[Joint House and Senate Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 116-274
THE ECONOMIC OUTLOOK
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 13, 2019
__________
Printed for the use of the Joint Economic Committee
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
40-156 WASHINGTON : 2020
JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
SENATE HOUSE OF REPRESENTATIVES
Mike Lee, Utah, Chairman Carolyn B. Maloney, New York, Vice
Tom Cotton, Arkansas Chair
Ben Sasse, Nebraska Donald S. Beyer, Jr., Virginia
Rob Portman, Ohio Denny Heck, Washington
Bill Cassidy, M.D., Louisiana David Trone, Maryland
Ted Cruz, Texas Joyce Beatty, Ohio
Martin Heinrich, New Mexico Lois Frankel, Florida
Amy Klobuchar, Minnesota David Schweikert, Arizona
Gary C. Peters, Michigan Darin LaHood, Illinois
Margaret Wood Hassan, New Hampshire Kenny Marchant, Texas
Jaime Herrera Beutler, Washington
Scott Winship, Ph.D., Executive Director
Harry Gural, Democratic Staff Director
C O N T E N T S
----------
Opening Statements of Members
Hon. Carolyn B. Maloney, Vice Chair, a U.S. Representative from
New York....................................................... 1
Hon. Mike Lee, Chairman, a U.S. Senator from Utah................ 3
Witnesses
Hon. Jerome H. Powell, Chairman, Board of Governors of the
Federal Reserve System, Washington, DC......................... 4
Submissions for the Record
Prepared statement of Hon. Carolyn B. Maloney, Vice Chair, a U.S.
Representative from New York................................... 30
Prepared statement of Hon. Mike Lee, Chairman, a U.S. Senator
from Utah...................................................... 31
Prepared statement of Hon. Jerome H. Powell, Chairman, Board of
Governors of the Federal Reserve System, Washington, DC........ 31
Response from Hon. Jerome H. Powell to Question for the Record
Submitted by Senator Cotton.................................... 33
Response from Hon. Jerome H. Powell to Question for the Record
Submitted by Senator Cruz...................................... 34
Response from Hon. Jerome H. Powell to Question for the Record
Submitted by Senator Hassan.................................... 37
Response from Hon. Jerome H. Powell to Question for the Record
Submitted by Senator Klobuchar................................. 37
Response from Hon. Jerome H. Powell to Question for the Record
Submitted by Representative Beatty............................. 38
Response from Hon. Jerome H. Powell to Question for the Record
Submitted by Representative Heck............................... 39
THE ECONOMIC OUTLOOK
----------
WEDNESDAY, NOVEMBER 13, 2019
United States Congress,
Joint Economic Committee,
Washington, DC.
The Committee met, pursuant to notice, at 11:05 a.m.,
before the Joint Economic Committee, Mike Lee, Chairman,
presiding.
Representatives present: Maloney, Marchant, Beatty,
Schweikert, Frankel, Trone, Herrera Beutler, and Beyer.
Senators present: Lee, Klobuchar, Cotton, Hassan, Heinrich,
Cruz, Portman, Cassidy, and Peters.
Staff present: Melanie Ackerman, Robert Bellafiore, Alan
Cole, Harry Gural, Owen Haaga, Amalia Halikias, Sema Hasan,
Colleen Healy, Ziyuan Huang, Christina King, Kyle Moore,
Michael Pearson, Hope Sheils, Kyle Treasure, Scott Winship, Jim
Whitney, and Randy Woods.
OPENING STATEMENT OF HON. CAROLYN B. MALONEY, VICE CHAIR, A
U.S. REPRESENTATIVE FROM NEW YORK
Vice Chair Maloney. The meeting will be called to order.
The Chairman is on his way. He has asked me to gavel in and
begin my opening statement, and then hopefully he will be here.
We are very, very honored to have Chairman Powell. We thank
him so much for testifying today. I look forward to hearing
your perspective on the current state of the economy, and the
potential challenges ahead.
I would also like to thank you for your thoughtfulness as
you help steer the economy through what in some ways are
extremely challenging times.
As you have said in your testimony, by some measures our
economy is strong. The national unemployment rate fell from 10
percent at its peak during the Great Recession to only 4.7
percent when President Trump took office. And it has continued
to fall. It now stands at only 3.6 percent.
The economy has continued to add jobs now for 109
consecutive months, more than nine years. Inflation remains
low, below the Fed's target. Wages are moving up, though not as
fast as we would like. But it is weak in other ways. Other
measures tell a very different story.
GDP growth has slowed, falling below 2 percent in the third
quarter. Job growth is also slowing. In fact, it has lagged
behind the last years of the Obama administration. About 35,000
fewer jobs have been added per month during the first 33 months
of Trump than the last 33 months of Obama.
Manufacturing is in recession. Business investments have
been shrinking for the past two quarters. And productivity fell
last quarter for the first time since 2015. Some of these more
troubling developments may be a sign of a possible end to our
decade-long economic expansion, or a slow fade from the sugar
high of the 2017 tax cuts.
But the most likely cause of economic uncertainty is the
President's trade war. This leads to a fundamental question:
How should the Federal Reserve act when one of the major
challenges facing our economy is the erratic behavior of our
President?
So I will not ask you to answer that question, but it is on
everyone's mind. You have an extremely difficult job.
Not everyone has benefited from this economy. In past
months, you have conducted a Federal Reserve listening tour
called ``Fed Listens.'' And I want to thank you for taking the
time to hear from Americans from all walks of life who
experience our economy very differently.
As you know, the economy as a whole can be very strong,
while entire segments of the U.S. population struggle. Some
regions still have not recovered from the Great Recession. Not
all demographic groups have shared equally in the economic
growth of the past decade.
As Members of Congress, we need to serve all Americans. You
have shown that this is your concern, too. It used to be that a
rising tide lifts all boats, but that has become less true and
we know that the tide lifts some boats much more than others.
That is why I have introduced legislation that would give
us insight into whom the economy is working for. My bill, with
a lot of my colleagues, the Measuring Real Income Growth Act,
would require the Bureau of Economic Analysis to report GDP
growth by income, and the top one percent alongside the top
line number. It would tell us who is benefiting from economic
growth.
And that takes me back to the fundamental question before
Fed policymakers: How low should unemployment go? How does the
Fed weigh the benefits of very low unemployment vs. the risk of
inflation?
We have had 11 straight quarters of an unemployment rate
below what CBO tells us is the so-called ``natural rate'' of
unemployment. Yet inflation remains comfortably below the Fed
target rate, which raises the question: Has the traditional
relationship between unemployment and inflation weakened?
If it has, then why? Is it downward price pressure from
around the globe? Or increased market concentration in certain
industries in the United States eroding worker bargaining
power? Or are there other factors in play? And what if
unemployment is extremely low suggesting that we are at full
employment?
But the unemployment rate for African Americans or Latinos
remains much higher. What if the unemployment rate for people
in some communities or those who work in some occupations is
stubbornly high?
These are questions with wide-ranging implications for both
fiscal and monetary policy. I look forward to your testimony,
and I yield back, and our Chairman is here.
[The prepared statement of Vice Chair Maloney appears in
the Submissions for the Record on page 30.]
OPENING STATEMENT OF HON. MIKE LEE, CHAIRMAN, A U.S. SENATOR
FROM UTAH
Chairman Lee. Thank you very much for being here, Chairman
Powell, and I appreciate your patience with our schedule. Votes
in committee and on the floor are often difficult to predict,
but welcome to the Joint Economic Committee's annual hearing
with the Chair of the Federal Reserve's Board of Governors.
Chairman Powell, I would like to extend you a warm welcome
and I look forward to our discussion today.
Our economy has finally recovered from the financial crisis
of 2008. Unemployment has reached a 50-year low of 3.5 percent.
It reached that in September, and most recently stood at 3.6
percent.
The share of working-age adults with a job has returned,
mercifully, to pre-crisis levels. However, despite this welcome
return to normalcy within our economy, and in terms of
employment measures, many aspects of our economy remain
unusual, and particularly so for central bankers.
Inflation remains persistently low. In four of the past
five quarters, inflation has been below the Federal Reserve's
two percent target. Treasury Yields also remain low, with a 10-
year borrowing rate of just 1.9 percent.
Interest rates that were once considered extraordinarily
low have become a long-run expectation. These phenomena of low
inflation and low long-term interest rates are not unique to
the United States, but rather they are echoed in most of the
developed markets around the world today.
This moment brings with it some challenges, such as
building a framework for fighting recessions in a low-interest-
rate environment. However, it also brings some significant
opportunities.
With inflation still in check, we may have yet room to
expand employment even further. As ever, it will be important
for the Federal Reserve Board to communicate how it addresses
these challenges and these opportunities. In this regard, a
greater transparency demonstrated by the Federal Reserve during
your chairmanship, Mr. Chairman, is to be commended.
In particular, the Fed has conducted a number of Fed
Listens events around the country, including a historic
conference held in June to hear feedback on current policy
conduct as well as to better understand the effects of monetary
policy at the local level.
Not only will these initiatives promote trust in the
Federal Reserve and in its decision-making, it will provide
important information relevant to monetary policy from
Americans who do not always get a seat at that table and in the
past have not been able to understand how these things operate
as well as they are able to today.
I will now introduce our witness. Mr. Powell is the 16th
and current Chairman of the Board of Governors of the Federal
Reserve System, serving in that role since 2018. He first
joined the Board of Governors in 2012. Prior to his appointment
to the Board, Mr. Powell was a visiting scholar at the
Bipartisan Policy Center where he focused on Federal and state
fiscal issues.
Mr. Powell previously served as an Assistant Secretary and
as Under Secretary of the Treasury under President George H.W.
Bush, with responsibility for policy on financial institutions,
the Treasury Debt Market, and related areas. Prior to joining
the Administration, he worked as a lawyer and investment banker
in New York City.
So we thank Chairman Powell for attending today's hearing
and look forward to hearing his insights. You are now
recognized for your testimony, Mr. Powell.
[The prepared statement of Chairman Lee appears in the
Submissions for the Record on page 31.]
STATEMENT OF HON. JEROME H. POWELL, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, DC
Chairman Powell. Thank you, Chairman Lee and Vice Chair
Maloney, and members of the Committee. I appreciate the
opportunity to testify before you today.
Let me start by saying that my colleagues and I strongly
support the goals of maximum employment and price stability
that Congress has set for monetary policy. We are committed to
providing clear explanations about our policies and our
actions. Congress has given us an important degree of
independence so that we can effectively pursue our statutory
goals based on facts and objective analysis. We appreciate that
our independence brings with it an obligation for transparency
and accountability. Today I will discuss the outlook for the
economy and for monetary policy.
The U.S. economy is now in the 11th year of this expansion
and the baseline outlook remains favorable. Gross domestic
product, or GDP, increased at an annual pace of 1.9 percent in
the third quarter of this year after rising at around a 2.5
percent rate last year and in the first half of this year. The
moderate third-quarter reading is partly due to the transitory
effect of the UAW strike at General Motors. But it also
reflects weakness in business investment which is being
restrained by sluggish growth abroad and by trade developments.
These factors have also weighed on exports and manufacturing
this year. In contrast, household consumption has continued to
rise solidly supported by a healthy job market, rising incomes,
and favorable levels of consumer confidence. And reflecting the
decline in mortgage rates since late 2018, residential
investment turned up in the third quarter following an extended
period of weakness.
The unemployment rate was 3.6 percent in October--near a
half-century low. The pace of job gains has eased this year but
remains solid; we had expected some slowing after last year's
strong pace. At the same time, participation in the labor force
by people in their prime working years has been increasing.
Ample job opportunities appear to have encouraged many people
to join the workforce and others to remain in it. This is a
very welcome development.
The improvement in the jobs market in recent years has
benefited a wide range of individuals and communities. Indeed,
recent wage gains have been strongest for lower-paid workers.
People who live and work in low- and middle-income communities
tell many of them at these Fed Listens events that the Chair
and Vice Chair referred to--tell us that many who have
struggled to find work are now getting opportunities to add new
and better chapters to their lives. Significant differences,
however, persist across different groups of workers and
different areas of the country. Unemployment rates for African
Americans and Hispanics are still well above the jobless rates
for whites and Asians, and the proportion of the people with a
job is lower in rural communities.
Inflation continues to run below the FOMC's symmetric 2
percent objective. The total price index for personal
consumption expenditures increased 1.3 percent over the 12
months ending in September, held down by declines in energy
prices. Core PCE inflation, which excludes food and energy
prices and tends to be a better indicator of future inflation,
was 1.7 percent over the same period. Looking ahead, my
colleagues and I see a sustained expansion of economic
activity, a strong labor market, and inflation near our
symmetric 2 percent objective as most likely. This favorable
baseline partly reflects the policy adjustments that we have
made to provide support for the economy. However, noteworthy
risks to this outlook remain. In particular, sluggish growth
abroad and trade developments have weighed on the economy and
pose ongoing risks. Moreover, inflation pressures remain muted,
and indicators of longer-term inflation expectations are at the
lower end of their historical range. Persistent below-target
inflation could lead to an unwelcome downward slide in longer-
term inflation expectations. We will continue to monitor these
developments and assess their implications for U.S. economic
activity and inflation.
We also continue to monitor the risks to the financial
system. Over the past year, the overall level of
vulnerabilities facing the financial system has remained at a
moderate level. Overall, investor appetite for risk appears to
be within a normal range, although it is elevated in some asset
classes. Debt loads of businesses are historically high, but
the ratio of household borrowing to income is low relative to
its pre-crisis level and has been gradually declining in recent
years. The core of the financial sector appears resilient, with
leverage low and funding risk limited relative to the levels of
recent decades. At the end of this week we will be releasing
our third Financial Stability Report which shares our detailed
assessment of the resilience of the U.S. financial system.
Turning to monetary policy: Over the past year, weakness in
global growth, trade developments, and muted inflation
pressures have prompted the FOMC to adjust its assessment of
the appropriate path of interest rates. Since July, the
Committee has lowered the target range for the Federal funds
rate by three-quarters of a percentage point. These policy
adjustments put the current target range at one-and-a-half to
one-and-three-quarters percent.
The Committee took these actions to help keep the U.S.
economy strong and inflation near our 2 percent objective and
to provide some insurance against ongoing risks. As monetary
policy operates with a lag, the full effects of these
adjustments on economic growth, the job market, and inflation
will be realized over time. We see the current stance of
monetary policy as likely to remain appropriate as long as
incoming information about the economy remains broadly
consistent with our outlook of moderate growth, a strong labor
market, and inflation near our symmetric 2 percent objective.
We will be monitoring the effects of our policy actions,
along with other information bearing on the outlook, as we
assess the appropriate path of the target range for the funds
rate. Of course if developments emerge that cause a material
reassessment of our outlook, we would respond accordingly.
Policy is not on a preset course.
The FOMC is committed to ensuring that its policy framework
remains well positioned to meet its statutory goals. We believe
our existing framework has served us well. Nonetheless, the
current low-interest-rate environment may limit the ability of
monetary policy to support the economy. We are currently
conducting a public review of our monetary policy strategy,
tools, and communications--the first of its kind for the Fed.
With the U.S. economy operating close to maximum employment and
price stability, now is an especially opportune time to conduct
such a review. Through our Fed Listens events, we have been
hearing a diverse range of perspectives not only from academic
experts but also from representatives of consumer, labor,
business, community, and other groups. We will draw on these
insights as we assess how best to achieve and maintain maximum
employment and price stability. We will continue to report on
our discussions in the minutes of our meetings and share our
conclusions when we finish the review, likely around the middle
of next year.
In a downturn, it would also be important for fiscal policy
to support the economy. However, as noted in the Congressional
Budget Office's recent long-term budget outlook, the Federal
budget is on an unsustainable path with high and rising debt.
Over time, this outlook could restrain fiscal policymakers'
willingness or ability to support economic activity during a
downturn. In addition, I remain concerned that the high and
rising Federal debt can in the longer term restrain private
investment and, thereby, reduce productivity and overall
growth. Putting the Federal budget on a sustainable path would
aid the long-term vigor of the U.S. economy and help ensure
that policymakers have the space to use fiscal policy to assist
in stabilizing the economy if it weakens.
I will conclude with a few words on the technical
implementation of monetary policy. In January the FOMC made the
key decision to continue to implement monetary policy in what
we call an ample-reserves regime. In such a regime, we will
continue to control the Federal funds rate primarily by setting
our administered rates and not through frequent interventions
to actively manage the supply of reserves. In the transition to
the efficient and effective level of reserves in this regime,
we slowed the gradual decline in our balance sheet in May and
we stopped it in July. In response to the funding pressures in
money markets that emerged in mid-September, we decided to
maintain a level of reserves at or above the level that
prevailed in early September. To achieve this level of
reserves, we announced in mid-October that we would purchase
Treasury bills at least into the second quarter of next year
and would continue temporary open market operations at least
through January. These actions are purely technical measures to
support the effective implementation of monetary policy as we
continue to learn about the appropriate level of reserves. They
do not represent a change in the stance of monetary policy.
Thank you. I will be glad to answer your questions.
[The prepared statement of Hon. Jerome H. Powell appears in
the Submissions for the Record on page 31.]
Vice Chair Maloney. Thank you so much for your testimony.
The Chairman, along with other Senators, is voting. And because
the Fed Chair needs to leave at 12:30 at a hard stop, he is
suggesting that we limit our questions to four minutes so that
everyone gets a chance to question.
So I will start and then go to Representative Marchant
until the Chairman comes back.
So thank you. The full unemployment rate is well below the
Fed's long-run estimate of 4.2 percent. Measures of under-
employment and long-term unemployment also are at a near-decade
low. Yet the unemployment rate for some groups is substantially
higher. For example, the Black unemployment rate, while at a
historic low, is still well above 5 percent.
Is the economy at full employment? Or could a tighter labor
market draw more people back into the workforce?
Chairman Powell. Thank you. So we are charged to achieve
maximum employment. And when we think about maximum employment,
we look at not just unemployment but also labor force
participation; we look at wages; we look at, you know, many,
many data points. And I would say that what we have learned,
and what we will continue to learn, is that the U.S. economy
can operate at a much lower level of unemployment than many
would have thought.
And it is probably not surprising that we would be learning
that now, because we are at levels of unemployment that we have
not seen in 50 years. This is the first time that we have had
unemployment meaningfully below 4 percent for 18 months.
So we are observing this. And we are seeing, as you point
out, that inflation is actually kind of moving sideways. And
wages are moving at a healthy clip, but they are not moving up
in a way that would be--that would suggest that there are
upward price pressures.
So I think we are very open to the idea. I am very open to
the idea that we do not know where maximum employment precisely
is. We have to have significant humility when we make estimates
of that, and we have got to let the data speak to us.
And the data are not sending any signal that the labor
market is so hot, or that inflation is moving up, or anything
like that. So I think what we have learned is that the current
level of unemployment is consistent with a strong labor market,
but it is not one that is in any way presenting difficulties.
And it has many beneficial side effects, including pulling
people back into the labor market, including wages moving up
for people at the lower end of the wage spectrum.
So there is a lot to like about today's labor market, and
we would like to see it continue to be strong. And we are using
our tools to try to make that happen.
Vice Chair Maloney. As you noted, the economy has added
jobs for 109 consecutive months. Unemployment is well below 4
percent. However, the annual wage growth is just 3 percent. Why
is wage growth still below what we would expect with a strong
labor market?
Chairman Powell. We might have expected wages to move up
more this late in a lengthy, lengthy ongoing expansion,
particularly with very low unemployment. And there are a number
of possible explanations for why that has not happened.
One is just the productivity has been lower. So wages
should ultimately equal inflation plus productivity. And that
is right about where we are. We have 3 percent wage growth.
That accounts for about 2 percent inflation and around 1
percent wage growth.
But there are other possibilities. One is just that there
is still slack in the labor market. That can be part of the
answer. We do not know with any precision. It also may be that
the neutral rate of interest is lower than we have been
thinking, and that therefore our policy is less accommodative
than we had been thinking.
So I think we are letting the data speak to us and, you
know, carefully monitoring the situation and trying to get
answers to that question.
Vice Chair Maloney. Some have said it is the increased
concentration in different industries that has given employers
unprecedented power in keeping wages down. Is that----
Chairman Powell. So I think there are a number of other
sort of institutional possible explanations, and trend
explanations. You could point to automation. You could point to
globalization. You could point to concentration among
industries where over time U.S. industries have tended to get
more concentrated as the economy has matured. You could also
point to lower unionization. So any of those factors can well
be playing, and probably all are playing some role in what is a
bit of a puzzle for why we have not seen more of an uptick in
wages.
Vice Chair Maloney. My time has expired.
Representative Marchant for four minutes.
Representative Marchant. Thank you, Madam Chairman. And
thank you for being here today, Chairman Powell.
I would like to focus my questions today primarily on
preparing for the next downturn, whether it be three years from
now, five years from now, whenever it comes.
Historically speaking, is the Federal Reserve positioned as
well as it has been positioned in past recessions when the
Federal Reserve was the primary go-to agency where the Federal
Government said, you know, we need help from you to stimulate
the economy? Are we positioned there, or are we out of
position?
Chairman Powell. Well, if you look at post-war, typical
post-war recessions, what the Fed has done is it has cut
interest rates. And on average the amount of those cuts has
been 5 percent or so. So with the Federal funds rate having
peaked at about 2.4 percent, and now being at about a little
above 1\1/2\ percent, we do not have that kind of room. And
there are a couple of reasons for that.
If you look at the longer-term interest rates which are not
directly affected much by our policy, they have just been
declining for 40 years now. And that is because of inflation
being lower and under control and less volatile, and also just
the aging demographics means higher saving, means more savings
relative to investment, and that puts downward pressure on
interest rates.
So I think the new normal now is lower interest rates,
lower inflation, probably lower growth, and you are seeing that
all over the world not just in the United States. You are
seeing it to a much greater extent in many parts of the world
than we are seeing it here.
So knowing that, that is one of the main reasons we have--
really the basic reason why we are having this public review of
our monetary policy framework to see if there are ways we can
alter our strategies, our tools, and our communications in ways
that would make us more effective in this world where we are
too close, closer than we would like, to zero when we kind of
run out of options.
So that is one thing. Fiscal policy will also be important,
though. I think from the standpoint of monetary policy, we are
looking hard at ways to make sure that we can use our tools
even after rates go to zero. Ultimately, fiscal policy has been
a key part of the counter-cyclical reactions as well, though.
Representative Marchant. And next question. The disruption
in the repo market that took place in September? Anticipated?
Not anticipated? Do you anticipate keeping the expansion at the
level it is until you are sure that will not happen again?
Chairman Powell. Well, so anticipated or not it is a
different world post-crisis, and really because of all the
expansion in our balance sheet. And essentially what we have
done now is we have now required financial institutions to have
a lot more liquidity on their balance sheet so that the Fed
does not have to run in with our own liquidity.
So that--and that is I think a big benefit to the financial
system. But a lot of that liquidity is held in our reserves. We
used to manage the interest rate by keeping reserves scarce,
and we had a total of twenty billion. Right now we have in
excess of one-point-five trillion in reserves. And so that
means that we are trying to find that level as we allowed the
balance sheet to shrink where reserves would become scarce. And
there was really no way to know.
I think the data that we had suggested that we were not
close to that point until September. I think we are still very
much looking at what happened in September, but I think we
learned in September that we needed to make sure that reserves
did not go under that level that we were at in mid-September,
which is a little bit shy of one-and-a-half trillion.
So that is really what we are doing. It is technical. I
think we have it under control. We are prepared to continue to
learn and adjust as we do this, but it is a process. I would
say it is one that does not really have any implications for
the economy or for the general public, though.
Representative Marchant. Thank you.
Vice Chair Maloney. Representative Beatty for four minutes.
Representative Beatty. Thank you, Madam Vice Chair, and to
the Chair. And thank you, Chairman Powell, for being here.
We have four minutes. I have got three questions I want to
try to get through, one on the CRA, one on venture capital, and
one on climate change.
The first one on the CRA, as we have talked about it is
very important to me. I know recently that the Feds and the
Office of the Comptroller and Currency and the FDIC have all
been working on a proposal to revamp that 1977 CRA Act. It is
my understanding that they wanted to do a joint, but we are not
sure if one of the agencies would go along.
CRA is very important to me and to my Third Congressional
District in Ohio, like across the Nation, because of the
resources it puts back into communities. And, more importantly,
minority communities tend to benefit.
Do you have any insight on knowing where they are, or if
they are working together and will be able to meet that end-of-
the-year goal?
Chairman Powell. So we strongly support the mission of CRA,
which is to assure credit availability in the areas that banks
serve, particularly low- and moderate-income communities. We
think it is a good time to modernize, given technological
developments and all kinds of other developments.
We have been working very, very hard with the other two
bank agencies to try to find common ground. And, you know, we
are committed to making sure this reform actually puts us in a
better place to serve the intended beneficiaries of CRA.
We have not quite gotten there yet. We are going to keep
trying, though. And my hope is that we will ultimately be able
to come together with a common answer, which I think would be
better for everyone if we can do that.
Representative Beatty. Okay. My next question is: The
Federal Reserve Bank of San Francisco recently held a
conference entitled ``The Economics of Climate Change,'' and I
believe this was the first ever conference by the Feds on
climate change and the economy.
Can you discuss how the Federal Reserve views the impact of
climate change on our economy and monetary policy, and how the
Fed's views have evolved over time?
Chairman Powell. So I guess I would say climate change is
an important issue, but not principally for the Fed. It is
really an issue that is assigned to lots of other government
agencies, not so much the Fed.
Nonetheless, over time it can affect us in some ways, which
I will mention. One just is that we require financial
institutions and financial market utilities--the large
utilities that are so fundamental to the financial system--we
require them to be resilient against all kinds of things,
including severe weather. There is a link between severe
weather and climate change. So in a sense we are already, to
the extent severe weather is becoming more common, we are
already incorporating that into our supervision.
And we will have to think ahead. We are doing a lot of
research in this area to think ahead about it from sort of a
risk-management perspective. Our perspective is not--we are not
going to be the ones who decide society's response. That is
going to be elected legislatures, not us.
In terms of monetary policy, it does not have any near-term
implications for monetary policy. Over time, climate change
could have effects, but it is not something that we would be
considering now.
Representative Beatty. Okay. And only because of my time.
My last question is: There was a 2018 report by
PricewaterhouseCoopers that found that 80 percent of the
venture capital investments went to just four states:
California, New York, Massachusetts, and Texas.
I am from the great State of Ohio, and so I guess my
question is, startups throughout the rest of the country,
especially the Midwest, are overlooked. Are there any thoughts
on the fact that an overwhelming majority of the venture
capital is going to four states? What effect is this having on
the regions like the Midwest?
Chairman Powell. Um, I would have to look at that study. I
think, you know, a company that is in San Francisco can invest
in a company that is in Ohio, though. So I would hope that they
are not just investing in companies in San Francisco, but----
Representative Beatty. So we should maybe look at some
partnerships and how that works?
Chairman Powell. I do think--you know, look, many of the
successful companies in which venture capital firms invest are
not located in those areas. Some of them are, but some of them
are located anywhere in the country, really, where there are
entrepreneurs.
Representative Beatty. Okay, thank you.
Vice Chair Maloney. Representative Schweikert, four
minutes.
Representative Schweikert. Thank you, Madam Vice Chairman.
Chairman Powell, can I ask more of a global question? If
you look at much of the data from the Fed, from the BLS, from
others, our society is actually in, in many ways, a sweet spot.
(A) Do you agree with that? (B) What do we do policy-wise to
stay there? And for those of us up here, how do we not screw it
up? And then, how do we actually bias it towards the positive?
What would you do?
Chairman Powell. So as I mentioned, a 50-year low in
unemployment. Inflation, low and under control. Labor force
participation, ticking up. Consumer confidence high. The
outlook is good.
I think households generally are focused on, according to
the surveys, are focused on this healthy job market and wages
going up. So it is actually a very good place from that
standpoint. That is not to say that every community has
benefited. We know that is not the case.
How do we keep it there? So the key to this, given the
risks, the risks that we see are slowing global growth and
particularly weaker manufacturing, and that affects U.S.
manufacturing. So the key to keeping this going and to it
continuing are that we keep job creation at a solid level; that
households maintain their confidence; that wages keep moving
up. That seems to be the engine that is driving the U.S.
economy forward at this time.
But I want to go longer term with an answer. I mean the
U.S. faces longer-term issues that really need your attention
around labor force participation and productivity. Those are
the two things that we really--where, you know--in labor force
participation, we lag most other advanced economies. And that
is something we can do something about that really the Fed
cannot do much about.
So it is more about fiscal policy that supports attachment
to the labor force.
Representative Schweikert. So much of the policy that we
all engage in here could be pushing up labor force
participation? We are right now at about what, 63.3----
Chairman Powell. That is right.
Representative Schweikert [continuing]. Which for some of
our models of testimony we had as a committee a couple of years
ago, we did not think we would get that far. But we have
demonstrated that there is slack out there.
Could you touch on what we could do in that demographic
headwind that is where we are in the United States to also
encourage that labor force participation?
Incentives for someone who is older to stay in the labor
force. Getting Millennial males to actually start to equal
Millennial females in the labor force, what would you do?
Chairman Powell. Well I think there is a range of policies,
and they would appeal I think across the political spectrum.
Some of them are about labor demand. Some are about labor
supply. And I think many of them would work. That is the great
thing. And I think, you know, for young males it is going to be
addressing the opioid problem. It is going to be skills and
training and internships. We had a great meeting with a bunch
of experts on internship programs recently.
I think you are seeing older people stay in the labor force
more and more. Their participation is moving up. But you also
see--I mean I think there are lots of programs which are
pulling people, for example, women who have been out of the
labor force back in after their kids are grown up. You see that
happening, as well.
So I think there are just so many things that can be done.
And, again, we lag just about every other wealthy country in
the world in labor force participation for prime-age workers.
This is not where we should be, and I think there are things we
can do about it.
Representative Schweikert. In my last twenty-some seconds,
slight non sequitur. Okay, with the dual mandate, how often in
your conversations with your economist do you get into the
discussion of currency differentials and headwinds that
actually creates both in export and capital coming into the
country? Where are we currency-wise in your conversations?
Chairman Powell. You know, exchange rates are one financial
condition among many, and it happens to be one that is assigned
to the Treasury Department for management. So they--the
Treasury has full responsibility for exchange rate policy; we
do not. It is just another--it is in all economic models, when
we change policy.
Representative Schweikert. So it is just a model input?
Chairman Powell. It is just a model input. In no way is it
a principal driver of the way we think about policy, or the way
other central banks do.
Representative Schweikert. Thank you, Mr. Chairman. Madam
Vice Chair, thank you.
Vice Chair Maloney. Thank you. Lois Frankel for four
minutes.
Lois Frankel.
Representative Frankel. Thank you, Madam Chair.
Thank you for being here, Mr. Powell. I want to read you
something that has just been recently posted by the National
Women's Law Center and get your comment on it. I have a couple
questions related to this.
So we have all heard about the gender wage gap, women on
the average make only 82 cents to the average man's dollar;
much worse for women of color. But there are two sides to a
family's budget: the income that comes in, and the expenses
they pay out.
New research is finding that in addition to the wage gap,
there is rising inequality on how quickly prices are rising for
families struggling the most in the economy. This concept known
as ``inflation inequality'' means the kinds of products that
are disproportionately consumed by richer households--think
organic produce and name-brand drugs--rose in price at a slower
rate than the kinds of products consumed by low- and moderate-
income households.
And a just-released research by Columbia University begins
to quantify these impacts by updating poverty rates for an
adjusted inflation index that accounts for inflation
inequality. And the article goes on to suggest that an
appropriate course of action would be to peg the Federal
poverty threshold to a higher rate of inflation given how many
more people would be considered in poverty when looking at the
expense sides of the ledger.
I would just ask you whether or not any of this enters into
any of your decisionmaking? Whether you have any research on
this, or any comment on this?
Chairman Powell. It is an interesting--so I did see that
research which showed that. So different groups of people buy
different baskets of goods. And in principle inflation can be
higher or lower. This was a piece of research that showed that
the basket of goods that are bought by people at the lower end
of the income spectrum have experienced higher inflation over
time.
So the implication of that would be that their real incomes
are even lower than we think. So I would like to see a lot more
research on that. That is an interesting recent paper that is
getting a lot of attention right now.
There is a--there is no definitive answer. There is a
series that I guess the government currently conducts for
consumer price inflation that looks at a basic basket of goods
that finds a much smaller difference. Nonetheless, it is an
important issue that needs further research.
Representative Frankel. Is that something that you would be
doing? Or do you think somebody else should be doing that
research?
Chairman Powell. Well, our researchers would do it, but you
would tend to see, you know, the agency--whoever does CPI, the
Bureau of Labor Statistics, would do that.
We have researchers who do research on inflation all the
time. I am not sure whether the piece you--I do not think the
piece you mentioned was a Fed piece. But we have researchers
who research----
Representative Frankel. It was out of Columbia University.
Chairman Powell. Yeah, but there were co-authors. There
were several co-authors.
Representative Frankel. And I wanted to ask you another
subject. Could you explain the relationship of our immigration
policy to the employment rate and the economy?
Chairman Powell. Sure. So first, we do not have
responsibility for immigration policy. We do not comment on it.
We do not advise anybody on immigration policy. It is
completely not our role.
But it does kind of connect to our role in, you know, in
analyzing the economy. So you can think of the economy's
ability to grow as consisting of two things. One is how fast is
the labor force growing? And secondly, how much is output per
hour growing? That is what growth consists of, really just
those two things.
In the United States, the trend growth of our labor force
has been very slow. It was two-and-a-half percent in the 1960s.
Now it is about a half a percent, and about half of that is
immigration. So immigration is a key input into our longer-term
growth rate.
And I would say if you look to population growth as a way
to support higher growth for the United States, then
immigration would need to be in your thinking. But again it is
something we do not comment too much on.
Representative Frankel. Thank you. I yield back.
Vice Chair Maloney. Thank you.
Representative Trone.
Representative Trone. Thank you, Madam Chair.
Chairman Powell, thank you for being here today, very much.
I had some questions also on labor market participation, and I
think you have addressed those, and also on immigration, how
that could help us increase our labor pool.
But I was thinking about the status across the country. Now
we have got over 30 states who have put in minimum wage laws
from $13 to $16. And there is something business is affected
with everywhere. How do you see that is going to address the
situation on the mismatch between labor's scarcity and yet this
very low wage growth that we see? And how does that tie into
inflation?
Chairman Powell. Well we do not take a position on the
minimum wage. It is really an issue you have to balance. There
are two things to balance. And if I were you, I would look at a
broad range of research that comes to different perspectives.
But in essentially all the research you see, when the minimum
wage is raised a significant amount, you will see some job loss
and you will see some wage gains.
I would look at a range of that research, and I would try
to think what the right policy is. That is how I would do it.
In terms of inflation, it does not really play much into
it. First of all, our mandate is price inflation not wage
inflation. We do not see wages moving up in any kind of way
that suggests that they would put unwelcome upward pressure on
prices. So I do not really think it is an important part of the
inflation discussion right now.
Representative Trone. In trying to translate this labor
scarcity that we have into higher wages for the American
workers, from 2012 to 2016 we had about a $120 increase per
month in average wages. And then in 2016 to current, that has
been cut in half, about $56 a month.
And yet this is in the time of the lowest inflation, as you
said, in 50 years these last 18 months. So what does that
mismatch between wage growth and lower unemployment mean to our
economy?
Chairman Powell. Well, so we look at a wide range of wage
and compensation measures. And what they tend to show is, if
you go back five years wages and compensation were going up
about two percent. That has gradually moved up to about three
percent.
So the trend has been upward. And that is consistent with a
tighter labor market, lower unemployment and surveys that
suggest the labor market is tight; it is consistent with that.
We have seen wages moving up. And we look--I could tell you the
principal ones we look at, but I think that is true across all
major measures of wages over the last let's say five, six
years.
Representative Trone. Why do you think they have slowed so
dramatically the last two years?
Chairman Powell. You know, I think it is hard to say. I
think average hourly earnings is an important one which peaked
at 3.4 percent earlier this year, or at the end of last year,
and has been sort of trickling down. It is right at 3 percent
now, so it is a fairly modest one.
I am not at all sure why that is. It may be compositional
effects. Some argue that as older workers retire, younger
workers come in at lower. But in any case, you know, it is
consistent with this idea that we are not seeing excessive
tightness in the labor market that is generating out-sized wage
gains.
We are seeing kind of nice wage gains, given inflation and
productivity, but nothing that is at all out of line with that.
Representative Trone. Thank you.
Chairman Lee. Chairman Powell, borrowing as a country, as a
government, more than ever, with debt held by the public
expected to reach 95 percent of gross domestic product within
the next ten years. And yet we are also paying interest on that
debt at an all-time historic low, with the 30-year borrowing
cost of just 2.4 percent.
What is the reason for this, I guess some would say,
fortunate fiscal reprieve at a time when Congress as an
institution has shown really no sign of fiscal discipline at
all? So where does it come from?
Chairman Powell. Well, it really is a long-term trend. For
example, if you were to look at a graph of what the 10-year
Treasury yielded, and if you went back 40 years, what you would
see is a ski slope down. It is all the way down to today. This
is a long-term trend--by the way, it is true all around the
globe.
Now why is that happening? I think first of all it is
inflation getting under control, becoming less volatile, and
ultimately continuing to decline to the point where the risk of
lower inflation is actually greater than the risk of higher
inflation at the moment. That is part of it.
It is also just aging demographics. So as people get into
their later years, they save more. That creates more savings
per dollar of investment. And that tends to drive interest
rates down.
And I do not know that that trend shows no signs of
reversing or anything like that. So that is really what is
going on with these longer rates.
Chairman Lee. Some have suggested that because we in the
United States, that the United States Government borrows in its
own currency. This level of spending is not a problem because
the Fed can just monetize the debt and keep doing so more or
less indefinitely. What is your reaction to that talk? Are
there risks inherent in it?
Chairman Powell. Yes. No, and as I mentioned in my
testimony, the fact that interest rates are lower does mean
that we will pay less in interest. It does not mean that we can
ignore deficits, at all. We are going to have to get on a
sustainable path. What does that mean?
So the debt is growing faster than the economy. It is as
simple as that, in nominal terms. And that is, by definition,
unsustainable. Ultimately you will have to get it to where the
debt is not growing faster than the economy. And it is growing
faster in the United States by a pretty significant margin.
So even with lower rates, and even with decent growth,
there is still going to be a need to reduce these deficits.
And I would say, by the way, that is a need over time. We
are not in the business of advising you when to do that, or how
to do it. But it is inevitable that over time we will have to
do it. And, you know, frankly, if we do not do it what happens
is our children will wind up spending their tax dollars more on
interest than the things they really need like education,
security, and health.
Chairman Lee. In the past you have mentioned uncertainties
in the area of international trade as imposing something of an
economic headwind for us. We have had over the last couple of
years a lot of trade measures going into effect. What has the
Fed learned about the interaction between trade and monetary
policy?
Chairman Powell. So the first thing I need to say is we
should never be heard to be commenting on trade policy. It is
not our job. We try to stay in our lane. But our lane is the
economy. But we do not have any view at all, and we would not
express one, on trade policy itself.
Our lane is the economy. So in principle, anything that
affects our ability to achieve our mandated goals is an
appropriate subject for monetary policy. So we have been
hearing now for a year-and-a-half from companies, and I think
this is fairly widely accepted now, that tariffs, but to an
even greater extent, uncertainty around future trade policy is
for now, it has been weighing on business sentiment, and is
probably part of the global slow-down in manufacturing, in
business investment, in exports in trade, part of the story.
There is a much bigger story out there, but it is a part of
that.
Chairman Lee. I see my time has expired.
Senator Klobuchar.
Senator Klobuchar. Thank you very much, Mr. Chairman. Thank
you to you, Mr. Chairman, for being here today.
Some of the issues that I was going to raise have been
discussed, the challenges ahead with our economy, including the
deficit, which I will note was greatly exacerbated by the last
tax bill, as well as problems in some sectors such as
agriculture, which is very important to us in the Midwest.
But I wanted to focus on a third issue I have, which is
income inequality, and even if people have jobs it is often
hard for them to afford things. And then you have the added
problems and strains. The Washington Post reported this year in
September that income inequality in America is the highest it
has been since the Census Bureau started tracking it more than
five decades ago.
The top one percent experienced income growth of over 200
percent in the last decades, and between 2007 and 2016 the
median wealth of lower-income families fell by 42 percent.
In your opinion, will widening inequality lead to lower
growth expectations over the long term? And what should we be
doing about this?
Chairman Powell. So I guess I would start by saying that I
think we probably would all agree that prosperity should be as
widely shared as possible. And so I would just point to two
aspects of the broader problem that I think are important and
need attention.
The first is just the relative stagnation of incomes below
the fairly high part of the distribution. And that is even
after allowing for taxes and benefits and things like that.
That is one thing where we want to see incomes moving up
broadly across the income spectrum.
The second is mobility. I think you want to see people
moving from the bottom to the top, and vice versa, by the way.
It has to happen, just as a matter of arithmetic.
So, for example, the bottom 20 percent, what are the
chances that if you are born in the bottom 20 percent of income
or wealth you will make it to the middle 20 percent, or the top
20 percent?
The United States actually lags most other wealthy
countries in that measure now. This is very much not our self-
image as a country, and those are things we need to address. So
I think those are important.
Senator Klobuchar. Um-hmm, that is one. And I think
increasing the minimum wage. I have my own views on this, would
be helpful. But as you talk about that, one of our challenges
right now is hooking up our education system with the jobs that
are available right now, and making sure everyone has access to
those jobs.
And I do not think it always means a four-year degree. Some
of the fastest-growing job areas are one- and two-year degrees.
There were 64,000, or 74,000 openings for electricians. And one
of the things I am really focused on is apprenticeships, and
trying to make it easier for people to access those kinds of
degrees.
Could you briefly talk about that?
Chairman Powell. We just met last week with six people who
run apprenticeship programs and funding of apprenticeship
programs around the country in our board room, and I have to
tell you, it is very, very impressive what they can do.
They are focusing on low- and moderate-income communities.
They are getting them in high schools, and out of high schools,
and matching them up with employers who need those people.
They are getting good jobs. It is really working. And the
thing that limits their ability to do this on a much wider
scale is funding.
Senator Klobuchar. Um-hmm. Exactly.
Chairman Powell. It is very impressive what they can do.
Senator Klobuchar. I think a lot of this is how we use our
resources for education, and matching that up. I will ask you,
in writing, a question on retirement. I just think it is
becoming such a challenge in our new economy. And Senator Coons
and I have a bill to address that called, with UP savings
accounts, which I think is a great idea for small and medium
businesses.
But my last thing is back to the income inequality, very
briefly. How would reporting economic statistics by income
bracket benefit our understanding of the economy? We do not
have that right now.
Chairman Powell. We are actually doing something with that
at the Fed. You know, we like to cut data up and look at it in
new ways, and this is one of the things we are doing, is
combining a couple of data sets that we have. We are quarterly
publishing a distributional financial account.
Senator Klobuchar. And when will we get that, then? By the
next----
Chairman Powell. It comes out every quarter. So it is a new
thing that we are doing, and again it is just a combination of
two existing data sets that we have. But we think it is an
interesting insight into the economy. There are a lot of
different ways to look at what is happening in the economy, and
that is an important one.
Senator Klobuchar. Thank you.
Chairman Lee. Representative Herrera Beutler.
Representative Herrera Beutler. Thank you.
So I apologize if some of this ground has already been
covered, but it is a pleasure to be here and to have you. I
would say the growth in the forecast of our economy is probably
the number one thing that impacts the people I serve in
southwest Washington. And so it is helpful to hear from your
perspective.
Specifically, in rural communities where unemployment is
higher than the national average, most of my areas are rural--
although we are bumping up everywhere. I wanted to hear some of
your biggest takeaways. And I have gone through some of your
testimony, again I apologize if you are repeating, but in terms
of outlook and some of the things that we have done in the most
recent years with regard to the Tax Cuts and Jobs Act,
different regulatory changes, but to either maintain the growth
that we have seen, or expand it, what recommendations would you
give?
Chairman Powell. Well, first I think the outlook is still a
positive one. There is no reason this expansion cannot
continue, and there is a lot of value in continuing it. And we
are trying to use our tools to accomplish that.
We are seeing in the 11th year of an expansion, now the
longest in U.S. recorded history, that income gains are the
highest at the lower end of the wage scale. And so it is very
positive.
We are also seeing people being pulled back into the labor
market. There is a lot to like about this rare place of the
11th year of an expansion. And I think we are certainly
committed to doing what we can to extend it.
Representative Herrera Beutler. In that vein, I know your
testimony touched on concerns with regard to the national debt.
Could you elaborate on that, and how it should be addressed,
particularly as it relates to expanding, or at least not
contracting the economy?
Chairman Powell. So I think it is a longer-term issue that
I imagine we all realize will have to be addressed over time.
It is just the case now that the debt is growing faster than
the economy, than the nominal GDP. And ultimately in the long
run that is not a sustainable place to be.
Now how to fix that, it is easy to say that. How you do
that, and when you do that, is an issue that is up to you and
not to us. But I would be remiss in not pointing out that the
consequences of not addressing it are just that we will be
spending more and more, our kids really and grandkids, they
will be spending their tax dollars servicing debt rather than
on the things they really need. As I mentioned earlier,
education, health care, security, all the things that we need,
that they will need, they will be spending more and more of
their money on the debt. You do not need to balance the budget,
or pay down the debt or anything like that, you just need to
get the economy growing faster than the debt. And that should
be I think the goal. And by the way, the successful programs
for countries to get back on a sustainable path tend to take
place over a long period of time and be relatively gradual. And
I would be looking at something that would work over time, but
really would not be giving you a lot of advice on how to do it.
Representative Herrera Beutler. With my final 30 seconds,
do you anticipate maintaining the current Fed rate through the
next year?
Chairman Powell. No, I would not say that at all. What we
have said, what I have said here, and I will go right to the
actual language, is that we see the current stance of monetary
policy as likely to remain appropriate as long as incoming
information about the economy remains broadly consistent with
our outlook of moderate growth, a strong labor market, and
inflation near the symmetric 2 percent objective.
So that is a very data-dependent statement. We do think
monetary policy is in a good place, but we are going to be
watching very carefully incoming data. And if developments
emerge that cause a material reassessment of the outlook, then
we will act appropriately.
Representative Herrera Beutler. Context, context, context.
Thank you. I appreciate it. With that, I yield back.
Chairman Lee. Representative Beyer.
Representative Beyer. Mr. Chairman, thank you very much for
your equanimity, your strong and stable leadership, and for
providing about the most straightforward answers of anybody we
talk to.
Yesterday at the Economic Club of New York, the President
continued his criticism of the Fed saying it had put the U.S.
at a competitive disadvantage. And he also floated the idea of
negative interest rates.
Do you take comments from public officials into account
when implementing monetary policy? And is there any precedent
in U.S. history for this kind of criticism, or praise, from an
American President?
Chairman Powell. We look exclusively at the data, at the
research, and at the performance of the U.S. economy. Those are
the things we--we have a very careful, thoughtful process that
has been developed over decades, over a century, really, and
that is how we try to set interest rates.
We do not consider political factors and things like that
in what we do.
Representative Beyer. Thank you. I have a friend in
Switzerland who went to borrow $10 million and got a negative
interest rate, negative three-tenths of a percent. So they are
paying him $30,000 a year to borrow $10 million.
Do you see any prospect for negative interest rates in the
U.S. economy?
Chairman Powell. Negative interest rates would certainly
not be appropriate in the current environment. Our economy is
in a strong position. We have growth. We have a strong consumer
sector. We have inflation that is a bit below target. So the
very, very low and even negative rates that we see around the
world would not be appropriate for our economy.
You tend to see negative rates in the larger economies at
times when growth is quite low, and inflation is quite low.
That is just not the case here. It is different for some of the
smaller European countries. It is really about keeping their
currency from appreciation, which is the case with a number of
those countries.
Representative Beyer. From December 2015 through December
2018, there were slow consistent increases in rates. And we
have turned that around with recent cuts this year. Is there
enough room to cut rates further, if we get another slowdown or
recession? Have we given up monetary policy as a tool at the
moment for dealing with that?
Chairman Powell. Well, a typical post-World War II
recession has involved rate cuts of close to 5 percent. The
current Federal funds rate is in the mid-150s. So we are well
short of that one-and-a-half percent.
So I think it is a fact not just in the United States but
around the world that central banks are going to have less room
to cut in this new normal of lower rates and low inflation. So
that is why we are conducting this external review of monetary
policy at the Fed. We are looking for ways to make sure that we
have the tools to do what we are assigned to do, by you, which
is achieve maximum employment and stable prices even in
downturns. And that is what we are going to be doing.
I will say also, though, that fiscal policy is often part
of the answer, often a big part of the answer, when there is a
severe downturn. And we would certainly look for that to be the
case if needed.
Representative Beyer. Thank you again by bringing up the
challenge the public debt faces all of us here. I was raised to
believe that money supply and growth were causally related.
That if our money supply grew more quickly than our economic
output that inflation was the inevitable result. But we are at
less than two percent this year. You have muted expectations.
Is there no longer a connection between money supply growth
and inflation? Should I pay any attention to modern monetary
theories, for example?
Chairman Powell. Well the connection between monetary
aggregates and inflation, that is something we all learned in
Econ 101. I did. It was important. It was generally thought to
be--and empirically it was a good relationship.
I think about 40 years ago, as the financial system
developed all kinds of alternative forms of money, the
relationship between monetary aggregates and growth has just
gone away.
And so we do not--we of course look at those aggregates,
but they no longer are a driving part of the theory. It is
really the price of money, as opposed to the quantity that we
look at, which is interest rates.
Representative Beyer. I am out of time, but thank you very
much. Mr. Chairman, I yield back.
Chairman Lee. Senator Cotton.
Senator Cotton. Thank you, Mr. Chairman.
Chairman Powell, welcome back. I want to start off by
talking about China's economic growth. Maybe I should say
China's economic ``growth'' in quotes. They have reported most
recently six-and-a-half percent growth. That is down from most
of the last 30 years, but still probably somewhat inflated. In
fact, Michael Pettis at the Carnegie Endowment for
International Peace says that Chinese industrialists and
economists find it hard to find any economic sector in China
enjoying any growth.
They had a few findings that I found to be quite
interesting. First, GDP is not a particularly useful measure
for determining Chinese growth because they have such massive
investments in nonproductive activities.
Second, that China likely distorts its GDP significantly in
a way that is systematically pushing it higher.
And then third, that increasingly GDP as reported in China
is not so much a measure of economic output but a measure of
political intent, given the benchmarks that China imposes on
local governments. As well as many state-owned enterprises, as
long as they have debt capacity and can postpone the writing
down of nonproductive assets, they could essentially achieve
any growth target they wanted.
What are your thoughts about this general question of
Chinese growth, and the specific points that Mr. Pettis'
research had found?
Chairman Powell. I think it is very hard. I certainly feel
that it is very hard to understand China. You can read all you
want. You can visit it all the time. But nonetheless, it is
still very hard I think for me, anyway, to really feel like you
understand the way the economy works, the way the society
works. So I think you have to, as a general matter, just accept
that it is really hard to know.
I think on economic data in particular, you know, we do
not--and I am familiar with Michael Pettis and his research and
all that--but we have not taken a view as an institution about
that. I think a couple of things are worth noting.
One is that it may be that there is more information in the
change than there is in the level, if you know what I mean.
Another is that we have noticed here in the last few years that
the volatility of their economic reports has declined
substantially, which kind of suggests a little bit more
management.
Nonetheless, we do not really know. The truth is, we do not
really know. We have to take the data, and we do take it with a
bit of a grain of salt.
Senator Cotton. You spend at the Federal Reserve, with your
many capable economists there, a lot of time looking at a lot
of underlying indicators, and statistics to try to assess the
direction of our economy. When you look at not just how the
Chinese leadership in the communist party behaves, but when you
look at some of those indicators of how their people are
behaving, or how other things like say maybe energy inputs, or
shipping and so forth, do you see a country behaving as if they
have almost 7 percent growth right now?
Chairman Powell. It is hard to say. I would say that one
thing that is notable is that they have not responded with
massive stimulus to this current situation. They have had--
obviously over a longer period of time, growth has been slowing
from, you know, three decades of 10 percent as an economy
matures. And I think they are trying to manage that decline.
They did put an awful lot of stimulus to work after the
financial crisis, and that supported their growth. I think they
have been much more cautious and careful. They have a
deleveraging campaign, as I am sure you know, that has been
going on now for one or two years, and they have not really
backed away from that.
And that is part of, by the way I think that is part of the
global slowdown, actually, is trying to at least stop debt from
growing inside China where they have unusually high debt as a
society for any emerging market nation.
So I would say that they are behaving relatively
thoughtfully and responsibly in response--they appear to be--in
response to this current slowdown.
Senator Cotton. Alright, thank you. My time has expired.
Chairman Lee. Senator Hassan.
Senator Hassan. Well thank you very much, Mr. Chair, and I
appreciate your and the Vice Chair's convening of this meeting.
And to Chair Powell, thank you for being here and for your
work. Mr. Powell, as you know it is critical to the long-term
safety and stability of the U.S. economy that the Federal
Reserve makes data-driven decisions and remains independent
from political influence.
Unfortunately, recent political pressure on the Fed is
having real-world economic consequences. A recent study found
that markets react each time you are publicly pressured to
intervene in the economy, with a quantifiable change in
investors' expectations that the Fed's interest rate targets
will drop.
Chair Powell, can you tell the Committee what actions you
are taking at the Federal Reserve to not only insulate against
political influence but also to signal to investors that the
Fed makes independent decisions based on sound economic
analyses?
Chairman Powell. Thank you. So politics plays absolutely no
role in our decisions. We use the best data, the best analysis
we can muster. We are human. We will make mistakes. But we will
not make mistakes of character or integrity.
So I am familiar with that research, and I will just say I
think it is very hard to look at, you know, our incredibly
complicated financial markets and economy where many, many
things are driving results, and pull out one or two tiny
effects. There is other research that points to different
results, but it is absolutely essential that everyone
understands that we are doing our jobs as we always have,
without regard to politics.
We serve all Americans. We do the best we can based on our
analysis. We try to be as transparent as we can. We explain
ourselves, put everything we do on the record. When people
dissent, they put their dissent on the record. And that is as
it should be.
Senator Hassan. Well I just think it is important,
understanding that research is complicated, that we do not
complicate it further with political actors putting pressure on
the Fed. And that has been the norm and the tradition, and it
is one that I hope we can return to.
I wanted to follow up on something that Senator Lee had
talked to you about. Because as a member of the Senate Finance
Committee, which also has jurisdiction over trade, I am pushing
for clear, strategic trade policy that provides certainty to
struggling small businesses.
As you and I have talked about, I have heard from
businesses all across my state that have been targeted by
China's unfair trade practices, including the theft of
intellectual property and the forced transfer of proprietary
technology.
On top of these economic harms, the Administration has
manufactured endless trade uncertainty and heaped damaging
tariffs on New Hampshire's businesses. I know you have
repeatedly said, Chair Powell, that this recent trade
uncertainty has created risks for the U.S. and global
economies. Can you expand a bit on your previous answer on how
trade uncertainty has impacted the economic outlook, and what
you view as the Fed's proper role in responding to the ongoing
trade tensions with China?
Chairman Powell. So we hear from businesses, and have been
hearing from them for a year-and-a-half that this is a big
issue for them, and that it is holding them back from making
decisions.
In the first instance, businesses were looking at ways to
rearrange their supply chains. Almost all manufacturing
businesses these days have supply chains. So I think it has
been a real distraction for management, and I think it has
weighed on businesses' willingness and ability to invest and
keep growing and that kind of thing.
In terms of the appropriate response, you know, our
response is not to give advice on trade policy, but it is to
react to whatever it is that is either helping or hurting our
ability to achieve our mandated goals. And so this is one of
those things. We call it out as something that we are aware of,
and as something that is weighing on business sentiment and
ultimately on the economy.
Senator Hassan. Well thank you for that. And I will just
note, we may submit to the record that I share Representative
Frankel's interest and concern about the inflation gap. It is
not just a wage gap, but the impact of inflation in particular
on working and middle-class families. And I hope that that is
something that we can learn more about from the Fed.
Thank you, Mr. Chair.
Chairman Lee. Senator Heinrich.
Senator Heinrich. Welcome, Chairman, and thank you for
coming to testify today.
I had a chance recently to meet with a number of European
central bankers, and they really outlined for a group of us the
steps that they are taking to understand and quantify and
mitigate the risks that climate change is posing to the
financial markets. So I wanted to ask you what the Fed is doing
to understand those risks, and to look at their role in the
economy as we are moving forward.
Chairman Powell. I would just say that climate change is an
important issue, but it is not one that is given principally to
the Fed to deal with, if you will. Other agencies have that.
Senator Heinrich. Clearly that is the case. I just want to
understand if we are looking in a broad way at risk and
understanding the data from that sort of lens.
Chairman Powell. So I think that is the right lens. The
lens for us is risk management. So we are doing--there are
researchers all through the Federal Reserve System who are
thinking about the longer-run implications of climate change
for the economy, for financial institutions, and for all kinds
of things.
And I think that is appropriate research. We are just
globally at the beginning of understanding that. And there is a
lot of research going on, including a significant amount at the
Fed.
I think, honestly, for monetary policy it is not a current
consideration. It would not be something that would have any
effect on the current setting of monetary policy.
Over time, though, it could, for example, affect the
neutral rate of interest, or the volatility of economic
activity and things like that. Those are things that, you know,
we are thinking about for the longer term.
I think the public will expect us to assess any risk and
use that assessment in the way we supervise and regulate
financial institutions, and also just potentially over the
longer term in terms of monetary policy.
Senator Heinrich. Do you have an opinion on the robustness
of how U.S. banks, broadly, are analyzing that risk? And
basically, what I am asking is do we need to start thinking
through whether or not we need to either self-impose or at some
point impose some sort of stress test to look at the assets
that banks are holding, and whether they are not--whether they
do not have some concentration of risk if they are not thinking
through that appropriately?
Chairman Powell. What we are doing now is we are trying to
make sure that financial institutions that are in regions that
may be subject to severe weather have plans to have redundant
systems, and be able to be resilient to that. That is the main
thing we are doing.
So the Bank of England, as it sounds like you are aware, is
doing a stress test based on climate scenarios. But it is a
stress test that is meant to be purely informative. It would
not do what our CCAR stress tests do and potentially limit
distributions and that kind of thing.
That is an interesting idea. We will be monitoring it, and
I think we are going to benefit from some of the activity
around the world that we are seeing with other central banks.
We will try to learn from what they are doing.
Senator Heinrich. We are obviously already seeing some
places where it is harder to turn over a house in flood-prone
areas. And if you had a concentration of mortgages that you
were holding in areas like that, obviously that could pose a
real financial risk.
Do you think that GDP data adequately gives us enough of a
picture about who is benefiting from the economy? And I guess
in other words, should we be looking at how economic growth is
being distributed across the quintiles of the economy?
Chairman Powell. I think it is really hard to capture Gross
Domestic Product in a $22 trillion economy. I think the people
who do that do a great job at it, but it is quite difficult.
We actually--it is interesting to try to cut the income
data. So we are doing some of that now with our distributional
financial accounts. Other agencies are doing the same thing.
I think when you have the data, we have a tendency to want
to cut it up different ways and see what we learn. And so we
are doing that now. And I think it is informative about the way
income and wealth are shared, broadly speaking, in the country.
It is an important perspective.
Senator Heinrich. We are certainly looking forward to
seeing that data. Thank you.
Chairman Lee. Senator Cruz.
Senator Cruz. Thank you, Mr. Chairman.
Chairman Powell, welcome. Thank you for your testimony. We
are right now experiencing remarkable economic growth across
the country. We have the lowest unemployment in 50 years. We
have the lowest African-American unemployment ever recorded. We
have the lowest Hispanic unemployment ever recorded.
In your judgment, what economic policies have played the
most important part in generating that economic growth that we
are seeing right now?
Chairman Powell. Well, I think I would be reluctant to
single out particular policies. I will just say this, though,
that it has been a long, slow recovery, but it has come a long
way. We are now in the 11th year. It is the longest since we
began keeping credible records of the U.S. economy in the mid-
1800s, the longest one, and we hope a significant way to go.
We have just seen continued improvement. And I think I
would point to a couple of things. These long expansions are
common now, and that really is because we conquered the high
inflation.
We have seen three of the four longest expansions in U.S.
history have been among the last four expansions. So it has
kind of become the norm to have these long ones.
I hope everyone takes credit for the good economy we are
seeing now, because it is a really good place. I think it is
worth noting, you know, as you mentioned, a 50-year low in
unemployment, wages moving up at the bottom of the scale more
than anywhere else. Growth continuing at a solid pace in the
11th year of the expansion.
I think it is a really good time, and I want everybody to
get credit for that. Not us.
Senator Cruz. So I have real concerns that going into 2020
that we may see a slowdown in investments, as those allocating
capital look at the political scene, and look at some of the
economic proposals being put forth by democratic candidates for
president. And I have concerns that that may cause people to
tap the brakes in terms of deploying capital until at least
after the election and finding out whether these policies might
possibly be implemented.
In your judgment, what would the likely economic impact be
of the Federal Government implementing a massive tax increase?
Chairman Powell. Senator, I am pretty reluctant to be
pulled into the 2020 election, if you will forgive me.
Senator Cruz. And I certainly do not expect you to comment
on the election, but you can comment on the economy and if a
massive tax increase is good or bad for the economy.
Chairman Powell. Again, indirectly as you started out your
question, it is about proposals of candidates, and I just
honestly do not want to get into that business if you will
forgive me.
Senator Cruz. Well let me ask you, a number of candidates
are proposing a wealth tax, not just on income but on wealth.
Do you have any views on the economic behavior that would
likely follow from a wealth tax scaling as high as 8 percent
annually?
Chairman Powell. It is really not our role to score or
evaluate campaign proposals. That is what the CBO does. That is
what lots of other people do. We really try to stay out of that
business.
Senator Cruz. Alright, well let's try a different thing.
Former Chairman Ben Bernanke in 2014 called the shale
revolution, quote, ``one of the most beneficial economic
developments in the country.''
Do you share that assessment? And conversely, do you have
concerns about the impact on the economy if the Federal
Government were to ban fracking and shut down the shale
revolution?
Chairman Powell. I would certainly agree. I think that the
energy independence of the United States is something that
people have been talking about for 50 years, and I never
thought it would happen and here it is. It is in the nature of
a miracle, it seems to me. So it is a great thing, I would say.
That is not to say there are not issues to manage--
environmental issues, all kinds of other issues--but I think it
has been a great thing for the country.
Senator Cruz. And would it be harmful to end it,
economically?
Chairman Powell. Well I would not be looking--I would not
be--I think to shut down the shale industry, yeah, that would
probably not be a good thing for the economy.
Senator Cruz. Thank you.
Chairman Lee. Thank you very much, Mr. Chairman. We know
you have a hard stop here in about two minutes. I wanted to use
my prerogative as Chairman to ask one final question.
We are in the middle of some pretty strong economic
activity with very low unemployment, almost unprecedented
economic stability. What policy or policies should we pursue to
keep that going?
Chairman Powell. Well I think if you are asking for my
views on that, I think that the thing to focus on, if I were in
your shoes, are the longer-run issues that we face particularly
around labor force participation and growth. It is about the
potential growth of the United States.
We are seeing now how important it is and how good it is to
have a long expansion with a lot of growth, and how it benefits
people across the income spectrum. So I cannot overstate the
importance of that.
I think in the longer run, the things we need to address
are labor force participation and productivity, which is
closely linked to education. So I think our workers need to
have the skills and aptitudes to win in a global economy. And
those are the things that are going to matter for our children
and our grandchildren, is what can we do now to keep the U.S.
sustainable longer-term growth rate as high as it can be going
forward.
Chairman Lee. Thank you very much. Thanks so much for
joining us today, and thanks for your service on behalf of our
country.
The record will remain open for two weeks, and we stand
adjourned.
Chairman Powell. Thank you, very much.
[Whereupon, at 12:27 p.m., Wednesday, November 13, 2019,
the hearing in the above-entitled matter was adjourned.]
SUBMISSIONS FOR THE RECORD
Prepared Statement of Hon. Carolyn B. Maloney, Vice Chair, Joint
Economic Committee
Thank you, Chairman Powell, for testifying today.
I look forward to hearing your perspective on the current state of
the economy and the potential challenges ahead.
I'd also like to thank you for your thoughtfulness as you help
steer the economy through what in some ways are challenging times.
As you have said in your testimony, by some measures, our economy
is strong.
The national unemployment rate fell from 10 percent at its peak
during the Great Recession to only 4.7 percent when President Trump
took office.
And it has continued to fall; it now stands at only 3.6 percent.
The economy has continued to add jobs--now for 109 consecutive
months--more than nine years.
Inflation remains low, below the Fed's target.
Wages are moving up, though not as fast as we would like.
But other measures tell a different story.
GDP growth has slowed--falling below 2 percent in the third
quarter.
Job growth is also slowing. In fact, it has lagged behind the last
years of the Obama administration.
About 35,000 fewer jobs have been added per month during the first
33 months of Trump than the last 33 months of Obama.
Manufacturing is in recession, business investment has been
shrinking for the past two quarters and productivity fell last quarter
for the first time since 2015.
Some of these more troubling developments may be a sign of a
possible end to our decade-long economic expansion.
Or a slow fade from the ``sugar high'' of the 2017 tax cuts.
But the most likely cause of economic uncertainty is the
President's trade war.
This leads to a fundamental question--how should the Federal
Reserve act, when one of the major challenges facing our economy is the
erratic behavior of our President himself?
No--I won't ask you to answer that question. But it's on everyone's
mind.
You have a tough job.
In past months, you have conducted a Federal Reserve listening
tour--``Fed Listens.''
I want to thank you for taking the time to hear from Americans from
all walks of life who experience our economy very differently.
As you know, the economy as a whole can be very strong while entire
segments of the U.S. population struggle.
Some regions still have not recovered from the Great Recession.
Not all demographic groups have shared equally in the economic
growth of the past decade. As members of Congress, we need to serve all
Americans.
You have shown that this is your concern too.
It used to be that ``a rising tide lifts all boats.''
But that has become less true, and we know that the tide lifts some
boats much more than others.
That's why I have introduced legislation that would give us insight
into whom the economy is working for.
My bill, the Measuring Real Income Growth Act, would require the
Bureau of Economic Analysis to report GDP growth by income decile and
the top 1 percent alongside the top line number.
It would tell us who is benefiting from economic growth.
And that takes me back to the fundamental question before Fed
policymakers.
How low should unemployment go?
How does the Fed weigh the benefits of very low unemployment vs.
the risks of inflation?
We've had 11 straight quarters of an unemployment rate below what
CBO tells us is the so-called natural rate of unemployment.
Yet inflation remains comfortably below the Fed target rate.
Which raises the question: has the traditional relationship between
unemployment and inflation weakened?
If it has, why?
Is it downward price pressure from around the globe?
Or, increased market concentration in certain industries in the
United States eroding worker bargaining power?
Or, are there other factors at play?
And what if unemployment is extremely low--suggesting that we are
at full employment, but the unemployment rate for African Americans or
Latinos remains much higher?
What if the unemployment rate for people in some communities, or
those who work in some occupations, is stubbornly high?
These are questions with wide-ranging implications for both fiscal
and monetary policy.
Chairman Powell, I'd like to close my remarks because we have a lot
of ground to cover.
But before I finish, let me again express my admiration.
You have a tough job. Thanks for doing it.
I look forward to your testimony.
__________
Opening Statement of Hon. Mike Lee, Chairman, Joint Economic Committee
Good morning and welcome all to the Joint Economic Committee's
annual hearing with the Chair of the Federal Reserve's Board of
Governors. I would like to extend a warm welcome to Chairman Jerome
Powell, and I look forward to our discussion on monetary policy and the
state of the economy.
Our economy has finally recovered from the financial crisis of
2008. Unemployment reached a 50-year low of 3.5 percent in September
and most recently stood at 3.6 percent. The share of working-age adults
with a job has returned to pre-crisis levels.
However, despite this welcome return to normalcy in employment
measures, many aspects of the economy remain unusual--and particularly
so for central bankers. Inflation remains persistently low; in four of
the past five quarters, inflation has been below the Federal Reserve's
two percent target.
Treasury yields also remain low, with a 10-year borrowing rate of
just 1.7 percent. Interest rates that once were considered
extraordinarily low have become a long-run expectation.
These phenomena of low inflation and low long-term interest rates
are not unique to the United States, but rather, echoed in most
developed markets around the world today.
This moment brings with it some challenges, such as building a
framework for fighting recessions in a low-interest-rate environment.
However, it also brings opportunities: with inflation still in check,
we may yet have room to expand employment even further.
As ever, it will be important for the Federal Reserve Board to
communicate how it addresses these challenges and opportunities. In
this regard, the greater transparency demonstrated by the Federal
Reserve during the Chairman's tenure is to be commended. In particular,
it has conducted a number of Fed Listens events around the country,
including a historic conference held in June, to hear feedback on
current policy conduct as well as to better understand the effects of
monetary policy at the local level. Not only will these initiatives
promote trust in Federal Reserve decision-making, they will provide
important information relevant to monetary policy from Americans who do
not always get a seat at the table.
We hope to discuss these topics and more with Chairman Powell.
Before I introduce our esteemed witness, I will now yield to Vice
Chair Maloney for her opening remarks. Thank you.
__________
Prepared Statement of Jerome H. Powell, Chairman, Board of Governors of
the Federal Reserve System
Chairman Lee, Vice Chair Maloney, and members of the Committee, I
appreciate the opportunity to testify before you today. Let me start by
saying that my colleagues and I strongly support the goals of maximum
employment and price stability that Congress has set for monetary
policy. We are committed to providing clear explanations about our
policies and actions. Congress has given us an important degree of
independence so that we can effectively pursue our statutory goals
based on facts and objective analysis. We appreciate that our
independence brings with it an obligation for transparency and
accountability. Today I will discuss the outlook for the economy and
monetary policy.
the economic outlook
The U.S. economy is now in the 11th year of this expansion, and the
baseline outlook remains favorable. Gross domestic product increased at
an annual pace of 1.9 percent in the third quarter of this year after
rising at around a 2.5 percent rate last year and in the first half of
this year. The moderate third-quarter reading is partly due to the
transitory effect of the United Auto Workers strike at General Motors.
But it also reflects weakness in business investment, which is being
restrained by sluggish growth abroad and trade developments. These
factors have also weighed on exports and manufacturing this year. In
contrast, household consumption has continued to rise solidly,
supported by a healthy job market, rising incomes, and favorable levels
of consumer confidence. And reflecting the decline in mortgage rates
since late 2018, residential investment turned up in the third quarter
following an extended period of weakness.
The unemployment rate was 3.6 percent in October--near a half-
century low. The pace of job gains has eased this year but remains
solid; we had expected some slowing after last year's strong pace. At
the same time, participation in the labor force by people in their
prime working years has been increasing. Ample job opportunities appear
to have encouraged many people to join the workforce and others to
remain in it. This is a very welcome development.
The improvement in the jobs market in recent years has benefited a
wide range of individuals and communities. Indeed, recent wage gains
have been strongest for lower-paid workers. People who live and work in
low- and middle-income communities tell us that many who have struggled
to find work are now getting opportunities to add new and better
chapters to their lives. Significant differences, however, persist
across different groups of workers and different areas of the country.
Unemployment rates for African Americans and Hispanics are still well
above the jobless rates for whites and Asians, and the proportion of
the people with a job is lower in rural communities.
Inflation continues to run below the Federal Open Market
Committee's (FOMC) symmetric 2 percent objective. The total price index
for personal consumption expenditures (PCE) increased 1.3 percent over
the 12 months ending in September, held down by declines in energy
prices. Core PCE inflation, which excludes food and energy prices and
tends to be a better indicator of future inflation, was 1.7 percent
over the same period.
Looking ahead, my colleagues and I see a sustained expansion of
economic activity, a strong labor market, and inflation near our
symmetric 2 percent objective as most likely. This favorable baseline
partly reflects the policy adjustments that we have made to provide
support for the economy. However, noteworthy risks to this outlook
remain. In particular, sluggish growth abroad and trade developments
have weighed on the economy and pose ongoing risks. Moreover, inflation
pressures remain muted, and indicators of longer-term inflation
expectations are at the lower end of their historical ranges.
Persistent below-target inflation could lead to an unwelcome downward
slide in longer-term inflation expectations. We will continue to
monitor these developments and assess their implications for U.S.
economic activity and inflation.
We also continue to monitor risks to the financial system. Over the
past year, the overall level of vulnerabilities facing the financial
system has remained at a moderate level. Overall, investor appetite for
risk appears to be within a normal range, although it is elevated in
some asset classes. Debt loads of businesses are historically high, but
the ratio of household borrowing to income is low relative to its pre-
crisis level and has been gradually declining in recent years. The core
of the financial sector appears resilient, with leverage low and
funding risk limited relative to the levels of recent decades. At the
end of this week, we will be releasing our third Financial Stability
Report, which shares our detailed assessment of the resilience of the
U.S. financial system.
monetary policy
Over the past year, weakness in global growth, trade developments,
and muted inflation pressures have prompted the FOMC to adjust its
assessment of the appropriate path of interest rates. Since July, the
Committee has lowered the target range for the Federal funds rate by
\3/4\ percentage point. These policy adjustments put the current target
range at 1\1/2\ to 1\3/4\ percent.
The Committee took these actions to help keep the U.S. economy
strong and inflation near our 2 percent objective and to provide some
insurance against ongoing risks. As monetary policy operates with a
lag, the full effects of these adjustments on economic growth, the job
market, and inflation will be realized over time. We see the current
stance of monetary policy as likely to remain appropriate as long as
incoming information about the economy remains broadly consistent with
our outlook of moderate economic growth, a strong labor market, and
inflation near our symmetric 2 percent objective.
We will be monitoring the effects of our policy actions, along with
other information bearing on the outlook, as we assess the appropriate
path of the target range for the Federal funds rate. Of course, if
developments emerge that cause a material reassessment of our outlook,
we would respond accordingly. Policy is not on a preset course.
The FOMC is committed to ensuring that its policy framework remains
well positioned to meet its statutory goals. We believe our existing
framework has served us well. Nonetheless, the current low-interest-
rate environment may limit the ability of monetary policy to support
the economy. We are currently conducting a public review of our
monetary policy strategy, tools, and communications--the first of its
kind for the Fed. With the U.S. economy operating close to maximum
employment and price stability, now is an especially opportune time to
conduct such a review. Through our Fed Listens events, we have been
hearing a diverse range of perspectives not only from academic experts,
but also from representatives of consumer, labor, business, community,
and other groups. We will draw on these insights as we assess how best
to achieve and maintain maximum employment and price stability. We will
continue to report on our discussions in the minutes of our meetings
and share our conclusions when we finish the review, likely around the
middle of next year.
In a downturn, it would also be important for fiscal policy to
support the economy. However, as noted in the Congressional Budget
Office's recent long-term budget outlook, the Federal budget is on an
unsustainable path, with high and rising debt: Over time, this outlook
could restrain fiscal policymakers' willingness or ability to support
economic activity during a downturn.\1\ In addition, I remain concerned
that high and rising Federal debt can, in the longer term, restrain
private investment and, thereby, reduce productivity and overall
economic growth. Putting the Federal budget on a sustainable path would
aid the long-term vigor of the U.S. economy and help ensure that
policymakers have the space to use fiscal policy to assist in
stabilizing the economy if it weakens.
---------------------------------------------------------------------------
\1\ Congressional Budget Office (2019), The 2019 Long-Term Budget
Outlook (Washington: CBO, June), https://www.cbo.gov/system/files/2019-
06/55331-LTBO-2.pdf.
---------------------------------------------------------------------------
I will conclude with a few words on the technical implementation of
monetary policy. In January, the FOMC made the key decision to continue
to implement monetary policy in an ample-reserves regime. In such a
regime, we will continue to control the Federal funds rate primarily by
setting our administered rates, not through frequent interventions to
actively manage the supply of reserves. In the transition to the
efficient and effective level of reserves in this regime, we slowed the
gradual decline in our balance sheet in May, and stopped it in July. In
response to the funding pressures in money markets that emerged in mid-
September, we decided to maintain a level of reserves at or above the
level that prevailed in early September. To achieve this level of
reserves, we announced in mid-October that we would purchase Treasury
bills at least into the second quarter of next year and would continue
temporary open market operations at least through January. These
actions are purely technical measures to support the effective
implementation of monetary policy as we continue to learn about the
appropriate level of reserves. They do not represent a change in the
stance of monetary policy.
Thank you. I would be pleased to take your questions.
__________
Response from Hon. Jerome H. Powell to Question for the Record
Submitted by Senator Cotton
1. Chairman Powell, I understand that the CECL accounting standard
was on the agenda of last week's FSOC meeting. A short time ago, a
bipartisan letter from Congress was sent to Secretary Mnuchin, who
serves as FSOC's Chairman, called for tasking the Office of Financial
Research to study CECL and its likely impact on the economy. Is the
FSOC planning to follow up on the recommendation in that letter and
give that assignment to the OFR? What additional plans came out of last
week's FSOC meeting?
As described in the minutes of the November 2019 FSOC meeting,\2\
members of the Financial Stability Oversight Council (FSOC) heard
presentations by staff from member agencies describing issues around
Current Expected Credit Losses (CECL). In terms of your question about
plans corning out of the meeting, the minutes note that ``[t]he
Chairperson asked the Office of Financial Research to review existing
research on CECL and to report back to FSOC with a summary of that
literature.'' The Secretary of the Treasury, as Chair of the FSOC, is
best able to answer questions regarding any additional work. The
Federal Reserve Board (Board) remains committed to supporting the work
undertaken by FSOC.
---------------------------------------------------------------------------
\2\ https://home.treasury.gov/system/files/261/November072019-
minutes.pdf.
---------------------------------------------------------------------------
2. Chairman Powell, a year ago the Fed was approaching finalizing
its long-proposed rule creating a new Stress Capital Buffer (SCB).
Started under the past Administration, the SCB was designed integrate
the forward-looking stress test results with the Board's non-stress
capital requirements. The result would produce capital requirements for
large banks that are firm-specific and risk-sensitive. Unfortunately,
that effort was delayed and missed being applied for the 2019
evaluation year. Will the SCB be finalized this Fall so that it can be
applied for 2020?
The Board continues to consider the stress capital buffer proposal
and to look for ways to improve the capital framework that maintains
the resilience of the financial system, while increasing efficiency and
transparency. I currently do not have a further update regarding rule
finalization and implementation.
__________
Response from Hon. Jerome H. Powell to Question for the Record
Submitted by Senator Cruz
1. During your confirmation hearing on November 28, 2017, before
the U.S. Senate Committee on Banking, Housing, and Urban Affairs, you
showed a willingness to share your views on fiscal policy, as Federal
Reserve Chairmen before you have previously done. For example, Senator
Van Hollen asked if you agreed with former Chairman Yellen's statement
that: ``current spending and taxation decisions will lead to an
unsustainable debt situation with rising interest rates and declining
investment in the United States that will further harm productivity,
growth, and living standards.'' You responded by discussing your views
on fiscal policy and agreed with Chairman Yellen's statement.
Your willingness to discuss spending and taxation policies during
your confirmation hearing appears to stand in stark contrast with your
unwillingness to answer similar questions when testifying before the
United States Joint Economic Committee on November 13, 2019. During
that hearing, I expressed my concern that certain types of Federal
policies (i.e., tax policies) could discourage investment and slow down
economic growth. I then asked you to opine on whether a massive tax
increase would be good or bad for the economy. I specifically asked:
``Would a massive tax increase be good or bad for the economy? In your
judgement, would such policies decrease investment and slow down
economic growth?''
Given your willingness to respond to taxation questions during your
confirmation hearing, please respond to the following: Would a massive
tax increase be good or bad for the economy? In your judgement, would
such policies decrease investment and slow down economic growth?
2. In your opinion, would higher taxes on small-and medium-sized
businesses potentially lower their disposable income?
3. If businesses have less disposable income, would they
potentially reduce their investment in capital? If so, what impact
would that have on the U.S. economy?
4. If Congress decided to levy an annual tax on taxpayers' entire
net worth--what some are calling a ``wealth tax''--what impact might
that have on economic behavior?
5. Would a wealth tax reduce national saving, and if so, what
ripple effects would that have across the economy, especially for
working-class Americans?
6. The Tax Cuts and Jobs Act allowed for full and immediate
expensing for most types of business investment. If Congress were to
reverse this change and instead require firms to deduct the cost of an
investment from their taxes over the life of the asset acquired, what
would this do to business investment?
7. What effect does a decrease in business investment have on jobs
and wages, particularly for middle- and working-class Americans?
8. Prior to the Tax Cuts and Jobs Act, the United States had the
highest corporate tax rate amongst OECD nations. The 2017 tax reform
law lowered the corporate tax rate in the United States to 21%, making
our rate more competitive with other OECD countries. If the United
States were to return its corporate rate to 35%, what consequences
would that have on business investment in the United States and
economic growth generally?
9. If Congress were to increase the corporate tax rate, would the
burden of that tax fall only to wealthy corporations along with the
nation's millionaires and billionaires, or would it fall on the
shoulders of workers, shareholders, and consumers as well? To what
extent would it impact various groups (e.g., corporations,
shareholders, workers, consumers, etc.)?
10. During your confirmation hearing, Senator Tillis asked you
whether reducing the tax and regulatory burden on certain businesses
would lead to more or less investment in productivity. You responded:
``I think there clearly are ways in the tax code to support different
kinds of activity, and certainly, investment is one of these.'' What
are some of the ways in which the tax code supports investment?
11. What are some of the ways in which the tax code now better
supports business investment than it did prior to the enactment of the
Tax Cuts and Jobs Act? Please be specific in terms of which changes to
the code supported investment.
12. On December 13, 2017, in response to Congress passing the Tax
Cuts and Jobs Act, former Chairman Janet Yellen stated, ``My colleagues
and I are in line with the general expectation among most economists
that the type of tax changes that are likely to be enacted would tend
to provide some modest lift to GDP growth in the coming years.'' Again,
with the benefit of hindsight, has Chairman Yellen's prediction borne
itself out over the last two years since passage of the Tax Cuts and
Jobs Act? Do you agree that the tax changes have provided a lift to
GDP?
13. On April 2, 2008, Chairman Ben Bernanke testified before the
United States Joint Economic Committee. During the hearing,
Representative Kevin Brady asked Chairman Bernanke if it was a bad time
for Congress to consider significant new tax increases while the
economy was experiencing job uncertainty, low consumer confidence, and
a loss of net household worth. In response, Chairman Bernanke stated:
``in the short term certainly I think new tax increases would reduce
disposable income and consumption, and I think that would be a
concern.'' Do you agree with Chairman Bernanke's statement? Please
explain, and if you do agree, would you say the statement is still true
today?
14. On November 8, 2007, Chairman Bernanke testified before the
United States Joint Economic Committee. During the hearing Senator
Brownback asked Chairman Bernanke if raising taxes would be harmful to
long-term economic growth in the United States. In response, Chairman
Bernanke stated: ``A large increase in net taxes would tend to be a
drag on consumer spending and on the economy through a number of
different channels, I should say. That would be an issue, I think, if
that were to be the case, given what we expect to be a slower growth
economy for the next couple of quarters.'' Do you agree with Bernanke's
statement? In your view, is Chairman Bernanke's statement that ``a
large increase in net taxes would tend to be a drag on consumer
spending and on the economy'' still true today? Please explain.
15. During his June 15, 2004, confirmation hearing before the U.S.
Senate Committee on Banking, Housing, and Urban Affairs, former
Chairman Alan Greenspan stated: ``I have always been strongly
supportive of the elimination of the double taxation of dividends
largely because I have always considered it a type of tax which
probably impeded capital expansion and economic growth as a
consequence. So, I was very strongly supportive and remained supportive
of those types of tax cuts, including marginal tax-rate cuts.'' Do you
agree with Chairman Greenspan's statement? Please explain.
16. Former Chairman Greenspan also stated during his 2004
confirmation hearing that for ``ordinary workers,'' ``a significant
part of the increase in disposable income was the result of tax cuts.''
Do you agree with Chairman Greenspan's statement? Please explain.
17. During an interview with CNBC's ``Squawk on the Street'' on
January 7, 2019, former Chairman Greenspan stated that the 2017 Tax
Cuts and Jobs Act: ``was an excellent tax cut.'' Do you agree with
Chairman Greenspan's statement? Please explain.
18. From the first quarter of 2015 to the third quarter of 2016,
net domestic investment declined to 437 billion. In the past three
years, however, the nation has experienced unprecedented growth.
Earlier this year the unemployment rate fell to the lowest level
since 1968. AfricanAmerican unemployment is the lowest ever recorded at
5.4%, current poverty levels for African Americans and Hispanics are
the lowest ever recorded, and the number of individuals on food stamps
has dropped dramatically.
From August 2018 to August 2019, there were 1.7 million fewer
Americans on food stamps. Additionally, approximately 243,000 Texans
came off the supplemental nutrition assistance program, and in the
first quarter of 2019, net domestic investment peaked at over $676
billion.
Chairman Powell, do you agree that our country experienced a slow
recovery from the recession through 2016? If yes, what has been the
biggest driver of the economic growth that our country has experienced
since 2016?
Fiscal policy is properly the purview of Congress and the
Administration, and therefore, it would not be appropriate for the
Federal Reserve to comment on the specifics of fiscal policy proposals.
In that spirit, I will highlight some important general considerations
when assessing the effects of fiscal policy on the economy that relate
to the questions you have posed.
As you noted, I have often stated that current fiscal policy is on
an unsustainable path with rising deficits and debt as a share of gross
domestic product (GDP). A large and growing Federal debt, relative to
the size of the economy, over coming decades would have negative
effects on the economy. In particular, it would tend to reduce national
saving, all else equal, and put upward pressure on longer-term interest
rates, raising borrowing costs for households and businesses. Those
effects would probably restrain private investment, which in turn,
would reduce productivity and overall economic growth. Consequently,
standards of living would improve more slowly.
As I wrote in my testimony, putting fiscal policy on a sustainable
path over time would also help ensure that policymakers have the space
to use fiscal policy to assist in stabilizing the economy if it weakens
in the future. Despite the overall need for deficit reduction, the
current low-interest-rate environment means that, in addition to
monetary policy, it would be important for fiscal policy to help
support the economy in a downturn.
Fiscal policy decisions can affect the productive capacity of the
economy through additional channels besides the national saving channel
described above. Notably, effective marginal tax rates can alter
incentives to save, invest, and work, and spending on infrastructure
and other public investments can influence the productive capacity of
the economy as well.
19. Chairman Powell, I understand that you are on the Financial
Stability Oversight Council (FSOC) and that the current expected credit
loss (CECL) accounting standard for loan losses was on the agenda of
last week's FSOC meeting. On October 18, 2019, a bipartisan letter from
Congress was sent to Secretary Mnuchin, who serves as FSOC's Chairman.
The letter called for tasking the Office of Financial Research (OFR) to
study CECL and its likely impact on the economy. Is the FSOC planning
to follow up on the recommendation in that letter and give that
assignment to the OFR? What additional plans came out of last week's
FSOC meeting?
As described in the minutes of the November 2019 meeting,\3\ my
Financial Stability Oversight Council (FSOC) colleagues and I heard
presentations by staff from banking agencies describing issues around
current expected credit loss (CECL). After the presentation, the
Chairperson asked the Office of Financial Research to review existing
research on CECL and report back to the FSOC with a summary of that
literature. The Federal Reserve remains committed to supporting any
work undertaken by the FSOC.
---------------------------------------------------------------------------
\3\ See https://home.treasury.gov/system/files/261INovember072019-
minutes.pdf.
---------------------------------------------------------------------------
20. Chairman Powell, a year ago the Federal Reserve was close to
finalizing its long-proposed rule creating a new Stress Capital Buffer
(SCB). Started under the past Administration, the SCB was designed to
integrate the forward-looking stress test results with the Fed's non-
stress capital requirements. The result would produce capital
requirements for large banks that are firm-specific and risk-sensitive.
Unfortunately, that effort was delayed and missed being applied for the
2019 evaluation year. Here we are, a year later, quickly approaching
2020. Can we get the SCB finalized this year so that it can be applied
for 2020?
The Federal Reserve Board continues to consider the stress capital
buffer proposal and to look for ways to improve the capital framework
that maintains the resilience of the financial system, while increasing
efficiency and transparency. I currently do not have any update
regarding rule finalization and implementation.
__________
Response from Hon. Jerome H. Powell to Question for the Record
Submitted by Senator Hassan
1. A recent study by Xavier Jaravel that was highlighted by the
Center on Poverty and Social Policy at Columbia University \4\ found
that, from 2004 to 2015, inflation for retail products was, on average,
0.44 percentage points higher for the bottom income quintile relative
to the top income quintile. When adjusting inflation measures to
account for this ``inflation inequality,'' the number of people in
poverty in 2018 was about 8 percent larger than under the official
inflation measure. This translates to roughly 3.2 million more
households classified as living in poverty than under official
measures. In pursuing its dual mandate, how does the Federal Reserve
account for inflation inequality in setting policies such as target
interest rates--that are aimed at managing inflation? Further, does the
Fed have plans to research inflation inequality and its implications
for monetary policy?
---------------------------------------------------------------------------
\4\ Center on Poverty and Social Policy, Columbia University. 2019.
``The Costs of being Poor: Inflation Inequality Leads to Three Million
More People in Poverty.'' https://groundworkcollaborative.org/wp-
content/uploads/2019/11/The-Costs-of-BeingPoor-Groundwork-
Collaborative.pdf.
---------------------------------------------------------------------------
The research you cite finds evidence that inflation over the period
studied was higher for low-income groups than for those with higher
incomes. The paper argues that the differences may have been driven by
product innovation that is targeted to products that relatively
affluent people purchase. This research is interesting, and the issues
it raises are clearly relevant for understanding changes in the
standard of living for different income groups. Some related research
has been conducted by individual staff at the Federal Reserve,\5\ and
it would indeed be useful to see more such work being done.
---------------------------------------------------------------------------
\5\ Kaplan, G. and S. Schulhofer-Wohl. 2017. ``Inflation at the
Household Level.'' Journal of Monetary Economics, vol. 91, November,
pp. 19-38, https://doi.org/10.1016/j.jmoneco.2017.08.002.
---------------------------------------------------------------------------
Knowing the implications of this work for monetary policy is
challenging, however. My colleagues and I fully recognize that
inflation is not the same for everyone. Different people purchase
different things from different places, and the national price indexes
are by necessity averages across the population. At the same time,
monetary policy affects inflation broadly, and we interpret our price
stability mandate to refer to overall inflation. Moreover, the study
does not indicate that the observed inflation differentials across
income groups were somehow related either to the overall level of
inflation or to the state of the business cycle. Accordingly, it is not
clear how the results might bear on the Federal Reserve's decisions
regarding either the inflation or employment portions of our
congressional mandate.
Economic policy should strive to achieve solid economic growth and
rising standards of living not just on average but throughout the
population. The policies to support these objectives are mostly outside
the scope of monetary policy, but I believe the Federal Reserve can
contribute by pursuing our mandate of maximum employment and price
stability.
__________
Response from Hon. Jerome H. Powell to Question for the Record
Submitted by Senator Klobuchar
A third of non-retirees have zero retirement savings, and a well-
known Federal Reserve study found that four in 10 adults do not have
enough cash to pay for a $400 emergency expense.
How would enhanced financial security for older Americans
help promote economic growth?
The Federal Reserve's dual mandate requires careful
consideration of the effect of monetary policy on both inflation and
unemployment. We know that keeping the unemployment rate low is
critical for working Americans while inflation can be particularly
harmful for seniors who rely on a fixed income. Could policies that
significantly increase retirement savings help mitigate the most
painful effects of unforeseen inflation?
In general, older Americans have more wealth than younger
Americans. According to the Federal Reserve's Distributional Financial
Accounts, households with heads older than age 55 hold almost 75
percent of overall wealth. However, these overall numbers mask major
differences across older households in their financial resilience. For
example, data from the Federal Reserve's Survey of Consumer Finances
suggests that only about half of older households have enough money
easily accessible to cover three months of their expenses.
Financial resilience is a particular concern for older households.
It is likely harder for these households to address financial setbacks
by working more hours or re-entering the labor force. Instead, in
difficult times, these households may be forced to cut their spending
significantly. These sudden drops in spending can amplify the effects
of recessions. Enhanced financial security would reduce this drag on
economic growth. Unforeseen inflation is among the financial setbacks
that might occur to older households, and its effects would be less if
households have greater retirement savings.
__________
Response from Hon. Jerome H. Powell to Question for the Record
Submitted by Representative Beatty
1. According to the Federal Reserve of St. Louis, auto loan debt is
at a record $1.2 trillion, up about a half a billion dollars over the
last decade, meaning it is up roughly 63% over the last decade. We are
also seeing the average length of an auto loan increase significantly
with about a third of auto loans in the first half of 2019 for new
vehicles with terms longer than 72 months--up from just 10% a decade
ago.
What does the Federal Reserve make of this recent uptrend of debt
in the auto market in the last decade and the lengthening of loan terms
out more than 72 months? Does this say anything about the strength of
the consumer in this economy? This does not seem to be sustainable,
does it?
Auto loan debt is at a record of near $1.2 trillion dollars as of
2019:Q3, about $460 billion higher in nominal terms than a decade ago--
when auto loan balances were at the nadir in the midst of the Great
Recession. That said, auto loan growth has been outpaced by nominal GDP
growth over the past fifteen years. Among other factors, we expect auto
loan nominal balances to continue to grow with the economy and
inflation.
Terms of auto loans indeed have increased noticeably during the
past decade. However, in a longer perspective, the maturity extension
is comparable to what occurred over the past several decades. For
example, the Federal Reserve Board's (Board) G.20 Finance Companies
Statistical Release indicates that the average term of auto loans
originated by financing subsidiaries of auto makers (captive finance
companies) increased from 35 months in the early 1970s to 62 months in
the early 2010s, a pace of about 6 months per decade. The upward trend
in auto loan terms reflects, in part, the improvement of vehicle
durability.
Implications of longer auto loan terms on borrowers are mixed. On
the one hand, other factors held constant, longer loan terms reduce
monthly payments, which makes vehicles and loans more affordable for
liquidity-constrained car buyers. On the other hand, increased auto
loan terms may exacerbate consumers' vulnerabilities. For example,
longer auto loan terms expose consumers to future income and
expenditure shocks for a longer period, increasing the probability of
default. Additionally, extended loan terms reduce equity accumulation
and push up loan-to-value ratios. Currently, overall auto loan
delinquencies remain stable at moderate levels.
2. At a recent meeting of the Financial Stability Oversight Council
(FSOC), members of FSOC heard a presentation from staff of the Federal
Reserve, Federal Housing Finance Agency, and Conference of State Bank
Supervisors regarding the growth of non-bank mortgage origination and
servicing and potential related risks. One of these risks related to
the reliance of many nonbank lenders on short-run financing from banks
that could dry up in a downturn. These non-bank lenders have increased
their share of the mortgage lending market since the Financial Crisis
of 2008, especially as it relates to FHA loans, which is where many
low-income and minority borrowers receive financing to purchase a home.
Can you tell this Committee what you thought of that presentation?
Is FSOC or the Federal Reserve taking any actions to address this
concern?
I share your concern about the vulnerabilities associated with the
growth of nonbank mortgage originators and servicers. In its annual
report, which was released on December 4, 2019, the Financial Stability
Oversight Council (FSOC) highlighted these risks and recommended that
Federal and state regulators continue to coordinate closely to collect
data, identify risks, and strengthen oversight of nonbank companies
involved in the origination and servicing of residential mortgages. The
Board does not have any direct regulatory authority over these nonbank
institutions, but we share our technical expertise as appropriate with
our partner agencies and remain committed to supporting work undertaken
by FSOC. The Secretary of the Treasury, as Chair of the FSOC, is best
able to answer questions regarding future actions.
3. As you know, the Federal Reserve is currently developing capital
requirements for insurance companies that own depository institutions,
otherwise known as insurance savings and loan holding companies. In the
notice of proposed rulemaking issued in September, the Board indicated
that your intention under your proposed requirements, no company
subject to the requirements would have to raise capital above what they
hold today under state law. This also reflects the robust nature of
existing state capital requirements.
If you found through further analysis and comment that healthy
insurers that are well capitalized under state law would have to
significantly increase capital to meet Board requirements and continue
their current business operations, would you take that into account
when finalizing your rule?
The Board currently supervises eight institutions that are
significantly engaged in insurance activities. These eight institutions
would therefore be subject to the proposed capital requirement. In
addition to publication of the Notice of Proposed Rulemaking (NPR) for
comment, the Board conducted a Quantitative Impact Assessment (QIS) of
the Building Block Approach (BBA) with supervised firms. The responses
to the NPR as well as the feedback from supervised forums on the QIS
and the data that will be received through the QIS will provide us with
the ability to ensure appropriate calibration of the BBA capital
requirement.
__________
Response from Hon. Jerome H. Powell to Question for the Record
Submitted by Representative Heck
1. Five years ago, as unemployment crossed below 6%, the first
members of the FOMC said ``full employment'' was at hand. In the years
since, as unemployment dropped below 5% and below 4%, more and more
members of the FOMC said the Fed had reached its goal. We know now that
those estimates of full employment were far too early, as you've
acknowledged this in previous Congressional hearings. How is the
Committee reckoning with this? Is there an open discussion about what
caused those premature estimates or how to better measure of full
employment in the future?
A great deal of uncertainty surrounds estimates of the level of
full employment. This uncertainty stems from the fact that full
employment is not observable. Instead, we must infer it from the
behavior of observable variables. But these observable variables are
influenced by many other factors, not just full employment, making the
estimation of full employment extremely challenging. Adding to the
challenge is the fact that the structure of the economy is constantly
changing. For example, the Phillips curve relationship between
inflation and the distance to full employment has weakened over time,
making estimates of full employment even more uncertain.
The Federal Reserve has responded to this uncertainty by gathering
as much information as possible on full employment, including, but not
limited to, extensive economic data on the labor market, inflation, and
many other aspects of the economy, as well as estimates and forecasts
from state-of-the-art statistical and structural models of the economy.
We also consult research outside of the Federal Reserve System and
benefit from conversations with economists, businesses, non-profits and
individuals at events such as our ``Fed Listens'' series. In addition,
each member of the Federal Open Market Committee (FOMC) uses their own
experience and expertise to interpret the relevant economic data and
analysis. The exposure to these different perspectives benefits all
FOMC members.
We also regularly examine our forecast errors of important macro
variables, such as inflation and unemployment, to see what we got wrong
and why. We then use this information to inform our estimate of full
employment and our current forecasts. Because the structure of the
economy is constantly changing in ways that are difficult to recognize
and understand in real time, we must guard against anchoring our
understanding of the economy too much in the past. Finally, realizing
that we will not always be right about full employment and other
structural aspects of the economy, we use alternative simulations of
economic activity to examine what the consequences for activity and
employment would be if we are wrong. We then take these risks into
account in deciding current policy.
2. Can you explain how you measure full employment? In the economic
projections, the FOMC members estimate that the sustainable
unemployment rate is 4.0-4.3%, which suggests that, at our current
level of 3.6%, we're well beyond full employment, but other measures
like monthly job gains show there's still slack in the labor market.
What should regular citizens and policymakers look at to gauge how
close the FOMC believes we are to meeting the full-employment mandate?
As noted in the previous response, the level of full, or maximum,
employment is not observable. Accordingly, estimates of the level of
full employment and assessments of labor market slack are subject to
considerable uncertainty and re-evaluation. FOMC members consider a
range of indicators when evaluating the strength of the labor market,
including direct measures of labor market utilization such as the
unemployment rate, the labor force participation rate, and the share of
employed individuals working part time but preferring full-time
employment. Members also consider the pace of job gains, indicators of
how hard or easy it is for people to find jobs and for employers to
find qualified workers, how quickly wages and broader measures of
hourly compensation are increasing, and the inflation rate for the
personal consumption expenditure (PCE) price index (as well as other
measures of price inflation).
The unemployment rate in January 2020 was 3.6 percent, and since
December 2017 it has remained at or below 4.1 percent--the median of
participants' estimates of the sustainable unemployment rate in the
December 2019 Summary of Economic Projections. As you noted, on the
basis of the unemployment rate alone, it would appear that the labor
market is operating above its full-employment level. However, both PCE
price inflation and core PCE inflation, which excludes the volatile
food and energy components, have remained below 2 percent--the rate of
price inflation that the FOMC judges to be most consistent with
achievement of both parts of the dual mandate--and the pace of wage
gains has remained modest. Indeed, the coincidence of inflation running
below 2 percent and a low and declining unemployment rate has led FOMC
participants to revise down their estimates of the long-run sustainable
unemployment rate, with the median estimate declining by 0.5 percentage
point since the December 2017 FOMC meeting.
Other indicators of labor market activity seem to support the view
that we have not yet reached full employment and that the unemployment
rate may be overstating the strength in the labor market. In
particular, the continuing solid pace of job gains and the sustained
increases in the labor force participation rate for 25 to 54 year olds
both suggest that there is further room for employment to increase.
It is not unusual for these various indicators to be sending
divergent signals about labor market slack, so congressional
policymakers and the public should look at a variety of measures of
labor market activity, as well as for signs of a pickup in the pace of
wage gains and PCE inflation rising toward 2 percent, to get a broad
sense of how close FOMC members think we are to full employment.
FOMC participants convey their assessments of the maximum level of
employment and discuss the information they use to inform those
assessments in various public communications, including speeches,
testimony, post-meeting statements, and FOMC meeting minutes. The
Board's biannual Monetary Policy Report to Congress also includes a
detailed analysis of the labor market.
3. As the Fed conducts its framework review, most of the focus has
been on the price stability mandate. For example, you've discussed
switching to average inflation targeting. Are there framework changes
being considered with respect to the full-employment mandate? And if
so, what are those changes?
The Federal Reserve conducts monetary policy to pursue maximum
employment and price stability. Unlike the inflation rate, the maximum
level of employment is largely determined by nonmonetary factors that
affect the structure and dynamics of the labor market. These factors
cannot be directly observed and may change over time. Consequently, the
FOMC's policy decisions are informed by assessments of the maximum
level of employment based on a wide range of data, recognizing that
such assessments are necessarily uncertain and subject to revision. In
recent years, declines in the unemployment rate have not been
associated with a significant acceleration in wages or a pickup in
overall inflation, suggesting that the labor market was not as tight as
would have been suggested by earlier estimates of the so-called natural
rate of unemployment. Accordingly, many forecasters have revised down
estimates of the natural rate of unemployment in recent years. FOMC
participants have also revised down their individual estimates of the
unemployment rate that is expected to prevail in the longer run.
The Federal Reserve is taking a broad and open-minded look at the
monetary policy strategy, tools, and communications practices it uses
to pursue its goals of maximum employment and price stability. While
this review is broad in scope, it takes as given the Federal Reserve's
congressionally assigned dual mandate goals, including maximum
employment.
The review includes a series of ``Fed Listens'' events around the
country to hear perspectives from representatives of business and
industry, labor leaders, community and economic development officials,
academics, nonprofit organizations, and others. The feedback from these
events has underscored the positive implications of strong labor
markets and high rates of employment for various communities.
4. Business investment has been slowing for six straight quarters
despite the passage of the tax cut in 2017, the economy getting closer
to full employment, and interest rates remaining very low. How bas the
experience of weak business investment in the aftermath of the tax
changes been reflected in updates to the Federal Reserve's economic
forecasting model? How do you expect business investment to trend going
forward?
The U.S. economy is now in the 11th year of this expansion, with
gross domestic product on pace for a moderate gain for 2019 as a whole.
Household consumption remains a bright spot, supported by a healthy job
market, rising incomes, and favorable levels of consumer confidence.
Reflecting the decline in mortgage rates since late 2018, residential
investment turned up in the third qualifier following an extended
period of weakness.
In contrast to the continued strength in household spending,
investment spending by businesses decelerated sharply in 2019,
following strong gains in 2018. The softness in business investment has
been widespread, with all three major sub-sectors--equipment,
structures, and intellectual property products--making sizable
contributions to the deceleration. Sluggish growth abroad, trade
developments, and heightened uncertainty all appear to be weighing on
investment. In addition, the suspension of deliveries and production at
a major commercial aircraft manufacturer has reduced transportation
equipment investment, and sliding energy prices have contributed to
ongoing declines in drilling and mining investment that began in mid-
2018. Investment in non-drilling structures has also declined, with
commercial construction particularly shopping malls--accounting for
much of the decrease. If it were sustained, the recent diminished pace
of business investment could meaningfully reduce the contribution of
capital deepening (capital services per trend employee hour) to the
growth rate of trend labor productivity and thus to the longer-run
growth rate of the U.S. economy as a whole.
Looking ahead, business output growth and the cost of capital are
both fundamental determinants of business investment. As such, the
sustained expansion in economic growth that we anticipate, which partly
reflects the policy adjustments we have made this past year, should
encourage a sustained pickup in business investment. Moreover,
corporate financing conditions as well as financing conditions for
small businesses have remained generally accommodative on the whole. At
the same time, while some of the uncertainties around trade have
diminished recently, uncertainty over global economic prospects pose
ongoing risks. In the longer term, another risk is that high and rising
Federal debt could restrain business investment and thereby reduce
productivity and overall economic growth.
Forward-looking indicators of business spending, such as orders of
nondefense capital goods, surveys of business conditions and sentiment,
capital spending plans, and profit expectations from industry analysts,
all appear to have stabilized in recent months after having
deteriorated markedly earlier in 2019. These indicators are consistent
with continued soft investment growth in the months ahead, but likely
not material declines.
5. As we have discussed before, I believe that reaching full
employment will spur business investment--rising wages and difficulty
hiring will spur investment in labor-saving equipment. I believe the
economy as a whole is still short of full employment, but there are
likely some industries where all the labor market slack has been taken
up. Are we seeing increased business investment in those industries?
In principle, when the economy is nearing full employment and labor
markets tighten, the incentive for most firms to invest in labor-saving
technologies should rise. Such investment should in turn raise the
contribution of capital deepening (i.e., the amount of capital services
per employee) to the growth rate of trend labor productivity and lift
the longer-run growth rate of the U.S. economy as a whole. Higher trend
productivity and additional labor market strengthening should both
support stronger growth in hourly compensation.
In practice, it is difficult to discern a clear link between labor
market slack and business investment in the available data. A simple
cross correlation between industry-level equipment investment and
industry-level unemployment rates in the past few years shows
essentially no relationship. Investment in some industries with low
unemployment rates, like utilities and healthcare, does appear to have
accelerated. But in other low-unemployment industries, like finance and
insurance, investment does not appear to have accelerated.
That said, good quality industry-level investment data is only
available with a considerable lag and tends to be quite volatile from
year-to-year. Thus, it may take several more years for a clearer
pattern to emerge in the data. More generally, there are many other
factors besides labor market slack that affect investment, including
economic growth, profit expectations, financing conditions, tax policy,
and uncertainty. Therefore, isolating a statistically significant
relationship between labor market slack and business investment may
continue to prove elusive.
6. Business investment is the key to productivity growth which in
turn is the key to sustained high wage growth. What do you believe is
the single most important policy adjustment we could make to spur
business investment?
Despite strong labor market conditions, including an unemployment
rate near half-century lows, available indicators generally suggest
that hourly labor compensation growth remains moderate by historical
standards despite picking up some of late. Moderate compensation gains
likely reflect the offsetting influences of a strengthening labor
market and productivity growth that have been weak through much of the
expansion. A sustained pickup in productivity, as well as additional
labor market strengthening, would support stronger gains in hourly
compensation.
Considerable debate remains about the reasons for the slowdown in
productivity growth, but the weakness may be partly attributable to the
sharp pullback in business investment during the most recent recession
and the relatively slow recovery that followed. All else equal, a
pickup in net investment-that is, investment in excess of what is
needed to replace depreciated capital should raise the contribution of
capital deepening (i.e., the amount of capital services per employee)
to the growth rate of trend labor productivity.
Congress has instructed the Federal Reserve to promote maximum
employment and stable prices. Generally speaking, all policies that
boost the growth potential of the economy should help to spur business
investment on a sustainable basis. In the longer term, it would be
important to put the Federal budget on a sustainable path, as high and
rising Federal debt could restrain private investment, thereby reducing
productivity and overall economic growth. What types of policies are
most appropriate to promote business investment are for Congress and
the Administration to decide.