in a timely manner?
        Mr. Powell. To respond to?
        Mr. Tipton. Some of the challenges that are going to be
    paced by the cost and the implementation of CECL. Are they
    going to be able to respond?
        Mr. Powell. Ah, CECL. Sorry. Yes, I do. I think we are
    alert to what we are hearing. And we--again, we have put--we
    have given our institutions a 3-year phase-in period so they
    can--and they have also had some years to study and understand
    it. And, we have worked with smaller institutions so they know
    they don't have to have a department of CECL implementation,
    try to get that done in an efficient way.
        Mr. Tipton. Well, I appreciate that. And I know that you
    are going to be keeping an eye on it, and I would like to
    encourage you just for the impacts potentially on the industry
    and on our economy just to monitor the subject.
        Mr. Chairman, in your testimony, you did also note
    something that is important for my part of the world. There is
    a noticeably lower employment rate in terms of the communities
    in rural areas compared to the urban areas, and that gap has
    widened over the past decade.
        Has the post-crisis regulatory environment for community
    financial institutions impacted job creations in rural
    communities?
        Mr. Powell. I don't think that is really the story. It
    seems to be more loss of manufacturing jobs. If you read the
    box, there really isn't--I wish there were a clear answer at
    the end of the box, you get there and it says, okay, here is
    why, and here is what we can do about it. It is not that
    simple.
        So essentially, the unemployment rates in rural communities
    and metropolitan areas haven't diverged that much. What has
    diverged is the labor force participation, and it seems to be--
    it possibly could be tied to lower education levels in rural
    areas, but that doesn't seem to explain much of the difference.
    It may be that it is more about loss of manufacturing, which is
    more likely to take place away from metropolitan areas.
        We are still looking at why, but it is a significant
    disparity that emerged really after the crisis. And if you go
    back a ways, rural areas had higher participation and lower
    unemployment. So it is a curious development and one that we
    are calling to your attention and trying to understand.
        Mr. Tipton. I yield back.
        Chairwoman Waters. The gentlewoman from California is
    recognized for 5 minutes.
        Ms. Porter. Thank you, Madam Chairwoman.
        Mr. Powell, thank you for being here today with us and for
    your patience during what I know is a long hearing.
        I wanted to ask you about the hedge fund working group that
    the Financial Stability Oversight Council (FSOC) formed a few
    years ago. Can you describe whether this working group is
    actually, in fact, doing any work, and the nature of that work,
    and when we can expect to see any work product? It has been a
    little over 2 years since we have had any information from that
    working group, and I would like to see its results and what it
    is doing.
        Mr. Powell. I will have to look into that for you. I am
    sure that we have a number of staff who work full time with the
    FSOC, or part time at least with the FSOC, and I can get back
    to you on that. I don't personally know what that working group
    is doing.
        Ms. Porter. Okay. So in your role as a member of FSOC, I
    would appreciate your following up with that working group--
        Mr. Powell. I would be glad to.
        Ms. Porter. --and getting a briefing for yourself and
    sharing it when you can on what they are doing.
        As you know, no banks failed last year. The period in
    American history when the nation went the longest without a
    single bank failure was across 32 months, from 2004 to 2007,
    just before the financial crisis. Then we had three banks
    collapse in 2007; 25 failed in 2008; 140 failed in 2009; and
    157 banks failed in 2010. Since the FDIC was created in 1933,
    until that run-up in the financial crisis in 2004, not a single
    calendar year had passed without a bank failing.
        Do you agree that a long stretch without any bank failures
    can lull the public and even financial market experts and
    regulators such as yourself into a false sense of security?
        Mr. Powell. I think really we are talking about human
    nature here, so, yes, I do think so. I would say though, if I
    may add, that the banking system is now so much better
    capitalized and more resilient than it was. And we have made
    sure to kind of allow for that aspect of human nature, I think,
    by making a system that is much more resilient to shocks.
        Ms. Porter. So I appreciate your point about the importance
    of making sure the system is correctly capitalized, but is the
    Fed not reducing loss absorbing capital requirements for big
    banks?
        Mr. Powell. No, we are not.
        Ms. Porter. And have you changed the capital holding
    requirements and the leverage ratios and the measures that are
    used in the stress tests, especially for banks that are under
    the $250 billion threshold?
        Mr. Powell. Well, I think overall we have raised capital
    standards. We have effectively doubled the amount of capital in
    the largest institutions.
        Ms. Porter. Since when?
        Mr. Powell. Since before the crisis.
        Ms. Porter. Oh, okay. So I am speaking about in the most
    recent couple years. What has the direction been generally in
    terms of capital holding?
        Mr. Powell. It has been to hold capital right where it is.
    I think we--the Fed's view has always been that we don't want
    the leverage ratio to be the binding. We want it to be a high
    and hard backstop. We don't want it to be binding. And it had
    become binding at its current level so we lowered it a bit. The
    actual amount of capital that will leave the system, including
    the holding companies, is very, very small.
        Ms. Porter. So, in fact, in the most recent couple of years
    we have, in your view, moderately reduced the capital holding
    requirements?
        Mr. Powell. It is actually de-minimus, I would say.
        Ms. Porter. Okay. But we are going slowly somewhat down?
        Mr. Powell. No. I like to see that--I think we are holding
    the level where it is. The leverage requirement, it is far less
    than 1 percent of capital. It is a relatively tiny amount of
    capital that leaves the system. Some of it can leave the bank
    to go to other parts of the holding company, but it doesn't get
    out of the holding company. And from--other than that, we are
    absolutely holding the line on capital. It is not in our
    thinking that capital levels are too high.
        Ms. Porter. And with regard to stress testing, which is one
    of the ways that we assess risk, my understanding is that the
    Fed has recently advanced proposals to reduce the stress
    testing standards.
        Mr. Powell. No, I wouldn't say that is right, no.
        Ms. Porter. Can you describe then for me and the committee
    what have been the changes and then maybe we can characterize
    them differently. But I would love to hear from you about that.
        Mr. Powell. We have tried to improve transparency without--
    the whole idea of a stress test is it should be stressful and
    in some sense surprising, and the scenarios change every year
    and that kind of thing. At the same time, we have tried to be
    more transparent about the way we look at losses and that kind
    of thing.
        I think the banks make the point that, you know, this is
    our binding capital requirement for the biggest banks and we
    ought to have some transparency in terms of what it is going to
    be so that our own capital isn't volatile year to year. So we
    have tried to address those concerns but without undermining
    safety and soundness and without at all limiting the
    bindingness of the stress test.
        Ms. Porter. Okay. Thank you very much.
        I yield back.
        Chairwoman Waters. The gentleman from Texas, Mr. Williams,
    is recognized for 5 minutes.
        Mr. Williams. Thank you, Madam Chairwoman.
        And, Chairman Powell, thank you for coming to the committee
    today. We always appreciate having you here.
        And I would like--I have started asking the witnesses who
    come before us if they are socialists or capitalists. And I can
    adjust my questions accordingly when I hear that, but with you,
    I know what you are. You are a strong capitalist, and I
    appreciate you for that.
        Briefly, I am going to touch on--as you probably remember,
    I am a car dealer. I have been in the car business for 50
    years, and tariffs have us really concerned right now. But
    besides tariffs, which you have no control over, we are
    concerned about interest rates. I come back from a 20 percent--
    I was in business at 20 percent, so I know what interest rates
    can do, and in my lifetime 6 percent has always been a good
    rate.
        The problem is today balances of the cost of goods sold are
    very high, much higher than they were in 1981 at 20 percent. We
    are concerned about the interest rates. Sometimes you can tweak
    the interest rate a little bit and it could change a person's
    payment on a car or whatever, 50 bucks, it could put them out
    of the market.
        We are a consumption-driven nation and people want to buy.
    So I merely take advantage of you being here today to just ask
    you to be generous or be careful when you start raising the
    interest rates because it can affect the economy. And in my
    business, if people can't buy, we cut orders and we cut orders.
    The plant has to lay people off and so forth. So it does
    trickle down. So interest rates are a real concern that we
    have, that--all of us at finance inventories, and I appreciate
    you being gentle to us when you consider raising those rates.
        Also, we need to reward people for going back to work. We
    need to get more people contributing to the economy, and we
    cannot have our citizens making rational economic decisions to
    stay on the sidelines of this booming economy because our
    government is paying them to do so.
        The Monetary Policy Report says that the labor force
    participation, which we have talked about today, grew by only
    one-fourth of a percentage point since June even though there
    are 7.3 million job openings.
        So my question to you is, are we creating an economy that
    encourages people to sit in the dugout rather than get out and
    play the game?
        Mr. Powell. Well, clearly, we have a problem with labor
    force participation, and I think there are a range of opinions
    and views and research about why that is. I do think there are
    some disincentives to work. For example, if you--it is not that
    our benefits are that generous, but it is in some cases you
    lose all of your benefits when you go back to work. And so it
    becomes a pay cut in effect even though the benefits themselves
    have lost value in real terms over time. So that is an
    important thing.
        I also think it is just--it is people with relatively low
    education and skills. It is a lot of young males. It is
    certainly opioids. Low labor force participation is a function
    of many things, but many things that I think would be able to
    be addressed by the kinds of things that Congress can do as
    opposed to what we can do. We can run a strong labor economy,
    and I think we have that now, but to sustain that over time it
    needs more active measures.
        Mr. Williams. Well, I can tell you as an employer, we are
    looking for people to work. There is no question about it.
        Mr. Powell. Yes.
        Mr. Williams. Next question, it seems like some of my
    colleagues on the committee believe that banks bringing in more
    profits is a bad thing. Well, just because we can't turn a
    profit up here in this business, it doesn't mean that the
    private industry has to suffer along with us.
        When a bank is more profitable, there is more money to lend
    to small businesses like me and hire more people like we do and
    ultimately grow our nation's GDP. We have a slide that keeps
    popping up there that says record profits for banks, so I
    personally think that is a good slide. We should show that
    more.
        So, Chairman Powell, do you believe that a sector's
    profitability should be used as justification for more
    regulation?
        Mr. Powell. I think it is important for businesses to be
    profitable. It is a good thing. And for banks it is how you
    accumulate capital. It is the reward for servicing your
    companies, your customers well.
        Mr. Williams. ``Profit'' is not a dirty word. It never has
    been.
        Next question, we need our economy to let the private
    sector continue to build wealth for individuals. And the
    government--the people in government don't understand the
    government can help create a job, but it is the private sector
    that creates net worth. And the Tax Cuts and Jobs Act took a
    big step in allowing businesses to keep more of their hard-
    earned money and invest it how they see fit.
        The other major step that was taken last Congress was the
    passage of Senate bill 2155, which will continue to roll back
    the overly burdensome regulations that have been hurting small
    businesses and Main Street for years. They are finally seeing a
    little respite and they are able to do business.
        So do you believe the Federal Reserve has been coordinating
    effectively with the other Federal regulators to implement this
    much-needed regulatory relief bill?
        Mr. Powell. I do. We are implementing it. We have a lot of
    resources, and there is a lot to do under S.2155, as you know,
    and as I mentioned yesterday, it is our highest priority. It is
    the biggest thing we are working on right now.
        Mr. Williams. Thank you for being here, and I yield back.
        Chairwoman Waters. Thank you very much. And I am pleased
    you like our slide.
        The next person that we have up is the gentleman from
    Illinois, Mr. Garcia, for 5 minutes.
        Mr. Garcia of Illinois. Thank you, Madam Chairwoman, and
    ladies and gentlemen of the committee.
        Chairman Powell, when you served as Governor overseeing the
    Reserve Banks, you sent the Reserve Banks an annual letter
    suggesting candidates from a range of labor and community
    groups. Why do you think it is that your suggestions have
    largely been ignored, and why is the Fed still sluggish in
    choosing and electing class B and C directors from backgrounds
    outside of business and the Wall Street community?
        Mr. Powell. Actually, Congressman, I think we have made
    pretty good progress there. We now have, I guess, it is 24, I
    think, community interest--community group people, and I think
    six of the Reserve Banks have a person from labor on the board.
    So we have made real progress there.
        And I think also, I think our record on diversity for the B
    and C directors is actually an excellent one and a record that
    I am proud of. In the last 5 or 6 years, we have really made
    quite big strides there.
        Mr. Garcia of Illinois. Well, Chicago for one, I think, has
    been a leader in that regard. The Chicago Fed has one of the
    most diverse boards--as I understand it, it is the only Reserve
    Bank to have one director from a labor background, one director
    from an academic background, and one director from a community
    organization on its board.
        As a matter of fact, two women who happen to be African
    American and one Latino comprise that diversity in Chicago.
    Have you spoken with anyone in Chicago at the Chicago Fed about
    how they have been able to surpass other Reserve Banks in
    racial and occupational diversity, and if so, what are the best
    practices that they have shared?
        Mr. Powell. We have an office that deals with the Reserve
    Banks around this particular issue, and I think--I actually
    would say that the progress across the Reserve Banks has been
    quite broad. I know that the--the statistic you are referring
    to is including an academic as well, and there are not as many
    academics.
        Also with many labor people, you have to give up all
    political activity to go on our board. I think that is hard for
    a lot of senior labor people, so it is a challenge for us to
    find--still we do though and we focus very hard on doing that.
    So, yes, we talk to Chicago, but, I wouldn't want to say the
    other Banks haven't made good progress too. I believe they
    have.
        Mr. Garcia of Illinois. Thank you.
        On the subject of mergers and market concentration,
    switching gears briefly, last year the Office of the
    Comptroller of the Currency issued an advance notice of
    proposed rulemaking around the Community Reinvestment Act.
    Fourteen state attorneys general, including the former Illinois
    attorney general, issued a public comment on the OCC's proposal
    expressing concern that the proposal might soften the
    conditions under which a bank's violations of consumer
    protection laws would cause it to be downgraded.
        According to the attorneys general, ``Such a minor
    downgrade will not impact regulators' review of their mergers
    and acquisitions, the only real stick for the CRA compliance.''
    Do you share the concern that these attorneys general express
    that the rare circumstances where the Fed presently steps in to
    interfere in a merger might be undermined by the OCC's
    proposal?
        Mr. Powell. I wouldn't want to comment on the OCC's--on
    that proposal, but I will just say, we haven't changed our
    policy on CRA and mergers. And it still is that we--it is one
    of the things we look at. And we want companies to have
    satisfactory or outstanding CRA ratios who are presenting
    merger applications.
        Mr. Garcia of Illinois. On the merger review, is it correct
    that about 97 percent of all mergers are approved and that over
    the past decade approximately 450 such mergers have been
    approved? Do you expect that to rise even more so?
        Chairwoman Waters. The gentleman's time has expired.
        Mr. Powell. May I respond, Madam Chairwoman?
        Chairwoman Waters. Yes, you may.
        Mr. Powell. Sorry. I have to look at the numbers. Many
    merger proposals are withdrawn when we raise questions about
    them. Most often, you don't wind up actually turning down a
    proposal. People just withdraw it because they can see it is
    not going to be approved. And there is a fair amount of that.
    It is way more than 3 percent, I believe.
        Mr. Garcia of Illinois. Do they withdraw because of CRA?
        Mr. Powell. They withdraw because they know--yes, I mean,
    among other--
        Mr. Garcia of Illinois. Compliance.
        Mr. Powell. Well, they withdraw because they can see that
    this is either going to take a really long time or it is
    probably not going to be a successful effort. So--or for other
    reasons, but in any case, we haven't changed our policy on CRA.
        Mr. Garcia of Illinois. Thank you, Madam Chairwoman, for
    your indulgence. I yield back.
        Chairwoman Waters. Thank you.
        The gentleman from Arkansas, Mr. Hill, is recognized for 5
    minutes.
        Mr. Hill. Chairman Powell, welcome back to the committee.
    We are delighted to have you here. Thank you for your steady
    hand on the tiller of monetary policy at the Fed, and we are
    grateful for all the time you spend on both sides of the Hill
    answering our questions.
        I want to follow up on my friend from Kentucky, Mr. Barr's,
    line of questioning on the balance sheet, and, again, just
    looking for some detail as you look at the normalization
    process.
        I noted that the balance sheet was down about $368 billion
    January to January or about a 9 percent reduction. And if you
    think about the size of the economy and your comments that you
    have made about the future balance sheet size, it occurred to
    me that if, just for discussion purposes, the Fed balance sheet
    was down at 10 percent of GDP, so $2 trillion in theory as
    opposed to the 6 or 7 percent it was before the financial
    crisis, that at this rate it would take about 5 years to
    normalize in that range.
        And as you began to think about the balance sheet, have you
    all--that would be about 16 years after the financial crisis
    that the balance sheet would be normalized. If you look at the
    rolling off of the portfolio, what range of years do you think
    it would reach? I know it is--I am looking for some range of
    the denominator.
        Mr. Powell. So the level of demand for our liabilities,
    principally reserves and currency, but also the Treasury
    general account, which is a place where Treasury keeps cash,
    more cash than they used to, and also the designated financial
    market utilities keep their rainy day cash there. The demand
    for those liabilities is so much higher that we are actually
    not very far from the level of that demand. And our estimates
    of the demand, particularly for reserves, among the large
    banking institutions have gone up quite a lot just over the
    course of the last couple of years.
        So in terms of years, I actually think we are going to be
    in a position, we are working on a plan, in fact, to stop
    runoff later this year. We may still be a bit above equilibrium
    demand for reserves, but we are not looking to limit the growth
    of the other liabilities because we think they meet important
    demands from the public.
        Mr. Hill. So you are suggesting that sometime this year, on
    the asset side, you would stop letting the securities roll off?
        Mr. Powell. That is right. And so that will be about 16, 17
    percent of GDP, whereas it was 6 percent before.
        Mr. Hill. Yes.
        Mr. Powell. And the difference really is currency is a
    bigger part of--currency as a percentage of GDP and the same
    thing with reserves.
        Mr. Hill. When you look at the composition, I know you have
    testified, and Vice Chairman Quarles has too, that you prefer a
    Treasury-only balance sheet, and you have heard discussions in
    this committee previously where we recognize in periods of
    crisis that the Fed might take other assets but that many of us
    believe they should have swapped those back out over at the
    Treasury so that the central bank only maintains a Treasury
    portfolio.
        Do you still hold that view? And what is your view of Mr.
    Quarles' comments last week that he would look at limited sales
    of the CMBS portfolio?
        Mr. Powell. We have said that we want primarily a Treasury
    balance sheet. We have also said that we hold the possibility
    out there that at some point--and this isn't something we have
    decided. It is not something in the near term--we would do
    limited sales of MBS to hasten that process along.
        I think where we are with the balance sheet is we have a
    bunch of decisions to make, and the one on MBS sales is
    probably closer to the back of the line. Really we have to
    decide about the maturity composition and things like that. We
    will be working through that in a very careful way. Markets are
    sensitive to this so--
        Mr. Hill. Yes. I know the markets would certainly connect
    with those sale, and I think I would encourage that.
        I want to switch gears and talk about another U.K. issue
    that is not Brexit, and that is the subject of open banking,
    the U.K.'s payment services directive, which is also termed
    informally as open banking. And I would like to get, if not
    your thoughts today, get your thoughts in writing about the
    promise of open banking as benefits for more competition.
        And this is where consumers have access to all their data,
    brokerage banking that they get to control. It is a way to have
    better data security and more consumer security. It has been
    required now of the major banks in the U.K. Are you familiar at
    all with that and--
        Mr. Powell. I am not familiar with the U.K. aspect of it. I
    am familiar with the fact that it is a very interesting and
    important issue here.
        Mr. Hill. I think as we look at FinTech in our markets and
    as we look at ways to level the competitive playing field
    between the G-SIFIs and everybody else, this will be an
    emerging issue, and I would invite your comments in the future
    about that. Thank you.
        Mr. Powell. Great. Thank you.
        Mr. Hill. I yield back.
        Chairwoman Waters. Thank you.
        The gentleman from New York, Mr. Zeldin, is recognized for
    5 minutes.
        Mr. Zeldin. Thank you, Madam Chairwoman.
        And thank you to Chairman Powell. You have been a great
    resource for--and very open and transparent for my inquiries
    recently, in my office, just a couple weeks back. And I just
    want to thank you for how available you are for concerns of
    this committee and Members of Congress. You have been great.
        I wanted to follow up on the 2016 heist of $81 million from
    Bangladesh's central bank, which exploited vulnerabilities in
    the New York Fed's fraud detection process. According to a 2016
    investigation, Reuters concluded that, ``inertia and clumsiness
    at the New York Fed was a key factor in the theft of these
    funds.''
        I understand that the New York Fed established a hotline
    for global banks following the heist, but could you provide us
    with an update on additional measures the Fed has taken to
    rectify the problems identified in the Bangladesh case? And are
    you confident that the Fed would prevent any payments if a
    similar hack was attempted in the future?
        Mr. Powell. I think the Fed--the New York Fed and central
    banks all over the world frankly were very struck by that event
    and have--and there have been actions at the international
    level to look at principles and things we can do.
        And so I think we have tried to harden our systems to that
    kind of a fraud, where someone actually gets control of another
    central bank and starts to--and is able to in effect pretend to
    be that central bank and try to withdraw dollars or--so I think
    we have worked hard on that problem. We have also tried to
    imagine other ways that the system can be invaded in that way.
    So it is something we have put a lot of resources in.
        Mr. Zeldin. Over the course of today's hearing you have
    received a lot of questions, a lot of comments. Is there
    anything--I have some available time left. Is there anything
    that you are looking to clear up with any available time or no?
        Mr. Powell. I don't think clear up, no--
        Mr. Zeldin. Great. Well, thank you for--
        Mr. Powell. I have an open microphone, you know, but--
        Chairwoman Waters. Will the gentleman yield?
        Mr. Zeldin. Madam Chairwoman?
        Chairwoman Waters. Yes. If the gentleman will yield--
        Mr. Zeldin. Yes, ma'am.
        Chairwoman Waters. --I will help you to post more questions
    to the chairman. Would you ask him--well, I will ask him if you
    are yielding to me, if you will expound more on the stress
    test. It has come up and I alluded to it when I opened.
        And I am worried that what you are recommending will
    basically create the kind of transparency where you are giving
    banks the answers ahead of time. And that is not what was
    intended in Dodd-Frank. Would you help us with that?
        Mr. Powell. Sure. We think stress testing is probably the
    most successful post-crisis regulatory innovation, and we
    absolutely intend to preserve stress testing as a key pillar of
    post-crisis regulation, especially for the very large financial
    institutions.
        I think we--the idea that we would give them our actual
    models is not a good idea for a couple of reasons: One, that
    really would be showing, in effect, giving away the test; but,
    in addition, I think it would create real incentives for banks
    to kind of stop thinking about the way--about risk on their own
    and kind of relying on our thinking about risk and our loss
    rate estimates.
        We want them to model their own risks and not use our
    models. And, of course, we want to check it with our models. So
    we have stopped way short of that. But we have provided more
    transparency and I think appropriately so. I think in--you
    know, in our system of government we owe a level of
    transparency to the public, and I think we have tried to strike
    the right balance.
        Mr. Zeldin. Madam Chairwoman, kindly, if I could reclaim my
    time, I would like to yield to the ranking member, Mr. McHenry.
        Chairwoman Waters. Thank you.
        Mr. McHenry. Thank you.
        Along the same lines, the living will process and the
    stress test process, I agree have had a beneficial impact. The
    complaint I have heard from those who have to submit to the
    stress test is they don't get any feedback. It is pass or fail,
    everything is on the line, and they hear when the public hears,
    and they pass or don't and that is all they hear.
        So what is the feedback you are giving them on this
    measure, to the chairwoman's similar question? And in her view,
    you are lessening the burden; in my view, you are better
    communicating with those people you are seeking to get
    information from. So how do you see that?
        Mr. Powell. So, I guess, my sense was and I will go back to
    the office and look into this, but my sense was there is
    actually quite a lot of feedback, for example, at the staff
    level and also above the staff level.
        For example, if you have one particular business that is
    important to you, then we are going to look at the risk models
    and we are going to be evaluating them and see that they are
    capturing evolving risks and that kind of thing. And a lot of
    that kind of thing comes out in the stress test and in our
    feedback.
        Mr. Zeldin. I yield back.
        Chairwoman Waters. Thank you. The gentleman's time has
    expired.
        The gentleman from Guam, Mr. San Nicolas, is recognized for
    5 minutes.
        Mr. San Nicolas. Thank you, Madam Chairwoman.
        And thank you, Chairman Powell, for being with us today.
        In a prior setting, I posited a question with respect to
    interest rate policy and how it can be applied to various size
    companies. And I want to, I guess, reinitiate the inquiry, but
    first begin by kind of laying the foundation for why I am
    posing the question.
        The Fed has a dual mandate to stabilize prices and provide
    for maximum employment. But when we pursue interest rate policy
    that applies across the board to all institutions equally,
    sometimes we may be carving into one at the expense of the
    other. For example, community banks and smaller financial
    institutions don't have the same employment figures necessarily
    as those areas that are more commonly served by the ``big
    banks.''
        In the more rural areas that are serviced by community
    banks, you will find that the unemployment figures are higher
    than they are when factored against the national average. On
    the other hand, when it comes to price stability and using
    interest rates to try and reduce the amount of capital in the
    economy, the big banks are the ones that are more pervasive in
    terms of the consumer credit that they issue on a net basis.
        And so if we were to, for example, raise rates to try and
    stabilize prices, that rate increase would apply to both
    community banks and big banks, thereby reducing the lendability
    of the community banks the same way that they would impact the
    bigger banks. But what that would do is it would exacerbate the
    employment circumstances in the rural areas while also
    containing the prices on the big bank areas.
        And so my question that I posited in a prior setting that I
    would like to put on the record here today is whether or not
    the Fed would consider bifurcating interest rate policy to
    consider a different interest rate policy with respect to
    community banks or smaller institutions and the areas they
    serve versus the larger institutions and the more broad stroke
    that they have on the overall financial system?
        And just to kind of tie up my question, again, in our
    previous setting I mentioned that the contagion risks, the
    systemic risks that community banks pose are more diluted
    versus the systemic risk that our big banks present. And so
    that also just kind of puts into my mind the fact that an
    interest rate policy that looks at both service areas a little
    differently might actually help to not only improve employment
    numbers but to do so in rural areas that are dragging down the
    overall average and to do so in a way that may not necessarily
    impact pricing pressures because it is not an across-the-board
    rate policy.
        So could you please share your thoughts on the idea of
    perhaps bifurcating interest rate policy between larger
    institutions and smaller institutions?
        Mr. Powell. That is an interesting question. I think it
    would not, of course, be in keeping with the tradition of
    interest rates, which is our policy rate is, you know, it
    applies to the whole economy, and we don't get into
    distinguishing between different borrowers and that kind of
    thing. I wouldn't want to see us going down that road. That is
    more for you to distinguish between different entities under
    the law.
        But I think, again, I wouldn't want to see us going down
    the road of raising rates, different amounts on different
    people and different sectors. I think the interest rate is a
    blunt tool. Remember that we are not elected. We are, you know,
    we have--we are not supposed to be--we are supposed to be with
    interest rates just operating at the national level and I think
    that is probably a healthy thing.
        Mr. San Nicolas. I appreciate your feedback. But, when we
    get back to the question of the mandates of the Fed--and the
    mandates are very clear: stabilize prices; and maximize
    employment. But if the variables that are impacting both are
    different with respect to the institution sizes and the
    interest rates as they apply to them, we may be unnecessarily
    impacting employment in pockets of the country by taking a
    broad stroke approach on interest rates with respect to the
    pursuit of price stability, for example.
        And so while I don't encourage the Fed to necessarily pick
    and choose, if we were to have the Fed consider growing and
    evolving its mandate in a way that is using the available data
    that is out there to be able to target the employment areas
    that are typically more exacerbated in the community or rural
    bank places while also pursuing an interest rate policy of
    price stability that is more so impacted by the bigger banks, I
    think that that is something that will be worthy of
    consideration. So I just wanted to put it on the record.
        Thank you, Madam Chairwoman. And I yield back.
        Chairwoman Waters. The gentleman from Georgia, Mr.
    Loudermilk, is recognized for 5 minutes.
        Mr. Loudermilk. Thank you, Madam Chairwoman.
        And thank you, Chairman Powell, for sitting through this
    again. I have several issues I want to touch on, but first of
    all, something you and I have spoken about privately and
    something that Mr. Luetkemeyer brought up, being CECL. I have
    emphasized my concern. He has expressed his concerns about the
    potential impact it would have on our economy. First of all, I
    appreciate the numbers that you brought forward to us, the
    strength of our economy, the incredible economic expansion and
    the long-term expansion we have seen. This is good news, good
    news for everybody in the country in all demographics. We don't
    want to do anything to suppress that at all.
        One of the grave concerns that the manufacturers have in my
    district, which was surprising to me as I met with them, and I
    asked their concerns, of course, trade is always a concern with
    them. But the number one concern was the lack of single-family
    homes, entry-level homes so that the large number of employees
    they are bringing in have a place to buy, to enter into the
    housing market.
        So I would just reemphasize the concern that we have had as
    we would love to see an offset in capital requirements with
    CECL to make sure it doesn't suppress this great economic gain
    that we have made.
        But to move onto some issues, as you and I have spoken, I
    have an IT background and I also represent Georgia, which
    contains about two-thirds of the payment processors across the
    nation. And so I know that the Fed is exploring the possibility
    of getting into the payment business and especially with the
    realtime payment network.
        My question, and I haven't fully developed an opinion on
    this, but I am very hesitant whenever the Federal Government
    engages in any practice that competes with the private sector,
    my first question would be, if you do establish a realtime
    payments network, is it appropriate for you to continue serving
    as the regulator for the private sector with which you would be
    competing?
        Mr. Powell. We do have some instances where we operate, for
    example, ACH and there is another ACH operator. I think though
    it is a fair question, and we do hold ourselves to a big
    standard in that. It is not a--by the way, it is not a payments
    network really. It is a settlement system. Really only the
    central bank can provide real, final settlement in immediately
    available funds. The private sector can provide that too to
    some, but it is actually on its own books. It is a little bit
    different approach.
        Mr. Loudermilk. Okay. And one of the things that you have
    indicated with the request for comment is that if you do
    implement the system, it would be fully compatible with the
    private sector networks.
        Mr. Powell. Yes.
        Mr. Loudermilk. What have you done to ensure that this
    would be the case, that it would be fully compatible?
        Mr. Powell. Well, we just will have to do that. That is an
    undertaking that we have made. And we haven't decided to do
    this yet, so, but if we do it, it will absolutely be fully
    compatible.
        Mr. Loudermilk. Is there any thought, once you establish
    this, of eventually privatizing?
        Mr. Powell. I hadn't thought of that.
        Mr. Loudermilk. Okay. I am a big fan of privatization, and
    as Mr. Williams pointed out, you are a capitalist. I am a
    strong proponent of the free market and competition, but also I
    am very hesitant when the government which regulates a certain
    area competes in it as well.
        One of the other areas I would like to ask you a question
    about, is first of all, I appreciate all the work that you have
    done in tailoring the proposal for reasonable banks under
    S.2155. When will the Fed produce a rule on tailoring
    prudential regulations for U.S. subsidiaries of foreign-owned
    banks?
        Mr. Powell. We are working on that, and I do think that is
    something we, I believe, expect to get done pretty shortly
    here.
        Mr. Loudermilk. Is there a reason why it has taken so long?
        Mr. Powell. It is just complicated, and we have--I think we
    have done a dozen rulemakings under S.2155. It is--there are
    just a lot of things in the law, but we are working on that
    one.
        Mr. Loudermilk. Okay. The end result, do you think it will
    be similar to the proposal for domestic regional banks?
        Mr. Powell. Conceptually, we are trying to treat them
    similarly, yes.
        Mr. Loudermilk. Okay. Well, I encourage you to move forward
    as quickly as possible, but not to the point that we don't have
    a good end product but also to keep our domestic banks in mind.
        The last question, just a little bit off the cuff,
    regarding cryptocurrency, I know the Securities and Exchange
    Commission is currently regulating it. Do you have any position
    or thoughts from a monetary policy standpoint on the impact of
    cryptocurrency?
        Mr. Powell. From a monetary policy standpoint, the
    implications are not large, certainly in the near term. People
    are not using cryptocurrencies in large size for payments, for
    example. It has really been more of a store of value for some,
    and you can see that it is highly volatile, so I think it is
    not attracting a lot of success there. We can talk about it
    more offline.
        Mr. Loudermilk. Okay. Thank you.
        Chairwoman Waters. The gentleman's time has expired.
        The gentleman from North Carolina, Mr. Budd, is recognized
    for 5 minutes.
        Mr. Budd. Thank you, Madam Chairwoman.
        And, Chairman Powell, I appreciate you being here today,
    for your steady hand and your continued service, so, again,
    thank you.
        Back in 2017 the Treasury Department issued a series of
    reports. They had recommendations for streamlining and
    improving the regulation of the financial systems so that it
    creates maximum value for American businesses and consumers.
    While progress has been made on some of those recommendations,
    there are still some that even 18 months later, haven't been
    implemented.
        An example of that would be a requirement that banks
    exchange margin on transactions between their own affiliates or
    the inter-affiliate margin, I think it is called. It is a
    requirement that is not imposed over at the CFTC or by
    international regulators.
        According to a recent survey, this ties up about $40
    billion in capital with no known benefit and it actually
    prevents banks from most efficiently managing risk in this
    area.
        Last November, Vice Chairman Quarles agreed that the
    regulators should prioritize this issue and that the agencies
    had the ability to move into compliance with the rest of the
    world on this. Can you describe the Fed's plans to implement
    the Treasury's recommendation with this initial margin
    requirement, when it would be exempted and when we might expect
    to get some progress on this?
        Mr. Powell. I know it is something we are working on, and I
    don't have a date for you or really a result, but I can get
    back to you on that.
        Mr. Budd. Do you have the sense that it is actually a
    priority?
        Mr. Powell. Yes. But remember, with S.2155 we have a lot of
    priorities right now, and that is one which is certainly under
    active--it is being worked on actively, I know that.
        Mr. Budd. Thank you. I appreciate that.
        I want to switch over to CECL or the current expected
    credit loss rule, and ask a couple of questions on that. As
    currently structured, a lot of us on both sides of the aisle
    think that CECL prevents or presents a major capital volatility
    risk affecting pricing and ability of lending for 30-year
    mortgages and to borrowers of lower quality credit, especially
    during downturns. Personally, I feel that it is pro-cyclical.
        There have been proposals made that before implementing
    this major accounting change, there should be a quantitative
    impact study conducted to look at these concerns. So I worry
    that this 3-year phase-in that the Federal Reserve recently
    finalized does not address this underlying pro-cyclicality
    issue. Do you see any harm in conducting such a study, this
    QIS?
        Mr. Powell. You know what, I think we have--I can go back
    and look at that, but I think we don't think it will have that
    effect but we are going to be watching very carefully--
        Mr. Budd. So to do a study on it, would it be reasonable
    even to do a QIS? There are varying opinions among very
    respected people on this. So a QIS would be reasonable?
        Mr. Powell. I would have to go back and talk to the group
    on this, but this is something we have been working on for 10
    years. I think there has been a lot of thought that has gone
    into it. And I don't have an answer for you on QIS but I can
    get that.
        Mr. Budd. But as you stand right now, you don't have any
    known harms that a study would do?
        Mr. Powell. Well, I don't sitting here today, but I don't
    know how long it would take, and I am not sure what we have
    done on that front. I can check.
        Mr. Budd. Sure. I would encourage us to do our homework as
    much as possible, including a QIS. Thank you.
        I want to go back briefly to international insurance
    regulation and your conversation with Congressman Duffy. You
    told Mr. Duffy that you wanted to negotiate something that
    ``works for the U.S.'' Thank you for that, by the way.
        This is still just a little bit ambiguous for a lot of us,
    but there are really only two possible outcomes that you could
    try to achieve, either we are trying to reach an agreement that
    will require the U.S. to adopt some specific changes to our
    system or we are trying to have the U.S. system achieve a
    formal mutual recognition that would require no changes to our
    system of insurance regulation.
        So do you have a preference which way are you headed,
    either we get mutually recognized as is, or are we going to
    force changes on the system?
        Mr. Powell. I think, you know, we are not looking to change
    the fundamental nature of our insurance system. We think it
    works well. We are also looking to have an international
    agreement that works with our system.
        So I am not sure that exactly responds to your question,
    but we are certainly not looking to say, okay, we have
    negotiated this deal with this group abroad and we are going to
    come back and it substantially changes our insurance regulation
    system. That is not going to happen.
        Mr. Budd. So more of a mutual recognition, this is how it
    works?
        Mr. Powell. Yes, I don't say that--there may be some things
    that we take on board which sound like good ideas. I don't
    really know much about the details. But I know that we are in
    very, very close contact all the time with the State
    supervisors on this. We have had quite a lot of consult on this
    and--
        Chairwoman Waters. The gentleman's time has expired.
        Mr. Budd. Chairman Powell, thank you. I yield back, Madam
    Chairwoman.
        Chairwoman Waters. The gentlewoman from Ohio, Mrs. Beatty,
    is recognized for 5 minutes.
        Mrs. Beatty. Thank you, Chairwoman Waters, and Ranking
    Member McHenry.
        And thank you, Chairman Powell, for being here today.
        You have had a lot of questions thrown at you from monetary
    and policy and banking and a whole host of things, so I am
    going to shift and talk about people for a little bit.
        I have two questions. The first question is going to be
    centered around the Federal Reserve's bank board's diversity,
    and the second is going to be about income equality and the
    wealth gap.
        So let me start by saying I want to draw your attention to
    a report from the Center for Popular Democracy's Fed Up
    Campaign, which conducts an annual analysis of gender, racial,
    and occupational diversity of the Federal Reserve.
        And, Madam Chairwoman, I would like to submit this for the
    record.
        Chairwoman Waters. Without objection, it is so ordered.
        Mrs. Beatty. The Federal Reserve Act, as you know, of 1913
    in 12 USC 302 that class B and class C directors are to be
    selected to represent the public with, quote, due but not
    exclusively consideration to the interest of agriculture,
    commerce, industry, service, labor, and consumers, and without
    discrimination.
        However, the analysis done by this report suggests that the
    Federal Reserve Banks around the country are not representative
    of the public at all. The report found, quote, that in 2019,
    among the 108 current Federal board directors, 70 percent--76
    percent come from the banking or business sector, 74 percent
    are white, and 62 percent are male.
        Additionally, the report found that an overwhelming number
    of Federal Reserve Bank presidents are overwhelmingly white at
    83 percent. The most troubling aspect of the report was what
    happened just last year. In 2018, the incoming board of
    directors was comprised of 50 percent people of color, and 43
    percent women. But in 2019 we backslid with incoming directors
    who were from 82 percent banking or business sectors, 75
    percent white and 61 percent male.
        You have consistently committed to this committee that you
    are committed to diversity, of which I am very appreciative.
    And let me remind you of a quote that you gave: ``We make
    better decisions when we have diverse voices around the tables,
    and that is something we are very committed to at the Federal
    Reserve.'' You probably remember saying that.
        So do you have any thoughts on this report? Because I am
    concerned that we are losing momentum on this issue that was
    started by Janet Yellen, your predecessor. And I am thinking
    that I may need to expand my legislation to include the
    ``Beatty Rule'' with the Federal Reserve, patterned after the
    Rooney Rule, which I am sure you are also familiar with,
    because we have had dialogues about it. Do you have any
    thoughts on that?
        And because my time is probably going to run out, I want
    you to also address, when asked about the challenges--you did a
    townhall with regular people. I think it was teachers. And you
    cited widely shared prosperity and mobility, the opportunity to
    move from being born into a low quintal of wealth spectrum to
    the highest.
        And so as Chair of the Subcommittee on Diversity and
    Inclusion, I am certainly interested in this and would like to
    know if you can elaborate on what you believe to be one of the
    top challenges this economy faces over the next decade as
    related to diversity and inclusion?
        Mr. Powell. Okay. Thank you.
        I think that my experience over my private sector career
    and public sector career has been that successful organizations
    value diversity, value inclusion, value freedom to speak, and
    those sorts of things. And that is certainly true at the Fed. I
    really do believe that we get better results to the extent we
    have diverse perspectives around the table.
        I feel strongly about that. I have also been involved in
    the selection of Reserve Bank directors now really since I
    joined the Board in 2012, and I think that we have made very
    substantial progress there. And I am proud of the progress that
    we have made. I think if you look at the numbers over the last
    5, 6, 7 years, the number of the diversity among B and C
    directors is actually higher than the numbers that you read
    from that report.
        Mrs. Beatty. Let me interrupt you for one second. That is
    very true of Chicago, but then when you look at Dallas, it is
    the direct opposite.
        Mr. Powell. I know the numbers at the aggregate level, I
    think, of the B and C directors that we currently have, 70
    percent are diverse in one dimension or another and 25 percent
    are African American. And these numbers have come way up from
    where they were 7 or 8 years ago.
        If I could just say a second on the Rooney Rule, we are way
    past the Rooney Rule. I have been involved in eight selection
    processes for Reserve Bank presidents and in every case we have
    had multiple diverse candidates, racially diverse, gender
    diverse, all kinds of diversity. We--and Reserve Banks, you
    know, hire a national search firm and they go into that.
    Anyway, sorry.
        Mrs. Beatty. We can talk later. My time is up.
        Chairwoman Waters. The gentlelady's time has expired.
        Chairman Powell has a hard stop at 1:00. We are going to
    get our last Member in, Mr. Davidson from Ohio. You are
    recognized for 5 minutes.
        Mr. Davidson. Thank you, Madam Chairwoman.
        Chairman Powell, thank you for your testimony. And I know
    it has been a long stretch there at the microphone, so it is an
    honor to be able to get this question in and several hopefully.
        Really with great foresight, Congress has acted at times
    and sometimes not so much. One of the things Congress got right
    was the Telecommunications Act of 1996. And the reality is, our
    economy is so vibrant because it is fostered in an amazing
    amount of innovation.
        Incredibly with the internet, Congress had the foresight to
    say it is the policy of the United States to preserve the
    vibrant and competitive free market that presently exists for
    the internet and other interactive computer services unfettered
    by Federal or State regulation. Now, it wasn't zero regulation.
    There was a framework for it, but it was fairly light touch.
        As we look at the token economy, tokenized assets and the
    crypto market, inherently people think of Bitcoin. They think
    of Bitcoin as the first website that you came across. You might
    like it, you might hate it, but it certainly didn't represent
    the internet because it was a website.
        And Bitcoin doesn't represent blockchain anymore than a
    website represents the internet. It is one use. But as our
    country has kind of been reluctant to provide any regulatory
    certainty, capital has fled the United States where this
    innovation initially was off to a good start for other
    pastures. Do you believe that regulatory certainty could foster
    increased innovation in this market in the token economy?
        Mr. Powell. I would want to understand that better, but,
    yes, that makes sense on its face to me.
        Mr. Davidson. And when you look at consumer protection, for
    example, the SEC is focused on protecting the securities
    market. And the concern is, if everything looks like a
    security, there is a lack of certainty for investors. And so
    the Token Taxonomy Act, a bipartisan legislation, that would
    provide that certainty to say if it meets these criteria then
    it is not a security is one that we are currently working on
    and hope to move through this committee in short order.
        Beyond that, obviously the scope of the Federal Reserve has
    a charter. And earlier in your testimony, you talked about 2
    percent inflation as a target. Here in Congress, and around the
    country in certain sectors, people hear 2 percent plus or minus
    zero deviation, certainly no long-term deviation. Can you state
    that or confirm that it is a policy to target precisely 2
    percent or to what extent is there some level of variance for
    higher or lower inflation?
        Mr. Powell. Yes. We say that inflation--that our objective
    is 2 percent but it is a symmetric objective. Because, of
    course, in the nature of an economy, it is never--it will
    rarely be exactly 2.000 percent. It is going to be a little bit
    higher. It is going to be a little bit lower as economic
    activity fluctuates, as oil prices fluctuate and that sort of
    thing.
        Mr. Davidson. Right. No, but what sort of time horizon do
    you look at that?
        Mr. Powell. Well, one, it is symmetric in a sense that we
    are always going to be trying to get back to that. And these
    things don't move super quickly, so we will be conducting
    monetary policy in a way that achieves both of our objectives.
    We also have our maximum employment objective, so--
        Mr. Davidson. Right. And so in balance and maybe over a
    longer period than a quarter, for example?
        Mr. Powell. Yes. Definitely over a longer period.
        Mr. Davidson. Okay. And the last time we spoke, we finished
    talking about trade. And I think it is fitting we finish
    talking about trade today. Obviously, the United States has
    become really the world's land of opportunity. We are a great
    destination for good services, capital, intellectual property,
    labor, and including people.
        But trade has definitely been a high point for this current
    Administration. We have strengthened our trade deals. We are
    working to strengthen our trade deal with China as we speak,
    but there has been a lot of consternation about tariffs.
        Historically, Congress has overall authority for trade and
    they have delegated that to the presidency. My concern is, as
    we look at 232 tariffs on steel and aluminum, for example,
    while U.S. steel companies have benefited from higher tariffs
    with greater profits, their share prices have been destroyed.
    And part of that is there is no certainty as to how long this
    tariff is going to last.
        If we passed a law, whether it was a 25 percent tariff or a
    200 percent tariff or a zero tariff, would the certainty
    provide better outcomes for the market?
        Mr. Powell. I think certainty in these matters would be
    helpful.
        Mr. Davidson. So toward that end, we are working on the
    Global Trade Accountability Act. My hope is that it can be
    bipartisan and Congress can eventually lock in our rates and
    the trade deals that do make trade great again.
        Thank you, and my time has expired. I yield back. I
    appreciate your testimony.
        Chairwoman Waters. Thank you very much, Chairman Powell. I
    would like to thank you for your testimony today.
        The Chair notes that some Members may have additional
    questions for this witness, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to this witness and to place his responses in the record. Also,
    without objection, Members will have 5 legislative days to
    submit extraneous materials to the Chair for inclusion in the
    record.
        I will ask our witness to please respond as promptly as you
    are able.
        And with that, this hearing is adjourned.
        [Whereupon, at 1:05 p.m., the hearing was adjourned.]

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