[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
                            
                            
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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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