[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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