    [Senate Hearing 116-2]
    [From the U.S. Government Publishing Office]

                                                          S. Hrg. 116-2

             THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS

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

                                    HEARING

                                   BEFORE THE

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

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

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

                                   __________

                                FEBUARY 26, 2019

                                   __________

      Printed for the use of the Committee on Banking, Housing, and Urban
                                    Affairs

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                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                          MIKE CRAPO, Idaho, Chairman

    RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
    PATRICK J. TOOMEY, Pennsylvania      JACK REED, Rhode Island
    TIM SCOTT, South Carolina            ROBERT MENENDEZ, New Jersey
    BEN SASSE, Nebraska                  JON TESTER, Montana
    TOM COTTON, Arkansas                 MARK R. WARNER, Virginia
    MIKE ROUNDS, South Dakota            ELIZABETH WARREN, Massachusetts
    DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
    THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
    JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
    MARTHA MCSALLY, Arizona              DOUG JONES, Alabama
    JERRY MORAN, Kansas                  TINA SMITH, Minnesota
    KEVIN CRAMER, North Dakota           KYRSTEN SINEMA, Arizona

                         Gregg Richard, Staff Director

                          Joe Carapiet, Chief Counsel

                    Brandon Beall, Professional Staff Member

                Laura Swanson, Democratic Deputy Staff Director

                     Elisha Tuku, Democratic Chief Counsel

                           Dawn Ratliff, Chief Clerk

                          Cameron Ricker, Deputy Clerk

                          Shelvin Simmons, IT Director

                        Charles J. Moffat, Hearing Clerk

                              Jim Crowell, Editor

                                      (ii)

                                C O N T E N T S

                                  ----------

                           TUESDAY, FEBRUARY 26, 2019

                                                                       Page

    Opening statement of Chairman Crapo..............................     1
        Prepared statement...........................................    47

    Opening statements, comments, or prepared statements of:
        Senator Brown................................................     3
            Prepared statement.......................................    48

                                    WITNESS

    Jerome H. Powell, Chairman, Board of Governors of the Federal
      Reserve System.................................................     5
        Prepared statement...........................................    49
        Responses to written questions of:
            Senator Brown............................................    52
            Senator Rounds...........................................    58
            Senator Perdue...........................................    62
            Senator Tillis...........................................    63
            Senator Moran............................................    67
            Senator Warner...........................................    69
            Senator Schatz...........................................    74
            Senator Van Hollen.......................................    78
            Senator Cortez Masto.....................................    80
            Senator Smith............................................    85
            Senator Sinema...........................................    93

                  Additional Material Supplied for the Record

    Monetary Policy Report to the Congress dated February 22, 2019...    95

                                     (iii)

             THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS

                                  ----------

                           TUESDAY, FEBRUARY 26, 2019

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met, at 9:49 a.m., in room SD-106, Dirksen
    Senate Office Building, Hon. Mike Crapo, Chairman of the
    Committee, presiding.

                OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

        Chairman Crapo. The hearing will come to order.
        We welcome you, Chairman Powell, to the Committee for the
    Federal Reserve's Semiannual Monetary Policy Report to
    Congress.
        This hearing provides the Committee an opportunity to
    examine the current state of the U.S. economy, the Fed's
    implementation of monetary policy, and its supervisory and
    regulatory activities.
        In the wake of the 2008 financial crisis, the Fed entered a
    period of unconventional monetary policy to support the U.S.
    economy, including drastically cutting interest rates and
    expanding its balance sheet.
        I have long been concerned about the Fed's quantitative
    easing programs and the size of its balance sheet.
        As economic conditions improved, the Fed began trying to
    normalize monetary policy, including by gradually reducing the
    size of its balance sheet.
        The Fed's balance sheet grew to approximately $4.5 trillion
    from around $800 billion between 2007 and 2015 and now stands
    at around $4 trillion still.
        During the press conference following the FOMC's most
    recent meeting, Chairman Powell provided additional clarity on
    the Fed's plans to normalize monetary policy, saying, ``the
    ultimate size of our balance sheet will be driven principally
    by financial institutions' demand for reserves plus a buffer,
    so that fluctuations in reserve demand do not require us to
    make frequent sizable market interventions.''
        ``Estimates of the level of reserve demand are quite
    uncertain, but we know that this demand in the postcrisis
    environment is far larger than before. Higher reserve holdings
    are an important part of the stronger liquidity position that
    financial institutions must now hold.''
        ``The implication is that the normalization of the size of
    the portfolio will be completed sooner, and with a larger
    balance sheet, than in previous estimates.''
        Banks' reserve balances grew from $43 billion in January
    2008 to a peak of $2.8 trillion in 2014 before falling to $1.6
    trillion as of January 2019.
        During this hearing, I look forward to understanding more
    about: what factors the Fed may consider in determining what is
    the appropriate size of the balance sheet; what factors have
    affected banks' demand for reserves, including the Fed's
    postcrisis regulatory framework; and what amount of reserves
    are estimated to be necessary for the Fed to achieve its
    monetary policy objective.
        The state of the U.S. economy is a key consideration in the
    Fed's monetary policy decisions.
        The U.S. economy remains strong with robust growth and low
    unemployment.
        Despite everyone telling us prior to tax reform that annual
    growth would be stuck below 2 percent as far as the eye could
    see, the economy expanded, as we predicted, at an annualized
    rate of 3.4 percent in the third quarter of last year,
    following growth of 4.2 percent and 2.2 percent in the second
    and first quarters of 2018, respectively, according to the
    Bureau of Economic Analysis.
        This strong growth, which is on track to continue to exceed
    previous expectations, will now provide our policymakers with
    much greater flexibility to address other fiscal challenges
    than if we were continuing to struggle with insufficient
    growth.
        And according to the Bureau of Labor Statistics, the
    unemployment rate has remained low and steady around 4 percent
    while the U.S. economy added 223,000 jobs per month on average
    in 2018, as well as 304,000 jobs in the first month of this
    year.
        People continue to enter the labor force with the labor
    participation rate increasing to 63.2 percent from 62.7 percent
    over the last year.
        Reinforcing this strong employment environment, Fed Vice
    Chairman Rich Clarida said in a recent speech that ``the labor
    market remains healthy, with an unemployment rate near the
    lowest level recorded in 50 years and with average monthly job
    gains continuing to outpace the increases needed over the
    longer run to provide employment for new entrants into the
    labor force.''
        Major legislation passed through this Committee and enacted
    last Congress supported economic growth and job creation.
        The Economic Growth, Regulatory Relief, and Consumer
    Protection Act passed Congress with significant bipartisan
    support and was enacted to right-size regulation and redirect
    important resources to local communities for homebuyers,
    individuals, and small businesses.
        I appreciate the work that the Fed has done so far to
    introduce proposals and finalize rules required by the law.
        Overseeing the full implementation of that law and the
    Federal banking agencies' rules to right-size regulations will
    continue to be a top priority of the Committee in this
    Congress.
        In particular, the Fed and other banking regulators should
    consider whether the Community Bank Leverage Ratio should be
    set at 8 percent as opposed to the current 9 percent;
    significantly tailor regulations for banks with between $100
    billion and $250 billion in total assets with a particular
    emphasis on tailoring the stress testing regime; provide
    meaningful relief from the Volcker Rule for all institutions,
    including by revising the definition of ``covered funds'' and
    eliminating the proposed accounting test; and examine whether
    the regulations that apply to the U.S. operations of foreign
    banks are tailored to the risk profile of the relevant
    institutions and consider the existence of home-country
    regulations that apply on a global basis.
        The Committee will also look for additional opportunities
    to support policies that foster economic growth, capital
    formation, and job creation.
        Turning for a moment to another issue, Senator Brown and I
    issued a press release on February 13 inviting stakeholders to
    submit feedback on the collection, use, and protection of
    sensitive information by financial regulators and private
    companies, including third parties that share information with
    regulators and other private companies.
        Americans are rightly concerned about how their data is
    collected and used and how it is secured and protected.
    Americans need this kind of attention from this Committee and
    from the Fed and our other financial regulators.
        Given the exponential growth and use of data, and the
    corresponding data breaches, it is also worth examining how the
    Fair Credit Reporting Act should work in a digital economy and
    whether certain data brokers and other firms serve a function
    similar to the original consumer reporting agencies.
        The Banking Committee has plans to make this a major focus
    in this Congress, and we encourage our stakeholders to submit
    their feedback by the March 15 deadline.
        Last, I want to take a moment to recognize one of our staff
    members who is retiring this week.
        Dawn Ratliff is the Committee's Chief Clerk, and she will
    be retiring, as I said, at the end of the week.
        She might not want me to say this, but Dawn has been in the
    Senate longer than most Senators. She has dedicated 27 years in
    these hallways and has been with the Senate Banking Committee
    since 2007, starting with then-Chairman Chris Dodd, and then
    working for Chairman Tim Johnson, then Chairman Shelby, and now
    myself.
        Dawn is a Banking Committee institution. She is incredibly
    knowledgeable, helpful, and professional, respected and well
    liked by everyone with whom she works.
        Dawn, your work on the Committee has truly made a lasting
    impact, and even though you will not be here following this
    week, you will not be forgotten anytime soon.
        We wish you the best of luck in your well-earned
    retirement. Enjoy it.
        [Applause.]
        Chairman Crapo. Senator Brown.

               OPENING STATEMENT OF SENATOR SHERROD BROWN

        Senator Brown. Thank you, Chairman Crapo. And, Ms. Ratliff,
    thank you again for your service to our country--to this
    Committee and to our country and to the Senate. She has been
    instrumental in making this Committee run smoothly for over a
    decade. We will miss her, and congratulations on your
    retirement.
        Chairman Powell, welcome back to the Committee. It has been
    a great week for Wall Street. The FDIC announced that banks
    made a record-breaking $237.7 billion in profits in 2018,
    almost a quarter trillion dollars in profits.
        Corporations--led by the Nation's largest banks--bought
    back a record $1 trillion in stocks last year, conveniently
    boosting CEO compensation. The President's tax bill put $30
    billion in the banks' pockets and continues to fuel even more
    buybacks and CEO bonuses.
        But that is never enough for Wall Street. It continues to
    demand weaker rules so big banks can take bigger and more
    dangerous risks. And from the proposals the Fed has put out
    after the passage of S. 2155, it looks like the Fed and you are
    going along.
        The economy looks great from a corner office on Wall
    Street, but it does not look so great from a house on Main
    Street.
        Corporate profits are up. Executive compensation has
    exploded--all because of the productivity of American workers.
    But workers' wages have barely budged. Hard work simply does
    not pay off for the people fueling this growth.
        Seven of the ten fastest-growing occupations do not pay
    enough to afford rent on a modest one-bedroom apartment, let
    alone save for a downpayment.
        Household debt continues to rise, taking its toll on
    families. At the end of 2018--think about this for a minute. At
    the end of 2018, 7 million Americans with auto loans were at
    least 90 days past due on their payments. Seven million
    Americans with auto loans were at least 90 days past due on
    their payments, even though the President brags about
    unemployment being at record lows.
        Borrowers of color have not recovered financially from the
    crisis. Too many Americans of all ages are saddled with
    mountains of student loan debt.
        The Trump shutdown revealed another frightening reality:
    Too many Americans still live paycheck to paycheck, even with
    stable jobs.
        After 35 days of no pay, of uncertainty, of hardship, those
    workers went back to their jobs and eventually received their
    pay. But more than a million Government contractors were not so
    lucky. We are talking in many cases about custodians and
    security guards and cafeteria workers making $12 to $15 an hour
    and going 35 days without pay and getting no compensation later
    like the 800,000 Government workers. We have heard a lot of
    talk about whether GDP will recover from the shutdown, not much
    about how workers will recover.
        I give special thanks to Senator Smith for her work on
    trying to remedy this incredible injustice that damn near
    anybody talks about--damn near nobody talks about.
        We have questioned for quite a while whether the economic
    recovery--now in its tenth year--has been felt by all
    Americans. Stagnating wages and increasing income inequality
    between Wall Street CEOs and working Americans point to an
    obvious answer.
        Mr. Chairman, Chairman Powell, your comments at the
    February 6 Fed town hall, for educators confirmed this. A
    teacher asked about your major concerns for the economy, and
    your answer was: ``We have some work to do more to make sure
    that prosperity that we do achieve is widely spread . . .
    median and lower levels of income have grown, but much more
    slowly. And growth at the top has been very strong.''
        ``Growth at the top has been very strong.'' In other words,
    the CEOs, the folks on Wall Street, they are doing just fine in
    this economy.
        Chair Powell, the Fed has spent a decade bending over
    backwards to help banks, to help big corporations that have
    hoarded profits for themselves rather than investing in the
    millions of workers who actually make our companies successful.
        We are late in this economic cycle. It is clear that record
    Wall Street profits will not be trickling down to workers
    before the next downturn.
        Before the last crisis, we heard over and over again from
    Government officials and banks that the economy was doing fine
    10 years ago. Regulators and Congress continued to weaken rules
    for Wall Street, continued to ignore the warning signs as
    families struggled to make ends meet.
        As the severity of the financial crisis became clear, the
    Fed rushed to the aid of the biggest banks, but it did not
    devote even a fraction of that firepower to helping the rest of
    America. Ignoring working families was a policy failure then;
    it is a policy failure now.
        Mr. Chairman, I hope we do not make the same mistake again.
    I look forward to your testimony and the new ideas for making
    hard work pay off for everyone in our economy.
        Thank you.
        Chairman Crapo. Thank you, Senator Brown.
        Chairman Powell, we welcome you here again. We appreciate
    your attention. We appreciate the report that you have provided
    to us, and you may make your statement about that report and
    whatever information you would like to present to us, and then
    we will proceed to some questions. Thank you.
        Chairman Powell.

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

        Mr. Powell. Thank you and good morning. Chairman Crapo,
    Ranking Member Brown, and other Members of the Committee, I am
    happy to present the Federal Reserve's semiannual Monetary
    Policy Report to the Congress.
        Let me start by saying that my colleagues and I strongly
    support the goals Congress has set for monetary policy--maximum
    employment and price stability. We are committed to providing
    transparency about the Federal Reserve's policies and programs.
    Congress has entrusted us with an important degree of
    independence so that we can pursue our mandate without concern
    for short-term political considerations. We appreciate that our
    independence brings with it the need to provide transparency so
    that Americans and their representatives in Congress understand
    our policy actions and can hold us accountable. We are always
    grateful for opportunities, such as today's hearing, to
    demonstrate the Fed's deep commitment to transparency and
    accountability.
        Today I will review the current economic situation and
    outlook before turning to monetary policy. I will also describe
    several recent improvements to our communications practices to
    enhance our transparency.
        The economy grew at a strong pace, on balance, last year,
    and employment and inflation remain close to the Federal
    Reserve's statutory goals of maximum employment and stable
    prices--our dual mandate.
        Based on available data, we estimate that gross domestic
    product, or GDP, rose a little less than 3 percent last year
    following a 2.5-percent increase in 2017. Last year's growth
    was led by strong gains in consumer spending and increases in
    business investment. Growth was supported by increases in
    employment and wages, optimism among households and businesses,
    and fiscal policy actions. In the last couple of months, some
    data have softened but still point to spending gains this
    quarter. While the partial Government shutdown created
    significant hardship for Government employees and many others,
    the negative effects on the economy are expected to be fairly
    modest and to largely unwind over the next several months.
        The job market remains strong. Monthly job gains averaged
    220,000 in 2018, and payrolls increased an additional 304,000
    in January. The unemployment rate stood at 4 percent in
    January, a very low level by historical standards, and job
    openings remain abundant. Moreover, the ample availability of
    job opportunities appears to have encouraged some people to
    join the workforce and some who otherwise might have left to
    remain in it. As a result, the labor force participation rate
    for people in their prime working years--which is to say the
    share of people ages 25 to 54 who are either working or
    actively looking for work--has continued to increase over the
    past year. In another welcome development, we are seeing signs
    of stronger wage growth.
        The job market gains in recent years have benefited a wide
    range of families and individuals. Indeed, recent wage gains
    have been strongest for lower-skilled workers. That said,
    disparities persist across various groups of workers and
    different parts of the country. For example, unemployment rates
    for African Americans and Hispanics are still well above the
    jobless rates for whites and Asians. Likewise, the percentage
    of the population with a job is noticeably lower in rural
    communities than in urban areas, and that gap has widened over
    the past decade. The February Monetary Policy Report provides
    additional information on employment disparities between rural
    and urban areas.
        Overall consumer price inflation, as measured by the 12-
    month change in the price index for personal consumption
    expenditures, is estimated to have been 1.7 percent in
    December, held down by recent declines in energy prices. Core
    PCE inflation, which excludes food and energy prices and tends
    to be a better indicator of future inflation, is estimated at
    1.9 percent. At our January meeting, my colleagues and I
    generally expected economic activity to expand at a solid pace,
    albeit somewhat slower than in 2018, and the job market to
    remain strong. Recent declines in energy prices will likely
    push headline inflation further below the FOMC's longer-run
    goal of 2 percent for a time, but aside from those transitory
    effects, we expect that inflation will run close to 2 percent.
        While we view current economic conditions as healthy and
    the economic outlook as favorable, over the past few months we
    have seen some crosscurrents and conflicting signals. Financial
    markets have become more volatile toward year end, and
    financial conditions are now less supportive of growth than
    they were earlier last year. Growth has slowed in some major
    foreign economies, particularly China and Europe. And
    uncertainty is elevated around some unresolved Government
    policy issues, including Brexit and ongoing trade negotiations.
    We will carefully monitor these issues as they evolve.
        In addition, our Nation faces important longer-term
    challenges. For example, productivity growth, which is what
    drives rising real wages and living standards over the longer
    term, has been low. Likewise, in contrast to 25 years ago,
    labor force participation among prime-age men and women is now
    lower in the United States than in most other advanced
    economies. Other longer-run trends, such as relatively stagnant
    incomes for many families and a lack of upward economic
    mobility among people with lower incomes, also remain important
    challenges. And it is widely agreed that the Federal Government
    debt is on an unsustainable path. As a Nation, addressing these
    pressing issues could contribute greatly to the longer-run
    health and vitality of the U.S. economy.
        Over the second half of 2018, as the labor market kept
    strengthening and economic activity continued to expand
    strongly, the FOMC gradually moved interest rates toward levels
    that are more normal for a healthy economy. Specifically, at
    our September and December meetings we decided to raise the
    target range for the Federal funds rate by \1/4\ percentage
    point at each, putting the current range at 2\1/4\ to 2\1/2\
    percent.
        At our December meeting, we stressed that the extent and
    timing of any further rate increases would depend on incoming
    data and the evolving outlook. We also noted that we would be
    paying close attention to global economic and financial
    developments and assessing their implications for the outlook.
    In January, with inflation pressures muted, the FOMC determined
    that the cumulative effects of these developments, along with
    ongoing Government policy uncertainty, warranted taking a
    patient approach with regard to future policy changes. Going
    forward, our policy decisions will continue to be data
    dependent and will take into account new information as
    economic conditions and the outlook evolve.
        For guideposts on appropriate policy, the FOMC routinely
    looks at monetary policy rules that recommend a level for the
    Federal funds rate based on measures of inflation and the
    cyclical position of the U.S. economy. The February Monetary
    Policy Report gives an update on monetary policy rules, and I
    continue to find these rules to be helpful benchmarks, but, of
    course, no simple rule can adequately capture the full range of
    factors the Committee must assess in conducting policy. We do,
    however, conduct monetary policy in a systematic manner to
    promote our longer-run goals of maximum employment and stable
    prices. As part of this approach, we strive to communicate
    clearly about our monetary policy decisions.
        We have also continued to gradually shrink the size of our
    balance sheet by reducing our holdings of Treasury and agency
    securities. The Federal Reserve's total assets declined about
    $310 billion since the middle of last year and currently stand
    at close to $4 trillion. Relative to their peak level in 2014,
    banks' reserve balances with the Federal Reserve have declined
    by around $1.2 trillion, a drop of more than 40 percent.
        In light of the substantial progress we have made in
    reducing reserves, and after extensive deliberations, the
    Committee decided at our January meeting to continue over the
    longer run to implement policy with our current operating
    procedure. That is, we will continue to use our administered
    rates to control the policy rate, with an ample supply of
    reserves so that active management of reserves is not required.
    Having made this decision, the Committee can now evaluate the
    appropriate timing and approach for the end of balance sheet
    runoff. I would note that we are prepared to adjust any of the
    details for completing balance sheet normalization in light of
    economic and financial developments. In the longer run, the
    size of the balance sheet will be determined by the demand for
    Federal Reserve liabilities such as currency and bank reserves.
    The February Monetary Policy Report describes these liabilities
    and reviews the factors that influence their size over the
    longer run.
        I will conclude by mentioning some further progress we have
    made in improving transparency. Late last year we launched two
    new publications: the first, the Financial Stability Report,
    shares our assessment of the resilience of the U.S. financial
    system; and the second, the Supervision and Regulation Report,
    provides information about our activities as a bank supervisor
    and regulator. Last month we began conducting press conferences
    after every FOMC meeting instead of every other one. This
    change will allow me to more fully and more frequently explain
    the Committee's thinking. Last November we announced a plan to
    conduct a comprehensive review of the strategies, tools, and
    communications practices we use to pursue our congressionally
    assigned goals. This review will include outreach to a broad
    range of stakeholders across the country. The February Monetary
    Policy Report provides further discussion of these initiatives.
        Thank you, and I will be happy to respond to your
    questions.
        Chairman Crapo. Thank you very much, Chairman Powell.
        As I mentioned in my opening statement, you said that the
    balance sheet normalization may end sooner with a larger
    balance than previously anticipated in the--if I understand it
    correctly, the ultimate size of the balance sheet will be
    principally driven by financial institutions' demand for
    reserves plus a buffer, correct?
        Mr. Powell. That is correct.
        Chairman Crapo. Reserves have increased from $43 billion in
    early 2008 to about $2.8 trillion in 2014, if I understand
    correctly, before falling now down to about $1.6 trillion
    currently. Do you have an estimate of the amount of reserves
    that are estimated to be necessary to achieve the Fed's
    monetary policy objective? And how does the Fed's postcrisis
    regulatory policy affect this amount?
        Mr. Powell. The quantity of reserves before the financial
    crisis, Mr. Chairman, was $20 billion, in that range, plus or
    minus, so a relatively small amount.
        One of the important things we did after the financial
    crisis was require banking institutions, particularly the very
    largest ones, to hold quite large buffers of highly liquid
    assets. One of those assets that the banks like to hold to
    satisfy this requirement is bank reserves, so the demand for
    reserves is going to be very substantially higher than it was
    before the crisis and will not go back to those lower levels in
    any case.
        We only have estimates based on market intelligence and
    discussions with financial institutions, and those estimates
    have actually gone up substantially just over the course of the
    last year or so. We do not have a precise notion, but, you
    know, we believe that the public estimates that are out there
    of around $1 trillion plus a buffer, as you mentioned in your
    remarks, will be, as a reasonable starting point, an estimate
    of where we might wind up.
        Chairman Crapo. All right. Thank you. As you know, I have
    been a strong critic of the quantitative easing the Fed has
    been engaged in, and I appreciate your explanation of how you
    intend to reach the appropriate balance of what the Fed's
    balance sheet should be. And I will continue to work with you
    on understanding how we get to the right spot as soon as we
    can.
        You mentioned in your statement and in your report that the
    labor force participation rate has started to grow. That has
    been one of the reasons we have seen such low economic
    performance, in my opinion, in the past years. Do you expect
    that the labor force participation rate growth that we have
    seen will stabilize and even possibly increase as we continue
    to move forward?
        Mr. Powell. So labor force participation, if I can provide
    just a little bit of background, was an area where the U.S. was
    at least comparable to other well-off countries and in some
    cases at the high end as far as labor force participation by
    women was concerned.
        We are now at the bottom end of the league table for both
    men and women, and it is a very troubling concern. A big part
    of it, though, is driven by something that we cannot really
    change, and that is just demographics. As the country ages,
    labor force participation should decline at a fairly steady
    level. Nonetheless, even allowing for that, we are lower than
    we need to be.
        So the gains we have seen over the past year have been very
    positive and very welcome from our standpoint. We do not know
    how long they can be sustained, but we hope for a long time. I
    would just say that I think we need a broad policy focus on how
    to sustain labor force participation, including not just
    through Fed policy but through legislative policy as well.
        Chairman Crapo. And I agree. I think that that is a
    critical part of our ability to maintain the growth and
    strength of our economy.
        I have lots of questions for you, but just one that I will
    have time for in the remaining amount of time I have, and this
    will get to regulatory relief and implementation of Senate bill
    2155. As you know, Senate bill 2155 provides smaller
    institutions with relief from the Volcker Rule. Regardless,
    there are still significant issues with the rule for
    institutions of all sizes, and I and six of my Banking
    Committee colleagues wrote to our financial regulators in
    October of last year urging further revisions to the rule to
    address outstanding issues, such as the rule's ``covered
    funds'' definition and its broad application to venture
    capital, other long-term investments, and loan creation. In
    addition, I am concerned that the proposed accounting test may
    make the Volcker Rule more complex than is necessary.
        Can you commit to using your significant regulatory
    discretion provided by statute to promptly address these
    outstanding issues?
        Mr. Powell. Yes, we received comments on those issues and
    more, and we thought some of those comments were very well
    taken, and we are working hard to try to address them. And I
    assure you we will do our best to do that.
        Chairman Crapo. I appreciate that.
        Senator Brown.
        Senator Brown. Thank you. Thank you again for being here,
    Chairman Powell.
        Yesterday your predecessor, Janet Yellen, said she does not
    think President Trump has a grasp of macroeconomic policy. Is
    she right?
        Mr. Powell. I will not have any comment on that for you,
    Senator.
        Senator Brown. All right. I guess I am not surprised.
        It is troubling that the former Fed Chair, the woman that
    sat in your job and was very good at that job, tells the press
    point blank that she does not think the President of the United
    States understands the economy. I think the American people
    continually and more and more understand that this President--
    that many Americans, GM workers in Youngstown and Hamtramck,
    for example, believe he has betrayed workers in this country.
    That is becoming clearer and clearer.
        Let me shift to another question. Last week former Fed
    Chair Paul Volcker raised concerns that the culture of banking
    only focuses on the profits of the firm and the pay of the CEO.
    I share this concern that we should focus on workers. Since
    1979--you know these numbers, Mr. Chairman--worker productivity
    has grown 70 percent. Compensation for those workers has grown
    by just 11 percent. Meanwhile, the top one-tenth of 1 percent
    saw their earnings grow by 343 percent. This disparity, as you
    know, is even worse for women and people of color.
        So do you think, Mr. Chairman, the Fed's employment mandate
    is just to ensure that people are employed? Or do you think
    full employment implies a dignity of work, that is, meaning
    workers earn a salary and benefits that let them fully
    participate in the 2019 economy in our country?
        Mr. Powell. Our mandate, as you well know, is maximum
    employment, and we try to take that to heart. And, you know,
    our tool for trying to achieve that is monetary policy. And I
    think we are at a 50-year low in unemployment. There are many
    other issues in the country. You have mentioned some of them.
    But, honestly, to achieve some of the things you are talking
    about, we need other tools. It is not--the Fed cannot affect
    every social problem, as you well know.
        Senator Brown. Is that a social problem, that fewer and
    fewer people, even though they are employed, wages are
    stagnant, is that just a social problem?
        Mr. Powell. Well, wages, I would say wages do go into our
    assessment of maximum employment. We do look at wages, and I am
    happy to say that wages, while they were very sluggish in the
    aftermath of the crisis, have now started to move up in a way
    that is more consistent with past history and with inflation
    and productivity----
        Senator Brown. But not even close to productivity, not even
    close to gains in productivity for most workers.
        Mr. Powell. So today--I know the chart you are talking
    about. You are talking about over the longer run. If you look
    at what--wages are now going up a little better than 3 percent.
    Inflation is right at 2. Productivity has been running--sorry.
    Inflation has been at 2. Productivity has been around 1. So 3
    percent is about right from that narrow standpoint.
        Wages have moved up. We welcome that. We do not find it
    troubling from an inflation standpoint at this point. So we do
    look very carefully at wages as we assess maximum employment,
    as we assess whether we are meeting our maximum employment
    goal.
        Senator Brown. Let me put it in a bit of a historical
    perspective. Will Rogers during the Great Depression provided a
    lesson I think we could learn from today. He said that,
    ``Unlike water, money trickles up, not down.'' Of the
    Government's response to that economic crisis of the Great
    Depression, he said, ``The money was all appropriated for the
    top in the hopes that it would trickle down to the needy. . . .
    Give it to the people at the bottom . . . the top will have it
    before night anyhow. But it will at least have passed through
    the poor fellow's hands. They saved the big banks but the
    little ones went up the flue.''
        This observation is 89 years old. It seems like the Fed
    still thinks, from your answer and from the behavior of the
    Fed, that the best way to help workers is to shore up big bank
    profits and hope the prosperity trickles down. Over the last
    decade, it has been creative in how it accomplishes this. I
    believe the Fed has the authority and the duty to be creative,
    to help workers share in the prosperity they create. My staff
    will follow up with your staff on ways of doing that.
        One more question. It seems like ``too big to fail'' is
    alive and well. We are seeing a potential merger--we are seeing
    growth in most of the largest money center banks. Two regional
    banks, as you know, SunTrust and BB&T, each with over $200
    billion in assets, decided to merge, saying it was too
    difficult for them to compete with the money center banks'
    investment in technology.
        What message does the Fed send to regional and community
    banks about their future if the Fed eventually approves this
    merger?
        Mr. Powell. Well, we have a process that we go through in
    evaluating any merger. It is set forth in great detail in the
    law and in our guidance. We will go through that process
    carefully, fairly, and thoroughly and with a lot of
    transparency when we do get an application. We do not actually
    have an application yet on that matter. We expect to get it
    sometime in the next few weeks.
        So we will do all of that. I would just say we have not
    prejudged anything, and we are going to do our work on that
    professionally, carefully, fairly, and transparently.
        Senator Brown. OK.
        Chairman Crapo. Senator Shelby.
        Senator Shelby. Thank you.
        Chairman Powell, somebody is doing something right. I do
    not know if it is the President or you or a combination of
    everything. I think this is the best economy I have seen in my
    lifetime at this point.
        Now, the question is: How do we keep it going? How do we
    keep it going? That is part of your job--not totally, but you
    are into the money. How do you gauge inflation, for example?
    You know, there are a lot of ways to do it. That is one. You
    were talking about price stability, maximum employment. Price
    stability, you are talking about the stability of the monetary
    policy, the value of our currency, and everything that goes
    with it. How do we keep this economy going, in your judgment?
        Mr. Powell. So I think you said it very well. We want to
    use our tools to sustain this expansion and keep the labor
    market strong and keep inflation near 2 percent. That is
    exactly what we are trying to do. And so we look around and
    what do we see? We see a labor market that is strong and
    continuing to strengthen. Job creation is strong. Wages are
    moving up. So that is a very healthy thing.
        With inflation, we see muted inflation pressures. Even now
    with really historically low unemployment and a great recovery,
    an ongoing recovery in the labor markets, we still see muted
    inflation pressures, and that gives us the ability to be
    patient with monetary policy, and that is what we are going to
    do. The Committee has decided that with our policy rate in the
    range of neutral, with muted inflation pressures and with some
    of the downside risks that we have talked about, this is a good
    time to be patient and watch and wait and see how the situation
    evolves.
        Senator Shelby. How does the abundance of hydrocarbons that
    we have found in this country in recent years, which prices
    everything, how does that feed into the economy in a positive
    way?
        Mr. Powell. Well, in a couple of ways. One, it's a big
    industry. We have a very large energy industry now thanks
    really to shale. In addition, if you think about the--so that
    employs a lot of people, and that is a big thing in certain
    areas of the country. Five or six major areas of the country
    have a lot of employment and economic activity.
        Interesting on inflation. If you look back to the 1970s, a
    lot of what set off the bad inflation outcomes in the 1970s was
    an oil shock. What we have in our very large domestic oil
    industry now is, in effect, a shock absorber, because when oil
    prices go up, American shale producers and other oil producers
    will produce more oil, and so that offsets that shock and will,
    you know, prevent that shock from driving inflation up here. So
    it has been a real positive for our economy from a number of
    perspectives.
        Senator Shelby. Mr. Chairman, how important is the
    certainty of good trade agreements to our economy and to the
    world economy?
        Mr. Powell. Well, uncertainty is the enemy of business, and
    businesses, they want a set of rules, they want an established,
    transparent set of rules, and they want to play by those rules,
    be able to make longer-term plans, investments, and hiring and
    that kind of thing.
        At the same time, we need the trade--you know, of course,
    we are not responsible for trade. We do not comment on trade
    policy at all. But we have been hearing a lot from our contacts
    around the country really all year, this year and all last
    year, about uncertainty, and we do sense it has been holding
    back some decisions, probably had some minor effect on
    confidence and maybe activity. But, overall, certainty around
    trade and other Government policies is very important.
        Senator Shelby. As we look at our current account, the
    imbalance of trade with most of the world, does that concern
    you? And if it does, why?
        Mr. Powell. You know, the overall current account is set
    economically by the difference between savings and investment
    in our country. So it is really an identity that kind of works
    that way.
        It tends to go up in good times. When Americans are, you
    know, at work and earning well and buying things and the
    economy is strong, we tend to buy things. Some of those things
    tend to be imported. The trade deficit and the current account
    balance can go down quickly in bad states of affairs.
        Of course, over time we would like to see balance both in
    savings and investment and in the trade balance.
        Senator Shelby. I do not have much time left, but we have
    discussed this before, cost-benefit analysis. Last year when
    you came before the Committee, we discussed here the formation
    and the policy affecting this, an assessment unit to conduct
    cost-benefit analysis on regulations. Could you provide here an
    update on the work of the entity here? And what have you
    learned and what is going on?
        Mr. Powell. Yes, so that unit is up and running now, and it
    is a relatively new undertaking. Cost-benefit analysis is
    something we, of course, have done really always, and
    particularly in the last decade or so we have upped our game.
    Now we have a particular unit focused on it. We are very
    pleased with the progress it is making, and they are involved
    in the rulemakings and assessment of everything we do. So it is
    a positive development, and, you know, we look forward to
    making it ever stronger.
        Senator Shelby. My last question to you, in the few seconds
    I have left, is: What is the health of our banking system that
    you regulate at the Federal Reserve, our biggest banks?
        Mr. Powell. I think our banking system overall is quite
    strong, you know, record profits, no bank failures I think in
    2018, much higher capital, much higher liquidity, better risk
    management; stress tests have really focused banks on
    understanding and managing their risks. We have better
    resolution planning overall. I think our banking system is
    strong and resilient. We never take it for granted. We are
    always looking for problems and cracks, but I would say overall
    our banking system is strong.
        Senator Shelby. Thank you.
        Thank you, Mr. Chairman.
        Chairman Crapo. Senator Menendez.
        Senator Menendez. Welcome, Chairman. As the number of
    legitimate cannabis-related businesses grow across the United
    States, the vast majority of banks and credit unions are not
    offering services to these enterprises for legitimate fear of
    legal and regulatory risk. My home State of New Jersey is
    moving toward legalization of recreational marijuana, and I
    have concern that these new businesses as well as the existing
    medical marijuana businesses in the State will continue to find
    themselves shut out of the banking system. And when these
    businesses are forced to operate exclusively in cash, they
    create serious public safety risks in our communities.
        Do you agree that financial institutions need clarity on
    this issue?
        Mr. Powell. I think it would be great to have clarity. Of
    course, financial institutions and their regulators and
    supervisors are in a very difficult position here with
    marijuana being illegal under Federal law and legal under a
    growing number of State laws. It puts financial institutions in
    a very difficult place and puts the supervisors in a difficult
    place, too. It would be nice to have clarity on that
    supervisory relationship.
        Senator Menendez. And in a corollary question, related to
    the provision of banking services is the ability for such
    businesses to secure insurance products, a necessity for those
    looking to secure financing. Would it be helpful for Congress
    to also consider the role of insurance companies as States move
    forward to legalization?
        Mr. Powell. I believe so, yes.
        Senator Menendez. OK. On a different question, on February
    7th BB&T announced that it planned to purchase SunTrust in a
    deal that would result in the combined bank becoming the sixth
    largest commercial bank in the country with $434 billion in
    total assets. As you may know, in 2008 BB&T's Community
    Reinvestment Act rating was downgraded due to substantive
    violations of the Equal Credit Opportunity Act and the Fair
    Housing Act. BB&T's most recent CRA exam released last year
    also included a substantive violation of fair lending laws, a
    violation which likely should have resulted in another
    downgrade to the bank's CRA rating.
        I want to be sure that the Federal Reserve is not following
    the OCC and deemphasizing its treatment of fair lending
    violations when it comes time to evaluate a proposed merger.
    What assurance can you give us that the Federal Reserve will
    treat these violations with the seriousness they deserve?
        Mr. Powell. We have not changed our policy on that, and we
    do consider--it comes in the law under convenience and needs of
    the communities served, and that includes consumer compliance
    and fair lending records and the record of performance under
    CRA. Those are all things that we do consider when we get a
    merger application.
        Senator Menendez. And when you are considering it, can you
    give us a sense of what the Federal Reserve's review of this
    bank's or any other bank's Community Reinvestment Act track
    record of compliance with fair lending laws will look like?
        Mr. Powell. We will look thoroughly at it. We will look at
    the rating, of course, which I believe is--I think it is
    satisfactory now. Banks that have an unsatisfactory or less
    than satisfactory rating I think have a hard time. But we will
    look at that, and we will also consider public comments and a
    full range of information. Any information that is presented to
    us we will consider.
        Senator Menendez. Well, I ask this question because it
    seems to me that, particularly at the OCC, we have--who has
    released a proposal without input from the Fed or FDIC
    contemplating sweeping changes to the implementation of the
    Community Reinvestment Act. In a speech last year, Governor
    Brainard said the Community Reinvestment Act was ``more
    important than ever.'' He stressed that branches and deposit-
    taking ATMs remain an important way that banks engage with a
    community. You also highlighted recently the importance of
    enforcing the CRA and other laws that help ensure people have
    adequate access to financial services wherever they live.
        Can we get your commitment to build consensus among the Fed
    Governors before moving forward with proposals to change
    implementation of the Community Reinvestment Act?
        Mr. Powell. Oh, yes.
        Senator Menendez. OK. I think it is important that you do
    everything in your power to try to achieve a unanimous vote on
    this issue, should the Fed decide to move forward. Many of us
    find this an incredibly important part of our law and an
    increasingly diminishing reality of financial institutions that
    somehow think that they do not really have to fully engage and
    implement the law and ultimately still get away with it. And so
    I think there has to be a strong message that that is not the
    case. I hope you will be able to deliver that message.
        Mr. Powell. We are unified in our commitment to, you know,
    the mission of CRA, and to any revisions that we do, we are
    going to want to see that they preserve that mission and enable
    banks to serve it more effectively.
        Senator Menendez. Thank you, Mr. Chairman.
        Chairman Crapo. Senator Toomey.
        Senator Toomey. Thank you, Mr. Chairman.
        Chairman Powell, welcome back. Good to see you again. Let
    me just start by once again compliment you and your colleagues
    on taking us a long way toward normalizing monetary policy. In
    my view, this was long overdue, but you have been pursuing what
    strikes me as a prudent, thoughtful, and data-informed process
    of getting back to normal. So I want to thank you for that.
        A quick regulatory question, if I could. I was pleased with
    the interagency proposal that was released by the Fed and the
    other agencies dealing with S. 2155 and specifically the
    tailoring of capital and liquidity requirements, enhanced
    prudential standards.
        I think the comment period closed in January on this
    proposal. Can you assure us that it is a high priority to
    finalize these rules?
        Mr. Powell. It is a very high priority. S. 2155
    implementation is probably our highest priority, and we are
    pushing ahead.
        Senator Toomey. Any idea of a timeframe by which we could
    expect to see finalized rules there?
        Mr. Powell. I would not want to put a date--I mean, there
    are so many rules. There are a dozen rules that we have
    comments on right now. I can come back to you with----
        Senator Toomey. OK. But I am glad to hear it is a priority.
        Mr. Powell. It is.
        Senator Toomey. We are obviously eager, and we think you
    are--I think you are heading in the right direction.
        Unrelated, as you know, the private sector has set up a
    real-time payment system, and I think a real-time payment
    system is a terrific innovation that is very, very good for our
    economy. My understanding is all depository institutions have
    access to it on an equal footing, as they should. To the extent
    that that is the case, do you believe it is necessary for the
    Fed to develop an alternative or competing real-time payment
    system?
        Mr. Powell. That is a judgment that we have not made. We
    sought comment on that question, and we had a range of views,
    and it is something we are thinking about. We are mindful that,
    you know, we do not--under the Monetary Control Act, for
    example, we have to find that the services we provide are
    capable of being paid for and also not something that the
    private sector can adequately provide.
        Senator Toomey. Right.
        Mr. Powell. So we are looking at that very question.
        Senator Toomey. I would be interested in just hearing what
    your thoughts are as you go forward on that. It does seem to me
    that the private sector is providing a perfectly viable and
    affordable and reasonable mechanism here.
        On another topic, as you know, there has been recent
    discussions both, I think, inside and certainly outside the Fed
    about whether the Fed ought to reconsider the way it thinks
    about inflation, and specifically, I guess the way I understand
    this discussion, whether the Fed ought to target a price level
    rather than a change in the price level, and specifically if
    there were an extended period of time when inflation ran below
    a target, would it make sense for the Fed to intentionally
    attempt to exceed the target modestly or by enough so that over
    a long period of time you would hit the average.
        My first reaction is to be pretty concerned about that.
    Intentionally running at an inflation rate above the target
    rate worries me given that historically inflation has been much
    harder to control and high inflation has been a bigger problem
    than low inflation. But I wonder what your thoughts are about
    this topic.
        Mr. Powell. These are questions, as you know, that are
    going to be the subject of careful consideration over the
    course of this year and beyond in our thinking.
        You know, the issue that we face is that rates have come
    down--long and short rates have come down really over the last
    40 years and are now much--they are just much lower, real rates
    and, of course, inflation--add inflation back in, nominal rates
    as well, the implication of that being that in a typical
    downturn, the odds are much more--much higher that we will wind
    up back at the zero lower bound again. And in that situation,
    that fact there has the potential to drag inflation
    expectations down over time.
        In our thinking, inflation expectations are now the most
    important driver of actual inflation. So we are trying to
    think--and, really, the economics profession has been thinking
    about it for 20 years, since the experience of Japan in the
    late 1990s, thinking of ways to make that inflation 2-percent
    target credible, highly credible, so that inflation kind of
    averages around 2 percent rather than only averaging 2 percent
    in good times and then averaging way less than that in bad
    times, which would draw expectations down.
        No decisions have been made. You raise a--there are plenty
    of questions and concerns to be addressed, but there is also a
    problem that I think we owe it to the public to try think our
    way through the best possible way to address that problem so
    that we can carry out our mandate.
        Senator Toomey. Yeah, I understand the logic. I understand
    the problem that you are wrestling with. I would just urge
    great, great caution on this for many, many reasons, not the
    least of which, for whatever period of time the Fed decided it
    would exceed the goal so that it averages the goal--first of
    all, during that period of time, presumably you do not have
    price stability. Certainly not zero. You would be intentionally
    running above even the goal.
        I have got other questions, but I see I am out of time. I
    just want to urge caution on that one, Mr. Chairman.
        Chairman Crapo. Senator Tester.
        Senator Tester. Thank you, Mr. Chairman, Ranking Member
    Brown. Thank you for being here, Chairman Powell. I appreciate
    your service, appreciate the work you are doing.
        I want to talk a little bit about the Government shutdown
    that we just came through that cost the economy $11 billion,
    and I think that is a conservative figure. There is at least
    one in this Government that wants to use Government services
    and public employees as a pawn when they do not get their way.
        But what I want to ask you about is we are faced with a
    debt ceiling coming up March 1. Could you walk us through
    quickly, if you could, the economic impacts of failing to
    increase that debt ceiling?
        Mr. Powell. Well, the failure to increase the debt ceiling
    creates a lot of uncertainty in the first instance, and then
    when you actually get up to the point where the Government runs
    out of cash and does not pay its bills--we never passed that
    point yet. That is kind of a bright line, and I hope we never
    do pass it. But there is a lot of uncertainty that is generated
    and a lot of distraction from what is otherwise a pretty good
    economy.
        Senator Tester. What would happen to our interest rates on
    $22 trillion worth of debt if we were not to do what we needed
    to do with the debt ceiling?
        Mr. Powell. It is beyond even considering. The idea that
    the United States would not honor all of its obligations and
    pay them when due is just something that cannot even be
    considered.
        Senator Tester. Would it double?
        Mr. Powell. It would go up. But I think, you know, we have
    the best credit rating; you know, we borrow at very low rates,
    and the world believes in our full faith and credit. And I
    think that is not something I would----
        Senator Tester. It would have draconian effects on our
    economy overall.
        Mr. Powell. Potentially. Very hard to predict and possibly
    large negative effects.
        Senator Tester. But there are some in this body, quite
    frankly, that say it would be no big deal. Do you agree with
    that?
        Mr. Powell. No, I do not. I think it would be a very big
    deal not to pay all of our bills when and as due. I think that
    is something the U.S. Government should always do.
        Senator Tester. I agree. Senator Shelby talked about the
    certainty of trade agreements. I will not ask you to grade this
    Administration's trade policies, but from your perspective, how
    is this Administration's trade policy affecting our economy--
    positively or negatively?
        Mr. Powell. You know, again, we do not play a role in trade
    negotiations. I think it would be inappropriate for me to
    comment on their trade policy, either directly or indirectly.
    As I mentioned, you know, we have been hearing and everyone has
    been hearing from business about it, and particularly I would
    think in your State, hearing about trade.
        Senator Tester. Exactly. And in my real job, I farm, and I
    can tell you, as we prepare for planting this spring, I cannot
    tell you any commodity or any livestock that is going to make
    us much money, if any.
        And so I believe the Minneapolis Fed came out and said that
    bad ag loans, we are seeing an uptick--a serious uptick, I
    might add--in farm foreclosures. Are you concerned about that?
    Do you think it is a direct result of trade, or is it something
    else?
        Mr. Powell. I actually did see that piece. As you know far
    better than I, the agricultural economy has been under a lot of
    pressure for really 5 years now. It is just low crop prices,
    sustained low crop prices, and that has not changed, and that
    has driven up, you know, bankruptcies under Chapter 12,
    foreclosures, and all kinds of bad things. So, I mean, I think
    the bigger picture is just crop prices have been low.
    Obviously, the trade issues have not helped this year.
        Senator Tester. OK. And the Fed also suggested that farm
    bankruptcies have not peaked yet, that we have not seen the
    potential negative impact on rural America that these low
    commodity prices--and might I add, before that 5 years, we had
    some of the best ever when we had some trade going on.
        Do you agree with the assessment that the Federal Reserve
    study suggests that we have not seen the peak of farm
    bankruptcies yet?
        Mr. Powell. I did read that, whatever it was, an article or
    a blog post, and it did say that. It sounded plausible to me.
        Senator Tester. OK. We in agriculture got a bailout. It was
    pretty serious dollars overall, but it did not amount to much
    by the time it got to the ground, truthfully, as compared to
    what production ag is losing in products. But we also hear from
    more than just agriculture. We hear from small businesses, and
    the small businesses are telling me that the big guys can
    afford to stay in business because of these trade wars, but
    they are going to be out of business. And we are not talking
    about family farms now, which is absolutely affecting--my
    previous question. But do you believe that the trade policies
    impact smaller businesses greater than the big ones?
        Mr. Powell. I do not know the answer to that. It is a fair
    question.
        Senator Tester. OK. Well, I have got some other questions I
    will put in for the record.
        I want to thank you for being here today. I will tell you
    that the economy is booming, but there are a lot of flags that
    are coming up that I am seeing that are canaries in the coal
    mine, so to speak, and I hope--you are a smart guy. Hopefully
    you are able to pay attention to those to avoid any pitfalls.
        Thank you.
        Chairman Crapo. Senator Rounds.
        Senator Rounds. Thank you, Mr. Chairman. Good morning,
    Chairman Powell.
        Mr. Powell. Good morning.
        Senator Rounds. It is good to see you once again, and thank
    you very much for coming in today.
        Before I begin my questions, I wanted to take a moment to
    underscore the importance of the Insurance Policy Advisory
    Committee that the Fed is required to establish pursuant to S.
    2155. As you are aware, South Dakotans have a very strong
    interest in preserving our State-based insurance regulatory
    system. I look forward to working with you and the new
    Committee to find ways that we can promote the interests of our
    State-based system. So I appreciate that.
        I have got a series of questions that I think I am just
    going to put them in as questions for the record and ask you to
    respond later on. Very seldom do we get an opportunity to have
    the Chairman of the Fed come in in front of literally the
    country and to share his thoughts about the direction of our
    country, in many cases the financial systems that we have here
    and so forth. And I got to thinking, this is probably an
    opportunity that we should not let go by to talk about the
    impact of the Federal Government and its spending with regard
    to monetary policy as well.
        In particular, it seems that Congress has a tendency to
    only make changes in the way it does business when there is a
    crisis at hand, and I would like to give you another particular
    to perhaps visit with us and offer if not direction, at least
    an observation as to what happens when Congress fails to take
    care of some of the safety net programs that we have in this
    country. And I want to begin by simply recognizing that we have
    $22 trillion in debt, and clearly that debt is being financed.
    That means there is competition for those dollars.
        The Federal Reserve, on the other hand, it actually manages
    through regular meetings and discussions--and the quantitative
    easing is an example of one where you as an organization have
    very carefully selected how you will work that through, how you
    will refinance and so forth. But you manage it on a regular
    basis.
        Congress has a tendency with its budget and the money that
    it spends to not even look at a number of the expenditures.
    Today with our budget, we have about 31 percent of the budget
    that we actually vote on. We vote on defense and nondefense
    discretionary spending. We do not vote on nor do we appear to
    manage Social Security, Medicare, Medicaid, or interest on the
    debt, about 70--well, close to 70 percent of all of that which
    we spent every single year.
        Every single year for as far as we can see, we are going to
    run significant deficits. Would you care to comment on the way
    that Congress manages or does not manage the safety nets--
    Social Security, Medicare, and Medicaid--and what impact that
    has on our economy as a Nation?
        Mr. Powell. I should start by saying that we try to stay in
    our lane, which is monetary policy, bank regulation, financial
    stability, and we have no supervisory role or really role as a
    commentator. We do not score bills. There is JCT, there is CBO,
    there is OMB, and we do not do those jobs.
        But I will say, as I said in my statement, that the U.S.
    Federal Government is on an unsustainable fiscal path, by which
    is meant that debt as a percentage of GDP is growing and now
    growing sharply, growing quickly, faster, and that is
    unsustainable by definition. We need to stabilize debt to GDP.
        The timing of doing that, the ways of doing it, through
    revenue, through spending, all of those things are not for the
    Fed to decide.
        Senator Rounds. But as perhaps, for lack of a better term,
    one of the chief economists in the Nation, to be able to give
    advice to the folks that are out there, to the country as a
    whole about the things that we have in our future and about the
    threats to our future, Social Security will go bankrupt unless
    we start managing it. Is that a fair statement, on the current
    trajectory?
        Mr. Powell. I think if I could say it this way: I think
    what happens over time is that we wind up spending more and
    more of our precious revenues to service the debt, to pay
    interest to people who own the debt, as opposed to investing in
    the things that we really need--education--all the things that
    we need to be investing in so that we can compete in the global
    economy.
        I think, you know, on the spending side, the thing in my
    personal thinking--again, this is not the Fed's role--and I
    think in many people's thinking, the thing that drives our
    fiscal unsustainability, the single biggest thing is just
    health care delivery. We deliver health care outcomes that are
    pretty average for a well-off country, but we spend 17 percent
    of GDP doing it. Everyone else spends on average 10 percent of
    GDP. That is a trillion-plus, way more than a trillion dollars
    every year that we spend in delivering health care. So if I
    were in your seats--and I am not--I think that is a good place
    to look. It is not that benefits themselves are too generous.
    It is that we deliver them in highly inefficient ways,
    particularly health care.
        Senator Rounds. If I could--and I know I am out of time,
    but I will just say, in other words, what you are saying is if
    we actually managed--if we actually managed the resources that
    we had, we could probably do a better job than what we do
    today, where we just simply do not even include it in our
    regular budget that we vote on on a year-to-year basis.
        Mr. Powell. Again, I cannot--I am not here to criticize
    Congress, but I do think it is a profitable thing to do.
        Senator Rounds. Thank you.
        Thank you, Mr. Chairman.
        Chairman Crapo. Thank you. I will agree with you, Senator
    Rounds.
        Senator Smith.
        Senator Smith. Thank you, and it is wonderful to see you
    again. I appreciated very much our conversation in my office
    the other day.
        I want to follow up a little bit on what Senator Tester was
    asking about regarding the economic issues in rural areas. And
    I appreciate your interest in this discussion, and this was
    featured in the Monetary Policy Report that you put out.
        You know, it strikes me that if you look at the overall
    positive numbers in our economy, it is a good thing. But when
    you unbundle those strong numbers, you see inequities and gaps,
    as you have pointed out, around race and gender and then also
    around rural areas. In Minnesota, it is interesting. You know,
    we have some rural counties where the unemployment rate is
    close to 2 percent. And then we have other rural counties where
    the unemployment rate is more like 6 or 7 percent.
        So your Monetary Policy Report highlights the impact of
    what is happening with rural workers without a college degree,
    in particular, and the impact on labor force participation and
    how employment-to-population ratios have recovered dramatically
    for college-educated people but less so for noncollege people.
    And I am really worried about this disparity that it is
    causing.
        So can you tell us, in your judgment, why is this gap
    widening in rural areas?
        Mr. Powell. I thought the box is very interesting, and you
    will note that, like so many economic problems, there is no
    really clear or easy answer. But the way I would say it is the
    gap between rural and urban areas in unemployment is not so
    big. It really shows up in labor force participation.
        Senator Smith. Right.
        Mr. Powell. That is where it shows up. So when we think
    about low labor force participation, the first thing that comes
    to mind is educational levels, because people in the
    population, the broader population, lower educational levels
    tend to be associated with lower labor force participation. But
    even accounting for that, that does not account for much,
    really, of the disparity. So, you know, it can be that rural
    areas are more associated with manufacturing activities, which
    have had less recovery than the service sector, which is now
    much larger than the manufacturing sector.
        In addition, it all may be affected by people leaving rural
    areas, in other words, people who leave rural areas to go to an
    urban area where there are better job opportunities. So it is
    something, you know, that we are still working on
    understanding, but it is a fairly stark disparity, and I think
    we all see it.
        Senator Smith. Right.
        Mr. Powell. I was in Mississippi a couple of weeks ago and
    certainly saw it there in a rural area.
        Senator Smith. So when people are leaving, does that
    suggest then that the population that is left is older and----
        Mr. Powell. Or perhaps less able to find a job, less able
    to take part in the labor force. So some of the people who have
    job skills may have left that area, leaving the remaining
    population with lower labor force participation. That may be
    part of it.
        Senator Smith. So would that not suggest that it would be
    smart on our part--this is not a Fed policy, but it is a policy
    to increase our emphasis and our investment in, you know,
    career and technical education, the kind of training that you
    need in order to fill those manufacturing jobs in rural areas?
        Mr. Powell. So I do think that we could use a national
    focus on labor force participation, and that would be certainly
    one piece of it. We do not really have the tools. I can
    identify it as a problem, and it is a serious problem, but I
    think that is a profitable place to look.
        Senator Smith. The other thing I wonder is maybe people are
    not coming back into the workforce because they cannot afford
    to. In rural Minnesota, you cannot afford child care and it is
    not readily available. So I wonder if that is not part of the
    problem, that the jobs that are there are not paying. So how
    come wages do not go up? If there is a demand for labor, people
    potentially are there, why don't wage go up?
        Mr. Powell. As I mentioned earlier, wages have moved up
    from their very low levels of increase earlier. I would not say
    that they are going up quickly now, but they are going up at a
    more healthy rate.
        There are some things in the Federal Tax Code where people
    lose their benefits with their first dollar of earnings, which,
    again, it is not our job, but that does not sound like you want
    people to go back to work.
        Senator Smith. That is counterproductive, right.
        Mr. Powell. You want them to be rewarded for going back to
    work, and it seems like that is something we could look at--you
    could look at.
        Senator Smith. Right. Thank you very much, Chairman Powell.
    I know I am out of time. I want to just note that I appreciated
    the question that Senator Tester was asking about farm
    bankruptcies, which is a real concern in Minnesota and across
    the whole northern swath of States. I am going to follow up
    with a written question about how you see those farm
    bankruptcies potentially affecting the overall economic
    strength of the country, especially in rural areas.
        Mr. Powell. Thank you.
        Senator Smith. Thank you, Mr. Chair.
        Chairman Crapo. Senator McSally.
        Senator McSally. Thank you, Mr. Chairman. Chairman Powell,
    good to see you again.
        I want to continue actually on the line of discussion that
    you have been on. In our conversation when we met, we talked
    about this labor force participation issue, and everywhere I go
    in Arizona, in the more metropolitan areas anyway, companies
    are--the economy is doing great, the optimism is there, but
    they are lacking for workers. They are just screaming for
    workers. And it is really up and down the skill set. It is not
    just in the trade craft, although that often tends to be those
    areas. And so what we are seeing is this labor force
    participation rate is going up a little bit, ticking up, but
    there is clearly still this gap that is maybe holding back even
    more economic growth because of the mismatch of not having the
    workers for the jobs that are there.
        So can you just give some additional perspective on that?
    And, you know, what within your power and within our power do
    you think that we can do in order to incentivize increasing
    that number, get more people off the sidelines, get them the
    skills that they need in order to continue to provide more
    opportunities for people we represent?
        Mr. Powell. Sure. So this strong labor market and strong
    economy that we have at the aggregate level is, as you
    mentioned, pulling people back into the labor force or
    encouraging them to stay in the labor force and not leave. So
    this is very, very positive for us. Labor force participation
    has gone back up above 63 percent, and to be in the labor
    force, by the way, you have either got to have a job or have
    looked for a job in the last 4 weeks. So if you have not looked
    for a job in the last 4 weeks and you are not employed, you are
    not considered unemployed.
        So this is very, very positive, and we hope it is
    sustained, but, you know, that is sort of a strong labor
    market, pulling people back in. Even with that, though, our
    labor force participation rates are lower than other countries
    that have anything like our level of wealth and income and
    economic activity. And it is not easy to say why, but I do
    think--and I think that the Fed's ability to--our ability to
    address this is really just a function of trying to keep us at
    maximum employment. There are plenty of people and it is
    younger people, particularly younger men, particularly less
    well educated younger men, but also people across the gender
    spectrum and the income spectrum and age spectrum. We just have
    low labor force participation, and I think it is--you know, we
    want the economy to grow, and we want that prosperity to be
    widely spread. Labor force participation gets both of those
    things almost better than anything, and so I think it is
    something that ought to be a high focus for people who have
    different tools than ours.
        Senator McSally. I agree with you, and not necessarily
    within your tools, but just based on your perspective. What do
    you think is holding that back? What is your perspective and
    what else can we do in order to remove those barriers for
    people to, you know, get back in the labor force, to be working
    to support their families, themselves, and meet their full
    potential?
        Mr. Powell. Part of it would be probably education and
    skills gaps. Part of it would be the opioid crisis. You know,
    there just would be a range of things, and I would think that
    there are also--as we were discussing a minute ago, there also
    are some disincentives to go to work that are built into
    benefit programs. I met with a group of women in West Virginia
    last year who were in an apprenticeship program for carpentry,
    electrical, plumbing, steel work, and that kind of thing. And
    the hardest thing they had to do was to go to work in this
    program, which has 100 percent placement and which paid, you
    know, 9 or 10 bucks an hour, because that was less than the
    very meager benefits they were already getting. So they had to
    take a pay cut to go back to work. And they did it anyway. They
    did it anyway, which was pretty inspiring. But I think we ought
    to have policies that reward and support labor force
    participation.
        Again, they are not ours. I should not get into the
    prescriptive business, but I think it is really important for
    the country.
        Senator McSally. Thank you, and I do want to follow up on
    the rural-urban gap. We have got a lot of rural counties. I
    visited many of them this week in Arizona, and we are seeing
    the same thing where there is that disconnect in wage growth
    and in labor force participation in those rural areas. Do you
    take that into account in Fed policy? And, again, other
    perspectives of what else we might be able to do on our side or
    on your side in order to not have that gap widening for those
    in the rural areas?
        Mr. Powell. We do in the general sense that we are learning
    and we have learned this year that there is more slack in the
    labor market because people are coming back in. If people were
    not coming back in, then the unemployment rate would be
    substantially lower. But they are, or they are staying in. So
    labor force participation is rising in either case, and that
    tells us that there is more room to grow, and that certainly
    has implications for monetary policy.
        In terms of the urban and rural, we look at those
    disparities. We look at all different kinds of disparities. In
    a general way, they inform our thinking about the state of the
    economy, and particularly maximum employment, which is not--
    there is no one number that you can look at. You have to look
    at a range of indicators, and that would be one of them.
        Senator McSally. OK, great. Thank you.
        Chairman Crapo. Senator Jones.
        Senator Jones. Thank you, Mr. Chairman. Chairman Powell,
    thank you for being here today. I really appreciate it.
        I want to stay on the urban versus rural divide a little
    bit. Obviously, we see you have got Senators on this Committee
    who have a lot of urban areas, and it seems like that there is
    one factor that may come into play that is not quite so obvious
    that we have talked about, and that is health care.
        In 2017, the Atlanta Fed set out to study the urban-rural
    divide in the Southeast, and one of the factors they kept
    noticing was the impact on residents' health on the economic
    output to simplify what is obviously a very complex issue.
        According to that Fed study in Atlanta, while the portion
    of workers who say they are too sick or disabled to work is
    roughly 6 percent nationally, that rises to over 12 percent and
    higher in the rural South.
        So from your perspective, what role do you think that
    health outcomes play in economic growth, particularly in rural
    America?
        Mr. Powell. I think poor health outcomes are very much
    associated with a lot of social issues, including low labor
    force participation and lots of other economic issues, you
    know, low lifetime earnings and many, many different things.
    And those are obviously more prevalent now in rural areas, as
    you pointed out.
        Senator Jones. And I would assume you would agree that if
    health care is not accessible in those areas--for instance, in
    Alabama we have seen rural hospitals closing left and right,
    seven or eight in the last 7 or 8 years--with the absence of
    health care, it may contribute to the people leaving those
    rural areas and into urban areas. Would you agree with that?
        Mr. Powell. It is hard to say whether--you know, people
    have been leaving for some time. Some of these counties, as you
    obviously know, have lost half their population in the last
    four or five decades.
        Senator Jones. Individually, if the States were to develop
    policies that would expand health care in these communities,
    give affordable health care, access to health care, what would
    you expect the economic impact to be?
        Mr. Powell. Well, I think people who--health care is going
    to--you know, in principle would allow people to remain in the
    labor market, would get them back in the labor market and keep
    them from getting sick and being out of the labor market. So
    that would be a positive for the economy.
        Senator Jones. I appreciate that. I promise you we are not
    going to ask you to testify in front of the HELP Committee.
        Senator Tester made a comment as he was finishing up that
    despite--and there is a lot of good economic news. Everybody
    agrees there is a lot of great economic news out there. But I
    think a lot of folks also, as in Senator Tester's words, see
    canaries in the coal mine. Do you see any? Other than the
    obvious of the debt that we have, do you see any canaries in
    the coal mine that we need to be looking for in this Congress?
        Mr. Powell. I would say that the outlook for the U.S.
    economy is a positive one, is a favorable one. There are always
    risks, and right now I would say that the predominant risks to
    our economy are slowing global growth, as I mentioned,
    particularly China and Europe. We have seen a significant
    slowing in growth really over the course of the past year, and
    it seems to be ongoing. And that can create a headwind for the
    United States economy. I talked about Brexit. That is an event
    risk which could have implications for us.
        Here domestically, again, I think the outlook is generally
    a favorable one.
        Senator Jones. OK. Thank you, Mr. Chairman. And Senator
    Shelby asked you about the state of health of our big banks,
    which you gave a pretty favorable report on. But in December of
    this year, right as the Government was shutting down, the
    Secretary of the Treasury issued a press release, and he had
    this call with all of the big banks to discuss their liquidity
    and to make sure that things were OK. The next day, I think he
    had a call with you and some of the other regulators. And that
    sent some alarm bells, I think, throughout the country and
    folks up here.
        Can you kind of walk through those 2 days and what was the
    purpose? What did you see was the purpose of the Secretary of
    the Treasury 4 days into the shutdown attempting to reassure
    folks, I guess, that the banking system was OK?
        Mr. Powell. Let me say, of course, I would not comment on
    the Secretary at all. But, you know, our financial system, as I
    mentioned earlier, is very strong, record profits, no bank
    failures last year, capital is much higher, liquidity is much
    higher, risk management is much better. You know, we never take
    this for granted. We keep watching carefully and looking for
    problems. But I can say that what I was thinking in those days
    was, you know, we had significant volatility in the markets,
    and I was just, you know, wondering, looking and asking the
    question, does that have any broader implications for the
    economy or for the financial system? And the answer I felt was
    no, but it is something that you are--part of the job is to ask
    that question, which I was.
        Senator Jones. All right. Thank you, Mr. Chairman. I
    appreciate you being here.
        Thank you, Mr. Chairman.
        Chairman Crapo. Senator Kennedy.
        Senator Kennedy. Mr. Chairman, thank you for coming today.
    My good friend Senator Brown lamented the fact that our
    financial institutions are making profits now. That is a good
    thing, right?
        Mr. Powell. We need a profitable financial system to have a
    well-capitalized financial system.
        Senator Kennedy. Well, is it better if banks are making
    money or losing money from a macroeconomic standpoint?
        Mr. Powell. I think we want banks to be profitable and
    strong and well capitalized, and they have been.
        Senator Kennedy. OK. I want to talk about the Government
    shutdown. Tell me if I get this wrong. CBO estimates an $11
    billion impact to our economy. We will recover about $8
    billion, so the net loss to our economy is $3 billion. Does
    that sound about right?
        Mr. Powell. All I know about that is that is what I have
    read.
        Senator Kennedy. OK. That is what I have read, too. You got
    to trust somebody. I will take CBO at their word.
        We have got about a $21 trillion economy. Is that right?
        Mr. Powell. That sounds about right.
        Senator Kennedy. OK. So as a percentage of our economy,
    that $3 billion loss is one-half of 1 percent. Is that about
    right?
        Mr. Powell. You did that math very quickly, Senator. I am
    going to trust you on that.
        Senator Kennedy. Good. OK. That is an infinitesimal impact,
    is it not?
        Mr. Powell. That is very small.
        Senator Kennedy. OK. Let us talk about the economy. Some
    economists said that if we passed the Tax Cuts and Jobs Act,
    our economy would overheat. Those economists were wrong, were
    they not?
        Mr. Powell. The economy did not overheat, has not
    overheated.
        Senator Kennedy. We are having growth without inflation. Is
    that correct?
        Mr. Powell. We have inflation right at our target.
        Senator Kennedy. About 2.2 percent?
        Mr. Powell. Right around 2 percent, 1.9 percent.
        Senator Kennedy. OK. And we have had more business
    investment. Is that correct?
        Mr. Powell. We have had solid investment, very solid in the
    first part of last year and reasonably good in the second half
    of last year, and I think the outlook is for continued
    reasonable levels of business investment.
        Senator Kennedy. And wages are up. Is that correct?
        Mr. Powell. Yes, they are. As I mentioned, you have wages
    now--all of our wage measures have moved up to 3 percent or a
    little better, which is a very good thing to see.
        Senator Kennedy. I want to get your opinion on--and I am
    not trying to ask you to make policy, but I am asking you as
    the Fed Chair, what could we have done in hindsight to
    encourage more business investment in plants and machinery and
    equipment and software which would have created more jobs and
    hopefully increased productivity? Specifically, let me ask you
    this: There is legislation to prohibit share buybacks. Is that
    a good thing? I know share buybacks have a positive economic
    impact. But if you had legislation that cut business taxes but
    also said you cannot use that money to buy back shares, you
    have to invest it in your company or pay shareholders
    dividends, what would you think about legislation like that,
    just from an economic standpoint?
        Mr. Powell. Well, I think it is--first of all, that kind of
    a decision is really not in our hands.
        Senator Kennedy. I know.
        Mr. Powell. It is really for you to make.
        Senator Kennedy. I am asking you as an economist.
        Mr. Powell. So I would say the goal--I guess I would just
    say the goal of having prosperity be widely shared I think is
    one that we all share. I think the thing about share--when you
    talk about companies and what they do with their profits and
    how they allocate capital, in our system we have always left
    those decisions to the private sector, to private hands.
        Senator Kennedy. Right.
        Mr. Powell. And I would want to understand the consequences
    of changing that, and I would want to look at whether there are
    not other ways to achieve the goals that I think we all want,
    which is to have prosperity be widely shared.
        Senator Kennedy. OK. Are there other ideas you might have
    to make sure prosperity is more widely shared?
        Mr. Powell. I think it ties to some of the things we have
    been talking about here. You know, labor force participation is
    just a win for the overall economy. The economy will grow
    faster, and the people who are not taking part tend to be the
    ones with lower education, who are the edges of the labor
    force. So we are underperforming as a Nation on this compared
    to our peer group.
        Senator Kennedy. Why?
        Mr. Powell. It is a good question. It is a problem that
    stands out here compared to other countries, and----
        Senator Kennedy. Is it because we pay people too much not
    to work, or is it because people do not have the skills, or is
    it because they do not have access to the jobs? This is my last
    one, Mr. Chairman.
        Mr. Powell. You know, I think there is a range of
    perspectives on this, and there is a range of--there is some
    wisdom in a lot of different ideas, and I think the best thing
    to do would be to get some proposals that would have broad
    support and work on those.
        I do think quite a bit of it is skills, education,
    aptitude, and also not having disincentives in the Tax Code
    where people lose their benefits, for example, with the first
    dollar of pay. That seems like a disincentive to work that--and
    none of this, by the way, is in the Fed's hands, but since you
    ask.
        Senator Kennedy. You are doing a great job. Thank you.
        Mr. Powell. Thank you, Senator.
        Chairman Crapo. Senator Warren.
        Senator Warren. Child care. Thank you, Mr. Chairman. Thank
    you, Chairman Powell, for being here.
        Earlier this month, two giant banks, SunTrust and BB&T,
    announced that they intended to merge. This new too-big-to-fail
    institution would have about $450 billion in assets and become
    the sixth largest bank in the United States.
        Now, as you know, bank acquisitions and mergers do not go
    through on their own. They have to be approved first by the
    Fed. So last spring I wrote you a letter asking for data on the
    number of merger and acquisition applications received by the
    Fed and the number that had been approved over the last 10
    years.
        Chairman Powell, when you answered my letter in May of
    2018, how many merger and acquisition applications from the
    banks had you received since 2006? Do you remember?
        Mr. Powell. No, I do not have the numbers in front of me.
        Senator Warren. Would 3,819 sound right?
        Mr. Powell. Yes.
        Senator Warren. Good. OK. And do you remember how many of
    those 3,819 applications you denied?
        Mr. Powell. No, I do not.
        Senator Warren. Would zero sound right?
        Mr. Powell. If you say so.
        Senator Warren. Well, you said so. It is your letter.
        Chairman Powell, has the Board denied any applications
    since you responded to my letter in May?
        Mr. Powell. I would just--if I can offer a little context--
    --
        Senator Warren. Well, let us get this part out, because
    that is what I am trying to do is build some context here.
        Mr. Powell. I do not believe we have. I think what happens
    is that we--people do not apply or they withdraw their
    applications.
        Senator Warren. That is exactly what I am going to talk
    about. So zero percent of the applications for mergers and
    acquisitions since 2006 have been denied. Now, that does not
    mean that all potential mergers and acquisitions make it
    through the process. Thirteen percent of applications are
    withdrawn before they get a decision. According to your letter,
    Chairman Powell, ``Prospective applicants may discuss a
    proposed transaction with Federal Reserve System staff prior to
    filing, and applicants will be discouraged from filing
    applications where it is apparent that the applications would
    not meet all of the statutory factors required for approval.''
        So if you think that a proposed merger will not be
    approved, you discourage the bank from following through. Is
    that right?
        Mr. Powell. In some cases. I think that would be in cases
    where it is clear that there is a statutory problem, you know,
    for example, in some cases----
        Senator Warren. OK, but you approve 100 percent of those
    that go ahead and apply, so I assume they are getting some----
        Mr. Powell. Unless they are withdrawn. Unless they are
    withdrawn.
        Senator Warren. That is what I said. So you encourage them
    to withdraw if they are not going to get an approval.
        Mr. Powell. But they can file and then withdraw.
        Senator Warren. But the point is they withdraw if they are
    not going to get it because of a conversation you had that is a
    nonpublic conversation.
        So this is a formal process required by regulation. In
    order to do an approval, people who object to the merger have
    an opportunity to file a protest. That is how the process is
    supposed to work. That would include, for example, communities
    that are worried that local banks may close following a merger
    or acquisition; employees who are concerned about losing their
    jobs; State officials that may be concerned about decreasing
    competition and so on.
        So, Chairman Powell, you have explained that consultation
    with a bank starts, can start before the merger is announced
    publicly. When is it that the public can actually file
    protests, before or after the merger is announced?
        Mr. Powell. So I think the process is that we receive an
    application for a merger--which we have not received yet. We
    expect to receive it, I am told, sometime next month. And----
        Senator Warren. And when will the public have a chance to--
    --
        Mr. Powell. Certainly then.
        Senator Warren. And that is true in all of these, right?
    The public does not get a chance to comment until after the
    application is already filed. But the application is only filed
    after the banks have had a chance to have this quiet
    conversation with the Fed.
        I just want to get this straight. You and the banks get
    together in the back room and grease the wheels before the
    merger is announced. And if you are not going to approve the
    merger, you tell the bank in advance, and then they go figure
    out something else. If the public wants a chance to weigh in,
    they have to wait until you have already made a decision. No
    wonder you approved 100 percent of the merger applications. Not
    a single no. Your approval process itself appears to be a
    rubber stamp, that everything is happening behind closed doors.
        So the question I have is about the SunTrust and BB&T
    merger. Is this one just going to be another rubber stamp? You
    have already made the decision behind closed doors before the
    public gets a chance to weigh in?
        Mr. Powell. No, not at all. We are going to conduct a very
    fair and open, transparent process. I think, you know, our
    obligations under the statute are clear and they are quite
    broad. We will be hearing from groups of all kinds and going
    through our process carefully and thoroughly.
        Senator Warren. So it is just that in the last 3,819 merger
    applications, which were all approved without a single one for
    which you said no, this time you are going to be listening to
    comments from the public that might cause you to say no?
        You know, I just have to say I will bet that SunTrust and
    BB&T looked at that 100 percent merger success rate and saw
    what everyone else sees, and that is that the Fed works for
    big, rich banks that want to get bigger and want to get richer,
    and then everyone else pays the price for diminished
    competition, for worse service, for higher prices, for employee
    layoffs, for the risk that we have yet another too-big-to-fail
    bank on our hands.
        I just think it is time that we put down the rubber stamp
    and that we really let the public and everyone else weigh in
    before we create yet another too-big-to-fail bank.
        Thank you, Mr. Chairman.
        Chairman Crapo. Senator Cotton.
        Senator Cotton. Thank you, Chairman Powell, for being here.
    I want to start talking about stress tests for midsize banks.
        Reform legislation that the Congress passed to the Dodd-
    Frank Act last Congress increased the threshold for stress
    tests from $10 billion banks to $100 billion banks. Can you
    tell us why so many of us still hear from banks in that window,
    larger than $10 billion but smaller than $100 billion, are
    still hearing from their examiners that they need to undergo
    such stress tests?
        Mr. Powell. Well, let me say the law, the new law, is that
    banks between 10 and 100 do not have to--are exempt from the
    DFAST stress tests. That should be crystal clear. I think you
    are referring to the guidance.
        Senator Cotton. Yes.
        Mr. Powell. Which we are in the process of looking at and
    revising and, I would think, addressing that issue.
        Senator Cotton. OK. But to be perfectly clear, banks
    between $10 billion and $100 billion are not required to
    undergo Dodd-Frank stress tests.
        Mr. Powell. Correct.
        Senator Cotton. When I was in Afghanistan and Iraq, young
    soldiers used to complain about the rules of engagement, and if
    you looked at the rules of engagement that the four-star
    commanders had issued, they are actually pretty flexible. That
    had been filtered down in a different way to the front lines,
    though. Do you think it is possible that your guidance that you
    just gave gets filtered down to examiners on the front line in
    a slightly different way?
        Mr. Powell. I think that is something that happens, yes,
    and, again, we are looking at--there is this guidance that is
    still outstanding. Some of these banks are still going to want
    to do stress testing, and we are not going to discourage that.
    It is actually a good practice. But we are going to be looking
    at that guidance to make sure that there is no question that
    banks between $10 and $100 billion in assets are not required
    by law to do stress tests.
        Senator Cotton. OK. Thank you. These examiners, they hold a
    lot of power in their hands, obviously, when they are on the
    front lines and they are in one of these smaller community
    banks. And when they say something may be voluntary, you know,
    that is heard by the banker in a different way than they may
    intend it. It reminds me of my old basketball coach who used to
    have voluntary shoot-arounds before school and on some
    afternoons. And it just so happened that the players that
    reported to those voluntary shoot-arounds tended to be the ones
    that got playing time on Tuesday and Friday night.
        Mr. Powell. We try to communicate, and I think our
    examiners do a good job, basically, but, you know, we know we
    need to work hard to make sure that the message gets out
    clearly, and we find that our people do listen. So we are alert
    to that.
        Senator Cotton. Thank you.
        I want to turn now to a different question. I know there
    has been some talk here about the unemployment rate, which is
    pretty low, and the labor force participation rate, which is
    increasing. I want to talk about wages and wage growth. There
    was some recent data out from the Bureau of Labor Statistics.
    It was highlighted in a recent Wall Street Journal article that
    said, despite these factors, income to employees in the form of
    pay and benefits continues to decrease. It is down to 52.7
    percent of our gross domestic income. It was as high as 59
    percent in the 1970s and 57 percent in 2001. By the same token,
    business income, profits to businesses, whether it be the
    biggest corporations or small businesses, have gone from 12
    percent to up to 20 percent.
        Can you give me your thoughts on why we are seeing more
    income going into the hands of owners in this country and less
    into the hands of workers?
        Mr. Powell. Yes, so that is the labor share of income, is
    what you are talking about, and really, if you look back
    through history, it zigs and zags, but it generally zigged and
    zagged at a higher level. And then right around the year 2000,
    labor's share went down sharply for about 10 years and then,
    broadly speaking, has been about flat since then. You know, it
    goes up and it goes down, but it is basically flat. And the
    question is, Why? It is a really good question, and there are a
    lot of different answers. Honestly, there is no clear, easy
    answer.
        As a separate matter, wages are actually growing at a level
    that makes sense. The problem is the level. It is not the
    growth rate. Wages and benefits are growing at around 3
    percent, a little better. That is a healthy growth rate in an
    economy with 1 percent productivity increase and 2 percent
    inflation. The problem is there were 10 years when that did not
    happen, from 2000 until 2010. So, you know, it can have to do
    with a lot--globalization is a big answer there. That was right
    around the time of China joining the WTO. Some researchers will
    connect it to that. So, in any case, you know, we welcome these
    wage increases for this reason.
        Senator Cotton. Well, I do as well, and I hope that we will
    continue to see them and see a little bit more of that growing
    economic pie going into the hands of our workers.
        Thanks.
        Chairman Crapo. Senator Cortez Masto.
        Senator Cortez Masto. Thank you. Chairman Powell, thank you
    for being here again.
        I have concerns about discrimination in lending, so I want
    to ask you a follow-up question to the record that I submitted
    last time you were here, and it involves the Federal Reserve's
    responsibility to enforce the fair lending laws.
        I asked you how the Fed would improve its oversight of fair
    lending rules. In your response, you mentioned that Fed
    examiners evaluate each financial institution for fair lending
    compliance.
        So I guess my specific question is: How would examiners
    evaluate whether a lender might steer consumers to higher-
    priced loans? In your written response, you mentioned credit
    scores, loan-to-value ratios, and lending products, but can you
    expand on what the examiners would consider to ensure against
    consumers being steered to high-priced loans?
        Mr. Powell. So I think examiners who examine for that I
    believe are trained to look for patterns of that nature.
        Senator Cortez Masto. Specific criteria. Is there anything
    specific that they look to that you are aware of?
        Mr. Powell. You know, I have a general understanding of
    this, but I should come back to you with more details.
        Senator Cortez Masto. OK, and thank you. I appreciate that.
    And I would also like to know, as you come back and answer this
    question, would examiners consider incentive pay tied to
    higher-priced loans as a red flag or a pattern? Would the
    existence of bonuses for bank staff that provided a loan with
    higher fees and interest rates be a red flag to these
    examiners? So if you could expand on that in writing, that
    would be fantastic. I appreciate that.
        Mr. Powell. Happy to do that.
        Senator Cortez Masto. Thank you.
        The other issue that is important for me because it is an
    issue in Nevada and across the country is affordable housing.
    In your response to my submitted questions for the record, I
    asked you if the rapid rise of housing costs was encouraging
    your consumer price models to assume a higher threat of
    inflation than actually existed.
        Do you think that the Fed's raising interest rates was a
    factor in rising house costs?
        Mr. Powell. Well, I think that higher interest rates
    certainly played into higher mortgage rates, and that will have
    had an effect.
        Senator Cortez Masto. What about the costs of building that
    apartment or house?
        Mr. Powell. Yeah, I think materials costs and--what you
    hear from builders is labor shortages, particularly skilled
    labor shortages, and you also hear higher materials costs, some
    of which are affected by tariffs, of course. So you hear them
    under tremendous cost pressure, and I think that was flowing
    through into higher prices, and that was, you know, making the
    affordability calculus a little bit more challenging for buyers
    at the same time rates were going up, and I think all together
    that picture, you know, slowed down housing construction in the
    last year or so.
        Rates are now down a little bit, about 50 basis points, and
    so we are seeing a little bit--starting to see a little bit of
    a pickup there.
        Senator Cortez Masto. How would you compare the impact of
    the higher interest rates on construction to that of the higher
    prices for goods that may be caused by tariffs?
        Mr. Powell. You know, I think that the higher costs--it
    depends on--from the standpoint of the consumer, what matters
    is what does the house cost. I think you will find that the
    interest rate has an important--is a very important thing from
    the consumer's standpoint. But in setting the price of the
    house, it is not the interest rates. It is really the cost of
    materials and labor.
        Senator Cortez Masto. And then you talked about----
        Mr. Powell. And land.
        Senator Cortez Masto. ----the higher cost of labor. Could
    that higher cost of labor also be due to curbing immigration
    and the lack of labor because of that?
        Mr. Powell. It certainly could in construction,
    particularly in some regions. I visited Houston not so long
    ago, and I think a big part of their construction labor force
    was from immigration. I think they were feeling shortages there
    for that reason.
        Senator Cortez Masto. Thank you.
        Last summer, the Federal Reserve economist noted that high
    levels of student debt was preventing Millennials from buying a
    home. Other studies have found that Millennials faced housing
    supply constraints, beginning their careers in a poor labor
    market, and high student loan burdens which have made it
    difficult for them to buy a home.
        What was the response to the Federal Reserve's assertion
    that student debt prevented at least 400,000 Millennials from
    buying a home?
        Mr. Powell. What was the response?
        Senator Cortez Masto. Yes.
        Mr. Powell. It is just research, and I think there is a
    growing amount of research that shows that student loans, of
    course, have been growing very, very fast in the last few
    years, and----
        Senator Cortez Masto. Was that the right number, the
    400,000?
        Mr. Powell. I do not know that number.
        Senator Cortez Masto. Did you get a sense was it too high,
    too low? Was that----
        Mr. Powell. I do not know that number. I will tell you it
    is a trillion and a half dollars in outstanding student loans,
    and there is research that shows that for students who cannot
    discharge--cannot service their loans or discharge them, that
    those loans can weigh on them over a long period of time and
    have real effects on their economic and personal lives over
    time.
        Senator Cortez Masto. And ability at actually home
    ownership. Is that correct?
        Mr. Powell. Yes.
        Senator Cortez Masto. Thank you. Thank you, Chairman, for
    being here.
        Mr. Powell. Thank you.
        Chairman Crapo. Thank you.
        Senator Moran.
        Senator Moran. Mr. Chairman, thank you very much. Mr.
    Chairman, thank you very much.
        Let me start with what I think is a straightforward
    question followed by a much more complicated one. Eighteen of
    my Senate colleagues joined me in a letter calling on
    regulators to provide a more significant reduction in the
    reporting burden of our smallest banks in the first and third
    calendar quarters, as required by Section 205 of 2155. We are
    looking for a greater difference in those reporting
    requirements than what has been proposed.
        According to the current proposal, banks with less--those
    smallest assets would save only an average of 71 minutes per
    quarter. So not a significant change based upon the proposed
    rules. Can you speak to whether you think our concerns about
    our smallest banks and their call reports have been addressed?
        Mr. Powell. Senator, as you mentioned, that rule, we put
    that rule out for comment. We got a lot of comments and got
    your letter, and we are carefully reviewing those comments. I
    think what we are trying to balance is--we are trying to find
    the right balance, and we will certainly take into account the
    comments that we get.
        Senator Moran. Well, I appreciate that. I would want you to
    do that. But if the end result of 2155 is as modest as this
    appears to be, we have not achieved our goal. That cannot be
    the congressional intent, at least in this instance on this
    topic. So let me reiterate that.
        Then let me talk about what I think is at least a difficult
    topic for me to have a conversation with you about just because
    of its complexity. A key goal of this legislation was to
    provide qualifying community banks relief from the complexities
    and burdens of current risk-based capital rules. But we, of
    course, want to ensure that they maintain a high quality of
    capital consistent with the current rules.
        The recent interagency proposal for community bank leverage
    ratio allows certain banks with less than $10 billion in total
    assets to elect to use the CBLR instead of the current risk-
    based capital requirements if the CBLR ratio is above 9
    percent, the current ratio required being 5 percent. So under
    the new proposed framework, a bank would be considered less
    than well capitalized if it fell below 9 percent and has not
    opted out of the CBLR, that would then trigger certain
    restrictions and requirements.
        As currently written, the proposal seems to dangle the
    incentive of reduced regulatory burden but with capital
    requirements 4 percent higher for our small banks to qualify.
        Would it not make sense to leave the existing PCA framework
    unchanged, allowing small banks to maintain well-capitalized
    status and begin reporting capital ratios under the current
    risk-based capital rules when CBLR falls below the 9 percent?
        Mr. Powell. That is another rule that we have out for
    comment, obviously, and--Senator, can I ask, is that a comment
    that you have----
        Senator Moran. If we have not, we can or will.
        Mr. Powell. I would encourage you to do so. You know, these
    are--we think these are really important tailoring proposals,
    and they are obviously mandated by S. 2155, and we want to get
    them right. So I understand your question, and, you know, we
    will look carefully at that.
        Senator Moran. Are all of the financial institution
    regulators working well together in implementation of 2155?
        Mr. Powell. I believe so, yes. I think we share the goal
    of, first of all, putting a very high priority on implementing
    S. 2155, but also on tailoring. For smaller banks, I think all
    of us feel that there is a lot we can do without undermining
    safety and soundness, and we want to find those things and do
    them.
        Senator Moran. I appreciate that approach. I have had many
    conversations with regulators for as long as I have been on
    this Committee and in the Senate, and it is something that has
    always--and I am not suggesting this at all about you, but it
    is always something that is highlighted certainly when talking
    to me about its importance. But it is hard to find change that
    has occurred voluntarily by regulators to make the burdens less
    on our community banks, and that is why 2155 was so appealing
    to me, is that we had failed generally to get regulators to
    change their behaviors, and 2155 seems to me to be the option,
    the only option that I have seen that actually might force
    change when it has been so reluctantly to arrive. So I care a
    lot about that.
        In the 15 seconds I have left, I would remind you that
    agriculture, as you and I visited about last time we talked, is
    in significant--faces significant challenges. I want to make
    certain that our community banks, our relationship bankers do
    not lose the ability to consider character and history, remind
    you that we have generational bankers along with generational
    farmers whose grandfather bankers have taken care of
    grandfather farmers and down through the generations. That has
    continued, and our community bankers know who has character,
    who has ability to pay, who has the history to demonstrate
    that, and we cannot tie their strings or the agricultural
    challenges the economy faces today, ag country's problems will
    be significantly exacerbated if you take away the ability to
    take into account those factors that are not crossing a ``T''
    and dotting an ``I.''
        Thank you.
        Mr. Powell. Thank you.
        Chairman Crapo. Senator Van Hollen.
        Senator Van Hollen. Thank you, Mr. Chairman. And, Chairman
    Powell, thank you for your service.
        I want to focus for a moment on the impact of the tax bill,
    the tax bill that passed about a year ago, and especially
    taking a look at the banking industry, because I think in no
    other sector is it clearer as to what a huge giveaway this tax
    cut was to big financial interests. I do not know if you saw
    the Bloomberg analysis that was conducted earlier this month.
    They looked at the 23 U.S. banks that the Federal Reserve says
    are most important to our economy and concluded that those 23
    banks got a $21 billion tax break windfall. Did you see that
    analysis?
        Mr. Powell. I do not know that I did.
        Senator Van Hollen. And would you be surprised to learn
    that they used much of that windfall for a major stock buyback?
        Mr. Powell. I honestly do not know. First of all, I know
    that the tax cut reduced taxes for big companies that were very
    profitable quite substantially.
        Senator Van Hollen. Well, they did, and, again, it was a
    $21 billion windfall, and a lot of it used for, you know, stock
    buybacks that helped a lot of the executives.
        What is interesting is that during that same period of time
    we saw a loss of 4,300 jobs among those 23 banks. Does that
    surprised you--big tax break, and yet a loss of jobs among the
    big banks?
        Mr. Powell. You know, it must be several million people we
    are talking about, so it is----
        Senator Van Hollen. But, of course, it was sold on the
    promise that we would see all these new jobs generated. I do
    want to ask you about the increase in wages. Obviously, it is
    always good to see an increase in wages. Of course, nominal
    wages are only half the equation, right? You also have to look
    at rising costs when you look at real wages. And isn't it the
    case that when you look at real wages and the rise in real
    wages during the last term of the Obama administration, real
    wages rose faster during that period of time than they have
    since the beginning of the Trump administration, even with the
    tax cut? Isn't that the case?
        Mr. Powell. You know, I just do not look at it in terms of
    those timeframes. I would say that--the way I would say it
    about wages, if you look back to 2012, if you look at the four
    major wage and benefit increases, things that we track, it was
    around 2 percent. All of them were right around 2 percent. Now
    they are at 3 percent or a little better, and part of that is
    just that the labor market has continued to improve since that
    time.
        Senator Van Hollen. Sure. No, of course. But as you
    testified, you have also seen an uptick in inflation and costs,
    right? So the result for a real American is how much of the
    increased wages that are coming in, what the purchasing power
    of that will be. Anyway, if you could take a look at that and
    get back and confirm whether or not that is true. The figures I
    have got suggest that you saw a more rapid increase in real
    wages, again, during the last term of the Obama administration,
    which just gets to the point about, you know, there is a lot of
    hype about the tax cuts.
        Let me ask you about student loans. My colleague just asked
    you about that. You just testified that we have got $1.5
    trillion in student loans. I think that the Fed just reported
    that delinquent U.S. student loans reached a record $166
    billion in the fourth quarter of 2018. You indicated this is
    putting a lot of stress on students who were trying to get out
    there and buy their apartments or rent their apartments.
        Would you be in favor of allowing students to discharge
    their debts in bankruptcy just like banks can?
        Mr. Powell. So I think it is important that students be in
    a position to borrow, to invest in their education. It is
    important that they get proper disclosure about what the risks
    are and what the success rates are and that kind of thing. It
    is not a Fed--someone asked me in this Committee a year or so
    ago that question, and I did answer it directly. But I would
    say it is not really for the Fed----
        Senator Van Hollen. Well, let me ask you, is the impact of
    student debt in your view impacting the economy in a negative
    way, the fact that these students are, you know, stuck as soon
    as they graduate trying to pay back loans that they apparently
    cannot repay?
        Mr. Powell. Yes, I think for students who cannot repay
    their loans, there is a growing amount of research that shows
    that those people can have, you know, longer-term negative
    economic effects. Of course, some people invest in their
    education and borrow money to do it, and it works out very well
    for them as well. But for those who do not, it can be quite a
    negative----
        Senator Van Hollen. Well, there are a lot of people who
    cannot right now.
        Mr. Powell. That is right.
        Senator Van Hollen. You just reported a record delinquency
    rate in the last quarter.
        The last thing I would say, Mr. Chairman, while I have the
    Chairman of the Federal Reserve here, is I am going to keep
    after you and your colleagues on this faster payments issue. It
    makes no sense to me that Mexico, South Africa, soon the entire
    European Union will have immediate ability to clear payments
    while we do not. A check cashed on Friday will not clear until
    the middle of next week. And millions of Americans are paying a
    lot more in terms of late fees and, you know, payday loan
    interest rates at sort of loan shark rates because of that. So
    I hope you will give the same attention to that issue as you
    are giving to some of the other issues you discussed this
    morning.
        Mr. Powell. Thank you. We will.
        Chairman Crapo. Senator Perdue.
        Senator Perdue. Thank you, Mr. Chairman. And thank you,
    Chairman, for being here and for your perseverance. These are
    big committees. You have been here a long time. I have two
    questions for you.
        One, I am always amazed at the economic experts in this
    Committee and the revisionist views of history, so let me just
    throw some facts out in leading to a question for you. This
    recovery is real. We are growing about 100 basis points more
    than the last Administration just after 2 years. CBO says if
    you grow four-tenths of 1 percent, you more than pay for this
    tax bill. So those are two facts.
        The second thing is median income is at a historic high. It
    is the highest it has ever been in the United States. Five
    million new jobs have been created, lowest unemployment in 50
    years, lowest African American unemployment ever measured,
    lowest Hispanic unemployment ever measured.
        My concern, though, is with labor issue, with export
    issues, and interest rate issues. We have nine Fed fund
    increases over the last 2 years or so, 2\1/2\ years, and with
    our debt--and this is the question I am trying to get to, and
    you know where I am going here. I appreciate the time you gave
    me recently in a private conversation. The Federal debt really
    bothers me, and its overhang on the economy and our ability to
    drive the economic wherewithal of every American. The national
    debt is the greatest threat to national security, according to
    our military experts, and yet today we just turned $22 trillion
    of national debt, if you include all the debt that we have as a
    Government.
        As I understand it, there is about $200 trillion of debt in
    the world; $60 trillion of that is sovereign. We have about a
    third of that. Five percent of the world's population has about
    a third of all sovereign debt.
        So the question I have--and the projection is in the next--
    that increase is 2\1/4\ percent, with our size debt technically
    is about $450 billion of new interest that we have loaded in
    there. And yet of that $60 trillion of sovereign debt in the
    world, about $11 trillion of that is laid out at negative
    interest rates. Much of that is in the euro zone.
        My question is: Are there carry-on contagion issues out
    there that could negatively impact this recovery and the
    continuation of this recovery independent of what we do
    fiscally or monetarily here in the U.S. due to these negative
    interest rates around the world?
        Mr. Powell. I think the negative interest rates that you
    are seeing are a reflection of kind of a risk-off mood and
    slower growth in China and Europe in particular. Europe had a
    good strong year in 2017 and then really slowed down over the
    course of 2018, and we are seeing some more of that now. So
    that is, I think, what you are seeing. I think it really is
    through slower--slower global growth for the United States can
    be a headwind, just as very strong--2017 was a year of
    synchronized strong growth really around the world. It was a
    very good year, and we were feeling a tailwind for that. That
    has now turned into a bit of a headwind for us.
        Our economy, though, I think the outlook for our economy is
    still a favorable one, still a positive one. But, nonetheless,
    this will be a headwind.
        Senator Perdue. There is a growing debate in Congress now
    among some of my colleagues about advocating a change in how
    monetary and fiscal policy work together, and these people are
    advocating a modern monetary theory. They want a spend-now,
    spend-later, spend-often policy that would use massive annual
    deficits to fund these tremendously expensive policy proposals
    such as Medicare for All, free college for all, make every
    structure in the U.S. energy efficient in 10 years, and a
    universal basic income whether you are working or not.
        Under this landscape, it is proposed that the Fed would
    keep interest rates artificially low and that fiscal policy
    would then be driven by Congress and theoretically manage the
    business cycle.
        What obstacles do you anticipate seeing, and how successful
    has fiscal policy been in terms of managing either inflation or
    interest rates?
        Mr. Powell. Let me say I have not really seen a carefully
    worked out, you know, description of what it meant by MMT, what
    you are mentioning. It may exist, but I have not seen it. I
    have heard some pretty extreme claims attributed to that
    framework, and I do not know whether that is fair or not. But I
    will say this: The idea that deficits do not matter for
    countries that can borrow in their own currency I think is just
    wrong. I think U.S. debt is fairly high at a level of GDP and,
    much more importantly than that, it is growing faster than GDP,
    fairly significantly faster. We are not even close to primary
    balance, which means, you know, the deficit before interest
    payments. So we are going to have to either spend less or raise
    more revenue.
        In addition, you know, to the extent people are talking
    about using the Fed as a--our role is not to provide support
    for particular policies. It is to--and that is central banks
    everywhere. It is to try to, you know, achieve maximum
    employment and stable prices. So that is really what it is, and
    I think decisions about spending and controlling spending and
    paying for it are really for you.
        Senator Perdue. Thank you.
        Chairman Crapo. Senator Schatz.
        Senator Schatz. Thank you, Mr. Chairman. Chairman Powell,
    thank you for your service. Thank you for your stewardship.
        PG&E, California's largest utility, filed bankruptcy last
    month, partly as a result of liability costs from climate-
    related disasters. The damage from 2017 and 2018 wildfires
    exceeded $30 billion, more than PG&E's assets and insurance
    coverage combined. Climate risks threaten many sectors of our
    economy: real estate, agriculture, fisheries, industries with
    extensive supply chains. They are all at risk.
        Take coastal real estate as just one example. The U.S.
    Government currently estimates that storms, floods, erosion,
    rising sea level now threaten approximately $1 trillion in
    national wealth held in coastal real estate. According to
    Freddie Mac, ``Some of the varied impacts of climate change may
    not be insurable.'' More than 300,000 coastal homes are at risk
    of chronic inundation by 2045, a timeframe that falls well
    within the timeframe of the 30-year mortgage. These properties
    are worth about $117 billion and contribute nearly $1.5 billion
    toward the property tax base. Banks, insurance companies, and
    other financial institutions are all exposed to these risks,
    and that is why the Bank of England recently announced that it
    is planning to include the impact of climate change in its bank
    stress tests next year.
        So here is a simple question. It is not a ``gotcha''
    question. Do you agree that climate change creates financial
    risks for the individual financial institutions and for our
    financial system as a whole?
        Mr. Powell. So let me say we do not formally or directly
    include climate change in our supervision, but we do, actually,
    require financial institutions, particularly those who are more
    exposed to natural disasters and that kind of thing, we do
    require them to understand and manage that particular operating
    risk.
        So, for example, if you are a bank on the southern coast of
    Florida and you are subject to hurricanes, we definitely
    require you to have plans and risk management things in place
    to deal with those sorts of things. So you would pick up
    natural disasters and that kind of thing which are associated
    with climate change.
        Senator Schatz. Do you think your processes and your staff
    and your sort of approach to this, which has been built
    properly over many, many years and pursuant to the statute, do
    you think you are moving fast enough to acknowledge the
    accelerating risks of climate change over the last 2 or 3
    years? Do you think there is room for you to do a scrub of
    whether or not you are fulfilling your statutory mandate?
    Because I get that you are supposed to pick up any risks
    related to natural disasters. The question is whether you have
    really loaded in the latest information from the scientific
    community to go back to these banks, to go back to REITs, to go
    back to lenders who have either stranded assets or assets in
    the coastal area or whose supply chain is particularly
    dependent on a certain kind of weather pattern which is not
    materializing anymore. Do you think you are doing enough in
    this space?
        Or let me phrase it another way. Are you confident that you
    are doing enough in this space?
        Mr. Powell. You know, it is a little bit like cyber risk.
    You know, should you ever be confident that you are doing
    enough in that space? So I think we--you know, I think we are
    open--we are clear-eyed about the nature of coastal risks and
    natural disaster risks and that kind of thing. But it is a fair
    question, and, you know, we will go back and look at it again.
        Senator Schatz. Could you please respond in writing as it
    relates to this specific question?
        Mr. Powell. Sure.
        Senator Schatz. The Bank of England and 29 central banks
    and bank supervisors from around the world are moving toward
    incorporating climate risk into their supervision of financial
    institutions. You know that another part of the Federal
    Reserve's mandate is to engage with its counterparts abroad to
    address systemic risk. Do you think the Federal Reserve should
    be engaging with its international counterparts on this
    question?
        Mr. Powell. We are in those meetings. We are involved in
    those bodies. As I mentioned, we do not formally take climate
    change into account in our risks, but I think the consequences
    are things that we do supervise for.
        Senator Schatz. I just think that you have been
    extraordinary in terms of your ability to withstand political
    pressure and look at the data and do what is right for the
    health of the economy. I do not want this to be an exception. I
    understand that talking about climate change is fraught with
    partisan peril and will attract the ire of a certain category
    of people and institutions. But your job is to measure risk,
    and I would submit that you are not measuring that risk
    sufficiently.
        One final question, if you will indulge me, Chairman Crapo,
    and that is, has anybody either directly or indirectly
    communicated with you about rates from the White House?
        Mr. Powell. That is kind of a broad question.
        Senator Schatz. It is a broad question.
        Mr. Powell. You know, I do not really talk about--it is
    probably not appropriate to discuss our--my private
    conversations with other Government officials, any other
    Government officials. I would say I am completely committed to
    conducting monetary policy in a way that is nonpolitical and in
    a way that serves all of the American public. You know, and I
    am very comfortable and confident that that is exactly what the
    Fed is going to do.
        Senator Schatz. Thank you.
        Chairman Crapo. Senator Reed.
        Senator Reed. Mr. Chairman, thank you for your
    distinguished service.
        Senator Brown brought up in his comments your February 6
    town hall, where you made it clear that we have to work to make
    prosperity more dispersed throughout society. You also
    indicated that many of the policies are beyond the purview of
    the Federal Reserve, but most of them are clearly in the
    purview of Congress. If you could, just give us your top three
    issues that we have to deal with or can deal with to make
    equality much more realized in this country.
        Mr. Powell. Senator, I will go back again to labor force
    participation, which is just--it is a big win for the overall
    economy, and it is also--the people who are not taking part in
    the labor force are by and large the less well educated and
    less skilled or people who may be in areas where opioids are
    prevalent and that kind of thing.
        So I think a bipartisan focus, a focus on labor force
    participation would bring in a lot of policies that would help
    deal with, you know, what I see as the problems, which are, you
    know, sort of relatively stagnant growth in incomes, in median
    incomes, and also relatively low mobility. Education, of
    course, would be at the top of every list, I think, in
    addressing these issues as well.
        Senator Reed. And this could require resources that we
    would have to commit, and I think you are aware we are on the
    cusp of another debate about sequestration and the share of
    resources to defense and nondefense. And, in fact, we are
    looking at very draconian numbers in terms of the situation
    with the BCA. But you would argue that we do have an obligation
    to make a significant investment in domestic programs in order
    to provide for this equality?
        Mr. Powell. I think that it would be great for our country
    and for our economy if we could address these issues. Easy for
    me to say. I do not have to find the resources.
        Senator Reed. Thank you.
        Let me just turn to another topic which I am very much
    involved with: the Military Lending Act. As you know, it puts a
    36 percent cap on interest rates that are charged to men and
    women in the uniform of the United States. The Federal Reserve
    is one of the independent regulators charged with its
    enforcement.
        Unfortunately, what we have seen from the CFPB particularly
    is a retreat. They are no longer supervising this; they are no
    longer using this in their supervisory activities. They will
    enforce a complaint, but the complaints are seldom made. Most
    young soldiers do not even realize, or sailors or marines, that
    they have this ability to complain. We are looking at DOD and
    OMB exempting an insurance product for auto dealers which might
    result in interest payments far in excess of 36 percent.
        Can you commit your continued, strong, and persistent
    enforcement to the letter of the Military Lending Act?
        Mr. Powell. Yes, it will be a priority for us. I commit to
    that.
        Senator Reed. Thank you very much.
        There is another issue, too, that I think you have touched
    upon, and that is cybersecurity. It seems to be the ubiquitous
    complaint of everyone, not just in the financial sector but
    every sector. And it seems to me, too, that typically those who
    are going to exploit cyber look for the back door, not the
    front door. They look for the small institution, not the big
    Wall Street bank that is spending $200 million a year on
    cyberprotections.
        How are you dealing with that? How are you and your
    colleagues dealing with that, going out and making sure that
    community banks and other smaller institutions that might be
    more vulnerable are taking the appropriate steps? Is that part
    of your expected procedures? Are you looking closely at
    cybersecurity?
        Mr. Powell. Yes, we are, and it is hard because, of course,
    the big banks are attacked, too, but they have the resources to
    deal with it. And so we deal through FFIEC, you know, which is
    a body of the regulators to promulgate guidance. We supervise
    for that guidance, and with the smaller banks, it is very
    important, and, you know, that is a way--we see that as a real
    vulnerability, for example, for the payment system. But we have
    also got to be mindful of the burden on smaller banks. But it
    is something we are very focused on.
        Senator Reed. Are you focused to the extent of conducting,
    you know, red-on-blue exercises, i.e., you know, seeing what is
    working out there, seeing where all the connectivity exists or
    does not exist? Are you doing that or getting any access to
    organizations that are doing that?
        Mr. Powell. We do tabletop exercises, let us say, and these
    are led by the Treasury Department. This has been a major focus
    for Treasury, and appropriately so, and we take part in them.
    There is always the feeling with cyber that you are just not
    doing enough.
        Senator Reed. Right. Well, in fact, that feeling is
    justified.
        Mr. Powell. It probably is.
        Senator Reed. Unfortunately.
        Mr. Powell. Yeah.
        Senator Reed. Thank you again for your service, Mr.
    Chairman. I appreciate it very much.
        Mr. Powell. Thank you, Senator.
        Chairman Crapo. Thank you, and I am not quite done yet, Mr.
    Chairman. I have a couple more questions.
        I would like to go back to the issue of wages. This has
    been discussed by a number of the Senators with you. In your
    testimony and in some of your answers, you indicated that wage
    growth is at about 3 percent, and there was some comment by one
    of the Senators, at least, that the nominal wage growth--or
    that the current rate of wage growth may or may not be keeping
    up with inflation, if I understand the question you were asked
    correctly. But if I understand your answers, isn't wage growth
    today growing at a faster rate than inflation?
        Mr. Powell. Yes. Real wages are going up at--you have to
    look at the average over a year or so, and you have got to look
    at a broad range of indicators. There is no question that wages
    are going up in real terms by roughly the amount of the
    productivity increase, which is appropriate.
        Chairman Crapo. And in your use of the term ``wages,'' do
    you include benefits? Or is there a separate calculation on how
    benefits----
        Mr. Powell. There are four different--there are countless
    measures of wages, of compensation, let us say. One of them
    that includes wages and benefits is the Employee Compensation
    Index, and that might be our single favorite one. It is one of
    four major ones that we look at. So that one does include
    benefits, and it, too, is showing growth in excess of right
    around 3 percent, maybe in the low 3's now.
        Chairman Crapo. All right. Thank you.
        We have also--in fact, I had discussed with you earlier
    some aspects of the labor force participation rate. Now, I
    understand that just the retirement--or the Baby Boomers
    retiring is one of the biggest downward pressures in our labor
    force participation rate, and I started to have a discussion
    with you in my earlier questions about now that we have seen
    that labor force participation rate start to increase, whether
    that would be stable or not. Could you just discuss a little
    more with me your evaluation of what it looks like for us in
    terms of labor force participation in general? And I may follow
    up on that a little bit.
        Mr. Powell. Yes. So I would say it is very gratifying to
    see U.S. labor force participation actually move up by 0.5 over
    the course of the last year as the labor market has gotten just
    stronger and stronger and stronger. So that has been a great
    thing to see.
        Given the level of job creation that we have had, if labor
    force participation had not gone up, then the unemployment rate
    would now be much lower than it is. So the unemployment rate
    has actually gone up to 4 percent from 3.7 percent, but this is
    only a good thing because it means people are coming back into
    the labor force.
        The real thing, though, is even with these increases, we
    still lag other countries. We still lag other countries who
    have higher labor force participation. You pointed out,
    correctly, that the aging of the population is decreasing labor
    force participation at a trend rate, and that trend rate is
    about 0.2 or maybe 0.25 percent every year. So for us just to
    hold participation flat is actually a gain against a longer-run
    trend. And really for the last--really since 2013, since the
    latter part of 2013, labor force participation has been flat to
    slightly up, which, again, is really good to see. But,
    honestly, that is just a consequence of having a really good
    labor market.
        I think if you are going to have that be sustained through
    good times and bad and put us on a more competitive footing
    with other countries, it is going to need more than a good
    labor market. It is going to need policies that reach out and,
    you know, give people the skills and aptitudes to be able to be
    sustainably in the labor market.
        Chairman Crapo. All right. Thank you. I cannot remember
    where I read this, but someone commented recently that today,
    the way our labor market is working, if a person wants to work,
    there is a job for them. Do you tend to agree with that
    observation?
        Mr. Powell. Generally speaking, although, you know, if you
    are in some regions, for example, there are regions of the
    country which are very poor and do not have job creation. I
    will tell you where that comes from. The level of job openings
    is now at or above the level of unemployed people. So you can
    say in a sense if you are looking for a job, there is at least
    numerically one job. But there are lots of people who--you
    know, probably millions of people who are out of the labor
    force and in a perfect world, in a better world, would be in
    the labor force. They are in their prime working years, and
    they are not in the labor force because of some kind of a
    problem or issue, and I think those are the people we want to
    get back.
        Chairman Crapo. All right. Thank you.
        Just to switch topics for a minute, we have seen, I think
    you indicated, a little bit under 3 percent growth in our GDP
    in the last year. I guess on Thursday we are going to get some
    economic analysis that will give us some statistics on that.
        One of my colleagues indicated today that, with regard to
    the tax bill that was passed, there was a lot said--I am not
    going to ask you to comment on this. I am just putting some
    facts out there. There was a lot said about how the tax bill
    would generate a $1.4 trillion deficit. That projection assumed
    somewhere in the neighborhood of 1.9 or 2 percent growth in the
    economy. And it was indicated at the time from all of the
    analysis we got that, if we just had four-tenths of a
    percentage rate of growth above that, there would not be any
    deficit involved with the tax legislation. And, of course, we
    have seen far more than four-tenths of growth so far in terms
    of the performance of the economy.
        So that leads to my question, and I know that you do not
    have a crystal ball, but you do analyze what it looks like for
    the economy. And my question relates to given what we have
    seen, we have seen a growth of about almost a percentage point
    in the GDP over the last 12 months, or previous growth rates,
    if I understand it right. Do you have a projection or do you
    have anything that you can share with us about what you see
    moving forward as to whether the economy will continue to
    perform? I know you said that it may slow down a little bit
    this year. But do you have a projection as to what it would
    likely look like over the next few years in terms of GDP
    growth?
        Mr. Powell. I think a good place to start with that
    question is what makes up growth, and it really boils down to
    more hours worked and then more output per hour. That is really
    all there is. And more hours worked is really a function of
    population growth. Population growth has slowed--or let us say
    it this way: The trend growth in the labor force, given aging
    and given immigration and everything we have, is only about
    five-tenths right now. And, actually, if immigration is going
    to be even lower, then it is going to be below five-tenths.
    Immigration has made up, you know, half of that five-tenths. So
    that is one piece of it. It is 0.5 percent trend labor force
    growth. The rest is just productivity. No one can forecast
    productivity growth with any confidence. All we can really do
    is create policies that will, you know, encourage investment,
    encourage innovation, and all those sorts of things, and let
    productivity happen as it will. It is something that just
    happens.
        But if you look at longer-term averages, it has been very
    difficult to predict. But you would have to have sustained high
    productivity--if you are going to have five-tenths labor force
    growth, you would have to have, you know, very high sustained
    productivity, higher than we have seen, frankly, to get really
    high levels of growth. That is why I think it is so important
    to focus on both of those two things--labor force participation
    and also productivity. That is the closest to anything we can
    focus on to raise our potential growth rate.
        Chairman Crapo. Well, thank you. And in terms of increasing
    labor force participation, I know there are a lot of factors.
    One that has been brought up here today already is to perhaps
    change our policy at the policy level so that a person who
    takes a job, who is not currently employed, a person who is
    willing to go take one of those jobs and become productive in
    the labor force does not actually economically suffer from that
    decision based on the safety net program support that the
    Government is already providing.
        I am not going to ask you to comment on policy, but is it
    correct that if we were to eliminate or reduce the incentive to
    stay unemployed because of the disadvantage economically of
    relying on wages rather than benefits, we would increase labor
    force participation?
        Mr. Powell. I think incentives do matter, and I think--I
    mean, I would think if you go back to work, your pay should
    only go up, in my perfect-world thinking. Again, easy for me to
    say, but that is how I would say it.
        Chairman Crapo. All right. Thank you.
        Switching gears one more time, and then I will wrap it up.
    Housing finance reform. As I am sure you have seen, there is a
    very significantly increased emphasis on housing finance
    reform, both on this Committee and I think in Congress in
    general, as well as at the level of the Administration. In
    2017, you gave a speech in which you outlined a few principles
    that you saw for how we should approach housing finance reform,
    and I am just going to quote what you said: ``Do whatever we
    can to make the possibility of future housing bailouts as
    remote as possible; to change the system to attract large
    amounts of private capital, and that any guarantee should be
    explicit and transparent and should apply to securities, not to
    institutions; and to identify and build upon areas of
    bipartisan agreement.''
        Do you still agree with those principles and how to
    approach it?
        Mr. Powell. I sure do.
        Chairman Crapo. Good. I agree with them, too. Strongly. And
    we are going to be very aggressively trying to put together a
    bipartisan solution to this here on this Committee and in
    Congress in general. And I just would like to ask you, first of
    all, if you will commit to work with this Committee in our
    efforts to build the right solution to this issue; and then,
    second, any other comments you might want to make about how our
    Nation should approach housing finance reform. And I would ask
    you also to discuss how getting this fixed could impact our
    economy and could impact growth.
        Mr. Powell. So I do think--and I said this in those
    remarks. I think that this is one of the big unfinished pieces
    of business in kind of the postcrisis reform period. Fannie and
    Freddie had to be taken over by the Government fairly early on
    in the financial crisis. It was a big part of the financial
    crisis. And I think we have--I think the proposals that you
    have had in the past and I am sure the one you will have this
    year, I think they all have the right elements there. It is
    just a question of getting something done. And I think it would
    be really good for the economy to get this off the Fed's--
    sorry, off the Federal Government's balance sheet and get a lot
    of private capital between the taxpayer and the housing risk,
    if you will.
        So I think it would be a very positive thing for the
    economy, and, of course, we will be delighted to work with you.
    I think we have some very strong, experienced staffers in the
    housing area, and we would be happy to provide whatever expert
    help we can.
        Chairman Crapo. All right. Thank you. And I know I said
    that was the last one, but this is really the last one. Again,
    shifting subjects, you have testified today that there are some
    pretty positive things going on in our economy right now and
    that we are in a relatively good position on a lot of factors.
        In terms of risks to our economy, could you just tell me
    what you think are some of the bigger risks we should keep in
    mind?
        Mr. Powell. I do think that the baseline outlook is a good
    one, favorable one. There are always risks, though, and as I
    mentioned, I do see the foreign risks as particularly relevant
    right now. So global growth has slowed. It has slowed in China.
    It has slowed particularly in the advanced economies and
    particularly in Europe.
        When growth is booming around the world, we feel that as a
    tailwind. When growth is slowing, we feel it as a headwind. And
    I think we are feeling some of that now, and we may feel more
    of it. So that is a risk.
        Brexit is an event risk, which should not in the end have
    much of an effect on our economy, but it is something we are
    monitoring very carefully.
        You know, domestically, I think we are in good shape.
    Unemployment is low. Confidence is still at positive levels. So
    I feel like, you know, we have the makings of a good outlook,
    and as I said, our Committee is really monitoring the
    crosscurrents, we call them, which are really the risks. And
    for now we are going to be patient with our policy and allow
    things to take time to clarify.
        Chairman Crapo. All right. Well, thank you. And I know I
    speak on behalf of the Committee. We appreciate the dedication
    of you and the other Governors at the Federal Reserve. We all
    want to have this economy stay strong and grow stronger, and we
    look forward to making sure that we can achieve the right
    policies and help together to make that happen.
        My last closing comment would be I echo the concerns--or
    not the concerns, really, but the issues raised by some of my
    colleagues about the implementation of S. 2155. I know you are
    working very--you just said it was the highest priority maybe
    at the Fed right now on the oversight level. But I would just
    encourage you to move ahead expeditiously on those issues. A
    number have been raised already. I will reiterate our concern
    that we move as quickly as we can on the implementation of the
    requirements and the principles of S. 2155 with regard to those
    financial facilities, banks under $100 billion, and getting the
    stress testing levels for them at the right point.
        If you want to comment on that, you are welcome to. If not,
    I will wrap up the hearing.
        Mr. Powell. I might add one thing to my last comment, if I
    could.
        Chairman Crapo. Sure.
        Mr. Powell. I would want to leave you with the thought that
    when I say we are going to be patient, what that really means
    is that we are in no rush to make a judgment about changes in
    policy. We are going to be patient. We are going to allow the
    situation to evolve, and also the balance of risks and allow
    the data to come in. And I think we are in a very good place to
    do that.
        Chairman Crapo. All right. Thank you. I appreciate that
    perspective, and once again, thank you for being here with us
    today.
        That does conclude the questioning for today's hearing, and
    for Senators who wish to submit questions for the record, those
    questions are due on March 5th, Tuesday.
        Chairman Powell, we ask that you respond to those questions
    as promptly as you can. Once again, thank you for being here,
    and this hearing is adjourned.
        Mr. Powell. Thank you, Senator.
        [Whereupon, at 12:15 p.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follow:]
                   PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
        We welcome Chairman Powell to the Committee for the Federal
    Reserve's Semiannual Monetary Policy Report to Congress.
        This hearing provides the Committee an opportunity to examine the
    current state of the U.S. economy, the Fed's implementation of monetary
    policy, and its supervisory and regulatory activities.
        In the wake of the 2008 financial crisis, the Fed entered a period
    of unconventional monetary policy to support the U.S. economy,
    including drastically cutting interest rates and expanding its balance
    sheet.
        I have long been concerned about the Fed's quantitative easing
    programs and the size of its balance sheet.
        As economic conditions improved, the Fed began trying to normalize
    monetary policy, including by gradually reducing the size of its
    balance sheet.
        The Fed's balance sheet grew to $4.5 trillion from around $800
    billion between 2007 and 2015, and now stands at around $4 trillion.
        During the press conference following the FOMC's most recent
    meeting, Chairman Powell provided additional clarity on the Fed's plans
    to normalize monetary policy, saying `` . . . the ultimate size of our
    balance sheet will be driven principally by financial institutions'
    demand for reserves, plus a buffer so that fluctuations in reserve
    demand do not require us to make frequent sizeable market
    interventions.''

            Estimates of the level of reserve demand are quite uncertain,
            but we know that this demand in the postcrisis environment is
            far larger than before. High reserve holdings are an important
            part of the stronger liquidity position that financial
            institutions must now hold . . .

             . . . The implication is that the normalization of the size of
            the portfolio will be completed sooner, and with a larger
            balance sheet, than in previous estimates.

        Banks' reserve balances grew from $43 billion in January 2008 to a
    peak of $2.8 trillion in 2014 before falling to $1.6 trillion as of
    January 2019.
        During this hearing, I look forward to understanding more about:
    what factors the Fed may consider in determining what is the
    appropriate size of the balance sheet; what factors have affected
    banks' demand for reserves, including the Fed's postcrisis regulatory
    framework; and what amount of reserves are estimated to be necessary
    for the Fed to achieve its monetary policy objective.
        The state of the U.S. economy is a key consideration in the Fed's
    monetary policy decisions.
        The U.S. economy remains strong with robust growth and low
    unemployment.
        Despite everyone telling us prior to tax reform that annual growth
    would be stuck below 2 percent as far as the eye could see, the economy
    expanded at an annualized rate of 3.4 percent in the third quarter of
    last year, following growth of 4.2 percent and 2.2 percent in the
    second and first quarters of 2018, respectively, according to the
    Bureau of Economic Analysis.
        This strong growth, which is on track to continue to exceed
    previous expectations, will now provide our policymakers with much
    greater flexibility to address other fiscal challenges than if we were
    continuing to struggle with insufficient growth.
        And, according to the Bureau of Labor Statistics, the unemployment
    rate has remained low and steady around 4 percent while the U.S.
    economy added 223,000 jobs per month on average in 2018, as well as
    304,000 jobs in the first month of this year.
        People continue to enter the labor force with the labor
    participation rate increasing to 63.2 percent from 62.7 percent over
    the last year.
        Reinforcing this strong employment environment, Fed Vice Chairman
    Rich Clarida said in a recent speech that ``the labor market remains
    healthy, with an unemployment rate near the lowest level recorded in 50
    years and with average monthly job gains continuing to outpace the
    increases needed over the longer run to provide employment for new
    entrants to the labor force.''
        Major legislation passed through this Committee and enacted last
    Congress supported economic growth and job creation.
        The Economic Growth, Regulatory Relief and Consumer Protection Act
    passed Congress with significant bipartisan support and was enacted to
    right-size regulation and redirect important resources to local
    communities for homebuyers, individuals, and smaller businesses.
        I appreciate the work the Fed has done so far to introduce
    proposals and finalize rules required by the law.
        Overseeing the full implementation of that law and the Federal
    banking agencies' rules to right-size regulations will continue to be a
    top priority of the Committee this Congress.
        In particular, the Fed and other banking regulators should consider
    whether the Community Bank Leverage Ratio should be set at 8 percent as
    opposed to the proposed 9 percent; significantly tailor regulations for
    banks with between $100 billion and $250 billion in total assets with a
    particular emphasis on tailoring the stress testing regime; provide
    meaningful relief from the Volcker Rule for all institutions, including
    by revising the definition of ``covered funds'' and eliminating the
    proposed accounting test; and examine whether the regulations that
    apply to the U.S. operations of foreign banks are tailored to the risk
    profile of the relevant institutions and consider the existence of home
    country regulations that apply on a global basis.
        The Committee will also look for additional opportunities to
    support policies that foster economic growth, capital formation, and
    job creation.
        Turning for a moment to another issue, Senator Brown and I issued a
    press release on February 13 inviting stakeholders to submit feedback
    on the collection, use, and protection of sensitive information by
    financial regulators and private companies, including third parties
    that share information with regulators and other private companies.
        Americans are rightly concerned about how their data is collected
    and used, and how it is secured and protected.
        Given the exponential growth and use of data, and corresponding
    data breaches, it is also worth examining how the Fair Credit Reporting
    Act should work in a digital economy, and whether certain data brokers
    and other firms serve a function similar to the original consumer
    reporting agencies.
        The Banking Committee plans to make this a major focus this
    Congress, and we encourage stakeholders to submit feedback by our March
    15 deadline.
        Lastly, I want to take a moment to recognize one of our staff
    members who is retiring this week.
        Dawn Ratliff is the Committee's Chief Clerk, and she will be
    retiring at the end of the week.
        She has dedicated 27 years in these hallways, and has been with the
    Senate Banking Committee since 2007, starting with then-Chairman Chris
    Dodd, and then working for Chairman Tim Johnson, Chairman Shelby, and
    now myself.
        Dawn is a Banking Committee institution--she is incredibly
    knowledgeable, helpful, and professional, respected and well-liked by
    everyone with whom she works.
        Dawn, your work on the Committee has truly made a lasting impact,
    and even though you will be gone, you will not be forgotten anytime
    soon.
        We wish you the best of luck in your well-earned retirement. Enjoy
    it.
                                     ______

                  PREPARED STATEMENT OF SENATOR SHERROD BROWN
        Thank you, Chairman Crapo.
        I also want to thank our Chief Clerk Dawn Ratliff for her service
    to this Committee and the public. She has been instrumental in making
    the Committee run smoothly for over a decade. Dawn, we will miss you,
    and congratulations on your retirement.
        Chairman Powell, welcome back to the Committee.
        It has been a great week for Wall Street.
        The FDIC announced that banks made a record-breaking $237.7 billion
    in profits in 2018, almost a quarter trillion dollars.
        Corporations--led by the Nation's largest banks--bought back a
    record $1 trillion in stocks last year, conveniently boosting their
    CEOs compensation. The President's tax bill put $30 billion in the
    banks' pockets, and continues to fuel even more buybacks and CEO
    bonuses.
        But that's never enough for Wall Street--it continues to demand
    weaker rules, so big banks can take bigger and more dangerous risks.
    And from the proposals the Fed has put out after the passage of S.
    2155, it looks like you are going along.
        The economy looks great from a corporate headquarters on Wall
    Street, but it doesn't look so good from a house on Main Street.
        Corporate profits are up. Executive compensation has soared. And
    that's all because of the productivity of American workers. But
    workers' wages have barely budged. Hard work isn't paying off for the
    people fueling all this growth.
        Seven of the 10 fastest growing occupations don't pay enough to
    afford rent on a modest one-bedroom apartment, let alone save for a
    downpayment.
        Household debt continues to rise, taking its toll on families. At
    the end of 2018, seven million Americans with auto loans were 90 or
    more days past due on their payments--a record, even though
    unemployment is at decade lows.
        Borrowers of color have not recovered financially from the crisis.
    And too many Americans of all ages are saddled with a mountain of
    student loan debt.
        The President's Government shutdown also revealed another
    frightening reality--too many Americans, still live paycheck to
    paycheck, even those with stable jobs.
        After 35 days of uncertainty and hardship, those workers went back
    to their jobs and eventually received their pay. But more than a
    million Government contractors weren't so lucky. We're talking in many
    cases about custodians and security guards and cafeteria workers making
    $12 or $15 an hour. We have heard a lot of talk about whether GDP will
    recover from the shutdown, and not enough about how workers will
    recover.
        We have questioned for quite a while whether the economic
    recovery--now in its 10th year--has been felt by all Americans.
    Stagnating wages and increasing income inequality between Wall Street
    CEOs and working Americans point to an obvious answer.
        Chair Powell, your comments at the February 6th Fed town hall for
    educators confirmed this. A teacher asked about your major concerns for
    the U.S. economy, and you answered:

            We have some work to do more to make sure that prosperity that
            we do achieve is widely spread. ( . . . ) median and lower
            levels of income have grown, but much more slowly. And growth
            at the top has been very strong.

        ``Growth at the top has been very strong.'' In other words, the
    CEOs, the folks on Wall Street, they're all doing just fine.

        Chair Powell, the Fed has spent a decade bending over backwards to
    help banks and big corporations that have hoarded profits for
    themselves rather than investing in the millions of workers who
    actually make our companies successful.
        We are late in this economic cycle, and it is clear that record
    Wall Street profits won't be trickling down to workers before the next
    downturn.
        Before the last crisis, we heard over and over again from
    Government officials and banks that the economy was doing fine.
    Regulators and Congress continued to weaken rules for Wall Street, and
    ignored the warning signs as families struggled to make ends meet.
        As the severity of the financial crisis became clear, the Fed
    rushed to the aid of the biggest banks, but it did not devote even a
    fraction of that firepower to helping the rest of America. Ignoring
    working families was a policy failure then, and it is a policy failure
    now.
        Chair Powell, I hope we don't make the same mistake again. I look
    forward to your testimony and new ideas for making hard work pay off
    for everyone in our economy.
                                     ______

                     PREPARED STATEMENT OF JEROME H. POWELL
           Chairman, Board of Governors of the Federal Reserve System
                               February 26, 2019
        Good morning. Chairman Crapo, Ranking Member Brown, and other
    Members of the Committee, I am happy to present the Federal Reserve's
    Semiannual Monetary Policy Report to the Congress.
        Let me start by saying that my colleagues and I strongly support
    the goals Congress has set for monetary policy--maximum employment and
    price stability. We are committed to providing transparency about the
    Federal Reserve's policies and programs. Congress has entrusted us with
    an important degree of independence so that we can pursue our mandate
    without concern for short-term political considerations. We appreciate
    that our independence brings with it the need to provide transparency
    so that Americans and their representatives in Congress understand our
    policy actions and can hold us accountable. We are always grateful for
    opportunities, such as today's hearing, to demonstrate the Fed's deep
    commitment to transparency and accountability.
        Today I will review the current economic situation and outlook
    before turning to monetary policy. I will also describe several recent
    improvements to our communications practices to enhance our
    transparency.
    Current Economic Situation and Outlook
        The economy grew at a strong pace, on balance, last year, and
    employment and inflation remain close to the Federal Reserve's
    statutory goals of maximum employment and stable prices--our dual
    mandate.
        Based on the available data, we estimate that gross domestic
    product (GDP) rose a little less than 3 percent last year following a
    2.5 percent increase in 2017. Last year's growth was led by strong
    gains in consumer spending and increases in business investment. Growth
    was supported by increases in employment and wages, optimism among
    households and businesses, and fiscal policy actions. In the last
    couple of months, some data have softened but still point to spending
    gains this quarter. While the partial Government shutdown created
    significant hardship for Government workers and many others, the
    negative effects on the economy are expected to be fairly modest and to
    largely unwind over the next several months.
        The job market remains strong. Monthly job gains averaged 223,000
    in 2018, and payrolls increased an additional 304,000 in January. The
    unemployment rate stood at 4 percent in January, a very low level by
    historical standards, and job openings remain abundant. Moreover, the
    ample availability of job opportunities appears to have encouraged some
    people to join the workforce and some who otherwise might have left to
    remain in it. As a result, the labor force participation rate for
    people in their prime working years--the share of people ages 25 to 54
    who are either working or looking for work--has continued to increase
    over the past year. In another welcome development, we are seeing signs
    of stronger wage growth.
        The job market gains in recent years have benefited a wide range of
    families and individuals. Indeed, recent wage gains have been strongest
    for lower-skilled workers. That said, disparities persist across
    various groups of workers and different parts of the country. For
    example, unemployment rates for African Americans and Hispanics are
    still well above the jobless rates for whites and Asians. Likewise, the
    percentage of the population with a job is noticeably lower in rural
    communities than in urban areas, and that gap has widened over the past
    decade. The February Monetary Policy Report provides additional
    information on employment disparities between rural and urban areas.
        Overall consumer price inflation, as measured by the 12-month
    change in the price index for personal consumption expenditures (PCE),
    is estimated to have been 1.7 percent in December, held down by recent
    declines in energy prices. Core PCE inflation, which excludes food and
    energy prices and tends to be a better indicator of future inflation,
    is estimated at 1.9 percent. At our January meeting, my colleagues and
    I generally expected economic activity to expand at a solid pace,
    albeit somewhat slower than in 2018, and the job market to remain
    strong. Recent declines in energy prices will likely push headline
    inflation further below the Federal Open Market Committee's (FOMC)
    longer-run goal of 2 percent for a time, but aside from those
    transitory effects, we expect that inflation will run close to 2
    percent.
        While we view current economic conditions as healthy and the
    economic outlook as favorable, over the past few months we have seen
    some crosscurrents and conflicting signals. Financial markets became
    more volatile toward year end, and financial conditions are now less
    supportive of growth than they were earlier last year. Growth has
    slowed in some major foreign economies, particularly China and Europe.
    And uncertainty is elevated around several unresolved Government policy
    issues, including Brexit and ongoing trade negotiations. We will
    carefully monitor these issues as they evolve.
        In addition, our Nation faces important longer-run challenges. For
    example, productivity growth, which is what drives rising real wages
    and living standards over the longer term, has been too low. Likewise,
    in contrast to 25 years ago, labor force participation among prime-age
    men and women is now lower in the United States than in most other
    advanced economies. Other longer-run trends, such as relatively
    stagnant incomes for many families and a lack of upward economic
    mobility among people with lower incomes, also remain important
    challenges. And it is widely agreed that Federal Government debt is on
    an unsustainable path. As a Nation, addressing these pressing issues
    could contribute greatly to the longer-run health and vitality of the
    U.S. economy.
    Monetary Policy
        Over the second half of 2018, as the labor market kept
    strengthening and economic activity continued to expand strongly, the
    FOMC gradually moved interest rates toward levels that are more normal
    for a healthy economy. Specifically, at our September and December
    meetings we decided to raise the target range for the Federal funds
    rate by \1/4\ percentage point at each, putting the current range at
    2\1/4\ to 2\1/2\ percent.
        At our December meeting, we stressed that the extent and timing of
    any further rate increases would depend on incoming data and the
    evolving outlook. We also noted that we would be paying close attention
    to global economic and financial developments and assessing their
    implications for the outlook. In January, with inflation pressures
    muted, the FOMC determined that the cumulative effects of these
    developments, along with ongoing Government policy uncertainty,
    warranted taking a patient approach with regard to future policy
    changes. Going forward, our policy decisions will continue to be data
    dependent and will take into account new information as economic
    conditions and the outlook evolve.
        For guideposts on appropriate policy, the FOMC routinely looks at
    monetary policy rules that recommend a level for the Federal funds rate
    based on measures of inflation and the cyclical position of the U.S.
    economy. The February Monetary Policy Report gives an update on
    monetary policy rules. I continue to find these rules to be helpful
    benchmarks, but, of course, no simple rule can adequately capture the
    full range of factors the Committee must assess in conducting policy.
    We do, however, conduct monetary policy in a systematic manner to
    promote our long-run goals of maximum employment and stable prices. As
    part of this approach, we strive to communicate clearly about our
    monetary policy decisions.
        We have also continued to gradually shrink the size of our balance
    sheet by reducing our holdings of Treasury and agency securities. The
    Federal Reserve's total assets declined about $310 billion since the
    middle of last year and currently stand at close to $4.0 trillion.
    Relative to their peak level in 2014, banks' reserve balances with the
    Federal Reserve have declined by around $1.2 trillion, a drop of more
    than 40 percent.
        In light of the substantial progress we have made in reducing
    reserves, and after extensive deliberations, the Committee decided at
    our January meeting to continue over the longer run to implement policy
    with our current operating procedure. That is, we will continue to use
    our administered rates to control the policy rate, with an ample supply
    of reserves so that active management of reserves is not required.
    Having made this decision, the Committee can now evaluate the
    appropriate timing and approach for the end of balance sheet runoff. I
    would note that we are prepared to adjust any of the details for
    completing balance sheet normalization in light of economic and
    financial developments. In the longer run, the size of the balance
    sheet will be determined by the demand for Federal Reserve liabilities
    such as currency and bank reserves. The February Monetary Policy Report
    describes these liabilities and reviews the factors that influence
    their size over the longer run.
        I will conclude by mentioning some further progress we have made in
    improving transparency. Late last year we launched two new
    publications: The first, Financial Stability Report, shares our
    assessment of the resilience of the U.S. financial system, and the
    second, Supervision and Regulation Report, provides information about
    our activities as a bank supervisor and regulator. Last month we began
    conducting press conferences after every FOMC meeting instead of every
    other one. The change will allow me to more fully and more frequently
    explain the Committee's thinking. Last November we announced a plan to
    conduct a comprehensive review of the strategies, tools, and
    communications practices we use to pursue our congressionally assigned
    goals for monetary policy. This review will include outreach to a broad
    range of stakeholders across the country. The February Monetary Policy
    Report provides further discussion of these initiatives.
        Thank you. I am happy to respond to questions.
            RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                         FROM JEROME H. POWELL

    Q.1. Last month I sent the Board of Governors a letter asking
    it to reevaluate the countercyclical capital buffer, currently
    set at zero. Banks are doing well, but there are certainly
    growing risks in the economy. Now is the time to ensure that
    the banks have enough capital for those eventual bad times, and
    many of your colleagues on the Board and at the Reserve Banks
    agree. I have not received a response.
        When will the Fed raise the buffer?

    A.1. As stated in the Federal Reserve Board's (Board) policy
    statement, we will raise the countercyclical capital buffer
    when systemic vulnerabilities are meaningfully above normal.
    \1\ At this time, the Board assesses the resilience of the
    financial system overall to be strong. Our forward-looking
    stress tests indicate that the institutions at the core of the
    financial system--the Nation's largest banks--will be able to
    continue to support lending and economic activity during severe
    macroeconomic and stressed market scenarios. The Board recently
    voted to maintain the level of the countercyclical capital
    buffer at zero. \2\
    ---------------------------------------------------------------------------
         \1\ Regulatory Capital Rules; The Federal Reserve Board's
    Framework for Implementing the U.S. Basel III Countercyclical Capital
    Buffer, 12 CFR Part 217, Appendix A.
         \2\ Minutes of the Federal Open Market Committee, November 7-8,
    2018, p.8. For additional detail on the Federal Reserve's framework for
    assessing vulnerabilities in the U.S. financial system, see Board
    (2018), Financial Stability Report, November 28, https://
    www.federalreserve.gov/publications/files/financial-stability-repmt-
    201811.pdf.

    Q.2. Earlier this month the Board suspended stress testing for
    bank holding companies between $100 billion and $250 billion in
    total assets. Meanwhile you have not finalized rules for how
    this same group of banks will be regulated after passage of S.
    2155.
        Will you commit to me that these institutions will be
    required to participate in the 2020 stress testing cycle?

    A.2. As noted in the October 31, 2018, Notice of Proposed
    Rulemaking, domestic bank holding companies subject to Category
    IV standards (those with total assets between $100-$250 billion
    and less than $75 billion in cross-jurisdictional activity,
    nonbank assets, weighted short-term wholesale funding, and off-
    balance sheet exposure) would be subject to supervisory stress
    testing on a 2-year cycle. The exemption from the 2019 stress
    test cycle for domestic bank holding companies with assets of
    between $100 and $250 billion with a limited risk profile was
    intended to provide these banks with immediate burden relief,
    consistent with the requirement in S. 2155 that they be subject
    to periodic rather than annual stress tests. Under the Board's
    current rules, these banks will be subject to stress tests in
    2020.

    Q.3. Related, in the form letters to each of the firms exempted
    from the stress tests, the Board indicated that in assessing
    the company's risk profile, the Board takes into consideration
    the company's size, scope of operations, activities, and
    systemic importance. Yet, these factors vary greatly between
    all of the exempted firms--for example: nonbank assets range
    from $0.2 billion to $65.6 billion; off balance sheet exposures
    range from $4.7 billion to $45.8 billion, and cross-
    jurisdictional activity range from $0.1 billion to $48.1
    billion. It looks like the Board categorically exempted
    companies within a certain asset threshold without considering
    each firm's particular risk profile.
        How does the Board explain why all of these firms, which
    range in complexity, have received the same treatment when it
    comes to 2019 stress testing?

    A.3. On February 5, 2019, the Board provided certain domestic
    bank holding companies with assets of between $100 billion and
    $250 billion and certain U.S. intermediate holding company
    subsidiaries of foreign banking organizations with assets of
    less than $250 billion relief from all regulatory requirements
    related to annual supervisory and company-run stress testing
    for the 2019 stress test cycle and from the requirement to
    submit a capital plan to the Board on April 5, 2019. In
    providing this relief, the Board considered each firm's asset
    size, cross-jurisdictional activity, reliance on short-term
    wholesale funding, nonbank assets, and off-balance sheet
    exposure. These factors may, individually or in combination,
    reflect greater complexity and risk to a banking organization
    and can, depending on the firm, result in greater risk to the
    financial system. The Board also considered reports of
    examination and other supervisory information, including a 2018
    review of each film's Comprehensive Capital Analysis and Review
    (CCAR) capital plan and capital planning processes, and the
    results of the Board's 2018 Dodd-Frank Annual Stress Testing
    (DFAST) supervisory stress test, as well as other publicly
    reported information. Each of these firms received notice in
    2018 that the Federal Reserve did not object to its capital
    plan or planned capital actions. Our analysis suggested that
    the 2018 DFAST stress tests remained an adequate assessment of
    the risks of each of these firms and that no firm had risks
    that would warrant an additional DFAST stress test in 2019.

    Q.4. The Fed has recently finalized proposals to make stress
    testing more transparent, providing more information to the
    financial institutions in advance.
        Why is the Fed making it easier for the largest, most
    complex banks to pass their stress tests, which are one of the
    most important tools enacted after the crisis to ensure that
    institutions have enough capital to withstand a severe economic
    shock?

    A.4. The model disclosure enhancements increase the
    transparency of the stress test, but do not make the stress
    test exercise easier for firms. The stress test is one of our
    most important and effective tools. The high level of
    credibility of the stress test has been built over the years,
    in part, through careful and regular efforts to improve the
    transparency of the test.
        We believe that our new disclosures would further enhance
    the public's understanding of the DFAST and CCAR supervisory
    stress test models without undermining the effectiveness of the
    tool. The new model disclosures include more detail about these
    supervisory models and methodologies, which may help the public
    understand and interpret the results of the stress test and
    thereby improve public and market confidence in the financial
    system.
        These disclosures may facilitate public comments on the
    models, including those from academic experts, which could lead
    to data improvements and a better understanding of the risks of
    particular loan types. They also may help financial
    institutions better understand the capital implications of
    changes to their business activities by providing general
    information about how the Federal Reserve's models treat broad
    classes of assets.
        We carefully designed the new model disclosures to avoid
    allowing firms to see the full models. In particular, the
    amount of detail we provide in the model disclosures would not
    facilitate a firm making incremental modifications to its
    business practices that have little effect on its risk profile,
    but could materially change its DFAST and CCAR supervisory
    stress test results.
        The information in the model disclosures also is not
    detailed enough to enable a firm to minimize stress test losses
    by optimizing credit allocations across geographies or
    industries, as that type of regulatory arbitrage could have
    unintended consequences for credit availability.
        We will continue to seek feedback on our DFAST and CCAR
    stress test from a wide range of stakeholders. The Board
    recently announced that it will host a stress testing
    conference in July that will be open to the public. During the
    conference, we expect that a number of stakeholders, including
    academics, public interest representatives, and financial
    sector representatives, will share their thoughts on certain
    aspects of the stress test program, including our current level
    of transparency.

    Q.5. In response to my question related to maximum employment,
    you replied that wages are considered as part of the maximum
    employment mandate.
        Does the Fed consider the level of wages and benefits and
    whether those levels allow the employee to fully participate in
    the economy?

    A.5. The Federal Open Market Committee considers a wide variety
    of economic indicators in assessing the level of maximum
    employment, including information on wages and benefits. The
    appropriate level of wages and benefits for any given type of
    work is best left to the interactions between firms demanding
    and workers supplying that type of work under the regulations
    and institutions that govern behavior in the labor market.
    Average increases in wages and benefits in the economy provide,
    in conjunction with many other macroeconomic indicators,
    information about the balance between the overall demand and
    supply of labor and the presence, or absence, of inflationary
    pressures. The increase in the pace of wage gains over the past
    few years has been a welcome development that has signaled a
    strengthening in the labor market and helped move inflation
    toward our 2 percent objective.

    Q.6. In your testimony, you describe that real wages are
    slightly rising, but indicate that some of the longer-term
    challenges to our economy are stagnant incomes and lack of
    upward economic mobility.
        Do you expect wages to continue to rise in ways that are
    meaningful to address concerns about stagnant incomes and lack
    of economic mobility? How much will wages need to rise to
    reverse this trend?

    A.6. In the aggregate, the pace of wage gains has been
    gradually improving. With wages now rising at a rate of roughly
    3 percent per year, and with inflation near 2 percent, we
    should see real wage gains of about 1 percent per year. That is
    slightly better than the pace we saw through most of the
    current expansion, and cumulated over time, such gains are
    meaningful. One important reason we have not seen larger real
    wage increases is that productivity growth has been relatively
    weak during this economic recovery.
        I would emphasize that those are aggregate wage figures,
    which apply to Americans as a whole, but do not speak to issues
    of income distribution or of economic mobility. As you know, I
    believe those issues are of central importance to the well-
    being of American families; together with productivity, they
    determine living standards for the bulk of our population. I
    encourage policymakers to devote attention to policies to help
    strengthen productivity growth as well as improve mobility and
    income distribution. Such policies are largely beyond the scope
    of monetary policy, but the Federal Reserve is committed to
    fulfilling the maximum employment element of our congressional
    mandate.

    Q.7. As inflation hovers near the Fed's target, a recent San
    Francisco Fed report noted that one component of that,
    ``acyclical'' inflation, had large effects. The report
    indicated cellular telephone services and financial services
    charges and fees including ``charges for deposit accounts,
    credit card services, and ATMs . . . '' made up about half of
    the increase in that component. \1\ Financial services fees
    rose by 10 percent in the year prior to this report, and likely
    disproportionately affected lower income workers and their
    families.
    ---------------------------------------------------------------------------
         \1\ https://www.frbsf.org/economic-research/files/el2018-26.pdf
    ---------------------------------------------------------------------------
        Are you concerned that financial services fees make up a
    significant portion of inflation? If financial services fees
    are a significant contributor to inflation, and the Fed is
    responsible both for monetary policy and regulation of
    financial services, how is the Fed coordinating its efforts to
    ensure that inflation is not disproportionately borne by
    workers whose incomes have been stagnant for years?

    A.7. The measure of financial service charges and fees that was
    noted in the Federal Reserve Bank of San Francisco report
    encompasses charges and fees associated with deposit accounts
    and credit cards (e.g., overdraft and ATM fees, membership
    fees), as well as some other items such as postal money orders.
    The price index for this expenditure category posted large
    increases in late 2017 and early 2018, contributing noticeably
    to inflation over the 12-month period noted in the report.
    Notably, that increase followed a period of smaller price
    increases. Considering the 5-year period ending December 2018,
    increases in this category of prices averaged 3.1 percent per
    year, which is above overall inflation, but not enormously so.
        We recognize that bank fees can be a burden on low-income
    Americans. In 2017, according to an FDIC survey, about one-
    quarter of unbanked households indicated that high bank account
    fees were among the reasons they did not have an account. Other
    more commonly cited reasons were not having enough money to
    keep in an account and a lack of trust in banks. Federal
    financial regulations require specific disclosure of fees and
    terms for bank deposits, as well as for other financial
    products like credit cards and prepaid cards, but these
    regulations generally do not limit the size of those fees. \3\
    ---------------------------------------------------------------------------
         \3\ See Regulation DD (Truth in Savings Act) at https://
    www.ecfr.gov/cgi-bin/text-idx?c=ecfr&tpl=/ecfrbrowse/Titlel2/
    12cfr1030_main_02.tpl. See Regulation Z (Truth in Lending Act) at
    https://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&tpl=/ecfrbrowse/Titlel2/
    l2cfr1026_main_02.tpl.

    Q.8. Following up on the numerous questions related to the BB&T
    and SunTrust merger, the Bank Holding Company Act requires that
    the Fed evaluate the competitive effects of mergers,
    acquisitions, and other transactions when determining whether
    to approve these applications. The factors for consideration
    include the effect of the acquisition or merger to lessen
    competition in any section of the country.
        How has the Fed considered this factor in the past, and
    what criteria does the Fed use to evaluate the effect of a
    merger on the competition in any section of the country?

    A.8. The Bank Holding Company Act requires the Board to analyze
    any application by a company seeking to control a bank or bank
    holding company, including through merger or acquisition, to
    determine whether the proposal would substantially lessen
    competition in any section of the country. A similar analysis
    is required under the Home Owners' Loan Act regarding
    applications by companies to control savings and loan holding
    companies or thrifts. Courts have held that the antitrust
    standards embodied in the banking laws were intended to
    incorporate the antitrust standards of the Clayton Act.
        The Board analyzes the competitive effects of the proposal
    in the context of local geographic banking markets where the
    applicant and the target compete. In order to perform the
    required competitive analysis, the Board performs an initial
    screen similar to the screen used by the U.S. Department of
    Justice (DOJ), in which deposits of the institutions are used
    to calculate market shares and market concentration. In
    applications in which consummation of the proposal would result
    in market shares or concentration levels below certain
    specified thresholds, a Reserve Bank may approve the
    transaction under authority delegated by the Board. However, if
    the structural effects exceed the initial screening thresholds,
    the Board further analyzes the proposal and determines whether
    the transaction can be approved.
        In its analysis of market concentration under the Bank
    Holding Company Act, the Board's review includes a close
    examination of the behavior of commercial banks, thrift
    institutions, and credit unions in the local banking market to
    determine the extent to which they compete with each other. The
    review also includes factors that might mitigate the structural
    effects of a proposed merger or acquisition, including the
    number of institutions remaining in the market, the likelihood
    of entry into the market, the financial viability of the target
    institution, any proposed branch divestiture that the applicant
    offers to reduce the potential anticompetitive effect of the
    merger or acquisition in affected markets, and other factors.
        In order to advance transparency concerning competitive
    analysis of banking mergers and acquisitions, the Board and
    DOJ, in 2014, jointly released a set of Frequently Asked
    Questions and responses, \4\ which are posted on the Board's
    public website.
    ---------------------------------------------------------------------------
         \4\ See https://www.federalreserve.gov/newsevents/pressreleases/
    bcreg20141009a.htm.

    Q.9. At the hearing you stated that, ``S. 2155 implementation
    is probably our highest priority, and we are pushing ahead.''
    The Fed appears to have ceased work completely on several rule
    proposals that would have increased regulation of large Wall
    Street banks. These include proposed rules on bonus payments
    for top executives and on capital for merchant banking and
    commodities activities.
        Why did the Board shift away from finalizing rules that
    would strengthen regulation, even apparently abandoning
    proposed rules, and instead prioritize activity on rules that
    would weaken regulation? Is the Fed currently considering any
    rulemakings that would strengthen regulation?

    A.9. The Board, along with the other Federal banking agencies,
    has spent almost a decade building the postcrisis regulatory
    regime. The regulatory policies implemented since the financial
    crisis have improved the safety and soundness of the financial
    system. The U.S. banking system is significantly better
    capitalized as a result of postcrisis regulatory capital
    requirements and stress testing. At this point, the agencies
    have completed the bulk of the work of postcrisis regulation;
    however, the agencies are still in the process of implementing
    a small number of important measures to strengthen the
    regulatory framework.
        Recently, the Board has examined the regulations put into
    place in light of our supervisory experience. We, at the
    Federal Reserve, intend to maintain the core elements of the
    postcrisis framework to protect the financial system's strength
    and resiliency, while also seeking ways to enhance
    effectiveness of our regulations. The Federal Reserve is
    committed to continuing to evaluate the effects of regulation
    on financial stability and on the broader economy and to making
    appropriate adjustments. The Board also is committed to
    enhancing the transparency and efficiency with which the
    Federal Reserve supervises and regulates firms under our
    jurisdiction.
        In order to enhance the strength and resiliency of the U.S.
    financial system, the Board has requested comment on the
    following proposed rulemakings: the Reduction of
    Interconnectedness and Contagion Risks of G-SIBs and the Net
    Stable Funding Ratio. When the comment periods on these
    proposals close, staff will consider the comments received and
    work towards the final proposed rules, as appropriate.
        Other actions the Board has recently taken to strengthen
    the regulatory framework for financial organizations it
    regulates include finalizing a number of rulemakings such as
    Single-Counterparty Credit Limits and the Large Financial
    Institution Rating system.
                                    ------

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

    Q.1. I'm concerned that the community bank leverage ratio
    created pursuant to S. 2155, as drafted, does little to provide
    actual relief for community banks.
        The Fed, OCC, and FDIC established the leverage ratio at
    the very upper end of the threshold allowed under S. 2155. The
    9 percent capital level that the regulators settled on is well
    above the status quo for well-capitalized banks and would do
    little to help any institution with assets under $10 billion.
    It's hard for me to understand why any bank would jump through
    the new hoops established by the regulators when the trade-off
    is a much higher threshold for Prompt Corrective Action.
        I'm concerned that the regulators did not do a sufficient
    job of consulting with our State banking supervisors as
    required under 2155. You are likely aware that the Conference
    of State Banking Supervisors sent you a letter on February 14th
    laying out its concerns in great detail.
        How are you working with State regulators on the
    implementation of the community bank leverage ratio?

    A.1. Section 201 of the Economic Growth, Regulatory Relief, and
    Consumer Protection Act (EGRRCPA) directs the Federal banking
    agencies (agencies) to establish a community bank leverage
    ratio (CBLR) of not less than 8 percent and no more than 10
    percent for community banking organizations with less than $10
    billion in total consolidated assets that also meet certain
    qualifying criteria. Under the CBLR proposed rule, \1\ a firm
    with a CBLR above 9 percent would be considered to have met the
    capital ratio requirements for purposes of the agencies'
    capital rule and for purposes of being well capitalized under
    the agencies' prompt corrective action (PCA) rules of section
    38 of the Federal Deposit Insurance Act.
    ---------------------------------------------------------------------------
         \1\ See 84 FR 3062 (February 8, 2019).
    ---------------------------------------------------------------------------
        The proposed 9 percent calibration of the CBLR, in
    conjunction with the qualifying criteria and simplified
    definitions, seeks to strike a balance among the following
    objectives: maintaining strong capital levels in the banking
    system, ensuring safety and soundness, and providing
    appropriate regulatory burden relief to as many banking
    organizations as possible. For example, an 8 percent CBLR would
    allow more banking organizations to opt into the CBLR framework
    but could allow a large number of banking organizations to hold
    less regulatory capital than they do today.
        The proposal is not expected to require a material change
    to the amount of capital held by qualifying firms that opt into
    the community bank leverage ratio framework because these firms
    generally hold capital well in excess of the minimum
    requirements. The agencies are currently reviewing all public
    comments on the proposal, including those related to the
    proposed calibration, and will consider them before finalizing
    the CBLR.
        Before issuing the proposal, the agencies consulted on
    several occasions with State bank regulators, as well as the
    Conference of State Bank Supervisors, to ensure their views
    were considered. The agencies very much appreciate the
    perspectives provided by the State bank regulators and plan to
    continue consulting with them before finalizing the CBLR.

    Q.2. Why are the agencies applying a new prompt-corrective-
    action framework to banks that fall below the 9 percent
    community bank leverage ratio threshold instead of simply
    requiring them to report risk-based capital?

    A.2. The CBLR proposal seeks to provide material burden relief,
    in the form of significantly simpler capital requirements and
    shorter reporting schedules, while maintaining safety and
    soundness in the banking system. The agencies believe that one
    way of achieving this outcome is by giving a community banking
    organization the flexibility to opt-in to and opt-out of the
    CBLR when the firm deems it appropriate. Consistent with
    section 201 of EORRCPA, the proposal establishes procedures for
    a CBLR firm that falls below 9 percent to be assigned a
    ``proxy'' PCA category based on the level of its CBLR. If we
    were to require a firm that has opted-in to the CBLR framework
    but that falls below the 9 percent CBLR to immediately revert
    to the current capital rule's requirements (including the
    substantially longer and more complex reporting requirements),
    we would be reducing the firm's flexibility by not allowing it
    to remain in the simpler regime.
        Under the proposal, a firm can opt-out of the CBLR
    framework and revert to the current capital rule at any time
    and for any reason. The agencies provided this optionality
    because they believed a CBLR firm would appreciate the
    flexibility to either revert to the current capital rule or
    remain subject to the CBLR as opposed to immediately being
    required to revert to the capital rule and associated
    regulatory reporting if the firm's CBLR drops below 9 percent.
    Without this flexibility, firms may feel compelled to maintain
    their current regulatory capital and reporting apparatus in
    case their CBLR drops below 9 percent.
        The comment period for the CBLR proposal ended on April 9,
    2019. The agencies are currently reviewing comments from the
    public on all aspects of the proposed rule, including the
    optionality embedded in the proposal, and will consider them
    before finalizing the rule.

    Q.3. Why is the Federal Reserve Board lowering capital
    standards for the largest U.S. banking organizations while at
    the same time increasing leverage capital requirements for
    community banking organizations?

    A.3. The agencies have proposed changes to prudential
    requirements that would better align regulations with a firm's
    size, risk profile, and systemic footprint, consistent with
    EGRRCPA. Under the proposals, the largest firms, such as U.S.
    OSIBs, would continue to be subject to the most stringent
    requirements.
        The CBLR proposal is an optional framework designed to
    reduce compliance burden for qualifying community banking
    organizations. The CBLR proposal is not intended to materially
    change the amount of capital currently required to be held
    under the risk-based and leverage-based capital requirements.

    Q.4. You may recall that I've had a longstanding dialogue with
    the Fed regarding the rule on the standardized approach for
    measuring counterparty credit risk, or SA-CCR. I first raised
    this issue at Vice Chairman Quarles' confirmation hearing in
    July 2017, going on 2 years ago, and have written to you about
    it as well as asked about it in open hearings since that time.
        Because I believe it's easier to establish rules making our
    financial system safer outside of a crisis, I was glad to see
    that a draft SA-CCR rule was published last October. The draft,
    however, falls short. It failed to include initial margin
    exposure, a point that Vice Chairman Quarles ignored when
    responding to my previous questions for the record. The draft
    rule was also overbearing in several key areas, such as how it
    treats hedging risk for commodities.
        Can you please share your thoughts on where the SA-CCR rule
    currently stands and tell us whether or not the rule is ever
    going to be finalized?

    A.4. With respect to initial margin in the supplementary
    leverage ratio (SLR), the Standardized Approach to Counterparty
    Credit Risk (SA-CCR) proposal requests comment on an
    alternative approach that would permit greater recognition of
    initial margin for cleared transactions under the SLR. The
    comment period on the SA-CCR proposal ended on March 18, and
    the Board of Governors (Board), the Office of the Comptroller
    of the Currency (OCC) and the Federal Deposit Insurance
    Corporation (FDIC) are now reviewing the comments, including
    with respect to the treatment of commodities and the treatment
    of initial margin under the SLR.

    Q.5. Last August, a number of my colleagues and I sent you a
    letter about the G-SIB surcharge. Our letter said in part that
    we hoped you would examine excessive capital requirements in
    the U.S. given the successful implementation of postcrisis
    reforms.
        In response, you wrote back saying, ``The Board is
    conducting a comprehensive review of the regulations in the
    core areas of postcrisis reform, including capital, stress
    testing, liquidity, and resolution. The objective of this
    review is to consider the effect of those regulatory frameworks
    on the resiliency of the financial system, including
    improvements in the resolvability of banking organizations, and
    on credit availability and economic growth.''
        In addition, when responding to a question from Senator
    Shelby during our recent hearing, you said that our banking
    system overall is quite strong, there have been no banking
    failures in 2018, and that the system has much higher capital,
    liquidity, and risk management than in years past.
        Can you please provide an update on the comprehensive
    review from your earlier letter?
        Will there be an output--such as a report--as the result of
    this review?
        When will it conclude, and will the public have the
    opportunity to comment?

    A.5. In connection with postcrisis reforms and recent statutory
    developments, the Board has been evaluating its regulations for
    simplicity, efficiency, and transparency. Board staff are in
    the process of reviewing core elements of the Board's
    regulatory framework. The Board will consider this analysis
    when developing future regulatory proposals. In addition, on
    October 31, 2018, the Board issued the proposals to tailor
    requirements for certain banking organizations while also
    ensuring the continued safety and soundness of their
    operations. \2\ These proposed rulemakings seek public comment
    on separate proposals for tailoring enhanced prudential
    standards, tailoring of capital and liquidity requirements, and
    modifying stress testing requirements for certain banking
    organizations. In developing these proposals, the Board
    considered the expected impact of the rulemakings and sought
    comment from the public on this question and all other aspects
    of the proposals.
    ---------------------------------------------------------------------------
         \2\ See 83 FR 61408 (Nov. 29, 2018); 83 FR 66024 (Dec. 21, 2018);
    84 FR 4002 (Feb. 14, 2019).

    Q.6. We all recognize that the Federal Reserve plays a critical
    role in ensuring the safety and soundness of the U.S. financial
    system and that you are constantly evolving your thinking on
    potential risks. Last year, I asked how you are considering
    evaluating bank practices in areas that are beyond the scope of
    the traditional supervision process. You responded that there a
    variety of ways the Federal Reserve ensures it understands what
    best practices should look like at the firms you supervise.
        That said, it remains unclear how decisions concerning
    technology, HR management, and general corporate strategy
    present clear safety and soundness issues. At some level, it
    seems the Federal Reserve's view is that anything could create
    risk and therefore you are able to dictate practices to firms.
        Consider, for instance, use of new cloud technologies to
    store customer data. Such a decision by bank management is no
    different than those made by other private companies--
    retailers, credit card companies, or even a local utility.
    These are private companies, with very engaged boards and
    investors, and well-informed senior management teams.
        As you develop expectations for firms in these types of
    areas, will you make certain that there is sufficient
    stakeholder engagement and that you are appropriately deferring
    to the judgments of private entities and not dictating what
    such entities must do on matters outside your traditional areas
    of expertise?

    A.6. As emerging and evolving risks become more relevant to
    safety and soundness supervision, the Federal Reserve
    incorporates a broad range of views into shaping potential
    policy. This engagement happens during the research and
    development phase, where outreach and information gathering is
    conducted, and also through public comment periods when
    proposed rules are published.

    Q.7. I was pleased to see that S. 2155 included Section 402,
    which would exempt cash that custody banks store at the Fed
    from their leverage ratio calculation. Shortly before S. 2155
    was signed into law, however, the Fed released a new rule
    changing that same calculation.
        In response to a question from the record from last
    November, Vice Chairman Quarles said, ``staff is evaluating the
    April 2018 proposal in light of the statutory change.''
        Can you elaborate on Vice Chairman Quarles' response?

    A.7. The Board, along with the OCC and FDIC, plan to issue a
    joint proposal in April 2019, to implement Section 402(b) of
    the EGRRCPA. The comment period on the proposal would end 60
    days after publication in the Federal Register.
        The April 2018 proposal to recalibrate the enhanced
    supplementary leverage ratio (eSLR) standards was calibrated
    based on the definition of the existing denominator of that
    ratio. At that time, the denominator included central bank
    deposits for all firms. The April 2018 proposal noted that any
    subsequent and significant changes to the SLR would likely
    necessitate the Board to reconsider the proposal recalibration,
    as it was not intended to materially change the aggregate
    amount of capital in the banking system.
        As you note, section 402(b) directs the agencies to allow
    custodial banking organizations to exclude qualifying central
    bank deposits from the SLR, and therefore, would meaningfully
    modify the SLR as applied to these firms. Accordingly, as the
    Board weighs any recalibration of the eSLR, the Board will
    consider the potential changes to capital levels at custodial
    banking organizations resulting from the implementation of
    section 402, as well as the expected impact on the aggregate
    level of capital in the banking system.

    Q.8. Are instructions for the latest Comprehensive Capital
    Analysis and Review tests forthcoming? When will they be
    released and why have they been held up this year?

    A.8. The instructions for the 2019 Comprehensive Capital
    Analysis and Review (CCAR) were released on March 6, 2019.
    While the CCAR instructions have been released in prior years
    on or around the beginning of February, the release of this
    year's instructions was postponed to incorporate into them the
    Board's final rule limiting the use of CCAR's qualitative
    objection.

    Q.9. In a recent press conference, you mentioned that the Fed
    would make an announcement on changes to the countercyclical
    capital buffer ``in early 2019''. The Fed has yet to take
    further action.
        When will you make your announcement on the countercyclical
    capital buffer?

    A.9. The Board recently voted to maintain the level of the
    countercyclical capital buffer (CCyB) at zero. \3\
    ---------------------------------------------------------------------------
         \3\ The Board voted 4-1 to maintain the level of the CCyB at zero.
    See https://www.federalreserve.gov/newsevents/pressreleases/
    bcreg20190306c.
    ---------------------------------------------------------------------------
                                    ------

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

    Q.1. In April 2017, at the Global Financial Forum, you
    commented that capital rules should not disincentivize
    derivatives clearing or serve as an impediment to end users
    hedging risk. These products are critical risk management tools
    for farmers, ranchers, and other businesses in Georgia and
    across the country.
        Unfortunately, the supplementary leverage ratio (SLR) is
    limiting access to derivatives risk management opportunities
    for the agricultural community in my State and discouraging the
    central clearing of standardized swap products by futures
    commission merchants (FCMs) registered with the CFTC. Since
    2008, according to the CFTC, the number of firms providing
    clearing services has declined from 88 to 55 in 2018.
        In December 2018, I introduced legislation to correct this
    unintended consequence, and to ensure regulators properly
    recognize the risk-reducing nature of client initial margin for
    a cleared derivative transaction. Ultimately, this will provide
    much-needed relief to farmers and other consumers and free up
    capital for our main street economy. As you also know, the Fed,
    along with the FDIC and OCC are currently soliciting comments
    as they seek to implement a new approach for calculating the
    exposure amount of derivatives contracts under the agencies'
    regulatory capital rules. The CFTC Commissioners recently
    submitted a joint comment that raises my very concerns.
        Do you share my concerns about SLR and what steps can you
    take to address the concerns above into consideration as you
    move through the joint-comment process?
        Will you commit to taking the concerns above into
    consideration as you move through the joint-comment process?

    A.1. The Federal Reserve Board (Board) is reviewing a number of
    its rules and regulations to address any unintended
    consequences and undue regulatory burden, including for the
    provision of central clearing services. In this regard, on
    October 30, 2018, the Board, along with the Office of the
    Comptroller of the Currency and the Federal Deposit Insurance
    Corporation (the agencies), issued a joint notice of proposed
    rulemaking to implement the standardized approach for
    counterparty credit risk (SA-CCR), to determine the exposure
    amount of a derivative contract. SA-CCR introduces a new
    methodology for calculating exposure amount in both the risk-
    based capital rules and the supplementary leverage ratio (SLR)
    rule. The proposal specifically requests comment on whether the
    agencies should permit greater recognition of margin for
    purposes of the SLR. The comment period closed March 18. We
    will take your concerns into account as we review comments on
    the rule.
                                    ------

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

    Q.1. In October of last year, the Federal Reserve (Fed) issued
    a request for public comment on ``actions the Federal Reserve
    could take to support faster payments in the United States.''
    We understand the Fed has been working collaboratively with the
    banks and other private-sector stakeholders for years on how
    best to facilitate faster payments. As you noted at a recent
    press conference, the Fed has thus far been ``more of a
    convener, bringing industry and the public and public interest
    groups . . . around the table and . . . playing a constructive
    role'' in encouraging the private sector in this area. In
    October, however, the Fed issued a request for public comment
    indicating that it could instead decide to enter the market for
    faster payments as a direct competitor of the private sector
    solutions with its own Real-Time Gross Settlement'' (RTGS)
    system.
        Is it possible the Fed's proposal could hamper and delay,
    rather than facilitate, the arrival of real-time payments?

    A.1. In its October 2018 Federal Register Notice requesting
    public comment (2018 FRN), the Board of Governors of the
    Federal Reserve System (Board) specifically sought feedback on
    whether potential Federal Reserve action(s) in faster payments
    settlement would hasten or inhibit financial services industry
    adoption of faster payment services. The potential actions,
    which would facilitate real-time interbank settlement of faster
    payments, build on collaborative work with the payment industry
    through the Federal Reserve System's Strategies for Improving
    the U.S. Payment System initiative. Real-time settlement avoids
    interbank credit risk by aligning the speed of interbank
    settlement with the speed of underlying payments. As a result,
    broad use of real-time settlement for faster payments could
    enhance the overall safety of the faster payments market in the
    United States. Development of a nationwide real-time interbank
    settlement infrastructure by the Federal Reserve could
    encourage more banks to develop faster payment services,
    creating more choice for consumers, households, and businesses.
        The 2018 FRN sought feedback on what operational and
    technical adjustments the private sector would need to make in
    order to operate in a 24x7x365 settlement environment and
    potential challenges and related costs the industry could face
    in the process of transitioning to such an environment.
        As part of its central mission, the Federal Reserve has a
    fundamental responsibility to ensure that there is a flexible
    and robust infrastructure supporting the U.S. payment system on
    which the private sector can develop innovative payment
    services that serve the broadest public interests.
        The Federal Reserve is committed to working together with
    the private sector to achieve nationwide access to faster
    payments and will continue to explore collaborative efforts to
    promote the safety and efficiency of faster payments and to
    support the modernization of the financial services sector's
    provision of payment services.

    Q.2. Please explain why the Fed is proposing the creation of a
    Government-run real-time payments system when the private
    sector has already created one that is up and running?

    A.2. The potential actions outlined in the 2018 FRN are
    intended to promote the safety and efficiency of faster
    payments in the United States and to support the modernization
    of the financial services sector's provision of payment
    services. The Federal Reserve has long supported these
    objectives in its existing services, which provide nationwide
    access to check, Automated Clearing House (ACH), and wire
    services to banks of all sizes. The Federal Reserve has
    provided services (check, ACH, wire) alongside private-sector
    service providers since its inception, and the Board has
    established policies and processes to avoid conflicts of
    interest across the various roles played by the Federal
    Reserve. \1\
    ---------------------------------------------------------------------------
         \1\ See https://www.federalreserve.gov/paymentsystems/
    pfs_standards.htm.

    Q.3. The Fed's own policy statement on ``The Federal Reserve in
    the Payments System'' requires that the Fed satisfy three
    conditions before proposing a new service. Among those is a
    finding that the private sector ``cannot be expected to provide
    such service with reasonable effectiveness, scope, and
    equity.'' Has the Fed made this finding, and, if so, on what
    ---------------------------------------------------------------------------
    grounds was it made?

    A.3. In response to the 2018 FRN, the Board received over 400
    comment letters from a broad range of market participants and
    interest groups, including consumer groups. The Board is
    carefully considering all of the comments received before
    determining whether any potential action is appropriate, as
    well as the timing of such potential action. Any resulting
    action would be pursued in alignment with the provisions of the
    Federal Reserve Act, the Monetary Control Act, and longstanding
    Federal Reserve principles and criteria for the provision of
    payment services. The criteria specify that the Federal Reserve
    must expect to (1) achieve full cost recovery over the long
    run, (2) provide services that yield a public benefit, and (3)
    provide services that other providers alone cannot be expected
    to provide with reasonable effectiveness, scope, and equity.

    Q.4. How long would it take for the Fed to create its real-time
    system?

    A.4. The Federal Reserve is not committing to any specific
    actions at this time, and there are several potential
    approaches that could help achieve the objective of safe,
    efficient, and ubiquitous faster payments. Any implementation
    period will depend on what actions, if any, the Board decides
    to take.

    Q.5. Would the Fed's proposed RTGS and the existing private
    sector real-time payments network be interoperable and, if so,
    why--specifically--do you believe that will be the case?

    A.5. The 2018 FRN asked for feedback on specific areas,
    including interoperability with existing or potentially new
    Real-Time Gross Settlement (RTGS) service providers. The Board
    received responses to such questions and is assessing the
    comments. The Federal Reserve recognizes that a decision to
    undertake a 24x7x365 RTGS settlement service will require close
    partnership and collaboration with a wide range of industry
    stakeholders.

    Q.6. If you believe the systems would interoperate, would such
    interoperability require the private sector system to
    significantly alter its current design?

    A.6. As noted, the Board recognizes that a decision to
    undertake the proposed actions, in particular the development
    of a 24x7x365 RTGS settlement service, will require close
    partnership and collaboration with industry stakeholders. Based
    on the comments received, the Board is assessing the
    implications for various industry stakeholders including banks,
    service providers, merchants, and financial technology
    providers. One important consideration relates to
    interoperability, which can involve different layers of a
    payment message (e.g., rules, standards, processing). The Board
    is assessing the options for interoperability between a Federal
    Reserve RTGS settlement service and existing or potentially new
    RTGS service providers across these layers for achieving
    nationwide access to faster payments in the United States.

    Q.7. As currently structured, CECL presents major capital
    volatility risk, affecting pricing and availability of lending
    for 30-year mortgages and to borrowers of lower credit quality,
    especially during downturns. It is highly procyclical. There
    have been proposals made that before implementing this major
    accounting change, there should be a quantitative impact study
    (QIS) conducted to look into these concerns. The 3-year phase
    in that the Fed recently finalized does not address this
    underlying procyclicality issue.
        Do you see any harm in conducting such a QIS?

    A.7. We recognize the importance of evaluating the quantitative
    impact of a policy change. Prior to finalizing the current
    expected credit loss (CECL) accounting standard, the Financial
    Accounting Standards Board followed its established process,
    which included cost-benefit analysis and extensive outreach
    with all stakeholders, including users, preparers, auditors,
    and regulators. Furthermore, various economists, institutions,
    and independent organizations have produced impact analyses of
    CECL with varying conclusions.
        We have reviewed these analyses and performed additional
    internal studies to support the 3-year phase-in referenced in
    your question as well as the Board's announcement that it will
    maintain the current modeling framework for loan allowances in
    its supervisory stress test through 2021. Institutions subject
    to the Board's Comprehensive Capital Analysis and Review (CCAR)
    will be required to incorporate CECL into their own stress
    tests starting in the 2020 cycle. However, the Board will not
    issue supervisory findings on those institutions' allowance
    estimations in the CCAR exercise through 2021.
        Given the importance of the CECL accounting standard to the
    institutions we supervise and the banking industry as a whole,
    we are committed to closely monitoring implementation and
    studying the effect of the accounting standard on the banking
    system to determine if further changes to the regulatory
    framework are appropriate.

    Q.8. The Fed has not undertaken any effort to update its rules
    to provide a pathway to margin eligibility for companies traded
    over-the-counter (OTC) since NASDAQ became an exchange in 2006.
    Margin eligibility of OTC-traded stocks can be an important
    part of the growth of small and emerging companies, as it helps
    to improve the market quality of those securities, impacts an
    investor's willingness to purchase those securities, and as a
    result, has a direct impact on capital formation. U.S.
    investors in the ADRs for Roche and other large, international
    OTC traded firms are also negatively impacted by the Fed's
    inaction on this issue.
        Will you commit to following up with me on the actions the
    Fed will take to revive the margin list for certain OTC
    securities--those that have similar characteristics to those
    traded on NASDAQ before it became an exchange?

    A.8. As you note, the List of Over-the-Counter Margin Stocks
    (OTC List) is no longer published by the Federal Reserve Board
    (Board), and, in fact, the OTC List's publication ceased in
    1998. Board staff have continued to monitor OTC market
    developments in the years since. Any expansion of the types of
    securities that are margin-eligible would require the Board's
    careful consideration of the benefits of such an approach,
    weighed against the potential increase in burdens on banks and
    other lenders.
        We will be sure to take your concerns into account as we
    look into potential approaches that may be considered, while
    ensuring any changes would not pose additional regulatory
    burden.
                                    ------

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

    Q.1. With cash flow dwindling in the farm sector amid ongoing
    trade disputes, the volume of non-real estate farm debt
    continues to increase at a rapid pace, driven by the growth in
    operating loans which have reached a historically large average
    size. Bankruptcies across the Farm Belt are rising past the
    highest level in at least 10 years.
        Lower farm incomes, the uncertainties about ag trade, and
    the growth of lending volumes has interest rates on ag loans
    trending ever higher. The rapidly increasing combination of
    higher leverage and rising rates continue to put pressure on
    operations across the Farm Belt.
        With financial performance at agricultural banks remaining
    relatively strong and the value of farm real estate continuing
    to provide ongoing support, what actions are you and regulators
    considering to help alleviate mounting pressure on the farm
    sector experiencing difficulties beyond their control?

    A.1. The agricultural industry is experiencing uncertainty, as
    commodity prices were suppressed in 2018 and trade issues
    continue to put pressure on economic growth. Some producers may
    be well-positioned to withstand the prolonged challenges facing
    today's agricultural sector, but others are more susceptible to
    financial stress. As regulators, it is essential to ensure that
    banks have appropriate processes to effectively measure and
    mitigate risks while maintaining safe and sound operations and
    serving the needs of the agricultural communities in which they
    operate.
        In 2011, the Federal Reserve issued guidance to the
    industry on ``Supervisory Expectations for Risk Management of
    Agriculture Credit Risk''. This guidance applies in all
    economic environments, but is especially helpful to banks
    during periods of economic stress. It reminds bankers that
    ``the identification of a troubled borrower does not [prohibit]
    a banker from working with the borrower,'' and it provides a
    road map for lenders to work prudently with troubled borrowers
    in a way that serves the long-term interests of all
    stakeholders. With respect to the Community Reinvestment Act
    (CRA), the current regulations consider bank activities in
    their assessment areas, including bank activities in the
    assessment areas that are responsive to the needs of those that
    have been affected by disasters.
        In acknowledgement of the concerns and uncertainties
    surrounding the outlook of agricultural conditions, the Federal
    Reserve has taken measures to maintain an ongoing dialogue
    between regulators, bankers, and agricultural communities. On a
    quarterly basis, we conduct Agricultural Credit Conditions
    Surveys that gather comments from bankers located in various
    Reserve Bank Districts \1\ with significant agricultural
    exposure. Our FedLinks and Community Banking Connections
    website \2\ and publications, which could be useful to all
    banks, aim to improve the understanding of supervisory
    expectations and provide tools to help community banks across
    the United States. Additionally, we invite bankers and
    agriculture industry professionals to the annual National
    Agricultural Credit Conference, hosted by the Federal Reserve
    Bank of Kansas City, which provides a forum for those in the
    industry to discuss current developments. The most recent
    conference was held at the Board of Governors of the Federal
    Reserve System on March 25, 2019. All of these outreach efforts
    allow the Federal Reserve to hear diverse perspectives and
    receive feedback from both the industry and public. They also
    enable the Federal Reserve to have a better understanding of
    credit conditions and challenges in agricultural markets so
    that supervisory reviews can be tailored, as appropriate.
    ---------------------------------------------------------------------------
         \1\ Our survey is aimed at areas of the country with high
    concentrations of agricultural lending by community banks, located
    primarily in Chicago, St. Louis, Minneapolis, Kansas City, and Dallas.
         \2\ See, https://communitybankingconnections.org/fedlinks.
    ---------------------------------------------------------------------------
        In addition to the supervisory process, the Federal Reserve
    System strives to incorporate perspectives from all regions of
    the country and from a broad range of industries, including
    agriculture, into its regular monetary policy deliberations and
    its assessments of the U.S. economy. We receive input on
    agricultural conditions from business contacts across the
    country through our boards of directors at regional Reserve
    Banks, various advisory councils, and surveys, in addition to
    reports from staff who track developments in U.S. agriculture.

    Q.2. One parallel I suggest you and regulators explore and
    consider for lenders is the regulatory relief granted to
    financial institutions in areas affected by natural disasters,
    such as favorable Community Reinvestment Act consideration,
    extension of repayment terms, restructuring existing loans, and
    easing terms for new loans.
        Would you and your staff be willing to work with my staff
    and I to develop the legislation necessary to provide
    regulators with this authority?

    A.2. As always, we are available to provide technical
    assistance to Members of Congress and their staffs. For this
    particular issue, our staff can inform you and your staff about
    past initiatives that the Board and the other Federal banking
    agencies (agencies) have taken to provide regulatory assistance
    to our supervised institutions affected by a major natural
    disaster. On an interagency basis, the agencies issue
    statements to encourage institutions operating in a disaster
    area to meet the financial services needs of their communities.
    For example, on October 10, 2018, the agencies and the
    Conference of State Bank Supervisors issued a statement that
    provides an overview of supervisory practices for institutions
    affected by Hurricane Michael. \3\ More recently, the agencies
    and relevant State regulators issued interagency statements on
    supervisory practices regarding financial institutions and
    their customers related to the flooding in the Midwest and
    wildfires in California. \4\
    ---------------------------------------------------------------------------
         \3\ See, https://www.federalreserve.gov/newsevents/pressreleases/
    bcreg20181010a.htm.
         \4\ See, https://www.federalreserve.gov/newsevents/pressreleases/
    bcreg20190325a.htm, and https://www.federalreserve.gov/newsevents/
    pressreleases/bcreg20181115b.htm.
    ---------------------------------------------------------------------------
                                    ------

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

    Q.1. Community Reinvestment Act--As you noted in a speech a
    couple weeks ago at the HBCU Mississippi Valley State
    University, the loss of a branch often means ``more than the
    loss of access to financial services; it also meant the loss of
    financial advice, local civic leadership, and an institution
    that brought needed customers to nearby businesses.'' I
    couldn't agree more. You rightly mention the Community
    Reinvestment Act as an important tool to encourage banking
    services in underserved areas.
        As regulators consider updates to the regulations
    implementing the Community Reinvestment Act, how can we make
    sure we that we protect the folks most likely to be
    significantly affected by branch closures--low income families,
    families of color, rural families?

    A.1. Public comment and the Federal Reserve's outreach to banks
    and community stakeholders have clearly conveyed that bank
    branches are an important venue for banks to engage with their
    communities. Commenters have emphasized the high value that
    bank branches have for retail customers, small business owners,
    local leaders, and community developers, especially in
    underserved communities.
        One opportunity in modernizing the Community Reinvestment
    Act (CRA) regulations is to better define the area in which the
    agencies evaluate a bank's CRA activities, while retaining a
    focus on the credit needs of local communities. There is a
    complex balance between the profitability of branches and the
    needs of local communities to interact with bank personnel
    needs to be kept in mind as revisions to the regulations are
    considered. Additionally, it would be useful to find ways to
    recognize how technology offers meaningful and cost-efficient
    opportunities to serve consumers and communities. \1\
    ---------------------------------------------------------------------------
         \1\ The Agencies have been aware of the impact of technology on
    the delivery of banking services for many years now. In 2016, the
    Agencies provided guidance on how examiners will evaluate the
    availability and effectiveness of alternative (nonbranch) product and
    service deliver mechanisms. That guidance can be found at in the
    Interagency and Answer Guidance on Community Reinvestment (Q&A
    _.24(d)(3), https://www.govinfo.gov/content/pkg/FR-2016-07-25/pdf/
    2016-16693.pdf.
    ---------------------------------------------------------------------------
        As the Federal Reserve works with the Office of the
    Comptroller of the Currency and the Federal Deposit Insurance
    Corporation (the Agencies) to develop a notice of proposed
    rulemaking, it is important to ensure that any modernization of
    assessment areas keeps in focus the goal of encouraging banks
    to seek out opportunities to create incentives for CRA capital
    to effectively meet the credit and banking needs of underserved
    communities and consumers.

    Q.2. Beyond the Community Reinvestment Act, what other tools do
    you as a regulator have to promote access to bank branches?

    A.2. The Federal Reserve has dedicated staff in each Reserve
    Bank throughout the country who work collaboratively to engage
    relevant stakeholders; to understand issues and challenges in
    low- and moderate-income (LMI) communities; and to provide
    research, insights, and technical assistance to support
    community and economic development programs.
        For example, staff facilitate roundtable discussions
    between banks, nonprofit organizations, and Government
    officials to support awareness of community needs and CRA-
    eligible activities, and to provide information on possible
    policy options and practices that may help serve the banking
    needs in LMI communities. In addition, staff work to advance
    Federal Reserve policymakers' understanding of labor markets,
    housing markets, and other economic and financial conditions
    across populations and geographies. By engaging a broad range
    of stakeholders, staff obtain diverse views on issues affecting
    the economy and financial markets. This information helps banks
    identify opportunities to serve the credit and financial
    services needs of their communities.

    Q.3. Cybersecurity Harmonization--Many financial institutions
    are subject to cybersecurity supervision from a number of State
    and Federal regulators. Not only are these institutions subject
    to, at times, differing requirements from these regulators,
    there is often not even a shared lexicon among regulators, so
    that when one regulator says ``effective data security,'' they
    actually mean something different from what another regulator
    means by the same phrase.
        Are there efforts underway to harmonize the cybersecurity
    lexicon used by State and Federal regulators? How is that
    effort progressing?

    A.3. The Federal Reserve, in collaboration with other
    regulatory agencies, continues to identify opportunities to
    harmonize the cybersecurity lexicon used by State and Federal
    regulators. Specifically, the Federal Reserve chairs a working
    group of the Financial and Banking Information Infrastructure
    Committee (FBIIC) \2\ that is working to harmonize the
    cybersecurity lexicon by using the National Institute of
    Standards and Technology (NIST) as the primary source of
    cyberterms and definitions going forward.
    ---------------------------------------------------------------------------
         \2\ The FBIIC consists of 18 Federal and State member
    organizations that collectively engage in supervisory activities for
    the banking, investment, and insurance sectors.

    ---------------------------------------------------------------------------
    Q.4. What about an effort to harmonize standards?

    A.4. The FBIIC provides a forum for member agencies to discuss
    regulatory and supervisory practices, including opportunities
    for harmonization and to leverage existing standards, such as
    the NIST Cybersecurity Framework. As discussed above, the
    Federal Reserve chairs a FBIIC working group that is engaged in
    identifying opportunities to further harmonize cyber-related
    standards and supervisory activities for firms subject to the
    authority of multiple regulators.
        In addition, the agencies, with supervisory responsibility
    for the banking sector, collectively engage in efforts to
    promote uniformity in the supervision of those financial
    institutions through the Federal Financial Institutions
    Examination Council (FFIEC). The FFIEC, established in 1979,
    includes the Board of Governors of the Federal Reserve System
    (Board), Office of the Comptroller of the Currency (OCC),
    Federal Deposit Insurance Corporation (FDIC), National Credit
    Union Administration, Consumer Financial Protection Bureau and
    the State Liaison Committee. The FFIEC promotes uniformity in
    the supervision of financial institutions through the
    development of joint examination procedures, principles,
    standards, and report forms.

    Q.5. Real Time Payments--I fully support the adoption in the
    United States of a real time payments (RTP) system. Such a
    system brings with it terrific promise for innovation in
    financial services that meet customer demands to make payments
    cheaply and instantly.
        In its 2013 Strategies for Improving the U.S. Payment
    System, the Federal Reserve said that it ``would not consider
    expanding its service provider role unless it determines that
    doing so is necessary to bring about significant improvements
    to the payment system and that actions of the private sector
    alone will likely not achieve the desired outcomes for speed,
    efficiency, and safety in a timely manner'' and unless ``other
    providers alone could not be expected to provide this
    capability with reasonable effectiveness, scope, and equity''--
    phrases that the Federal Reserve has repeated elsewhere.
        I can understand how the provision by the Federal Reserve
    of a 24/7/365 real time liquidity management tool that would
    support a private sector RTP solution--as contemplated in the
    Federal Reserve's recent proposal--would meet the test that the
    Federal Reserve has consistently outlined for its operational
    involvement. A 24/7/365 liquidity management tool would help
    alleviate otherwise potentially destabilizing liquidity demands
    that overnight RTPs could generate.
        The development of a real time gross settlement (RTGS)
    system, however, seems to be a different matter in terms of
    meeting the requirements the Fed set forth in its 2013
    Strategies for Improving the U.S. Payment System and the
    requirements of the Monetary Control Act.
        With regard to the possible development of an RTGS system,
    has the Federal Reserve made a determination that Federal
    Reserve provision of RTGS services meets this test? If so, on
    what basis?

    A.5. The potential actions outlined in the Board's October 2018
    Federal Register Notice request for comment (2018 FRN) are
    intended to promote the safety and efficiency of faster
    payments in the United States and to support the modernization
    of the financial services sector's provision of payment
    services. The Federal Reserve has provided services alongside
    the private-sector service providers since its inception that
    have supported both objectives while providing nationwide
    access to check, Automated Clearing House (ACH), and wire
    services to banks of all sizes.
        The Board has received over 400 comment letters from a
    broad range of market participants and interest groups,
    including consumer groups in response to the 2018 FRN seeking
    public input on potential actions the Federal Reserve might
    take in regard to supporting faster payments in the United
    States. The Board is carefully considering all of the comments
    received before determining whether any action is appropriate
    or the timing of such potential action. Any resulting action
    the Board decides to take would be pursued in alignment with
    the provisions of the Federal Reserve Act, the Monetary Control
    Act, and longstanding Federal Reserve policies and processes
    created to avoid conflicts of interest across the various roles
    of the Federal Reserve.
        In particular, the Congress, in part motivated to encourage
    and ensure fair competition between the Federal Reserve and the
    private sector, passed in 1980, the MCA, requiring that the
    Federal Reserve fully recover costs in providing payment
    services over the long run and adopt pricing principles to
    avoid unfair competition with the private sector. The Board
    also has established additional criteria for the provision of
    new or enhanced payment services that specify the Federal
    Reserve must expect to (1) achieve full cost recovery over the
    long run, (2) provide services that yield public benefit, and
    (3) provide services that other providers alone cannot be
    expected to provide with reasonable effectiveness, scope, and
    equity. In addition to these criteria, for new services or
    service enhancements, the Board also conducts a competitive
    impact analysis to determine whether there will be a direct and
    material adverse effect on the ability of other service
    providers to compete effectively in providing similar services.
    \3\
    ---------------------------------------------------------------------------
         \3\ See ``The Federal Reserve in the Payments System'' (issued
    1984; revised 1990), Federal Reserve Regulatory Service 9-1558.

    Q.6. The Federal Reserve has also consistently supported the
    implementation of RTP system by 2020. I understand there is a
    fully operational private sector clearing and settlement
    solution that has significant adoption by depository
    institutions. Would a Federal Reserve-provided RTGS
    infrastructure be implemented by 2020? If not, how long would
    ---------------------------------------------------------------------------
    such an infrastructure take to become fully operational?

    A.6. The Federal Reserve is not committing to any specific
    actions at this time, and there are several potential
    approaches that could help achieve the objective of safe,
    efficient, and ubiquitous faster payments. Any implementation
    period will depend on what actions, if any, the Board decides
    to take. Analysis of the input received in response to the
    Board's 2018 FRN is currently underway. The Board is in the
    process of carefully considering all of the comments received
    before the determining whether any action is appropriate or the
    timing of such potential action(s).

    Q.7. Given the Fed's long-held goal of getting to real-time
    payments by 2020, is there a risk that the Fed's suggestion
    that it might, at some time in the future, enter the real-time
    payments market--as a direct competitor of existing private-
    sector alternatives--delay, rather than facilitate, adoption of
    real-time payments?

    A.7. In its 2018 FRN request for public comment on actions the
    Board specifically sought feedback on whether potential Federal
    Reserve action(s) in faster payments settlement would hasten or
    inhibit financial services industry adoption of faster payment
    services. The potential actions, which would facilitate real-
    time interbank settlement of faster payments, build on
    collaborative work with the payment industry through the
    Federal Reserve System's Strategies for Improving the U.S.
    Payment System (SIPS) initiative. Real-time settlement avoids
    interbank credit risk by aligning the speed of interbank
    settlement with the speed of underlying payments. As a result,
    broad use of real-time settlement for faster payments could
    enhance the overall safety of the faster payments market in the
    United States. Development of a nationwide, real-time interbank
    settlement infrastructure by the Federal Reserve could
    encourage more banks to develop faster payment services,
    creating more choice for consumers, households, and businesses.
        The 2018 FRN sought feedback on what operational and
    technical adjustments the private sector would be required to
    make to operate a 24x7x365 settlement environment and potential
    challenges and related costs the industry could face in the
    process of transitioning to such an environment.
        As part of its central mission, the Federal Reserve has a
    fundamental responsibility to ensure that there is a flexible
    and robust infrastructure supporting the U.S. payment system on
    which the private sector can develop innovative payment
    services that serve the broadest public interests.
        The Federal Reserve is committed to working together with
    the private sector to achieve nationwide access to faster
    payments and will continue to explore collaborative efforts to
    promote the safety and efficiency of faster payments and to
    support the modernization of the financial services sector's
    provision of payment services.

    Q.8. Brexit: Financial Stability Monitoring--I'm glad to see
    the news that the Federal Reserve is now publishing semiannual
    financial stability reports. I think it's critical that the
    Federal Reserve, and the other financial regulators and FSOC,
    continue to monitor for new and emerging threats to financial
    stability. One of the items the Fed has highlighted in its
    financial stability report is Brexit.
        What are the key economic and financial risks associated
    with the possibility that Britain crashes out of the EU?

    A.8. European Union (EU) leaders agreed at their April 10
    summit to grant the United Kingdom (U.K.) a Brexit extension
    until October 31, 2019. Although this extension reduced
    uncertainty in the near term, it is unclear how Brexit will
    play out. The EU and the U.K. Governments reached a deal last
    November that would set the terms of U.K. withdrawal from the
    EU, and introduce a basis for new relations, but the U.K.
    Parliament has not ratified this agreement. The possibility
    remains that the U.K. could leave the EU without a ratified
    agreement. U.K. authorities have warned that, under such a no-
    deal scenario, there likely would be logistical issues as the
    two economies jump from a seamless trading environment to one
    involving tariffs, rules of origin of products, and border
    inspections. Planned measures to address such issues likely
    would not eliminate all such disruptions, which might have a
    significant near-term effect on the U.K. economy and on some of
    the EU economies that trade most heavily with the U.K.
        The direct trade impacts on the United States likely would
    be minimal. A no-deal scenario could generate some European
    financial stresses that could spill over to global financial
    markets, including in the United States. However, U.S.
    financial institutions have had a long time to prepare, with
    oversight from U.S., U.K., and EU regulators, for potential
    spillovers resulting from Brexit. More generally, U.S. banks
    currently are well capitalized, and their exposures to Europe
    are fairly small relative to their capital levels.

    Q.9. What is the Fed doing to prepare for such an event?

    A.9. Board staff has monitored and analyzed the U.K. expected
    withdrawal from the EU, including the possibility of a no-deal
    scenario. As part of these efforts, staff has discussed
    preparedness for a variety of scenarios with financial
    institutions and closely monitored political, economic, and
    financial sector developments. Staff has also coordinated with
    other domestic financial regulatory agencies and the U.S.
    Department of the Treasury as well as engaged with relevant
    authorities in the U.K. and EU, as appropriate. In particular,
    Board staff has consulted regularly with the Bank of England
    and its Prudential Regulation Authority.

    Q.10. With which Federal agencies is the Fed working in
    preparation?

    A.10. As mentioned in response above, Board staff has
    coordinated and consulted with colleagues at several Federal
    agencies, including the U.S. Department of the Treasury,
    Commodity Futures Trading Commission, Securities and Exchange
    Commission, OCC, and FDIC.
                                    ------

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

    Q.1. The U.S. Government's Fourth National Climate Assessment
    says climate change will ``cause substantial net damage to the
    U.S. economy throughout this century,'' with annual losses in
    some sectors projected to exceed the current GDP of many U.S.
    States. Climate-related extreme weather will ``increasingly
    affect our trade and economy, including import and export
    prices.'' It will also disrupt operations and supply chains,
    and ``lead to large-scale shifts in the availability and prices
    of many agricultural products across the world.''
        Has the Federal Reserve specifically examined data in the
    National Climate Assessment on the economic impact of different
    climate change scenarios?

    A.1. The longer-term predicted impacts of climate change are
    generally beyond the scope of monetary policy. Although it is
    important for us to understand how weather is affecting the
    economy in real time and respond accordingly, monetary policy
    is not well suited to address longer-term economic disruptions
    associated with severe weather events. Longer-term predictions
    such as those in the Fourth National Climate Change Assessment
    report are an issue for Congress and the Administration to
    consider.

    Q.2. Has the Federal Reserve examined any data, produced by the
    U.S. Government or by others, on the economic impact of
    increasingly severe weather and climate events, such as
    flooding, sea level rise, drought, wildfires, and deadly
    storms?

    A.2. The Federal Reserve takes into account the severity of
    weather events in assessing current economic conditions as part
    of our deliberations about the appropriate stance of monetary
    policy. For example, our staff has relied on data from the
    Federal Emergency Management Agency and the Department of
    Energy to gauge the disruptions to oil and gas extraction,
    petroleum refining, and petrochemical and plastic resin
    production in the wake of hurricanes that affected the Gulf
    region. Our staff regularly uses daily measures of temperatures
    and snowfall from National Oceanic and Atmospheric
    Administration (NOAA) weather stations to understand better,
    how severe weather may be affecting economic activity in
    specific areas. In addition, our staff recently has begun to
    use credit and debit card transaction data to gauge how
    specific types of severe weather events might affect consumer
    spending in areas affected by those events.

    Q.3. Have you considered how different climate change scenarios
    would impact the Federal Reserve's statutory mandate to
    stabilize prices, maximize employment, and moderate long-term
    interest rates?

    A.3. As I have noted previously, while Congress has entrusted
    the matter of addressing climate change to other agencies, the
    Federal Reserve uses its authorities and tools to prepare
    financial institutions for vulnerabilities, including severe
    weather events. Over the short-term, severe weather events have
    the potential to inflict serious damage to the lives of
    individuals and families, to devastate local economies and even
    temporarily affect national economic output and employment. The
    Federal Reserve, in its conduct of monetary policy and related
    decision making, is concerned with short- and medium-term
    developments that may change materially over quarters and a
    relatively small number of years, rather than the decades
    associated with longer-term changes.

    Q.4. Have you considered how different climate change scenarios
    would impact the Federal Reserve's statutory mandate to promote
    the safety and soundness of supervised institutions and the
    stability of the overall financial system?

    A.4. The Federal Reserve Board (Board) has supervisory and
    regulatory authority over a variety of financial institutions
    and activities, with the goal of promoting a safe, sound,
    efficient, and accessible financial system that supports the
    growth and stability of the U.S. economy. In carrying out the
    responsibility to promote the safety and soundness of
    individual financial institutions that we supervise, we assess,
    among other things, supervised firms' ability to identify,
    measure, monitor, and control risks, including those related to
    severe weather events. The Federal Reserve has particular tools
    and mechanisms for monitoring the financial system.
        One of the most critical elements of safety and soundness
    is a financial institution's ability to absorb substantial
    unexpected losses and continue to lend to households and
    businesses. Severe weather events are one potential source of
    such losses, especially for firms with exposures concentrated
    in regions that are likely to experience those events. We
    routinely examine banks' management of concentration risk and
    recommend or, if necessary, enforce, enhancements, including
    additional capital, where warranted. For example, our
    supervisors consider any evidence of a rising incidence of
    severe weather events, including coastal flooding, in those
    areas where it is a factor.
        To that end, the Board issued supervisory guidance in 1996,
    to ensure that bank management takes into account all relevant
    risks in their underwriting and review practices. Our guidance
    with respect to credit underwriting and asset quality provides
    supervisors the flexibility necessary to address risks from
    severe weather events. \1\ In addition, our guidance also
    specifically addresses lending to sectors where assessments of
    these risks are critical for due diligence and underwriting.
    \2\
    ---------------------------------------------------------------------------
         \1\ See, e.g., 12 CFR Part 208, App. D-1 to Part 208
    (``Interagency Guidelines Establishing Standards for Safety and
    Soundness''); Board of Governors of the Federal Reserve System, ``SR
    96-36: Guidance on Evaluating Activities Under the Responsibility of
    U.S. Branches, Agencies, and Nonbank Subsidiaries of Foreign Banking
    Organizations (FBOs)'' (Dec. 19, 1996), https://www.federalreserve.gov/
    boarddocs/srletters/l996/sr9636.htm; Federal Deposit Insurance
    Corporation, ``Uniform Financial Institutions Rating System'', 62 FR
    752 (Jan. 6, 1997).
         \2\ See, e.g., Board of Governors of the Federal Reserve System,
    ``Commercial Bank Examination Manual'', 2142.1 (``Agricultural Credit
    Risk Management''), 2150.1 (``Energy Lending--Reserve-Based Loans'')
    (rev. Oct. 2018), https://www.federalreserve.gov/publications/files/
    cbem.pdf.
    ---------------------------------------------------------------------------
        The Board also ensures that financial institutions that are
    core clearing and settlement organizations, or play significant
    roles in critical financial markets maintain sound practices to
    ensure that they can recover and resume their activities
    supporting these markets following a severe weather event. In
    addition, the Board has provided guidance to banking
    institutions directly affected by an event that results in a
    Presidential declaration of a major disaster. The supervisory
    approach described in the guidance provides examiners
    flexibility to conduct supervisory activities and formulate
    supervisory responses that take into account the issues
    confronting institutions impacted by such events.

    Q.5. Does the Federal Reserve coordinate with other central
    banks and bank supervisors around the world to discuss best
    practices for managing emerging risks? If no, why not? If yes,
    have climate risks to financial institutions been discussed?

    A.5. In its role promoting financial stability, the Federal
    Reserve cooperates and coordinates with many other central
    banks and bank supervisors and regulators, both bilaterally and
    through international standard setting bodies, such as the
    Basel Committee on Banking Supervision and the Financial
    Stability Board (FSB). We discuss climate risks frequently with
    our international central bank colleagues. Our engagement is
    intended to help identify and address vulnerabilities in the
    global financial system and to develop stronger regulatory and
    supervisory policies in order to help ensure a more stable and
    resilient global financial system.
        Additionally, the Federal Reserve Board is an active
    participant in the proceedings of the FSB, which was
    established after the financial crisis to strengthen financial
    systems and increase the stability of international financial
    markets, and has undertaken relevant work in this area. Of
    particular interest are efforts to promote enhanced risk
    management disclosure by financial institutions. In this
    regard, the FSB established in 2015 the Task Force on Climate-
    related Financial Disclosures (TCFD), a global, industry-led
    effort to develop recommendations for consistent climate-
    related financial disclosures, for use by companies in
    providing information to investors, lenders, insurers, and
    others. The TCFD considers the physical, liability, and
    transition risks associated with climate change and what
    constitutes effective financial disclosures across industries.

    Q.6. Your counterpart in the United Kingdom, Mark Carney,
    recently announced that the Bank of England is planning to
    include the impact of climate change in its bank stress tests
    as early as next year. The Bank of England is taking this step
    because it believes that responding to climate-related
    financial risks ``helps ensure the Bank can fulfil its mission
    to maintain monetary and financial stability.''
        Are you aware of the Bank of England's plans to incorporate
    climate risk into bank stress testing?

    A.6. The Board is aware of the Bank of England's (BOE) plans to
    incorporate severe weather risk into bank stress testing. The
    BOE has said it will conduct this analysis as part of its
    exploratory scenario either next year or 3 years hence. As we
    understand, banks cannot pass or fail these exploratory
    scenarios; instead, the scenarios are designed to increase
    transparency and to focus on specific issues.

    Q.7. Do you think it would be productive for the Federal
    Reserve to learn more about the Bank of England's efforts to
    incorporate climate risks into bank stress testing?
        If not, please explain why the Federal Reserve does not
    think it is worth learning more about how climate risks could
    impact the safety and soundness of financial institutions or
    the stability of the financial system.

    A.7. Federal Reserve staff meet regularly to exchange views
    with our counterparts at the BOE and other global regulators.
    We look forward to seeing the structure of and results of the
    exercise, should the BOE ultimately decide to conduct these
    tests.

    Q.8. In his September 2010 testimony before the Financial
    Crisis Inquiry Commission, former Federal Reserve Chairman Ben
    Bernanke said the most prominent trigger of the 2007-08 global
    financial crisis ``was the prospect of significant losses on
    residential mortgage loans.'' Chairman Bernanke explained,
    ``When house prices declined, the equity of those homeowners
    was quickly wiped out; in turn, `underwater' borrowers who owed
    more than their houses were worth were much more likely to
    default on their mortgage payments.''
        The National Climate Assessment found it is likely that
    ``between $66 billion and $106 billion worth of real estate
    will be below sea level by 2050; and $238 billion to $507
    billion, by 2100.'' It is reasonable to expect that frequent
    and intense coastal property damage under such scenarios will
    drastically reduce property values.
        We do not need to wait to 2050 to see the impact of climate
    change on property values. Coastal flooding from sea level rise
    is already eroding property values. A recent analysis by First
    Street Foundation estimated that property value losses from
    coastal flooding in 17 States totaled almost $16 billion from
    2005 to 2017. \3\
    ---------------------------------------------------------------------------
         \3\ First Street Foundation, ``Rising Seas Erode $15.8 billion in
    Home Value From Maine to Mississippi'', February 27, 2019, available
    at: https://assets.floodiq.com/2019/02/
    9ddfda5c3f7295fd97d60332bb14c042-firststreet-floodiq-mid-atlantc-
    release.pdf.
    ---------------------------------------------------------------------------
        Has the Federal Reserve assessed the risks that extreme
    weather events pose to the U.S. housing market?

    A.8. The Board conducts an active research program on a broad
    array of topics in economics and finance. As part of this
    broader research mission, research staff write working papers
    and publish articles in peer-reviewed journals. This research
    includes studies on a number of topics that pertain to modeling
    the economic effects of severe weather events, modeling
    uncertainty and risks from such events in financial markets,
    and estimating the effects of these events on consumer and
    business activity, as well as on local and aggregate real
    estate markets. In recent years, Board economists have authored
    more than 30 papers on the impact of climate change on the
    financial sector and undertaken research on the economics of
    weather, natural disasters, climate policy, and related risks.

    Q.9. How does the Federal Reserve assess the risk of natural
    disasters that are increasing in frequency and severity on the
    loan portfolios of supervised financial institutions and the
    financial system as a whole?

    A.9. The Board's framework for monitoring the stability of the
    U.S. financial system distinguishes between shocks to and
    vulnerabilities of the financial system. \4\ Shocks are
    typically surprises and are inherently difficult to predict.
    Vulnerabilities tend to build up over time and are the aspects
    of the financial system that are most expected to cause
    widespread problems in times of stress. Thus, in our framework,
    severe weather events are treated as shocks to the system. For
    example, the possibility of large losses to property and
    casualty insurers from historically atypical timing, intensity,
    or frequency of hurricane damages represents one such potential
    shock. If that shock led to significant strains on capital
    positions of affected firms, those losses could expose or
    exacerbate other vulnerabilities, such as funding risks,
    through the firms' connections to the broader financial system.
    ---------------------------------------------------------------------------
         \4\ See Board of Governors of the Federal Reserve System,
    ``Financial Stability Report'' (May 2019), https://
    www.federalreserve.gov/publications/files/financial-stability-report-
    201905.pdf.
    ---------------------------------------------------------------------------
        While the Board's framework provides a systematic way to
    assess financial stability, some potential risks do not fit
    neatly into that framework. Some potential risks are difficult
    to quantify, especially if they materialize over such a long
    horizon that methods beyond near-term analysis and monitoring
    are appropriate. Accordingly, we rely on ongoing research by
    academics, our staff, and other experts to improve our
    understanding and measurement of such longer-run or difficult-
    to-quantify risks.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                SENATOR VAN HOLLEN FROM JEROME H. POWELL

    Q.1. One of the fundamental economic challenges of our times is
    to make sure that America families actually benefit from
    economic growth. There is a growing gap between skyrocketing
    corporate profits and CEO salaries on one side, and stagnant
    pay for typical workers on the other side. At the same time,
    President Trump is implementing policies that make the
    situation even worse, such as huge tax cuts for millionaires
    and big corporations, while taking credit for economic trends
    that predate his Administration.
        During the hearing, I asked you about data showing that for
    the typical American worker, weekly earnings are growing slower
    under President Trump than they were during President Obama's
    second term, after adjusting for inflation. According to the
    Bureau of Labor Statistics, the median usual weekly earnings
    for full-time wage and salary workers was $333 in the 4th
    quarter of 2012, just before President Obama's second term
    began. At the end of President Obama's second-term, in the 4th
    quarter of 2016, this figure was $349. Two years into President
    Trump's term, in the 4th quarter of 2018, it is $355. All of
    these figures are 1982-1984 constant dollars.
        Is it correct that median usual weekly earnings for workers
    were increasing at an average rate of 1.18 percent per year
    during President Obama's second term, compared to 0.86 percent
    since President Trump took office?

    A.1. It is correct that, according to both of the measures you
    report, inflation-adjusted labor compensation, in the
    aggregate, increased a little more rapidly from 2012:Q4 to
    2016:Q4 than from 2016:Q4 to 2018:Q4.
        I would emphasize that the result you describe--faster real
    wage gains during the 2012-2016 period--depends importantly on
    the fact that oil prices fell between 2014 and 2016 and
    partially rebounded after that. That 2014-2016 drop in oil
    prices fed through to prices of gasoline and other energy
    products, and so boosted households' purchasing power at that
    time. Because energy prices can be so variable, it is useful to
    look at real wage gains over somewhat longer periods, to help
    avoid having transitory energy price movements dominate the
    calculations.

    Q.2. During the hearing, you identified the Employment Cost
    Index (ECI) as your single favorite source for compensation
    data that includes both wages and benefits. The Employment Cost
    Index for total compensation of all civilian workers was 117.8
    in the 4th quarter of 2012, 128.0 in the 4th quarter of 2016,
    and 135.2 in the 4th quarter of 2018, when indexed to a base of
    100 for December of 2005.
        At the same time, inflation measured by the Consumer Price
    Index for All Urban Consumers (CPI-U), was 231.369 in the 4th
    quarter of 2012, 242.164 in the 4th quarter of 2016, and
    252.759 in the 4th quarter of 2018, when indexed to a base of
    100 for 1982-1984 dollars.
        Is it correct that ECI was increasing at an average annual
    rate of 2.10 percent during President Obama's second term, with
    CPI-U increasing at an average annual rate of 1.15 percent
    during this period, meaning that 0.94 percent of the average
    annual increase in ECI could be attributed to real compensation
    growth?

    A.2. See response to Question 1.

    Q.3. Is it also correct that ECI has increased at an average
    annual rate of 2.77 percent since President Trump took office,
    with CPI-U increasing at an average annual rate of 2.16 percent
    during this period, meaning that 0.60 percent of the increase
    in ECI can be attributed to real compensation growth?

    A.3. See response to Question 1.
                                    ------

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

    Q.1. Inequality--A few weeks ago, you told a group of teachers
    you were concerned that income growth for middle- and working-
    class Americans ``has really decreased,'' while ``growth at the
    top has been very strong. We want prosperity to be widely
    shared. We need policies to make that happen.''
        If Congress were able to pass policies that would increase
    the paychecks and bank accounts of working families--raise the
    minimum wage, invest in infrastructure, subsidize housing and
    child care for low-wage workers, support for unions, and make
    health care and college more affordable--what would the impact
    on the economy be? Would you see higher economic growth?
    Greater workforce participation? Changes to unemployment?
    Inflation increases?
        Are there Nations that have better fiscal policies that
    lead to higher wages you would recommend we consider? Which
    countries and which policies lead to higher wages do you think?

    A.1. Specific fiscal policy or labor market policy proposals
    that are most appropriate for the United States are best
    decided by Congress. Generally speaking, however, policies
    aimed at increasing workforce participation and raising
    productivity have the best chance at boosting economic growth
    and raising living standards for Americans across the economic
    spectrum.
        We at the Federal Reserve can play a role by conducting
    monetary policy so as to fulfill our dual mandate of maximum
    employment and stable prices. In this way, we can ensure that
    the conditions are in place to keep labor demand high and
    stable for as many workers as possible, which in turn allows
    workers to find jobs that best match their abilities and that
    provide them with the greatest opportunity to increase their
    skills, productivity, and earnings more easily.

    Q.2. Economic Mobility--Earlier this month in your speech to
    teachers, you pointed out that the United States used to be a
    global leader in mobility--the ability of people born into
    poverty to move up to the middle class or even the wealthiest
    echelons of society. You said that is no longer true. You said
    ``The U.S. lags now in mobility. And that's not our self-image
    as a country, nor is it where we want to be.''
        Are there Nations that have better fiscal policies that
    lead to more economic mobility you would recommend we consider?
    Which countries and which policies lead to greater economic
    mobility?

    A.2. Research by a number of economists suggests that
    intergenerational economic mobility in the United States lags
    that of many other advanced economies. The reasons behind this
    are complex and not well understood. The Federal Reserve can do
    its part by working to achieve its dual mandate of maximum
    employment and price stability, as full employment improves the
    resources available to lower income households.

    Q.3. During the hearing, you mentioned a carpentry program for
    women that paid more in benefits than they would receive from
    the job for which they were training. Please provide details on
    this program: where it was located, for which jobs and which
    types of programs through which the recipients received
    benefits that provided and income of more than ``$9 or $10 an
    hour.''

    A.3. Last year, I visited West Virginia Women Work, a nonprofit
    in Morgantown, West Virginia, founded in 2000 to help women
    explore, train, and secure employment in nontraditional
    occupations, especially the skilled trades. The organization
    developed the Step Up for Women Construction Pre-
    Apprenticeship, a program designed to prepare women for entry-
    level construction jobs and apprenticeships. Additional
    information on this program is available on the West Virginia
    Women Work's website at: http://wvwomenwork.org/stepup.

    Q.4. Bank Profits--Banks and other financial firms made more
    than $500 billion in profits in the first three quarters of
    2018. Banks made a record $237 billion in the fourth quarter of
    2018. These are record profits.
        It seems that finance (banks, insurance, and real estate)
    earned more than 26 percent of all domestic corporate profits
    during those first three quarters of last year. Only about 6
    percent of the private sector workforce is employed in finance
    but their share of corporate profits is about $1 in every $4
    dollars.
        Are those figures correct? How much profits did the finance
    sector earn in 2018? What did finance earn compared to other
    private sectors such as manufacturing and real estate? What
    percent of corporate profits did finance earn? What share of
    people are employed in finance compared to other sectors?
        What is the impact on the economy when financial firms earn
    such an outsized percentage of corporate profits?
        The Federal Reserve tracks a number of indicators of our
    Nation's economic prosperity. If you were to prioritize the top
    five indicators of economic prosperity, would bank
    profitability be in the top five?

    A.4. Data from the Bureau of Economic Analysis (BEA) indicates
    that, in the first three quarters of 2018, the corporate
    financial sector (including finance, insurance, bank, and other
    holding companies, but excluding Federal Reserve Banks)
    reported profits of $387 billion at an annual rate of 1.9
    percent of U.S. gross domestic product (GDP), on average. \1\
    Data from the Federal Deposit Insurance Corporation (FDIC)
    indicates that FDIC-insured commercial banks and savings
    institutions earned profits of $237 billion in all of 2018.
    ---------------------------------------------------------------------------
         \1\ On March 28, 2019, the BEA reported the profits for the fourth
    quarter of $372 billion at an annual rate of 1.8 percent of GDP.
    ---------------------------------------------------------------------------
        During the first three quarters of 2018, the corporate
    financial sector accounted on average for 24.8 percent of
    profits generated by the domestic corporate sector, according
    to data from the BEA. During the postrecession period, there
    has been no discernible increasing or decreasing trend in the
    fraction of corporate domestic profits generated by the
    financial sector or in other domestic sectors. For example, the
    manufacturing sector has been responsible, on average, for 22
    percent of the domestic corporate sector's profits. The
    manufacturing sector's share was 14.9 percent in the first
    quarter after the last recession (2009 Q3). Its share then
    reached a peak value of 28.l percent in the last quarter of
    2013, and in the third quarter of 2018, its share was 18.4
    percent.
        Data from the Bureau of Labor Statistics (BLS) indicate
    that the financial corporate sector's share of total private
    employment has declined slightly since the financial crisis,
    from 5.4 percent in 2009 to 4.9 percent in 2018. Over the same
    period, the share of manufacturing sector employment also has
    declined a bit, from 10.8 percent to 10 percent. By contrast,
    the professional, scientific, and technical services sector's
    share of total private employment has increased from 15.3
    percent to 16.6 percent.
        Total profits relative to the number of total employees in
    the corporate financial sector was $62,250 per employee in the
    third quarter of 2018. This relatively high profitability per
    worker is typical of sectors that rely on intangible assets to
    create value. Intangible assets include, but are not limited
    to, reputational and institutional capital, brand value, and
    patents. As an example, in the third quarter of 2018, the
    profit-to-employees ratio for information technology and
    chemicals (dominated by pharmaceuticals)--two intangible-
    intensive sectors--were $57,619 per employee and $56,915 per
    employee, respectively.
        It is difficult to assess the range of economic
    consequences derived from the degree of profitability of the
    financial sector, particularly because the size and
    profitability of the corporate sector are themselves the result
    of other economic forces. For example, the corporate financial
    sector has increased in importance in the U.S. economy during
    the postwar period. Academic research suggests that this rise
    is itself a consequence of the increase in the volume of
    intermediation to support economic activity, especially
    business credit, equity, and household credit. \2\
    ---------------------------------------------------------------------------
         \2\ See Thomas Philippon, ``Has the U.S. Finance Industry Become
    Less Efficient?'' American Economic Review, 105(4), 2015.
    ---------------------------------------------------------------------------
        In general, profits in the banking sector are important to
    the extent that they contribute to building and maintaining the
    capital adequacy of the financial system. We view the
    resilience of bank capital as a fundamental element of
    financial stability and the health of the credit markets that
    support the U.S. economy. More generally, in the Federal Open
    Market Committee's (FOMC) conduct of monetary policy, to best
    achieve its maximum employment objective and its symmetric 2-
    percent inflation objective, the Committee takes into account a
    wide range of information, including measures of labor market
    conditions, indicators of inflation pressures and inflation
    expectations, and financial and international developments.
    Bank profitability is only one of numerous factors that
    influence the FOMC's assessment of overall economic conditions.

    Q.5. Buybacks--We need investments that help families prosper.
    Instead, the majority of the Trump and GOP tax bill has gone to
    share buybacks--$171 billion worth have been announced so far
    in 2018--more than double 2017's total. This keeps stock
    markets high. Financial Times' columnist, Rana Foroohar, refers
    to the buybacks as a ``financial shell game of issuing their
    own [corporate] debt at very cheap rates and handing the money
    back to their investors as buybacks and dividends, while also
    buying up the higher-yielding bonds of riskier companies at a
    favorable spread and holding those assets offshore.''
        What happens when the buybacks stop?

    A.5. While it is too early to conclude the overall effects of
    the 2017 tax legislation on firm investment and share
    repurchase decisions, it is likely that companies allocated at
    least some portion of earnings repatriated from abroad to share
    buybacks following changes in the tax treatment of foreign
    earnings. In dollar volume, share buybacks in 2018 were up
    substantially from 2017 and are at their highest annual level
    on record since 1983. However, when measured relative to
    operating earnings, share buybacks appear somewhat closer to
    their historical range. For the first three quarters of 2018,
    buybacks for nonfinancial companies averaged about 22 percent
    of companies' operating income, and we estimate, based on
    partial data available to date, that buybacks were 26 percent
    of operating income in the fourth quarter. By comparison, share
    buybacks also averaged 22 percent of operating income from 2014
    to 2016, but buybacks fell to 16 percent of operating income in
    2017.
        Companies generally repurchase shares when they deem these
    repurchases to be the highest value use of those particular
    funds for the company. U.S. companies have been quite
    profitable in recent decades and those profits have allowed
    companies to accumulate cash, pay dividends, and repurchase
    shares, in addition to investing and hiring.
        A reduction in share repurchases would not, however,
    necessarily translate into an increase in investment. For
    example, in lieu of share buybacks, a given company may choose
    to distribute funds to shareholders by other means (e.g.,
    regular or special dividends) or retain a larger share of the
    funds by accumulating cash or other liquid assets.

    Q.6. Discrimination in Lending--These questions follow up on
    our discussion during the hearing about how Fed examiners
    evaluate financial institution for fair lending compliance.
        Please expand on the type of indicators or red flags
    examiners look for in determining compliance with the Equal
    Credit Opportunity Act or the Fair Lending Act? It's not just
    credit scores and loan-to-value ratios. What types of lending
    products? Would examiners consider incentive pay tied to
    higher-priced loans? Would the existence of bonuses for bank
    staff that provided a loan with higher fees and interest rates
    be a red flag? Please be specific and comprehensive in your
    response.

    A.6. The Federal Reserve's fair lending supervisory program
    reflects our commitment to promoting financial inclusion and
    ensuring that the financial institutions under our supervision
    fully comply with applicable Federal consumer protection laws
    and regulations. For all State member banks, we enforce the
    Fair Housing Act which provides us authority to review all
    Federal Reserve regulated institutions for potential
    discrimination with respect to mortgages, including potential
    redlining, pricing, and underwriting discrimination. For State
    member banks of $10 billion dollars or less in assets, we also
    enforce the Equal Credit Opportunity Act (ECOA), which provides
    us authority to review these State member banks for potential
    discrimination concerning any credit product. Together, these
    laws prohibit discrimination on the basis of race, color,
    national origin, sex, religion, marital status, familial
    status, age, handicap/disability, receipt of public assistance,
    and the good faith exercise of rights under the Consumer Credit
    Protection Act (collectively, the ``prohibited basis'').
        We evaluate fair lending risk at every consumer compliance
    exam based on the risk factors set forth in the Federal
    Financial Institutions Examination Council's interagency fair
    lending examination procedures. \3\ These procedures include
    risk factors related to potential discrimination in pricing,
    underwriting, redlining, and steering. Our examiners commonly
    review mortgage products and consumer products reportable under
    the Home Mortgage Disclosure Act for fair lending risk,
    although a State member bank's lending record will determine
    the loan products that are reviewed in a particular exam.
    ---------------------------------------------------------------------------
         \3\ See https://www.ffiec.gov/pdf/fairlend.pdf.
    ---------------------------------------------------------------------------
        The presence of any financial incentives, including
    incentive pay tied to higher-price loans or bonuses for staff
    originating such loans, is a risk factor that the Federal
    Reserve considers, consistent with the interagency fair lending
    procedures. Since April 2011, Regulation Z's mortgage loan
    originator compensation rule has prohibited banks from
    providing financial incentives based on the terms or conditions
    of a loan, including the price. Although this rule has
    decreased the risk of financial incentives influencing mortgage
    pricing, it has not eliminated such risk. In our outreach
    efforts to State member banks and the public, including in our
    publication, Consumer Compliance Supervision Bulletin, \4\ we
    have been clear in explaining how fair lending risk may be
    increased by financial incentives. During our consumer
    compliance exams, we continue to evaluate any financial
    incentives in place at a State member bank for compliance with
    both Regulation Z and the fair lending laws by reviewing the
    bank's compensation structure along with any other existing
    fair lending risk factors.
    ---------------------------------------------------------------------------
         \4\ See www.federalreserve.gov/publications/2018-july-consumer-
    compliance-supervision-bulletin.htm.

    Q.7. Climate Change--Chapter 3 of the Monetary Report includes
    a section on Uncertainty and Risks. It includes uncertainty
    about the funds rate and the impact of trade and tariffs but
    nothing about climate change. A recent paper by V.V. Chari of
    the Federal Reserve of Minneapolis \5\ urged social scientists
    to take the findings of climate scientists about the effects of
    global warming on the atmosphere, climate, land, and oceans and
    understand and communicate the consequences of these physical
    changes on the economic, social, and political well-being of
    humanity.
    ---------------------------------------------------------------------------
         \5\ Chari, V.V., ``The Role of Uncertainty and Risk in Climate
    Change Economics''. The Federal Reserve Bank of Minneapolis: Research
    Division. December 2018. Available at: https://www.minneapolisfed.org/
    research/sr/sr576.pdf.
    ---------------------------------------------------------------------------
        Central Banks and economists have a role to play to guide
    policy recommendations to respond to climate change. Last year,
    William Nordhaus and Paul Romer received the Nobel Memorial
    Prize in Economic Sciences for pioneering the analysis of the
    economic effects of climate change.
        Do you agree with Janet Yellen who, along with 3,300
    economists, signed a statement supporting a carbon tax to
    prevent devastating droughts, fires, and hurricanes? \6\
    ---------------------------------------------------------------------------
         \6\ Jackson, Hugh, ``Did AOC Nudge Economists (Including 12 From
    Nevada) To Back a Carbon Tax?'' Nevada Current. February 20, 2019.
    Available at: https://www.nevadacurrent.com/2019/02/20/did-aoc-nudge-
    economists-including-12-from-nevada-to-back-a-carbon-tax.

    A.7. I think that it is appropriate for the details of fiscal
    ---------------------------------------------------------------------------
    policy decisions to be left to Congress and the Administration.

    Q.8. What role will the Federal Reserve play in communicating
    the effects of alternative policies aimed at addressing climate
    change? Will the Fed include economic models to respond?

    A.8. Addressing climate change is a responsibility that
    Congress has entrusted to other agencies. That said, the
    Federal Reserve uses its authorities and tools to prepare
    financial institutions for severe weather events. Over the
    short term, these events have the potential to inflict serious
    damage on the lives of individuals and families, devastate
    local economies (including financial institutions), and even
    temporarily affect national economic output and employment. As
    such, these events may affect economic conditions, which we
    take into account in our assessment of the outlook for the
    economy.
                                    ------

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

    Q.1. In November, the Minneapolis Fed reported that the number
    of farms filing for Chapter 12 bankruptcy has doubled in Ninth
    District States over the past 4 years. We have watched this
    problem evolve for years. The overproduction of certain
    commodities like grains and dairy has led to low prices which,
    combined with recent trade disputes, has made it nearly
    impossible for family farms to turn a profit. In the years
    following the Great Recession, low interest rates made it
    easier for farmers to take on debt, upgrade equipment and
    facilities, and buy new land. Steadily rising interest rates in
    the last 3 years have made it more difficult for farmers with
    already small margins to pay off their debts. The Beige Book
    put out by the Minneapolis Fed in the fourth quarter of 2018
    says that approximately three in five lenders reported seeing a
    decrease in farm incomes and in capital spending. It is clear
    that downturns in the farm economy can have big impacts on
    consumer spending and regional economic prosperity.
        How do you expect the rise in farm bankruptcies to impact
    the state of our economy, both regionally and nationally?

    A.1. The U.S. farm economy has remained in a prolonged downturn
    for the past several years, alongside persistently low
    agricultural commodity prices. Nationally, farm income is
    expected to rise in 2019 due, in part, to Government support
    programs announced in recent months. Some agricultural prices
    have also increased significantly due to widespread weather
    disruptions that affected planting in May and June. Looking
    ahead, however, agricultural commodity prices and farm incomes
    are generally expected to remain low beyond 2019.
        Amid reduced incomes, financial stress in the agricultural
    sector has continued to build at a gradual pace. At commercial
    banks, delinquencies on farm loans have increased slightly in
    recent years, but remain less than in 2010, and well below
    those of the 1980s, a period often referred to as the U.S. farm
    crisis, which included a number of bank failures and other
    significant challenges in rural communities.
        Similar to the uptick in delinquencies on farm loans, farm
    bankruptcies also have edged higher since 2014. Nationally,
    Chapter 12 bankruptcy filings have increased from 360 in 2014
    to 498 in 2018. The increase in bankruptcies appears to be most
    pronounced in States with a high concentration of dairies, as
    well as States focused on corn and soybean production. In
    Minnesota, for example, there were an average of thirteen
    Chapter 12 filings per year from 2014 to 2017, increasing to
    twenty-six in 2018.
        Despite the ongoing challenges of low farm incomes and an
    uptick in farm bankruptcies, measures of solvency have
    generally remained strong, and the increase in bankruptcies
    appears to be having a limited effect on broader economic
    conditions. The debt-to-asset ratio for the U.S. farm sector is
    expected to rise only slightly in 2019 to 13.9 percent, as farm
    real estate values remain relatively stable. Although the
    severe planting delays this spring may affect financial
    conditions for some producers, Government payments will provide
    some support and, thus far, there appears to be limited impacts
    on broader regional economies. Moreover, unemployment has
    remained historically low, even in rural areas focused on
    agriculture, where job growth has been weaker in recent years.
    As these conditions evolve, the Board of Governors of the
    Federal Reserve System (Board) will continue to monitor
    developments in agriculture and the potential for implications
    in other segments of the national or regional economy.

    Q.2. Can you speak to how future changes in the Federal funds
    rate may impact the agricultural economy?

    A.2. While it cannot be said with certainty what actions will
    be taken in response to the future state of the economy, the
    Federal Reserve System strives to incorporate perspectives from
    all regions of the country and from a broad range of
    industries, including agriculture, into its regular monetary
    policy deliberations and its assessments of the U.S. economy.
    We receive input on agricultural conditions from business
    contacts across the country through our boards of directors at
    the Federal Reserve Banks, various advisory councils, and
    surveys, in addition to reports from staff who track
    developments in U.S. agriculture.
        Although interest rates on farm loans are typically not
    indexed or explicitly tied to the Federal funds rate, the rates
    on these loans have increased in recent years. The increases
    have been relatively modest, and some financial stress has been
    mitigated by the relative strength of farm real estate values.
    Since the end of 2015, the average interest rate on farm
    operating loans at commercial banks has increased about 1.9
    percent, but still remains less than prevailing interest rates
    on these farm loans as recently as 2012.
        Interest expenses on farm debt also account for a
    relatively small share of overall expenses in the U.S. farm
    sector. Moreover, despite the modest increase in interest
    rates, farm real estate values have remained relatively strong
    and have supported farm borrower balance sheets.

    Q.3. Wage growth has been stagnant for many Americans over the
    last decade or longer. One of the causes of this concerning
    slowdown has been a decline in worker productivity growth--only
    about 1 percent annually over the last decade. This figure is
    well below historic norms and is not, in my estimation,
    sustainable if we want strong, long-term wage growth.
        Why is there slower growth in productivity?

    A.3. The reasons for the slowing in productivity growth over
    the last decade or so are not clear. Some explanations assign a
    large role to the Great Recession and its aftermath, which
    dramatically reduced the level of investment in equipment,
    software, and research and development, and which also likely
    reduced credit available for business startups. Other research
    suggests, instead, that the slowing occurred prior to the Great
    Recession and may be due to a relative scarcity of new,
    general-purpose, high-impact technologies. If the slowdown has
    been due largely to factors associated with the Great
    Recession, then as the expansion continues, productivity growth
    should pick up. Last year, productivity did rise at a
    relatively robust rate of nearly 2 percent, but we would need
    to see this higher rate of growth persist before concluding
    that the period of low growth was behind us.

    Q.4. To what extent, if any, is this slowdown affected--either
    now or potentially in the future--by high levels of stock
    buybacks crowding out investment in workforce, technology and
    capital improvements?

    A.4. Companies generally repurchase shares when they deem these
    repurchases to be the highest value use of those particular
    funds for the company. U.S. companies have been quite
    profitable in recent decades, and those profits have allowed
    companies to accumulate cash, pay dividends, and repurchase
    shares, in addition to investing and hiring. Businesses without
    profitable investment opportunities are more likely to return
    income to shareholders than invest. Shareholders are then free
    to invest the funds in businesses that have profitable
    investment opportunities.

    Q.5. Around the world, countries have begun shifting to nearly
    instantaneous, 24/7 payment systems. But while consumers can
    send money in pseudo-real time using apps like Venmo, those
    transactions are only instantaneous for the consumer--they're
    usually not fully settled for the bank or retailer until days
    later. Two years ago, the Fed's Faster Payments Task Force
    embraced a goal of having a true, ubiquitous, 24/7 real-time
    payment system in the United States by 2020--which is necessary
    to keep pace with foreign countries that are developing or
    already implementing similar systems. Last year, the Fed sought
    comments on how to implement a faster payments system, and
    asked what role, if any, the Fed should play in developing it.
        Do you think the United States is on track to meet the Task
    Force's goal of having a ubiquitous real-time payment system in
    place by 2020?

    A.5. The Faster Payments Task Force (FPTF), an industry work
    group established by the Federal Reserve in 2015, called on all
    stakeholders in its 2017 final report to facilitate a vision of
    ``a payment system in the United States that is faster,
    ubiquitous, broadly inclusive, safe, highly secure, and
    efficient by 2020.'' The Federal Reserve continues to applaud
    the FPTF's aspirational goal and the industry's progress to
    date. Also as part of that final report, the FPTF requested
    that ``the Federal Reserve develop a 24x7x365 settlement
    service'' and to assess other operational roles ``to support
    ubiquity, competition, and equitable access to faster
    payments.'' The Federal Reserve agreed to consider both
    requests of the FPTF, and the Board sought, in an October 2018
    Federal Register Notice, public input on potential actions the
    Federal Reserve might take in regard to supporting faster
    payments in the United States.
        While those requests focused on infrastructure needs in the
    United States to support faster payments, the FPTF also
    identified a need for ongoing industry collaboration to build
    the foundation for a highly functioning faster payments
    ecosystem and asked the Federal Reserve to facilitate an
    industry group to establish a governance framework. Late last
    year, the industry announced the formation of the U.S. Faster
    Payments Council to develop collaborative approaches to
    accelerate U.S. adoption of faster payments.
        All of these efforts by the Federal Reserve and industry
    are intended to create a strong foundation for collective
    efforts to promote the safety and efficiency of faster payments
    in the United States and to support the modernization of the
    financial services sector's provision of payment services.

    Q.6. With the 2020 deadline quickly approaching, when do you
    expect the Fed to take next steps on this issue?

    A.6. The Board has received over 400 comment letters from a
    broad range of market participants and interest groups,
    including consumer groups, in response to the October 2018
    Federal Register Notice. The Board is carefully considering all
    of the comments received before determining whether any action
    is appropriate or the timing of such potential action. Any
    resulting action the Board decides to take would be pursued in
    alignment with existing, longstanding Federal Reserve
    principles and criteria for the provision of payment services.

    Q.7. Are you monitoring actions of foreign countries to develop
    real-time payment systems, and if so, how are those
    developments informing your decision making?

    A.7. Globally, the Federal Reserve is not unique in considering
    settlement infrastructure to support faster payments--several
    jurisdictions around the world have undertaken similar
    processes and implemented settlement infrastructures to support
    real-time payments in their jurisdictions. The Federal Reserve
    has been actively monitoring these efforts and considering the
    models for faster payment settlement in other countries,
    including real-time gross settlement (RTGS) and deferred net
    settlement (DNS), as part of its analysis.

    Q.8. You remarked recently that income inequality is our
    country's biggest economic challenge in the next decade--and
    said that: ``We want prosperity to be widely shared,'' and,
    ``We need policies to make that happen.'' I agree with this
    assessment. Many have pointed to the recent strength in both
    the U.S. stock market and overall GDP growth as evidence that
    Americans are doing better. But I'm not sure these are the
    right indicators to be looking at to assess how the average
    American family is faring these days. The recent stock market
    highs and tax cut legislation do not benefit the average
    American household to nearly the same extent as it benefits the
    very wealthiest households. In 2016, the top 10 percent of
    American households owned 84 percent of all stocks, and the top
    20 percent received about 70 percent the benefits of the 2017
    tax bill. Banks have done well in this economy too--with last
    years' profits up 44 percent from 2017, including $29 billion
    in profits attributable to the Trump tax cuts alone. But
    instead of steering these profits and tax windfalls toward new
    investment in jobs and technology, banks and corporations have
    instead rewarded wealthy investors with record stock buybacks--
    over $1 trillion worth in 2018.
        Would you say that the 2017 tax bill, on balance, has
    increased or decreased income and wealth inequality in the
    U.S., and would you consider it an example of a policy that
    creates the ``widely shared prosperity'' that you called for
    recently?

    A.8. For a number of reasons, estimates of the distributional
    effects of the Tax Cuts and Jobs Act of 2017 are subject to
    considerable uncertainty. For example, the changes in the
    personal income tax laws were very complicated and have
    affected different families in various ways, in part reflecting
    the new limits on deductibility of State and local income taxes
    and the end of personal exemptions. Similarly, the
    distributional effects of corporate income taxes are very
    complex. A corporate income tax cut may benefit working people
    if the tax cut induces more investment that results in higher
    productivity and real wages. But estimating the magnitude of
    these effects from tax cuts is highly uncertain. More
    generally, policies to reduce economic inequality, including
    tax policies, are appropriate for Congress to decide.

    Q.9. How committed is the Fed to studying the macroeconomic
    effects of our record-high levels of inequality, and how are
    the findings being incorporating into the Fed's policymaking
    and its assessment of the economic outlook?

    A.9. The Federal Reserve tries to understand the root causes
    and economy-wide implications of the uneven distribution of
    income and wealth. For example, we support two household
    surveys, the annual Survey of Household Economics and Decision
    Making (SHED) and the triennial Survey of Consumer Finances
    (SCF), to study household finances. In addition, we recently
    released the Distributional Financial Accounts, which we also
    hope will add to our understanding of changes in the income and
    wealth distributions. And, we have included analyses of various
    forms of economic disparities in several recent issues of the
    Federal Reserve's Monetary Policy Report. With regard to
    monetary policy, the Federal Reserve is limited in the extent
    to which its tools can specifically address inequality.
    However, our dual mandate includes maximum employment, which
    has a direct impact on the most vulnerable families who depend
    on their labor income. More generally, and regardless of its
    effects on growth, inequality is an important and complicated
    issue that is appropriately addressed by Congress.

    Q.10. Recent Bureau of Labor Statistics data has shown
    unemployment rates to be approaching record lows--hovering
    around 4 percent. But the headline picture obscures key
    compositional effects. When these numbers are broken down by
    race, we see significant disparities, with notably higher
    unemployment rates for African Americans and other
    traditionally marginalized communities. Compared to white
    unemployment, which remains below 4 percent, black and hispanic
    workers face 6.8 percent and 4.9 percent unemployment rates,
    respectively. These disparities reflect structural barriers but
    also demonstrate that there is some slack in the labor market
    with the potential to reintegrate traditionally marginalized
    individuals into the labor force. The Fed has suggested
    previously that as a whole, the economy is at or near full
    employment.
        Are communities of color at full employment as well?

    A.10. The unemployment rate has fallen sharply in recent years
    for all major racial and ethnic groups. In particular, the
    unemployment rate of African Americans recently reached its
    lowest level on record (data began being collected in the early
    1970s). Despite these encouraging developments, as you note,
    the unemployment rate of black workers remains well above that
    of whites. This troubling differential in unemployment rates is
    not new; it has persisted for several decades, regardless of
    the state of the business cycle. Indeed, one relevant study \1\
    prepared by Federal Reserve staff made two important findings.
    First, the black-white unemployment rate gap is highly
    cyclical, widening in recessions and narrowing in expansions.
    That said, beyond the cyclical variation, there has been very
    little secular improvement in this gap in the past four
    decades. Second, the black-white unemployment rate gap--as well
    as its cyclicality--is primarily driven by large and persistent
    differences in the rate of job loss (rather than in the rate of
    job finding) between black and white workers. In particular, in
    economic downturns, black workers lose their jobs at a much
    higher rate than white workers, perpetuating large gaps in
    unemployment rates.
    ---------------------------------------------------------------------------
         \1\ Cajner, Tomaz, Tyler Radler, David Ratner, and Ivan Vidangos
    (2017), ``Racial Gaps in Labor Market Outcomes in the Last Four Decades
    and Over the Business Cycle'', Finance and Economics Discussion Series
    2017-071. Washington: Board of Governors of the Federal Reserve System,
    https://www.federalreserve.gov/econres/feds/files/2017071pap.pdf.
    ---------------------------------------------------------------------------
        One important implication is that the Federal Reserve can
    be most helpful by focusing on our dual mandate of fostering
    full employment and price stability. Setting monetary policy
    that is not consistent with the dual mandate could lead to high
    price inflation or financial imbalances, and thereby set the
    stage for an economic downturn, which would appear to be
    especially harmful to African American workers. Meanwhile,
    progress to further narrow the differentials in unemployment
    rates by race and ethnicity is more likely to be found in
    structural policies aimed at addressing longer-run disparities.
    This is an important issue that is appropriately addressed by
    Congress.

    Q.11. How does the Federal Reserve and the FOMC consider
    disparities in the headline unemployment data when it comes to
    fulfilling its maximum employment mandate?

    A.11. In setting monetary policy to be consistent with the dual
    mandate of maximum employment and price stability for the
    economy as a whole, the Federal Open Market Committee (FOMC)
    considers a range of experiences and economic outcomes across
    the country. For example, at every FOMC meeting, Reserve Bank
    presidents describe economic conditions in their Districts, and
    the Committee reviews a wide range of information on the
    strength of the labor market, including data on the labor
    market conditions experienced by different demographic groups.
    Similarly, in advance of every FOMC meeting, Federal Reserve
    staff provide to the Committee their review of labor market
    developments, including analyses of labor market conditions
    across groups defined by age, gender, race, and ethnicity.
    Finally, Federal Reserve staff regularly conduct research aimed
    at better understanding differences in economic outcomes across
    demographic groups; the study cited previously is one example.

    Q.12. One of most important powers given to FSOC in Dodd-Frank
    was the ability to subject nonbank financial institutions to
    the same enhanced regulatory scrutiny as the largest banks.
    This power is crucial for keeping our financial system safe.
    Large nonbank firms like AIG played a major role in crashing
    our economy in 2008 through their risky bets and excessive
    leverage, and they were able to do so largely beyond the reach
    of the existing regulatory regime. Despite the importance of
    this regulatory power, as of October 2018, all four nonbank
    SIFIs have been dedesignated--leaving no nonbank institution,
    no matter how large or how risky, under higher scrutiny from
    regulators to protect our Nation's financial stability. Most
    recently, both MetLife and Prudential have successfully fought
    to shed their enhanced SIFI oversight--but not by significantly
    deleveraging and radically changing their business models like
    GE Capital and AIG did. The Treasury Department under Secretary
    Mnuchin proposed in a 2017 report that FSOC's systemic risk
    oversight of nonbanks should shift to an activities-based
    approach rather than an entity-based approach, which would make
    it more difficult and time-consuming to place SIFI status on a
    nonbank entity. Former Chair Yellen, however, argued in a
    Brookings interview last month that individual nonbank entities
    do pose systemic risks, and when they do so it is important to
    supervise and regulate them.
        Do you today believe that no nonbank financial institution
    currently warrants SIFI-level enhanced supervision, and do you
    agree with the 2017 Treasury report proposing to make it more
    difficult for FSOC to impose SIFI designations on nonbank
    entities?

    A.12. Maintaining stability of the U.S. financial system
    remains a top priority for the Federal Reserve. The Federal
    Reserve actively monitors potential risks to U.S. financial
    stability in a variety of ways, including reviewing the
    resilience of key financial intermediaries. As noted in the
    Federal Reserve's Financial Stability Report, the largest U.S.
    banks remain strongly capitalized; the leverage of broker-
    dealers is substantially below precrisis levels; insurance
    companies appear to be in relatively strong financial
    positions; and hedge fund leverage appears to have declined.
    \2\
    ---------------------------------------------------------------------------
         \2\ See ``Federal Reserve Board Financial Stability Report''
    (April 2019), https://www.federalreserve.gov/publications/files/
    financial-stability-report-201905.pdf.
    ---------------------------------------------------------------------------
        In terms of nonbank designations, the Financial Stability
    Oversight Council's (FSOC's) October 2018 decision to rescind
    the designation of Prudential Financial, Inc. (Prudential) was
    based upon its reevaluation of the risks posed by the firm.
    This reevaluation determined that the original designation
    likely overstated the negative consequences of potential asset
    liquidation should Prudential experience material financial
    distress. For MetLife, Inc., in March 2016, the U.S. District
    Court overturned FSOC's determination that MetLife poses a
    threat to U.S. financial stability. It should be noted that, in
    the summer of 2017, MetLife shrank substantially by spinning
    off a portion of its U.S. retail life insurance and annuity
    segment into Brighthouse Financial.
        The FSOC published proposed amendments to its guidance on
    nonbank financial company determinations for public comment on
    March 6, 2019. The proposed guidance, which was drafted
    following the 2017 Treasury report, promotes an activities-
    based approach for identifying and mitigating risks to
    financial stability. However, FSOC also maintains the important
    tool of designating individual entities as systemically
    important in cases where the activities-based approach cannot
    address the potential risks or threats. The proposed guidance
    represents a disciplined framework that can more effectively
    identify and address underlying sources of risk to financial
    stability.
        Still, individual nonbank entities can pose systemic risks,
    and therefore it is critical that FSOC maintains the option to
    designate these firms when appropriate. The activities-based
    approach described in the proposed guidance is intended to
    enhance the FSOC's process for evaluating individual nonbank
    financial companies for designation by increasing transparency,
    analytical rigor, and public engagement. It is viewed as a
    valuable complement to entity designations, rather than a
    substitute for the current entity-based approach of managing
    systemic risk.

    Q.13. In the same Brookings interview, former Chair Yellen
    stated that the Trump administration's support for the SIFI
    designation standards from the MetLife court would, ``all but
    eliminate the chances of future designations''--do you agree
    with this assessment, and is it a concern for you?

    A.13. As I noted in my response above, we continue to believe
    that individual nonbank entities can pose systemic risks. The
    proposed activities-based is viewed as a valuable complement to
    entity designations, rather than as a replacement for the
    current entity-based approach of managing systemic risk.

    Q.14. In your testimony, you said ``there are some things in
    the Federal tax code where people lose their benefits with
    their first dollar of earnings,'' and you noted this effect
    could cause individuals to avoid entering the labor market.
        Specifically, which tax credits were you referring to?

    A.14. In general, safety-net programs are typically designed so
    that benefits fall as incomes rise. As a consequence, for low-
    and moderate-income households, any improvement to household
    finances from increased work is partially offset by the loss of
    benefits that occurs as household income rises. Researchers
    have found that programs with a rapid phase-out of benefits and
    the interaction among various safety-net programs sometimes
    leads to relatively high effective marginal tax rates. This, in
    turn, may discourage work, particularly for potential second
    earners. Researchers have found that programs where the phase-
    out range is relatively long reduce potential disincentive
    effects.
        It is up to Congress to determine how best to ensure
    safety-net programs provide the lowest work disincentives as
    possible while still achieving the social goals of the
    programs. For our part, the Federal Reserve is focused on
    pursuing our congressionally mandated goals of maximum
    employment and price stability, and making the best decisions
    we can in the interest of the public.
                                    ------

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

    Q.1. Arizonans continue to be concerned about the
    Administration's trade policy. This unnecessary trade war hurts
    Arizona farmers and businesses, stifling job creation. On
    February 17th, the Commerce Department submitted its national
    security report to the President under Section 232 of the Trade
    Expansion Act.
        While the details of this report aren't public and the
    President is not necessarily bound by the report's
    recommendations, it is possible that this report recommends
    additional tariffs on automobiles and automobile parts, levied
    as high as 25 percent.
        What is your assessment on the effect these additional
    tariffs would have on investment, the labor market, and the
    economy overall--both in Arizona and nationally?
        Modeling all but certain retaliatory tariffs from impacted
    Nations, which have historically targeted American farmers and
    agriculture.
        What is your assessment on the collective effect this
    decision to escalate the trade war would have on investment,
    the labor market, and the economy overall--both in Arizona and
    nationally?

    A.1. In response to both of your questions, it is important to
    note that the Federal Reserve Board is responsible for
    formulating monetary policy to achieve price stability and
    maximum sustainable employment. Matters of trade policy are the
    responsibility of Congress and the Administration.
        In pursuit of our mandated objectives, we monitor the
    effects of various developments, including trade policy, on the
    economy. Tariff increases, by both the United States and other
    countries, already have affected individual businesses and
    industries. As indicated in the Federal Open Market Committee
    minutes and the Beige Book, our business contacts report that
    trade policy developments are increasing input costs and
    creating policy uncertainty, causing some firms to delay
    investments.
        Similarly, potential tariffs on the auto industry could
    raise input costs and could cause some firms to delay plans for
    investment or hiring. Such tariffs also may disrupt the
    extensive supply chains that link the auto industries in the
    United States, Canada, and Mexico. Consumers could face higher
    prices for new automobiles. However, the particular effects
    would depend on the precise implementation of tariffs and may
    be mitigated by certain types of agreements with Canada and
    Mexico.
        Retaliatory tariffs by other countries have impacted
    certain U.S. industries, most notably agriculture, with farmers
    facing lower demand and prices for their crops, such as
    soybeans. Additional retaliatory tariffs could put further
    strain on farmers and other affected businesses.
        The overall process of trade negotiations is ongoing, and
    it is unclear how it will play out. If the end result is a
    world with higher tariffs in many countries, then experience
    suggests there will be negative effects for the U.S. economy as
    we miss out on some of the benefits of trade. However, if the
    end result is a world with lower trade barriers and a more
    level playing field, then the U.S. economy should benefit.
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