[Senate Hearing 116-72]
[From the U.S. Government Publishing Office]
S. Hrg. 116-72
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
__________
JULY 11, 2019
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Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
______
U.S. GOVERNMENT PUBLISHING OFFICE
37-911 PDF WASHINGTON : 2019
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
Laura Swanson, Democratic Staff Director
Joe Carapiet, Chief Counsel
Catherine Fuchs, Counsel
Brandon Beall, Professional Staff Member
Elisha Tuku, Democratic Chief Counsel
Cameron Ricker, Chief 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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THURSDAY, JULY 11, 2019
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 44
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 3
Prepared statement....................................... 45
WITNESS
Jerome H. Powell, Chairman, Board of Governors of the Federal
Reserve System................................................. 5
Prepared statement........................................... 46
Responses to written questions of:
Senator Brown............................................ 49
Senator Rounds........................................... 50
Senator Tillis........................................... 55
Senator Moran............................................ 61
Senator Menendez......................................... 69
Senator Warren........................................... 72
Senator Cortez Masto..................................... 75
Senator Jones............................................ 76
Senator Smith............................................ 80
Senator Sinema........................................... 81
Additional Material Supplied for the Record
Monetary Policy Report to the Congress dated July 5, 2019........ 82
(iii)
THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS
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THURSDAY, JULY 11, 2019
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:02 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 now come to order.
We welcome Chairman Powell back to the Committee for the
Federal Reserve's semiannual Monetary Policy Report to
Congress.
In this hearing, the Banking Committee will evaluate the
current state of the U.S. economy, the Fed's implementation of
monetary policy, and discuss its supervisory and regulatory
activities.
In the last semiannual Monetary Policy Report, Chairman
Powell provided additional clarity on the Fed's plans to
normalize monetary policy, including how the size of the
balance sheet would be driven by financial institutions' demand
for reserves, plus a buffer.
Since then, the Fed has provided additional information and
continued receiving feedback on its monetary policy strategy,
tools, and communication, all of which I look forward to
hearing an update on today.
The U.S. economy is still strong, growing at 3.1 percent in
the first quarter of 2019, according to the Bureau of Economic
Analysis, and the unemployment rate remains low at 3.7 percent,
as of June, according to the Bureau of Labor Statistics.
Wages have continued rising, as well, with average hourly
earnings 3.1 percent higher in June compared to a year earlier,
which is the 11th straight month in which wage growth exceeded
3 percent, according to the Bureau of Labor Statistics.
In fact, the U.S. is officially in its longest expansion of
economic growth since 1854, according to the National Bureau of
Economic Research.
In order to continue this positive economic trajectory,
regulators must continually evaluate their regulatory and
supervisory activities for opportunities to tailor regulations
and to ensure broad access to a wide variety of financial
products and services.
With respect to regulation and supervision, it has been
over a year since the enactment of S. 2155, the Economic
Growth, Regulatory Relief, and Consumer Protection Act.
Mr. Chairman, as you move forward finalizing certain rules
required under S. 2155 and consider proposing new ones, I
encourage you to consider carefully the following:
Simplify capital rules for smaller financial institutions
while ensuring they maintain significant capital by setting the
Community Bank Leverage Ratio at 8 percent;
Simplify the Volcker rule, including by eliminating the
proposed accounting prong and revising the ``covered funds''
definition's overly broad application to venture capital, other
long-term investments, and loan creation, to improve market
liquidity and preserve access to diverse sources of capital for
businesses;
Harmonize margin requirements for interaffiliate swaps with
treatment by the CFTC by quickly making a targeted change to
your margin rules to enhance end users' ability to hedge
against risks in the marketplace;
Examine whether the recent proposal that applies to U.S.
operations of foreign banks is appropriately tailored and
whether regulations on intermediate holding companies should be
applied based on the assets of the intermediate holding company
alone, rather than the assets of all U.S. operations. I also
encourage you to align the foreign bank proposal with the
domestic bank proposal and exclude interaffiliate transactions
from each of the risk-based indicator calculations;
Index any dollar-based thresholds in the tailoring
proposals to grow over time to improve the rules' durability;
And modernize the Community Reinvestment Act (CRA) to
ensure banks are not ignoring their mandate to serve their
``entire communities,'' which should include legal businesses
that banks disfavor operating in their communities.
A bank responding to political pressure or attempting to
manage social policy by withholding access to credit from
customers and/or companies that it disfavors is not meeting the
credit needs of the entire community.
These approaches would promote economic growth by ensuring
that rules are balanced, work for all stakeholders, and do not
unnecessarily impede access to financial products and services
in the marketplace.
On a different topic, Facebook announced it is partnering
with both financial and nonfinancial institutions to launch a
cryptocurrency-based payments system using its social network.
The project has raised many questions among U.S. and global
lawmakers and regulators, including about its potential
systemic importance, consumer privacy, data privacy and
protection, and more.
I am particularly interested in its implications for
individuals' data privacy.
The Bank of England Governor Mark Carney said, ``Libra, if
it achieves its ambitions, would be systemically important. As
such, it would have to meet the highest standards of prudential
regulation and consumer protection. It must address issues
ranging from anti- money laundering to data protection to
operational resilience.''
I look forward to hearing more about how the Fed, in
coordination with other U.S. and global financial regulators,
plans to engage on important regulatory and supervisory matters
with Facebook throughout and after the project's development.
While Libra's systemic importance depends on several
factors in its future development, there are already some too-
big-to-fail institutions that must be addressed: Fannie Mae and
Freddie Mac.
They continue to dominate the mortgage market and expose
taxpayers in the case of an eventual downturn.
In a 2017 speech, you, Mr. Chairman, publicly referred to
Fannie and Freddie as ``systemically important.''
Although my strong preference is for comprehensive
legislation, the Banking Committee recently explored one option
for addressing Fannie and Freddie, which is for the Financial
Stability Oversight Council to designate Fannie and/or Freddie
as ``systemically important financial institutions,'' and to
subject them to Fed supervision and enhanced prudential
standards.
Chairman Powell, I appreciate you joining the Committee
today to discuss these and many other important issues.
We will now turn to Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. And, Chairman
Powell, thank you for joining us and for your public service.
The stock market is soaring, but most American families get
their money from a paycheck, not an account statement from
their stockbroker.
A critical part of your job, Mr. Chairman, is measuring and
evaluating the economy, and those measurements need to take
into account workers, not just wealth. Talk to workers who have
not had a meaningful raise in years, who have seen their
retirement cut, who watch their health care premiums rise, who
have seen the cost of their child care and their kids' college
and paying off their own student loans going up and up and up.
To those workers, to most Americans, the idea that a stock
market rally means more money in their pockets is laughable.
As the Fed's own data reveals, the economy has not helped
most Americans. Corporate profits go up and up and up;
executive compensation explodes upwards. Workers are more and
more productive, but workers do not share in the wealth that
they create. The top 1 percent have an average net worth of $24
million; the bottom half of all Americans each has about
$20,000. That is less than one one-thousandth of their
wealthiest neighbors. Meanwhile the share of workers who have
been unemployed for over 26 weeks continues to climb.
Mitch McConnell and Donald Trump responded a year or so ago
by giving the wealthiest Americans and multinational
corporations a $2 trillion bonus. Those corporations turned
around and funneled the money back to their executives through
stock buybacks.
We are in the midst of the longest economic expansion in
modern times, beginning, frankly, around the time this
Committee decided to rescue the auto industry. We know interest
rates are low, yet it is worrying that interest rate-sensitive
sectors of the economy that provide good-paying jobs, like the
auto industry, are not doing better. Employment in auto
manufacturing, critical to Ohio and the industrial Midwest,
continued to fall in June.
The Fed's policies should ensure that everyone who
contributes to the economy also shares in the wealth that they
create. All work has dignity. We need an economy that rewards
and honors work, not just wealth.
Some of the challenges facing our economy can only be
addressed by Congress. Millions of Americans struggle to pay
for prescription drugs, which are increasing at five times the
rate of inflation. Yet the White House looks like a retreat for
drug company executives. Too many feel the squeeze of rising
housing costs, with more than a quarter of renters spending
over half their income on housing.
The Fed cannot fix all these issues on its own. Only
Congress can.
But there are things that you can and should do to help the
economy work for the vast majority of Americans, through
careful monetary policy and doing your job of policing Wall
Street.
I appreciate, Mr. Chairman, your recent recognition that
this expansion has the potential to benefit communities that
have missed out on prior economic expansions. I hope your
comments expressing frustration that wages have not increased
as much as you expected means you will take action. I urge you
to continue with policies that both lower unemployment and
increase wages.
In previous hearings, I have raised concerns about threats
to the financial system, including the Fed's steps to weaken
the rules on the largest banks, the failure to activate the
Countercyclical Capital Buffer to prepare for the next
financial crisis, and the lack of action to address risks posed
by leveraged lending. Just this week, Deutsche Bank announced a
significant restructuring, overhauling several businesses,
cutting 18,000 jobs--almost 20 percent of its workforce. After
several failed turnarounds in recent years, Deutsche Bank's
latest effort shows it is too large and complex and has been
mismanaged and underregulated. It is not the only megabank in
that situation.
I continue to be concerned that the Fed and other banking
regulators are not doing enough. I add a new worry today to the
list: private corporations, Facebook in this case, that have
gotten carried away with their own wealth and their own power
and are now attempting to ape the role of Government, creating
their own currencies and monetary policy and payment systems.
So now, in addition to complex and risky Wall Street banks,
we face new risks from unregulated giant tech companies--armed
with vast amounts of personal data--with the intent, as far as
I can tell, of conducting monetary policy on their own terms.
You and I have a duty to serve the American people, but
these private corporations have no duty to the broader economy
or consumers. They are motivated by one thing: surely their own
bottom line. Allowing big tech companies to take over the
payments system or position themselves to influence monetary
policy would be a huge mistake and is surely a threat to our
democracy.
Too many times, when the stock market soars and banks make
money hand over fist, regulators have been complacent. As we
have seen in the past, though, bank profitability is not a
reliable indicator of a bank's true health. The stock market is
not a reliable indicator of the real economy's performance.
I hope this is not another example of the Fed taking a pass
from the responsibility to protect Americans from corporations
taking big risks with our entire financial system. It is your
responsibility, Mr. Chairman, to use your tools over monetary
policy, the payment system, and prudential regulation to
protect the financial system and make our economy work for all
Americans, not just wealthy stockholders and huge corporations.
Thank you for being here.
Chairman Crapo. Thank you, Senator Brown. And, again, thank
you, Chairman Powell, for being here with us today.
Before I turn the time over to Chairman Powell for his
statement, I want to remind our colleagues that we have a vote
at 11:00--three votes at 11 o'clock. We obviously are not going
to get through all the questions for all the Senators here in
that timeframe. Senator Brown and I will try to rotate during
that and keep the hearing going, but I would like to ask all of
our Senators to be careful, especially this time, to pay
attention to your 5-minute term on your questions so that your
colleagues can all have an opportunity to ask questions.
With that, Chairman Powell, we look forward to your
statement. Please proceed.
STATEMENT OF JEROME H. POWELL, CHAIRMAN, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Powell. Thanks very much, and good morning. Chairman
Crapo, Ranking Member Brown, and Members of the Committee, I am
pleased to present the Federal Reserve's semiannual Monetary
Policy Report to Congress.
Let me start by saying that my colleagues and I strongly
support the goals of maximum employment and price stability
that Congress has set for monetary policy. We are committed to
providing clear explanations about our policies and activities.
Congress has given us an important degree of independence so
that we can effectively pursue our statutory goals based on
objective analysis and data. We appreciate that our
independence brings with it an obligation for transparency so
that you and the public can hold us accountable.
Today I will review the current economic situation and
outlook before turning to monetary policy. I will also provide
an update of our ongoing public review of our framework for
setting monetary policy.
The economy performed reasonably well over the first half
of 2019, and the current expansion is now in its 11th year.
However, inflation has been running below the FOMC's symmetric
2-percent objective, and crosscurrents, such as trade tensions
and concerns about global growth, have been weighing on
economic activity and the outlook.
The labor market remains healthy. Job gains averaged
172,000 per month from January through June. This number is
lower than the average of 223,000 a month last year but above
the pace needed to provide jobs for new workers entering the
labor force. Consequently, the unemployment rate moved down
from 3.9 percent in December to 3.7 percent in June, close to
its lowest level in 50 years. Job openings remain plentiful,
and employers are increasingly willing to hire workers with
fewer skills and train them. As a result, the benefits of a
strong job market have been more widely shared in recent years.
Indeed, wage gains have been greater for lower-skilled workers.
That said, individuals in some demographic groups and in
certain parts of the country continue to face challenges. For
example, unemployment rates for African Americans and Hispanics
remain well above the rates for whites and Asians. Likewise,
the share of the population with a job is higher in urban areas
than in rural communities, and this gap has widened over the
past decade. A box in the Monetary Policy Report provides a
comparison of employment and wage gains over the current
expansion for individuals with different levels of education.
GDP increased at an annual rate of 3.1 percent in the first
quarter of 2019, similar to last year's pace. This strong
reading was driven largely by net exports and inventories--
components that are not generally reliable indicators of
ongoing momentum. The more reliable drivers of growth in the
economy are consumer spending and business investment. While
growth in consumer spending was weak in the first quarter,
incoming data show that it has bounced back and is now running
at a solid pace. However, growth in business investment seems
to have slowed notably, and overall growth in the second
quarter appears to have moderated. The slowdown in business
fixed investment may reflect concerns about trade tensions and
slower growth in the global economy. In addition, housing
investment and manufacturing output declined in the first
quarter and appear to have decreased again in the second
quarter.
After running close to our 2-percent objective over much of
last year, overall consumer price inflation, measured by the
12-month change in the price index for personal consumption
expenditures, or PCE inflation, declined earlier this year and
stood at 1.5 percent in May. The 12-month change in core PCE
inflation, which excludes food and energy prices and tends to
be a better indicator of future inflation, has also come down
this year and was 1.6 percent in May.
Our baseline outlook is for economic growth to remain
solid, labor markets to stay strong, and inflation to move back
up over time to the Committee's 2-percent objective. However,
uncertainties about the outlook have increased in recent
months. In particular, economic momentum appears to have slowed
in some major foreign economies, and that weakness could affect
the U.S. economy. Moreover, a number of Government policy
issues have yet to be resolved, including trade developments,
the Federal debt ceiling, and Brexit. And there is a risk that
weak inflation will be even more persistent than we currently
anticipate. We are carefully monitoring these developments, and
we will continue to assess their implications for the U.S.
economic outlook and inflation.
The Nation also continues to confront important longer-run
challenges. Labor force participation by those in their prime
working years is now lower in the United States than in most
other Nations with comparable economies. As I mentioned, there
are troubling labor market disparities across demographic
groups and different parts of the country. The relative
stagnation of middle and lower incomes and low levels of upward
mobility for lower-income families are also ongoing concerns.
In addition, finding ways to boost productivity growth, which
leads to rising wages and living standards over the longer
term, should remain a high national priority. And I remain
concerned about the longer-term effects of high and rising
Federal debt, which can restrain private investment and, in
turn, reduce productivity and overall economic growth. The
longer-run vitality of the U.S. economy would benefit from
efforts to address these issues.
Against this backdrop, the FOMC maintained the target range
for the Federal funds rate at 2\1/4\ to 2\1/2\ percent in the
first half of this year. At our January, March, and May
meetings, we stated that we would be patient as we determined
what future adjustments to the Federal funds rate might be
appropriate to support our goals of maximum employment and
price stability.
At the time of our May meeting, we were mindful of the
ongoing crosscurrents from global growth and trade, but there
was tentative evidence that these crosscurrents were
moderating. The latest data from China and Europe were
encouraging, and there were reports of progress in trade
negotiations with China. Our continued patient stance seemed
appropriate, and the Committee saw no strong case for adjusting
our policy rate.
Since our May meeting, however, these crosscurrents have
reemerged, creating greater uncertainty. Apparent progress on
trade turned to greater uncertainty, and our contacts in
business and agriculture report heightened concerns over trade
developments. Growth indicators from around the world have
disappointed on net, raising concerns that weakness in the
global economy will continue to affect the U.S. economy. These
concerns may have contributed to the drop in business
confidence in some recent surveys and may have started to show
through to incoming data.
In our June meeting, we indicated that, in light of
increased uncertainties about the economic outlook and muted
inflation pressures, we would closely monitor the implications
of incoming information for the economic outlook and would act
as appropriate to sustain the expansion. Many FOMC participants
saw that the case for a somewhat more accommodative monetary
policy had strengthened. Since then, based on incoming data and
other developments, it appears that uncertainties around trade
tensions and concerns about the strength of the global economy
continue to weigh on the U.S. economic outlook. Inflation
pressures remain muted.
The FOMC has made a number of important decisions this year
about our framework for implementing monetary policy and our
plans for completing the reduction of the Fed's securities
holdings. At our January meeting, we decided to continue to
implement monetary policy using our current policy regime with
ample reserves, and we emphasized that we are prepared to
adjust any of the details for completing balance sheet
normalization in light of economic and financial developments.
At our March meeting, we communicated our intention to slow,
starting in May, the decline in the Fed's aggregate securities
holdings and to end the reduction in these holdings in
September. The July Monetary Policy Report provides details on
these decisions.
The report also includes an update on monetary policy
rules. The FOMC routinely looks at monetary policy rules that
recommend a level for the Federal funds rate based on inflation
and unemployment rates. I continue to find these rules helpful,
although using these rules requires careful judgment.
We are conducting a public review of our monetary policy
strategy, tools, and communications--the first review of its
kind for the FOMC. Our motivation is to consider ways to
improve the Committee's current policy framework and to best
position the Fed to achieve maximum employment and price
stability. The review has started with outreach to and
consultation with a broad range of people and groups through a
series of Fed Listens events. The FOMC will consider questions
related to the review at upcoming meetings, and we will
publicly report the outcome of our discussions.
Thank you, and I am happy to respond to your questions.
Chairman Crapo. Thank you very much, Chairman Powell. I am
going to use my time to focus on the question of cryptocurrency
and the development of the new cryptocurrency payment system by
Facebook and its partners.
The Federal Reserve has played a significant role in
overseeing data protection and privacy across the U.S.
financial system, including payments. Cryptocurrency payments,
particularly those based on blockchain technology, pose a
number of new challenges for data protection and privacy and
the effective oversight of those issues. I am sure that the
members of the Federal Reserve have been looking at this, and I
would just be interested in what your understanding of this
point is of how the Federal Reserve's role for data protection
and privacy with respect to traditional financial services can
be applied to Libra and Calibra.
Mr. Powell. Thank you, Mr. Chairman. I guess I would start
by saying that we do support responsible private sector
innovation in the financial system as long as that is carried
out in a way that addresses the associated risks and preserves
safety and soundness. So the project sponsors hold out the
possibility of public benefits, including greater access to the
financial system for some. But I think we agree that Libra
raises a lot of serious concerns, and those would include
around privacy, money laundering, consumer protection,
financial stability, and those are going to need to be
thoroughly and publicly assessed and evaluated before this
proceeds.
And so we have set up a working group to focus on this at
the Fed, and we are in contact with the other regulatory
agencies. Indeed, we are in contact with central banks and
Governments around the world on this and really just getting
started. And I would just stress I think it is a great thing
that you are having a hearing on this, I guess next week. I
think it is important that this process of understanding and
evaluating this proposal be a patient one and not a sprint to
implementation.
You asked specifically about data privacy. One of the
features of this project is you would want to see a particular
regulatory body that has oversight over the whole project, and
that does not appear to be the case. There is not any one
agency that can stand up and have oversight over this. We do
not have oversight over Facebook. The privacy rules that we
apply to banks, we have no authority to apply them to Facebook
or to Libra or to Calibra, or to the Libra Association. So we
are just in the process of thinking this through, but I think
one of the notable features of the project is that the
supervision and regulation of it would fall in front of many,
many different agencies--State, national, and international--
and we need to get our arms around that for starters.
Chairman Crapo. Well, thank you, and you have actually led
into my second question on that. I was going to talk about how
we fit in all of our banking regulators, the SEC, FinCEN, CFPB,
and, frankly, going beyond even financial regulators to capture
the entire scope of not just this but many other aspects of the
data collection that is going on in the global experience that
we are having, the human experience we are having on the
Internet these days.
Do you think that we need to look at the possibility of
creating a new regulator dealing with data protection?
Mr. Powell. I think that is exactly the question we need to
be focused on, one of the many questions we need to be focused
on. It is not obvious at all from our current regulatory system
that we have in place what we need to assess and provide
oversight over this. And I expect we will be working hard on
this and, ideally, working with your staff as we explore it.
Chairman Crapo. Well, thank you, and I look forward to--I
am glad to hear that you have got a working group together and
that you are reaching out to other regulators who have a piece
of this issue and of the broader issue of data collection, and
I look forward to working with you on this.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman. And thank you for
your questions about Facebook. Clearly this alternative banking
system clearly implicates monetary policy and payments and
regulatory issues. Your concerns, I appreciate the concerns you
express.
Talk in a little more detail, if you would, Mr. Chair,
about what kinds of risks this alternative Facebook currency
would pose to ordinary people.
Mr. Powell. Well, I think you start with privacy and the
privacy of financial data, and then it moves quickly, I think,
into the question that these things become--is the blockchain
going to be so private that it becomes a vehicle for somehow
evading money-laundering rules and that kind of thing. So there
is a balance to be struck there.
In addition, the potential scale of this, given the size of
Facebook's network, means it could be essentially immediately
systemically important, and I think the company has
acknowledged that. So that means--and I would echo what you
quoted, Mr. Chairman, what Governor Carney said. That means
that this should be subject to the highest level, the highest
expectations in terms of privacy, but also prudential
regulation. And the question is: Who is going to provide that
and how and when?
I wish we had an easy answer, but that is the question.
Senator Brown. You, in response to the Chairman's question,
mentioned you have been in touch with your counterparts in
central banks. Can you tell me what you are hearing from them,
whatever publicly you can tell us what you are hearing from
other central banks, I know China and Japan and Britain? Just
your thoughts.
Mr. Powell. I think, you know, everyone wants to start with
the proposition that we want there to be innovation in the
financial system. We do not want to be, you know, just reacting
negatively to innovation. We want to find a way to incorporate
it. But there just are serious concerns all around the table on
how this will fit in our regulatory system and what it will
really mean. And so I expect we will be making quite a bit of
progress. In fact, there is a G7 meeting, Ministers and
Governors, in Paris next week, and I know it will be a topic
there. And so I think we are at the early stages, really, of
understanding--I think we understand what is in the White Paper
and that sort of thing, but what are the right ways to assure
that the public is protected, and the financial system.
Senator Brown. The working group that the two of you talked
about certainly let us know--give us regular updates on where
you are going and what you are suggesting. The Fed's latest
Monetary Policy Report says credit standards for new leveraged
loans are weak and have deteriorated further over the past 6
months. A slowdown in economic activity could pose risks to
borrowing firms and their creditors. These borrowing firms are
companies that employ millions of people, including many in the
regional sector.
How would a crash in the leveraged lending market decrease
economic activity and how would it affect employment?
Mr. Powell. Well, I think the thought is that if the
business sector as a general matter has a lot of debt,
companies that are highly levered will be more affected by an
economic downturn should one happen. They will be more likely
to cut back on capital expenditures and maybe hiring and that
sort of thing. So highly levered companies are more vulnerable
to economic shocks, and I think that is the nature of the risk
we see around leveraged lending.
We do not see it as akin to the risks that existed before
the financial crisis, which were more risks to the financial
system as such. Most of this risk is now held in market-based
vehicles which have stable funding--not all of it, but most of
it is held in that. So it is really for us a macroeconomic
risk, and we have called it out, and, you know, we are looking
hard at those vehicles and assuring that they do have stable
funding, as we believe they do, for the most part.
Senator Brown. And we need you to pay special attention to
those risks, as you know.
Let me talk for a moment about CCAR. The Fed recently
approved capital distributions from the largest banks. Not
surprisingly, you can expect the largest banks will spend tens
of billions of dollars rewarding themselves and their investors
with dividends and stock buybacks. That has been their history.
That is likely to be their future. This clearly does not help
workers and consumers. Why does the Fed continue to approve
these kind of exorbitant capital plans and direct so much money
away from the real economy?
Mr. Powell. So the sense of the stress test is that after
the shock that we apply, the global market shock in the case of
many of the largest institutions, and then the economic shock
to the others, the banks have to exceed certain minimum capital
requirements, even after this shock. And those requirements are
higher than the actual level of capital that the banks had in
2007, so they are quite high. And the shocks are quite large.
And the stronger the economy is, the biggest the shock is. That
is their obligation.
Above that, if they have capital that is well in excess of
that, or if they have--then they have the ability to pay
dividends, as long as they meet that test. It is a consequence
of the fact that we have spent a decade with stress tests and
requirements having the banks raise their capital higher and
higher and higher, and they now are in a position where they
can pay out all of their earnings for that year and still be in
compliance with the test, with a margin of error--and a margin.
So that is really where we are.
Senator Brown. Thank you.
Chairman Crapo. Senator Shelby.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Powell, thank you for your service. Thank you for
your work to keep the Federal Reserve independent of both
parties and do your job for what it was set up to be. We salute
you for that.
Mr. Chairman, before I get into a few questions, I am going
to try to stay within the 5 minutes. I have a number of
questions I would like to ask for the record, without
objection, if you would.
Chairman Crapo. Without objection.
Senator Shelby. Thank you.
You mentioned trade as a cloud perhaps on the economy, you
know, some certainty there. We all know the economy is the best
that I have seen in my lifetime at the moment. We want to
sustain that. Trade is one way to sustain it if we have
certainty there. That is not the only one. Would you elaborate
on that, how important that is to the economy?
Mr. Powell. I will. I should start by saying that we, of
course, play no role in setting trade policy and, please, no
one should construe anything we say about----
Senator Shelby. But it affects what we do in the economy,
does it not?
Mr. Powell. Yes. But it should not be construed as in any
way a criticism, because those are assigned to you and to the
Administration. But what we get from our business contacts--and
I imagine this is fairly widely the same as what you are
hearing--is if you are a manufacturing company in the United
States these days of any size, you probably have a supply chain
that goes across international lines. And that is a really
important part of your business, and so the trade negotiations
that have been going on have injected uncertainty for those
businesses into their supply chain. So many of them have moved
their supply chains. Some moved them to Mexico and then found
that Mexico might be the target of tariffs. Others are
considering what to do.
In any case, at a minimum, it is a distraction from going
out there and, you know, rolling out new products and that sort
of thing. And so it shows up a lot in the Beige Book, just
overall concerns, and I think it is weighing on the outlook. It
does seem to be weighing on the outlook. We see, you know,
weakness in manufacturing and investment and trade in the
United States, and that is where it shows up.
Senator Shelby. Your mandate as Chairman of the Fed is to
do what you can for full employment and also price stability.
Sometimes you have got to balance that. As we all know, it is
very important for our monetary system, and I think overall you
are doing a good job on that.
I do worry down the road about inflation, as you do, and so
forth. It seems to be fairly tame at the moment and so forth,
but we have observed in the past that there has been some type
of relationship in previous years between inflation rates and
unemployment rates. As unemployment goes way down, jobs, there
is pressure on wages and salaries and so forth.
Is there a new paradigm out there as far as evaluating this
today? And is it because of the global economy? Or what is it?
Because we have low unemployment, but we have at the moment not
a lot of pressure, from your testimony and what we observe, on
inflation.
Mr. Powell. The relationship between slack in the economy,
or unemployment, and inflation was a strong one 50 years ago.
If you remember, in the 1960s there was a close correlation
there, and that has gone away, and it has really been----
Senator Shelby. But we had a different economy then, did we
not?
Mr. Powell. Very different economy in so many ways, and in
this way, that really--I would say that period--at least 20
years ago that period was over, and the relationship between
unemployment and inflation became weak. It has become weaker
and weaker and weaker.
In addition to that, I think we are learning that interest
rates--that the neutral interest rate is lower than we had
thought, and I think we are learning that the natural rate of
unemployment is lower than we had thought. So monetary policy
has not been as accommodated as we had thought. So I think we
are learning all of those things. At the end of the day, there
has to be a connection because low unemployment will drive
wages up and ultimately higher wages will drive inflation, but
we have not reached that point. And in any case, the connection
between the two is quite small these days.
Senator Shelby. What is your take on the ability for the
German Nation to borrow money, their bond, at a lower rate than
we do, say a 10-year bond? Is it based on what we traditionally
know in economics as the least likelihood of default? Or what
is that? Because they are borrowing money around 2 percent
lower than we are.
Mr. Powell. I think it is a range of factors, and I would
not know them for sure. But I would say it is low inflation in
Europe. That goes into rates. It is also the amount of
quantitative easing and asset purchases that the European
Central Bank has done. It is also expectations of slower
growth. All of those things I think go into driving those
extraordinarily low European sovereign rates.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. And thank you,
Chairman Powell, for your service.
During your testimony in front of the House Financial
Services Committee, you stated that any problems that could
emerge through Libra would ``rise to a systemically important
level just because of the mere size of Facebook.'' So is
Facebook simply too big to build its own digital currency?
Mr. Powell. I think it is early to say that. I think we are
at the beginning of assessing that. But I think the size of
their network does focus your attention on the very likely
systemic importance of this currency, and that does not mean
they should not do it, but it means that--at a minimum it means
that the standards that need to be applied to it will be the
highest.
Senator Menendez. And as such, then, if Libra moves
forward, we will--is it possible that our concerns rise and
that we will have another too-big-to-fail institution tethered
to the U.S. economy?
Mr. Powell. I certainly hope not, Senator. Again, we are at
the very beginning of assessing all this. I do not know that
Facebook itself--I mean, Libra is actually 28 companies,
including Facebook. I do not know that Facebook would be too
big to fail no matter what happens with Libra.
Senator Menendez. Yeah, I was referring to Libra. Let me
ask you about this. If Libra moves forward as a cryptocurrency,
should FSOC consider classifying Libra as a nonbank SIFI?
Mr. Powell. That is a very good question. I know the FSOC
will be focusing on this. We have not had a principals meeting
at FSOC since this was announced. There have been staff level
meetings on it, though. So we will be focusing on it. It is the
Treasury Secretary's lead there. He is the Chair.
Senator Menendez. Yeah, but I would assume you would have
some comments and say on that.
Mr. Powell. Yes, absolutely.
Senator Menendez. I look forward to seeing how that
evolves.
Chairman Powell, we see what happens in countries like
Venezuela when central banks stop making decisions based on
economic data and instead change monetary policy to suit the
political goals of those in power. The results are pretty ugly.
Now, of course, I do not always think the Fed gets things
right, but our system is infinitely superior to one where the
President dictates interest rates, especially when we are
heading into elections.
President Trump has on several occasions threatened to
either fire or demote you in what is clearly an attempt to
intimidate you into taking certain actions, and I think I speak
for all of my colleagues when I say that we applaud your
efforts to keep the Federal Reserve as an independent and
nonpartisan institution.
So in your Monetary Policy Report, you talk a lot about how
uncertainty is holding back economic growth. Is it fair to say
that the President's comments about you and the Fed's monetary
policy decisions are contributing to that uncertainty?
Mr. Powell. I would be reluctant to address that. I think
we are really referring to uncertainties around trade and
global growth in what we said in the Monetary Policy Report.
Senator Menendez. OK. So then let us turn to that. If it is
trade, you noted several times that uncertainty over trade
policy is weighing on the economy. And I can tell you not a
week goes by that I do not hear from folks in New Jersey that
they are finding it harder and harder to grow their businesses
and hire more workers because of the Administration's
unpredictable trade policy.
So when you talk about ``uncertainty in trade policy,''
isn't what you are really talking about the President's
unpredictable behavior and his obsession with tariffs, which
are really just taxes on Americans? Probably the most stark
example of this is when the President put tens of thousands of
American jobs at risk by threatening tariffs on Mexico to
address an issue completely unrelated to trade. Would you agree
that threatening to put tariffs on imports from the second
largest trading partner in the world on an issue completely
unrelated to trade has increased uncertainty and held back our
economy in the past few months?
Mr. Powell. I think businesses, like people, like a settled
rule book. They like to know what the rules are so that they
can act as aggressively or carefully as they want to. And I
think when you go through a series of trade negotiations with
your major trading partners, inevitably there will be
uncertainty around that.
Again, that is not to judge whether these conversations in
any way--not to judge them in any way, but I think----
Senator Menendez. But I am not talking about----
Mr. Powell. ----that is what it is.
Senator Menendez. Excuse me, Mr. Chairman. I am not talking
about trading negotiations in general. I am talking about using
tariffs for nontrade purposes. That creates uncertainty. Every
CEO I had when we were talking about, you know, tax reform,
they would say to me, ``Regardless of what policy you come up
with, give me predictability and certainty, and I will figure
out a way to make money.'' Certainly it becomes enormously
unpredictable when tariffs are used for nontrade issues.
Mr. Powell. I think that the reaction to that was actually
pretty strong in the business community.
Senator Menendez. Thank you.
Chairman Crapo. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. Welcome back, Mr.
Chairman. Good to see you here.
I just want to follow up a little bit on a point that
Senator Menendez was making. I, too, observed parts of your
testimony before the House Financial Services Committee
yesterday, and I noted that you were asked whether you intend
to serve out the entirety of your term. And you said that you
definitely are intending to do that, and I want to say I for
one am glad to hear that that is your conclusion, in part
because I do think it is important that the Fed remain
insulated from political pressure. But I also want to say for
the record that I think you have done an outstanding job. I
would remind my colleagues, on the day that you were sworn in,
the Fed funds rate was still on a real basis very close to
zero. We had an enormous balance sheet. We had not yet exited
the extremely abnormal monetary policy that we had pursued for
about a decade. And I think that was a very dangerous
experiment, and the unwind of that had no road map. There was
no precedent. We had never experienced this before. And the
central banks in other parts of the world were not in the
process of normalizing.
And so you had to figure out a way to do that because I
think you believed that it was important to normalize. And you
went about doing that, and we went about doing some things on
our side. We did major tax reform. We rolled back some
regulation that we thought was excessive. And what is the
result? What are the results of that work? The result is the
strongest economy of my lifetime: 3 percent economic growth
last year, 3 percent in the first question of this year, record
low unemployment, record job creation. We now have more job
openings than we have people looking for work.
We helped to expand the productive capacity of the economy.
The economy has responded tremendously. And now we are seeing
an acceleration of wage gains which is strongest at the low end
of the income spectrum, so this policy and this economy is
narrowing the income gap, the wealth gap. And, Mr. Chairman, we
used to have an expression for an economy like this. We used to
call it the ``Goldilocks economy,'' strong growth, very low
unemployment, rising wages, and very low inflation. That is
exactly what you hope for in an economy.
So I am not suggesting you get all the credit for it. We
certainly do not get all the credit for it. But you were able
to normalize from this very strange experiment, and here we are
with some terrific consequences.
That leads me to my question. In light of the sovereign,
the fundamental strengths to the economy, as I see them--and I
acknowledge that there are doubts and uncertainties. There
always are. But I have to confess I have been a little
surprised to see over recent weeks that the market has
estimated about a 100-percent certainty that we are going to
get a reduction in the Fed funds rate. I am not asking you to
tell us what the Committee is going to decide to do at the end
of this month. But in light of the strength, the fundamental
strength, it is surprising to me the breadth of the consensus
that we are going to lower interest rates. And one of the
things that I wonder about is to what extent is this driven by
market-driven interest rates. So as you know, virtually the
entire Treasury yield curve is trading below the Fed funds
rates. I think you have got to go out to the 20-year maturity
to get close to where Fed funds are. And maybe that is the
private market telling us that the price of money should be
lower than it is. And I just wonder how you think about the
fixed income markets, especially the Treasury markets. To what
extent does that influence the judgment of you and your
colleagues in determining where interest rates should be?
Mr. Powell. Thank you, Senator. So we see it quite
similarly to the way you described it. The U.S. economy is in a
very good place, but we also see those uncertainties I
mentioned as weighing on the outlook, and we also see some
weakness in the United States economy that I mentioned--
housing, manufacturing, trade. And I think, you know, we have
signaled--and central banks around the world are seeing
weakness everywhere, and they are also providing more
accommodation. We have signaled that we are open to doing that,
and you are seeing that in the curve now. You are seeing that
embedded in the United States interest rate curve, the fact
that we have said that we are going to----
Senator Toomey. It seemed to me that the yield curve was
suggesting that even before.
Mr. Powell. It was, and so what does that reflect? I think
it reflected the real concerns that arose really beginning in
May. You saw business confidence surveys gapping out and, you
know, quite negative, fairly broadly. It was a bit of a
confidence shock.
Now, I think some of that has recovered, but that in part
is because we have stepped forward and indicated that we are--
you know, that is what happens, is we address that through our
policy and indicated at our last meeting that we were looking
at changing rates.
The bottom line is the economy is in a very good place, and
we want to use our tools to keep it there. It is very important
that this expansion continue as long as possible.
Senator Toomey. Thank you very much, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Tester.
Senator Tester. Thank you, Mr. Chairman, Ranking Member
Brown. I also want to echo what many of the Members have said
already, that is, thank you for the job you are doing, Chairman
Powell. I very, very much appreciate it.
I think I am going to start here. It was in 2007 or 2008
that we had a hearing in here with the Secretary of Treasury
when he said that we were on the cusp of a total financial
meltdown. We are looking at an economy that is flying right
along. We are racking up debt of $1 trillion a year. We have
got a President that puts tariffs on at whims without any exit
strategy with the tariffs. We have got allies that have been
pushed away. We are witnessing China's influence
internationally that has been incredible, plus their investment
in infrastructure in their own country. We are seeing health
care becoming unaffordable. We are seeing higher education
being unaffordable. And we have invested virtually nothing in
infrastructure in this country, especially when we look at a
21st century economy.
I remember that hearing that we had in this Banking
Committee very, very vividly because the question I asked of
the Treasury is: How come we hear about this when it is such a
crisis situation that we are looking at a financial meltdown
situation worldwide? And he had been in front of our
Committee--you are not Secretary of Treasury, but you have a
very important job. He had been in front of our Committee
before and never said a word about it.
So my question to you is: Since your job is very, very
important and looking at the underlying factors, what is the
thing that you are looking at or two or three things that you
are looking at that would tip the scale? Because I think there
are a lot of things going on right now that are very
concerning. Even as we talk about low unemployment, we also
fail to mention the fact that many of these families have to
work multiple jobs to be able to afford even to rent a house.
So could you tell me what the underlying factors are that
you are looking at that would give me assurance that this
strong economy is actually as strong as we think it is?
Mr. Powell. In terms of our economy in the near and medium
term, I think we really are in a good place. Mainly the
consumer part of the economy is pretty much intact. That is 70
percent of the economy. You have low unemployment. You have
good job creation. You have rising wages. You have people
spending. All of that is--housing is more or less sideways, and
you do not see the kind of risky problems that you saw before
the crisis. So those are all good things.
You see some weakness in the business sector here, and that
is really tied to manufacturing around the globe. That is the
thing that I worry about. If you talk to international economic
authorities, people are very concerned about global growth, and
we will feel that over time. So I would say that is the main
thing I worry about.
The other thing I worry about--and I mentioned some of
these--is just the longer-run issues that we face as a country.
We do not want to be at the bottom of the league table on labor
force participation by prime-age workers. We do not want to
have an opioid problem that keeps----
Senator Tester. That is correct. So I guess there are a lot
of things out there that are cruising along as we look at it,
and I will tell you that the infusion of $1 trillion off the
credit card every year into this economy I would say has a
pretty significant effect on its ability to grow. You give me
$20,000 a year extra, I guarantee you I am going to spend more
money and things are going to happen. But I have got to pay
that off at some point in time. Does the debt come into this
equation at all? And then if you want to address the debt
limit, potentially playing games with that, you could address
that, too.
Mr. Powell. Household debt is actually----
Senator Tester. I am talking about national debt.
Mr. Powell. National debt, that is different. I would say
the United States Federal budget is on an unsustainable path. I
think we all know that, and it is something that will have to
be addressed. At the same time, we are the world's reserve
currency. We borrow very cheaply, and there is no competitor
really at the current timeframe in terms of another reserve
currency. So what will happen, I think, is we will just spend
more and more of our precious resources paying interest on debt
as opposed to investing in the stuff that we really need.
Senator Tester. OK. I am out of time. Thank you very much.
I do have some questions for the record, and I want to talk
about the impact that these tariffs are having on ag and what
you are seeing with the bigger banks and the smaller banks.
Thank you for being here, Chairman Powell.
Senator Brown [presiding]. Senator Cotton.
Senator Cotton. Welcome back, Mr. Chairman.
Mr. Powell. Thank you.
Senator Cotton. The last time you were here, we spoke about
the labor share of income and why more profits are not going
down to regular workers. Today I would like to explore a
related concept on economic mobility. On that front, I would
like to say that I am pleased to be chairing next week a
hearing of the Economic Policy Subcommittee with Senator Cortez
Masto, the Ranking Member, on economic mobility and whether the
American Dream is in crisis.
There was an interesting article today in the Wall Street
Journal, based in part of your semiannual report, that mentions
the record expansion surprise winner--the low-skilled--and it
talks about how so many people who had been on the sidelines
have gotten back into the economy, including some of the groups
that you mentioned that traditionally have been hurt the worst
in recessions--minorities or the youth, the disabled, and so
forth. But it also says that it takes on average 8 years for
less educated workers to recover the wages they lost in the
recession. It is much shorter for college-educated or even
those more highly educated.
So, Mr. Chairman, I want to get your take on whether upward
mobility depends in part on strong economic recoveries making
it all the way into the eighth or even the ninth inning, so to
speak. And are we currently in that state of this recovery, the
eighth or the ninth inning, maybe even in extra innings?
Mr. Powell. The good news is I think that we are in those
innings, and we are seeing that, and it is very gratifying to
speak to people in low- and moderate-income communities who
work there or live there or both and have them say that they
have not seen a labor market like this really ever. It is very,
very tight, and that means employers are looking through all
kinds of blemishes on resumes and hiring people and they are
training people up and things like that. So that is really
good. That is the good news.
The bad news is, as that box indicates, that started about
8 years into this recovery, so that is not really a great
national strategy as to wait 8 years into it. We do not have
that many recoveries--or expansions, rather. You know, we need
a better strategy than that. It is working now, but ultimately
the last time we had an expansion this long was 50 years ago.
They do not tend to last this long. It also underscores again
how important it is for us to keep this going, because a couple
of more years of this, it is going to be very beneficial to
those communities.
Senator Cotton. I want to highlight your remarks a couple
months ago at a Federal Reserve conference. You noted that the
widening gap in economic status and prospects between those
with a college degree and those without one, and I will quote
more directly from your speech to illustrate just how wide that
gap has become.
``In the 1960s, well over 90 percent of working-age men
held a job, and there was very little difference in employment
between those with or without a college degree.''
``While the share of college-educated working-age men with
a job has fallen from more than 95 percent in 1967 to around 90
percent in 2017, it has plunged for others. Ninety-five percent
of male high school graduates were working in 1967, but only
about 80 percent of them were working in 2017. Among working-
age men without a high school diploma, about 90 percent had a
job in 1967 versus a bit more than 70 percent in 2017.''
That is a pretty stark difference between men with a
college degree on one hand and men without one on the other
hand. What, in your opinion, explains this new situation, Mr.
Chairman?
Mr. Powell. The way I think about this is that what is
really--a couple of major, you know, trends have been
happening, and those are really globalization and the advance
of technology. And for many of us, both of those things are
advantages. If you are on the right side of those trends,
probably this is the best time in human history for you. But
there are people who, because they do not have the training and
the skills and the background to benefit from advancing
technology, then they fall on the other side of the divide, and
that is what you are seeing. You are seeing similar patterns,
maybe not as extreme but similar patterns in other advanced
economies that have faced these same challenges.
So at the end of the day, it comes down to an educational
system and a society that produces people who have the skills
and aptitudes to benefit from technology, increasing
technology, more complicated technology. And when you have
that, you can have declining inequality and widespread
prosperity. Without it, it will be very hard to achieve.
Senator Cotton. It sounds to me like if, say, China had had
a completely open market for American manufactured goods for
the last 30 years but completely foreclosed the American market
in investment banking and management consulting, we might be
hearing a different tune, kind of those who are on the right
side of globalization right now. I will not ask you to comment
on it, though.
I will note, though, that I think immigration plays an
important role here. In the period of time you were talking
about from the 1950s to the late 1990s, less than 10 percent of
the American workforce was foreign born. Right now we are
reaching a point of our highest in over a century, and I think
it is important that we focus on immigration policy, too, the
role that it plays in blue-collar, working-class jobs,
something we will explore next week on the Economic
Subcommittee.
Thank you.
Senator Brown. Senator Warner.
Senator Warner. Thank you. Mr. Chairman, it is good to see
you again. I will make an editorial comment first.
I was proud to support you when you became Chair. You made
a commitment to me that you would realize this job and role
required an independent Fed Chair that would not be subject to
political lobbying and haranguing, whether it comes from this
end of Pennsylvania Avenue or the other end. I think you have
stuck to your guns so far, but I want you to keep sticking to
your guns.
I would like to turn to some questions about Facebook and
its proposed cryptocurrency Libra. I am a supporter of
innovation in the financial sector, and if done right, this
notion of a cryptocurrency could really deliver, I think, real
benefits for increased friction, more access for consumers. But
I have also got to tell you, as somebody who has spent a lot of
time in the last couple years dealing with social media, and
Facebook in particular, I think it would be safe to say--and,
frankly, for people on both sides of the aisle--that Facebook
has developed something of a trust deficit, and that the kind
of Silicon Valley mindset of move fast and break things maybe
works when you are just thinking about it in a technology
framework, but when we are thinking about the kind of
implications social media has had around consumer privacy,
public discourse, that break things and move fast, no
regulation, does not always work.
Now, yesterday, I think at the House Financial Services
Committee, you noted that Libra posed many serious concerns,
``including potential risk of the stability of the financial
system.'' And, again, while I am open to the public benefits, I
share your concerns about systemic risks, money laundering,
privacy, other items.
This past week, former FDIC Chair Sheila Bair called on the
Fed to exercise additional oversight over Libra, the
possibility if this currency is fully built out, particularly
if Calibra, which would be the Facebook wallet in Libra, the
ability to have credit disruptions, consumer losses, foreign
currency risks, financial mismanagement of the Libra reserve.
The truth is we could be creating a system without the kind of
regulatory oversight that led to the gaps that the crisis that
took place, as Senator Tester pointed out. I think back about
when the reserve fund broke the buck. We did not think that was
going to be the thing that potentially brought down the system,
but you could end up with the same circumstances around Libra.
Could you expand a little bit on what you see around these
regulatory risks? And do you basically share Sheila Bair's
concerns regarding the liquidity risks presented by Libra?
Mr. Powell. I do. I think the risks are--I think we need to
do a very careful, patient, thorough assessment of what the
risks really are, and I think that is going to take a little
bit of time. The idea that this would be going into
implementation within 12 months I think is not going to be
proven right. I think we are going to take more time than that.
And as I mentioned earlier, one of the key issues really is
that there is not a single, credible regulatory authority that
can be responsible for oversight and held accountable for its
oversight. It falls into many, many pockets--State, Federal,
international.
So we are going to be looking at that. I did see that op-
ed. I thought that was an interesting idea. I would not want to
prejudge what we do or where we come out. We really have not
even kind of gotten to the basics yet, but----
Senator Warner. My hope would be, though, that you would--
we have not been great recently at getting things across the
finish line. My hope would be that you would, you know, take a
serious look here. I think back to concerns I had back in the
late 1990s when social media was set up. I was a telecom guy,
and the rules of the road that were set up were basically
thinking social media, these are just dumb pipes, we are not
going to put any regulatory structure around it. We are now 20
years later; 65 percent of Americans get their news from
Facebook and Google. We have the ability to disrupt our
democratic processes. We see hate speech from either end of the
political spectrum being brought forward.
I would be really concerned, as we think about the
innovation that comes from this space, that we do not make the
same exact mistakes back in the late 1990s, that if we do move
forward with this innovation, that we ensure--whether it is
Facebook or any other dominant players, that we make sure that
there really is going to be access for third-party wallets, not
just a Facebook product; that we really think about the ability
for third-party developers to plug into this new financial
system.
You know, getting this right on the front end is so
terribly important, and I look forward to trying to work with
you and the other regulators to make sure we get it right.
Mr. Powell. Thank you. And I will just say this has gotten
people's attention in a way that is very--I hope that is very
clear, not just ours but the other regulatory agencies and
Governments and similar bodies around the world.
Senator Warner. I will say--my time is up, but Facebook has
taken advantage of the gaps within the current system, and we
have got to make sure we do not have those gaps if we are going
to talk about a whole new financial system.
Thank you, Mr. Chairman.
Senator Brown. Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
Chairman Powell, first of all, thank you very much for
being here today. Before I begin my questions, I just wanted to
comment on the insurance capital standard being developed by
the IAIS. I think my colleague from Wisconsin, Congressman
Steil, hit the nail on the head yesterday in his conversation
with you in which he made it very clear that any version of the
ICS that fails to recognize the aggregation method in the
United States is simply unacceptable. And I appreciated your
comments basically agreeing with that, that it has got to work
for us, too.
I also appreciated the response from Vice Chairman Quarles
to the Senate letter that I led on this issue, but I remain
concerned that the EU is using the ICS as a back door to
implement its Solvency II insurance capital framework
worldwide. The EU's insurance regulator took a victory lap at
the end of the latest annual report saying that they have
achieved their goal of having, and I quote, ``Solvency II as
the practical implementation of the ICS.'' So moving forward,
it is imperative that we see a very strong, assertive response
from the Fed and from Team USA to the IAIS activity.
My first question concerns the capital plans that banks are
required to develop under the CCAR framework. The CEO of
JPMorgan, one of the banks required to participate in CCAR,
said something about CCAR in his annual shareholders letter
that I found rather striking. According to Mr. Dimon, and I
quote, ``Under the Fed's most extreme stress-testing scenario,
where 35 of the largest American banks bear extreme losses . .
. , the combined losses are about 6 percent of the total loss
absorbing resources of those 35 banks. JPMorgan Chase alone has
nearly three times the loss absorbing resources to cover the
projected losses of all of these 35 banks.''
Mr. Chairman, it seems a little absurd to me that we are
forcing an institution like JPMorgan to hold not just enough
capital to cover its own losses, but also the losses of the
other 35 largest institutions three times over. This is coming
at a tremendous opportunity cost in my opinion. The capital
tied up under CCAR is capital that could be deployed to help
first-time homebuyers purchase a home or budding Main Street
entrepreneurs start a small business.
Vice Chairman Quarles said at a conference in Boston
earlier this week that capital stress tests need to be more
predictable and easier for firms to pass.
I guess my question would be: Do you agree that CCAR
framework should be revised? Is it an item which is up for
debate?
Mr. Powell. Well, I think that we are going to have to
continue to change--well, the tests will have to evolve over
time, or they will inevitably, like anything else, become out
of touch with reality. So we are committed to making
appropriate changes.
I would say, though, that the banks' obligation is to have
a minimum level of capital post stress, and they are going to
want to have a buffer on top of that. That is the test they
have to pass. And we do not want them to be able to go--you
know, we have made a pretty good judgment about what that
minimum amount would be. I think the level of capital in the
system is just about right. I do not think that it should be
less, particularly for the largest banks. I do not believe
that.
I think there is lots of work going on on CCAR, though, and
it was the subject of that conference in Boston on, I guess,
Monday or Tuesday, lots of changes. But, again, we are going to
preserve the overall strength and power of them while making
them more transparent.
Senator Rounds. Yeah, and look, I appreciate that, and I
understand that capital requirements are important. It just
seemed a little surprising to me what the current guidelines
would do in terms of the amount of capital that they are, and I
think there is a cost when you maintain that versus being able
to put that back out in terms of loans to places that need it.
I recognize that this is something which is ongoing, but I
just want to point out that seems to me to be a little bit
larger than what I would ever have expected it to be in terms
of the capabilities today.
Mr. Powell. Well, again, I think the level of capital that
we have required of the largest institutions in particular is
about right, and it is high. It is high. It has not even been
10 years since the financial crisis. We have not even been
through a downturn. So I think it is early to be talking about
reducing those standards.
Senator Rounds. OK. One other question. In the semiannual
Monetary Policy Report, you point out that credit provided by
commercial banks to fund businesses as well as commercial and
residential real estate continued to grow in 2019 and that bank
profitability remained solid in the first quarter of 2019. I
was encouraged to read this because the pressures that farmers
are facing due to our trade disputes and other headwinds have
led to questions about whether or not banks will continue to be
able to make loans in the ag sector. Given your view of the
economy, should banks be in a position to continue to provide
credit to farmers and ranchers during this time in which net
farm income is down 50 percent in the last 5 years?
Mr. Powell. Well, the answer is yes to that. I think our
farm belt banks have had a lot of experience in dealing with
the issues that farmers are confronting right now. I know the
whole agricultural sector is in a difficult place. It is a
tough time. And I know that banks are trying to work through
those difficulties with farmers.
Senator Rounds. Very good. Thank you, Mr. Chairman. I
appreciate the work you are doing.
Thank you, Mr. Chairman.
Mr. Powell. Thank you.
Chairman Crapo [presiding]. Senator Schatz.
Senator Schatz. Thank you, Chairman.
Chairman Powell, thank you for being here. I am going to
ask you a series of questions about severe weather and climate
change, and the first thing I want to say is that I do not
expect monetary policy to solve a public policy problem. But I
do think it is important in your prudential supervision
capacity that you measure risk accurately and completely.
And so the first question I have is: Does increased severe
weather pose a risk to the institutions that you supervise?
Mr. Powell. Yes, I mean, we--and you know this, Senator. We
do require financial institutions that we supervise to have a
plan and an understanding to deal with severe weather events,
particularly those that are in areas that are exposed to
increased risk of severe weather.
Senator Schatz. Is severe weather increasing due to climate
change?
Mr. Powell. I believe it is, yes.
Senator Schatz. Has the Fed changed the approach that it
uses in assessing severe weather risk over the last 10 or 20
years?
Mr. Powell. We have had a policy in place. I would tell you
there has been quite a lot of research done at the Fed around
severe weather and its effect on the economy, and we do
incorporate that into our supervision of these institutions. So
it has definitely evolved. I think we have, you know, a
cutting-edge understanding of the effect of severe weather
events on the economy, and we do incorporate that into our
supervision.
Senator Schatz. But has the process changed?
Mr. Powell. Has the process changed? You know, I would have
to go back and look.
Senator Schatz. And the reason I am asking this specific
question is that severe weather, generally speaking, over the
last 10 or 20 years has been treated sort of force majeure; it
cannot be helped, and to a certain extent it cannot be
accounted for except that there is this sort of outside risk.
But when that risk, say, of a 500-year storm rises 10 times in,
say, 15 years, then the question becomes: Are your systems
adequate to the conditions on the ground? And I can take that
for the record if you do not want to puzzle through it----
Mr. Powell. No, I can----
Senator Schatz. Go ahead.
Mr. Powell. One way to get at that is to go back to
Superstorm Sandy. In a world where you have water lapping at
the foot of the New York Fed, which is not that close to the
water, in downtown Manhattan, you know that you are going to
need robust plans and redundancy and all those things to deal
with severe weather events. And that happened in, what, 2013 or
2014. So we know that, and we do apply very high standards to
the key payment utilities and other financial institutions.
Senator Schatz. Let me read you something from the Bank of
England: ``The costs of climate change are having a devastating
effect. As financial policymakers and prudential supervisors,
we cannot ignore the obvious risks before our eyes. We must
integrate the monitoring of climate-related financial risks
into the day-to-day supervisory work, financial stability
monitoring, and board risk management.''
Do you agree with the Bank of England?
Mr. Powell. You know, I guess I see climate change as a
longer-run issue. I do not know that incorporating it into the
day-to-day supervision of financial institutions would add much
value. We have lots of things to supervise them for.
Senator Schatz. Let me make the case for day-to-day
supervision, especially prudential supervision. You measure
cybersecurity risk, political risk, balance sheet risk. You
measure risk. This risk is accelerating. And I understand the
desire for the Fed to sort of stay out of the political fray
and even to stay out of the public policy fray. But this risk
is accelerating, and I am not quite--I am satisfied that you
are puzzling through this and that the staff is trying to get
this right. But I am not satisfied that you are drawing the
correct distinctions between weather and climate and that you
are adequately accounting for the increased frequency and
severity of severe weather events due to climate change.
And there is one other part of climate change. It is not
just individual events. It is changes in weather patterns that
could cause individual portfolios to be more at risk. And so do
I have your commitment to continue to work with our office on
this problem, especially given that, as you know, more than a
dozen central banks around the planet are working really hard
on this, and, again, without an ideological lens but just to
try to adequately measure the risk?
Mr. Powell. Yes, and I will also say there is really
nothing going on in the other central banks that we are not
quite well aware of, as I think you know.
Senator Schatz. Thank you.
Mr. Powell. Thank you.
Chairman Crapo. Senator Perdue.
Senator Perdue. Mr. Chairman, good to see you again.
Mr. Powell. Nice to see you.
Senator Perdue. Thank you for your forbearance, your second
day going through this.
I would like to go back to a topic that we covered just a
little bit earlier. Today we have in the world about $60
trillion of sovereign debt. The United States has about 22 of
that. Corporate debt since 2008 in the United States between--
the last decade, between 2008 and 2018, about doubled, but
still only represents about 4 percent of more than $60 trillion
in overall U.S. capital market assets.
My question is, basically, after reviewing all the data
around corporate debt, sovereign debt, and particularly the
increase in corporate debt, do you believe that leveraged
lending has reached the point where it is beginning to be a
systemic risk? If so, could you explain what information you
are using to look at that?
Mr. Powell. So as far as corporate debt is concerned, I
would tell you I do not see it as rising to the level of a
systemic risk or a financial stability risk, which we think of
as something that could threaten the functioning of the
financial system. And the reason is a couple of things.
First, the risk is really held in--more than half of the
risk in leveraged lending is held in collateralized loan and
debt obligations, and those are market-based vehicles. They are
not on the balance sheet of banks, and they are not runnable. I
mean, it was runs during the crisis that caused a lot of
damage. The funding for those vehicles actually has longer
life, expected life, than the assets that they own. So that is
an important thing.
The next biggest holder of that paper is mutual funds, and
those in theory could be subject to accelerated withdrawals and
that kind of thing. We monitor that very carefully. There is a
risk there, but we have seen them weather lots of downturns. So
just empirically, we have seen them weather, you know, spikes
in volatility and that kind of thing.
We are not in any way backing away from this and saying it
is not a problem. I think we are very focused on monitoring it
and confirming that it does not evolve into something that
could threaten the system. And in the meantime, it clearly can
be an amplifier to an unexpected macroeconomic downturn.
Senator Perdue. You know, I tried to buy a couple of
carefully in China last year with a credit card and with cash,
and you just could not do it. So it was all, you know, AliPay,
WePay, et cetera. With the cryptocurrency question you had
earlier, in all the technology that is coming, it just seems to
me that technology is running ahead of us in our ability to
look at how currency is managed around the world, how cash-
flows are managed, and the impact that it could have on how we
for the last 100 years or so have used reserve currency in the
world, and we have benefited that in the United States. The
ability to borrow $22 trillion of debt and potentially $10
trillion more over the next decade depends heavily on our
ability to be the reserve currency, have the dollar as the
reserve currency.
What risk to the structure itself and then also to the fact
that the dollar has enjoyed for over 100 years now, or about
100 years, being the reserve currency?
Mr. Powell. You know, I think being the reserve currency
does confer benefits and costs. One of the potential costs is
that you are a little bit immune from market discipline because
everyone wants to be in the most liquid asset. And it tends to
be a pretty stable equilibrium, so there tends to be one
reserve currency, or two, and it tends to last for a long time.
But if you are going to keep that role, you have to run your
fiscal house successfully. You have to be running up a
sustainable fiscal policy. And we are not. I do not think in
the near term there is anything to threaten our status such as
a reserve currency, but in the medium and longer term, we will
have to address our fiscal issues.
Senator Perdue. With $30 trillion in a decade--and that
would be approaching probably 40 to 50 percent of all sovereign
debt in the world at that point, because a lot of other
countries are de-leveraging to some degree. All of a sudden
then that does--your medium to long term--I am not trying to
get you to quantify that, but if you look at the next decade
and we are going to add 50 percent--if we were to add 50
percent more, that near- to long-term definition could fall in
within the next decade or so, could it not?
Mr. Powell. Well, you have to have another reserve currency
that has more attractive features. We have the best--we have
the rule of law. We have institutions. We are a trading Nation.
We are open to trade. And we have a highly developed financial
system. That is really important because when you are the
reserve currency, you can have inflows and outflows, and you
have to have a financial sector that can absorb and manage
that, or you will have spikes in inflation and currency
volatility and that kind of thing.
So another currency would have to emerge that could take
over that role, and there really is not one right now that
could check all of those boxes. So it could be a long time.
Senator Perdue. And the market basket concept has no more
appeal today than it did a decade ago when they started talking
about that?
Mr. Powell. It has not really taken off yet, if you are
talking about special drawing rights.
Senator Perdue. Agree. Yes, sir. Right.
Mr. Powell. But, nonetheless, we should not assume that it
will last forever, because it will not.
Senator Perdue. Yes, sir. Thank you for being here.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Smith.
Senator Smith. Thank you, Chair Crapo, and thank you so
much, Chair Powell, for being here today. I very much
appreciate your service, and I want to just note that I believe
in the first 30 seconds of your testimony this morning, you
used the word ``independence.'' I believe that I heard
colleagues on both sides of the aisle pay tribute to how
important it is to have an independent Fed, so I want to thank
you for that, for your steadfast defense of that.
I also want to just quickly follow up on comments that my
colleagues Senator Tester and Senator Schatz said. You know,
Senator Tester asked, What is going to tip the scale to bad
when it comes to our long-term economic prospects? And I would
like to just for the record say that I do really believe that
our increasingly volatile climate, climate change, is on the
same scale as the long-term threats to a growing national debt
in terms of the stability of our economy. And trust me, the
farmers in Minnesota who are looking at lost yields and a
complete shake-up of the world in which they operate, for them
this is a short-term and an immediate issue. So I wanted to
just add my thoughts to that point.
Speaking of issues that are long-term challenges to the
economy, you mentioned housing and sort of the lagging of
housing construction. You know, what we are seeing all over the
country and certainly in Minnesota is that housing costs are
growing faster than wage growth, and the market is producing,
so we have shortages of housing at price points that people can
afford. And we are seeing, of course, more high-end homes being
built but not homes that people can actually afford.
So I would like to have you just talk a bit more about the
impact of this. This has impacts on employment in rural areas,
impacts on long-term economic prospects for the country, and
what you see the Fed's role could be and what our role should
be.
Mr. Powell. I think what we hear from the home builders is
that it is a series of factors that are really holding them
back and driving--and challenging affordability. And it is in
many cases that there was a big home-building sector in 2005,
and a lot of those people retired in 2007, 2008, 2009, 2010,
and 2011, and now you have a shortage of skilled labor, so it
is hard to get people on the job--electricians, plumbers,
carpenters, and other people. That is one issue, just to get
the people. No matter what you pay them, just finding people
who can do that work expertly.
Senator Smith. Would you say our immigration policy might
have something to do with that?
Mr. Powell. I think that--that is what we hear from home
builders.
Senator Smith. Me, too.
Mr. Powell. That is part of it for sure. It is also hard to
get lots. You know, in many metropolitan areas, you have a lot
of homes and traffic and that kind of thing, and the rules for
creating new lots are challenging. Material costs too have gone
up, and some of that is tariffs for sure. So the home builders
feel almost like they have been hit by a perfect storm here. I
think with rates on mortgages having dropped quite
significantly over the course of the year, we do expect a turn-
up there. But these longer-run challenges I think are going to
be there, and affordability is going to be a challenge.
Senator Smith. What I hear from businesses and communities,
especially in rural Minnesota but really all over the State, is
that the lack of workforce housing, affordable housing for
people who have good jobs is actually a real limit on economic
growth. I am doing a series of roundtables around the State to
try to get at this, so I appreciate your comments on that.
Thank you.
Let me just ask you on another topic, Senator Shelby was
talking about the relationship, maybe the shifting relationship
between interest rates and growth. You are under political
pressure, which I do not approve of, to lower interest rates. I
am not asking you what you are going to do, but I want to look
at the lesson of what we are seeing in the EU. So in Europe,
the central bank essentially has negative interest rates.
Economic growth is only about 1.2 percent a year, and inflation
is also below target. So my question is: What can we learn from
the experience in Europe? It looks to me or some could conclude
that you end up losing many tools in your toolbox when you--
that seems to be sort of the challenge that they have. Now,
obviously, some of this is monetary policy and some of it is
fiscal policy. But could you comment on that?
Mr. Powell. I will, and it is really the same lesson that
we have learned, I think, from Japan that you see that in a
less extreme form in Europe, and that is that you do not want
to let--you do not want to get behind the curve and let
inflation drop well below 2 percent, because what happens is
you get into this unhealthy dynamic, potentially, where lower
expected inflation gets baked into interest rates, which means
lower interest rates, which means less room for the central
bank to react, and that becomes a self-reinforcing thing. We
have seen it in Japan. We are now seeing it in Europe. And that
is why we think it is so important that we defend our 2-percent
inflation goal here in the United States, and we are committed
to doing that.
Senator Smith. Thank you.
Chair Crapo, I have several other questions that I would
like to submit for the record. I am especially interested in
submitting a question around Deutsche Bank. Last night, the New
York Times reported that Deutsche Bank's private banking
managers urged the bank to retain Jeffrey Epstein as a client,
even after the compliance officers recommended that the bank
drop him as a client because of reputational risks. So I am
going to submit a question about what type of customer does
represent a reputational risk, and if not Epstein, then who?
Thank you.
Chairman Crapo. Thank you.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman. And thank you,
Mr. Chairman.
Mr. Chairman, what is the economic impact, in your
judgment, of illegal immigration on America's economy?
Mr. Powell. I would have to answer it in generalities. I
have not tried to quantify that. But people who come in legally
or illegally, they add to our workforce, and they contribute to
GDP certainly. So that is part of it.
I think that part of growth--you can really boil growth
down into labor force growth and productivity increases, and
immigration, total immigration, has contributed more than half
of the growth to our workforce in the last few years. So it is
important.
Senator Kennedy. What about illegal immigration? Does it
have an impact on wages?
Mr. Powell. You know, there has been a lot of research on
that, and it has really not reached a clear conclusion. There
is research that finds no visible impact, and there is research
that finds it has a modest impact.
Senator Kennedy. Well, do you think illegal immigration is
a good thing?
Mr. Powell. You know, it is really not in our--it is really
not at all in our say-so. It is like trade or guns or some
other things that we do not really take part in.
Senator Kennedy. Well, in part it is, and let me explain my
perspective. We welcome about a million of our world's
neighbors to become American citizens every year. I think that
makes our country stronger. I think we can probably agree on
that.
Unfortunately, we have a lot of folks that come into our
country illegally. I think part of the reason that so many
people want to come to America is because we have rights and we
cherish them and we protect them. I mean, when is the last time
you heard of somebody trying to sneak into China. They want to
come to America.
But with rights go responsibilities. One of our
responsibilities is to abide by the rule of law. Federal law is
not an a la carte menu. You cannot pick and choose which laws
you want to abide by. And to come into our country illegally is
a violation of Federal law. And it would seem to me that we
would want to do everything we can, if you believe, as I said,
that people respond to incentives, not to give people an
incentive to violate the law. Now, that is kind of my
perspective on it.
Properly vetting people who come into your country, in my
judgment, is not racist. It is prudent, in the interest of
public safety.
Are you familiar with the program called ``Directo a
Mexico''?
Mr. Powell. I am not, at least by that name.
Senator Kennedy. I understand it is a program under the
Fed. It facilitates remittances from people in America to other
countries with low transaction and exchange fees.
Mr. Powell. This must be part of our ACH operation, and we
do some remittance business through our ACH internationally.
Senator Kennedy. OK. Will you make it easier for people in
our country to send money to another country?
Mr. Powell. Very, very limited. Most of that happens in the
commercial banking system--almost all of it. But I think we
do--see, we have something called--this is complicated, but
``automated clearing house'' is really set up to do things like
payrolls, and we do that internationally. It is not a great
tool at all for sending back remittances.
Senator Kennedy. OK. But you do have a program--you are
just not familiar with it--called ``Directo a Mexico''?
Mr. Powell. I am not familiar with it. Sorry. I will look
into it.
Senator Kennedy. OK. Do you know if U.S. citizenship is a
prerequisite to being able to use the program?
Mr. Powell. I do not. I would have to check on that.
Senator Kennedy. Do you know the impact of your program on
the American economy? What does it do for us?
Mr. Powell. I would have to look into all those things, and
I would be glad to do it.
Senator Kennedy. OK. You are aware that remittances form a
huge portion of the GDP in other countries, like Mexico, for
example?
Mr. Powell. Yes, I think a number of countries rely on
remittances from relatives usually who work in the United
States and send money back home.
Senator Kennedy. Right. And if someone is here illegally,
this program could be an incentive, could it not?
Mr. Powell. In principle, yes. Again, I am completely
unfamiliar with it, so I should really----
Senator Kennedy. OK. That is fair. I do not want to catch
you off guard. I will be calling you. I would like to visit
more about this.
Mr. Powell. Good.
Senator Kennedy. And whether this is a good idea or whether
it improperly incents people to break the law. OK?
Mr. Powell. Thank you, Senator.
Senator Kennedy. Thanks for your good work.
Chairman Crapo. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. And welcome,
Mr. Chairman, and thank you for your leadership.
As you know from previous questions I have asked you at
these hearings, I have been very frustrated--very frustrated--
about the lack of the development of a real-time payment system
at the Federal Reserve. There were some questions in the House
yesterday about this. As you acknowledged, the Fed has been
looking at this for 5 or 6 years. In the meantime, every day
that goes by, the lack of a real-time payment system is costing
millions of Americans lots of money. And over the course of a
year, we are talking about millions of Americans losing
billions of dollars, especially those who are going paycheck to
paycheck.
At the same time, other countries--Great Britain, the EU
countries, lots of other countries--have gotten there before
us, and there is no reason we should not have gotten there a
long time ago.
In the meantime, because of lack of progress, there has
been more momentum for a de facto private sector version of a
consortium of big banks, The Clearing House, and there are lots
of concerns about that system. Mr. Hoenig, who is formerly the
Vice Chair of the FDIC, and Bruce Summers, formerly at the Fed,
recently wrote an editorial about their concerns with the
largest banks in the country controlling the payment system. I
just want to quote from their article, and they say: ``The
needs of consumers and businesses, and the depository
institutions nationwide that provide them services, will be
best served by the Federal Reserve continuing to play its role
as a payments processor. The alternative, we believe, is to
award The Clearing House a de facto monopoly, resulting in a
less competitive and less efficient market for immediate
payments.''
Question: Do you share the concerns they expressed in that
editorial?
Mr. Powell. Senator, as you, I am sure, know, we actually
have a proposal out to provide a real-time settlement system,
24/7/365, and asked the public to comment on it. We sent it out
late last year. We have got several hundred--900, I think--
comment letters and all that, and there has been--this proposal
came out of our Faster Payments Initiative. We chose to pull
people together. As you know----
Senator Van Hollen. Not to cut you off, but when do you
expect to get this done? I mean, again, other countries have
done this. It is not that complicated. It is really just a
question of making a decision. So do you share the concerns
that were expressed by those two individuals in their
editorial? And as you think about your answer, I want to point
out that 2\1/2\ years ago, when the big bank consortium was
preparing to launch a real-time payment system, they told the
Department of Justice that they would charge the same price to
all depository institutions regardless of their size. About a
year later, the Justice Department cited that assurance when it
told The Clearing House that it had no intention to take any
antitrust action against them. But last month, The Clearing
House added a big caveat to its pledge. They said that they
would only maintain that commitment if there was no other
competition, meaning the Federal Reserve. And community bankers
are very worried about this. Here is a quote from Bob Steen. He
is the CEO of a $93 million asset Bridge Community Bank in
Mount Vernon, Ohio, talking about the Fed, ``If they do not
take that as a dare, then I do not know what it takes for the
Fed to serve as a central bank role.''
So we have just got to make a decision here because the
lack of the Fed making a decision is essentially putting in
place the de facto clearing house. Now, if that is the result
of a deliberate decision, that is one thing. But if it is the
result of inaction, then there are real risks at stake here.
Mr. Powell. We are working our way through the comments and
approaching a decision, and we have to weigh this very
carefully under the law, under the Monetary Control Act and
under our regulations.
You are absolutely right that the smaller institutions are
strongly in favor of our doing this, but there is a range of
commentary. We have a process we need to go through. We have
been going through it and, you know, expect to reach a
decision.
Senator Van Hollen. All right. I would just be concerned
with providing the biggest banks a monopoly over this big an
area of transactions.
Very quickly, you have indicated how important it is for
the Fed to be independent, but the President does give you a
call from time to time, right?
Mr. Powell. He has.
Senator Van Hollen. Has he ever raised the issue of
Deutsche Bank in those conversations?
Mr. Powell. By longstanding practice, of course, I respect
the privacy of my conversations with any elected official,
including the President.
Senator Van Hollen. Right. There is no executive privilege,
though, between the President and the Federal Reserve, is
there?
Mr. Powell. This is----
Senator Van Hollen. It is an independent body, right?
Mr. Powell. That is correct. It is not a legal matter. It
is just out of respect for--I would give you the same respect.
Senator Van Hollen. Well, as you know, a group of Senators
on this Committee have written to you about the Deutsche Bank
situation where senior executives at Deutsche Bank overruled
one of their experts who wanted to issue a suspicious activity
report with respect to certain Trump entities, financial
entities. That was overruled. Deutsche Bank has under your
regulatory purview. How can you provide us assurances that that
will be looked into when you have a whistleblower case like
that?
Mr. Powell. As you know, we have an enforcement action in
place against Deutsche Bank for its system and money-laundering
issues, and, you know, we are providing absolutely standard
oversight to that at this time.
Senator Van Hollen. OK. Can you provide us assurances that
that kind of situation would come under that purview and
investigation?
Mr. Powell. That kind of situation, yeah.
Senator Van Hollen. Thank you, Mr. Chairman.
Chairman Crapo. Senator Jones.
Senator Jones. Thank you, Mr. Chairman. And, Chairman
Powell, thank you for being here and thank you for your
testimony.
One of the short-term risks to the economy that I fear and
I think you have highlighted are the ongoing negotiations in
Congress over both Government spending and the debt ceiling. In
the June FOMC minutes, for example, it was written that
participants generally agreed that a downside risk was a sharp
reduction in Government spending, and all told, if Congress
does not reach an agreement, there is a potential for a $120
billion immediate reduction in Federal spending for national
security and a host of domestic programs.
Would you just elaborate a little bit on what you believe
what kind of risk does this represent to the economy and how is
the Fed processing this risk?
Mr. Powell. I think that it is essential that Congress
raise the debt ceiling in a timely way, by which I mean in a
way that allows the U.S. Government to pay all of its bills
when and as they are due. That is essential. Any other outcome
is unthinkable. We have always paid our bills, and it simply
must happen that Congress raises the debt ceiling in time to
allow that to happen. The consequences of failing to do so
would be highly unpredictable, and no one should assume that
the Fed or any other agency can be relied upon to shield our
economy from the short-, medium-, and long-term negative
consequences of such an act.
Senator Jones. Is there risk in protracted negotiations? I
mean, if we are in the 11th hour of discussions--and, you know,
so many times we have seen, like last year with the Government
shutdown, with disaster relief, there is all this political
posturing and, you know, dueling press conferences, and we end
up getting down the road and getting close, and then they fall
apart. Is there risk just in the protracted negotiations and
waiting until the 11th hour to do something?
Mr. Powell. I think markets have seen this movie, and I
think they think they know how it ends. And so they tend to
look through that. You do see some of the Treasury securities
that are maturing; they might trade and they are now trading a
bit off because they--on the theory that there might be some
delay in payments. But, clearly, everyone is assuming that this
will get worked out. And if that were not to happen, that would
be, I think, a big surprise and not a good one.
Senator Jones. Well, I appreciate your answer. Maybe
Congress and the President can take a lesson from that and just
go ahead and get it done now instead of going through the
protracted, you know, ``Who shot John?'' kind of things and
where we are.
I want to go back to a question my colleague Senator Shelby
talked about just a little bit with regard to trade and the
apparent progress in trade. And I want to kind of couple that a
little bit with what you have talked about with regard to so
many sectors of the economy that are not feeling the buoyancy
of their jobs, of their wages, and things like that. Our
manufacturers in my State and farmers in my State, I am not
sure they have seen the apparent progress that was initially
seen that you talked about. But, regardless, they are certainly
feeling the pain of the uncertainty, and those challenges are
broad in scope. We have got uncertainty with China. There is
uncertainty with Canada and Mexico. There are steel tariffs.
There are potential auto tariffs. There are retaliatory tariffs
on farmers. And yesterday we heard there may be French tariffs,
and even our Eximbank needs reauthorization.
In my State, that seems to be affecting folks in those
rural areas, the African American folks probably more than
most. It has not hit directly the consumer, I do not think just
yet with the tariffs, but it is going to happen. I mean, we are
seeing now--we are seeing now that in the short term we are
going to see tariffs that are going to cause an increase in
depletion and supply of things like Bibles and artificial
fishing lures, which are fairly standard staples in Alabama,
most Alabama households.
Can you elaborate for me on which of all of this in
particular is the thing that concerns you most about the
current situation with tariffs? What are the concerns that you
have most? Because they are all over the board, and we seem to
be going this alone.
Mr. Powell. I would just say I think it is general
uncertainty on the part of businesses, and you do not really
see that--as you noted, you do not really see that in household
confidence surveys and things like that. I think you do see it
in business confidence surveys now. And the concern would be
that over time it will just be--it will weigh on the economic
outlook, and it is a concern. I think we have been hearing that
all year long from our business contacts.
Senator Jones. In particular, let me ask about--the
President right now has on his desk a report from the Commerce
Department about whether or not foreign automobiles and
suppliers are a national security threat. That has been sitting
on his desk since February. It has not been released despite
many of us on this panel, including Senator Toomey and I, have
been asking. Is the fact that that is sitting there and the
President is not even releasing it publicly, does that add to
the uncertainty?
Mr. Powell. You know, I would be reluctant to comment on
any particular aspect of trade policy, which is clearly not our
job. At the same time, we try to call out the things that we
are seeing. We owe that to the public, and so I would just
leave it at the level of high uncertainty.
Senator Jones. Well, I appreciate the answer. It is really
more of a comment from me than anything else. Thank you, Mr.
Chairman, so much for being here. And thank you, Chairman
Crapo.
Chairman Crapo. Thank you, Senator Jones. And as you can
see, Mr. Chairman, we do not have any other here, but we have
Senators coming. So we are in the second vote at this point.
Senator Brown will be back in a few moments. He and I are
switching out. And while we wait for some of the other Senators
who want to have a chance to ask you some questions, I get to
ask a few more of my own.
I would like to go back for just a moment to the
cryptocurrency issue. You indicated before, as you start to
look at the new Libra proposal, that you have been in
communication with some of the other central banks and other
regulators, as well as the United States regulator. Are you
aware of any other cryptocurrency proposals that are out there
other than Libra, something else globally that is being
developed?
Mr. Powell. I mean, not really. There are companies that
are looking at internal stable coin-type ideas to use with
their customers, but nothing that--I am not aware of anything
that could potentially be quite so scalable so quickly as this
given the existing network that the company has.
Chairman Crapo. All right. And to return to the question
that Senator Perdue had asked you about, the impact of a
cryptocurrency system on our reserve currency in the world,
particularly in the United States reserve currency, which, as
you both indicated in your conversation, has--I think the
United States has benefited from our currency being the world's
reserve currency. If a cryptocurrency system were to become
prevalent throughout the globe, would that diminish or remove
the need for a reserve currency in the traditional sense?
Mr. Powell. I think things like that are possible, but we
really have not seen them. We have not seen widespread
adoption. I mean, bitcoin is a good example. Really almost no
one uses bitcoin for payments. They use it more as an
alternative to gold, really. It is a store of value. It is a
speculative store of value like gold. So we do not have--and
people, of course, have been talking about this since
cryptocurrencies emerged. But we have not seen it. But that is
not to say we will not see it. And if we do see it, yes, you
could see a return to an era in the United States where we had
many different currencies, and, you know, in the so-called, I
guess, national banking era.
Chairman Crapo. All right. Thank you. I do have more
questions, but some of our Senators are returning now, and I
will turn to Senator Tillis.
Senator Tillis. Thank you, Mr. Chairman. Chair Powell,
thank you for being here.
A quick question on payments, maybe a couple of questions.
Do you think that the current private sector payment systems
are broken?
Mr. Powell. I would not say they are broken.
Senator Tillis. Then what part of the problem exists out
there that is prompting the Fed to move forward with a payments
platform?
Mr. Powell. Well, we have not decided to do that, although
we do, of course, play an active role in the payment system in
a number of ways already. Where the U.S. lags is real-time
payments broadly available on an equitable basis. Other
countries are way ahead of us on that, and so for the last 5
years, the Fed has been trying to push us--we do not have
plenary authority in this area--trying to push us generally
into a place where that will be available to people, as it is
in many other countries around the world.
Senator Tillis. How do we go about funding it, funding the
implementation of the ongoing operation?
Mr. Powell. Of?
Senator Tillis. If you decide to move forward with a Fed
payment system.
Mr. Powell. Ah. So anything that we do in the way of a
payment service is subject to the Monetary Control Act, and the
Monetary Control Act requires that we--a couple of things. One
is--and I will not get the language exactly right, but the
sense of it is that it must pay for itself on a basis that is
comparable to a private provider, meaning, including the cost
of capital and taxes.
Senator Tillis. I have got a series of questions that I
will submit for the record on the decision process and going
forward. But I for one hope that we can get to a point to where
perhaps we can facilitate a private sector solution that
addresses some of the things that I think you rightly point
out, but not necessarily take on that.
First off, I should have thanked you for the great work you
are doing. I think you are doing great work as Chair, and I
appreciate----
Mr. Powell. Thank you.
Senator Tillis. ----everything that you do in some, I
think, of the most confusing times for somebody in your
position, and I appreciate it.
I think someone mentioned earlier when I was out--I
apologize. We have got multiple committees and multiple votes
going on right now. But I think that we had some of the folks
on the other side of the aisle that are concerned that as
Deutsche Banks takes itself apart, that the bigger banks will
pick up those assets and maybe even get bigger. But I do not
necessarily think that that is going to happen. What I think is
probably going to happen is we are going to see that move into
private equity where they are probably chomping at the bit to
buy things for pennies on the dollar. What is your view?
Mr. Powell. You know, as you know, as you remember, that is
exactly the kind of thing I used to spend my time doing. But I
honestly have not looked at the company with that question in
mind. I will come back to you on that.
Senator Tillis. Thank you.
Another area that I am kind of curious about, you know, if
you were in the private sector and you had a 10-year yield that
was close to 2 percent, would you extend your maturity profile
and lock in financing based on today's market conditions?
Mr. Powell. I mean, as a general matter, I think this would
be a nice time to lock in. This is a low rate----
Senator Tillis. So as we take a look at our own debt, is it
time to potentially consider--I know there are some short-term
transition costs, but potentially consider what other countries
are doing on longer-term bonds up to and including I think more
recently 100-year bonds?
Mr. Powell. This one is squarely in the wheelhouse of the
Treasury Department which does the debt management. I know they
looked carefully, as you obviously know, at doing very long
bonds.
Senator Tillis. Do you have any view on the pros and cons
of doing it?
Mr. Powell. I really do not. You know, I think they looked
quite carefully at it. When I was at Treasury 25 years ago, we
looked at it and concluded that the market would--there might
or might not be a market to do it, so we did not get it done,
anyway.
Senator Tillis. The last thing I will leave you with,
because I want to make sure that the other Members get in their
questions, is we will be submitting additional questions for
the record for some of my age-old priorities in terms of
regulatory work that you are doing specifically around
interaffiliate margin, Volcker, recalibrating the G-SIB
surcharge, and a number of other things. We really believe that
these are things that are very positive that we need to see
progress on, so we will be submitting questions for the record
so that we can see what the progress is and timelines for
results.
Thank you for being here.
Mr. Powell. Thank you.
Senator Brown [presiding]. Senator Reed, are you ready? Or
should I go with Senator Cortez Masto?
Senator Reed. Go ahead, please.
Senator Brown. Senator Cortez Masto.
Senator Cortez Masto. Thank you. Chairman Powell, thank
you. It is good to see you again.
Mr. Powell. Good to see you.
Senator Cortez Masto. And thank you for all the good work
that you are doing.
At yesterday's hearing, you said that American workers have
missed 10 years of wage growth. You said the Federal Reserve
needs to do a better job of calling out the declining returns
to workers, and you also said more business owners realize that
an economy where the richest 1 percent of families control 40
percent of the Nation's wealth is problematic. And yet you said
one answer was for workers to increase their education, and you
said this before. I think last time you were before us we had
this conversation. And correct me if I am wrong. I am looking
at the Fed's data, and I think it is on page 8--it is on page 8
of the Monetary Policy Report that just came out. If I read
this correctly, it shows that wages have barely increased for
both high school and lower-educated workers and college-
educated workers. So if you look at that graph, how I am
reading it--and correct me if I am wrong--from 2007 to 2017
wages were basically flat for both. In the past year and a
half, wages have gone up by about 1.5 percent over 2007 levels
for both college-educated and high school-educated workers. Am
I reading that correctly? So it has been flat for both.
Mr. Powell. These are real wages after inflation. That is
what the trick is here. If you added inflation back in, nominal
wages, of course, have increased.
Senator Cortez Masto. But for both categories, it has
pretty much been flat. There has been a nominal increase for
both categories. Is that correct?
Mr. Powell. So if you look at the table on the right, the
picture on the right, what you see is that you had declines in
real wages and then you see them increasing. Around 2015 it
became positive for college-plus, but, generally speaking,
yeah, that is the picture.
Senator Cortez Masto. Yeah, and so would you agree that at
least what I see here, that the 1.5 wage increase over a decade
is completely inadequate?
Mr. Powell. I was actually referring to the first decade of
this century when I made that comment.
Senator Cortez Masto. OK.
Mr. Powell. So what happened beginning in about 2000, the
share of profits going to labor declined. It had sort of
oscillated around a particular level for a long time, and then
around the year 2000 it went gradually down over a period of 10
years. So my point was, when we talk about wage growth, we are
talking about 3-percent wage growth, which is a pretty healthy
level of wage growth. The problem is not the change. It is the
level in the sense that we missed that period where workers
were losing ground in wages against what they would have gotten
traditionally. So it is kind of a complicated point, but that
is what I was referring to.
Senator Cortez Masto. So can I ask you this, because you
touch on--I am going to go back to this idea that somehow
increasing one's education will lead to higher wages for them.
Do you agree? Because you have said that a couple of times, and
I heard the conversation you had with Senator Cotton as well.
Is that something you are saying to address and increase higher
wages for individuals as to ensure that they get a better
education? And what do you mean by that?
Mr. Powell. Well, I think people with higher education tend
to have substantially higher compensation in their jobs. The
value of a college degree compared to not having a college
degree in terms of lifetime earnings is enormous, and it has
never been bigger----
Senator Cortez Masto. Yeah, so let me just----
Mr. Powell. By the way, I am not saying----
Senator Cortez Masto. No, and I appreciate that. But here
is the problem and concerns I have with these numbers and these
categories. Come to my State of Nevada. High-skilled labor,
organized labor, individuals graduate high school but they do
not get a college degree. They go get a skilled--go through an
apprenticeship and learn a skill or a trade, and they are
making good money, sometimes better than some of the folks that
go to college. So what I see in these numbers is not a
reflection of the true demographic of who we are as a country.
That is my concern. And this idea that we are categorizing
people as whether they are low-income or high-income, I think
it is a false narrative. I think people with a high school
education can make good jobs. They may not be destined to go to
a college or university, but they can go through an
apprenticeship program. They can be that skilled labor that we
need in this country. And it goes back to this issue, because
you have identified the weaknesses we have in housing
manufacturing and trade. And I will tell you housing is the
number one issue in the State of Nevada. Part of that issue is
we have lost all the skilled trade because of the downturn in
the economy. So we should be investing in those individuals and
getting them back to a level where they can go through those
apprenticeship programs.
And the final thing is with this unemployment market. I do
see and I agree with you that because we have low unemployment,
that has increased the wages a little bit because it has forced
these companies to say, ``Wow, it is a really competitive
market now, and I am going to have to pay more to get more
people in.'' But that should not be the only condition for
increasing wages for individuals across this country.
And the other thing you need to know--if you do not know,
come to my State--whether you are a single mother or you are a
two-parent family, these families are working more than one
job. I think one job should be enough, don't you? I do not
think you should have to work two jobs just to be able to make
minimum wage. And, by the way, a minimum wage of $7 an hour is
poverty level.
So my concern with these statistics is I want to see you
get into the true demographics of who we are as a country and
what is going on with these false narratives that I keep
hearing even from this President who keeps arguing that somehow
unemployment for African Americans and Latinos is wonderful,
and you even show it right here, so I appreciate that. But it
is not. We have got to do a better job. And so that is all I am
asking for. Let us look at the true numbers that we have in
this country, because that is the challenge that I see here and
not these false narratives that keep being thrown out there.
So I appreciate the hard work you are doing, and I thank
you for that. I look forward to working with you in the future,
but I ask you and invite you to come in and let us have a
further conversation on the data itself.
Mr. Powell. Great.
Senator Cortez Masto. Thank you.
Senator Brown. Senator Scott.
Senator Scott. Thank you, Ranking Member Brown.
Chairman, thank you for being here this morning--or now
this afternoon, basically. I do want to continue perhaps that
current narrative because it does draw my attention. I listened
to your testimony earlier this morning. I had meetings in the
office and I had a chance to listen to your exchange with
Senator Cotton on the labor force participation rate, frankly,
that the labor force participation rate has been ticking up
slightly. One of the reasons why we saw the 3.6 percent
unemployment got to 3.7 percent is because more folks were
coming back to the workforce, which is a positive development.
As it relates to the power of education and wages, I was
raised by a single mother who had a high school education, and
I thank God that she had the skills necessary to support her
two sons. But one of the things I think we could take away from
the numbers specifically as it relates to education is that
there is power in education. These numbers that I remember are
3 or 4 years old, maybe 2 or 3 years old, but the person who
does not finish high school has an average wage around $19,000;
the high school graduate has an average wage around $29,000;
the person who has a college education has an average wage
around $58,000; and if you go on to a postgraduate degree, you
have closer to a six-figure income. So you multiply that over a
40-year work life, the numbers are so drastic and undeniable
that, without question, consistently speaking throughout this
Nation, one of the fastest ways forward is, in fact, education.
Your comment--do you agree or disagree with that?
Mr. Powell. I totally agree with that.
Senator Scott. Well, your comment with Senator Cotton that
got my attention was that part of the challenge that we have
with upward mobility in our society, which I think pinned or
put the focus on education, is the importance of understanding
globalization and technology and the chasm that it creates in
our workforce for those on the one side are going to be
detrimentally impacted by this growing technology and
technological gap that is being created. This gig economy
requires perhaps even a different type of education. So it may
not be the formal education that we are all used to, and those
figures that I talked about from the high school dropout to the
person with an advanced degree, that still works. In addition
to that, one of the reasons why myself and Cory Booker and
others have focused on apprenticeships is because our Nation,
comparatively speaking to someplace like Germany, we are
woefully behind on using apprenticeships as a mechanism or
vehicle to help those folks who may not want the 4-year track
to still achieve the type of income that Senator Cortez Masto
wants for her constituents and that I need for mine as well. Is
that an accurate depiction of the comment with Senator Cotton
around globalization, technology, and the importance of
education?
Mr. Powell. Yes, and I would just say education for me is a
shorthand term that includes things like apprenticeship
programs and trade schools and things like that. It just means
things that enable you to get skills and aptitudes and succeed
in the economy.
Senator Scott. So in a technologically advancing society, a
lifelong learner will do better than one who is not.
Mr. Powell. Absolutely. Absolutely, yes.
Senator Scott. Pat Toomey talked about the Goldilocks
economy, which I thought was--I like the term. Sometimes I want
to compare that as the ``woe is me'' economy that we seem to
hear a lot about. I have a question as it relates to the number
of Americans who actually work multiple jobs. My understanding
is that it is somewhere around 7 to 8 percent of Americans have
more than one job, one in 15. I read an article recently in the
Wall Street Journal that said the number was closer to 5
percent. Can you help me understand what is the number? Is
there a way for us to discern it?
Mr. Powell. Yes, we can run that number down for you.
Senator Scott. OK. Is it less than 10 percent?
Mr. Powell. I do not know.
Senator Scott. OK.
Mr. Powell. I think there is a way to know that. It may be
just the difference between the household survey and the
establishment survey. We can get that number for you.
Senator Scott. I think it is important for the American
people to understand and appreciate what the number is and how
many folks are actually working more than one job. I think both
sides of this aisle have a strong passion to make sure that
upward mobility is, in fact, still alive and well and a part of
the American Dream. And a part of that American Dream is being
able to achieve a standard of living that is comfortable
without two jobs. It would be important, I think, to both side
for us to, A, figure out what the number is; B, see if there
are solutions, be it a lifelong learner or the standard college
track. I would love to have more information on that.
My final thought is on trade. You answered the question on
trade. You have been very clear on what your role is and what
your role is not. When you look around the world, GDP activity
is tough, whether it is Japan at 0.6 percent or the U.K. at 0.4
percent; Germany is at 0.5 percent. That plus tariffs and this
trade volatility, how does that impact a State like mine where
1 in 11 employees are connected to the exports of our State?
Mr. Powell. Well, I would guess that those companies and
people are feeling that weak global growth and uncertainty
around trade are weighing on their outlook. And, currently,
things are OK, but businesses are beginning to hold back on
investment. For example, we see business investment having
weakened. After having been quite strong in 2017 and most of
2018, business investment is critical. It has really slowed
down here, and one of the reasons is uncertainty around trade
and global growth.
Senator Scott. Thank you.
Mr. Powell. Thank you.
Senator Scott. Thank you, Mr. Ranking Member.
Senator Brown. Senator Reed.
Senator Reed. Thank you very much. Thank you, Mr. Chairman.
I apologize. We had a hearing with the Chairman of the Joint
Chiefs of Staff simultaneously, so forgive my late arrival.
Mr. Chairman, how much economic uncertainty has the
President delivered as he constantly moves the goal posts and
tweets about trade, about the debt ceiling, about multiple
issues? Does that help?
Mr. Powell. So I would not comment on trade policy as
though we were responsible for it. We do not comment on it in
any way. I will say that trade policy uncertainty, as you can
see from one of our charts in the Monetary Policy Report is
quite elevated, and many U.S. manufacturing companies have
supply chains that reach across national borders around the
world, and those companies are facing an uncertain situation. A
natural thing to do is to hold back, and so I think we are
seeing some of that and not making investments and that sort of
thing.
Senator Reed. And there is a correlation between the day-
to-day tweets, comments, advances, movements that the
President----
Mr. Powell. What we have been hearing really for more than
a year now is uncertainty is going up and down, and it went up
quite a bit in May. May was a real month where we saw trade
uncertainty spike around various events, and I think that will
show up in the data.
Senator Reed. The economy is doing well, but why does Wall
Street expect you to cut rates? Typically in a booming economy,
rates are either stable or go up.
Mr. Powell. Well, we do see an economy that is in a good
place, but what we see is a number of things that are weighing
on the outlook. I mentioned global weakness. Around the world
you do see really weak economic performance. You see that in
Asia; you see it in Europe. And you see central banks beginning
to address that by providing more accommodation. And we see
that as a downside risk here in the United States.
We also see subdued inflation. We are in our 11th year of
this expansion, I am happy to say, and we are at 3.7 percent
unemployment. We have been there for 15 months. And yet
inflation is below our target. So I think many of my colleagues
on the FOMC have come to the view that a somewhat more
accommodative monetary policy may be appropriate.
Senator Reed. Let me just change this topic to one issue of
importance, I think, to all of us, and that is, recently, more
so than the past, the independence of the Fed has been
questioned, and even your role has been questioned. And as the
Federal Reserve's own website points out, your policy decisions
have to be based on data and your judgment, not political
pressures that could lead to undesirable outcomes. So what are
some of those undesirable outcomes that would be produced if,
in fact, the Fed became less independent and more adjunct to
political forces?
Mr. Powell. We have, you know, a pretty narrow set of
protections that amount to what we call our ``independence,''
and we think that those institutional arrangements have served
the public and served the economy well over a period of time.
What we see in countries or in areas in the United States
when those protections are not in place is we have seen bad
outcomes happening. In particular, the high inflation that the
United States experienced in the 1960s and really in the 1970s
was a failure on the part of the Fed to do what needed doing.
Paul Volcker came in and did it. It was incredibly unpopular as
you will recall, but it really put the United States in a great
place really for a long period of time, having inflation under
control. So those are the kinds of things.
Senator Reed. Right, but I think that comes back to my
initial question, which is, you know, the agitation by the
President for lower interest rates to keep the economy going is
as much political as it is monetary policy. Does that influence
your decision to lower rates?
Mr. Powell. Not at all. I would want the public--it is
critical that the public understand that we are always going to
do our work objectively based on data, with transparency, and
we are going to do what we think is right for the U.S. economy.
That is what we are going to do, and that is what we are always
going to do.
Senator Reed. So with that data you are prepared to raise
rates, if necessary?
Mr. Powell. Absolutely. We will do what we think is right.
Senator Reed. Thank you. Just a final quick question, and
one only someone who was here for the Sarbanes-Oxley
legislation would ask. The Federal Reserve banks are subject to
several levels of audit and review, and the Reserve banks'
financial statements are audited by independent public
accountants retained by the Board of Governors. The question
is: Do you believe it is important for the Board of Governors
to know whether the auditor has been disciplined in the past
for poor performance before you select them?
Mr. Powell. It is important, and we do demand all relevant
information on that question, including just about any kind of
a question that has been raised. We get that information before
we make a hiring decision.
Senator Reed. Thank you, Mr. Chairman. Thank you for your
service.
Mr. Powell. Thank you.
Chairman Crapo [presiding]. Senator Brown would like to ask
another couple questions, and then we will be done, Mr.
Chairman.
Senator Brown. Thank you. Thanks for your patience as you
sit through this, Mr. Chairman. Two brief questions, and then a
short statement.
During the debate of passage of S. 2155, we repeatedly
heard from the Fed and the sponsors of the bill that Section
401 would not weaken the prudential standards on foreign G-SIBs
operating in the U.S. Yet the Fed released an implementing
proposal in April that appeared to do just that. What led to
that about-face?
Mr. Powell. I think that that proposal is just a matter of
providing national treatment to banks that do business in our
country. We try to treat similar banks similarly, whether they
are foreign banks or U.S. banks. And we expect the same for our
banks in foreign countries.
Senator Brown. I understand, Mr. Chairman, that is the
argument for it now, but it is not what we were hearing from
many people prior to this because we made the argument this
could increase systemic risk, and they either consented to that
belief or that then seemed to change their minds, you all
seemed to change your mind after this happened, but I will
leave it at that.
A couple other things. The last financial crisis was caused
in part by huge financial institutions, Wall Street banks that
largely were given free reign to take big risks with entire
sectors of our economy, as Senator Warner said, taking
advantage, as he termed it, of gaps in the regulatory system.
You have raised concerns about the ability to regulate
Facebook, that what would be the best--I would like to ask you
what would be the best, most effective way to regulate a
complex Internet-based company like Facebook with billions of
users and a digital currency based on a Swiss bank account. How
will you look at doing that?
Mr. Powell. That is a question we are just beginning to
address. We certainly do not want to regulate their social
media activities. That is not at all something we would have
any interest in. And I do not know what the right way to get at
this is, but I do think that this is a question we are going to
have to get our arms around. It is the reason we are working on
that now.
Senator Brown. OK. Listening to your comments, both Senator
Scott's comments and Senator Cortez Masto, both interchanges,
interactions that you had with each of them, I want to just--
this is not a question. I just want to make a point about how
important this is, that we know that unemployment rates for
African American and Latino American workers are consistently
higher than those for white workers. One economist, Algernon
Austin, said the experience of black America is one of
permanent recession. One of the benefits of aggressively
pursuing a high-employment economy is that job opportunities
improve substantially for workers who face the largest
barriers. You said a few minutes ago that waiting 8 years for
that in a recovery is just simply not acceptable public policy.
You are, of course, right about that.
You go on to say the black rate of unemployment in the best
of times is not much better than the white rate in the worst of
times in the economic situation of workers. So you had talked
about subdued inflation, and I think we miss opportunities when
there seems to be--I do not think I have seen that in you; I
have seen it in the past--a bias toward fighting inflation over
fighting unemployment, and I think this disparity in
unemployment rates between white workers and workers of color
is another strong argument for weighing the benefits of a high-
employment economy and assessing maximum employment, especially
with the likelihood of an outbreak of unacceptable inflation as
it remains remote. So I hope you will keep that focus as you
think about interest rates, as you think about your role in
this economy.
Mr. Powell. Thank you.
Chairman Crapo. Thank you, Chairman Powell. I told you
those were the last two questions, but Senator Brown's question
about Senate bill 2155 has prompted me to ask a follow-up. And
I think this is self-evident, but I just want to be sure and
let this be made part of the record.
The proposal that the Fed is looking at right now in terms
of how to treat foreign banks or the subsidiaries of foreign
banks that operate in the United States will not introduce
systemic risk or increase systemic risk, will it?
Mr. Powell. No. No, these are--remember, they only apply to
the U.S. entities, and they are not of that size or caliber.
Chairman Crapo. And it is the same standards that we apply
to our U.S.----
Mr. Powell. Our own, that is right.
Chairman Crapo. Our U.S. banks.
Mr. Powell. That is right.
Chairman Crapo. Did you want to follow up on that at all?
All right. We will debate this between ourselves later.
[Laughter.]
Chairman Crapo. Well, Chairman Powell, thank you again for
being here with us today. That concludes our questioning for
the hearing.
For the Senators who wish to submit questions for the
record, those questions are due to the Committee by Thursday,
July 18th. We ask you, Chairman Powell, to please respond to
those questions as promptly as you can.
With that, again, thank you for being here, and this
hearing is adjourned.
Mr. Powell. Thank you.
[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 back to the Committee for the Federal
Reserve's Semiannual Monetary Policy Report to Congress.
In this hearing, the Banking Committee will evaluate the current
state of the U.S. economy, the Fed's implementation of monetary policy,
and discuss its supervisory and regulatory activities.
In the last semiannual Monetary Policy Report, Chairman Powell
provided additional clarity on the Fed's plans to normalize monetary
policy, including how the size of the balance sheet would be driven by
financial institutions' demand for reserves, plus a buffer.
Since then, the Fed has provided additional information and
continued receiving feedback on its monetary policy strategy, tools,
and communication, all of which I look forward to hearing an update on
today.
The U.S. economy is still strong, growing at 3.1 percent in the
first quarter of 2019, according to the Bureau of Economic Analysis,
and the unemployment rate remains low at 3.7 percent, as of June,
according to the Bureau of Labor Statistics.
Wages have continued rising, as well, with average hourly earnings
3.1 percent higher in June compared to a year earlier, which is the
11th straight month in which wage growth exceeded 3 percent, according
to the Bureau of Labor Statistics.
In fact, the U.S. is officially in its longest expansion of
economic growth since 1854, according to the National Bureau of
Economic Research.
In order to continue this positive economic trajectory, regulators
must continually evaluate their regulatory and supervisory activities
for opportunities to tailor regulations and to ensure broad access to a
wide variety of financial products and services.
With respect to regulation and supervision, it has been over a year
since the enactment of S. 2155, the Economic Growth, Regulatory Relief
and Consumer Protection Act.
Mr. Chairman, as you move forward finalizing certain rules required
under S. 2155 and consider proposing new ones, I encourage you to
consider carefully the following:
Simplify capital rules for smaller financial institutions while
ensuring they maintain significant capital by setting the Community
Bank Leverage Ratio at 8 percent;
Simplify the Volcker Rule, including by eliminating the proposed
accounting prong and revising the ``covered funds'' definition's overly
broad application to venture capital, other long-term investments and
loan creation, to improve market liquidity and preserve access to
diverse sources of capital for businesses;
Harmonize margin requirements for interaffiliate swaps with
treatment by the CFTC by quickly making a targeted change to your
margin rules to enhance end users' ability to hedge against risks in
the marketplace;
Examine whether the recent proposal that applies to U.S. operations
of foreign banks is appropriately tailored and whether regulations on
intermediate holding companies should be applied based on the assets of
the intermediate holding company alone, rather than the assets of all
U.S. operations. I also encourage you to align the foreign bank
proposal with the domestic bank proposal and exclude interaffiliate
transactions from each of the risk-based indictor calculations;
Index any dollar-based thresholds in the tailoring proposals to
grow over time to improve the rules' durability; and
Modernize the Community Reinvestment Act (CRA) to ensure banks are
not ignoring their mandate to serve their ``entire communities,'' which
should include legal businesses that banks disfavor operating in their
communities.
A bank responding to political pressure or attempting to manage
social policy by withholding access to credit from customers and/or
companies it disfavors is not meeting the credit needs of the entire
community.
These approaches would promote economic growth by ensuring that
rules are balanced, work for all stakeholders, and do not unnecessarily
impede access to financial products and services in the marketplace.
On a different topic, Facebook announced it is partnering with both
financial and nonfinancial institutions to launch a cryptocurrency-
based payments system using its social network.
The project has raised many questions among U.S. and global
lawmakers and regulators, including about its potential systemic
importance, consumer privacy, data privacy and protection, and more.
I am particularly interested in its implications for individuals'
data privacy.
The Bank of England Governor Mark Carney said, ``Libra, if it
achieves its ambitions, would be systemically important. As such, it
would have to meet the highest standards of prudential regulation and
consumer protection. It must address issues ranging from anti- money
laundering to data protection to operational resilience.''
I look forward to hearing more about how the Fed, in coordination
with other U.S. and global financial regulators, plans to engage on
important regulatory and supervisory matters with Facebook throughout
and after the project's development.
While Libra's systemic importance depends on several factors in its
future development, there are already some too-big-to-fail institutions
that must be addressed: Fannie Mae and Freddie Mac.
They continue to dominate the mortgage market and expose taxpayers
in the case of an eventual downturn.
In a 2017 speech, Chairman Powell, you publicly referred to Fannie
and Freddie as ``systemically important.''
Although my strong preference is for comprehensive legislation, the
Banking Committee recently explored one option for addressing Fannie
and Freddie, which is for the Financial Stability Oversight Council to
designate Fannie and/or Freddie as ``systemically important financial
institutions,'' and to subject them to Fed supervision and enhanced
prudential standards.
Chairman Powell, I appreciate you joining the Committee today to
discuss many important issues.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Mr. Chairman, welcome. The stock market is soaring--but most
American families get their money from a paycheck, not an account
statement from their stock broker.
A critical part of your job is measuring and evaluating the
economy, and those measurements need to take into account workers, not
just wealth. Talk to workers who haven't had a meaningful raise in
years, who have seen their retirement cut, who watch their health care
premiums rise, who have seen the cost of child care and college and
paying off their own student loans go up and up.
To those workers--to most Americans--the idea that a stock market
rally means more money in their pockets is laughable.
As the Fed's own data reveals, the recovery hasn't helped most
Americans--corporate profits go up and up, but workers don't share in
the growth they create. The top 1 percent of have an average net worth
of almost 24 million dollars, while the bottom half of all Americans
have only about 20 thousand dollars. That's less than one one-
thousandth of their wealthiest neighbors. Meanwhile the share of
workers who have been unemployed for over 26 weeks continues to climb.
Mitch McConnell and Donald Trump responded by giving the wealthiest
Americans and multinational corporations a two trillion dollar bonus.
And those corporations turned around and funneled the money back to
their executives through record stock buybacks.
We are in the midst of the longest economic expansion in modern
times and interest rates are low, and yet it's worrying that interest
rate-sensitive sectors of the economy that provide good-paying jobs,
like the auto industry, are not doing better. Employment in auto
manufacturing--which is critical to Ohio--continued to fall in June.
The Fed's policies should ensure that everyone who contributes to
our economy also shares in growth they create. All work has dignity,
and we need an economy that rewards work, not just wealth.
Some of the challenges facing our economy can only be addressed by
Congress. Millions of Americans struggle to pay for prescription drugs,
which are increasing at five times the rate of inflation. And too many
feel the squeeze of rising housing costs, with more than a quarter of
renters spending over half their income on housing.
The Fed can't fix all of these issues on its own.
But there are things that you can and should do to help the economy
work for the vast majority of Americans, through careful monetary
policy and doing your job of policing Wall Street.
I appreciate your recent recognition that this expansion has the
potential to benefit communities that have missed out on prior economic
expansions. And I hope your comments expressing frustration that wages
haven't increased as much as you expected means you will take action. I
urge you to continue with policies that both lower unemployment while
increasing wages.
In previous hearings, I have raised my concerns about threats to
the financial system, including the Fed's steps to weaken the rules on
the largest banks, the failure to activate the Countercyclical Capital
Buffer to prepare for the next financial crisis, and the lack of action
to address risks posed by leveraged lending. As you know, those
concerns remain.
However, today I can add a new worry to the list--private
corporations, Facebook in this case, that have gotten carried away with
their own power and are now attempting to ape the role of Government,
creating their own currencies, monetary policy, and payment systems.
So now, in addition to complex and risky Wall Street banks, we face
new risks from unregulated, giant tech companies--armed with vast
amounts of personal data--with the intent, as far as I can tell, of
conducting monetary policy on their own terms.
You and I have a duty to serve the American people, but these
private corporations have no duty to the broader economy or consumers.
They're motivated by one thing: their own bottom lines. Allowing big
tech companies to take over the payments system or position themselves
to influence monetary policy would be a huge mistake, and undermine our
democracy.
Too many times, when the stock market is soaring and banks are
making money hand over fist, regulators have been complacent. But as we
have seen in the past, bank profitability is not a reliable indicator
of a bank's true health, and the stock market is not a reliable
indicator of the real economy's performance.
I hope this is not another example of the Fed taking a pass from
its responsibilities to protect Americans from corporations taking big
risks with our entire financial system. It is your responsibility to
use your tools over monetary policy, the payment system, and prudential
regulation to protect the financial system and make our economy work
for all Americans, not just wealthy stockholders and huge corporations.
Thank you Chairman Powell for being here, and I look forward to
hearing your testimony.
______
PREPARED STATEMENT OF JEROME H. POWELL
Chairman, Board of Governors of the Federal Reserve System
July 11, 2019
Chairman Crapo, Ranking Member Brown, and other Members of the
Committee, I am pleased to present the Federal Reserve's semiannual
Monetary Policy Report to Congress.
Let me start by saying that my colleagues and I strongly support
the goals of maximum employment and price stability that Congress has
set for monetary policy. We are committed to providing clear
explanations about our policies and activities. Congress has given us
an important degree of independence so that we can effectively pursue
our statutory goals based on objective analysis and data. We appreciate
that our independence brings with it an obligation for transparency so
that you and the public can hold us accountable.
Today I will review the current economic situation and outlook
before turning to monetary policy. I will also provide an update of our
ongoing public review of our framework for setting monetary policy.
Current Economic Situation and Outlook
The economy performed reasonably well over the first half of 2019,
and the current expansion is now in its 11th year. However, inflation
has been running below the Federal Open Market Committee's (FOMC)
symmetric 2 percent objective, and crosscurrents, such as trade
tensions and concerns about global growth, have been weighing on
economic activity and the outlook.
The labor market remains healthy. Job gains averaged 172,000 per
month from January through June. This number is lower than the average
of 223,000 a month last year but above the pace needed to provide jobs
for new workers entering the labor force. Consequently, the
unemployment rate moved down from 3.9 percent in December to 3.7
percent in June, close to its lowest level in 50 years. Job openings
remain plentiful, and employers are increasingly willing to hire
workers with fewer skills and train them. As a result, the benefits of
a strong job market have been more widely shared in recent years.
Indeed, wage gains have been greater for lower-skilled workers. That
said, individuals in some demographic groups and in certain parts of
the country continue to face challenges. For example, unemployment
rates for African Americans and Hispanics remain well above the rates
for whites and Asians. Likewise, the share of the population with a job
is higher in urban areas than in rural communities, and this gap
widened over the past decade. A box in the July Monetary Policy Report
provides a comparison of employment and wage gains over the current
expansion for individuals with different levels of education.
Gross domestic product increased at an annual rate of 3.1 percent
in the first quarter of 2019, similar to last year's pace. This strong
reading was driven largely by net exports and inventories--components
that are not generally reliable indicators of ongoing momentum. The
more reliable drivers of growth in the economy are consumer spending
and business investment. While growth in consumer spending was weak in
the first quarter, incoming data show that it has bounced back and is
now running at a solid pace. However, growth in business investment
seems to have slowed notably, and overall growth in the second quarter
appears to have moderated. The slowdown in business fixed investment
may reflect concerns about trade tensions and slower growth in the
global economy. In addition, housing investment and manufacturing
output declined in the first quarter and appear to have decreased again
in the second quarter.
After running close to our 2 percent objective over much of last
year, overall consumer price inflation, measured by the 12-month change
in the price index for personal consumption expenditures (PCE),
declined earlier this year and stood at 1.5 percent in May. The 12-
month change in core PCE inflation, which excludes food and energy
prices and tends to be a better indicator of future inflation, has also
come down this year and was 1.6 percent in May.
Our baseline outlook is for economic growth to remain solid, labor
markets to stay strong, and inflation to move back up over time to the
Committee's 2 percent objective. However, uncertainties about the
outlook have increased in recent months. In particular, economic
momentum appears to have slowed in some major foreign economies, and
that weakness could affect the U.S. economy. Moreover, a number of
Government policy issues have yet to be resolved, including trade
developments, the Federal debt ceiling, and Brexit. And there is a risk
that weak inflation will be even more persistent than we currently
anticipate. We are carefully monitoring these developments, and we will
continue to assess their implications for the U.S. economic outlook and
inflation.
The Nation also continues to confront important longer-run
challenges. Labor force participation by those in their prime working
years is now lower in the United States than in most other Nations with
comparable economies. As I mentioned, there are troubling labor market
disparities across demographic groups and different parts of the
country. The relative stagnation of middle and lower incomes and low
levels of upward mobility for lower-income families are also ongoing
concerns. In addition, finding ways to boost productivity growth, which
leads to rising wages and living standards over the longer term, should
remain a high national priority. And I remain concerned about the
longer-term effects of high and rising Federal debt, which can restrain
private investment and, in turn, reduce productivity and overall
economic growth. The longer-run vitality of the U.S. economy would
benefit from efforts to address these issues.
Monetary Policy
Against this backdrop, the FOMC maintained the target range for the
Federal funds rate at 2\1/4\ to 2\1/2\ percent in the first half of
this year. At our January, March, and May meetings, we stated that we
would be patient as we determined what future adjustments to the
Federal funds rate might be appropriate to support our goals of maximum
employment and price stability.
At the time of our May meeting, we were mindful of the ongoing
crosscurrents from global growth and trade, but there was tentative
evidence that these crosscurrents were moderating. The latest data from
China and Europe were encouraging, and there were reports of progress
in trade negotiations with China. Our continued patient stance seemed
appropriate, and the Committee saw no strong case for adjusting our
policy rate.
Since our May meeting, however, these crosscurrents have reemerged,
creating greater uncertainty. Apparent progress on trade turned to
greater uncertainty, and our contacts in business and agriculture
report heightened concerns over trade developments. Growth indicators
from around the world have disappointed on net, raising concerns that
weakness in the global economy will continue to affect the U.S.
economy. These concerns may have contributed to the drop in business
confidence in some recent surveys and may have started to show through
to incoming data.
In our June meeting statement, we indicated that, in light of
increased uncertainties about the economic outlook and muted inflation
pressures, we would closely monitor the implications of incoming
information for the economic outlook and would act as appropriate to
sustain the expansion. Many FOMC participants saw that the case for a
somewhat more accommodative monetary policy had strengthened. Since
then, based on incoming data and other developments, it appears that
uncertainties around trade tensions and concerns about the strength of
the global economy continue to weigh on the U.S. economic outlook.
Inflation pressures remain muted.
The FOMC has made a number of important decisions this year about
our framework for implementing monetary policy and our plans for
completing the reduction of the Fed's securities holdings. At our
January meeting, we decided to continue to implement monetary policy
using our current policy regime with ample reserves, and emphasized
that we are prepared to adjust any of the details for completing
balance sheet normalization in light of economic and financial
developments. At our March meeting, we communicated our intention to
slow, starting in May, the decline in the Fed's aggregate securities
holdings and to end the reduction in these holdings in September. The
July Monetary Policy Report provides details on these decisions.
The July Monetary Policy Report also includes an update on monetary
policy rules. The FOMC routinely looks at monetary policy rules that
recommend a level for the Federal funds rate based on inflation and
unemployment rates. I continue to find these rules helpful, although
using these rules requires careful judgment.
We are conducting a public review of our monetary policy strategy,
tools, and communications--the first review of its kind for the FOMC.
Our motivation is to consider ways to improve the Committee's current
policy framework and to best position the Fed to achieve maximum
employment and price stability. The review has started with outreach to
and consultation with a broad range of people and groups through a
series of Fed Listens events. The FOMC will consider questions related
to the review at upcoming meetings. We will publicly report the outcome
of our discussions.
Thank you. I am happy to respond to your questions.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM JEROME H. POWELL
Q.1. Capital--You have said that capital levels at the largest
banks are much higher than they were before the financial
crisis. Do you think that using capital levels during the
financial crisis is the correct benchmark from which to analyze
what is the appropriate level of capital? Do you agree that we
should not lower capital levels for the largest banks?
A.1. The Federal Reserve Board considers a number of factors in
assessing current capital levels, including the findings of
researchers and studies since the financial crisis on optimal
capital levels. I believe that the current overall level of
bank capital is about right. Maintaining the safety and
soundness of the largest banking firms is fundamental to
maintaining the stability of the U.S. financial system and the
broader economy. The banking agencies have substantially
strengthened regulatory capital and liquidity requirements for
large banking firms. The increase in requirements has
significantly increased the financial resiliency of these
firms. At the same time, regulation and supervision should be
tailored according to banking firms' size, complexity, and
risks posed to the financial system. I do not expect that
refinements to the postcrisis regulatory regime will result in
meaningful changes to capital levels, particularly for the
largest, most systemically important banks.
Q.2. Stress Capital Buffer--At the Fed's recent stress test
conference, Vice Chair for Supervision Randal Quarles indicated
that the Fed would soon finalize the stress capital buffer
proposal. You have said that the overall level of capital,
particularly at the largest firms, is about right. \1\ If this
proposal leads to lower capital levels at the largest banks,
however, will the Fed adjust the supervisory and CCAR stress
tests to offset that reduction and how?
---------------------------------------------------------------------------
\1\ Monetary Policy and the State of the Economy Before the Hous.
Comm. on Fin. Servs., 116th Cong. (Feb. 27, 2019).
A.2. As noted in the response to Question 1, I believe that the
current overall level of bank capital is about right, and I do
not expect that refinements to the postcrisis regulatory regime
will result in meaningful changes to capital levels,
particularly for the largest, most systemically important
---------------------------------------------------------------------------
banks.
Q.3. Stress Tests: Qualitative Objection--The Fed recently
eased the qualitative portion of the stress test regime and
removed the qualitative objection, which allowed the Fed to
prevent banks from making capital distributions based on the
quality of their risk management and internal controls.
Without a strong qualitative component and qualitative
objection, what incentive does a bank have to understand how
capital distributions would reduce the amount of capital needed
to survive another financial crisis? Before the 2008 financial
crisis, existing examination and supervision tools were not
enough to identify and correct mismanagement of capital risk.
Please explain how the Fed will address these risks without the
qualitative objection.
A.3. Given the importance of effective capital planning to
safety and soundness, we will continue to assess annually the
largest firms' capital planning practices through the rigorous,
horizontal Comprehensive Capital Analysis and Review's
exercise, as we have done since the last financial crisis. To
the extent a firm exhibits capital planning deficiencies that
call into question their ability to determine their capital
needs under normal or stressed financial conditions, the
Federal Reserve will use its full complement of supervisory
tools--including deficient capital ratings, enforcement
actions, and capital directives--to ensure prompt and thorough
remediation of identified weaknesses by the firm.
Q.4. Distributional Financial Accounts--The Federal Reserve
recently introduced distributional financial accounts, a new
set of statistics on the distribution of wealth in the United
States. These estimates once again confirm the clear increase
in wealth inequality in recent decades. I want to express my
appreciation to the Board for your attention to this issue and
for the hard work of the team that put this together.
Tell us, what do you see as the key findings from this new
research?
A.4. The distributional financial accounts (DFAs) provide a new
tool for monitoring quarterly changes in the distribution of
wealth in the U.S. Like other studies of the wealth
distribution, the DFAs show a substantial difference between
the amount of wealth held by the top of the distribution and
the bottom. For example, the wealth of the top 1 percent is
considerably larger than that of the bottom 50 percent, with
this difference increasing significantly over the last 30
years. In terms of shares, the top 1 percent owned about 31
percent of total wealth in the first quarter of 2019, while the
bottom half owned about 1 percent.
Looking at the components of wealth in DFAs, another key
finding is that business equity, which includes both corporate
stock and unincorporated business ownership, is an important
driver of increasing wealth concentration. Business equity as a
share of total wealth has increased, on net, over the last 30
years, and the share of business wealth held by the top of the
wealth distribution also has increased.
Q.5. How does this research, coupled with low interest rates,
guide your efforts to push for both job and wage growth?
A.5. The DFAs show that the bottom half of the wealth
distribution holds a very small slice of aggregate U.S. wealth.
This suggests that, for many of these households, good jobs are
crucial to their well-being and their ability to save for the
future. Our goal is to sustain the current expansion, with a
strong labor market and stable prices, for the benefit of all
households.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
FROM JEROME H. POWELL
Q.1. At our hearing, a number of my colleagues had the
opportunity to ask you about the future path for interest rates
and I appreciate your thoughts on that issue. I concur that the
Fed shouldn't exhaust all of the tools in its toolbox and leave
our economy unprepared for a response from the central bank in
a future downturn.
I'd like to ask a related question about the Fed's balance
sheet. You announced earlier this year that the Fed will end
its balance sheet runoff at some point in 2019. One point that
you have yet to address is what kind of Treasury securities
that the Federal Reserve will hold once the runoff is complete.
I understand that holding short-term notes will give the Fed
more flexibility in the event you need to respond to a downturn
in the economy.
What kind of Treasury securities will the Fed hold in the
future? If you can't say for certain at this point, what will
factor into your thinking on that front?
A.1. Since the Federal Open Market Committee (FOMC) ended
balance sheet runoff in August 2019, the Federal Reserve has
begun purchasing Treasury securities across the maturity
spectrum. As a result, the Federal Reserve is holding Treasury
securities with maturities from a few days to 30 years.
These purchases reflect two factors. First, at the
conclusion of its July 2019 meeting, the FOMC announced that it
intended to cease the runoff of its securities portfolio,
noting that beginning in August 2019, principal payments
received from agency debt and agency mortgage-backed securities
(MBS) up to $20 billion per month would be reinvested in
Treasury securities to roughly match the maturity composition
of Treasury securities outstanding; principal payments in
excess of $20 billion per month would continue to be reinvested
in agency MBS. Also beginning in August, all maturing treasury
securities in the Federal Reserve's portfolio would be rolled
over at Treasury auctions following usual practices; maturing
and prepaying securities are reinvested. Second, in light of
increases in the Federal Reserve's nonreserve liabilities, in
early October, the FOMC determined it would purchase Treasury
bills at least into the second quarter of next year in order to
maintain over time an ample level of reserve balances at or
above the level that prevailed in early September. This action
is consistent with the FOMC's intention to implement monetary
policy in a regime in which an ample supply of reserves ensures
that control over the level of the Federal funds rate, and
other short-term interest rates, is exercised primarily through
the setting of the Federal Reserve's administered rates, and in
which active management of the supply of reserves is not
required. These recent purchases are purely technical measures
to support the effective implementation of the FOMC's monetary
policy, and do not represent a change in the stance of monetary
policy.
The FOMC has also begun discussions about the longer-run
composition of the Federal Reserve's holdings of Treasury
securities, but has not made any decisions. The FOMC is
considering numerous factors that will influence its
deliberations. Some factors include how the portfolio
composition would interact with the setting of the target range
for the Federal funds rate, how the portfolio composition could
allow the FOMC to use balance sheet policy in a future economic
downturn, and how the portfolio composition would interact with
the Treasury and broader financial markets. Any decision the
FOMC ultimately reaches will be implemented with considerable
advance notice to the public and in a manner that allows for
smooth adjustment in financial markets.
Q.2. I would also like to understand your views on the yield
curve for Treasury securities and what that means for the
potential for a recession in the future. At an event for
Congressional staff in March, the Fed's Director of the
Division of Monetary Affairs, Thomas Laubach, said that he,
quote, ``would not draw too much'' from an inverted yield curve
for a few reasons.
Among the reasons that Dr. Laubach cited were asset
purchases from central banks in the U.S., EU, and Japan that
have caused a decrease in return premiums. In years past, when
monetary policy was tighter, an inverted yield curve would
indicate that a recession was ahead. Now, thanks to those asset
purchases, the yield curve is more indicative of where the
market sees interest rates remaining in the short term.
Do you share Dr. Laubach's thinking? In your opinion, is
the inverted yield curve still cause for concern?
A.2. Measures of long-term yield spreads, such as the
difference between the yield on a 10-year Treasury note and the
yield on a 3-month Treasury bill were negative in recent
months. Some academic research has documented that, in the
past, such inversions have often preceded recessions. Some of
these studies have further speculated that this pattern arises
because long-term yields tend to fall, inverting the curve,
precisely when market participants have come to believe that
that risk of recession is elevated and that the central bank
will soon reduce interest rates to support economic activity.
However, there are reasons to suspect that long-term rates
may be lower now than in years past for reasons that are
unrelated to expectations of a recession. For instance, strong
demand among investors around the world for long-term risk-free
assets likely has depressed long-term yields. In addition,
purchases of long-term sovereign bonds by central banks have
lowered long-term yields around the world, making inversions of
the yield curve more likely.
For these and other reasons, inversions of the yield curve
are by no means flawless predictors of recessions. In
evaluating the outlook for economic activity and inflation in
order to achieve its goals as mandated by Congress, the yield
curve is just one of many indicators that the FOMC considers.
The Committee expects that sustained expansion of economic
activity, strong labor market conditions, and inflation near
the Committee's symmetric 2 percent objective are the most
likely outcomes, but uncertainties about this outlook remain.
Q.3. The Coalition for Derivatives End Users pointed out that
the rule implementing SA-CCR--as it is proposed--
disproportionately burdens bank counterparties by increasing
the capital they have to hold with respect to transactions with
end-user counterparties.
Those end-user counterparties are currently exempt from
posting margin, so if the proposed rule moved forward, bank
counterparties would have to reset the imbalance by passing
through the cost of capital fees to the end-user counterparties
in the form of higher transaction fees or by dropping out of
market making activities. This means that our markets would
become less liquid and that farmers and Main Street consumers
would pay more for simple commodities like corn, wheat, or gas.
Can you tell me more about why the Fed designed the SA-CCR
rule this way and what impact you believe this will have on
everyday Americans?
A.3. The Federal Reserve Board (Board) proposed the
implementation of standardized approach for counterparty credit
risk (SA-CCR) to provide important improvements to risk
sensitivity and calibration relative to the current exposure
methodology (CEM), a standardized approach that uses
supervisory provided formulas to determine capital requirements
for the counterparty credit risk of derivative contracts. In
particular, the implementation of SA-CCR is responsive to
concerns that CEM, developed a few decades ago, has not kept
pace with certain market practices used predominantly by large
and sophisticated banking organizations. The agencies
anticipated that the proposal would not materially change the
amount of capital in the banking system. Rather, any change in
a particular banking organization's capital requirements,
through either an increase or a decrease in regulatory capital,
would reflect the banking organization's own derivative
portfolio, the enhanced risk sensitivity of SA-CCR relative to
CEM, and market conditions. Commenters have raised concerns
regarding how SA-CCR could affect commercial end-users' ability
to access the derivatives market, and the Board is considering
carefully these comments, along with all other comments
submitted, in formulating a final rulemaking that would
implement SA-CCR.
Q.4. Wire fraud through email poses tremendous risks to our
constituents, especially homebuyers, and their confidence in
our payment system's ability to safely transfer large amounts
of money as part of the homebuying process.
How is the Federal Reserve addressing criminal exploitation
of weaknesses in the U.S. wire system?
Which Federal agencies has the Federal Reserve coordinated
with on the issue of wire fraud?
A.4. The Federal Reserve has taken a number of steps to address
criminal exploitation of the U.S. wire system. The Board,
jointly with the Financial Crimes Enforcement Network, the
Office of the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, and the National Credit Union
Administration, promulgated the Customer Identification Program
(CIP) rule. The CIP rule requires banks to obtain sufficient
information from their customers in order to form a reasonable
belief regarding the identity of each customer. \1\ The CIP
rule requires verification procedures designed to ensure that
financial institutions know their customers and to assist in
identifying potential bad actors. Such procedures are important
in combating wire fraud related to real estate, and other
transactions.
---------------------------------------------------------------------------
\1\ See 31 CFR 1020.220.
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Additionally, the Federal Reserve has been engaged in
efforts to reduce fraud more broadly in wire payments. We have
worked collaboratively with other central banks as part of the
efforts by the Bank for International Settlement's Committee on
Payments and Market Infrastructures (CPMI) to reduce the risk
of wholesale payments fraud related to endpoint security with
the broader objective of supporting financial stability. \2\ As
a result, the Federal Reserve and CPMI member central banks
have developed a strategy to encourage and focus industry
efforts to reduce the risk of fraud related to endpoint
security. \3\ The strategy includes key elements that payment
system and messaging operators should consider as part of their
efforts to mitigate payments fraud, and it encourages a
holistic approach to address all areas relevant to preventing,
detecting, responding to and communicating about fraud.
Domestically, the Federal Reserve has collaborated with payment
system stakeholders through its Secure Payments Task Force
(Task Force) to advance information sharing for the mitigation
of payment fraud. \4\ In 2018, the Task Force published a
number of recommendations aimed at standardizing fraud
definitions, setting requirements for fraud data collection and
formatting, implementing a framework for sharing fraud
information domestically, and facilitating fraud information
sharing internationally.
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\2\ See https://www.federalreserve.gov/newsevents/pressreleases/
other20180508a.htm.
\3\ See https://www.bis.org/cpmi/publ/dl-78.pdf.
\4\ See https://fedpaymentsimprovement.org/payments-security/
secure-payments-task-force-archive/.
Q.5. An effort by the Federal Reserve to develop a real time
payments (RTP) system would not be an easy undertaking. An
existing RTP infrastructure already exists and is operated in
the United States today. On its face, this would conflict with
provisions in the Monetary Control Act that prohibit the
Federal Reserve from competing with the private sector. In
addition, should the Fed move forward, it would transmit and
hold a tremendous amount of sensitive data.
Please tell me more about what the Fed is planning for real
time payments.
A.5. The Board announced on August 5, 2019, that the Reserve
Banks will develop a new real-time payment and settlement
service, called the FedNow(SM) Service, to support faster
payments in the United States. \5\ In making this decision, the
Board adhered to the requirements of the Monetary Control Act
of 1980 (MCA) and long-standing Federal Reserve policies and
processes. \6\ The FedNow Service would operate alongside
private-sector real-time gross settlement (RTGS) services for
faster payments. This service is consistent with the operations
of most other payment systems in the United States, such as
funds transfers, checks, and automated clearinghouse payments,
whereby the Reserve Banks operate payment and settlement
services alongside and in support of similar private-sector
services.
---------------------------------------------------------------------------
\5\ See https://www.federalreserve.gov/newsevents/pressreleases/
other20190805a.htm.
\6\ Board of Governors of the Federal Reserve System, ``The
Federal Reserve in the Payments System'' (Issued 1984; Revised 1990).
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The MCA requires that Federal Reserve services be priced
competitively and made available equitably to depository
institutions. The MCA encourages competition between the
Reserve Banks and the private sector through an expectation
that the Reserve Banks will recover costs of services, both
actual expenses associated with providing the services as well
as certain imputed costs, including the taxes and cost of
capital that would be paid by a private-sector competitor.
The Board also adheres to internal policy criteria
established in 1984 and revised in 1990 \7\ 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 a public benefit, and
(3) provide services that other providers alone cannot be
expected to provide with reasonable effectiveness, scope, and
equity. The Board's August 2019 Federal Register Notice
provides a full analysis of how the FedNow Service meets the
requirements of the MCA as well as the Board's policy criteria
for the provision of new or enhanced services.
---------------------------------------------------------------------------
\7\ See https://www.federalreserve.gov/paymentsystems/pfs-
frpaysys.htm.
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Also in support of real-time payments, the Federal Reserve
announced its intention to explore the expansion of hours for
the Fedwire' Funds Service and the National
Settlement Service, up to 24x7x365, to support a wide range of
payment activities, including liquidity management in private-
sector services for faster payments. Subject to the outcome of
additional risk, operational, and policy analysis, the Board
will seek public comment separately on plans to expand Fedwire
Funds Service and National Settlement Service hours.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM JEROME H. POWELL
Q.1. Traditionally, the Federal Reserve Board (Fed) has not
been subject to audit, for fear of the audit undermining the
independence of its monetary policy function. There appears to
be no similar justification with respect to a business run by
the Fed in competition with the private sector, and where
budgets need to be reviewed for compliance with the Monetary
Control Act. Assuming the Fed proceeds in this area, would you
relax your traditional opposition to Fed audits if all monetary
policy functions were exempt?
A.1. Currently, the Federal Reserve is subject to several
levels of audit and review. Under existing law, the financial
statements of the Federal Reserve Board (Board) and the Reserve
Banks are audited annually by an independent accounting firm
(under the supervision of the Office of the Inspector General
of the Board and the Board's Division of Reserve Bank
Operations and Payment Systems, respectively). Our audited
financial statements are made publicly available and provided
to Congress annually.
In addition, the Congress and the Government Accountability
Office (GAO) may conduct financial and operational audits of
the Federal Reserve and have done so on many occasions. In
particular, for non- monetary policy activities undertaken by
the Federal Reserve, such as banking supervision and
regulation, the GAO already has full audit review authority. As
of the end of June 2019, nearly 170 audits have been conducted
since the financial crisis.
The GAO also has reviewed specifically the Federal
Reserve's role in providing payment services such as check,
automated clearinghouse (ACH) transactions, and wire, and
concluded that the payment system and its users have benefited
over the long run from the Federal Reserve's operational
involvement and competition with other providers. \1\
---------------------------------------------------------------------------
\1\ See GA0-16-614, ``Federal Reserve's Competition With Other
Providers Benefits Customers, but Additional Reviews Could Increase
Assurance of Cost Accuracy'' (2016), https://www.gao.gov/products/GA0-
16-614.
Q.2. You have indicated that the Fed is considering a new
business of providing a real-time payments service in
competition with the existing RTP system operated by The
Clearing House, and potentially other private sector actors.
The Monetary Control Act requires the Fed to establish a fee
schedule for Reserve Bank payment services that are based on
the basis of all direct and indirect costs actually incurred in
providing the priced services, including imputed costs
(including taxes) that would be incurred by a private-sector
---------------------------------------------------------------------------
provider.
A.2. Please see the responses to Questions 4 and 5.
Q.3. What is the Fed's estimate of how much it would cost to
build such a system, and operate it annually?
A.3. Based on what we have learned from central banks in other
countries and our own experience with building and modernizing
our existing Federal Reserve payment services, we expect the
costs to be within a range that would allow us to achieve cost
recovery over the long run.
The exact costs of building the FedNow(SM) Service would be
predicated on its specific features and functionality, which we
will specify after receiving and considering public comment as
part of our normal process for new services or major service
enhancements, and other factors, such as technical architecture
and build-versus-buy decisions.
Q.4. How would the Fed fund the initial outlay, for example,
would you increase prices on your existing payments system
products to fund it? Would these outlays reduce Fed remittances
to the Treasury in the years they are made?
A.4. FedNow Service outlays would be funded in a similar manner
as all Reserve Bank outlays. Our practice is to recover
development costs over the long run much like a private-sector
firm. This includes imputing capital and certain other costs,
for example taxes, to priced services as required by the MCA.
As with any Federal Reserve service, remittances to the
Treasury may fluctuate based on the Federal Reserve's cost
recovery.
Q.5. Can you commit that before incurring any start-up costs,
you would have in place a business plan that envisioned pricing
consistent with the Monetary Control Act, and share that plan
with this Committee prior to any decision to move ahead?
A.5. The MCA requires that ``(o)ver the long run, fees shall be
established on the basis of all direct and indirect costs
actually incurred in providing the Federal Reserve services.''
\2\ In addition, the MCA requires the Federal Reserve to ``give
due regard to competitive factors and the provision of an
adequate level of such services nationwide.''
---------------------------------------------------------------------------
\2\ 12 U.S.C. 226.
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Reflecting the MCA requirement also to give due regard to
both competitive factors and the provision of an adequate level
of services nationwide, the Board's longstanding policy (since
1980) recognizes that, during an initial start-up period, new
operational requirements and variations in volume may
temporarily change unit costs for a service. Our intention is
to match revenues and costs as soon as possible and monitor
progress in meeting this goal. We would be happy to discuss the
progress on the FedNow Service with the Committee.
Q.6. My understanding is that with regard to the existing ACH
services provided by the Fed, small banks are charged more than
large banks. The discount is used in order to attract the
greater volume provided by the large banks. Will you commit,
and construct your business plan on the assumption that the Fed
will never do volume discount pricing for any real-time payment
service?
A.6. The Federal Reserve has not yet determined the pricing
structures or levels that will be applicable to the FedNow
Service. Before the FedNow Service is launched, the Board will
announce the service's fee structure and fee schedule. Based on
prevailing market practices, the Board expects that the fee
structure would include a combination of per-item fees, charged
to sending banks and potentially, to receiving banks, and fixed
participation fees. The ultimate fee structure and schedule
would be informed by the Board's assessment of market practices
at the time of implementation, which could evolve from today's
practices. Separate per-item fees could also be charged for
other message types that may be offered in the future. This
approach is consistent with the approach currently taken with
respect to other priced services provided by the Federal
Reserve.
Q.7. The Clearing House is owned by the Nation's largest banks,
which are already participating in the RTP system, and have
built all the necessary connections to it. It seems exceedingly
unlikely therefore--whether with volume discounts or without
them--that those banks will abandon the RTP system to join any
Fed system in the future. Is part of the Fed plan to require
the largest banks to join the Fed System--in effect, outlawing
a private sector option? If not, please explain (and include in
your business plan an explanation of) how the Fed could price
in compliance with the Monetary Control Act when its system
does not process the volume of any of the large banks. What
would pricing have to look like in order to recoup start-up and
operating costs if only small banks, representing a fraction of
total volume, were participating in the Fed system?
A.7. Many banks today, particularly large ones, have signed up
for Federal Reserve and private-sector services in other
payment systems. We expect large banks would benefit from
joining the FedNow Service both from a business perspective, in
order to extend reach to a broader array of banks, and from a
resiliency perspective to have a back-up option. We expect
these benefits would outweigh the costs of joining two
services, as is the case today for other payment services.
Q.8. How many Fed employees (at the Board and the Reserve
Banks) are employed to operate the ACH network? How many
employees do you roughly estimate would be employed to operate
a real-time network? Would Reserve Banks need to add staff or
would they be transitioned from ACH (as the move towards real-
time could lead to fewer employees devoted to ACH)?
A.8. Approximately 70 employees work on day-to-day operations
of the Federal Reserve's FedACH service in order to support the
service's approximately 10,000 financial institution customers.
Staff from across the Federal Reserve System provide additional
support functions for various Federal Reserve services,
including FedACH, such as technology development.
The FedNow Service is a priority for the Federal Reserve,
and as such we will devote the necessary resources required to
deliver the highest quality service in a timely manner.
Resources will likely come both from existing staff within the
Federal Reserve as well as new staff. Staff will not be drawn
exclusively from any single service or other Reserve Bank
function. The Board requires all Federal Reserve services,
including FedACH and FedNow Service, to recover the actual and
imputed long-run costs, which includes staffing costs,
associated with operating the service.
Q.9. If the Fed offers real-time payments, why should it
continue to also be the regulator of the payments system?
Should that responsibility be conferred to another agency who
could more dispassionately assess the Fed's compliance with the
provisions of the Monetary Control Act and all other applicable
laws?
A.9. The Board does not have plenary regulatory or supervisory
authority over the U.S. payment system. Rather, the Board has
limited authority to influence private-sector payment systems
in specific circumstances. For example, the Bank Service
Company Act grants the Board (and the other Federal banking
agencies) the authority to regulate and examine third party
service providers, but only for the performance of certain
covered services and only when services are performed for
depository institutions under the agency's supervision.
Under the Federal Reserve Act, the Board supervises the
activities of the Reserve Banks through rules, policies, and
examinations. The decision to build the FedNow Service adheres
to the MCA and the longstanding Federal Reserve policies and
processes. \3\
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\3\ See https://www.federalreserve.gov/paymentsystems/
pfs_policies.htm.
Q.10. In January 2015, the Fed stated in its Strategies for
Improving the U.S. Payment System that they ``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.'' While you have stated that no final decisions have
been made, the request for comments issued clearly states that
the Fed is in fact considering expanding its role, despite the
significant improvements made by the private sector. In the
future, how can you expect the private sector to respond to the
Fed's calls for innovation, when the Fed fails to hold itself
---------------------------------------------------------------------------
to its commitments?
A.10. The decision to build the FedNow Service is responsive to
requests from the Faster Payments Task Force (FPTF) and a
recommendation from the U.S. Department of the Treasury (U.S.
Treasury). Through the Strategies for Improving the U.S.
Payment System (SIPS) initiative, the Federal Reserve and
industry stakeholders worked together to identify desirable
improvements to the U.S. payment system and the most effective
way to achieve those improvements.
The FPTF, a diverse group of more than 300 industry
stakeholders convened as part of the SIPS initiative, issued in
2017 a final report with 10 consensus recommendations intended
to advance the goal of ubiquitous, safe, faster payments in the
United States. \4\ Among those recommendations was a request
for the Federal Reserve to provide a 24x7x365 settlement
service for faster payments. The request was intended to
``enable a needed infrastructure to support faster payments.''
At that time, the members of the FPTF were aware of and
anticipated the launch of the private-sector service.
---------------------------------------------------------------------------
\4\ See https://fasterpaymentstaskforce.org/.
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The U.S. Treasury made a similar recommendation in its 2018
report on financial innovation: ``Treasury recommends that the
Federal Reserve move quickly to facilitate a faster retail
payments system, such as through the development of a real-time
settlement service.'' \5\ The FPTF request and U.S. Treasury
recommendation reflect the foundational role that the Federal
Reserve, as the Nation's central bank, has served since its
inception in providing payment and settlement services to
banks.
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\5\ See https://home.treasury.gov/sites/default/files/2018-08/A-
Financial-System-that-Creates-Economic-Opportunities-Nonbank-
Financials-Fintech-and-lnnovation-O.pdf.
Q.11. The FHFA has currently proposed a Conservatorship Capital
Framework that provides capital credit for Enterprise Credit
Risk Transfer (CRT) transactions in strong structures and/or
with strong counterparties which seems appropriate at a high
level. In a speech in July 2017 you expressed support for the
GSEs' credit risk transfer efforts, and I believe there is a
fair amount of consensus that these transactions have helped
reduce taxpayer risks and introduce more private capital in
support of the U.S. housing market. Among the often-cited
objectives of housing finance reform is to level the playing
field for private capital willing to price and invest in
mortgage credit risk. Also, one of the overarching principals
of the postcrisis regulatory environment has been that
similarly situated companies should be regulated similarly
regardless of charter type. With those objectives in mind, it
seems appropriate to me that banks should have a similar
opportunity to receive capital relief for CRT transactions that
are fully collateralized and/or insured by strong
counterparties. This could expand mortgage options for
consumers, allowing banks to retain the AAA risk on a mortgage,
maintain the consumer relationship, and sell off the credit
risk to entities better equipped to hold that risk given the
duration mismatch for banking institutions.
Would you commit to taking a fresh look with your fellow
banking regulators at the circumstances under which banks
should be allowed capital credit for bona fide credit risk
transfer transactions that involve sound structures and
counterparties?
A.11. The Federal Housing Financing Agency's (FHFA) proposal on
``Enterprise Capital Requirements'' is specifically designed
for Fannie Mae and Freddie Mac and their specialized lending
niche. The FHFA has calibrated its proposed capital
requirements and tailored its credit risk mitigation rules to
two specific categories of exposures: single-family home loan
and multifamily loan portfolios. These products have
standardized characteristics that are incorporated in the
FHFA's proposed approach for risk weighting these exposures.
Banks have a wider variety of exposures than Fannie Mae and
Freddie Mac. Thus, banks require a different calibration of
capital requirements and a more general set of rules governing
the recognition of credit risk mitigation.
The banking agencies' approach for recognizing credit risk
transfer through a securitization needs to be flexible enough
to accommodate a wide variety of securitized asset classes
without standardized characteristics. The approach may require
more capital on a transaction-wide basis than would be required
if the underlying assets had not been securitized, in order to
account for the complexity introduced by the securitization
structure. Furthermore, the agencies' capital rule requires
banking organizations to meet certain operational requirements.
An inability by a banking organization to meet these
operational requirements may lead to higher risk weighting,
relative to the FHFA's proposed approach. That said, you raise
a number of important considerations, and we are reviewing
policies related to credit risk transfers.
Q.12. What are you doing to ensure that examiners are not
downgrading ratings, issuing enforcement actions, or imposing
Matters Requiring Attention and Immediate Attention (MRAs and
MRIAs) based on guidance or informal standards? Banks are
probably going to be reluctant to raise these issues publicly,
so given the lack of transparency, how do we know that
examiners are really basing their ratings and findings on rules
and not guidance?
A.12. In September 2018, the Federal financial regulatory
agencies issued an Interagency Statement Clarifying the Role of
Supervisory Guidance (Interagency Statement). The Interagency
Statement reaffirmed that supervisory guidance, unlike laws and
regulations, is not legally enforceable, and therefore
supervisory actions cannot be based on supervisory guidance.
Where appropriate and helpful to explain the identified
issue and possible remediation steps to the firm, examiners
may, as the statement indicates, refer to guidance. The Board
issues guidance to increase the transparency of our supervisory
expectations. We have reminded our examiners to be clear when
communicating with financial institutions in order to minimize
possible confusion between the principles and sound practices
described in guidance and the requirements of regulations.
Since the issuance of the Interagency Statement, the
Federal Reserve has taken several steps to ensure that System
supervisory staff understand its content and are acting
consistent with it. These steps include:
Issuing internal talking points, FAQs, and training
materials after publication of the Interagency
Statement;
Conducting a mandatory training session for all
supervisory staff on the Interagency Statement, with
examples of acceptable language for supervisory
communications, as well as additional, more targeted
training sessions with staff;
Instituting a greater use of templates for
supervisory communications to firms to ensure
consistency in messages, including related to guidance;
Confirming with all Reserve Bank supervisory staff
and staff of all portfolio management groups that they
have implemented the Interagency Statement in their
respective Districts and portfolios;
Coordinating with the other Federal banking
agencies so that any interagency guidance is
consistently applied; and
Indicating to firms that if they have concerns
about how supervisory guidance is being applied, they
should feel free to reach out to Federal Reserve staff,
either at their local Reserve Bank or to Board staff
directly.
In addition, an appeals process exists for firms who wish
to challenge supervisory findings, including MRAs and MRIAs.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
FROM JEROME H. POWELL
Q.1. As you mentioned, our economic expansion continues, as
evident in the 3.7 percent unemployment rate and average of
172,000 jobs added to the economy each month. But we aren't
seeing the economic boom to the same degree in rural areas.
Farmers have seen their net income plummet by half since
2013 and are now expected to hold nearly $427 billion in debt
this year--the most since the farm crisis in the 1980s--while
many segments of the ag industry continue struggling to fill
jobs.
Aside from trade, where does the Federal Reserve's incoming
data indicate Congress should focus its efforts on to avoid
another farm crisis, and what are the Fed's future
considerations for providing support to this segment of the
economy?
A.1. Federal Reserve data suggest that the U.S. farm economy
has weakened since 2013 and is expected to remain relatively
weak in the coming months. Farm income declined sharply from
2013 to 2015 and has remained relatively flat in the years
since. The decline in farm income primarily has been due to
persistently low agricultural commodity prices and elevated
input costs. The weakness in farm income has led to gradual but
persistent declines in working capital due to ongoing cash flow
shortages. This has, in turn, led to increased financing needs
and a modest increase in financial stress in recent years in
the U.S. farm sector.
The root cause of the suppressed U.S. farm economy has been
persistently low farm income due to an ongoing environment of
low agricultural commodity prices. The weakness in agricultural
commodity prices has come about primarily from slower growth in
the global demand for U.S. agricultural commodities and an
increase in supply relative to previous years. The supply of
agricultural products from one year to the next tends to
respond to the broad undercurrent of global demand.
The Federal Reserve monitors all aspects of the U.S.
economy and incorporates developments in each segment of the
economy into its key mission areas. When evaluating the
appropriate stance of monetary policy, for example,
developments in the agricultural economy are regularly included
in its deliberations, in addition to an evaluation of
conditions in other areas of the U.S. economy. The Federal
Reserve also works to ensure that commercial banks are
evaluated properly in the provision of credit to the
agricultural sector. Finally, the Federal Reserve also
interacts regularly with the public, including agricultural
stakeholders, to share insights on the farm sector and gather
information in an effort to enhance decision making on matters
related to agriculture.
Q.2. It is disappointing to see final rules implementing 2155
provisions that are no different than the rule proposals
despite input from this body after the initial proposal; with
the short form call report final rule being a prime example
after hearing from a significant portion of the Senate.
Can you provide me with any vote of confidence that the
same thing won't happen with the final rule of the Community
Bank Leverage Ratio?
A.2. The Federal Reserve Board of Governors, the Office of the
Comptroller of the Currency and the Federal Deposit Insurance
Corporation (the agencies) recently adopted a community bank
leverage ratio (CBLR) framework that is consistent with the
Economic Growth, Regulatory Relief, and Consumer Protection
Act's objective of reducing the regulatory burden on community
banking organizations while maintaining safety and soundness.
The agencies carefully considered the public comments on the
proposal and actively consulted with State bank supervisors in
developing the final rule. \1\ Relative to the proposal, the
final rule incorporates a number of changes advocated by
commenters, notably including a ``grace period'' for films
which temporarily fail to meet certain qualifying criteria and
removal of the proposal's separate prompt corrective action
framework specific to the CBLR framework.
---------------------------------------------------------------------------
\1\ See: https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20191029a.htm.
Q.3. I understand that the Federal Reserve buys the majority of
the GSE's debt.
As the largest creditor for Fannie Mae and Freddie Mac, are
you concerned that the GSEs have not been designated as SIFIs
by FSOC--and wouldn't at least going through the SIFI
designation process help ensure that the GSEs have a strong
prudential framework?
A.3. Both the direct obligations issued by, and the mortgage-
backed securities (MBS) guaranteed by, Fannie Mae and Freddie
Mac are eligible for purchase by the Federal Reserve because
they are fully guaranteed as to principal and interest by
Fannie Mae and Freddie Mac. During the financial crisis and
subsequent recession, the Federal Reserve purchased agency debt
and agency MBS to help reduce the cost and increase the
availability of credit for the purchase of houses.
In late 2014, the Federal Open Market Committee (Committee)
stopped increasing its holdings of MBS and in late 2017
announced plans for the gradual reduction of the Federal
Reserve's securities holdings. Moreover, as part of its 2014
statement on policy normalization principles and plans, the
Committee stated that ``it will hold primarily Treasury
securities, thereby minimizing the effect of Federal Reserve
holdings on the allocation of credit across sectors in the
economy.'' As of August 2019, Federal Reserve holdings of
agency securities are approximately $1.5 trillion, down from
their October 2017 level of $1.8 trillion.
The Federal Reserve Board (Board) recognizes that the
Government-sponsored enterprises (GSEs) are important entities
in the mortgage markets and in the financial system generally.
Whether or not the Financial Stability Oversight Council (FSOC)
should designate the GSEs would depend on the FSOC's
consideration of the required statutory factors to determine
whether the GSEs are systemically important.
It is important to note that the GSEs already have a
consolidated prudential regulator with substantial regulatory
authorities. Indeed, following enactment of the Housing and
Economic Recovery Act of 2008 (HERA), the Federal Housing
Finance Agency (FHFA) came into existence with an enhanced
array of supervisory tools. These tools include explicit
authority to:
impose and enforce prudential standards, including
capital standards;
conduct targeted and full scope examinations;
obtain reports from parties on a regular and on an
as-requested basis;
oversee executive compensation, including incentive
compensation and golden parachutes;
require remedial actions; and
undertake a full range of enforcement actions.
In addition, as part of HERA, Congress granted the Director
of FHFA the discretionary authority to appoint FHFA as
conservator or receiver of Fannie Mae, Freddie Mac, or any of
the Federal Home Loan Banks upon determining that specified
criteria had been met. This authority was used in September
2008 to avoid mortgage financing and financial market
disruptions that may have resulted from the failure of Fannie
Mae or Freddie Mac at that time.
Q.4. How important do you think it is for Congress to reform
the housing finance market and take action to end the
conservatorship of Fannie Mae and Freddie Mac?
A.4. A robust, well-capitalized, well-regulated housing finance
system is vital to the stability of the financial system and to
the long-run health of our economy. We need a system that
provides mortgage credit in good times and bad to a broad range
of creditworthy borrowers. While reforms have addressed some of
the problems of the precrisis system, there is broad agreement
that the job is far from done. Today, the Federal Government's
role in housing finance is even greater than it was before the
crisis. The overwhelming majority of new mortgages are issued
with Government backing in a highly concentrated securitization
market. That leaves us with both potential taxpayer liability
and systemic risk. It is important to learn the right lessons
from the failure of the old system. Above all, we need to move
to a system that attracts ample amounts of private capital to
stand between housing sector credit risk and taxpayers. We
should also use market forces to increase competition and help
to drive innovation.
Q.5. One of the most common sentiments I have heard from
farmers over the years is that whether the rest of the economy
is booming or struggling, the opposite occurs in the ag
economy.
Do you and the Federal Reserve have an explanation for
these disparities, and where do we need to focus our efforts to
ensure our economic expansion benefits the ag economy and the
economy as a whole?
A.5. Cycles in the agricultural economy may differ from those
of the broader U.S. economy due, in part, to differences in the
time required for production to fully respond to underlying
changes in demand. The strength of the U.S. farm sector depends
crucially on the price of agricultural commodities, which is
significantly determined by global supply and demand
conditions. As global demand for agricultural products
strengthens, the price of agricultural commodities tends to
increase, which boosts farm income. Agricultural producers,
both in the U.S. and globally, tend to respond to these higher
prices by increasing production. However, unlike other economic
sectors, history has shown that it often takes a number of
years for agricultural production to fully adjust to the
increase in demand. Likewise, as global demand growth slows, it
may take a number of years for agricultural production to
adjust, resulting in persistently low agricultural commodity
prices.
In the mid-2000s, two primary drivers of demand for
agricultural commodities were economic growth in China and
growth in U.S. biofuels (i.e., ethanol). This increase in
demand for agricultural products caused agricultural commodity
prices to increase significantly from 2006 to 2013. Although
agricultural production responded to the increase in prices, it
took several years for supply to meet the increased demand.
Since 2013, the pace of growth in these components of demand
appears to have slowed. In general, however, the production of
agricultural commodities, has remained relatively high. The
slower demand growth, coupled with elevated supplies of
agricultural commodities, has been a primary factor in keeping
agricultural commodity prices relatively low.
Q.6. Does the Federal Reserve have any monetary policy tools to
help offset the disparities between the benefits of an
expanding economy as a whole and the ag economy specifically?
A.6. In conducting monetary policy, the Federal Reserve
incorporates information on all aspects of the U.S. economy
into its regular policy deliberations. These deliberations take
into account the strengths and weaknesses of various sectors,
including agriculture. The Federal Reserve's monetary policy
tools are powerful, but blunt, and not intended to address
individual sectors of the economy. Rather, the Federal Reserve
sets policy to achieve its overall aggregate goals of maximum
employment and stable prices.
Q.7. In its report last year on nonbank financials, FinTech,
and innovation, the Department of the Treasury made specific
policy recommendations to the financial regulatory agencies,
including the Federal Reserve, that were designed to ensure
that the U.S. financial system keeps pace with financial
systems abroad. One of the key areas of focus was the need to
assure consumers and small businesses that they own their own
financial data and should have the ability to grant permission
to third parties to provide products or services that rely on
customer data.
What steps has the Federal Reserve taken since the Treasury
report was published last July to meaningfully improve consumer
and small businesses digital financial data access?
A.7. As the Department of Treasury recently highlighted,
``[t]he only express statutory provision regarding access to a
consumer's own financial account and transaction data is
Section 1033 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank).'' \2\ Section 1033 provides the
Consumer Financial Protection Bureau (CFPB) with the authority
to prescribe rules regarding consumer rights in data related to
financial products and services obtained from a financial
institution. The CFPB identifies policy work related to this
authority in its Spring 2019 release of ``Long-Term Actions.''
\3\
---------------------------------------------------------------------------
\2\ U.S. Department of the Treasury (U.S. Treasury), ``A Financial
System That Creates Economic Opportunities--Nonbank Financials,
FinTech, and Innovation'' (July 2018), https://home.treasury.gov/sites/
default/files/2018-08/AFinancial-System-that-Creates-Economic-
Opportunities-Nonbank-Financials-Fintech-and-Innovation.pdf. As
described by the U.S. Treasury, the statute states that, subject to
rules prescribed by the CFPB, ``financial services companies subject to
the Bureau's jurisdiction as covered persons are required to make
available to a consumer, upon request, certain financial account and
transaction data concerning any product or service obtained by the
consumer from that financial services company.''
\3\ See https://www.reginfo.gov/public/do/
eAgendaViewRule?pubId=201904&RIN=3170-AA78 (Consumer Access to
Financial Records [as described in section 1033 of the Dodd-Frank
Act]). Other consumer laws and regulations might also be relevant to
the CFPB's policy response to issues involving account aggregation.
See, e.g., https://www.reginfo.gov/public/do/
eAgendaViewRule?pubId=201904&RIN=370-AA79 (Regulation E Modernization).
---------------------------------------------------------------------------
As the Department of Treasury also indicated, other
regulators have a role to play as well. FinTech innovators
generally rely on connections to banks for access to consumer
deposits or related account data, access to the payment system,
or credit origination. Accordingly, as banks explore advances
in FinTech products and services, the Federal Reserve has a
responsibility to ensure that institutions we supervise operate
in a safe and sound manner and that they comply with applicable
statutes and regulations, including consumer protection laws.
The Federal Reserve coordinates our activities on digital
financial access with those of other regulators in a number of
fora, including the Federal Financial Institutions Examination
Council (FFIEC) Task Force on Supervision and the FFIEC Task
Force on Consumer Compliance.
This calendar year, the Federal Reserve has also organized
a number of meetings with industry actors, trade associations,
and consumer advocates in a variety of FinTech areas, including
financial account aggregation, which have included joint
participation from a number of relevant regulators, including
the Office of the Comptroller of the Currency (OCC), Federal
Deposit Insurance Corporation (FDIC), CFPB, the Federal Trade
Commission, and the Conference of State Bank Supervisors. We
will continue to facilitate and to engage in collaborative
discussions with other relevant financial regulators in these
and other settings.
We also are reviewing how our guidance relates to
expectations regarding the way banks should engage with FinTech
firms, including data-sharing agreements between banks and data
aggregators. For example, the Federal Reserve often receives
questions about the applicability of our vendor risk management
guidance. Staff are reviewing this guidance to determine
whether any adjustments or clarifications would be helpful to
promote responsible innovation.
Q.8. As you know, the United Kingdom began deploying its Open
Banking regime--designed to empower consumers and small
businesses to choose any financial services provider they like,
be they an incumbent or challenger--in January of last year.
Since then, a number of other countries, including Australia,
New Zealand, Canada, Singapore, Hong Kong, Mexico, and South
Africa--just to name a few--have signaled their intentions to
implement similar regimes.
Is there a risk that the U.S. falls behind if we don't
start considering what a U.S. version of Open Banking should
look like?
A.8. As regulators, we have a responsibility to ensure that the
institutions subject to our supervision are operated in a safe
and sound manner and that they comply with applicable statutes
and regulations, including consumer protection laws. We have a
strong interest in permitting responsible innovations to
flourish, but first must ensure the risks that they may present
are appropriately managed, consistent with relevant legal
requirements. With regard to open banking, the Federal Reserve
has continued to monitor closely developments in other
jurisdictions and analyze potential opportunities and
challenges posed by the adoption of open banking models in the
United States. \4\
---------------------------------------------------------------------------
\4\ For example, Board members have spoken about some of these
issues. See, e.g., Lael Brainard, ``Where Do Banks Fit in the FinTech
Stack'' (April 28, 2017), https://www.federalreserve.gov/newsevents/
speech/files/brainard20170428a.pdf. See also Lael Brainard, ``Where Do
Consumers Fit in the FinTech Stack'' (Nov. 16, 2017), https://
www.federalreserve.gov/newsevents/speech/files/brainard20171116a.pdf.
---------------------------------------------------------------------------
From our study of these overseas directives, several
important considerations for adopting a United States' version
of open banking via regulation have emerged. For example,
certain approaches in other jurisdictions to address attendant
data-security and consumer-protection risks, by and large, are
not readily available policy options to Federal banking
regulators in the United States. Moreover, third parties that
access bank accounts are often subject to licensing and
registration requirements, as well as associated capital and
insurance requirements. Likewise, overseas directives may also
require that electronic payments (both bank and nonbank) be
authorized by two-factor authentication.
Perhaps most importantly, the jurisdictions that have moved
forward with open banking requirements have less diverse
banking systems materially, where the rules may impact fewer
than ten very large institutions. In contrast, a U.S. version
of open banking would impact a more diverse set of financial
institutions, including thousands of small and community
financial institutions. For institutions with limited
resources, the necessary investments in application programming
interface technology and in negotiating and overseeing data-
sharing agreements with data aggregators and third-party
providers may be beyond their reach, especially as they usually
rely on service providers for their core technology.
Accordingly, U.S. efforts to craft approaches that enhance
the connectivity of banks with nonbanks have benefited from the
engagement of multiple agencies, along with input from the
private sector and other stakeholders. In that regard, the
private sector is continuing to experiment actively with a
variety of different approaches to the connectivity issue and
may itself move toward one or more widely accepted standards.
We support ensuring that connectivity issues are
appropriately addressed in a way that allows community banks to
participate in innovative platforms, and that this should be an
important priority.
Q.9. Should a financial institution retain the ability to
restrict the ability of one of its customers to permission
access to their data for any reason other than an imminent
security threat?
A.9. In light of the CFPB's authority in this area (see
response to Question 7), the Board has not articulated an
independent position regarding consumer-permissioned data
access. Board members have, however, articulated general
concerns about appropriate risk management relating to safety
and soundness and consumer protection, as described in the
response to Question 8.
Q.10. The proliferation of bilateral contractual agreements
between large financial institutions and data aggregators has
been heralded by some policymakers as a positive development
for innovation.
But isn't this model of disparate, opaque agreements
between financial institutions and the facilitators of
technology-powered tools on which millions of American
consumers and small businesses rely likely to lead to a
markedly uneven playing field, with outcomes for end users
dependent entirely on with which institutions they conduct
their banking business?
A.10. We are aware that large data aggregators and financial
institutions are seeking to negotiate the appropriate balance
of trade-offs for various issues relating to consumer data
access, including data security and other prudential concerns,
in bilateral contractual agreements. We are monitoring these
and other collaborative efforts involving data aggregators and
financial institutions that seek to establish industrywide
norms that could be used by a broader array of participants.
The Federal Reserve regularly organizes meetings with
industry actors, trade associations, and consumer advocates in
a variety of FinTech areas, including financial account
aggregation to track developments. These meetings include joint
participation from a number of relevant regulators, including
the OCC, FDIC, CFPB, the Federal Trade Commission, and the
Conference of State Bank Supervisors to ensure information
sharing and maximize the opportunity for regulatory cooperation
on these issues.
Throughout these discussions, we have consistently stressed
the importance of involving relevant stakeholders, including
smaller financial institutions and consumer advocates. We will
continue to facilitate and engage in collaborative discussions
with other relevant financial regulators in these and other
settings.
Q.11. Is the Federal Reserve concerned about this outcome?
A.11. Please see the response to Question 10.
Q.12. What is the Federal Reserve doing to facilitate a more
level playing field across the industry for financial
institution customers?
A.12. Please see the response to Question 10.
Q.13. The OCC is working diligently to modernize the Community
Reinvestment Act, and I understand that FDIC Chairman
McWilliams is also working jointly with Comptroller Otting.
Is the Federal Reserve engaged in this process and will you
be part of any coordinated joint rulemaking effort?
A.13. We are working closely and diligently with the FDIC and
the OCC to determine how best to modernize the regulations
implementing the Community Reinvestment Act (CRA). While the
timing of a proposal is uncertain, we continue to discuss
important aspects of reform with them and are committed to
actively engaging in interagency discussions. We agree on the
goals of improving the regulations by establishing more clarity
about where and how CRA activities will be considered. We
continue to discuss various ideas about how best to accomplish
those goals.
Q.14. If the Federal Reserve does not engage in a joint
rulemaking with the OCC and FDIC, will you undertake a separate
rulemaking and what are the key aspects of the Community
Reinvestment Act would you like to address?
A.14. Given our significant engagement in the interagency
rulemaking process, I will refrain from speculating on what
would happen if the Federal Reserve does not sign on to a joint
rulemaking with the OCC and FDIC.
Q.15. Technological advancements within banking are helping to
transform the industry to suit the needs of customers in the
digital space. What are the Federal Reserve's thoughts
regarding what changes are needed to modernize the Community
Reinvestment Act since customers are less reliant on branches?
A.15. The Board understands the need to update the CRA
regulations' approach to delineating assessment areas in order
to reflect how technology and other advancements have
significantly changed the manner in which financial services
are accessed and delivered. Industry consolidation and adoption
of new technologies have resulted in an increasing provision of
banking services beyond geographic areas where banks have
branches.
No matter how the agencies define a bank's assessment area
in the future, a modernized CRA regulatory framework needs to
be designed and implemented in a way that encourages banks to
help meet the credit needs of all the communities that they
serve, including those areas that are not major markets for the
bank.
Q.16. I have heard a number of concerns from commercial end
users about the notice of proposed rulemaking published by the
Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation and the Office of the Comptroller
of the Currency, which would implement the standardized
approach for counterparty credit risk in derivative contracts
(SA-CCR). One area of particular concern is the proposed 1.4
calibration of the alpha factor applied to transactions with
commercial end users.
Is there empirical analysis or justification for this alpha
factor which conflicts with policy objectives of ensuring
commercial end users can use derivatives to hedge and mitigate
their commercial risk?
A.16. The alpha factor was included in the proposal to
implement the standardized approach for counterparty credit
risk (SA-CCR) to ensure that SA-CCR, a standardized approach
for determining capital requirements for the counterparty
credit risk of derivative contracts, does not produce lower
exposure amounts than the existing internal models methodology
(IMM). IMM is a models-based approach that certain large and
internationally active banking organizations may use to
calculate their risk-weighted assets under the capital rule. In
particular, IMM includes an alpha factor of 1.4 to add a level
of conservatism to the model-based calculation and to address
certain risks, such as wrong-way risk (meaning the exposure
amount of the derivative contract increases as the
counterparty's probability of default increases). As part of
the SA-CCR rulemaking process, the Board is carefully
considering commenters' concerns regarding the effect the
application of the alpha factor will have on commercial end-
user counterparties.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM JEROME H. POWELL
Q.1. In a speech earlier this year, you stated that any
revision to the Community Reinvestment Act (CRA) should ``more
effectively encourage banks to seek opportunities in
underserved areas.'' Recently, the Urban Institute found that
60 percent of CRA-qualifying loans in low- and moderate-income
census tracts are made to middle- and upper-income borrowers,
including 29 percent to higher income borrowers. While lending
to middle- and upper-income borrowers in low- and moderate-
income communities can encourage community diversity, it should
not be the predominant form of CRA lending.
Chair Powell, how is the Federal Reserve planning to ensure
that the majority of CRA qualifying loans are being made to
low- and moderate-income borrowers?
A.1. The Federal Reserve currently is working with the Office
of the Comptroller of the Currency (OCC) and the Federal
Deposit Insurance Corporation (FDIC) to consider improvements
to modernize the existing Community Reinvestment Act (CRA)
regulatory framework. As part of that review, we are
considering evaluation approaches that would ensure that banks
are meeting the credit needs of both low- and moderate-income
households and low- and moderate-income communities.
Q.2. What other steps is the Fed taking to ensure banks ``seek
opportunities in underserved areas?''
A.2. There are several options that the Federal Reserve staff
have discussed with the FDIC and the OCC to encourage banks to
seek opportunities in underserved areas. In our outreach with
banks, community organizations, and other stakeholders, the
Federal Reserve has heard support for updating the CRA
regulations as they relate to a bank's assessment area(s) so
there is more clarity regarding where banks may get CRA
consideration for activities. Specifically, we are considering
an approach that would retain assessment areas around a bank's
branches in order to keep the CRA's focus on nearby local
communities, including low- and moderate-income neighborhoods,
while adding assessment areas where banks conduct significant
activity apart from branches.
In addition, we are considering whether to more clearly
define a separate, larger assessment area for the purposes of
evaluating a bank's community development activities. A larger,
more clearly defined area for community development activities
could mitigate the artificial competition for investments in
areas served by many banks and benefit perennially underserved
rural areas or small metropolitan areas. We are also exploring
ways to adjust the definition of low- and moderate-income in
high-poverty rural areas where incomes overall may be low,
relative to Federal benchmarks. This type of adjustment could
be helpful in encouraging more CRA activity in underserved
rural areas.
Q.3. Our country's affordable housing crisis is making it
increasingly hard for working families to find an affordable
place to live anywhere near economic opportunity. The
percentage of housing stock available for rent or sale has
fallen sharply since the financial crisis and is now as low as
it has been in more than 30 years. The current annual supply of
new housing units is running an estimated 370,000 units below
the trend for new housing demand.
Chair Powell, are you concerned that the affordable housing
crisis is reducing labor mobility? What impact does reduced
labor mobility have on the broader economy?
A.3. Housing has indeed been a growing share of household
budgets in recent years. Between 2000 and 2017, the share of
households spending more than 30 percent of their income on
rent increased from 39 percent to 49 percent. Families with
lower incomes tend to spend much larger shares of their incomes
on housing, and their share of income spent on rent has risen
by an even larger amount. \1\ Increases in rent expenditure
shares have been widespread across the country, with four out
of five metropolitan areas experiencing an increase of at least
five percentage points since 2000.
---------------------------------------------------------------------------
\1\ Jeff Larrimore and Jenny Schuetz, ``Assessing the Severity of
Rent Burden on Low-Income Families'', FEDS Notes (Washington: Board of
Governors of the Federal Reserve System, December 22, 2017), https://
www.federalreserve.gov/econres/notes/feds-notes/assessing-the-severity-
of-rent-burden-on-low-income-families-20171222.htm.
---------------------------------------------------------------------------
Migration across States and metropolitan areas has trended
down over the past several decades across all segments of the
population. \2\ Additionally, migration rates continue to be
lower among people without a college degree, and highly
educated workers have become more geographically concentrated.
Furthermore, there was little migration out of the hardest-hit
areas after the Great Recession. \3\ Many have raised concerns
that a lack of affordable housing in areas with the strongest
employment opportunities has impeded labor mobility and
prevented migration from workers who would benefit from moving
to these areas--particularly workers without a college
education.
---------------------------------------------------------------------------
\2\ Raven Molloy, Christopher L. Smith, and Abigail Wozniak,
``Internal Migration in the United States'', Journal of Economic
Perspectives 25, no. 3 (2011): 173-196.
\3\ See the following studies for more information on these
phenomena: Abigail Wozniak ``Are College Graduates More Responsive to
Distant Labor Market Opportunities?'' Journal of Human Resources 45,
no. 4 (2010): 944-970; Enrico Moretti, ``Real Wage Inequality'',
American Economic Journal: Applied Economics 5, no. 1 (2013); and Danny
Yagan, ``Employment Hysteresis From the Great Recession'', NBER Working
Paper No. 23844 (Cambridge, MA: September 2017).
---------------------------------------------------------------------------
Economic theory can predict very large effects of a lack of
affordable housing on aggregate productivity, by preventing
workers from moving to locations where skills would be most
productive. \4\ However, evidence on the connection between
housing affordability and migration has not been clear cut.
Some research has found that high house prices reduce
migration, \5\ but other research has found little effect. \6\
---------------------------------------------------------------------------
\4\ Chang-Tai Hsieh and Enrico Moretti, ``Housing Constraints and
Spatial Misallocation'', American Economic Journal: Macroeconomics 11,
no. 2 (2019): 1-39; and Peter Ganong and Daniel Shoag, ``Why Has
Regional Income Convergence in the U.S. Declined?'' Journal of Urban
Economics 102 (2017): 76-90.
\5\ Relevant studies finding an effect of house prices on
migration include: Jelle Barkema and Tam Bayoumi, ``Stranded! How
Rising Inequality Suppressed U.S. Migration and Hurt Those Left
Behind'', IMF Working Paper No. 19/122 (2019); Matthew Notowidigdo,
``The Incidence of Local Labor Demand Shocks'', NBER Working Paper No.
17167 (Cambridge, MA: 2011); Andrew Plantinga, Cecile Detang-Dessendre,
Gary Hunt, and Virginie Piguet, ``Housing Prices and Inter-urban
Migration'', Regional Science and Urban Economics 43, no. 2 (2013),
296-306.
\6\ Studies finding limited effects include Molloy, Smith, and
Wozniak, ``Internal Migration in the United States''; and Jeffrey
Zabel, ``Migration, Housing Market, and Labor Market Responses to
Employment Shocks'', Journal of Urban Economics 72 (2012): 267-284.
---------------------------------------------------------------------------
Other factors outside of a lack of affordable housing also
are likely responsible, in part, for the decline in migration.
Research has suggested that the decline in migration may
reflect a decline in labor market dynamism more generally,
since fewer workers change employers each year even when they
do not move. There is also some evidence that there are fewer
opportunities in large cities for workers without a college
degree, and that part of the decline in migration also reflects
workers staying longer in central cities into middle age. \7\
And, consistent with the possibility that the lack of
affordable housing is not driving low-income households out of
expensive cities, lower income workers in areas with high rents
are about equally satisfied with the quality of their housing
as lower income workers in other areas. \8\
---------------------------------------------------------------------------
\7\ David Auter, ``Work of the Past, Work of the Future'',
American Economic Association Richard T. Ely Lecture (2019).
\8\ See https://www.federalreserve.gov/consumerscommunities/
shed.htm.
---------------------------------------------------------------------------
Ultimately, the impact of declining migration depends on
its cause. If declining migration is due to a Jack of
affordable housing, then we might expect reduced economic
output and increased economic inequality as fewer people move
to economic opportunities. If declining migration is due to
lower fluidity in the labor market more generally, then
declining migration could be a symptom, not a cause, of other
difficulties in the labor market. And, if declining migration
is due to workers increasingly believing that their current job
best matches their skills and interests--reducing the need to
move elsewhere for employment--then it could be a positive
development.
Q.4. If the affordable housing crisis reduces labor mobility,
affecting the entire economy, what role does the Federal
Reserve have in addressing the affordable housing crisis in the
U.S.?
A.4. A wide range of factors and policies outside of the
purview of the Federal Reserve affect the availability and
affordability of housing in the United States. The Federal
Reserve monitors developments in housing and labor markets to
assist in our understanding of the broader economy. With
respect to our regulatory and supervisory responsibilities, we
are committed to promoting a fair and transparent consumer
financial services marketplace and effective community
development, including for traditionally underserved and
economically vulnerable households and neighborhoods. As
discussed in my response to Question 1, the Federal Reserve is
actively engaged in an interagency effort to modernize the CRA
to encourage lending in low- and moderate-income communities.
Access to credit by households and businesses is certainly a
factor that contributes to the availability and affordability
of housing.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM JEROME H. POWELL
Q.1. Over the past year, we have discussed the risks to the
financial system from leveraged lending several times. In your
press conference following the June 19, 2019, Federal Open
Markets Committee meeting, you said that you ``feel like'' the
safety and soundness risk from leveraged lending to the banks
is ``in a good place,'' and that the paper ``is pretty stably
funded, in the sense that there's no run risk, but there's
still macroeconomic risk.'' \1\
---------------------------------------------------------------------------
\1\ The Federal Reserve, ``Chairman Powell's Press Conference'',
June 19, 2019, https://www.federalreserve.gov/mediacenter/files/
FOMCpresconf20190619.pdf.
---------------------------------------------------------------------------
Does the 2013 leveraged lending guidance still reflect the
Fed's thinking about the prudent levels of debt, understanding
that guidance by definition does not have the force of law?
A.1. The leveraged loan market continues to warrant attention.
We are closely monitoring how risks are evolving and the
potential impact of these risks on the broader financial
system, as well as assessing the adequacy of bank risk
management and controls. The 2013 guidance remains in effect,
but, as you note, it does not have the force and effect of law.
Supervised banks can continue to participate in leveraged
lending activities, provided such activities, as with all
lending activities, are conducted in a prudent manner,
consistent with safety and soundness standards.
Although banks originate the majority of leveraged loans, a
large percentage of leveraged loans are sold to investors
outside the regulated banking system. While these loan sales
allow the risks to be shared more broadly, we continue to
evaluate whether some of that risk diversification is being
diluted by banks increasing their exposure to collateralized
loan obligations (CLOs) and other holding vehicles to which the
loans are sold. We will continue to monitor the evolution of
the nature and risk profile of these holding vehicles.
Q.2. In 2018, the D.C. Circuit overturned 2014 rules mandate by
Dodd-Frank that exempted collateralized loan obligations from
risk retention rules that apply to other asset classes. Have
the rules been successful in aligning the incentives of the
managers and investors with respect to asset classes where
they're in effect?
A.2. The credit risk retention rule for securitization,
introduced in the 2010 Dodd-Frank Wall Street Reform and
Consumer Protection Act and finalized by regulators in 2014, is
designed to curtail risky lending and securitization practices.
The rule has had the biggest impact on commercial mortgage-
backed securities (CMBS) and CLOs, where the lowest equity
tranche of a deal (the riskiest part of the security) was
historically held by a party other than the issuer. In
contrast, issuers historically took the first-loss risk in many
other types of asset-backed securities, including by retaining
risk in excess of the requirement.
CMBS deals issued after the rules took effect generally
have better credit characteristics than deals issued before the
effective date of the rules. \2\ Investors and industry
professionals have also relayed anecdotally that risk retention
has been among the factors that has contributed to the
improvement in CMBS underwriting, and that they believe risk
retention aligns the interests of securitization sponsors and
investors. \3\
---------------------------------------------------------------------------
\2\ See ``Credit Metrics Comparison: Risk Retention Versus Non-
Risk Retention'', DBRS, June 13, 2017; and Sean Flynn, Andra Ghent, and
Alexei Tchistyi, ``Informational Efficiency in Securitization after
Dodd-Frank'', May 21, 2019.
\3\ See Paul Fiorilla, ``No Joke. It Really Is Different This Time
. . . Right?'' Commercial Property Executive, January 15, 2018.
---------------------------------------------------------------------------
Meanwhile, the private-label residential mortgage backed
securities new-issue market remains relatively small, and so
discerning the longer-term effects of risk retention is more
difficult.
Q.3. Would the reimposition of risk retention requirements with
respect to CLOs improve their quality and lessen the
macroeconomic risk you cited?
A.3. The decision in the U.S. Appeals Court in February 2018
exempted open-market CLOs--the most common type of CLOs, which
acquire their assets from arms-length negotiations and trading
on the open market--from adhering to risk retention. \4\
Because the rule was changed early in 2018, it is instructive
to compare some statistics from 2017 and 2018 to glean evidence
of effects. For instance, overall issuance of new CLOs was
robust in 2017 and increased only slightly from that amount in
2018. Looking at pricing, the spreads on highly rated CLO debt
increased in mid-2017 and remained about at that level in 2018,
hence investors do not seem to have priced in additional risk
as a result of the change in risk retention rules.
---------------------------------------------------------------------------
\4\ Balance-sheet CLOs, which are less common, are created by
originators of loans to transfer the loans off their balance sheets and
into a securitization vehicle. They are still subject to risk retention
as per the Agencies' rule.
Q.4. According to the industry's trade group, private equity-
owned companies employ 5.8 workers in the United States. Are
these jobs more vulnerable to a recession than jobs in an
---------------------------------------------------------------------------
industry less reliant on debt?
A.4. We are not aware of research that has systematically
studied the employment sensitivity to downturns for private
equity-owned firms. There is, however, ample theoretical and
empirical evidence that employment at more highly leveraged
firms is more sensitive to macroeconomic fluctuations and to
changes in financial-market conditions. \5\ The typical
business model followed by private equity firms tends to
involve leveraged buyouts. \6\ Other things equal, higher
leverage could drive greater employment variability.
Nonetheless, leverage is not the only characteristic relevant
for assessing employment sensitivity to business cycle
fluctuations. For instance, recent research that has attempted
to measure the quality of management practices has highlighted
that private equity-owned firms tend to have very strong
management practices relative to other ownership groups.
Although this research has not scrutinized the effect of
management practices on employment variability, it seems
plausible that better management practices could influence the
sensitivity of employment to business cycle fluctuations.
Moreover, private equity-owned firms may be better positioned
to obtain external funding during credit market disruptions.
\7\ Accordingly, absent further study of private equity owned
firms, it is unclear whether better management or other
characteristics could more than offset the effects of leverage
on employment sensitivity to a recession.
---------------------------------------------------------------------------
\5\ See Steven Sharpe (1994), ``Financial Market Imperfections,
Firm Leverage, and the Cyclicality of Employment'', American Economic
Review, Vol. 83, No. 4, pp. 1060-1074. Recent corroborating empirical
evidence is also provided by Xavier Giroud and Holger Mueller (2017),
``Firm Leverage, Consumer Demand, and Employment Losses During the
Great Recession'', Quarterly Journal of Economics, Vol. 132, No. 1, pp.
271-316. Using microlevel data from the U.S. Census Bureau, Giroud and
Mueller find that establishments of more highly levered firms
experienced significantly larger employment losses in response to
declines in local consumer demand.
\6\ See Steven Davis, John Haltiwanger, Kyle Handley, Ron Jarmin,
Josh Lerner, and Javier Miranda (2014), ``Private Equity, Jobs, and
Productivity'', American Economic Review, Vol. 104, No (12), pp. 3956-
3990.
\7\ A recent study of firms based in the United Kingdom found that
during the 2008 crisis, firms backed by private equity investors
decreased investments less than did their peers and experienced greater
equity and debt inflows, higher asset growth, and increased market
share. See Shai Bernstein, Josh Lerner, and Filippo Mezzanotti (2019),
``Private Equity and Financial Fragility During the Crisis'', The
Review of Financial Studies, Vol. 32, No. 4, pp. 1309-1373.
Q.5. I continue to be concerned with the lack of a real-time
payments system operated by the Federal Reserve--in my view,
it's not question of whether the United States will have a real
time payments system, it's a question of whether it will be
operated by the Fed, the big banks or big tech. In my view,
it's imperative that the Fed provide a competitive system,
quickly.
Last fall the Fed released a plan to establish a real-time
payments system for comment. The comment period closed more
than 7 months ago. When does the Fed intend to announce its
next steps toward establishing a real-time system?
A.5. The Federal Reserve Board (Board) announced on August 5,
2019, that the Reserve Banks will develop a new real-time
payment and settlement service, called the FedNow Service, to
support faster payments in the United States. \8\ In making
this decision, the Board adhered to the requirements of the
Federal Reserve Act, the Monetary Control Act (MCA), and
longstanding Federal Reserve policies and processes. \9\
---------------------------------------------------------------------------
\8\ https://www.federalreserve.gov/newsevents/pressreleases/
other20l90805a.htm
\9\ See the Federal Reserve Act, https://www.federalreserve.gov/
aboutthefed/fract.htm; Depository Institutions Deregulation and
Monetary Control Act of 1980, Pub. L. No. 96-221 (Mar. 31, 1980),
https://fraser.stlouisfed.org/title/1032; Board of Governors of the
Federal Reserve System, ``The Federal Reserve in the Payments System'',
(Issued 1984; revised 1990), https://www.federalreserve.gov/
paymentsystems/pfs-frpaysys.htm.
---------------------------------------------------------------------------
The Board's assessment of the planned FedNow Service
pursuant to the requirements of the MCA and the Board's
criteria for new services and major service enhancements,
proposed features and functionality for the service, and
initial competitive impact analysis of the service can be found
in our August 2019 Federal Register Notice. \10\
---------------------------------------------------------------------------
\10\ https://www.federalreserve.gov/newsevents/pressreleases/
files/other20190805a1.pdf
---------------------------------------------------------------------------
Q.6. When does it expect a real-time system to be operational?
A.6. The Federal Reserve recognizes that establishing FedNow
Service would need to be carried out as soon as practicably
possible and that time-to-market is an important consideration
for many industry participants. However, the achievement of
true nationwide reach, as opposed to initial availability of a
service, is a critical measure of success for faster payments.
Pending engagement between the Federal Reserve and the industry
to inform the final service design, the FedNow Service is
expected to be available in 2023 or 2024. However, it will
likely take longer for any service, whether the FedNow Service
or a private-sector service, to achieve nationwide reach
regardless of when the service is initially available. In
advance of the service's availability, the Federal Reserve will
work closely with banks and their technology partners to
prepare for expeditious onboarding.
Q.7. Have market developments, including the announcement by
Facebook and other companies that they intend to launch a
digital currency for payment, expedited the Fed's timeframe.
A.7. See Question 6.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM JEROME H. POWELL
Q.1. How much of the wage gains reported by the Federal Reserve
researchers, especially those of those with a high-school
education are less, are due to increases in the minimum wage at
the State and local level and how much to market forces?
A.1. Many factors affect the wages of individuals with
differing levels of education. There is no consensus regarding
their relative importance, but some of the factors cited by
economists include minimum wages, the strength of unions,
globalization, demographic change, hidden labor market slack
(that is, the low labor force participation rate), rising
employer concentration (which gives an employer more bargaining
power in a given labor market), and an increase in the
prevalence of noncompete and antipoaching agreements. As a
result, it is difficult to determine with any precision how
much of the increase in wages of less educated workers over the
past few years is due to an improving labor market and how much
is due to increases in minimum wages or other factors.
Q.2. Does the Federal Reserve have data showing the wage gain
impacts for workers with less than a college degree by State?
If so, does that wage data differentiate between States with
higher minimum wages and/or stronger unions?
A.2. Yes, the wage data for workers with less than a college
degree, which are collected as part of the Current Population
Survey conducted by the Census Bureau and the Bureau of Labor
Statistics, are available by State. \1\ Comparing wage changes
across States can be difficult, given the many variables that
affect wages.
---------------------------------------------------------------------------
\1\ See https://www.census.gov/programs-surveys/cps/data-
detail.html.
Q.3. Press reports that Federal bank regulators have formed an
interagency working group to consider increasing their
coordination in assessing cybersecurity at large banks. Are
these press accounts accurate? What do the bank regulators plan
---------------------------------------------------------------------------
to do to assess cybersecurity at large banks?
A.3. The acceleration of cybersecurity risk management is a top
supervisory priority for Federal regulatory agencies, as it has
implications for the safe and sound operations of financial
institutions as well as financial stability. To that end, an
interagency goal is to improve regulatory harmonization and the
supervision of cybersecurity through better coordination of
examinations at large financial institutions and to be more
efficient with the use of resources. As such, a joint
interagency cybersecurity examination is being planned. The
Federal Reserve is currently working with the Office of the
Comptroller of the Currency (OCC) and Federal Deposit Insurance
Corporation (FDIC), and we are in early stages of developing an
approach for a joint risk-based assessment of cybersecurity at
large financial institutions.
Q.4. The Federal Reserve Board has said it would consider on a
case-by-case basis whether to allow a recipient of the OCC
FinTech charter to obtain direct access to the Federal Reserve
payment systems. But the Federal Reserve Act requires national
banks to become members of the Federal Reserve System and to
become insured by the FDIC. Given that the recipient of a
FinTech charter would not be eligible for and could not obtain
FDIC insurance, why would the decision as to whether to allow a
FinTech charter recipient to obtain a master account be made on
a case-by-case basis?
A.4. As Governor Brainard has indicated in prior remarks, \2\
the OCC's proposal raises interpretive legal and policy issues
for the Federal Reserve regarding whether chatter recipients
would become Federal Reserve members or have access to Federal
Reserve accounts and services. As you note, the Federal Reserve
Act does require national banks to become members of the
Federal Reserve System and to be insured by the FDIC.
Currently, however, certain types of national banks that do not
accept insurable deposits, such as trust banks, are members.
Given the breadth of potential applicants for the OCC's special
purpose chatter, each applicant receiving such a chatter would
require the Board to determine, as a threshold question,
whether the facts and circumstances of that particular
applicant should cause the applicant to be eligible for
membership or Reserve Bank services under the Federal Reserve
Act.
---------------------------------------------------------------------------
\2\ See, e.g., Lael Brainard, ``Where Do Banks Fit in the FinTech
Stack'' (April 28, 2017), https://www.federalreserve.gov/newsevents/
speech/files/brainard20170428a.pdf; Lael Brainard, ``Where Do Consumers
Fit in the FinTech Stack'' (Nov. 16, 2017), https://
www.federalreserve.gov/newsevents/speech/files/brainard20171116a.pdf.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR JONES
FROM JEROME H. POWELL
Q.1. A reality of our economic system is that unemployment
rates for African Americans are stubbornly and consistently
higher than for white workers.
There are innumerable structural and historical reasons for
this reality, but the fact is that it is true, and it is
persistent.
Knowing this, do you believe it is appropriate for the
Federal Reserve to consider this disparity when developing
monetary policy and especially when determining proper metrics
for ``full employment,'' especially at a time when inflation
risk has waned?
A.1. The benefits of the current economic expansion have been
broadly shared, and the long expansion in economic activity has
also lessened the employment disparities across demographic
groups. For example, the unemployment rate for African
Americans, although still above the rate for other groups, has
noticeably narrowed its gap with the white unemployment rate
and is now near the lowest readings since the Bureau of Labor
Statistics began publishing this data series in the early
1970s. That said, there are long-standing disparities in
unemployment rates across different segments of the population
that the Federal Reserve does not have the tools or the mandate
from Congress to address. Progress to further narrow these
long-standing disparities in labor market outcomes by race and
ethnicity are more likely to be found in structural policies
that promote education, training, and equality of opportunity
across all segments of our society. Monetary policy can best
help by focusing on our dual mandate of fostering full
employment and low inflation.
In setting monetary policy, the Federal Reserve has a
statutory goal to promote maximum employment and stable prices.
Because the Federal Reserve's policy actions affect the economy
as a whole, it cannot directly target particular groups of
workers. However, by fulfilling the maximum employment
component of our dual mandate, the Federal Reserve 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 more easily find jobs that best match their
abilities and that provide them with the greatest opportunity
to increase their skills, productivity, and earnings. Indeed, a
highlight for me of our Fed Listens events have been the panels
focusing on the real world experiences of diverse groups in
labor markets and in accessing credit. These panels underscore
the importance of looking beyond the traditional macro-economic
statistics in gauging the effects of monetary policy and make
clear what the Federal Reserve's mandate to promote maximum
employment and stable prices really means in people's lives.
Q.2. Do you believe the Federal Reserve possesses the monetary
policy tools available to continue to lower unemployment in
communities that have been historically left behind in our
labor markets?
A.2. 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, prior to every meeting, Reserve Banks
prepare summaries of economic conditions in their districts
that are compiled and published in the Federal Reserve's
``Beige Book.'' \1\ In addition, at every FOMC meeting, Reserve
Bank presidents regularly describe economic conditions in their
Districts. That said, monetary policy is a broad tool that
cannot directly target particular communities. Despite that
limitation and as stated above, the Federal Reserve, through
our maximum employment mandate, can ensure that the conditions
are in place to keep labor demand high and stable for as many
workers as possible, which in turn helps workers in lower
income communities to more easily find employment. In addition
to our monetary policy tools, we regularly work with an array
of partners--from nonprofits, bankers and academics to
practitioners and policymakers--to help strengthen and
revitalize communities through housing and other place-based
strategies.
---------------------------------------------------------------------------
\1\ See https://www.federalreserve.gov/monetarypolicy/beige-book-
default.htm.
Q.3. I believe an important question with critical importance
to my constituents is if the nature of inflation has in any way
changed in our modern economy.
I understand there may be no perfect measure of inflation,
but for millions of people, young and old, official inflation
measures do not seem to align with their view of the economy.
Inflation, officially, is low and steady.
But for three of the largest expenses in a modern family's
budget--housing, health care, and education--there have been
year after year of cost growth that outpace our official
inflation measures.
I know that policymakers at the Federal Reserve are aware
of these trends, but do you believe our current inflation
measurements are accurately capturing cost increases in these
critical areas?
A.3. The measurement of inflation is challenging, but U.S.
statistical agencies do a good job and I think our measures of
inflation are reasonably accurate. One of the greatest
challenges in price measurement is capturing the effect of
changes in product quality. New or improved varieties of goods
and services can give consumers more (or less) for their money,
in a way that is often quite hard to measure--though our
statistical agencies do attempt to do so. This challenge is
particularly acute for health care, where it is very difficult
to quantify the benefits that come from advances in treating
disease.
Notwithstanding the issue of quality change, it is true
that prices of housing, health care, and education have all
risen faster than overall inflation. Those faster-than-average
price increases have been offset by other prices, such as for
apparel, cars, and televisions and other electronics, which
have risen more slowly than overall inflation.
Q.4. And what are the consequences in the long term of these
core items continually outpacing overall inflation?
A.4. Some households, especially lower-income households,
likely spend an above-average share of their income on
necessities. If the prices of necessities rise faster than
average, one would want to take this fact into account when
assessing the economic situation of these households.
Q.5. In the bipartisan Economic Growth, Regulatory Relief, and
Consumer Protection Act (S. 2155), one of the provisions
directed at relieving regulatory burden for community
institutions allowed for small depository institutions to file
streamlined Call Reports.
As the Federal Reserve and other prudential regulators have
worked to finalize these rules, we have heard concerns from
Alabama institutions that the final rules do not ultimately
streamline the reports in a meaningful manner--and many of the
reporting requirements that were removed had little impact on
small institutions.
What input from community institutions did the Federal
Reserve take while finalizing the rule, and does the Federal
Reserve have plans to revisit and further streamline the call
reports, consistent with S. 2155?
A.5. The Board of Governors (Board), Office of Comptroller of
the Currency (OCC), and the Federal Deposit Insurance
Corporation (FDIC) (the agencies) considered all comments
received on the proposal to implement section 205 of S. 2155
and streamline regulatory reporting requirements for small
institutions. Finalizing the proposal was one step in the
agencies' efforts to meaningfully streamline reporting
requirements. The agencies are committed to actively exploring
additional revisions to Call Reports in an effort to further
reduce any unduly reporting requirements.
Q.6. As you know, the Federal Reserve has begun the process of
reviewing and fine-tuning the regulation of the U.S. operations
of international banks. I believe the Federal Reserve's initial
efforts are largely positive, and in many aspects, show an
appropriate understanding of the importance of international
banks to our domestic economy, while balancing the need to
effectively regulate these institutions based on their
individual risks.
However, there are certain aspects of the proposed rules
which I believe deserve further attention.
First, when considering whether to include interaffiliate
transactions as part of the risk-based factors that the Federal
Reserve considers for international institutions, given that
these transactions are conducted wholly within the bank, what
are the risk factors that led Federal Reserve to the decision
to exempt these transactions for domestic institutions, but not
international institutions?
A.6. The tailoring proposals issued by the Board, along with
the OCC and the FDIC (the agencies), would apply prudential
requirements to large domestic and foreign firms based on the
risk profile of the firms using risk-based indicators.
Under the proposals, standards would be applied and
calibrated to U.S. firms at the global parent, where
interaffiliate transactions are eliminated in consolidation.
Standards applied to foreign banks would be tailored based on
the foreign bank's operations in the United States, rather than
the global parent. As a result, transactions between the U.S.
operations and the foreign parent generally would be included
in the calculation of the risk-based indicators for foreign
banks. To address the structural differences between foreign
and domestic films, the proposal would exclude interaffiliate
liabilities and certain collateralized claims with affiliates
from the measure of cross-jurisdictional activity.
The agencies requested comment on the treatment of
interaffiliate transactions and the methodology for computing
the risk-based indicators under the tailoring proposals, and
are currently evaluating those comments.
Q.7. Second, when considering the proper measure of a U.S.
Intermediate Holding Company's (IHC) overall domestic profile,
what factors led the Federal Reserve to determine that both the
IHC's assets, as well as the assets of the international
institution's U.S. branch, should be combined for purposes of
applying liquidity requirements? As you know, IHC's are
purposefully structured as a legal entity that is separate than
the U.S. branch.
A.7. The foreign bank tailoring proposals would generally apply
the same framework to foreign banks as would apply to domestic
firms, with certain adjustments to reflect the structure of
foreign banks' operations in the United States. Most
significantly, the proposals would determine regulatory
requirements for a foreign bank based on the risk profile of
the foreign bank's U.S. operations, rather than on the risk
profile of the global consolidated firm. For liquidity, the
proposals would assign a foreign bank a category of standards
based on the risk profile of the firms' combined U.S.
operations, including any U.S. subsidiaries (such as a U.S.
intermediate holding company) and any U.S. branches.
The proposed approach for the calibration of liquidity
requirements reflects the fact that a foreign bank's U.S.
intermediate holding company and U.S. branch network are both
part of a single firm, and is consistent with the Board's
current enhanced prudential standards framework for liquidity
risk management, stress testing, and buffer requirements. The
Board is carefully considering all comments on the proposals,
including with respect to tailoring of liquidity standards, as
we work to develop a final rule.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SMITH
FROM JEROME H. POWELL
Q.1. On July 10, the New York Times reported that Deutsche Bank
private banking managers retained notorious child predator
Jeffrey Epstein as a client, even after Deutsche Bank's
compliance officers recommended that the bank drop him as a
client because of reputational risks to the bank.
In general, what type of customer presents reputational
risks to a bank? How does the Fed assess a bank's reputational
risks, and how does the Fed account for reputational risks in
its supervision of banks?
A.1. The Federal Reserve expects firms to consider reputational
risks in their interactions with potential and existing
clients. In the examination process, supervisors assess whether
firms have adequate processes in place to detect and address
reputational risks. In general, the Federal Reserve will focus
on whether any risks, including reputational risks, present
safety and soundness concerns for the firm or present a risk of
noncompliance with a law or regulation.
Q.2. Could having Jeffrey Epstein--one of the most well-known
sex offenders in the world--present a reputational risk to a
bank?
A.2. Any individual client engaging in illegal or unethical
behavior potentially could present reputational risks for an
institution depending on the severity of the infraction or
behavior. The Federal Reserve does not comment on specific
individuals.
Q.3. If a bank doesn't think Jeffrey Epstein presents a
reputational risk, then what sort of customer would be
notorious enough that a bank should be concerned about
reputational risk?
A.3. Please see response to Question 2.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM JEROME H. POWELL
Q.1. According to the Fed's 2019 Consumer and Community Context
report, from 2005 to 2014 over 400,000 young Americans were
unable to buy a home due to the rise in student loan debt.
According to Freddie Mac's June 2019 survey, 89 percent of
millennials made different housing choices specifically to
afford student loan payments, including postponing the purchase
of a home. This survey also found that majorities of renters
and homeowners in the West feel home ownership has become less
accessible. Many Arizonans plan on selling their homes to
retire. Are you concerned about the implications that a decline
in home ownership by younger Americans will have on existing
homeowners? Are you concerned about the implications of this
trend for the housing market more broadly?
A.1. It is true that young Americans today have a notably lower
home ownership rate than previous generations did at the same
stage of life. This could reflect a variety of factors
including changing preferences and demographic trends, reduced
credit access for some borrowers, and insufficient income or
savings for downpayments given the cost of renting, house
prices, and student loan debt. Federal Reserve Board
researchers have specifically examined the potential role of
student loans and found it could only explain a small portion
of the decline in home ownership. \1\
---------------------------------------------------------------------------
\1\ Mezza, Alvaro, Daniel Ringo, and Kamila Sommer (January 2019),
``Can Student Loan Debt Explain Low Home Ownership Rates for Young
Adults?'' Consumer and Community Context, Board of Governors of the
Federal Reserve System, Vol 1., No. 1.
---------------------------------------------------------------------------
It is too soon to say for certain whether the low home
ownership rate among millennials reflects a permanent shift or
a delay in first home purchases. For instance, a recent survey
by Fannie Mae suggests that most millennials plan to become
homeowners eventually. \2\ Moreover, the current environment of
relatively low mortgage rates, a strong labor market, a return
to more accessible mortgage credit, and generally healthy
household balance sheets should encourage home ownership going
forward and support the housing market more broadly. Another
promising sign is that household formation rates have recovered
since the depths of the recession.
---------------------------------------------------------------------------
\2\ Betancourt, Kim, Steven Deggendorf, and Sarah Shahdad
(September 2018), ``Myth Busting: The Truth About Multifamily
Renters'', Fannie Mae, available at https://www.fanniemae.com/
resources/file/research/emma/pdf/MF_Market_Commentary_091718.pdf.
---------------------------------------------------------------------------
If the home ownership rate of millennials were to remain
low, the implications for existing home owners are unclear. The
future value of existing homes will be determined not only by
the demand for housing by younger generations but also by the
housing supply, which will depend in large part on construction
of new homes.
Additional Material Supplied for the Record
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