[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
          
          
          
          
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        Available via the World Wide Web: http://www.govinfo.gov
        
        
        
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              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.
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    \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.
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    \2\ https://home.treasury.gov/system/files/261/November072019-
minutes.pdf.
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    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.
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    \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.
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    \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.
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    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.