[Senate Hearing 116-2]
[From the U.S. Government Publishing Office]
S. Hrg. 116-2
THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS
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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
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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
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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
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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\
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\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\
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\3\ The Board voted 4-1 to maintain the level of the CCyB at zero.
See https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20190306c.
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------
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\
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\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
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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.
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------
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\
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\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
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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.
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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.
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\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.
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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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