[Senate Hearing 116-72]
[From the U.S. Government Publishing Office]




                                                         S. Hrg. 116-72

 
         THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS

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

                                HEARING

                               before the

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

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                                   ON

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

                               __________

                             JULY 11, 2019

                               __________

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

                              ----------                              

                        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

                              ----------                              


                        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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \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/.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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.
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    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.
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     \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.
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    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.


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