[Senate Hearing 116-171]
[From the U.S. Government Publishing Office]
S. Hrg. 116-171
NOMINATIONS OF JUDY SHELTON AND CHRISTOPHER WALLER
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
ON
NOMINATIONS OF:
JUDY SHELTON, OF CALIFORNIA, TO BE A MEMBER OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
__________
CHRISTOPHER WALLER, OF MINNESOTA, TO BE A MEMBER OF THE BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
__________
FEBRUARY 13, 2020
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
__________
U.S. GOVERNMENT PUBLISHING OFFICE
40-240 PDF WASHINGTON : 2020
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania JACK REED, Rhode Island
TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska JON TESTER, Montana
TOM COTTON, Arkansas MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
MARTHA MCSALLY, Arizona DOUG JONES, Alabama
JERRY MORAN, Kansas TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota KYRSTEN SINEMA, Arizona
Gregg Richard, Staff Director
Laura Swanson, Democratic Staff Director
Catherine Fuchs, Counsel
Brandon Beall, Professional Staff Member
Elisha Tuku, Democratic Chief Counsel
Corey Frayer, Democratic Professional Staff Member
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, FEBRUARY 13, 2020
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 37
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Prepared statement....................................... 38
NOMINEES
Judy Shelton, of California, to be a Member of the Board of
Governors of the Federal Reserve System........................ 5
Prepared statement........................................... 39
Biographical sketch of nominee............................... 41
Responses to written questions of:
Senator Brown............................................ 70
Senator Sasse............................................ 78
Senator Rounds........................................... 82
Senator Reed............................................. 84
Senator Menendez......................................... 88
Senator Tester........................................... 89
Senator Warren........................................... 94
Senator Schatz........................................... 102
Senator Cortez Masto..................................... 105
Senator Sinema........................................... 114
Christopher Waller, of Minnesota, to be a Member of the Board of
Governors of the Federal Reserve System........................ 6
Prepared statement........................................... 53
Biographical sketch of nominee............................... 54
Responses to written questions of:
Senator Brown............................................ 115
Senator Sasse............................................ 117
Senator Tillis........................................... 118
Senator Reed............................................. 122
Senator Tester........................................... 124
Senator Warren........................................... 126
Senator Schatz........................................... 134
Senator Cortez Masto..................................... 134
Senator Sinema........................................... 142
Additional Material Supplied for the Record
Letter from the Project on Government Oversight.................. 143
``The War on Judy Shelton'', by the Editorial Board, Wall Street
Journal, 2/12/2020............................................. 145
Letter of Support for nominee Christopher Waller................. 148
``Banking and Government: An Unholy Alliance'', Judy Shelton,
Cato Journal................................................... 152
``North America Doesn't Need Borders'', by Judy Shelton, Wall
Street Journal, 8/29/2000...................................... 157
``Trump Fed Pick Missed Almost Half of Board Meetings'', Paul
Kiernan, Wall Street Journal, 7/15/2019........................ 160
(iii)
NOMINATIONS OF JUDY SHELTON AND CHRISTOPHER WALLER
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THURSDAY, FEBRUARY 13, 2020
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9:02 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
This morning we will consider the nominations of the
Honorable Judy Shelton to be a member of the Board of Governors
of the Federal Reserve System and Dr. Christopher Waller to be
a member of the Board of Governors of the Federal Reserve
System. Welcome, and congratulations to each of you for your
nominations.
I see friends and family in the room today, and I welcome
them as well.
We are fortunate to have these two highly qualified
nominees appearing today. These positions are critical to
ensuring a safe, sound, and vibrant financial system and a
healthy, growing economy.
The Federal Reserve was created by Congress as the Nation's
central bank to promote a stable economy and a safer, more
flexible financial system.
Among the Federal Reserve's responsibilities is conducting
the Nation's monetary policy with the mandate of promoting
maximum employment, stable prices, and moderate long-term
interest rates.
In addition to its monetary policy role, it oversees a
significant portion of the banking sector, including large,
regional, and community banks, as well as certain nonbanks, and
aims to foster a safe and efficient payment and settlement
system.
With this in mind, it is important that we nominate and
confirm well qualified candidates with different perspectives
to the positions of Governors to ensure robust debate and more
effective decisions.
Before turning to Dr. Shelton and Dr. Waller, I am entering
into the record a letter from over 100 economists supporting
the nomination of Dr. Waller and also an article from the Wall
Street Journal supporting Dr. Shelton titled, ``The War on Judy
Shelton''.
Dr. Shelton most recently served as the Executive Director
for the European Bank for Reconstruction and Development and
was confirmed by voice vote in the Senate in 2018.
Dr. Shelton's experience working for nonprofits and
academic institutions forged her deep knowledge of democracy,
economic theory, and monetary policy that will broaden and
diversify the Fed's perspective.
Dr. Waller has served as the Research Director at the
Federal Reserve Bank of St. Louis for the last 11 years and
aided the president of the St. Louis Fed in analyzing the
economy and recommending U.S. monetary actions.
His research on monetary theory and the microfoundations of
money and payment systems will be valuable, as we are seeing a
rise in cryptocurrencies and digital currency in this country
and abroad.
I am confident that Dr. Shelton and Dr. Waller will bring
strong leadership to the Federal Reserve System.
As Governors at the Federal Reserve, Dr. Shelton and Dr.
Waller will play key roles in carrying out the Fed's regulatory
and supervisory activities consistent with the law, while also
playing an important role in striking the balance between
tailored regulations and supervision and safety and soundness.
I appreciate the positive meetings I had with each of you
leading to today's hearing. I look forward to continuing a
robust discussion on the following topics:
The importance of right-sizing regulations and tailoring
the supervisory framework to support a vibrant, growing economy
while also ensuring a safe and sound financial system;
Assessing market-based fixes to maintain stability in money
markets;
The development of central bank digital currencies and
other technological innovations in the financial space, which
we also discussed with Chairman Powell yesterday;
And continuing to encourage the Federal Reserve to submit
all rules to Congress under the Congressional Review Act, as
well as to submit all significant guidance for purposes of the
Congressional Review Act.
I look forward to working with Dr. Shelton and Dr. Waller
on these and other areas where the Fed and Congress can act to
further reduce unnecessary burdens and promote economic growth.
Congratulations again on your nominations, and I thank you
and your families for your willingness to serve.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. Welcome, and thank
you for beginning this hearing earlier because a vote is
coming.
Ms. Shelton and Mr. Waller, I would like to extend my
greetings to you, your family, and your friends who have joined
you. Welcome.
Fed independence matters. We know economies with
independent central banks have less price volatility, fewer
bank panics, and more stable economies.
One of the nominees, though, today before us does not
believe in an independent Fed and has spent her entire career
advocating for policies that would make our economy more
volatile, give families and businesses even more to worry about
in an uncertain world.
The point of the independent Federal Reserve is to be a
steady, guiding hand--to worry about the big picture of the
economy so hardworking families do not have to.
But for Ms. Shelton, these are not hazards to avoid. They
are the goal. We all understand that on economic issues there
are conservatives and liberals, and most people fall somewhere
in the middle on that continuum. But Ms. Shelton is not a
conservative. She is far outside the mainstream. She is off the
ideological spectrum.
For three decades, Ms. Shelton has been a prominent
advocate for returning to the gold standard.
In making the case for Ms. Shelton's nomination, her friend
James Grant wrote in the Wall Street Journal that, ``[w]ith the
nomination of Judy Shelton to the Fed, the discussion has
tilted to gold. Gold is money, or a legacy form of money, Ms.
Shelton contends, and the gold standard is a reputable, even
superior, form of monetary organization.''
People can agree to disagree on certain issues, but we do
not get our own facts, and the facts are clear. If we as a
Nation had followed Ms. Shelton's advice and had not advanced
beyond the gold standard nearly a half century ago, our Nation
would have bounced from boom to bust, without the monetary
tools necessary to pull us out of recessions.
Depressions would have been deeper and longer; millions of
working families would have suffered even more, for no reason,
and for certainly inexplicable reasons to them.
That is not the end of the story. In multiple writings, Ms.
Shelton clearly voiced her opposition to FDIC deposit
insurance--the insurance that everyone takes for granted that
has been part of our culture and our economy for so many years,
the insurance, most importantly, that protects the savings of
hardworking Americans. In other words, she thinks that if a
bank fails--and we all remember far too vividly 10, 12 years
ago, when they did indeed fail--then all the families whose
savings and paychecks are stored in that bank should just lose
all their money.
Passing Federal deposit insurance was one of President
Roosevelt's first acts during the Great Depression for a
reason. That guarantee--that your money is safe in the bank--is
the bedrock of our modern economy.
This is not some intellectual exercise about moral hazard.
This is the real world. I dare anyone to explain to working
families in Idaho or Pennsylvania or Alabama or Louisiana or
Minnesota or New Jersey or Rhode Island, I dare anyone to
explain to working families that experienced bank closures in
the Great Recession or the savings and loan crisis that FDIC
insurance is ``a hugely distorting factor.''
But with Ms. Shelton, it does not stop there.
The money in your wallet is backed by the full faith and
credit of the U.S. Government. Yet Ms. Shelton advocated for
doing away with the dollar and replacing it with a common
currency for North America. I am serious.
To make NAFTA more effective, she mused that the dollar
could be replaced with a common currency for North America
called the ``Amero.''
At other times she has called for the creation of a
generic, global currency, backed by gold.
That kind of globalist--probably no better word than that--
that kind of globalist ideology does not belong anywhere near
our fiscal and monetary policy. The American dollar is the
world's reserve currency; it should stay that way. We want it
that way. We agree that it should be that way, and we are proud
of it.
The bottom line is Ms. Shelton has too many alarming ideas
and has flip-flopped on too many important issues to be
confirmed for this job.
We know she will say exactly what the President wants her
to say--further threatening the independence of the Fed.
She was an interest rate hawk, until President Trump wanted
lower rates. She opposed tariffs on China before she was for
them.
And based upon what I and other Committee Members heard in
meetings with her, it appears that Ms. Shelton has changed
pretty much all of her positions--on everything from the gold
standard, to Bretton Woods, to a steadfast opposition to FDIC
insurance.
That is not the steadying hand required at the Fed.
Eleven years into this recovery, more than ever the Fed
needs to be independent and careful--not reactive to every
tweet coming out of the White House.
A vote for Ms. Shelton is a vote against Fed independence
and our Nation's reputation as a financial bulwark for the
whole world.
Our other nominee to the Board, Mr. Waller is an economist
whose work has been subject to peer review and whose analysis
has helped direct the research path undertaken by the St. Louis
Fed. I look forward to hearing more about how he will hold Wall
Street accountable if he is confirmed.
Last, Mr. Chairman, I want to note that there should have
been a third chair at this table. We are not exactly sure why,
but Ms. Jessie Liu was supposed to be considered by this
Committee today. Her nomination was withdrawn 36 hours ago,
although the Treasury Secretary told me publicly yesterday he
knew for 2 days, so I do not think the Chair of this Committee
and I know I did not know as Ranking Member.
The position she was nominated for is responsible for
overseeing our country's work preventing terrorist and drug
cartel financing and enforcing economic sanctions. Now that her
nomination has been withdrawn, that position will remain empty.
Once again, to protect himself, the President of the United
States put our national security at risk.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Brown, thank you.
I will now administer the oath. Would you both please rise
and raise your right hand? Do you swear or affirm that the
testimony you are about to give is the truth, the whole truth,
and nothing but the truth, so help you God?
Ms. Shelton. I do.
Mr. Waller. I do.
Chairman Crapo. And do you agree to appear and testify
before any duly constituted Committee of the Senate?
Ms. Shelton. I do.
Mr. Waller. I do.
Chairman Crapo. Thank you. You may be seated.
Your written statements will be made a part of the record
in their entirety. And before you begin your statements, I
invite you to introduce your family in attendance. Thank you.
And you may start, Ms. Shelton.
STATEMENT OF JUDY SHELTON, OF CALIFORNIA, TO BE A MEMBER OF THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Ms. Shelton. Chairman Crapo, Ranking Member Brown, and
Members of the Committee, thank you for the opportunity to
appear before you today. I am honored that the President has
nominated me to serve as a member of the Board of Governors of
the Federal Reserve System, and I am grateful to this Committee
for considering me for the position.
I am also deeply grateful for the support of my husband of
42 years, Gil, who is here today along with our son, Gibb. And
I want to give special thanks to my mother, Janette Potter, and
the healthy contingent of family members seated behind me: John
and Sharman, Jim and Kristy, Rick and Suzi. They all flew out
from California yesterday to be here today with me. It means a
lot.
For nearly four decades, going back to my years as a
doctoral student at the University of Utah, I have focused on
the impact of monetary policy on economic performance. My
studies encompass current financial and economic conditions as
well as historical antecedents tracing back to our
Constitution. One thing is very clear: The power to regulate
the value of U.S. money is granted to Congress.
Congress created the Federal Reserve as an independent
agency and through the Federal Reserve Reform Act of 1977
charged it with the mandate to promote maximum employment,
stable prices, and moderate long-term interest rates. Our
central bank has been entrusted with considerable power to
carry out its responsibilities. Along with the political
independence and operational autonomy granted to the Federal
Reserve comes an obligation to be wholly accountable both to
Congress and to the public.
If confirmed, my priority will be to support monetary
policy that facilitates productive economic growth while also
ensuring the soundness and stability of the U.S. financial
system. In exercising the Federal Reserve's regulatory
oversight, I will support policies that are effective,
efficient, and appropriately tailored to financial
institutions, allowing them to better serve their customers and
communities in ways consistent with maintaining a safe
financial system.
I am well prepared to conscientiously fulfill the duties of
the position for which I have been nominated based on my
background and experience. The first college course I ever
taught was ``Money and Banking''. As a research scholar at the
Hoover Institution at Stanford University, I analyzed the
relationship between monetary policy and economic
sustainability in the context of geopolitical competition. My
first book accurately predicted the collapse of the Soviet
Union; my second book examined the impact of currency movements
on trade.
I have testified numerous times as an expert witness before
congressional committees in both the House and Senate. As U.S.
Executive Director of the European Bank for Reconstruction and
Development, I demonstrated strong leadership to achieve high-
priority objectives in accordance with U.S. strategic
interests. Combining academic perspective with real-world
insights, I hope to contribute intellectual diversity as a
Governor and would work collegially to promote sound money and
sound finances.
In closing, I wish to emphasize my commitment to honor the
constitutional authority of Congress to regulate the value of
U.S. money. By fulfilling the statutory mandate Congress has
assigned to the Federal Reserve, we ensure that America's money
remains the world's most respected currency and its most
trusted standard of value.
Thank you again for the privilege of appearing before you
today. I look forward to your questions.
Chairman Crapo. Thank you.
Dr. Waller.
STATEMENT OF CHRISTOPHER WALLER, OF MINNESOTA, TO BE A MEMBER
OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Waller. Chairman Crapo, Ranking Member Brown, and
Members of the Committee, thank you for the opportunity to
appear before you today. I am honored to have been nominated by
the President for this prestigious position and grateful to the
Committee for its consideration of my nomination. I would be
humbled to be able to serve my country in this capacity.
I am also thankful for the support of my family members who
are here with me today: my loving wife, Laurie; my three
children, Sarah, Maggie, and Sam; and my mother, Ann, who has
been my hero throughout my life.
For the last 11 years, I have served as the Director of
Research at the Federal Reserve Bank of St. Louis. During that
time, I have attended over 60 Federal Open Market Committee
meetings, and I have served as the main policy advisor to my
bank president. As a result of this experience, I fully
understand and support the dual mandate of the Federal Reserve.
I also understand and appreciate the Federal Reserve's role in
pursing policies to ensure a safe and stable financial system.
If I am confirmed, I will continue to advocate for policies
that achieve our dual mandate and maintain financial stability.
I believe that my background and experience makes me
uniquely qualified to fulfill the responsibilities of a Federal
Reserve Governor. In my decade-long experience as a senior
Reserve Bank official, I was deeply involved in policy issues
confronting the Federal Reserve. But in my role, I also spent a
substantial amount of time talking to members of our community
about how monetary policy affected their lives and their
businesses. That public input affected how I thought about
policy and its consequences. I also learned how valuable it was
to communicate clearly to the public what our policies were and
why we were pursuing them.
In addition to my experience as a Federal Reserve official,
I was an academic for over 25 years, and I did a substantial
amount of research on monetary theory, monetary policy, and
central bank design. I have written extensively on the
importance of central bank independence for the conduct of
monetary policy. My research also focused on how the central
bank can be made accountable to the electorate without giving
up its independence. In particular, I studied the importance of
the nomination and confirmation process in achieving central
bank accountability.
The Federal Reserve has been given tremendous
responsibility by Congress to use its policies to improve the
lives of the citizenry. Congress has also given the Federal
Reserve tremendous freedom to pursue those policies as needed.
But in return, it must be accountable to the public for its
actions and be able to explain what those policies are and why
they are being pursued. If I am confirmed, I pledge to work
with my colleagues to implement policies that help us meet our
dual mandate. I also pledge to be accountable for those actions
and to be transparent as to why those actions were taken.
Thank you again for the privilege to appear before you
today, and I look forward to your questions.
Chairman Crapo. Thank you very much, and I will begin the
questioning with a couple of questions for each of you to
answer. You do not need to give long answers to these as long
as it is the right answer.
[Laughter.]
Chairman Crapo. First, do you agree with the importance of
right-sizing regulations and tailoring the supervisory
framework to support a vibrant, growing economy while also
ensuring a safe and sound financial system?
Ms. Shelton. Yes, I do, Mr. Chairman.
Mr. Waller. Yes, I do as well.
Chairman Crapo. Thank you.
Senator Brown. That was the right answer.
Chairman Crapo. That was the right answer.
Do you agree that it is important to encourage the Federal
Reserve to submit all rules to Congress under the Congressional
Review Act as well as to submit all significant guidance for
purposes of the CRA?
Ms. Shelton. Absolutely.
Mr. Waller. Yes, I do.
Chairman Crapo. All right. Thank you.
Again, this is for both of you, and you can give a longer
answer to this one. The Federal Reserve independence is
critical to enacting monetary policy and for addressing long-
term economic objectives. I know I and I think every single
member of this Committee and Member of the Senate wants to
assure that the Federal Reserve is independent. There is strong
bipartisan support for maintaining Fed independence. What are
your perspectives on the Federal Reserve maintaining its
independence? Ms. Shelton, you may start.
Ms. Shelton. Thank you very much for the question, Mr.
Chairman. I believe that the independence of the Federal
Reserve is a vital aspect of its credibility with the public.
Congress has granted tremendous powers to the Federal Reserve,
and citizens have to be assured that monetary authorities will
be relying on their own best judgment and their own analytical
capabilities in making their decisions, not subject to
political pressure.
Chairman Crapo. Dr. Waller.
Mr. Waller. I have lived and breathed central bank
independence for 35 years, both in my academic career and in my
job as a Federal Reserve official. It is absolutely critical to
do the right policies to get the best economic performance and
to look at the data to determine how you want to set policy as
opposed to partisan influences.
Chairman Crapo. Thank you. And then this question is--I am
going to ask both of you to answer it, but I want to start with
Dr. Shelton. Dr. Shelton, some have tried to characterize your
support for the gold standard as outside the mainstream thought
and disqualifying for this position. What exactly are your
views on monetary policy and the gold standard?
Ms. Shelton. I would not advocate going back to a prior
historical monetary arrangement. I think it is really important
to acknowledge that the power to regulate the value of U.S.
money is given to Congress by our Constitution, and Congress
has created the Federal Reserve as an independent agency and
given it its monetary mandate. That is a framework under which
I will make decisions, if confirmed as a member of the Board of
Governors. I have looked at historical systems going back to
the beginning of our country because I think you can gain
valuable insights by comparing economic performance under one
set of monetary rules versus another. But money only moves
forward, and we see it evolving faster than ever these days.
And so I only use it to give perspective on money.
Chairman Crapo. Thank you. And I would like your views on
this, too, Dr. Waller.
Mr. Waller. First, I have studied monetary theory for the
last 20 years, have studied both asset-based monetary systems
as well as fiat monetary system which we currently have. The
fiat monetary system is pretty much what we have around the
world. It works well as long as it is well managed by the
central bank. There is no need to have the inefficiency of
tying things to a metallic standard or any other real asset if
needed.
Chairman Crapo. All right. Thank you.
Senator Brown.
Senator Brown. Thanks, Mr. Chairman.
I want to talk about Fed independence in a slightly
different way from the Chairman. I appreciate his questions.
Mr. Waller, I will start with you. Do you think that
Chairman Powell has done a good job making independent
decisions regardless of what the President tweets at him?
Mr. Waller. I think Chairman Powell has been very
professional in his job in carrying out policy as best he can
and building a consensus on the Committee.
Senator Brown. I will ask you the exact same question, Ms.
Shelton. Do you think Chair Powell has done a good job making
independent decisions regardless of what the President tweets
at him?
Ms. Shelton. Thank you, Ranking Member Brown. I think Chair
Powell and every member of the Federal Open Market Committee is
sufficiently self-possessed to rely on their own judgment. I do
not think any of them are influenced by political pressure.
Senator Brown. So is it OK that the President of the United
States tweets at them and calls--the President who appointed
him tweets at him and calls his names and said he is not doing
good things for the economy, that is just OK?
Ms. Shelton. Well, I do not censor what other people say,
but I do believe that every American, every Member of Congress,
and even the President has the right to criticize our Federal
Reserve.
Senator Brown. Based on what the President says about Chair
Powell, Ms. Shelton, it looks like the Fed--and you could watch
this and we all in this Committee and both parties are Fed
watchers to a degree. You could watch these attacks by the
President on his Chairman, our Chairman now. It looks like the
President and the Federal Reserve are not working well
together. Do you think the Chairman is doing a bad job
accommodating the President's wishes?
Ms. Shelton. I do not think it is the job of the Federal
Reserve to accommodate political agendas. What I am saying is
that the Fed operates independently, as it should, working for
the best interests of the Nation.
Senator Brown. Understanding that will be your answer to
the next question, but go with me a little bit here. What do
you think about the President's criticisms of Chairman Powell.
Ms. Shelton. As I said----
Senator Brown. Is the President right? Is Chairman Powell
right?
Ms. Shelton. As I said, I am not censoring what other
people----
Senator Brown. I am not asking you to censor. I am just
saying we have something we have never seen in American history
where the President of the United States consistently attacks
his own nominee whom many of us, myself included, up here voted
for, trying to get him to do different things on economic
policy. What do you think about what the President--not
censoring him, but what do you think about the President's
advice to Chairman Powell and what he tells him to do?
Ms. Shelton. I think what we have seen historically is some
Fed Chairmen have felt they were being pressured behind the
scenes. In some ways, it is refreshing if that is out in the
open. And as I say, everyone--certainly business journalists
dissect every word that is uttered by a Federal Reserve
official, and it is available, all the information. Anyone can
make a comment at any time.
Senator Brown. Mr. Waller, I think that the Chairman of the
Federal Reserve has done a pretty good job remaining
independent. When he was here yesterday--he testified
yesterday--Senator Kennedy and Senator Rounds and Chair Crapo
and Senator Tester, and I am leaving out a couple, all
emphasized, emphatically emphasized, certainly complimented the
Chairman on his independence, but emphasized how important
independence is.
Do you pledge to be independent regardless of what
President Trump tells you to do?
Mr. Waller. Thank you, Senator Brown. I pledge to do what
is best for the economy in terms of how we read the data and
what is best to do to achieve our dual mandate. That is how I
view the job, and that is what I intend to do.
Senator Brown. Ms. Shelton, do you pledge to be independent
in your decision making regardless of what the President tells
you to do?
Ms. Shelton. I pledge to be independent in my decision
making, and, frankly, no one tells me what to do.
Senator Brown. My last comment and question, Mr. Chairman.
Ms. Shelton, going back three decades, you have written
extensively some 95 articles and books, including several op-
eds in the last couple of years. Can you explain to the
Committee why you have published in Cato or in the Wall Street
Journal time and again praise for one set of provocative
beliefs, like the U.S. should revert to the gold standard, that
low interest rates steal from investors, that the Fed is an
interloper in the marketplace and should be abolished, now when
you come before Congress you claim you are firmly in the
mainstream of economic thought? I am troubled with that. You
have a paper trail for 30 years. You seem to be the new Judy
Shelton, not the old Judy Shelton. What are we to make of that?
Ms. Shelton. Senator, I think I have been intellectually
consistent since I wrote a book in 1994 called Money Meltdown:
Restoring Order to the Global Currency System. I do not claim
to be in the mainstream of economists, but I do not think that
is necessarily a virtue.
Senator Brown. You are not an economist for one thing,
right?
Ms. Shelton. I am an economist, sir.
Senator Brown. I thought your Ph.D. was in something else.
Ms. Shelton. My Ph.D. from the University of Utah was
administered through the Finance Department as majoring in
international finance and economics, but it is a business
administration degree through their school, yes.
Senator Brown. OK.
Chairman Crapo. Senator Shelby.
Senator Shelby. Thank you, Mr. Chairman.
I think, Dr. Waller and Dr. Shelton, both of you have
extensive experience and you are academically qualified. I have
no problem with that.
Dr. Shelton, I am troubled by some of your writings and
some of the articles that you--well, that others have written
about your writings and some of the stands, and this is a good
time to air them out, I suppose.
I think the question to me--and I have been on this
Committee a long time, and we have Senator Brown. We are more
than Fed watchers. We are tasked with the Senate to evaluate
all of you before you are confirmed or not confirmed.
Some people say, Dr. Shelton, that you are basically an
outlier, that you are not mainstream, you do not have
mainstream views in the economy. Most people think--not
everybody--that the role of the Federal Reserve, as stated by
law, is price stability and full employment. Those are goals
that we try to reach.
When you are nominated to the Federal Reserve and confirmed
by the Senate, generally it is for a long term, probably the
longest term that we have, up to 14 years, I believe. So our
views, I believe, should be mainstream.
If people deem--and a lot of people have--that you are an
outlier, not a mainstream player, if you were on the Fed, how
would you work with the other members? Could you work with them
on the goal of price stability and full employment? Or would
you be really an outlier?
Ms. Shelton. Thank you, Senator Shelby. I would look very
much forward to working with my colleagues at the Federal
Reserve. I have great respect for their capabilities and for
their judgment. I think I would bring my own perspective, but I
think the intellectual diversity strengthens the discussion and
would be welcomed. So that is what I would hope to bring, but
certainly with the goal of working with the people who are
there as together we would try to formulate monetary policy
most conducive to productive economic growth.
Senator Shelby. You know, you have talked about it and
other people have written about the gold standard. If we had
all the gold in the world, all of it has been mined and all the
jewelry and storage, it would not be worth, I believe, anything
what our economies are worth, what the GDP of this country is
worth or the GDP of the European Union or China or Japan and so
forth. Would that basically be true?
Ms. Shelton. That is true.
Senator Shelby. So when you talk about the gold standard,
that obviously was coming--the gold standard came in the old
economy when we had a barter economy, statistical, didn't we,
in a sense? Is that fair?
Ms. Shelton. We have had a barter economy, yeah.
Senator Shelby. We have progressed beyond that and it is
the confidence of the Nation and the people and the economy
backing all of the wealth behind it. Is that what we deem
valuable today?
Ms. Shelton. Definitely.
Senator Shelby. So talk to us a little bit about your views
on the gold standard, which we have given up long ago, and the
other people in the world? I do not know anybody who is relying
on it now. Do you still believe that is important? And why?
Where are you?
Ms. Shelton. Thank you, Senator Shelby. Well, first, I
totally agree with your assessment. You never go back with
money. It keeps moving forward into the future. And I am
surprised that people attempt to say they must have some
thought about me advocating a gold standard, and I suppose they
are talking about the classical international gold standard. I
would just point out that there is about $1.8 trillion in
outstanding Federal Reserve notes. That is just the currency.
Most of it is held outside the country.
If you looked at the market value of the U.S. Government's
total holdings of gold, it would be less than even a quarter of
that amount, and that is just the most basic form of money. So
I am not really sure what anyone----
Senator Shelby. That is a commodity, isn't it?
Ms. Shelton. It is a commodity. It has a historical use as
a monetary surrogate. But it is mixed use today. So as I have
said, it is useful to look at something that worked from 1870
to 1913 when the U.S. was a participant in the classical gold
standard. It is worth it to look at the Bretton Woods gold
exchange standard where the U.S. was the anchor from 1944 to
1971. But that was 50 years ago when we had any kind of a
monetary role for gold. We certainly have to just be looking
toward the future.
Senator Shelby. Have you advocated a return to the Bretton
Woods program?
Ms. Shelton. What I have said about the Bretton Woods
agreement is that it did establish a level monetary playing
field in terms of exchange rates.
Senator Shelby. That is when the world was in disarray
right after the--about the time the Second World War ended.
Ms. Shelton. Precisely, and a lot of Nations still
struggling. The war was not over when Bretton Woods was being
put together by the United States. We are thinking, ``Is this
going to be worth it to win?'' Because if we are going back to
what we had in the 1930s, when you had competitive devaluation,
you had retaliatory tariffs, and that created a downward spiral
in international trade, that is not worth fighting for. So the
United States actually set up the Bretton Woods agreement to
give hope that there would be a better future and that
investment would flow to its highest use around the world, and
that people would not use competitive depreciation to undermine
the principles of free trade.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Dr. Shelton, you are being considered for a very important
position today. Can you think of a ``more stimulating
challenge'' than serving on the Fed?
Ms. Shelton. A more stimulating challenge?
Senator Menendez. Than serving on the Fed.
Ms. Shelton. It seems to me that would be the ultimate for
someone who has studied monetary policy and economic
performance.
Senator Menendez. Can you think of a ``more meaningful
responsibility'' than serving on the Fed?
Ms. Shelton. I think it is a gravely responsible position.
Senator Menendez. And can you think of a more important
role than ``safeguarding our Nation's vital interests and
deeply rooted values'' by serving on the Fed?
Ms. Shelton. No, Senator Menendez.
Senator Menendez. Those are serious words about serious
responsibilities that will impact every American. But I
question whether you fully understand the gravity of those
words.
Just 2 years ago, you appeared before the Senate
Foreign Relations Committee on which I am the Ranking
Member for your nomination as the U.S. Executive Director of
the European Bank for Reconstruction and Development. In your
testimony before the Committee, you said, ``Given my background
in analyzing the strategic implications of global financial
developments and my strong commitment to democracy, I cannot
imagine a more stimulating challenge, a more meaningful
responsibility than to take the role of safeguarding our
Nation's vital interests and deeply rooted values at the
EBRD.'' I agreed with you then.
Yet during your brief tenure, which you withdrew from
prematurely, you missed 11 of 26 Board meetings. You were the
U.S. representative to the Bank. You were in a Senate-confirmed
position, but you made it just to slightly over half of the
Board's meetings.
Dr. Shelton, would you give someone a promotion if they
missed almost half the most important proceedings that they
were assigned to?
Ms. Shelton. Thank you for the question, Senator Menendez.
It is a matter of public record that actually my attendance was
closer to 70 percent. But let me explain something about the
way a multilateral----
Senator Menendez. You dispute the numbers I just----
Ms. Shelton. Absolutely, I do.
Senator Menendez. ----of how many you missed?
Ms. Shelton. Not only that, but there is a perfect
correlation, which I would like to explain. When I was not
there, I was in Washington meeting with the people to whom I
reported at the Treasury Department. I was conferring with my
interagency colleagues----
Senator Menendez. That is why we have telephones. As a
matter of fact, Ambassadors are given telephones. They are
given ways to communicate so they do not leave their posts. It
is unique that each of the meetings you missed, you claim that
you were in D.C., but you needed to be at the Bank voting on
behalf of the United States in these all-important issues.
You know, I just cannot imagine that the Foreign Relations
Committee would give an ambassador a higher position if they
were not there nearly half the time that they were supposed to
be. So if you are confirmed, do you expect to serve your full
term on the Fed?
Ms. Shelton. I do.
Senator Menendez. You do. Well, that is what you told the
Foreign Relations Committee when you were confirmed as the
Director of the EBRD, and here you are. So I fail to understand
how I can take that answer seriously. Showing up is a basic
requirement of a job, and if any of us missed half of our
votes, half of our hearings, I do not think our constituents
would send us back.
Let me ask you this on a different topic. If we did not
have the Federal deposit insurance, do you think consumers
would trust a small, unknown financial institution with their
money, or would they turn to bigger institutions with better
name recognition?
Ms. Shelton. Senator Menendez, I totally support Federal
deposit insurance. We have had it since 1933. I think it is
essential to reassuring depositors that they can safely put
their money into American banks.
This idea that I am somehow against deposit insurance, I
tried to find out where that even came from. The only reference
I could find to me even commenting on deposit insurance goes
back 25 years where, in the course of explaining the theory of
moral hazard, I said that if there is Government insurance, in
theory a bank might engage in riskier financial behavior
seeking profits because they would be protected by the
Government insurance. And I feel strongly----
Senator Menendez. Well, we had a lot of that which led us
to the Great Recession, not because of financial insurance, but
at the end of the day, one of your writings suggested that the
deposit insurance increases risk in our financial system. But
now you are telling us you support deposit insurance.
So I am concerned how do we--have you ever told the
President of your views that North America needs no borders?
Ms. Shelton. No, and if you are referring to something I
wrote in 2000, I would be happy to explain the context of this
rumor. I was talking nothing to do with----
Senator Menendez. It is not a rumor. It is what you wrote.
Ms. Shelton. Well, it was nothing to do with immigration.
In 2000, as I am sure you are aware, for the first time in 70
years, Mexico elected a President who had not been a member of
the ruling party. And Vicente Fox was saying that he recognized
Mexico was experiencing a collapse in its currency every 6
years coinciding with their electoral cycle. He wanted to be
something new, and he wanted to bring Mexico's finances into
order, balance the budget, align their regulatory approach to
banking to something closer to what we have in the United
States. And I thought that should be encouraged. I think we
want a prosperous, stable economy on our border. And I also
feel that it is only fair for Mexicans to have a chance to be
successful in their own country. So that is what that article
was about.
Senator Menendez. I am happy to submit for the record, Mr.
Chairman, some articles that speak quite differently to the
view you just expressed on this and some of the other things I
have raised with you, and we will let the members decide in
their judgment.
Thank you.
Chairman Crapo. Thank you.
Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. And thank you to
both the nominees for being here today and for the discussion
we had in my office separately earlier this week.
Let me just say for the record I think that using a price
rule that might include precious metals is an intellectually
defensible approach to monetary policy, just for the record.
Senator Kennedy. Is or isn't?
Senator Toomey. Is a defensible approach.
Dr. Shelton, I understand that you have long advocated for
a stable international monetary system, stability in exchange
rates, and I doubt there would be any disagreement that that is
certainly preferable to the alternative. The concern I have is
that we do not get to control other countries' monetary
behavior. We do not have a vote on what they do. And I am
concerned about the extent to which you advocate for our
monetary policy to be influenced and reactive to the foreign
exchange behavior of other countries.
So in August of 2019, in a Wall Street Journal article, an
interview that you gave on CNBC was characterized--it said,
``Ms. Shelton said in an interview on CNBC Thursday that
central banks in Europe, China, and Japan are all devaluing
their currencies against the dollar through monetary policy.
When asked if the U.S. should follow suit, she said yes.''
Looking at the interview, it does look like that is an accurate
characterization to me.
In July of 2019, you wrote in a Wall Street Journal piece,
and I quote, ``When the United States' trading partners engage
in currency manipulation, it is not competing--it is cheating.
That is why it is vital to weigh the implications of U.S.
monetary policy on the dollar's exchange rate value against
other currencies.''
In September of last year, in a Wall Street Journal op-ed,
you clarified your view that the Fed should fight this alleged
cheating. You said, and I quote: ``In an era of worldwide
currency exchange, America's central bank should not ignore the
effects of movements spurred by other major central banks. With
no consistent free trade principles governing global monetary
policy, the Fed must take proactive steps to ensure that the
U.S. can compete successfully.''
So I guess my direct question, after reading these things
that you have said and written, is: Is it your view that if a
major American trading partner were to significantly devalue
its currency intentionally, aren't you saying that the U.S.
should match that devaluation and the Fed should play a role in
achieving that devaluation?
Ms. Shelton. Well, thank you, Senator Toomey, for the
question and also for our discussion the other day, which I
thought was very substantive. And I agree with what you were
saying, that monetary policy executed by the Federal Reserve is
directed at achieving our domestic economic objectives, and
they have been outlined very clearly by Congress.
I have said that among the factors that we need to
consider, if I were to become a member of the Board of
Governors, is the political context of the global economy and
global finance. And I think we have to be aware of what other
central banks are doing. Last year, 49 central banks lowered
their interest rate, which caused their currencies to
depreciate relative to the dollar, and it was not until July
that our Federal Reserve decided likewise to lower a quarter
point, as they did the next meeting and the next----
Senator Toomey. Yeah, so I know I only have 5 minutes, and
we are down to 1. My question is--and I think the only rational
conclusion one can come to from reading what you have written
and what you have said is that you believe the Fed should
actively seek to devalue our currency if other countries are
doing that. And I think that is a very, very dangerous path to
go down. This beggar thy neighbor mutual currency devaluation
is not in our interest, and it is not in the mandate of the Fed
to pursue it. I do not think it is achievable. You have got
multiple currencies. Which ones would you be watching? Would it
be the euro or the yuan? They could be moving in different
directions. And a Fed that has famously been unable to achieve
its inflation target for lo these many years, why we should
think that the Fed by changing monetary policy is going to be
able to achieve some currency target I think is very, very
unlikely.
So I just want to stress I think this is a dangerous path
to go down, and the recent body of your work certainly seems to
be advocating for that intervention.
Ms. Shelton. If I may, Senator?
Senator Toomey. Sure.
Ms. Shelton. It would be anathema to me to suggest that we
devalue our money to gain a trade advantage. What I am saying
is within the context of the framework for deciding monetary
policy, we also have to look at the impact on employment and on
stable prices. And if other central banks engage in those
unfair practices, it can affect employment, especially our
manufacturers who have to compete----
Senator Toomey. But we can observe that from domestic data.
We do not have to reference foreign exchange rates to determine
whether there is an adverse problem with employment in the U.S.
Sorry, Mr. Chairman.
Chairman Crapo. Senator Tester.
Senator Tester. Thank you, Mr. Chairman. I want to thank
you and the Ranking Member for having this hearing.
I want to thank both of you for being here in front of the
Committee and for your willingness to serve on the Fed.
I am going to start with you, Ms. Shelton. Do you think it
is a good idea to sell our public lands?
Ms. Shelton. I am sorry?
Senator Tester. Do you think it is a good idea to sell off
our public lands?
Ms. Shelton. To sell off public lands? Senator Tester,
honestly I have never considered that, and I do not have any
opinion.
Senator Tester. OK. In a 2009 book that you wrote, you said
for the purpose of balancing our budget, we should consider--
and I paraphrase--selling the Postal Service, Amtrak, and
Federal lands.
Ms. Shelton. I do not recall taking that position. It is
not something I am strongly advocating.
Senator Tester. Well, it is an important issue. Where do
you live?
Ms. Shelton. I live in Fredericksburg, Virginia.
Senator Tester. OK. So they probably do not have a lot of
Federal lands in Fredericksburg, Virginia. In Montana, we do
have a lot of public lands. And if we have got people out there
in positions of power that are in the position of making sure
that unemployment is maximized, as we do in the Fed, and we
have people that have written about selling off things like the
Postal Service and Amtrak and our Federal land holdings, that
is a problem. Would you see it as a problem?
Ms. Shelton. I understand what you said, that that would be
a problem for the local economy or the area that you are
speaking of, but----
Senator Tester. But not generally for the country?
Ms. Shelton. Well, I think it is always disconcerting to
change employment or make some transition away----
Senator Tester. Well, I think it is also important to note
that these public lands drive an economy in Montana, and
Montana has only got a million people, a little over a million
people, but it is about $7 billion to our economy in Montana.
So somebody who would advocate this would have pretty
significant impacts on the 72,000 people who work in the
outdoor industry in Montana.
Ms. Shelton. I believe, Senator Tester, that that is a
decision up to Congress. It would have nothing to do with the
Federal Reserve.
Senator Tester. You are right, but it does have impacts on
people that are in positions of power, and I will tell you, as
has been pointed out with previous questioners, the Federal
Reserve is a position of power.
One of the things that I like in folks is consistency, and
I want to quote you, something that you wrote very recently, 6
months ago, because you have said today--and correct me if I am
wrong--that you are for independence of the Fed.
Ms. Shelton. Absolutely.
Senator Tester. Six months ago, in a Wall Street Journal
op-ed you wrote, and I will quote this directly: ``It would be
in keeping with the historical mandate if the Fed were to
pursue a more coordinated relationship with both Congress and
the President.''
If that is not shipping the independence of the Fed out the
door, tell me what it is.
Ms. Shelton. Senator Tester, that article was explaining
the legislation that has shaped the role of the Federal
Reserve, especially with regard to its accountability. I was
quoting from the 1978 Humphrey-Hawkins Act, which was passed by
Congress a year after the Federal Reserve Reform Act. And what
I was explaining is that that legislative language actually
sets out six economic objectives for the country, and then it
says, ``Attainment of these objectives should be facilitated by
improved coordination among the President, the Congress, and
the Board of Governors of the Federal Reserve.''
Senator Tester. And in my opinion----
Ms. Shelton. That is in the law. I did not write that.
Senator Tester. Well, I am telling you that if you believe
that we need to pursue a more coordinated relationship with
both Congress and the President, but I think these questions
about the President's tweeting and potential of me having
influence on the Fed, which I do not think should be correct,
is real.
Ms. Shelton. Honestly, it surprised me to read that in the
language----
Senator Tester. But you wrote it.
Ms. Shelton. ----of the legislation. It surprised me to
read it, and then I merely revealed that, and I have been
subsequently surprised that it is attributed to me rather than
to Congress who wrote it.
Senator Tester. Because you wrote it. You wrote it in a
September Wall Street----
Ms. Shelton. I was quoting from the legislation.
Senator Tester. ----Journal article. OK. Let us go a
different direction. The gold standard, also in the Wall Street
Journal, let us return to the gold standard, and you hoped that
Vice President Pence would hasten a return to the gold
standard. You talked about a new Bretton Woods to be held in
Mar-a-Lago. If that is not advocating for a return to the gold
standard, I mean, what is?
Ms. Shelton. Well, I would differentiate that the Bretton
Woods agreement was a gold exchange standard when only the
United States as the anchor had any kind of convertibility
responsibilities. What I was suggesting there is that having a
stable, international, level monetary playing field is very
supportive of free trade, consistent with the principles of
comparative advantage and mutual benefit----
Senator Tester. Dr. Shelton, I really appreciate your
willingness to serve. I do. But I am going to tell you
something. When I read things and they say the things as
directly as you said them--which I appreciate, by the way--and
then you come in here and, by the way, can try to justify them,
the dog does not hunt. I am just telling you, it does not. You
have a lifetime of writings, and not once are there things in
there that would indicate anything other than what I pointed
out in this Committee meeting, whether it is the sale of public
lands, whether it is the sale of the Postal Service, whether it
is the gold standard, whether it is independence of the Fed.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
First of all, welcome to the Committee. I would like to go
back just a little bit. We had the opportunity to have Chairman
Powell in front of us yesterday, and I would like to just
remind my colleagues of what Chairman Powell said yesterday
about what we called ``groupthink.'' Chairman Powell agreed
with me that groupthink is unhealthy, and he said, ``I am
strongly inclined to think that you need to hear all sides of a
case.'' And to that end, Dr. Waller and Dr. Shelton, I think
both of you would provide the Board with a fresh perspective,
and I think that is healthy.
I did want to have the opportunity to maybe delve into just
a couple of separate items, and I am going to begin with Dr.
Waller. I think you have been neglected here a little bit, and
I would like to talk about--you are from the St. Louis Fed. Can
you talk a little bit about what the differences are between
what you see in the Upper Midwest with regard to the ag economy
versus what we find in a lot of the rest of the economy, which
has really been significant in terms of its growth, and yet the
ag economy has been very slow and perhaps in large part because
they have been on the tip of the spear of the trade
negotiations that have been going on.
Can you share a little bit about what you have seen in your
previous work?
Mr. Waller. Yeah, thank you, Senator. So as I mentioned in
my opening statement, a large part of my job at the St. Louis
Fed is to talk to the members of our community, bankers,
business people, and we have a big ag action. In fact, our
district is the largest soybean producer in the United States.
So, clearly, the trade wars with China had a huge impact on our
ag sector, and we hear that all the time when we go out and
talk.
We are hoping that some of the deals that have been signed
will reverse this and there will not be a persistent decline in
farm income. Also hopefully this will put some support under
land prices, which have been drifting down for the last 5
years, which potentially could create some problems for rural
and ag banks if that continues. We are keeping an eye on that.
But we are hoping that some of the trade uncertainty with China
will sort of alleviate this pressure.
Senator Rounds. Thank you.
Dr. Shelton, they have made it very clear that they think
that you come from a unique perspective with regard to your
discussions in an academic sense with regard to the gold
standard. They have suggested or at least some of your critics
have suggested that you would not be independent.
I have looked at some of your writings. It would appear to
me that you have taken almost a devil's advocate approach in
some cases. I think the Chairman of the Fed, Chairman Powell,
has made it clear that he looks for differing points of view.
And yet at the same time, I think each time we ask you
questions, we lead the question a little bit.
I would like to give you just a few minutes--and I have got
1 minute and 53 seconds left, but would you take some time here
and just explain what your thought is with regard to the gold
standard and perhaps a little bit about what you see your role
as a member of the Board with regard to both being a team
member, but also being an independent member as well. In South
Dakota, we value that independent point of view, and we think
it is important. I would like you to share your thoughts
without being led into any question.
Ms. Shelton. Thank you. I appreciate that, Senator Rounds.
I keep going back to the fact that the power to regulate the
value of U.S. money is granted by our Constitution to Congress.
It is in Article I, Section 8. And in the very same sentence,
Congress is given the power to define official weights and
measures for our country, because money was meant to be a
measure, to be a standard of value. And I think that money has
to work the same for everyone in the economy. And it is
important that it serve that purpose as a reliable measure so
that people can plan their lives.
I do not see how you can have a free market economy if
people cannot rely on the most vital tool that makes markets
work. It is through money that we transmit market signals, and
you need clarity of those signals or supply and demand can
figure out what is the optimal solution.
So I think that the importance of feeling responsible in
discussions at the Federal Reserve is a responsibility to
remember that the money has to work for everyone, and that in a
sense it is a moral contract between the Government and the
citizens.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Smith.
Senator Smith. Thank you, Mr. Chair and Ranking Member
Brown. And thanks to both of you for being here and for your
willingness to serve, and welcome to your families also.
As you can see, many of us on the Committee have great
interest and concerns about the independence of the Fed, so I
want to just pursue this a little bit.
Dr. Waller, you believe that the Fed was designed to be an
independent institution, yes?
Mr. Waller. Yes, I do.
Senator Smith. And do you think that independence is an
important feature of what allows the Fed to work?
Mr. Waller. Yes, I do. The structure of the Fed, this
process, everything is designed to give the Fed the
responsibility to conduct monetary policy as it sees fit,
according to achieving the goals that Congress has laid out for
us. So Congress gives us the goals; then they give us the
freedom to do what we think is best to meet those goals.
Senator Smith. Because the opposite of an independent Fed
is a Fed that is politicized, a Fed that would allow sort of
the short-term interests of a political leader to trump what is
in the best interests of Americans and the American economy in
the long run. That is really the choice: independence of the
Fed or politicization of the Fed.
So what would be your judgment of a statement like this--
this is a quote--noting that ``do not see any reference to
independence in the legislation that has defined the role of
the Federal Reserve for the United States,'' or think it is
healthy that, again, ``criticism from the White House of the
Fed is out in the open.'' What do you think of that, Dr.
Waller?
Mr. Waller. Well, the institutional design of the central
bank is what gives us its independence, the combination of
having politically confirmed Board members plus regional Fed
presidents who are not political appointees provides a check on
the political aspect. The overlapping long terms of office give
you some protection in the sense of being able to think in the
long run for the good of the country and how you develop
policies. The fact that we do not make policy by one person,
that it is actually a group that has to make that decision,
requires some degree of consensus on how you develop policy.
That is the tough job of the Chairman.
Senator Smith. But the fact that, in this statement, there
is not reference to independence in the legislation that
defined the role of the Federal Reserve of the United States,
do you think that that means that there is not independence?
Mr. Waller. No. Like I said, as far as I view it, it is the
institutional design that is what gives you your independence.
Senator Smith. So, Dr. Shelton, let me ask you the same
initial question. Do you believe in the independence?
Ms. Shelton. Absolutely, Senator Smith.
Senator Smith. So if that is the case, what did you mean
when you told a UBS executive in an interview 4 months ago that
you ``do not see any reference to independence in the
legislation that has defined the role of the Federal Reserve
for the United States''? What did you mean by that statement?
Ms. Shelton. In researching the language of the 1977
Federal Reserve Reform Act and in the Humphrey-Hawkins
legislation, I was searching for exactly that, to make this
statement. As I say, I was surprised it is not asserted more
clearly. But as Dr. Waller was saying, the operational autonomy
of the Federal Reserve assures its independence over and above
its political independence, which is guaranteed by having
members who think for themselves, as I believe every member of
the Federal Open Market Committee does. And, I mean, the only
one who can reverse an interest rate decision of the Federal
Reserve are the members of the FOMC themselves, as they did
last year.
Senator Smith. So you also said that you think that it is
healthy that ``criticism from the White House of the Fed is out
in the open.'' So do you think it is healthy for the President
to criticize the Fed?
Ms. Shelton. Well, as I have said, I think in the past some
Federal Reserve officials have suggested they were quietly
pressured, so at least it is transparent. But I have also said
I do not censor what someone else says, and I believe everyone
has the right to criticize the Federal Reserve, including the
President, including every Member of Congress, and every
citizen.
Senator Smith. But isn't what the President is doing here,
isn't this an attempt to influence the Fed, which wouldn't that
suggest that the President does not believe in the independence
of the Fed because he is, in fact, attempting to use his
significant power in order to influence the Fed? Doesn't that
mean that he does not himself believe in the independence of
the Fed?
Ms. Shelton. I do not think people in that position of
responsibility as someone serving on the Fed is easily
intimidated. I think that is what you are looking for, is
people who think for themselves. And that is why I appreciate
this Committee judging nominees for exactly that
characteristic. So I do not think that anyone on the FOMC is
affected by political pressure.
Senator Smith. Well, you know, my view is this is clearly
the President attempting to undermine the independence of the
Fed, and this is an issue that I am very concerned about. I
know I am out of time, Mr. Chair, but thank you very much.
Chairman Crapo. Thank you.
Senator Kennedy.
Senator Kennedy. Dr. Shelton, I want you to assume a couple
of facts for me. Assume that you are queen for a day and you
are running the Federal Reserve and you have unfettered
discretion. Assume that economic circumstances in the United
States and the world are the same as they are right now, except
the bottom has fallen out of consumer confidence and spending,
unemployment has jumped from 3.5 percent to 6.5 percent in a
very short period of time, and we are in a recession. How would
you get us out?
Ms. Shelton. Well, thank you for the question.
Senator Kennedy. You are welcome.
Ms. Shelton. It is hard to imagine that situation, but the
first----
Senator Kennedy. Assume it is true, and tell me, if you
could, because they only give us 5 minutes, how you would get
us out.
Ms. Shelton. It would not be up to me, even if I were queen
or Chairman. That is the importance of----
Senator Kennedy. Well, let us assume for a second----
Ms. Shelton. ----having the discussion.
Senator Kennedy. You are using my time, Doc. Please assume
what I just told you and you are running the Federal Reserve
and you do not have to answer to anybody. What would you do? I
think you understand the question.
Ms. Shelton. I would go to the mandate, and I would talk
with the other members of the FOMC about the appropriate
monetary policy to help restore----
Senator Kennedy. What is the appropriate monetary policy?
What would you do? You do not have to talk to anybody. What
would you do? How are you going to get us out of the recession?
Ms. Shelton. Well, the problem we have now is we are very
close to zero on interest rates.
Senator Kennedy. Yes, ma'am. What would you do to get us
out of the recession?
Ms. Shelton. I think we are down to the other tools that
the Federal Reserve has.
Senator Kennedy. Would you lower interest rates?
Ms. Shelton. I would never go negative. I mean, I am averse
to that idea. And so the alternative is----
Senator Kennedy. I am sorry. I am not trying to be rude,
but----
Ms. Shelton. ----quantitative easing.
Senator Kennedy. ----they just give us 5 minutes. Would you
take them to zero?
Ms. Shelton. At the maximum, and I do not like to say you
would eliminate courses of action, but I would be very
reluctant to go below that. The Fed can always engage in
purchases of assets----
Senator Kennedy. So you would take them to zero, but you
would not go negative?
Ms. Shelton. I think it undermines the financial structure.
Senator Kennedy. You would go to quantitative easing?
Ms. Shelton. Very reluctantly, but I think first I would
make it clear that there are limits to monetary policy. At some
point you really cannot stimulate growth. I would call for
fiscal----
Senator Kennedy. Yes, ma'am. Again, I am sorry to
interrupt, but you would go to quantitative easing.
Ms. Shelton. That is your only alternative. If you think
that----
Senator Kennedy. What volume would you use? Now, we have
gone from 3\1/2\ to 6\1/2\ interest rate, bottom fallen out of
consumer confidence. How much are you going to buy a month?
Ms. Shelton. Well, every round of QE has been less
effective than the prior rounds.
Senator Kennedy. I understand. How much are you going to
buy a month?
Ms. Shelton. I would probably look at what the most recent
one was, so we are looking at approximately $80 billion a
month.
Senator Kennedy. OK. Do you think Congress ought to start--
well, we are already deficit spending. We are already like a
problem gambler chasing his losses. But would you recommend
fiscal stimulus and that we have a stimulus package?
Ms. Shelton. Obviously, that is up to Congress, not the
Federal Reserve.
Senator Kennedy. I understand. I am asking your
recommendation. I get that.
Ms. Shelton. Well, there might be incentives----
Senator Kennedy. Would you recommend that we go to a
stimulus package?
Ms. Shelton. It depends what it is. If it is just spending
more or projects that are not shovel ready, I do not think that
is good. But if you can restore business confidence and
encourage business capital investment through tax reform, that
could be helpful.
Senator Kennedy. OK. So you think we should just increase
deficit spending?
Ms. Shelton. I do not like deficits, but----
Senator Kennedy. I understand. I am just asking what you
would do.
Ms. Shelton. In an emergency situation, I think the most
important thing is to restore that consumer and business
confidence.
Senator Kennedy. I get that. Would you recommend that we
deficit spend dramatically?
Ms. Shelton. Reluctantly, if it appears that there is
stimulus potential in doing so, but that would be----
Senator Kennedy. That is a yes?
Ms. Shelton. ----Congress' decision.
Senator Kennedy. That is a yes?
Ms. Shelton. If you are down to the wire.
Senator Kennedy. OK. I have got 38 seconds. Dr. Waller,
could you answer my question? What would you do?
Mr. Waller. Yeah, this would be the standard monetary
policy toolkit. You would cut interest rates probably as low as
you could to zero. Step two, you would typically use forward
guidance, which was trying to signal to the markets how long
you intend to keep interest rates low.
Senator Kennedy. You would try and talk them down.
Mr. Waller. Try and talk them down. I would agree you would
need some fiscal support since we are constrained by the lower
bound, because I personally would not want to go negative----
Senator Kennedy. Would you do quantitative easing?
Mr. Waller. Quantitative easing would be a possibility if
you wanted to try to lower longer-term----
Senator Kennedy. How much?
Mr. Waller. That would be a quantitative measure. I do not
know----
Senator Kennedy. What does your gut tell you?
Mr. Waller. My gut tell me?
Senator Kennedy. Yeah. We have gone from 3\1/2\ to 6\1/2\.
I am talking fast, Mr. Chairman.
Chairman Crapo. You are out of time.
Senator Kennedy. I am going to land this plane.
[Laughter.]
Mr. Waller. I will throw out a number: 500 million.
Senator Kennedy. 500 hundred million, thank you. Thank you.
Chairman Crapo. Thank you.
Senator Cortez Masto.
Senator Cortez Masto. Thank you. I appreciated the line of
questioning. It was really enlightening.
So, Dr. Shelton, let me ask you this: In July of 2015, you
presented at the Cato University, and at that event, in
response to a question, you said, and I quote: ``I do not trust
Government statistics on GDP growth or on inflation.'' So what
specifically about those statistics do you distrust?
Ms. Shelton. I think it is a challenge to look at,
particularly with regard to inflation, the variety of indices.
We are mostly familiar with the Consumer Price Index. The Fed
uses the Personal Consumption Expenditures Index. I am not sure
that either really captures the impact of technological
innovation; that is, a basket of goods priced at a certain
level today might be delivering a lot more in terms of services
than, say, a telephone from 20 years ago. And so I am not
saying I distrust. I am just saying that it is difficult to
measure consistently through time Consumer Price Indices and
use that as the main tool for making monetary policy.
Senator Cortez Masto. Are there other Government statistics
that you feel the same way about?
Ms. Shelton. I am not sure what ones I would suggest.
Senator Cortez Masto. Let me ask you this: There has been a
lot of talk about the gold standard in your previous writings
and your position on eliminating the Federal deposit insurance.
I was looking at your book, Money Meltdown, that you wrote in
1994, and really the last paragraph on the section that talks
about gold convertibility, you basically state that eliminating
the Federal deposit insurance would restore the essential
character of banking as a vehicle for channeling financial
capital into productive investments while striving to meet the
risk and timing preferences of depositors.
So if you were appointed to the Federal Reserve, would you
still consider that as an opportunity or an option to focus on
and advocate for the elimination of the Federal deposit
insurance?
Ms. Shelton. Senator, no. I think that having deposit
insurance is essential to maintain trust in the American
banking sector, and I was merely using an example to explain
moral hazard by suggesting that in the presence of Government
insurance, the owners of the bank, a failing bank, may be
motivated to engage in more risky behavior than they would in
the absence of Government insurance. And I think it is
important that the owners of the bank bear the brunt of the
cost of paying for failure rather than having the Government
step in.
Senator Cortez Masto. OK. Along with my colleagues, I am
concerned--and let me just say this, because you have a history
of writings, and you should be proud of them. They are your
writings, they are your belief, and based on your background
and experience. But when you come before us for this position,
it seems like you are taking a 180-degree position on all of
this just to be appointed to this position. So how do we trust
that whether you are before us today and who you are today
versus your writings in the past, who are we getting that is
going to be on the Federal Reserve?
And one final thing. You said you are from Fredericksburg,
Virginia, but you are going to be representing California on
the Federal Reserve. Explain that to me.
Ms. Shelton. I believe that issue you mentioned there at
the end is decided by other people. I am not involved with
that. But my understanding is that all the Governors are
assigned effectively to a district and that my correlation with
the San Francisco district bank is quite strong. I was born and
raised in California. My family behind me can verify that. And
I went to school in California, in Oregon, my graduate work in
Utah, all States within the San Francisco district. My husband
and I own homes in Utah and California. My first position after
receiving my doctorate was at the Hoover Institution in San
Francisco--or in Palo Alto, very near to San Francisco. So I
have a very strong affiliation with California and feel close
to that area.
Senator Cortez Masto. Thank you. So who are we getting? Who
are we getting on the Board: the woman who wrote extensively
and should be proud of it, or the woman who sits before us
today and is countering everything that she has said in the
past? Help me with that.
Ms. Shelton. Senator, you are getting the authentic Judy
Shelton. I feel I have been intellectually consistent
throughout my career, always focusing on monetary policy that
is conducive to productive economic growth.
Senator Cortez Masto. OK. Thank you.
Chairman Crapo. Senator Cotton.
Senator Cotton. Thank you, Mr. Chairman. Thank you both. I
know there has been a lot of talk about gold today. There is an
old saying, ``Worth its weight in gold,'' which goes back to
the fact that early coins actually were weighed. That is why
peso means ``weight'' and the British pound is called the
``pound,'' and lira means ``pound,'' which has the same Latin
root word as Libra, the digital currency that Facebook and
others have proposed as well, which brings me to my point that
I want to talk about with Ms. Shelton, the need for digital
currency to maintain the dollar's primacy in the world. These
examples are just a few of how throughout history currencies
have always had the same properties, whether they are liquid,
they are stable, they are stores of values, they eliminate
inefficiencies of bartering, and whether or not we need to add
a new property to our currency, namely, that it be digital.
To be clear, I am not talking here about cryptocurrencies
or anything like that. I am talking about a central bank
digital currency because that is exactly the direction that
China intends to go with the digital yuan.
China, like a lot of fragile developing economies, you
might say, needs digital currencies primarily internally
because they do not have the kind of institutions that we have,
whether that institution is the dollar, whether that
institution is the Federal Reserve, or simply the rule of law
and rights of property and contract.
For the United States, we need the digital currency a
little bit less, I would argue, internally but, rather, to help
preserve the primacy of the dollar worldwide, so, for instance,
China has wide-scale use of digital payment systems inside of
China. But they hope to use the digital yuan worldwide to
replace the dollar as the reserve currency, with all of the
economic benefits that that brings to the United States, and
especially the security benefit it brings to enforce sanctions.
So just to use an example, China buys a lot of agricultural
products from Argentina. They do not contract those and
transact in pesos or in yuan but in dollars, which, again,
gives us great leverage in enforcing our sanctions worldwide.
If we do not move to add digitization to the dollar as a
feature of those timeless historical properties of currency, I
worry a lot that a digital yuan could ultimately replace the
reserve currency, just as we replaced the pound in the last
century.
So, Ms. Shelton, could you talk to us a little bit about
what you on the Federal Reserve Board and what the Federal
Reserve as a whole can do to help protect the dollar's reserve
currency, and especially address the need to have digitization
as a potential property of the dollar?
Ms. Shelton. Thank you, Senator Cotton. I think that is an
extremely important discussion, and I agree with your
assessment. I think we are compelled to think about that. The
dollar is the most important instrument of soft power that we
have around the world. And, yes, it is the dominant reserve
currency. But we cannot rest on our laurels in that regard
because, as you suggested, rival Nations are working very
diligently to have an alternative to the dollar. And while they
cannot beat us as a currency, they can add features, because
there is a demand for digital access to banking services, to
payments, and I think it is very important that we get ahead of
the curve to ensure that the dollar offers, continues to offer
the best currency in the world, the most respected, the most
utilized, and we need FinTech innovation to keep us going in
the right direction and to be a leader instead of passively
observing what other countries might do.
Senator Cotton. And, again, to reiterate, I am speaking
primarily about the primacy of the dollar worldwide, not
domestic purposes. Governor Brainard gave what I thought was a
pretty good speech last week about central bank digital
currencies. She cited some of the reasons why developing
economies need it, such as, you know, high degrees of cash use
and weak financial institutions and underdeveloped payment
systems and a risk of inflation in domestic currencies. You
know, we do not face those nearly to the same degree. What I am
talking about is the need to have a dollar that is competitive
in world markets, that has--it has earned its position over the
last century, which is why we replaced the pound, and it has
maintained that position against competitors like, say, the
euro and still to this day the yuan. I do not want to see a day
when we wake up and have a Sputnik moment with our currency in
which we are no longer the world's reserve currency.
My time has expired. Thank you both for your willingness to
serve.
Chairman Crapo. Thank you.
Senator Jones.
Senator Jones. Thank you, Mr. Chairman. Thank you both for
being here today. Dr. Waller, thank you for your work. I
appreciate it. I know you have not had as many questions. We
have not had the chance to meet, but I appreciate that. I do
want to direct my questioning to Dr. Shelton.
Dr. Shelton, in 2011 there was a guy named Bernard von
NotHaus. He is the creator of a fictional currency called the
``Liberty Dollar''. He was convicted by a North Carolina
Federal jury by making, possessing, and selling $60 million
worth of his own precious metal-backed currency. The U.S. Mint
had actually had to issue a warning about this because he was
putting on this--they had to issue a warning that it was not
legal tender even though it was marked with dollar signs, the
word ``dollar,'' ``U.S.A.'' and said ``Trust in God'' instead
of ``In God We Trust.'' The prosecutor from North Carolina in
that case called him--accused him of domestic terrorism. He had
written in his book that he denied 9/11 had happened and
compared it to those people who think that Lee Harvey Oswald
did not kill President Kennedy.
I would call this guy an ``outlier.'' My colleague Senator
Shelby had talked about outliers, completely out of the
mainstream with regard to things. But in a 2012 interview, you
called this guy the ``Rosa Parks of monetary policy.''
Now, I got to tell you, I am a native Alabamian. Rosa Parks
has got a statue in the United States Capitol. She had, in one
act of courage, defied the Jim Crow laws and tried to bring
down the walls of oppression that kept a race of people from
voting and for basic human and civil rights. And this guy seems
to be issuing defiance on a Federal Government policy, monetary
policy, and you have praised that, you said, because he is
challenging what the Federal Government has done with regard to
carrying out its constitutional responsibility to maintain the
value of U.S. currency. At the Cato Institute, when he praised
you, you said to him, ``I very much admire your boldness and
audacity. I think you are really challenging the Fed in a way I
respect.''
What am I missing? If that is not out of the mainstream of
America, of history, I do not know what is. So tell me what I
am missing when you think a guy like this needs to be
compared--and what he is trying to do to the monetary policy in
the United States, how that compares to the courage of someone
like Rosa Parks?
Ms. Shelton. Well, Senator Jones, the last thing that I
would ever do is demean the courage of Rosa Parks.
Senator Jones. Well, you did. You do realize that, don't
you? I mean, you did by doing that.
Ms. Shelton. I apologize for the comparison. I truly do.
The gentleman you are referring to, he did an audacious
thing. I would never condone violating----
Senator Jones. Did you admire what he did with the Liberty
Dollar and $60 million and being convicted of Federal crimes in
North Carolina? Do you admire that, Ms. Shelton?
Ms. Shelton. I believe that he was testing the idea that
the Constitution in Article I, Section 10, says that States can
only use gold and silver as legal tender.
Senator Jones. So within the Federal Reserve, is that
something you want to test? I mean, you are going to be within
this, if you get confirmed. Is that something that you want to
test? Are you now taking that admiration to inside the walls of
the Federal Reserve? Is that what we are to think?
Ms. Shelton. No, Senator. And as I have said a number of
times this morning, it is important to acknowledge that the
power to regulate the value of U.S. money is granted to
Congress by the Constitution, not to the Fed. Congress created
the Federal Reserve as an independent agency and gave it a
monetary mandate to promote maximum employment, stable prices,
and moderate long-term interest rates. And that is the
framework under which I would make decisions if confirmed.
Senator Jones. You have indicated at one point that you
thought that we might want to go to a standard like the euro,
creating something for North America, a currency called the
``Amero.'' Do you still believe that? Is that a good policy?
Ms. Shelton. Well, Senator, sometimes I am asked to think
out of the box and look at future scenarios.
Senator Jones. I am just asking you a quick question. I
have got 30 seconds. Is that a good policy or not?
Ms. Shelton. I just want to clarify. I am not pursuing that
as an initiative, but I do think that when the currencies of
our major trading partners depreciate against the dollar, it
changes the terms of trade even after they have been carefully
negotiated.
Senator Jones. Well, Dr. Shelton, I have got to be honest
with you. I have heard the questions and answers, and I have
heard several Senators here question what you have written in
the past with what you are saying today. It reminds me of a
comment that my old boss, Senator Heflin, who I sit in his seat
now, talked about a number of people having a ``confirmation
conversion.'' But I think you said it best, that what we will
get is the authentic Judy Shelton, and that is what bothers me
tremendously. But thank you, Mr. Chairman.
Chairman Crapo. Senator Tillis.
Senator Tillis. Thank you, Mr. Chairman. Thank you both for
being here. Congratulations to the family. I am sure that you
are proud. And to the Shelton family, your heart rate will
reduce about 10 or 20 beats a minute in about 30 minutes.
Look, I want to go back. I had not planned on going through
this. I watched most of the hearing in my office before I came
down here, and I have heard a lot of people quoting your
writings. I want to lay something out and then get you to
respond to it. I want to make sure that people understand the
difference. They are using quotes that you wrote that were
actually quotations from other writings.
For example, I think in one article that I believe was used
by Senator Tester and referenced by others, public law says
Full Employment and Balanced Growth Act of 1978. In that public
law, it says, ``The attainment of these objectives should be
facilitated by setting explicit short-term, medium-term
economic goals and improve coordination among the President,
the Congress, and the Board of Governors of the Federal
Reserve.'' That is what you were quoting, right?
Ms. Shelton. Exactly, Senator.
Senator Tillis. And that was the basis for them thinking
that you were asserting--the other Judy Shelton was asserting
something else in your words. But, in fact, those were not your
words, right?
Ms. Shelton. I was quoting.
Senator Tillis. And, in fact, they are the words of
Congress.
I also want to go back--when we talk about independence--I
find it remarkable, actually, on this Committee we are talking
about--Chairman Powell was here yesterday, and we are talking
about undue political influence on the Fed. That is what we do
every day when we bring the Fed up before this Committee. We
are trying to assert our political influence. And I do not
think the President is any more or less entitled to do that.
And I do not think any other President has failed to do it,
whether they do it publicly or privately.
You made a point about, at least in this case, it is
transparent. That is one thing you can say about the President
and his communication style. But I think we are fooling
ourselves if we think any President has not tried to have a
discussion about their view of where you need to go.
But can you all cite either example--Mr. Waller, I am going
to give you a chance to talk because you have been given a good
pass, and then maybe with Dr. Shelton. But, Dr. Waller, give me
an example where you have seen political pressure ultimately
drive a political decision on the part of the Fed?
Mr. Waller. Well, there has been a long history of what
used to be called ``bashing and coercion'' from the
Administration on the Fed.
Senator Tillis. Yeah, it is what we do.
Mr. Waller. So this has a long history. The question is----
Senator Tillis. But what I am saying, in an example where
that political pressure--because we are all talking about this
fear, uncertainty, and doubt of the Fed being politicized. I am
just trying to give an example where that political pressure
actually drove the Fed to make a decision that was not founded
in the dual mandate.
Mr. Waller. So the classic example in monetary history is
Richard Nixon and Arthur Burns. Nixon put a tremendous amount
of pressure on Burns to keep interest rates low to help with
his reelection, which apparently Burns followed through with.
That is the best-known example I have.
Senator Tillis. I will tell you that sometimes I see maybe
political influence work in reverse. I am sure both of you are
aware of former Governor Dudley's comments about making things
go south so President Trump cannot get reelected. Do you all
think that is inappropriate? I hope so.
Mr. Waller. I thought it was totally inappropriate,
speaking for the Fed.
Senator Tillis. Dr. Shelton.
Ms. Shelton. Most certainly.
Senator Tillis. All right. Now I want to talk about--we
also talked about independence. I agree with what everybody
said on both sides of the aisle about Fed independence from
undue political pressure. What I have got a real problem with
and a couple of examples right now is the Fed asserting its
independence from oversight or asserting its independence from
the Administrative Procedures Act. Chairman Powell yesterday,
in response to a question I had about LISCC and the GAO's
assessment about that not having been appropriately
promulgated, concerns me because I get that you need to be
independent, but you have to be answerable to the laws that
other regulatory agencies are answerable to.
I am not going to ask you to respond to this question now
because I am going to finish on time, but the General Counsel
in the middle of June last year, in response to the GAO's
assessment that the LISCC guidance had really risen to a rule
and should have been promulgated in that manner, said that ``we
are assessing whether or not our guidance is accountable to the
GAO.'' That is an absolutely unacceptable answer. And for
anybody here, you all know this, Chairman Powell can give a
comment in an oversight hearing or make a speech, and it could
have a ripple effect rising to a level of a rule. And to sit
here and say, well, guidance is not really rulemaking, it is
not material to the examination process, defies any knowledge I
have of how examinations go on and what goes on in those
confidential meetings.
So I am going to submit for the record roughly the same
question I asked Chairman Powell yesterday, and I would like
your response.
Thank you all and congratulations.
Chairman Crapo. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. I thank both
of you for being here.
Ms. Shelton, I am sure you have been covering or watching
some of the articles that have been coming out with respect to
your record years ago compared to now. And there does seem to
be a pattern of total flip-flopping. If you look at the period
of time when Bernanke and Yellen were the heads of the Federal
Reserve, you criticized them for--let us see--cheap money, fake
economy. You were a deficit hawk. You wanted tight money then.
In 2011, you criticized the Federal Reserve for weakening the
dollar to improve our exports in order to improve our economy
back home.
The only pattern that I see here is a political one, not an
economic one. And I think that is what concerns a lot of people
because we want somebody on the Federal Reserve who is going to
look at the economic facts and draw conclusions from those, not
the political facts. And so I want to also ask you in that
regard about the positions you have taken on the deficits and
debt, and I have actually had concerns myself over the years
about deficits and debt. But here is what you wrote back in
2009, which, of course, was still during the economic downturn,
and so the economy was hurting. Obviously, economic stabilizers
kicked into effect.
But you wrote in the Wall Street Journal, ``Unending fiscal
deficits, unconscionable accumulations of Government debt,
these are trends that are shaping America's future.'' And you
go on to predict that ``there will be flight from the dollar,
our Nation's money is being severely compromised, and it is
going to be gloom and doom.''
None of those predictions proved to be true, did they?
Ms. Shelton. I think it was a very unhappy period in the
wake of the 2008 crisis that was devastating across the
country. And we engaged with the Federal Reserve seeking
monetary stimulus and extreme measures, going to near zero
interest rates and massive purchases of Government assets.
Senator Van Hollen. Right. And I think I heard an exchange
earlier with Senator Kennedy where you said that if we had that
kind of economic downturn, you would look at using all those
tools. Is that correct?
Ms. Shelton. Yes, at the----
Senator Van Hollen. But you were very critical--I mean, the
record is pretty clear. You criticized them strongly for taking
emergency provisions back then. You said the increase in the
national debt was ``unconscionable,'' even though, as you know,
when you have economic downturns, your GDP goes down and your
economic stabilizers go into effect, so there is more money
spent on things like Medicaid.
But I guess my question is: Was it unconscionable for
President Trump to add $2 trillion to that already
unconscionable debt in passing the tax cut? Which has actually
now taken projected debt to GDP to much higher levels than what
you predicted, and our annual deficits, the last year of the
Obama administration, the deficit was 3.2 percent of GDP. In
2019, it is 4.6 percent of GDP.
So my question is: In order to be consistent, did those
policies supported by the President, are they unconscionable
when it comes to our deficits and debt?
Ms. Shelton. Senator Van Hollen, if I may take us back to
2009 to compare my consistency. The immediate fiscal response
was an $800 billion package of Government spending that
ultimately turned out not to have as stimulative an effect as
we might have hoped, and there was talk of projects that were
not shovel ready. We went to these extreme monetary measures
likewise trying to stimulate in the wake of this meltdown.
There is a cost to that. For the years from 2009----
Senator Van Hollen. I am sorry. You are just not answering
my question. It was a pretty simple question. Look, look. We
can all--you know, people are entitled to their own opinions
but not the facts. The Congressional Budget Office's analysis
of the fiscal stimulus disputes exactly what you just said. And
my question to you was: Is it unconscionable to increase the
debt over the next 10 years by $2 trillion? If it was already
at unconscionable levels back in 2009, is it unconscionable to
add another $2 trillion to an already unconscionable debt? Yes
or no.
Ms. Shelton. I think we should always strive to reduce the
deficit because it does put a burden on future generations.
Senator Van Hollen. See, this is the problem. The problem
is you have got a lot of writings, strong writings, of a very
political nature. And now your responses today are totally
inconsistent with the positions you have taken in the past. The
only thing that has changed is who is in the White House.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Warner.
Senator Warner. You are down to the last one. Let me thank
both of you for the meetings that we had, and I enjoyed our
conversations with both of you.
I do hope, Dr. Shelton, in terms of our conversation about
our common ties to Virginia and where we both live and the fact
that you were nominated from Virginia to the European Bank for
Reconstruction, that you are not changing that status as well
in terms of how the Administration has put you forward this
time.
I know we talked about your Wall Street Journal editorial,
and I went back and read it because, again, I think you put
forward some views I do not necessarily agree with, but you put
them forward clearly. The one thing you keep coming back to is
Humphrey-Hawkins, and Senator Tillis raised it as well. The
thing you did at least mention in the article, but I do not
think you have mentioned in your commentary to most of the
questions, at least that I have heard, is that, you know,
Humphrey-Hawkins expired in 2020.
Ms. Shelton. That is true.
Senator Warner. It is no longer the law of the land. I am
not sure that is still a fair notion. And, you know, I was
going to also raise the questions Senator Van Hollen raised.
Again, we talked about this issue in my office.
I feel very strongly around debt and deficit, and, again,
let me be clear. I do not think either political party has much
legitimacy on the issue anymore. But I do think there is very
much a change in consistency in your view under what was
happening under Obama, where a group of us in both parties
tried to bring down the debt and deficit, to the chagrin of
folks on both sides of the aisle, that suddenly got blessed
under President Trump. And I know you have already addressed
it, but it is of real concern to me. I do not doubt your
integrity, but I question your consistency on this.
I want to go to another piece. In your writings, you said
that it would be appropriate and constructive for the Fed to
consider international monetary stability and interest rate
decisions in an era of worldwide currency exchange. The
question I feel--and I agree with many in both parties again,
currency manipulation is a bad thing. But I do not think
currency manipulation falls within the gambit of the Fed's
responsibility. Do you want to speak to that?
Ms. Shelton. It does not fall under the Fed's
responsibility. Any other prior monetary arrangement had to be
approved by Congress. I am just pointing out that in that
Humphrey-Hawkins legislation, an improved trade balance and
improved global competitiveness are among the six objectives
that are referred to as being in the national interest where it
calls for more coordination, the legislation does.
I do want to point out that in the article that you were
referring to, I specifically say that Humphrey-Hawkins expired
in the year----
Senator Warner. I know you did, but I feel like in many of
the conversations and some of your answers you have cited that
without that full explanation, and I feel pretty strongly on
your change on the debt and deficit issue. I have concerns
about the Fed in terms of playing a role in currency
manipulation. I think it is outside its gambit. And I want to
also reference one of my colleague's points. I do not fully
agree that every President and every Member of Congress is
always trying to overly influence the Fed. I think the Fed
independence--I think, Dr. Waller, your comment about President
Nixon and Chairman Burns was a dead-on accurate one, and I
think it has enormous blowback. And I guess one of the
challenges that I am grappling with, Dr. Shelton, with your
nomination is, you know, I think you have had a series of views
that go beyond the dual mandate. I commend you, frankly, for
some of the creative sets of views you have, and some of them I
agree with, some I disagree with.
The challenge right now that I think is unprecedented is we
have a President that goes so far beyond the norms of trying to
unduly influence all independent parts of our Government, the
Fed's independence being something that we generally share
complete commonality with. And when your views in some of your
writings, my takeaway is, frankly, would reinforce that effort
to kind of more politically manipulate the Fed or go beyond the
dual mandate. And with this level of influence that President
Trump is willing to influence on every action, and I think,
again, unprecedented in terms of his attacks on Chairman
Powell, it raises grave concerns.
But I very much appreciate you both being willing to--and I
appreciate both of our conversations, and, again, Dr. Shelton,
I did enjoy our conversation yesterday.
Ms. Shelton. I did, too.
Senator Warner. I appreciate the chance to raise those
final views. Thank you, Mr. Chairman.
Chairman Crapo. Thank you. And to our nominees, although
Senator Warner thought he was last, Senator Brown would like to
have another couple of questions. So I have told him he will
have a couple of minutes. So does Senator Shelby.
Senator Shelby. One minute for me.
Chairman Crapo. Also, Senator Kennedy and Senator Warner,
if you want to--I am not encouraging it--I will give you
another couple minutes.
Senator Warner. You are not encouraging more questions from
Senator Kennedy and me?
Chairman Crapo. I will tell you the vote started 10 minutes
ago, so we do not have much time. Senator Brown.
Senator Kennedy. They will not shut it down as long as
Senator Shelby is here.
[Laughter.]
Chairman Crapo. As long as we are here.
Senator Brown. I thought we did not have much time here,
Mr. Chairman.
Mr. Waller, given Ms. Shelton's answers on monetary policy
and her 30 years of writing on the gold standard, would you
recommend we confirm her to the Fed?
Mr. Waller. Senator, that is your decision, not mine.
Senator Brown. I figured that would be your answer. Let me
ask it a different way. You are at the St. Louis Fed, right?
Mr. Waller. Correct.
Senator Brown. If you were interviewing for your Research
Department, would you hire her?
Mr. Waller. I have a very different Research Department in
terms of the type of academic research we do. Judy has been
much more in the public light in terms of her research. My
department is all publishing for academic journals, that----
Senator Brown. If someone brought her body of work and
writing to you, would you hire her or him?
Mr. Waller. Like I said, what her outlets are compared to
what we expect our staff, they are just two different outlets
for your research.
Senator Brown. Mr. Chairman, just a last statement. The
takeaway is that we do not know who we are nominating to the
Federal Reserve. Ms. Shelton has disavowed 40 years of her
writing, as so many on this panel have shown, to say what she
needs to say to be confirmed. It is not just my colleagues on
the Democratic side of the aisle who are concerned. I heard
Senator Shelby's concerns. I have heard Senator Toomey's. I
have heard others. But conservatives outside of this body are
concerned. American Enterprise Institute Desmond Lachman urged
the Senate to reject Ms. Shelton's nomination. He wrote,
``Normally, a person would be in favor of either an easing
monetary policy to stimulate the economy or a hard monetary
policy to exert discipline on the Government. Either way one
would not expect her to hold both views at the same time, yet
Ms. Shelton does exactly that.''
AEI's Ramesh Ponnuru wrote, ``Shelton's prescription for
monetary policy has changed so dramatically, and her rationale
for it makes so little sense as to make her appointment to the
Fed a gamble. Does she believe what she is now saying, or is
she just saying what Trump wants to hear?'' This is from AEI.
If the latter, then the Fed--that the Fed, when she
referred to the rigid opposition to inflation at any cost that
has marked most of her career, or would she stick with whatever
Trump wants?
Thank you, Mr. Chairman.
Chairman Crapo. That was a little bit too long of a
question.
[Laughter.]
Senator Brown. That was an answer.
Chairman Crapo. Senator Shelby.
Senator Shelby. I will change the subject just a little bit
but still in economics. For years, economists, as you both
know, adhered to the Phillips curve, which describes an inverse
relationship between inflation rates and unemployment rates.
This was mentioned earlier today. Typically, lower unemployment
has generally produced higher inflation--this is in the past, I
guess--and vice versa. In recent years, as unemployment has
decreased, inflation rates have remained low, thank God.
What are your thoughts on the current relationship between
unemployment and inflation? And how has the relationship
between the two changed over time? Is there a new equation
here? Dr. Waller?
Mr. Waller. Well, I will make two comments. First of all,
if you were to go to any Ph.D. program in economics today and
you were taught the fundamental model of unemployment, there is
no inflation in that model. So even at that level of graduate
training, nobody talks about inflation and determining the
level of unemployment.
The second point----
Senator Shelby. But when you think of price stability, you
have got to be thinking the specter of inflation somewhere.
Mr. Waller. Correct. So that was where I was going with my
second point, which was that one of the things we have learned
on monetary policy research is that if you have a central bank
who is very committed to, say, a 2-percent inflation target and
that is very credible, that their actions will keep inflation
near that target, then inflation never really moves off that
target no matter what happens with the unemployment rate. So
the relationship looks like it has completely broken down, but
it is because a central bank has so much credibility in its
inflation target that nobody deviates from it.
Senator Shelby. But if inflation stays low, does that
give--as Senator Kennedy I think got into the question, would
that give the Fed a tool in case of a crisis?
Mr. Waller. I think what it does is it gives us a different
way to think about how to raise interest rates, and that is, I
think, what----
Senator Shelby. But that would be a tool, would it not? A
tool or option.
Mr. Waller. Correct, right. So your credibility is
everything for a central bank.
Senator Shelby. Everything.
Mr. Waller. That is it. I think you laid it out. It is the
confidence in our currency. It is the confidence in our
institution. If you lose that, you are done.
Senator Shelby. Confidence in the economy of the Nation.
Mr. Waller. Correct.
Senator Shelby. In the Nation itself, right?
Mr. Waller. Correct.
Senator Shelby. Dr. Shelton.
Ms. Shelton. Senator Shelby, I think that is one of the
most profound developments that has happened, particularly in
the last 3 years, the change in thinking and the realization at
the Federal Reserve, which is steeped in the Phillips curve
tradeoff mentality, that you can have low inflation and low
unemployment at the same time. In fact, it is a perfect stable
foundation for productive economic growth, and that is when you
start to see not just the GDP increase but the increases in
productivity which then justify gains in wages, and the
increased output is such that you do not get inflation. So I
think this is very important for the future monetary policy.
Senator Shelby. So low unemployment and stable prices, low
inflation, that is the two mandates of the Fed itself. Is that
correct?
Mr. Waller. Correct.
Ms. Shelton. Yes.
Senator Shelby. OK. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. All right. Thank you. And I will take the
last word--oh, did you have a question?
Senator Kennedy. A quick one.
Chairman Crapo. I will not do it now, then.
Senator Kennedy. Thirty seconds. Why did we have a meltdown
in the repo market?
Mr. Waller. That is going to take longer than 30 seconds.
Senator Kennedy. Give us the CliffsNotes version.
Mr. Waller. In a sense, as the Fed was draining reserves,
we thought there were plenty of reserves, but it clearly was
not distributed correctly. And then the puzzle that we are
trying to figure out is why didn't these reserves flow from
some banks to those that needed it, and that is something we
have been studying and trying to understand.
Senator Kennedy. Doctor.
Ms. Shelton. I think that it is partially a regulatory
issue in the sense that excess reserves have almost become
mandatory. They are eight times higher than required reserves,
and I think that the stated liquidity preferences of bank
examiners makes banks feel that they need to keep that ready
cash, and they were reluctant even to chase a 10\1/2\ percent
overnight repo rate.
Senator Kennedy. I am done.
Chairman Crapo. All right. Thank you.
I would just like to make a final comment. We all knew that
this was going to be a very aggressive hearing today,
particularly with regard to you, Dr. Shelton. I think you have
been very solid in explaining and defending your writings and
your positions. And, by the way, the reason that I introduced
into the record in my opening statement an article from the
Wall Street Journal entitled ``The War on Judy Shelton'' was
just to help make the point that this is an orchestrated,
calculated effort. I think you have done very well today, and I
just wanted to tell you that you have explained, I think very
capably, the positions that you take and the rationale for
them. And I just want to appreciate the fact that you have gone
through that, and----
Senator Brown. Mr. Chairman, if you are going to enter into
the record the Wall Street Journal article, I would like to
enter the National Review article.
Chairman Crapo. Well, you just quoted it, so it can be in
the record.
Senator Brown. Thank you.
Chairman Crapo. And with that we are done, and we are on
our way to our vote. Thank you very much for being here.
Ms. Shelton. Thank you, Mr. Chairman.
Mr. Waller. Thank you.
[Whereupon, at 10:52 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketches of nominees,
responses to written questions, and additional material
supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
This morning, we will consider the nominations of the Honorable
Judy Shelton to be a Member of the Board of Governors of the Federal
Reserve System and Dr. Christopher Waller to be a Member of the Board
of Governors of the Federal Reserve System.
Welcome, and congratulations on your nominations to these important
positions.
I see friends and family sitting behind you, and I welcome them as
well.
We are fortunate to have these two highly qualified nominees
appearing today.
These positions are critical to ensuring a safe, sound, and vibrant
financial system, and a healthy, growing economy.
The Federal Reserve was created by Congress as the Nation's central
bank to promote a stable economy, and a safer, more flexible financial
system.
Among the Federal Reserve's responsibilities is conducting the
Nation's monetary policy with the mandate of promoting maximum
employment, stable prices, and moderate long-term interest rates.
In addition to its monetary policy role, it oversees a significant
portion of the banking sector, including large, regional and community
banks, as well as certain nonbanks, and aims to foster a safe and
efficient payment and settlement system.
With this in mind, it is important that we nominate and confirm
well-qualified candidates with different perspectives to the positions
of Governors to ensure robust debate and more effective decisions.
Before turning to Dr. Shelton and Dr. Waller, I am entering into
the record a letter from over one hundred economists supporting the
nomination of Dr. Waller, and also an article from the Wall Street
Journal supporting Dr. Shelton, titled, ``The War on Judy Shelton''.
Dr. Shelton most recently served as the Executive Director for the
European Bank for Reconstruction and Development and was confirmed by
voice vote in the Senate in 2018.
Dr. Shelton's experience working for nonprofits and academic
institutions forged her deep knowledge of democracy, economic theory
and monetary policy that will broaden and diversify the Fed's
perspective.
Dr. Waller has served as the Research Director at the Federal
Reserve Bank of Saint Louis for the last 11 years, and aided the
President of the Saint Louis Fed in analyzing the economy and
recommending U.S. monetary actions.
His research on monetary theory and the microfoundations of money
and payment systems will be valuable, as we are seeing a rise in
cryptocurrencies and digital currency in this country and abroad.
I am confident that Dr. Shelton and Dr. Waller will bring strong
leadership to the Federal Reserve System.
As Governors at the Federal Reserve, Dr. Shelton and Dr. Waller
will play key roles in carrying out the Fed's regulatory and
supervisory activities consistent with the law, while also playing an
important role in striking the balance between tailored regulations and
supervision, and safety and soundness.
I appreciate the positive meetings I had with each of you leading
up to today's hearing, and I look forward to continuing a robust
discussion on the following topics:
The importance of right-sizing regulations and tailoring
the supervisory framework to support a vibrant, growing economy
while also ensuring a safe and sound financial system;
Assessing market-based fixes to maintain stability in money
markets; and
The development of central bank digital currencies and
other technological innovations in the financial space, which
we also discussed with Chairman Powell yesterday; and
Continuing to encourage the Federal Reserve to submit all
rules to Congress under the Congressional Review Act, as well
as submit all significant guidance for purposes of the
Congressional Review Act.
I look forward to working with Dr. Shelton and Dr. Waller on these
and other areas where the Fed and Congress can act to further reduce
unnecessary burdens and promote economic growth.
Congratulations again on your nominations, and I thank you and your
families for your willingness to serve.
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Ms. Shelton and Mr. Waller, I would like to extend my greetings to
you, your friends, and family here today. Welcome.
Fed independence matters. We know economies with independent
central banks have less price volatility, fewer bank panics, and more
stable economies.
But one of the nominees before us today doesn't believe in an
independent Fed, and has spent her entire career advocating for
policies that would make our economy more volatile, and give families
and businesses even more too worry about in an uncertain world.
The point of the independent Federal Reserve is to be a steady,
guiding hand--to worry about the big picture of the economy, so
hardworking families don't have to.
But for Ms. Shelton, these aren't hazards to avoid--they are the
goal. We all understand that on economic issues there are conservatives
and liberals, and most people fall somewhere in the middle on that
continuum. But Ms. Shelton is not a conservative--she's far outside the
mainstream. She's off the ideological spectrum.
For three decades, Ms. Shelton has been a prominent advocate for
returning to the gold standard.
In making the case for Ms. Shelton's nomination, her friend James
Grant wrote in the Wall Street Journal that, ``[w]ith the nomination of
Judy Shelton to the Federal Reserve Board, the discussion has tilted to
gold. Gold is money, or a legacy form of money, Ms. Shelton contends,
and the gold standard is a reputable, even superior, form of monetary
organization.''
People can agree to disagree on certain issues--but we don't get
our own facts, and the facts are clear. If we as a Nation had followed
Ms. Shelton's advice and had not advanced beyond the gold standard
nearly a half century ago, our Nation would have bounced from boom to
bust, without the monetary tools necessary to pull us out of
recessions.
Depressions would have been deeper and longer, and millions of
working families would have suffered even more, for no reason.
And that is not the end of the story. In multiple writings, Ms.
Shelton clearly voiced her opposition to FDIC deposit insurance--the
insurance that protects the savings of hard-working Americans. In other
words, she thinks that if a bank fails--and we all remember from 2008,
they do indeed fail--then all the families whose savings and paychecks
are stored in that bank should just lose all their money.
Passing Federal deposit insurance was one of FDR's first acts
during the Great Depression for a reason. That guarantee--that your
money is safe in the bank--is at the bedrock of our modern economy.
This is not some intellectual exercise about moral hazard. This is
the real world. I dare anyone to explain to working families in Georgia
or Iowa or Nevada or any community that experienced bank closures in
the Great Recession or the Savings and Loan crisis that the FDIC
insurance is ``a hugely distorting factor.''
But with Ms. Shelton, it doesn't stop there.
The money in your wallet is backed by the Full Faith and Credit of
the United States Government. Yet, Ms. Shelton advocated for doing away
with the dollar and replacing it with a common currency for North
America. I'm serious.
To make NAFTA more effective, she mused the dollar could be
replaced with a common currency for North America called the ``Amero.''
At other times she has called for the creation of a generic, global
currency, backed by gold.
That kind of globalist ideology doesn't belong anywhere near our
fiscal and monetary policy. The American dollar is the world's reserve
currency and it should stay that way.
The bottom line is, Ms. Shelton has too many alarming ideas and has
flip-flopped on too many important issues to be confirmed for this job.
And we know she will say exactly what the President wants her to
say--further threatening the independence of the Fed.
She was an interest rate hawk, until President Trump wanted lower
rates. She opposed tariffs on China, before she was for them.
And based upon what I and other Committee Members heard in meetings
with her, it appears that Ms. Shelton has changed all of her
positions--on everything from the Gold Standard, to Bretton Woods, to a
steadfast opposition to FDIC insurance.
That's not the steadying hand required at the Fed.
Eleven years into this recovery, now more than ever, the Fed needs
to be independent and careful--not reactive to every whim of the
President.
A vote for Shelton is a vote against Fed independence and our
Nation's reputation as a financial bulwark.
Our other nominee to the Board of Governors, Mr. Waller is an
economist whose work has been subject to peer review and whose analysis
has helped direct the research path undertaken by the St. Louis Fed.
I look forward to learning more about how he will hold Wall Street
accountable if he is confirmed.
Last, I want to note that Ms. Jessie Liu was also supposed to be
considered by this Committee today until her nomination was withdrawn
36 hours ago.
The positon Ms. Liu was nominated for is responsible for overseeing
our country's work preventing terrorist and drug cartel financing and
enforcing economic sanctions. Now that her nomination has been
withdrawn, that position will remain empty. Once again, to protect
himself, the President is putting our national security at risk.
Thank you, Mr. Chairman.
______
PREPARED STATEMENT OF JUDY SHELTON
To Be a Member of the Board of Governors of the Federal Reserve System
February 13, 2020
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for this opportunity to appear before you today. I am honored
that the President has nominated me to serve as a member of the Board
of Governors of the Federal Reserve System, and I am grateful to this
Committee for considering me for the position.
I am also deeply grateful for the support of my husband of 42
years, Gil, who is here today along with our son, Gibb. And I want to
give special thanks to my mother, Janette Potter, and the healthy
contingent of family members seated behind me: John and Sharman, Jim
and Kristy, Rick and Suzi. They all flew out from California yesterday
to be here with me today. It means a lot.
For nearly four decades, going back to my years as a doctoral
student at the University of Utah, I have focused on the impact of
monetary policy on economic performance. My studies encompass current
financial and economic conditions as well as historical antecedents
tracing back to our Constitution. One thing is very clear: The power to
regulate the value of U.S. money is granted to Congress.
Congress created the Federal Reserve as an independent agency and
through the Federal Reserve Reform Act of 1977 charged it with the
mandate to promote maximum employment, stable prices, and moderate
long-term interest rates. Our central bank has been entrusted with
considerable power to carry out its responsibilities. Along with the
political independence and operational autonomy granted to the Federal
Reserve comes an obligation to be wholly accountable both to Congress
and to the public.
If confirmed, my priority will be to support monetary policy that
facilitates productive economic growth while also ensuring the
soundness and stability of the U.S. financial system. In exercising the
Federal Reserve's regulatory oversight, I will support policies that
are effective, efficient, and appropriately tailored to financial
institutions--allowing them to better serve their customers and
communities in ways consistent with maintaining a safe financial
system.
I am well-prepared to conscientiously fulfill the duties of the
position for which I have been nominated based on my background and
experience. The first university course I ever taught was: ``Money and
Banking''. As a research scholar at the Hoover Institution at Stanford
University, I analyzed the relationship between monetary policy and
economic sustainability in the context of geopolitical competition. My
first book accurately predicted the collapse of the Soviet Union; my
second book examined the impact of currency movements on trade.
I have testified numerous times as an expert witness before
congressional committees in both the House and Senate. As U.S.
Executive Director of the European Bank for Reconstruction and
Development, I demonstrated strong leadership to achieve high-priority
objectives in accordance with U.S. strategic interests. Combining
academic perspective with real-world insights, I hope to contribute
intellectual diversity as a Governor and would work collegially to
promote sound money and sound finances.
In closing, I wish to emphasize my commitment to honor the
constitutional authority of Congress to regulate the value of U.S.
money. By fulfilling the statutory mandate Congress has assigned to the
Federal Reserve, we ensure that America's money remains the world's
most respected currency and its most trusted standard of value.
Thank you again for the privilege of appearing before you today. I
look forward to your questions.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF CHRISTOPHER WALLER
To Be a Member of the Board of Governors of the Federal Reserve System
February 13, 2020
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for the opportunity to appear before you today. I am honored
to have been nominated by the President for this prestigious position
and grateful to the Committee for its consideration of my nomination. I
would be humbled to be able to serve my country in this capacity.
I am thankful for the support from my family members who are here
with me today--my loving wife Laurie, my three children, Sarah, Maggie,
and Sam, and my mother Ann who has been my hero throughout my life.
For the last 11 years, I have served as the Director of Research at
the Federal Reserve Bank of St. Louis. During that time, I have
attended over 60 Federal Open Market Committee meetings and served as
the main policy advisor to my bank president. As a result of this
experience, I fully understand and support the dual mandate of the
Federal Reserve. I also understand and appreciate the Federal Reserve's
role in pursing policies to ensure a safe and stable financial system.
If I am confirmed, I will continue to advocate for policies that
achieve our dual mandate and maintain financial stability.
I believe that my background and experience makes me uniquely
qualified to fulfill the responsibilities of a Federal Reserve
Governor. In my decade-long experience as a senior Reserve Bank
official, I was deeply involved in policy issues confronting the
Federal Reserve. But in my role, I also spent a substantial amount of
time talking to members of our community about how monetary policy
affected their lives and businesses. That public input affected how I
thought about policy and its consequences. I also learned how valuable
it was to communicate clearly to the public what our policies were and
why we were pursuing them.
In addition to my experience as a Federal Reserve official, I was
an academic for over 25 years and did a substantial amount of research
on monetary theory, monetary policy, and central bank design. I have
written extensively on the importance of central bank independence for
the conduct of monetary policy. My research also focused on how the
central bank can be made accountable to the electorate without giving
up its independence. In particular, I studied the importance of the
nomination and confirmation process in achieving central bank
accountability.
The Federal Reserve has been given tremendous responsibility by
Congress to use its policies to improve the lives of the citizenry.
Congress has also given the Federal Reserve tremendous freedom to
pursue those policies as needed. But in return, it must be accountable
to the public for its actions and be able to explain what those
policies are and why they are being pursued. If I am confirmed, I
pledge to work with my colleagues to implement policies that help us
meet our dual mandate. I also pledge to be accountable for those
actions and to be transparent as to why those actions were taken.
Thank you again for the privilege to appear before you today, and I
look forward to your questions.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM JUDY SHELTON
Q.1. In how many of your publications and books have you
advocated for a return to the gold standard, or a gold-based
monetary standard?
What is your most recent publication advocating for the
gold standard?
A.1. My writings have included references to prior
international monetary arrangements going back through U.S.
history because I believe we can gain valuable insights by
comparing economic growth performance under one set of monetary
rules versus another. The United States was on the classical
international gold standard from 1870 to 1913 and served as the
anchor for the Bretton Woods gold exchange standard from 1944
to 1971. Economic growth and free trade flourished under the
gold standard, which established a level international monetary
playing field while preserving the national sovereignty of
participating Nations; proponents of the classical
international gold standard include Alan Greenspan, a former
Federal Reserve Board Chairman. \1\
---------------------------------------------------------------------------
\1\ ``Why Do We Need a Central Bank?'' Interview with Alan
Greenspan on Fox Business with David Asman, October 2007 https://
youtu.be/R8fubw5lz6g.
---------------------------------------------------------------------------
The Bretton Woods system restored exchange-rate stability
among allied Nations at the close of World War II as an
alternative to returning to the beggar-thy-neighbor era of the
1930s when Nations depreciated their currencies to gain an
unfair trade advantage, a syndrome that led to economic
disaster. Proponents of a new Bretton Woods-type arrangement
(with or without any reference to gold) include the late Paul
Volcker, also a former Board Chairman. \2\
---------------------------------------------------------------------------
\2\ ``Paul Volcker: Back to the Woods?'' Seth Lipsky, Wall Street
Journal, June 11, 2014.
---------------------------------------------------------------------------
Congress created the Federal Reserve as an independent
agency and through the Federal Reserve Reform Act of 1977
charged it with the mandate to promote maximum employment,
stable prices, and moderate long-term interest rates. That is
the framework under which I will make monetary policy decisions
if confirmed as a member of the Board of Governors.
Q.2. Of the publications you have written since your
dissertation, how many were subject to peer review?
A.2. My article entitled ``Equal Access and Miller's
Equilibrium'' was subject to peer review prior to being
published in the Journal of Financial and Quantitative
Analysis, Vol. 16 Issue 4 (November 1981). It received the 1981
Trefftzs Award for Outstanding Scholarly Achievement from the
Western Finance Association. Six other peer-reviewed articles
have been published in the Cato Journal.
Q.3. In a 2011 article about ending the Federal Reserve, you
said, ``I think it would be extremely positive, but the initial
effect would be so bold as to be alarming.'' In a 2014 speech
you said, ``It's so comfortable to be among those seeking an
alternative to central banking, which increasingly seems like
central planning.'' Do you think the Federal Reserve should
exist?
If not, please explain your position.
If so, why did you make the aforementioned statements?
A.3. Congress has chosen to exercise its power to regulate the
value of U.S. money through an independent agency, the Federal
Reserve, and has given it a statutory mandate to promote
maximum employment, price stability, and moderate long-term
interest rates. The Fed pursues these goals through its
monetary policy decisions, which are aimed at contracting or
expanding monetary aggregates by directly influencing the
Federal funds rate. The Federal Reserve is clearly authorized
to exist in compliance with the will of Congress.
Q.4. You have written extensively about your support for
efforts to abolish legal tender laws, including a 2009 op-ed in
the Wall Street Journal where you said ``Let's give the Fed
some competition. Abolish legal tender laws and see whose money
people trust.'' Will you continue to advocate for that position
as a Fed governor?
A.4. It would not be my role or responsibility as a member of
the Board of Governors of the Federal Reserve System to
determine U.S. currency policy. As I specifically explained in
my opening statement at the nomination hearing before the
Senate Banking Committee on February 13, 2020, the power to
regulate the value of U.S. money is granted to Congress by our
Constitution (Article I, Section 8). Congress created the
Federal Reserve as an independent agency with the mandate to
promote maximum employment, price stability, and moderate long-
term interest rates. That is the framework under which I will
make monetary policy decisions if confirmed as a member of the
Board of Governors.
Q.5. Please explain your support for abolishing legal tender
laws including your involvement in and support for efforts to
have the Commonwealth of Virginia consider the creation of its
own currency.
A.5. I served as a member of the Governor's Joint Advisory
Board of Economists for the Commonwealth of Virginia from 2010
to 2015. I was asked in 2013 by a long-serving member of the
Virginia House of Delegates to provide expertise regarding a
bill he wished to sponsor calling for a back-up currency in
case the Federal Reserve System suffered a major breakdown or
cyberattack--a concern in the wake of attacks on several
American banking institutions by the Iranian Government. The
idea was to create a ``Plan B'' metallic-based currency, so
Virginians would still be able to conduct commerce in the event
of such a breakdown. The proposed alternative currency was
deemed consistent with the Article I, Section 10 provision of
the Constitution, which limits the powers of the States by
prohibiting them from entering into treaties with foreign
Nations or other actions reserved to the President with the
approval of two-thirds of the U.S. Senate, or from making
``anything but gold and silver coin a tender in payment of
debts.'' The legislation (H.J. 590) sought ``to study the
feasibility of a monetary unit based on a metallic standard, in
keeping with constitutional precepts and our Nation's founding
principles, to facilitate commerce in the event of a major
breakdown of the Federal Reserve System or disruption of
financial services.'' It was supported by the Speaker of the
House and was approved by the Virginia House of Delegates
before being turned down in the Senate.
Q.6. Is this still your opinion? If so, please explain your
position.
A.6. Federal Reserve notes comprise more than 99 percent of all
U.S. currency in circulation; the remainder includes United
States notes, national bank notes, and silver certificates, all
of which remain legal tender. I might note that legislators in
a dozen States have pursued or passed legislation of some sort
to facilitate authorizing payments through metallic-linked
currencies. Texas lawmakers in 2015 approved building the
country's first State-backed gold depository; this past
November, the citizens of Texas voted to approve an amendment
to the State constitution (Texas Proposition 9) to allow the
legislature to exempt precious metals held in a precious metal
depository from ad valorem taxation, i.e., property taxation.
Approval of Proposition 9 enacted House Bill 2859 (H.B. 2859),
the legislation exempting precious metal held in precious metal
depositories from property taxation, with precious metals
defined as including gold, silver, and other such metals
``customarily formed into bullion or specie.''
Q.7. If it is not, why did you make the aforementioned
statements?
Do you think Facebook should be allowed to develop its own
currency for use in the United States?
A.7. The Libra concept is certainly an intriguing idea with the
potential to support entrepreneurial endeavor through enhanced
access to capital. It could provide a widely used medium of
exchange and meaningful unit of account, facilitating trade and
investment decisions. Libra represents a viable means for
advancing technological improvements in payments capabilities
that would improve efficiencies for consumers while also
reducing costs. The ubiquity of smart phones is changing the
way consumers make payments and access financial services.
Developing the technologies that increase the availability of
innovative services is critical to our global competitiveness.
Consumers are interested in possibilities for transferring
funds almost instantaneously; new digital currencies facilitate
such payments and will likely find increasing demand throughout
the private sector.
It is too early to tell, though, whether Libra itself would
prove good for the United States regarding dollar primacy
issues--not to mention oft-cited concerns about data privacy
and operational resilience. In my view, much depends on how the
Libra founders choose to roll out their vision, which is summed
up as ``a stable global cryptocurrency built on a secure
network.'' \3\ It is not clear whether Libra will be
``primarily based on American dollars'', as Facebook CEO Mark
Zuckerberg stated at a House Financial Services hearing in
October 2019, \4\ or instead might involve a currency board
arrangement with a basket of fiat currencies as the underlying
security, perhaps reflecting the Special Drawing Right
valuation utilized by the International Monetary Fund. The SDR
functions as a unit of account for the IMF and is not a
currency per se but rather its valuation is based on the
weighted daily market values for a basket of key international
currencies. The SDR basket currently consists of the following
five currencies: U.S. dollar (41.73 percent), the euro (30.93
percent), Chinese yuan (10.92 percent), Japanese yen (8.33
percent), and British pound (8.09 percent). The currencies
selected for the SDR basket are reviewed by the IMF every 5
years; it is notable that the IMF decided to include the
Chinese yuan (or renminbi) effective October 1, 2016. I would
not wish to elevate China's currency for settling cross-border
transactions by amalgamizing it with the U.S. dollar to benefit
from the popularity and well-established reputation of American
money as a global reserve currency.
---------------------------------------------------------------------------
\3\ ``Libra Is for the World: Simple, Inclusive, Global'', https:/
/libra.org/en-US/vision/.
\4\ ``An Examination of Facebook and Its Impact on the Financial
Services and Housing Sectors'', Hearing before the U.S. House Committee
on Financial Services, October 23, 2019, https://
financialservices.house.gov/calendar/eventsingle.aspx?EventID-404487.
---------------------------------------------------------------------------
Moreover, Facebook clearly has privacy risks, both
nationally and globally, that must be addressed. The company's
German unit was fined 51,000 euros ($55,000) in February 2020
for failing to name a data protection officer for its local
office. This was seen as a relatively light punishment and did
not affect the parent company, but it was nevertheless meant to
serve as a clear warning that data protection authority must be
taken seriously under the European Union's new privacy rules.
The law took effect in May 2018 and sets strict rules for how
companies handle personal data. The biggest privacy risks arise
from the fact that Facebook amasses much more personal data
than many users realize.
Q.8. You have called for the creation of a new global monetary
authority--the universal gold reserve bank--that would
supersede currency markets and limit the Federal Reserve's
influence on U.S. monetary policy.
Is this still your position?
How would the creation of a global monetary authority
benefit the United States?
A.8. I have been asked at times throughout my career to think
creatively about possible future scenarios involving the
evolution of money--to ``brainstorm''--for purposes of
encouraging people to consider new approaches and come up with
their own. I believe it is important to think ``out of the
box'' in order to go beyond groupthink in facing future
monetary challenges. But I know the difference between theory
and reality; I presume others do as well. If confirmed, I will
work within the established monetary framework for determining
appropriate interest-rate policies in accordance with the Fed's
statutory mandate to promote maximum employment, stable prices,
and moderate long-term interest rates.
Q.9. You have stated that ``[t]he existence of Federal deposit
insurance schemes that serve to insulate bank management from
the discipline required to properly manage deposited resources
against investment assets undermines the integrity of the
banking industry in the United States by steering it in the
direction of excessively risky loan portfolios . . . .''
Do you still believe FDIC insurance undermines the
integrity of the banking system in the United States?
Do you believe the existence of FDIC insurance contributed
to the financial crisis in 2007-08, and if so, how?
In your estimation, how many of the roughly 6,000 community
banking institutions across the United States would be viable
without a deposit guarantee?
A.9. I do not support eliminating deposit insurance. In my book
Money Meltdown, published in 1994, I commented on deposit
insurance in the context of explaining the concept of ``moral
hazard'' and wrote the following: ``Banks must be responsible
for upholding the value of the monetary obligations they issue
on the basis of held reserves or viable, well-managed loan
portfolios. The existence of Federal deposit insurance schemes
that serve to insulate bank management from the discipline
required to properly manage deposited resources against
investment assets undermines the integrity of the banking
industry in the United States by steering it in the direction
of excessively risky loan portfolios (as taxpayers, not the
equity holders of the bank, bear a substantial part of the cost
of fiduciary mismanagement).'' I fully understand that banks
pay fees for deposit insurance provided by the Federal Deposit
Insurance Corporation, an independent Government agency
established in 1933 to maintain public confidence and stability
in the U.S. financial system; this is an essential mission, one
I strongly support. I was simply emphasizing the importance of
prudent capital and management standards being in place for
banking institutions as the first bulwark against potential
losses, rather than relying on Government-provided deposit
insurance.
Q.10. Larry Kudlow says that the White House nominated you
because you don't believe that growth leads to inflation.
In your view, what causes inflation?
A.10. Too much money chasing too few goods.
Q.11. You have said that we should have 0 percent inflation. If
you were confirmed to the Board, what would you do to implement
that policy?
A.11. In conducting the Nation's monetary policy, the Federal
Reserve seeks to influence money and credit conditions in the
economy in pursuit of maximum employment and stable prices. The
first goal is defined by the Federal Reserve as having been
achieved when all Americans that want to work are gainfully
employed. The second goal was defined by former Fed Chairman
Alan Greenspan in July 1996 as ``that state in which expected
changes in the general price level do not effectively alter
business and household decisions.'' \5\ Since January 2012, the
Federal Open Market Committee has judged that inflation at the
rate of 2 percent (as measured by the annual change in the
price index for personal consumption expenditures, or PCE) is
most consistent over the longer run with the Federal Reserve's
statutory mandate regarding price stability. In accordance with
that definition, the Federal Reserve should raise interest
rates if inflation were to persistently exceed 2 percent--with
the caveat that the inflation goal is now defined as a
``symmetric 2 percent objective'' as mentioned by Chair Powell
in his most recent semiannual monetary policy report to the
Congress. \6\ Employing a symmetric approach means the Federal
Reserve would tolerate inflation running modestly above or
below the 2 percent target.
---------------------------------------------------------------------------
\5\ See transcript for Meeting of the Federal Open Market
Committee, July 2-3, 1996. https://www.federalreserve.go/monetarpolicy/
files/FOMC19960703meeting.pdf.
\6\ Semiannual Monetary Policy Report to the Congress, Statement
by Chair Jerome H. Powell before the Committee on Financial Services,
U.S. House of Representatives, Washington, D.C., February 11, 2020.
Q.12. At what points in history has the United States had 0
percent inflation or deflation, and what has been the result of
---------------------------------------------------------------------------
that economic environment?
A.12. Episodes of high inflation are recurrent in U.S. history.
Prior to the founding of the Federal Reserve in 1913, high-
inflation episodes were followed by prolonged periods of
deflation, bringing prices back to their original levels. In
the postwar period, inflation instead returned to positive
levels, making increases in the price level permanent rather
than transitory. A 2011 paper entitled ``Reform of the
International Monetary and Financial System'', published by the
Bank of England, analyzed the performance of the gold standard
(1870-1913) and the Bretton Woods gold-exchange system (1948-
72) relative to current monetary practices. \7\ The report
concludes that today's system has performed poorly relative to
prior monetary regimes, ``with the key failure being the
system's inability to maintain financial stability and minimize
the incidence of disruptive sudden changes in global capital
flows.'' Trade and investment flows are distorted as the
world's major central banks engage in subtle exchange-rate
competition. The 2015 Economic Report of the President
highlights the growth in middle-class incomes during the
Bretton Woods system of fixed exchange rates, describing the
period from 1948 to 1973 as the ``Age of Shared Growth''--
characterized by accelerating labor productivity, falling
income inequality, and increased workforce participation. \8\
Notable historical years of deflation occurred from 1930 to
1932, reflecting a market crash, Smoot-Hawley tariffs, Dust
Bowl conditions, and tax hikes under President Hoover. \9\ In
1939, U.S. inflation was 0.0 percent, correlating with an 8.0
percent expansion and ending of the Dust Bowl era. \10\ No
other instances of zero inflation in the United States occur
during the period from 1929 to the present, but we do see a
very low 0.4 percent inflation rate for 1955 correlated with a
7.1 percent expansion and a 0.1 percent inflation rate in 2008
correlated with the financial crisis. \11\
---------------------------------------------------------------------------
\7\ Oliver Bush, Katie Farrant, and Michelle Wright, ``Reform of
the International Monetary and Financial System'', Financial Stability
Paper No. 13--December 2011 (London, Bank of England, 2011).
\8\ ``Economic Report of the President'', transmitted to the
Congress together with The Annual Report of the Council of Economic
Advisers, February 2015, p. 31.
\9\ ``U.S. Inflation Rate by Year from 1929 to 2022'', Kimberly
Amadeo, The Balance, January 29, 2020.
\10\ Ibid.
\11\ Ibid.
Q.13. What are the merits of looking at Average Hourly Earnings
---------------------------------------------------------------------------
vs. the Employment Cost Index?
A.13. I am not sufficiently knowledgeable about the relative
merits and shortcomings of these two wage gauges to give an
informed response.
Q.14. You have recommended a global common currency. You wrote
in the Wall Street Journal, ``If the goal is to have a global
common market, how can we ignore the parallel need for a common
unit of account, a global form of money?'' An article in
China's People's Daily quoted a Chinese economist as saying
``that the world urgently needs to create a diversified
currency and financial system and fair and just financial order
that is not dependent on the United States.'' Your response to
that piece was ``Let's do exactly that.''
What would be the benefit to the United States of creating
a financial order that is not dependent on the United States?
A.14. I believe the United States needs to be at the forefront
of international finance and to ensure the primacy of the U.S.
dollar as the world's foremost reserve currency throughout the
world. According to the International Monetary Fund, the dollar
makes up 62 percent of all known central bank foreign exchange
reserves as of the third quarter of 2019; \12\ it is involved
in 90 percent of foreign exchange trading. \13\ The global
ubiquity of the U.S. dollar as a medium of exchange and
international monetary standard functions as an effective form
of soft power--an important element of our Nation's ability to
project geopolitical influence.
---------------------------------------------------------------------------
\12\ ``Currency Composition of Official Foreign Exchange Reserves
(COFER)'', International Monetary Fund, http://data.imf.org/?sk-
E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4.
\13\ International Standards Organization List, XE, ``ISO 4217
Currency Codes'', https://www.xe.com/iso4217.php, cited in ``Why the
U.S. Dollar Is the Global Currency'', Kimberly Amadeo, The Balance,
December 13, 2019.
Q.15. You have a demonstrated belief in ``sound money.'' At a
2010 event you quoted Deuteronomy's admonition about ``weights
and measures'' to make the case against stimulative policies at
the Fed.
How do those same passages from Deuteronomy support your
current advocacy for lowering interest rates to stimulate the
economy?
A.15. I believe you are citing a passage that relates to usury
rather than the point I was making about the importance of
maintaining accurate and honest weights and measures. As I
mentioned during the nomination hearing before the Senate
Banking Committee on February 13, 2020, the power granted to
Congress by our Constitution (Article I, Section 8) to regulate
the value of U.S. money appears in the same sentence that
grants to Congress the power to ``fix the standard of weights
and measures.''
Q.16. Deuteronomy 23:19 states ``Do not charge your brother
interest on money, food, or any other type of loan.'' Do you
believe the bible supports a Government prohibition on charging
consumers interest for credit cards, mortgages, student loans,
car loans, or any other type of credit?
A.16. No.
Q.17. Given your mistrust for Government statistics, you stated
in 2015, how do we know that inflation is at around 2 percent
instead of 8 percent? What nongovernmental metrics did you rely
upon in making that determination? Do you believe current
Government statistics about inflation? If you do believe
current Government inflation statistics, what has changed in
how the Government calculates inflation to give you this new-
found trust?
A.17. I do not recall ever uttering the phrase you attribute to
me above: ``How do we know that inflation is at around 2
percent instead of 8 percent?'' and thus cannot cite metrics
from governmental or nongovernmental sources regarding that
assertion. In general, I learned early in my career that it is
necessary to verify the accuracy of economic statistics before
making recommendations based on data that might later prove
invalid. I believe this is a prudent approach for both scholars
and policymakers. Inflation numbers are widely known for having
difficulties in measuring the increased value of a
representative consumer basket due to technological innovation.
The deflator used to measure nominal versus real growth is
likewise tricky to apply in Government budgeting forecasts as
well as for inflation-linked securities such as Treasury
Inflation-Protected Securities (TIPS) bonds.
Q.18. In his testimony before the Senate Banking Committee on
February 12, 2020, Chair Powell appeared before the Committee
on Banking, Housing and Urban Affairs as part of his
statutorily required semiannual report to Congress on the Fed's
dual mandate of price stability and full employment,
established by the Federal Reserve Reform Act of 1977.
You told Bloomberg earlier this year that you are ``highly
skeptical'' of the Fed's mandated goals and ``don't know [that
getting to maximum employment] is really the Fed's job.''
Do you believe that the Federal Reserve is statutorily
required to promote maximum employment? If not, why not? If so,
what did you mean by your comments above?
A.18. Congress created the Federal Reserve as an independent
agency and charged it through the 1977 Federal Reserve Reform
Act with the mandate to promote maximum employment, stable
prices, and moderate long-term interest rates. According to the
Federal Reserve's own assessment, as acknowledged in the FAQs
on its own website: ``The maximum level of employment is
largely determined by nonmonetary factors that affect the
structure and dynamics of the job market.'' Still, with regard
to using monetary policy to influence employment, the Fed's
ability to lower interest rates makes it cheaper for firms to
purchase plant and equipment--which, in turn, tends to spur
hiring and boost production.
Q.19. When the Senate was considering S. 2155, the bank
deregulation bill, Chair Powell said that deregulating U.S.
regional banks wouldn't mean deregulating foreign banks. But
the Fed's October rule did just that and the Fed justified
weakening the protections at foreign banks by stating that the
law requires that you treat foreign banks equivalent to
domestic banks. The rule referred to it as ``equality of
competitive opportunity.''
Do you agree with this analysis?
Do you think that the October rule weakened safety and
soundness or financial stability?
A.19. I think it is important that I have a thorough
understanding of the details in considering changes in rules
associated with S. 2155 As a nominee, I am unable to weigh in
knowledgeably on this issue--but I can assure you, if
confirmed, that I will pay close attention to discussions on
this important matter once I am better informed.
Q.20. In July 2019 when asked about leveraged loans, Chairman
Powell stated that ``the issue is that the risk isn't in the
banks'' and that the leveraged loan market was ``in a good
place.'' Several days ago, the Fed announced that leveraged
lending risks would be incorporated into bank stress tests.
Do you think the Chairman was correct to say that banks
were not exposed to leveraged lending risks in July?
If risks were not ``in the banks'' in July, what has
changed in leveraged loan markets since then that require
incorporation of this risk into bank stress tests?
A.20. As a nominee, I do not have access to the analytics and
proprietary information to offer an opinion on the assessment
of Chairman Powell.
Q.21. The United States has long maintained the separation of
banking and commerce. However, some financial holding companies
continue to engage in physical commodities activities.
Technology firms have also expressed interest in receiving
Industrial Loan Company (ILC) charters in order to gain the
benefits of low-cost funding by being a bank without having to
divest commercial activities as required by the Bank Holding
Company Act.
Do you believe the separation of banking and commerce is an
important to the stability of the United States financial
system?
Do you believe that financial holding companies should
continue to be allowed to engage in physical commodities
activities?
Do you think recognition of ILC charters is in keeping with
the separation of banking and commerce?
A.21. This is an important and ongoing discussion about whether
nonfinancial firms can establish banking units. It seems
particularly topical regarding the ``separation of banking and
commerce'' as providing justification for keeping tech
companies out of financial services. If confirmed, I will focus
intently on this issue because I believe we are compelled to
think about the ramifications of FinTech and evolution of
digital currencies.
Q.22. In January 2012, a nonprofit called The Gold Standard Now
publicly announced your appointment as a Senior Advisor. Our
Committee's questionnaire requires nominees to list all of
their past and present affiliations. Why did you omit this from
your Committee questionnaire?
A.22. Aside from responding to an email request at the time the
organization was founded and to show my respect for Lewis E.
Lehrman, who was appointed by Treasury Secretary Donald Regan
to serve on the ``Commission on the Role of Gold in the
Domestic and International Monetary Systems'' convened under
President Reagan in 1981, I have had no contact with The Gold
Standard Now.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
FROM JUDY SHELTON
Q.1. Ms. Shelton, in your testimony before the Senate Banking
Committee, you mention that ``Congress created the Federal
Reserve as an independent agency'' and to be ``wholly
accountable both to Congress and the public'', yet in a Q&A
session last year you said that ``I don't see any reference to
independence in the legislation that has defined the role of
the Federal Reserve for the United States'' and that the same
legislation that defined the role of the Federal Reserve
demands that the Fed ``work hand in hand with Congress and the
President to meet certain strategic economic goals for the
United States''.
Are these not contradictory statements? Can you please
explain your statements?
A.1. I sincerely regret that the comment I made regarding the
independence of the Federal Reserve has been taken to mean that
I do not acknowledge the reality and the importance of the
Fed's independence; in fact, I believe it is a vital aspect of
our central bank's monetary policy decision-making process, its
operational autonomy, and its credibility with the public. In
the interview you reference, I was discussing a review I had
recently undertaken of the precise legislative language of the
Federal Reserve Reform Act of 1977 and the Full Employment and
Balanced Growth Act of 1978, also known as the Humphrey-Hawkins
Act. Both laws, taken together, have shaped the Federal
Reserve's role as an instrument of policy, though I note that
the Humphrey-Hawkins Act expired in 2000. It was somewhat
surprising to me to discover that the word ``independent'' or
``independence'' cannot be found in either bill; that is what I
meant in saying that ``I don't see any reference to
`independence' in the legislation that has defined the role of
the Federal Reserve for the United States.'' The actuality of
the Fed's independence from both the executive and legislative
branches is ensured through the unique characteristics granted
to it by Congress, such as its (1) significantly longer length
of terms for members than those of most agencies, staggered
over multiple Administrations and Congresses, and (2) its own
funding mechanism that makes the Fed independent from
congressional appropriations. In my testimony during the
nomination hearing before the Committee, I stated on several
occasions that Congress created the Federal Reserve as an
independent agency and charged it with the mandate to promote
maximum, employment, stable prices, and moderate long-term
interest rates.
Q.2. If confirmed, would you support Federal Reserve
independence?
A.2. Yes, I would.
Q.3. Could you clarify on how the Federal Reserve should
contribute to U.S. competitiveness on trade?
A.3. It is not within the Federal Reserve's specific mandate,
nor is it the Fed's responsibility, to target U.S.
competitiveness on trade. The United States enhances its
competitiveness when its domestic economy is strong and
vibrant. To the extent that the Fed's monetary policy decisions
help to promote maximum employment and stable prices--resulting
in economic and financial conditions that foster productive
growth and innovation--it contributes importantly to U.S.
competitiveness on trade.
Q.4. What is your philosophy on free trade and, if confirmed,
how would this impact your term on the Federal Reserve Board?
A.4. I am a strong believer in free trade. My philosophy is
based on comparative advantage and reflects an ``Adam Smith''
approach; I believe that having access to the international
marketplace expands opportunity and prospects for prosperity
around the world to the benefit of all participants. But, I
also believe other Nations should reduce trade barriers.
Recognizing that trade policy is not the responsibility of the
Federal Reserve, my views would not impact my decisions as a
member of the Board of Governors, should I be confirmed.
Q.5. What economic or financial sectors benefit from free trade
and what, if any, sectors are hurt by free trade?
A.5. When free trade is conducted in accordance with free-
market mechanisms, I believe all economic and financial sectors
stand to benefit. And again, foreign Nations should reduce
trade barriers to maximize economic growth worldwide. In our
free economy, America's dominance in technology and our
Nation's ability to achieve greater productivity through
innovation can help counter perceived price advantages offered
by competitors by delivering higher-value goods with greater
market appeal. U.S. financial firms can likewise benefit from
free trade if they are not prevented from entering new markets
overseas through nontariff barriers or other obstacles.
Q.6. In the Federal Reserve study released in December 2019,
the Fed said that while,
U.S. import tariffs may protect some U.S.-based
manufacturers from import competition in the domestic
market . . . on the other hand U.S. tariffs have also
been imposed on intermediate inputs, and the associated
increase in costs may hurt U.S. manufacturer's
competitiveness in producing for both the export and
domestic markets . . . U.S. trade partners have imposed
retaliatory tariffs on U.S. exports of certain goods,
which could again put U.S. firms at a disadvantage in
those markets.
With this context, do you believe that tariffs are an
effective method to improving U.S. competitiveness?
A.6. Tariffs are inconsistent with free trade--as are nontariff
barriers, subsidies, and other obstacles that prevent genuine
competition. Competitiveness should reflect the strength,
quality, and value of goods/services being offered in the
international marketplace. Again, all Nations should reduce
trade barriers.
Q.7. In a CNBC interview in July 2019 you answered that the
U.S. should follow suit with the central banks in Europe,
China, and Japan who were devaluing their currencies against
the dollar. I share the concerns that several of my colleagues
who raised this concern over your suggestion that the U.S.
should devalue its currency to compete with other countries.
The Federal Reserve's mandate does not include this ``beggar-
thy-neighbor'' economic policy.
If confirmed, would you advocate for the devaluation of
U.S. currency?
A.7. No, I would not advocate for the devaluation of U.S.
currency. As I stated during the nomination hearing before the
Committee: ``It would be anathema to me to suggest that we
devalue our money to gain a trade advantage.'' My public
comments have been directed at criticizing what other Nations
sometimes appear to be doing under the guise of conducting
monetary policy stimulus--though I take very seriously and
concur with the statement made by Senator Toomey during that
same hearing: ``We don't get to control other countries'
monetary behavior.'' He is correct. If a major American trading
partner were to significantly devalue its currency
intentionally, it should not precipitate a beggar-thy-neighbor
currency response from the United States, and certainly, the
Federal Reserve should not play a role in achieving a
devaluation. Exchange-rate policy is within the province of the
Treasury Department, not the Fed. Moreover, recent trade
agreements between the United States and its major trade
partners have included specific chapters dealing with currency
matters; they target this issue in the context of negotiated
trade commitments to ``avoid manipulating exchange rates in
order to prevent effective balance of payment adjustment or to
gain an unfair competitive advantage.''
Q.8. What policies, if any, would you recommend the Federal
Reserve pursue to ensure that the U.S. is able to remain
competitive against other countries who devalue their currency?
A.8. It is not prescribed within the mandate of the Federal
Reserve that it should pursue policies to ensure that the U.S.
is able to remain competitive against other countries who
devalue their currency. Therefore, if confirmed, it would not
be appropriate for me to seek to pursue such a purpose through
monetary policy. It is only appropriate for members of the
Federal Open Market Committee to consider how best to promote
maximum employment, stable prices, and moderate long-term
interest rates as national economic objectives assigned by
Congress. Success in achieving these statutory directives helps
to ensure that the U.S. remains competitive in the global
marketplace.
Q.9. What risks do you believe that cybersecurity concerns pose
to the U.S. financial system?
A.9. While I have been made aware of past incursions and
cyberattacks on U.S. financial institutions--notably,
distributed-denial-of-service attacks emanating from Iran's
Government on major financial sector firms such as JPMorgan
Chase, Wells Fargo, and American Express from 2011 to 2013--
this area is not one in which I have sufficient expertise to
provide an informed answer. At the same time, I recognize that
this is clearly a matter of critical importance: I am concerned
about the national security implications of our financial
institutions and the susceptibility of the U.S. economy to
offensive operations carried out by our adversaries in
cyberspace.
Q.10. How do you believe the Federal Reserve should address
these concerns?
A.10. Please see my answer above. Suffice to say, I would wish
to be keenly involved in discussions at the Fed aimed at
securing the operational resilience of Federal Reserve System
functions as vital infrastructure for protecting our Nation's
security and the well-being of its citizens. We need to also
prioritize data protection and individual privacy concerns as
we guard against such hostile intrusions and threats aimed at
our Nation's central bank.
Q.11. How do you believe that the Federal Reserve could improve
transparency and communication with the public?
A.11. I believe that the listening tour conducted by the Fed--
its series of Fed Listens events first announced in November
2018--has proven enlightening and helpful in terms of
underscoring the importance of two-way communications with the
public. Going back to the writings of Thomas Jefferson, who
penned his ``Notes on the Establishment of a Money Unit, and of
a Coinage for the United States'' in 1784, a founding concept
for U.S. money was that it should be (1) convenient to use, (2)
easy to understand, and (3) accepted with confidence as having
recognized value. Perhaps to its surprise, the Fed learned that
members of the public are skeptical that inflation is deemed
too low by monetary authorities. Other insights gained included
recommendations to keep monetary conditions conducive to more
hiring of workers--that some communities were still not
experiencing sufficiently broad participation opportunities. To
me, this indicates support for monetary policy aimed at
supporting productive economic growth and invalidates the
notion of a Phillips curve trade-off between maximum employment
and stable prices. As I stated in my testimony before the
Committee, paraphrasing: I think that is one of the most
profound developments that has happened in recent years--the
change in thinking and the realization at the Federal Reserve
that you can have low inflation and low unemployment at the
same time. In fact, it's the perfect stable foundation for
faster growth, leading to higher wages and productivity without
inflation. So I think this is very important for future
monetary policy.
Q.12. Do you believe that the Federal Reserve needs to improve
its transparency?
A.12. The Federal Reserve needs to be transparent because its
monetary policy decisions affect job creation, upward mobility
for workers, and equitable prosperity. I believe the Federal
Reserve can remain insulated from political pressures in making
its decisions regarding interest rates while also providing
transcripts of discussions on a timely basis. Current levels of
transparency appear satisfactory.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
FROM JUDY SHELTON
Q.1. I appreciated the conversation we had recently in my
office, particularly as it related to digital currencies.
Unfortunately, I didn't get a chance to discuss your views on
digital currencies during your confirmation hearing. To that
end, I was hoping you could elaborate on the following
questions:
What place should digital currencies have in our economy?
A.1. The increasing use of smart phones is changing the way
consumers make payments and access financial services.
Developing the technologies that increase the availability of
innovative services is critical to our global competitiveness.
Consumers are interested in possibilities for transferring
funds almost instantaneously; new digital currencies facilitate
such payments and will likely find increasing demand throughout
the private sector.
Q.2. Is it important for the United States to be at the
forefront of innovation in digital currencies?
A.2. I believe the United States needs to be at the forefront
of innovation in digital currencies, not only to provide
leading-edge financial technology to American consumers who
utilize our Nation's currency in their daily lives to access
banking services and make payments, but also to ensure the
primacy of the U.S. dollar as the world's foremost reserve
currency throughout the world. According to the International
Monetary Fund, the dollar makes up 62 percent of all known
central bank foreign exchange reserves as of the third quarter
of 2019; \1\ it is involved in 90 percent of foreign exchange
trading. \2\ The global presence of the U.S. dollar as a medium
of exchange and international monetary standard functions as an
effective form of soft power--an important element of our
Nation's ability to project geopolitical influence.
---------------------------------------------------------------------------
\1\ ``Currency Composition of Official Foreign Exchange Reserves
(COFER)'', International Monetary Fund, http://data.imf.org/?sk-
E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4.
\2\ International Standards Organization List, XE, ``ISO 4217
Currency Codes'', https://www.xe.com/iso4217.php, cited in ``Why the
U.S. Dollar Is the Global Currency'', Kimberly Amadeo, The Balance,
December 13, 2019.
---------------------------------------------------------------------------
Q.3. Are digital currencies like Libra a good idea?
A.3. The Libra concept is certainly an intriguing idea with the
potential to support entrepreneurial endeavor through enhanced
access to capital. It could provide a (1) widely used medium of
exchange and (2) meaningful unit of account, facilitating trade
and investment decisions while fulfilling important monetary
functions. Libra represents a viable means for advancing
technological improvements in payments capabilities that would
increase efficiencies for consumers while also reducing costs.
It is too early to tell, though, whether Libra itself would
prove good for the United States regarding dollar primacy
issues mentioned above (not to mention oft-cited concerns about
data privacy and operational resilience). In my view, much
depends on how the Libra founders choose to roll out their
vision, which is summed up as ``a stable global cryptocurrency
built on a secure network.'' \3\ It is not clear whether Libra
will be ``primarily based on American dollars'', as Facebook
CEO Mark Zuckerberg stated at a House Financial Services
hearing in October 2019, \4\ or might rather involve a currency
board arrangement with a basket of fiat currencies as the
underlying security, perhaps reflecting the Special Drawing
Right valuation utilized by the International Monetary Fund.
The SDR functions as a unit of account for the IMF and is not a
currency per se but rather its valuation is based on the
weighted daily market values for a basket of key international
currencies. The SDR basket currently consists of the following
five currencies: U.S. dollar (41.73 percent), the euro (30.93
percent), Chinese yuan (10.92 percent), Japanese yen (8.33
percent), and British pound (8.09 percent). The currencies
selected for the SDR basket are reviewed by the IMF every five
years; it is notable that the IMF decided to include the
Chinese yuan (or renminbi) effective October 1, 2016.
---------------------------------------------------------------------------
\3\ ``Libra Is for the World: Simple, Inclusive, Global'', https:/
/libra.org/en-US/vision/.
\4\ ``An Examination of Facebook and Its Impact on the Financial
Services and Housing Sectors'', Hearing before the U.S. House Committee
on Financial Services, October 23, 2019, https://
financialservices.house.gov/calendar/eventsingle.aspx?EventID-404487.
Q.4. Should the Federal Reserve consider creating its own
---------------------------------------------------------------------------
digital currency?
A.4. This is likewise an interesting notion but one fraught
with concerns because of the tremendously dominant position of
the Federal Reserve and its potential to stultify creative
FinTech approaches at a time when the United States should be
demonstrating leadership in this field. Money evolves forward--
and America should not be a passive observer as other Nations
move aggressively to steer the course of these critical
developments. It is vital that the Federal Reserve seek to get
ahead of the curve in exploring the ramifications of digital
technology in determining the future path of money; the U.S.
dollar is the most respected currency in the world, but this
does not mean we can afford to rest on our laurels. Stablecoins
represent a step beyond earlier attempts to provide a digital
currency, such as Bitcoin, and seem more aligned with laudable
goals such as maintaining a stable value--which then enables
them to provide a dependable store of value, the third primary
function of money. Libra is presenting itself as a platform
that would work in tandem with the regulatory authority and
supervisory oversight of the Federal Reserve; on the other
hand, it might readily find itself in a position to challenge
the Fed by providing an alternative currency not tied to an
issuer such as a central bank. Is there an opening that might
be explored for working with Facebook or other digital currency
providers in cooperation with our Federal Reserve? If not,
would currency challengers such as Facebook's Libra somehow be
prevented from proceeding with offering their product to the
public? These are the compelling questions that need to be
addressed. My instinct is to avoid empowering central banks yet
further, perhaps enabling them to impose negative returns on
holders of cash through their domination of payments
transactions and control over monetary policy. At the same
time, I wish to see the dollar not only maintain but even
enhance its attractiveness as a monetary standard serving the
interests of market participants in the realms of both commerce
and investment. If we can reconcile the need to harness the
potential of digital currencies to empower individuals by
granting more direct access to financial intermediation
services--without undermining the potency of monetary policy or
weakening confidence in the U.S. dollar as a reflection of our
stable financial system overseen by the Fed--we can lift both
the ingenuity and integrity of America's money to new heights.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM JUDY SHELTON
Q.1. What do you think of Facebook's attempt to create its own
digital currency, Libra?
A.1. The Libra concept is certainly an intriguing idea with the
potential to support entrepreneurial endeavor through enhanced
access to capital. It could provide a widely used medium of
exchange and meaningful unit of account, facilitating trade and
investment decisions. Libra represents a viable means for
advancing technological improvements in payments capabilities
that would improve efficiencies for consumers while also
reducing costs.
Q.2. Do you support or oppose Libra?
A.2. The ubiquity of smart phones is changing the way consumers
make payments and access financial services. Developing the
technologies that increase the availability of innovative
services is critical to our global competitiveness. Consumers
are interested in possibilities for transferring funds almost
instantaneously; new digital currencies facilitate such
payments and will likely find increasing demand throughout the
private sector. It is too early to tell, though, whether Libra
itself would prove good for the United States regarding dollar
primacy issues not to mention oft-cited concerns about data
privacy and operational resilience. In my view, much depends on
how the Libra founders choose to roll out their vision, which
is summed up as ``a stable global cryptocurrency built on a
secure network.'' \1\
---------------------------------------------------------------------------
\1\ ``Libra Is for the World: Simple, Inclusive, Global'', https:/
/libra.org/en-US/vision/.
---------------------------------------------------------------------------
Q.3. Why specifically do you support or oppose?
A.3. It is not clear whether Libra will be ``primarily based on
American dollars'', as Facebook CEO Mark Zuckerberg stated at a
House Financial Services hearing in October 2019, \2\ or
instead might involve a currency board arrangement with a
basket of fiat currencies as the underlying security, perhaps
reflecting the Special Drawing Right valuation utilized by the
International Monetary Fund. The SDR functions as a unit of
account for the IMF and is not a currency per se but rather its
valuation is based on the weighted daily market values for a
basket of key international currencies. The SDR basket
currently consists of the following five currencies: U.S.
dollar (41.73 percent), the euro (30.93 percent), Chinese yuan
(10.92 percent), Japanese yen (8.33 percent), and British pound
(8.09 percent). The currencies selected for the SDR basket are
reviewed by the IMF every 5 years; it is notable that the IMF
decided to include the Chinese yuan (or renminbi) effective
October 1, 2016. I would not wish to elevate China's currency
for settling cross-border transactions by amalgamizing it with
the U.S. dollar to benefit from the popularity and well-
established reputation of American money as a global reserve
currency.
---------------------------------------------------------------------------
\2\ ``An Examination of Facebook and Its Impact on the Financial
Services and Housing Sectors'', Hearing before the U.S. House Committee
on Financial Services, October 23, 2019, https://
financialservices.house.gov/calendar/eventsingle.aspx?EventID-404487.
Q.4. Do you have any concerns that consumer privacy would be
further compromised if Facebook is successful in launching
Libra? If yes, what do you see as the biggest privacy risks
---------------------------------------------------------------------------
associated with Libra, both nationally and globally?
A.4. Facebook clearly has privacy issues that must be
addressed. The company's German unit was fined 51,000 euros
($55,000) in February 2020 for failing to name a data
protection officer for its local office. This was seen as a
relatively light punishment and did not affect the parent
company, but it was nevertheless meant to serve as a clear
warning that data protection authority must be taken seriously
under the European Union's new privacy rules. The law took
effect in May 2018 and sets strict rules for how companies
handle personal data. The biggest privacy risks arise from the
fact that Facebook amasses much more personal data than many
users realize.
Q.5. If another currency, including a digital currency, were to
displace the U.S. dollar as the world's reserve currency, what
impact would that have on the United States and our economy?
A.5. I believe the United States needs to be at the forefront
of innovation in digital currencies, not only to provide
leading-edge financial technology to American consumers who
utilize our Nation's currency in their daily lives to access
banking services and make payments but also to ensure the
primacy of the U.S. dollar as the world's foremost reserve
currency throughout the world. According to the International
Monetary Fund, the dollar makes up 62 percent of all known
central bank foreign exchange reserves as of the third quarter
of 2019; \3\ it is involved in 90 percent of foreign exchange
trading. \4\ The global position of the U.S. dollar as a common
medium of exchange and reliable monetary standard functions as
an effective form of soft power--an important element of our
Nation's ability to project geopolitical influence.
---------------------------------------------------------------------------
\3\ ``Currency Composition of Official Foreign Exchange Reserves
(COFER)'', International Monetary Fund, http://data.imf.org/?sk-
E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4.
\4\ International Standards Organization List, XE, ``ISO 4217
Currency Codes'', https://www.xe.com/iso4217.php, cited in ``Why the
U.S. Dollar Is the Global Currency'', Kimberly Amadeo, The Balance,
December 13, 2019.
Q.6. If confirmed, what will you do to ensure that the U.S.
---------------------------------------------------------------------------
dollar remains the world's reserve currency?
A.6. One option is to consider whether to establish a central
bank digital currency issued by the United States. This is an
interesting possibility but one fraught with concerns because
of the tremendously dominant position of the Federal Reserve
within our financial system. We need to consider whether the
Fed's institutional involvement from a favored position,
clearly occupying the inside track on money transfers, would
have the effect of stultifying creative FinTech approaches at a
time when the United States should be demonstrating leadership
in this field. Money evolves forward--and America should not be
a passive observer as other Nations move aggressively to steer
the course of these critical developments. It is vital that the
Federal Reserve seek to get ahead of the curve in exploring the
ramifications of digital technology in determining the future
path of money; the U.S. dollar is the most respected currency
in the world, but this does not mean we can afford to rest on
our laurels. Stablecoins represent a step beyond earlier
attempts to provide a digital currency, such as Bitcoin, and
seem more aligned with laudable goals such as maintaining a
stable value--which then enables them to provide a dependable
store of value, the third primary function of money. Libra is
presenting itself as a platform that would work in tandem with
the regulatory authority and supervisory oversight of the
Federal Reserve at present. But if permitted to move ahead, it
might readily find itself in a position to challenge the Fed by
providing an alternative currency not tied to central bank
issuance. Is there an opening that might be explored for
working with Facebook or other digital currency providers in
cooperation with our Federal Reserve? If not, would these
currency challengers somehow be prevented from proceeding with
offering their product to the public? These are the questions
that present themselves as imperatives that must be addressed
in the fast-moving world of FinTech.
Q.7. Given your ever changing economic views and your
questioning of the independence of the Federal Reserve, what
can you say to this Committee to convince us that you would, if
confirmed, act independently and free from political influence
in conducting your duties as a Federal Reserve Governor?
A.7. I believe the independence of our Nation's central bank is
a fundamental aspect of its credibility with the public.
Congress has granted tremendous powers to the Federal Reserve--
not only to formulate monetary policy but also in exercising
regulatory authority over banking institutions. Citizens need
to know they can trust monetary authorities to do the right
thing without regard to political pressure. I am known as an
independent thinker; my career testifies to the fact that I
draw my own conclusions rather than automatically accepting the
consensus view as evidenced by my work in evaluating the true
economic condition of the former Soviet Union. If confirmed, I
will rely on my own analytical capabilities and judgement in
making decisions as a member of the Board of Governors.
Q.8. Please identify three economic policies supported by the
Trump administration with which you disagree, and please
explain with specificity why you disagree.
A.8. Given my respect for maintaining the political
independence of the Federal Reserve, and noting that I am a
nominee to serve on the Board of Governors of that institution,
it would be inappropriate for me to condemn or condone specific
political or economic policies supported by the current
Administration.
Q.9. According to the Washington Post, you wrote in your book,
Money Meltdown, ``Eliminating Federal deposit insurance would
restore the essential character of banking as a vehicle for
channeling financial capital into productive investments while
striving to meet the risk and timing preferences of depositors.
Government should not intervene in that private business
activity.'' Do you stand by this statement? If so, why? If not,
why not?
A.9. I do not support eliminating deposit insurance. In my book
Money Meltdown, published in 1994, I commented on deposit
insurance in the context of explaining the concept of ``moral
hazard'' and wrote the following: ``Banks must be responsible
for upholding the value of the monetary obligations they issue
on the basis of held reserves or viable, well-managed loan
portfolios. The existence of Federal deposit insurance schemes
that serve to insulate bank management from the discipline
required to properly manage deposited resources against
investment assets undermines the integrity of the banking
industry in the United States by steering it in the direction
of excessively risky loan portfolios (as taxpayers, not the
equity holders of the bank, bear a substantial part of the cost
of fiduciary mismanagement).'' I fully understand that banks
pay fees for deposit insurance provided by the Federal Deposit
Insurance Corporation, an independent Government agency
established to maintain public confidence and stability in the
U.S. financial system; this is an essential mission, one I
strongly support. I was simply emphasizing the importance of
prudent capital and management standards being in place for
banking institutions as the first bulwark against potential
losses, rather than relying on Government-provided deposit
insurance.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM JUDY SHELTON
Q.1. Dr. Shelton, in your 1993 article ``Banking and
Government--An Unholy Alliance'' published in the Cato Journal,
you wrote, ``Now into this fairly straightforward relationship
among depositors and borrowers, with bankers in the middle
bringing the parties together and channeling the money into
those projects that offer maximum return with minimum risk, we
introduce a hugely distorting factor--Federal deposit
insurance.'' Also in that article you wrote, ``The unholy
alliance that exists between Government and the banking
industry is well-known . . . The alliance boils down to this:
The presence of Government-provided deposit insurance opens the
door for Government surveillance and regulation of banking
operations and management. Such a Faustian arrangement
engenders tremendous conflicts of interest and invites
governmental abuse of power.''
Since publishing that article, have you in any of your
public writings explained why you ``totally support Federal
deposit insurance'' as you said in your hearing? If so, please
list those writings.
A.1. I do not support eliminating deposit insurance. In the
1993 article you reference, as well as in my book Money
Meltdown, published in 1994, I commented on deposit insurance
in the context of explaining the concept of ``moral hazard''
and wrote the following: ``Banks must be responsible for
upholding the value of the monetary obligations they issue on
the basis of held reserves or viable, well-managed loan
portfolios. The existence of Federal deposit insurance schemes
that serve to insulate bank management from the discipline
required to properly manage deposited resources against
investment assets undermines the integrity of the banking
industry in the United States by steering it in the direction
of excessively risky loan portfolios (as taxpayers, not the
equity holders of the bank, bear a substantial part of the cost
of fiduciary mismanagement).'' I fully understand that banks
pay fees for deposit insurance provided by the Federal Deposit
Insurance Corporation, an independent Government agency
established in 1933 to maintain public confidence and stability
in the U.S. financial system; this is an essential mission, one
I strongly support. I was simply emphasizing the importance of
prudent capital and management standards being in place for
banking institutions as the first bulwark against potential
losses, rather than relying on Government-provided deposit
insurance.
Q.2. Dr. Shelton, in your 2009 Wall Street Journal article
``Capitalism Needs a Sound-Money Foundation'', you stated that
the U.S. should ``abolish legal tender laws and see whose money
people trust.'' Additionally, according to the Virginian Pilot
article ``Virginia alternative currency plan moves forward,''
you supported efforts in Virginia to ``study whether Virginia
should adopt an alternative currency to replace the dollar.''
Do you believe the U.S. should abolish legal tender laws
and allow individuals, State, and local governments to issue
alternatives to Federal Reserve notes?
A.2. I served as a member of the Governor's Joint Advisory
Board of Economists for the Commonwealth of Virginia from 2010
to 2015. I was asked in 2013 by a long-serving member of the
Virginia House of Delegates to provide expertise regarding a
bill he wished to sponsor calling for a backup currency in case
the Federal Reserve System suffered a major breakdown or
cyberattack--a concern in the wake of attacks on several
American banking institutions by the Iranian Government. The
idea was to create a ``Plan B'' metallic-based currency, so
Virginians would still be able to conduct commerce in the event
of such a breakdown. The proposed alternative currency was
deemed consistent with the Article I, Section 10 provision of
the Constitution, which limits the powers of the States by
prohibiting them from entering into treaties with foreign
Nations or other actions reserved to the President with the
approval of two-thirds of the U.S. Senate, or from making
``anything but gold and silver coin a tender in payment of
debts.'' The legislation (H.J. 590) sought ``to study the
feasibility of a monetary unit based on a metallic standard, in
keeping with constitutional precepts and our Nation's founding
principles, to facilitate commerce in the event of a major
breakdown of the Federal Reserve System or disruption of
financial services.'' It was supported by the Speaker of the
House and was approved by the Virginia House of Delegates
before being turned down in the Senate.
Q.3. Since publishing this article, have you in any of your
public writings expressed your support for Federal Reserve
notes as the sole national currency? If so, please list those
writings.
A.3. Federal Reserve notes comprise more than 99 percent of all
U.S. currency in circulation; the remainder includes United
States notes, national bank notes, and silver certificates, all
of which remain legal tender. I might note that legislators in
a dozen States have pursued or passed legislation of some sort
to facilitate authorizing payments through metallic-linked
currencies. Texas lawmakers in 2015 approved building the
country's first State-backed gold depository; this past
November, the citizens of Texas voted to approve an amendment
to the State constitution (Texas Proposition 9) to allow the
legislature to exempt precious metals held in a precious metal
depository from ad valorem taxation, i.e., property taxation.
Approval of Proposition 9 enacted House Bill 2859 (H.B. 2859),
the legislation exempting precious metal held in precious metal
depositories from property taxation, with precious metals
defined as including gold, silver, and other such metals
``customarily formed into bullion or specie.''
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM JUDY SHELTON
Q.1. Affordable Housing--Montana, and many areas of the
country, face challenges of housing availability,
affordability, and aging housing stock. As you know, this is a
significant issue for rural as well as urban areas and is one
of the largest barriers to success nationally. In Montana, lack
of workforce housing is one of the greatest inhibitors of
economic development.
What can be done to increase workforce housing and
encourage more affordable housing to be built?
A.1. As Federal Reserve Chairman Jerome H. Powell has
testified, part of the problem is a shortage of skilled labor-
electricians, plumbers, carpenters--even at higher pay levels.
Training new workers with the skills to perform these tasks
would help alleviate the current lack of workers with the
expertise for building needed housing; perhaps community
colleges could be helpful in this regard. Additionally, delays
in receiving the necessary permits to build houses could be
reduced by local officials to allow construction sites to move
forward on their projects.
Q.2. What do you see as the largest barrier to affordable
housing, particularly in rural areas?
A.2. As stated above, I believe that regulatory obstacles and
red tape involving zoning, codes, fees, and permits--compounded
by the lack of skilled labor for housing construction--pose
significant barriers to affordable housing, particularly in
rural areas where community colleges or trade schools might not
be available for potential workers to receive specialized
training for housing construction.
Q.3. What role does the Fed have in supporting housing? Where
is there room for additional efforts?
A.3. Since the Federal Reserve's mandate includes the directive
to promote maximum employment, it can use monetary policy to
keep interest rates sufficiently low to encourage housing
starts. The current record low rates of unemployment in the
United States also tend to bring about wage gains, which should
attract new workers to the field and motivate them to improve
construction skills, thus alleviating the current shortage of
labor supply for building new housing--especially low-cost/
affordable housing.
Q.4. Agriculture Lending--I have been hearing for the last year
or more from community bankers in Montana that examiners seem
more concerned lately when that their institution may be overly
concentrated in ag. This is a hard issue for rural
communities--we don't want to further jeopardize these farmers
who are already fighting to survive against trade wars,
changing weather, and difficult growing seasons, but we cannot
let these challenges take community banks down with them.
Access to banks in these rural areas is critical to
communities, and we've already seen too many close.
I'm focused on making sure that we support our farmers and
ranchers and their families through the current challenges
facing the agriculture sector, while continuing to prioritize
the safety and soundness of our community financial
institutions.
What are the risks to these banks as farmers are
increasingly overleveraged and continue to struggle with the
repercussions of these ongoing trade wars, extreme weather
happening more and more frequently because of our changing
climate, and persistently low commodity prices?
Does this pose a threat to rural America?
A.4. Community banks have long been a lifeline to farmers due
to long-standing relations of trust between borrower and
lender, sometimes going back generations. Farming is a cyclical
business with a vulnerability to unforeseen events--including
weather, as you mention. At the same time, farming is also
capital intensive, as tractors and combines and harvesters
require a major financial investment on the part of the farmer,
even as the capacity to pay off loans remains vulnerable to
conditions beyond the control of the borrower. It is important
to allow community banks to focus on lending without
unnecessary regulatory burdens that do not consider the
specific characteristics of a financial institution; this is
particularly critical for rural areas of America.
Q.5. What can and should we be doing in these communities?
A.5. Beyond the limited role of monetary policy in helping to
promote conditions conducive to productive economic growth--and
farming is perhaps the strongest example of employment geared
to the ``real'' economy--there is little the Federal Reserve
can do with regard to confronting the specific challenges for
rural communities. However, Congress might consider ways to
improve access to education and training at the local level;
additionally, the availability of broadband across rural
regions could improve access to the Internet and online courses
for improving job skills.
Q.6. From a banking perspective, are you concerned about how
this will effect community banks across rural America?
A.6. As stated in my prior responses, I am concerned about
regulatory and compliance issues that may have the effect of
making it difficult for community banks to provide needed
services to farmers and other borrowers in rural areas.
Q.7. Community Reinvestment Act--The CRA is a critical tool in
expanding access to financial services and credit access to
low- and moderate-income and underserved communities throughout
our country, including in rural America.
What issues will be most important to you as the Fed
considers updates to the CRA?
A.7. As a nominee, I am not yet sufficiently familiar with the
details of potential updates to the Community Reinvestment Act
to provide an informed response. I have not been involved in
deliberations among the Office of the Comptroller of the
Currency, the Federal Deposit Insurance Corporation, and the
Federal Reserve regarding the CRA; my understanding is that
public comments are being received, but I have not reviewed
those comments.
Q.8. How will you ensure that changes you consider remain
consistent with the original purpose of this Civil Rights-era
law to bringing financial services and credit access to low-
and moderate-income and underserved communities throughout our
country?
A.8. I strongly support the fundamental goals of the CRA, which
was enacted in 1977, while also acknowledging that its
parameters need to be updated to reflect changes in the way
banks operate and provide services today--particularly in
providing access to credit for lower-income communities.
Q.9. How will you assess the potential impact on rural America?
A.9. It is important to avoid the imposition of regulatory and
compliance measures that may have the effect of making it
difficult for community banks to provide needed services to
farmers and other borrowers in rural areas.
Q.10. Are you concerned that the Fed may move separately from
the OCC and FDIC?
Why or why not?
A.10. It does seem to me, for purposes of ensuring regulatory
clarity, that a common approach among the three agencies would
be optimal.
Q.11. Banking Hemp--The 2018 Farm Bill removed hemp from the
list of schedule I controlled substances, however regulators
and Federal agencies have been slow in making changes to
reflect this.
How can the Fed improve certainty for financial
institutions providing services to this legal business?
A.11. As a nominee, I do not have familiarity with the details
on this, but I understand from the Federal Reserve's website
that they published guidance on this issue (``Providing
Financial Services to Customers Engaged in Hemp-Related
Businesses'') as an example of how the Fed can improve
certainty for financial institutions providing services to
hemp-related businesses. The document states: ``For hemp-
related customers, banks are expected to follow standard SAR
(Suspicious Activity Report) procedures, and file a SAR if
indicia of suspicious activity warrants.''
Q.12. What oversight will be necessary from the Fed?
A.12. I would expect that the Federal Reserve will continue to
monitor the issue.
Q.13. Economic Tools, Debt and Deficits--Both the Fed, through
lower rates, and Congress, through increased spending and
increased debt, have been taking actions to boost the economy
during a long stretch of growth. I'm concerned that if we
approach a downturn our options for how to address that will be
limited by our actions during this decade of expansion.
What tools does the Fed have left to react to an economic
downturn?
A.13. The Fed's traditional monetary policy tools are open
market operations, adjusting the discount rate and/or adjusting
the reserve requirement. Currently, it primarily utilizes its
authority to provide an administered rate in paying interest on
excess reserves (IOER) to move the basic interest rate in
pursuit of meeting its statutory mandate. Additional tools in
recent years include quantitative easing (QE), i.e., large
purchases of financial assets, as well as providing forward
guidance regarding the future path of interest rates. There are
limits regarding the stimulus effect these measures might
provide given that we are already near the lower bound on
interest rates and the Fed's balance sheet is heading back
toward historically high levels after having stalled to decline
in accordance with the Fed's desire to ``normalize'' its
holdings.
Q.14. The debt is more than $23 Trillion--at what point do you
get concerned about that?
Is this sustainable?
A.14. Increasing Federal debt could hamper the ability of
Congress to support the economy in a downturn as policymakers
may feel restrained from using fiscal policy to provide
economic stimulus. While U.S. national debt does not pose any
immediate threat, and demand for U.S. Treasury obligations
remains high, the cost of servicing growing levels of public
debt infringes on the amount of Federal revenues available to
be used to address other spending priorities.
Q.15. Trade--One of my concerns about how we could end up in an
economic downturn is our trade policy over the past 2-plus
years.
What are your current views on free trade?
A.15. I am a strong believer in free trade. My philosophy is
based on comparative advantage and reflects an ``Adam Smith''
approach; I believe that having access to the international
marketplace expands opportunity and prospects for prosperity
around the world to the benefit of all participants. When free
trade is conducted in accordance with free-market mechanisms, I
believe all economic and financial sectors stand to benefit--
acknowledging that some less-developed countries have
substantially lower labor costs than those in the United
States, which can hurt U.S. workers in certain sectors such as
manufacturing. America's dominance in technology and our
Nation's ability to achieve greater productivity through
innovation can help counter perceived price advantages offered
by competitors by delivering higher-value goods with greater
market appeal. U.S. financial firms can likewise benefit from
free trade if they are not prevented from entering new markets
overseas through nontariff barriers or other obstacles.
Recognizing that trade policy is not the responsibility of the
Federal Reserve, my views would not impact my decisions as a
member of the Board of Governors, should I be confirmed.
Q.16. Federal Reserve Independence--We briefly touched on this
during my questions in the Committee hearing, but I would like
you to expand on your position.
What are your views on the independence of the Federal
Reserve?
A.16. I believe the independence of the Fed is a vital aspect
of our central bank's monetary policy decision-making process,
its operational autonomy, and its credibility with the public.
In my testimony during the nomination hearing before the
Committee, I stated on several occasions that Congress created
the Federal Reserve as an independent agency and charged it
with the mandate to promote maximum, employment, stable prices,
and moderate long-term interest rates.
Q.17. How do you define independence from Congress and the
President in this context?
A.17. The actuality of the Fed's independence from both the
executive and legislative branches is ensured through the
unique characteristics granted to it by Congress, notably (1)
its significantly longer length of terms for members than those
of most agencies, staggered over multiple Administrations and
Congresses, and (2) its own funding mechanism that makes the
Fed independent from congressional appropriations.
Q.18. Gold Standard--I think there's a reason that so many of
my colleagues--on both sides of the aisle, across the
ideological spectrum--agree that returning to the Gold Standard
would have a really detrimental impact on regular people, like
the folks from Montana that I represent--there's even some
evidence that back when we were on the Gold Standard farmers
were especially disadvantaged.
What impact do you believe going back to the Gold Standard
would have on our economy?
A.18. My writings have included references to prior
international monetary arrangements going back through U.S.
history because I believe we can gain valuable insights by
comparing economic growth performance under one set of monetary
rules versus another. The United States was on the classical
international gold standard from 1870 to 1913 and served as the
anchor for the Bretton Woods gold exchange standard from 1944
to 1971. Economic growth and free trade flourished under the
gold standard, which established a level international monetary
playing field while preserving the national sovereignty of
participating Nations; proponents of the classical
international gold standard include former Federal Reserve
Chairman Alan Greenspan. The Bretton Woods system restored
exchange-rate stability among allied Nations at the close of
World War II as an alternative to returning to the beggar-thy-
neighbor era of the 1930s when Nations depreciated their
currencies to gain an unfair trade advantage, a syndrome that
led to economic disaster. Proponents of a new Bretton Woods-
type arrangement (with or without any reference to gold)
include the late Paul Volcker, also a former Fed chairman. \1\
Congress created the Federal Reserve as an independent agency
and through the Federal Reserve Reform Act of 1977 charged it
with the mandate to promote maximum employment, stable prices,
and moderate long-term interest rates. That is the framework
under which I will make monetary policy decisions if confirmed
as a member of the Board of Governors.
---------------------------------------------------------------------------
\1\ ``Paul Volcker: Back to the Woods?'' Seth Lipsky, Wall Street
Journal, June 11, 2014.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM JUDY SHELTON
Q.1. Monetary Policy--In 2018, the Fed began a review of the
strategy, tools, and communications it uses to conduct monetary
policy. \1\ If confirmed, you will be responsible, along with
the other Board members, for evaluating the results of this
review and determining if changes are appropriate.
---------------------------------------------------------------------------
\1\ Board of Governors of the Federal Reserve System, ``Review of
Monetary Policy Strategy, Tools, and Communications'', June 25, 2019,
https://www.federalreserve.gov/monetarypolicy/review-of-monetary-
policy-strategy-tools-and-communications.htm.
---------------------------------------------------------------------------
Describe the implications of the apparent decline in the
neutral rate of interest for future recessions and economic
downturns.
A.1. First, deciding what constitutes a neutral rate is ``more
of an art than a science,'' as Robert Kaplan, president of the
Federal Reserve Bank of Dallas, noted in an October 2018 essay.
If the neutral rate has indeed declined, then the parameter for
measuring whether monetary policy is accommodative, neutral, or
restrictive, must likewise be adjusted downward.
Q.2. Do you believe the Fed's current monetary policy tools
will be sufficient to alleviate an economic downturn?
A.2. The Fed's traditional monetary policy tools are open
market operations, adjusting the discount rate and/or adjusting
the reserve requirement. Currently, it primarily utilizes its
authority to provide an administered rate in paying interest on
excess reserves (IOER) to move the basic interest rate in
pursuit of meeting its statutory mandate. Additional tools in
recent years include quantitative easing (QE), i.e., massive
purchases of financial assets, as well as providing forward
guidance regarding the future path of interest rates. There are
limits on how stimulative these measures might prove given that
we are already near the lower bound on interest rates and the
Fed's balance sheet is heading back toward historically high
levels after having stalled to decline in accordance with the
Fed's desire to ``normalize'' its holdings.
Q.3. What role do you believe fiscal policy will need to play
in the next downturn?
A.3. To the extent fiscal policy supports productive economic
growth, most likely by encouraging business capital investment,
it can prove helpful.
Q.4. In response to prior economic downturns, policymakers have
used a number of different fiscal policy tools as part of
stimulus packages including tax cuts, investments
infrastructure and emerging technologies and transfers to State
governments. Which fiscal policy tools do you believe would be
most effective?
A.4. Potentially, all those measures could be effective.
Q.5. Under what circumstances would you support additional
spending in response to a recession even if it adds to the
deficit?
A.5. Expenditures for infrastructure would be most promising in
terms of justifying additional Government spending in response
to a recession.
Q.6. President Trump has repeatedly advocated for negative
interest rates, arguing that they would boost economic growth.
\2\ Do you agree? Describe the implications of negative
interest rates.
---------------------------------------------------------------------------
\2\ NBC News, ``Trump Keeps Pushing `Negative' Interest Rates.
What Would That Mean for Your Wallet?'' Ben Popken, September 23, 2019,
https://www.nbcnews.com/business/consumer/trump-keeps-pushing-negative-
interest-rates-what-would-mean-your-n1056546.
A.6. My view on negative rates is that they are an anomaly, a
deviation from normal financial investment patterns that
compensate people for putting their money at risk over time. I
believe they have been largely engineered by the monetary
policies of central banks--primarily the European Central
Bank--and are proving relatively ineffective in stimulating
productive economic growth. It is understandable that any
Nation with substantial amounts of public debt outstanding
would welcome the opportunity to be paid for borrowing. Given
our own Nation's economic performance relative to other major
Nations, one would think the United States should have access
to the least-cost borrowing options in global financial
markets. But our Federal Reserve has indicated a general
reluctance to go below the zero boundary on interest rates, and
---------------------------------------------------------------------------
my own view concurs with that disinclination.
Q.7. Former Fed Chair Bernanke has argued that the decline in
the rate may be partly due to structural factors such as
demographic and technological change. \3\ Do you agree?
---------------------------------------------------------------------------
\3\ The Brookings Institution, ``The New Tools of Monetary
Policy'', Ben Bernanke, January 4, 2020, https://www.brookings.edu/
blog/ben-bernanke/2020/01/04/the-new-tools-of-monetary-policy/.
A.7. I lean more toward Robert Kaplan's perspective (please see
citation in my response to Question 1) regarding the
``inherently imprecise and uncertain nature of estimating what
---------------------------------------------------------------------------
constitutes `neutral'.''
Q.8. If so, should the Fed proactively thinking about the
trends in these structural factors and how they could impact
the effectiveness of monetary policy in the future?
A.8. I would avoid prejudging what future actions affecting the
stance of monetary policy should be predicated on an assumed
metric that poses such analytical challenges to being
accurately estimated.
Q.9. In response to developments in overnight lending markets
in September 2019, the Fed began conducting repo operations to
``stabilize money markets and provide reserves to keep the
Federal funds rate within its target range.'' \4\
---------------------------------------------------------------------------
\4\ Board of Governors of the Federal Reserve System, ``Monetary
Policy Report'', February 7, 2020, https://www.federalreserve.gov/
monetarypolicy/files/20200207_mprfullreport.pdf.
---------------------------------------------------------------------------
Some have pointed to the repo market concentration, with
the largest banks being almost exclusively responsible for
engaging in transactions with the Fed and lending that money
out. \5\ Can you describe the implications of the concentration
levels of the current repo market structure and how the
concentration of participants may have impacted the Fed's
recent interventions?
---------------------------------------------------------------------------
\5\ Wall Street Journal, ``Big Banks Loom Over Fed Repo Efforts'',
Daniel Kruger, September 26, 2019, https://www.wsj.com/articles/big-
banks-loom-over-fed-repo-efforts-11569490202.
A.9. Total reserves held in depository accounts at the Fed are
predominantly held by the very largest banks, with the five
largest banks holding more than 90 percent of total reserves.
\6\ This impacts the Fed's ability to recirculate through the
financial system the money it lends into the repo market.
---------------------------------------------------------------------------
\6\ Wall Street Journal, ``Big Banks Loom Over Fed Repo Efforts'',
Daniel Kruger, September 26, 2019.
Q.10. If the Fed were to adopt a standing repo facility, as it
has been considering even before the market disruption in
September, \7\ what factors should the Fed use to determine
which counterparties would be eligible?
---------------------------------------------------------------------------
\7\ Board of Governors of the Federal Reserve System, ``Minutes of
the Federal Open Market Committee'', June 18-19, 2019, https://
www.federalreserve.gov/monetarypolicy/fomcminutes20190619.htm.
A.10. The Fed has relied on primary dealers, comprised of 24
banks or securities dealers, to act as intermediaries for the
Fed with other investors and financial firms. While I do not
have access to the information needed to answer with greater
precision, it seems to me that concentration in the repo market
needs to be addressed by considering how to distribute more
widely through the financial system the money made available
---------------------------------------------------------------------------
through the Fed's participation.
Q.11. Financial Stability--In previous questions regarding the
Fed's response to climate change, Chairman Powell claimed that
the Fed uses ``its authorities and tools to prepare financial
institutions for severe weather events.'' \8\ At the same time,
science has clearly demonstrated that extreme weather events
are becoming increasingly common as a result of climate change.
\9\
---------------------------------------------------------------------------
\8\ Letter from Federal Reserve Chairman Jerome H. Powell to
Senator Elizabeth Warren, April 18, 2019.
\9\ National Oceanic and Atmospheric Administration, ``Report:
Climate Change Is Making Specific Weather Events More Extreme'',
December 9, 2019, https://www.noaa.gov/news/report-climate-change-is-
making-specific-weather-events-more-extreme.
---------------------------------------------------------------------------
To the extent that these weather events continue becoming
more common and having a greater impact on the business cycle
itself, do you believe that it would be appropriate for the Fed
to more explicitly consider the risks associated with climate
change in its decision making?
A.11. Only with regard to preparing for potential economic
risks linked to weather events, such as fires or flooding, as
the Fed already does as part of its planning for the
consequences of natural disasters.
Q.12. Do you believe it would be appropriate for the Fed to
hire economists that specialize in climate economics to address
these changes? Should the Fed hire natural scientists to inform
economic models?
A.12. The relevant data is widely available and could readily
be accessed and incorporated into economic and financial
projections formulated by its existing research staff.
Q.13. Do you support the Fed officially joining the Network for
Greening the Financial System (NGFS)? If not, why not?
A.13. While a number of other central banks--led by the Bank of
France, Bank of England, and People's Bank of China--are
calling for measures to spur green finance and better risk
assessments of climate change effects, I do not think the U.S.
Federal Reserve should be involved in this initiative unless
Congress specifically directs our central bank to do so and
amends its statutory mandate accordingly.
Q.14. The most recent report from Shared National Credit (SNC)
Review program conducted jointly by the Fed, Federal Deposit
Insurance Corporation (FDIC), and Office of the Comptroller of
the Currency (OCC), stated that ``credit risk associated with
leveraged lending remains elevated'' and ``lenders have fewer
protections and risks have increased in leveraged loan terms
through the current long period of economic expansion since the
last recession.'' \10\
---------------------------------------------------------------------------
\10\ Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, Office of the Comptroller of the
Currency, Board of Governors of the Federal Reserve System Federal
Deposit Insurance Corporation Office of the Comptroller of the
Currency, ``Shared National Credit Program: 1st and 3rd Quarter 2019
Reviews'', https://www.federalreserve.gov/newsevents/pressreleases/
files/bcreg20200131a1.pdf.
---------------------------------------------------------------------------
Please explain how you believe the Fed should evaluate and
monitor the credit-risk management practices of a financial
institution to ensure that these procedures, some of which are
untested, will be sufficient during an economic downturn.
A.14. The Fed should continue to evaluate and monitor the
credit-risk management practices of all financial institutions
over which it has regulatory oversight to ensure that
procedures will be sufficient during an economic downturn.
Q.15. Do you believe that the Interagency Guidance on Leveraged
Lending \11\ issued in 2013 is sufficient to address the risks
associated with leveraged lending, particularly with respect to
the growth of nonbank lenders?
---------------------------------------------------------------------------
\11\ Federal Reserve Board of Governors, Federal Deposit Insurance
Corporation, Office of the Comptroller of the Currency, ``Interagency
Guidance on Leveraged Lending'', March 21, 2013, https://
www.federalreserve.gov/supervisionreg/srletters/sr1303a1.pdf.
---------------------------------------------------------------------------
Do you believe these loans made by nonbanks currently pose
a risk to financial stability? If not, please explain why and
under what circumstances the Fed should begin to judge them a
threat to financial stability.
Many of these nonbank lenders fall into a regulatory gap.
What tools does the Federal Government have to mitigate the
risks from the growth of leveraged lending and the
deterioration of the terms of those loans?
A.15. I would need to look more closely at the source you
referenced to offer an informed opinion, noting that I agree
with the document's assertion: ``In particular, financial
institutions should ensure they do not unnecessarily heighten
risks by originating poorly underwritten loans.''
Q.16. Private equity firms often finance acquisitions through
highly leveraged loans. According to the private equity
industry, firms acquired in these acquisitions now employ 8.8
million workers. In an economic downturn, what would you expect
to happen to employment in these firms?
A.16. In an economic downturn, employment in general is likely
to decrease--perhaps more so in industries directly tied to the
performance of financial investments.
Q.17. Regulation--The OCC and FDIC made the decision to heed to
the concerns of the Fed with respect to their plan to modify
the Community Reinvestment Act (CRA) and issued a new proposed
rule on the law jointly enforced by the three agencies without
the Fed last December. \12\ On January 8, 2020, Governor
Brainard released her own alternative plan to modernize the
CRA. \13\
---------------------------------------------------------------------------
\12\ Comptroller of the Currency and Federal Deposit Insurance
Corporation, Federal Register Notice, ``Community Reinvestment Act
Regulations'', January 09, 2020, https://www.federalregister.gov/
documents/2020/01/09/2019-27940/community-reinvestment-act-regulations.
\13\ Board of Governors of the Federal Reserve System,
``Strengthening the Community Reinvestment Act by Staying True to Its
Core Purpose'', Governor Lael Brainard, January 08, 2020, https://
www.federalreserve.gov/newsevents/speech/brainard20200108a.htm.
---------------------------------------------------------------------------
Would you have voted to join the OCC and FDIC proposal? If
not, what aspects to you disagree with? If so, please explain
why you believe it is right approach.
A.17. I am only generally familiar with the proposal put
forward by the OCC and FDIC; given that the process is ongoing
and I do not have access to the analytics involving nonpublic
data, nor have I reviewed the myriad public comments relating
to this effort, I cannot provide an informed answer.
Q.18. Much of the criticism of the other agencies' plan focuses
on the lack of analysis demonstrating the economic impact of
the changes. However, according to Governor Brainard, the Fed
has conducted some analysis with relevant data and would like
to publish that data so the public can provide feedback.
Do you believe it is important for any new metrics included
in a new CRA plan are grounded in data?
A.18. Please see my answer above.
Q.19. Do you believe that it is important for the public to
have ample time to examine these data to provide input and
ensure that reforming this critical civil rights law is done
correctly?
A.19. I believe the process should be carried out in accordance
with predetermined timelines for making appropriate decisions.
Q.20. Do you believe there are consequences of having two
separate CRA regimes for institutions with different
regulators? If so, what are these consequences?
A.20. It seems to me, for purposes of ensuring regulatory
clarity, that a common approach among the three agencies would
be optimal.
Q.21. On January 30, 2020, the Fed finalized a rule to
determine ``when a company controls a bank or a bank controls a
company.'' \14\
---------------------------------------------------------------------------
\14\ Board of Governors of the Federal Reserve System, ``Federal
Reserve Finalizes Rule To Simplify and Increase the Transparency of the
Board's Rules for Determining Control of a Banking Organization'',
January 30, 2020, https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20200130a.htm.
---------------------------------------------------------------------------
Reporting has indicated that the rule could allow private
equity funds to control a greater portion of a bank's equity
and thereby allow private equity investors to influence the
operations of banks. \15\ Given the various risks associated
with the private equity business model and documented research
that demonstrates that private equity investments in financial
companies can increase the risk profile of those companies,
\16\ do you believe that this rule increases the level of risk
in the financial sector?
---------------------------------------------------------------------------
\15\ New York Times, ``The Fed Wants To Loosen Rules Around Big
Banks and Venture Capital'', Jeanna Smialek and Emily Flitter, January
30, 2020, https://www.nytimes.com/2020/01/30/business/economy/volcker-
rule-banks-venture-capital.html.
\16\ Harvard University, ``Private Equity Ownership, Risk-Taking,
and Performance in the Life and Annuities Industry'', Divya Kirti and
Natasha R. Sarin, April 2, 2018, https://scholar.harvard.edu/nsarin/
publications/private-equity-ownership-risk-taking-and-performance-life-
and-annuities-industry.
A.21. I believe the change is aimed at simplifying and
increasing the transparency of the Board's rules for
---------------------------------------------------------------------------
determining control of a banking organization.
Q.22. In her statement, Governor Brainard suggested that it
will be important to ``monitor the ownership structures of
banking organizations in light of this control framework and
industry trends'' and ``how the control framework interacts
with other regulations that involve ownership thresholds.''
\17\
---------------------------------------------------------------------------
\17\ Board of Governors of the Federal Reserve System, ``Statement
by Governor Lael Brainard'', January 30, 2020, https://
www.federalreserve.gov/newsevents/pressreleases/brainard-statement-
20200130a.htm.
---------------------------------------------------------------------------
Do you agree with Governor Brainard?
If so, please describe how the Fed should monitor these
ownership structures and how the Fed will determine if there is
a financial stability risk associated with a banking
organization's ownership structure?
A.22. As a nominee, I am not sufficiently familiar with the
details of this matter to take a position on the Fed's efforts
to clarify existing rules for determining if a company has
control over a banking organization under the Bank Holding
Company Act and the Home Owners' Loan Act. My understanding is
that the final rule takes effect April 1; if confirmed, I will
be interested to learn how the Fed proposes to monitor
ownership structures and what factors it will consider in
determining how the control framework interacts with other
regulations involving ownership thresholds with regard to
assessing any potential financial stability risk.
Q.23. Supervision--In Wells Fargo's Q4 2019 Earnings Call,
newly appointed CEO Charlie Scharf acknowledged the bank's many
misdeeds, claiming ``we made some terrible mistakes and have
not effectively addressed our shortcomings.'' \18\
---------------------------------------------------------------------------
\18\ Bloomberg, ``Q4 2019 Earnings Call'', Wells Fargo, January
14, 2020.
---------------------------------------------------------------------------
These comments suggest that Wells Fargo has not made
substantial progress in remedying the issues at hand. In a
written response to me in 2018, Chairman Powell stated that the
terms of the Fed's current Consent Order require that ``the
firm must make significant progress in remedying its oversight
and compliance and operational risk management deficiencies
before relief from the asset growth restriction would be
forthcoming.'' \19\ Chairman Powell has committed to me that
the Board of Governors would have a formal vote before the
Fed's asset cap on the bank could be lifted. Under what
circumstances would you vote to lift the asset cap?
---------------------------------------------------------------------------
\19\ Letter from Federal Reserve Chairman Jerome H. Powell to
Senator Elizabeth Warren, May 10, 2018, https://www.warren.senate.gov/
download/20180510-powell-response-re-wells-fargo.
A.23. Clearly, I would need to be familiar with the relevant
information, to which I currently have no access as a nominee,
to be in a decision to weigh in with an opinion as to whether
the firm had made ``significant progress in remedying its
oversight and compliance and operation risk management
---------------------------------------------------------------------------
deficiencies.''
Q.24. In a recent speech, Fed Vice Chair for Supervision Randal
Quarles suggested that Fed bank supervisors use of MRAs should
be limited, and that they should only be permitted to
institutions ``to violations of law, violations of regulation,
and material safety and soundness issues'' \20\--a severe
narrowing of Fed's authority.
---------------------------------------------------------------------------
\20\ Federal Reserve Vice Chair for Supervision Randal K. Quarles,
``Spontaneity and Order: Transparency, Accountability, and Fairness in
Bank Supervision'', January 17, 2020, https://www.federalreserve.gov/
newsevents/speech/quarles20200117a.htm.
---------------------------------------------------------------------------
Do you agree that the Fed should alter the process,
standards, and requirements under which MRAs and/or MRIAs are
issued? If so, why?
Do you believe there should be a formal notice and comment
process so that outside experts and consumer advocates can
review and comment on any proposal?
The 2013 guidance in the communication of supervisory
findings states, that standardization of the terms MRAs or
MRIAs ``facilitates the Federal Reserve's national systems of
record for information related to examination and inspection
issues'' and ``enables the Federal Reserve to access
information about supervisory issues and remediation efforts
and aids in the identification of systemic and programmatic
challenges facing banking organizations supervised by the
Federal Reserve.'' \21\ If, as proposed, certain supervisory
findings will no longer be categorized as MRAs, do you believe
this could impact the Fed's ability to access this information?
---------------------------------------------------------------------------
\21\ Federal Reserve Board of Governors, ``Supervisory
Considerations for the Communication of Supervisory Findings'', https:/
/www.federalreserve.gov/supervisionreg/srletters/sr1313a1.pdf.
---------------------------------------------------------------------------
Do you believe that it is possible for a bank examination
to uncover an issue with a financial institution that could
pose a threat to safety and soundness but does not represent a
legal violation? Please describe some examples.
The impact of any proposed changes to MRAs is largely
dependent on the definition of ``material safety and
soundness.'' How do you believe the Fed should determine this
decision?
A.24. The determination regarding the issuance of MRAs and/or
MRIAs is based on a process that involves standards and imposes
requirements based on considerations involving specific
institutions. As a nominee with no access to detailed
information concerning the process nor familiarity with how it
is conducted and applied at the supervisory level, it is not an
appropriate question for me to address herein.
Q.25. Clarifications Regarding Your Responses to My Letter--I
appreciate your response to my letter by the requested date of
February 13, 2020.
However, many of your responses require further
clarification:
In response to my question regarding your documented
opposition to the concept of deposit insurance, you claimed
that you were merely ``emphasizing the importance of prudent
capital and management standards being in place for banking
institutions as the first bulwark against potential losses.''
Do you support the current set of prudential standards and
capital requirements?
Do you believe that there are any requirements that should
be strengthened? If so, which ones? Which requirements and to
what levels?
Do you believe that there are any requirements that should
be further weakened or tailored? Which requirements and to what
levels?
Do you believe that the current overall level of capital in
the financial sector is the appropriate amount? If not, why
not?
A.25. As a nominee, I am not yet familiar with ``the current
set of prudential standards and capital requirements''
currently in place for banking institutions. It would be
imprudent for me to express support or lack of support for such
standards and requirements.
Q.26. In your response, you also claimed that ``multiple
factors caused the 2008 financial crisis, including errors in
monetary and regulatory policies, which were further
exacerbated by lack of transparency in assessing subprime
lending and specific risk characteristics of mortgage-backed
securities products.''
What were the errors in regulatory policy that you believe
contributed the 2008 financial crisis?
A.26. The fact that the Federal Reserve did not predict the
seizing up of credit markets that precipitated the 2008 crisis
suggests to me that its regulatory policy for adjudging
systemic financial risk was inadequate.
Q.27. What were the errors in monetary policy that you believe
contributed the 2008 financial crisis?
A.27. Perpetual inflation lures people into thinking that the
value of the real estate they purchase can only go up.
Q.28. Please clarify what you meant by ``lack of
transparency.'' Do you believe that there is currently a lack
of transparency in some of the structures used in the financial
sector today, such as collateralized loan obligations?
A.28. I support increased transparency on financial instruments
in general so that all parties involved are fully aware of the
risk-reward parameters of the underlying security as well as
its derivative instruments.
Q.29. You also stated that ``the most concerning aspect
regarding the 2008 financial crisis is the Federal Reserve's
lack of prescience in recognizing what was happening in credit
markets, along with its failure to foresee the implications for
global financial stability.''
What do you believe will cause the next recession? Do you
believe that the levels of consumer debt are cause for concern?
A.29. U.S. household debt came in high in the fourth quarter of
last year, as outstanding balances on mortgages, student loans,
auto loans and credit cards have climbed. However, debt
payments as a percentage of disposable income are generally
flat due to low interest rates--which suggests that most
Americans are living within their means.
Q.30. You also talked about the danger of groupthink on the Fed
Board. What perspectives do you believe are missing from the
Board? What decisions would you have made differently?
A.30. I would pay more attention to market-determined rates of
interest outside of the direct influence of the Federal
Reserve's policies--in terms of regulation as well as through
monetary policy decisions executed by means of administered
rates, i.e., by paying interest on excess reserves.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ
FROM JUDY SHELTON
Q.1. In a Wall Street Journal opinion piece in 2009, you blamed
the Federal Reserve for the financial crisis, blaming it for
keeping interest rates too low for too long and increasing the
money supply by too much. You also questioned, ``why do we need
a central bank?''
Do you think we need a central bank?
A.1. So long as Congress chooses to exercise its power to
regulate the value of U.S. money through an independent agency
in accordance with a statutory mandate to promote maximum
employment, price stability, and moderate long-term interest
rates--and that agency, the Federal Reserve, chooses to pursue
these goals through monetary policy decisions aimed at
contracting or expanding monetary aggregates by directing
influencing interest rates--that agency is clearly authorized
to exist in compliance with the will of Congress.
Q.2. Do you think the Federal Reserve has kept interest rates
too low since 2009?
A.2. The extreme monetary policies conducted by the Federal
Reserve in the wake of the 2008 financial crisis, such as
imposing near-zero interest rates and engaging in massive
purchases of financial assets, impose great costs on certain
segments of the population. Savers have been punished by the
low rates, through no fault of their own, affecting plans for
paying tuition or planning for retirement. The Government's
intervention in credit markets through its agency, the Federal
Reserve, has caused price distortions that skew returns to
those most able to participate in financial markets and fueled
speculation in markets for derivatives and other sophisticated
instruments. Were the costs of such actions by the Fed
justified by economic growth that benefited Americans in
general? I would point out that GDP growth from 2009 through
2016 averaged 1.6 percent--indeed, the precise growth number
for 2016 was 1.6 percent. During those same years, unemployment
averaged 7.2 percent. Congress implemented major structural
changes in subsequent years that have changed assessments of
``secular stagnation'' into substantially positive outlooks for
U.S. economic performance. The rate of GDP growth from 2017
through 2019 has averaged 2.5 percent, more than 50 percent
higher than the prior period. The rate of unemployment is
currently half the average rate during the earlier period.
Something clearly changed, precipitating higher business
confidence and consumer confidence--and we are seeing increased
productivity, increased wage gains, and decreasing income
inequality as a result. All of which suggests that having the
right monetary policy in place is a necessary but not
sufficient condition for promoting productive economic growth.
Q.3. Do you still think the Federal Reserve is to blame for the
financial crisis?
A.3. I believe multiple factors caused the 2008 financial
crisis, including errors in monetary and regulatory policies,
which were further exacerbated by lack of transparency in
assessing subprime lending and specific risk characteristics of
mortgage-backed securities products. I do not think it is fair
to typecast bankers in general as villains; I do not think it
is appropriate to infantilize borrowers in general as victims.
In my view, the most concerning aspect regarding the 2008
financial crisis is the Federal Reserve's lack of prescience in
recognizing what was happening in credit markets, along with
its failure to foresee the implications for global financial
stability. No other Government institution had more influence
over the creation of money and credit in the lead up to the
devastating 2008 meltdown than our own Nation's central bank.
Q.4. At the hearing, you backed away from your writings
advocating for the gold standard and a return to the Bretton
Woods system. You are now claiming that you were not advocating
for a return to the gold standard (despite clear statements to
the contrary), \1\ but instead that you simply support global
monetary stability. Even taking your new stance at face value,
it is hard to understand what you are recommending other than
returning to an asset-backed currency rather than fiat
currency.
---------------------------------------------------------------------------
\1\ Judy Shelton, ``Global Monetary Turmoil Is Hurting Economic
Growth'', The Hill, February 25, 2016, (``[I]t Would Certainly Make
Sense To Consider Using Gold as a Neutral Reference Point.'')
(available at: https://thehill.com/blogs/pundits-blog/finance/270690-
global-monetary-turmoil-is-hurting-economic-growth).
---------------------------------------------------------------------------
Please explain your current position on the gold standard
and whether you think it would be sound policy for the United
States to return to a system similar to the Bretton Woods
system.
If you believe it is sound policy, please explain what
asset or assets should serve as the reference?
A.4. My writings have included references to prior
international monetary arrangements going back through U.S.
history because I believe we can gain valuable insights by
comparing economic growth performance under one set of monetary
rules versus another. The United States was on the classical
international gold standard from 1870 to 1913 and served as the
anchor for the Bretton Woods gold exchange standard from 1944
to 1971. Economic growth and free trade flourished under the
gold standard, which established a level international monetary
playing field while preserving the national sovereignty of
participating Nations; proponents of the classical
international gold standard include former Federal Reserve
Chairman Alan Greenspan. The Bretton Woods system restored
exchange-rate stability among allied Nations at the close of
World War II as an alternative to returning to the beggar-thy-
neighbor era of the 1930s when Nations depreciated their
currencies to gain an unfair trade advantage, a syndrome that
led to economic disaster. Proponents of a new Bretton Woods-
type arrangement (with or without any reference to gold)
include the late Paul Volcker, also a former Fed chairman. \2\
Congress created the Federal Reserve as an independent agency
and through the Federal Reserve Reform Act of 1977 charged it
with the mandate to promote maximum employment, stable prices,
and moderate long-term interest rates. That is the framework
under which I will make monetary policy decisions if confirmed
as a member of the Board of Governors.
---------------------------------------------------------------------------
\2\ ``Paul Volcker: Back to the Woods?'' Seth Lipsky, Wall Street
Journal, June 11, 2014.
Q.5. If you no longer think it is sound policy, what are you
---------------------------------------------------------------------------
now recommending for U.S. currency policy?
A.5. It would not be my role or responsibility as a member of
the Board of Governors of the Federal Reserve System to
determine U.S. currency policy. As I specifically explained in
my opening statement at the nomination hearing before the
Senate Banking Committee on February 13, 2020, the power to
regulate the value of U.S. money is granted to Congress by our
Constitution (Article I, Section 8). Congress created the
Federal Reserve as an independent agency with the mandate to
promote maximum employment, price stability, and moderate long-
term interest rates.
Q.6. In a recent speech at the San Francisco Fed's conference
on the economics of climate change, Fed Governor Lael Brainard
stated: ``Climate risks are projected to have profound effects
on the U.S. economy and financial system. To fulfill our core
responsibilities, it will be important for the Federal Reserve
to study the implications of climate change for the economy and
the financial system and to adapt our work accordingly.''
Do you agree with Governor Brainard that climate-related
risks fall squarely within the Fed's mandate?
A.6. The Fed's mandate from Congress is to promote maximum
employment, stable prices, and moderate long-term interest
rates. To the extent climate change exerts negative effects on
the U.S. economy and financial system that impact the Fed's
ability to achieve its statutory mandate--such as causing
higher unemployment or threatening price stability--it becomes
an appropriate consideration for our Nation's central bank in
formulating monetary policy. But I am wary of the Fed
overstepping its responsibilities; while climate change is
clearly an important policy matter for many Americans, I
believe it is best addressed by citizens and their elected
representatives. If Congress wishes to amend its directive to
the Federal Reserve to include specific responsibilities
related to climate change that will of course become the new
statutory mandate.
Q.7. Fed Chair Jay Powell recently stated that the Fed would
likely join the Network for Greening the Financial System
(NGFS), a group of over 50 foreign central banks and financial
regulators committed to analyzing and mitigating the financial
stability risks of climate change.
As a Fed Governor, would you support joining the NGFS?
A.7. While a number of other central banks--led by the Bank of
France, Bank of England, and People's Bank of China--are
calling for measures to spur green finance and better risk
assessments of climate change effects, I do not think the U.S.
Federal Reserve should be involved in this initiative unless
Congress specifically directs our central bank to do so and
amends its statutory mandate accordingly.
Q.8. Are you willing to deploy the Fed's research, supervisory,
and regulatory tools to mitigate the risks that climate change
poses to the financial system?
A.8. As Federal Reserve Chair Jerome H. Powell stated in a
letter to Senator Elizabeth Warren dated April 18, 2019, the
Fed uses ``its authorities and tools to prepare financial
institutions for severe weather events.'' I would therefore
note that the Fed does prepare for potential economic risks
linked to weather events, such as fires or flooding, as part of
its planning for the financial consequences of natural
disasters.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM JUDY SHELTON
Q.1. I understand you wrote critiques of deposit insurance
years ago. When have you published articles or given speeches
supporting the deposit insurance fund? Please note your
published work supporting the deposit insurance fund?
A.1. I do not support eliminating deposit insurance. In a 1993
article published in the Cato Journal, as well as in my book
Money Meltdown, published in 1994, I commented on deposit
insurance in the context of explaining the concept of ``moral
hazard'' and wrote the following: ``Banks must be responsible
for upholding the value of the monetary obligations they issue
on the basis of held reserves or viable, well-managed loan
portfolios. The existence of Federal deposit insurance schemes
that serve to insulate bank management from the discipline
required to properly manage deposited resources against
investment assets undermines the integrity of the banking
industry in the United States by steering it in the direction
of excessively risky loan portfolios (as taxpayers, not the
equity holders of the bank, bear a substantial part of the cost
of fiduciary mismanagement).'' I fully understand that banks
pay fees for deposit insurance provided by the Federal Deposit
Insurance Corporation, an independent Government agency
established in 1933 to maintain public confidence and stability
in the U.S. financial system; this is an essential mission, one
I strongly support. I was simply emphasizing the importance of
prudent capital and management standards being in place for
banking institutions as the first bulwark against potential
losses, rather than relying on Government-provided deposit
insurance. Please note my clarifying remarks regarding this
matter in the transcript from the nomination hearing before the
Senate Banking Committee on February 13, 2020.
Q.2. You have previously suggested a single North American
currency, the ``Amero.''
Do you still support a single North American currency?
What do you think the economic impact of a single North
American currency would be?
What do you think the impact of a single global currency
would be?
A.2. I testified on April 22, 1999, as an expert witness before
the Senate Banking Committee regarding the ``Use of U.S. Dollar
as Official Currency in Emerging-Market Countries'' to explain
that some countries may have interest in ``dollarizing'' to
avoid the consequences of exchange-rate volatility; other
witnesses at that hearing included former Federal Reserve
chairman Alan Greenspan and former Treasury Secretary Lawrence
Summers. Clearly, the dominance of the dollar as a global
reserve currency means other countries would be aligning their
own currencies with the dollar--not vice versa. Any potential
benefits of trade partner countries deciding to do so would
likely include more stable financial and trade relations with
the United States; from the perspective of the United States,
ensuring that the currencies of trade partners cannot
depreciate against the dollar would be a way to prevent
competitive depreciation as an unfair trade tactic.
Q.3. Do you believe the U.S. dollar should continue to be the
international reserve currency?
A.3. Yes.
Q.4. Do you trust research put out by the Federal Reserve
System?
A.4. The Federal Reserve System is a highly reputable source
for supplying research information. I approach all data with a
strong sense of wanting to test its veracity to ensure that
recommendations based on that data are valid.
Q.5. During your hearing, there were multiple discussions on
the independence of the Federal Reserve from political
influence.
Do you think the Federal Reserve should host events at
properties owned or affiliated with members of the
Administration, the Vice President, or the President?
A.5. I believe you are asking this question in the context of a
commentary published in the Financial Times in September 2016
wherein I was pointing out the impact of currency movements on
trade and the role of central banks. The reference stated: ``No
one anticipates that a Bretton Woods-style conference will soon
take place at Mar-a-Lago, the exclusive Trump resort in
Florida.'' Since the Bretton Woods system was hammered out in
1944 at a resort hotel in Bretton Woods, New Hampshire, my
reference to Mar-a-Lago was meant as a metaphor for a similar
effort, even as I acknowledged that such an initiative was
unlikely to be undertaken in the near future.
Q.6. Have you had conversations with anyone in the White House
about serving as Chair of the Federal Reserve?
A.6. No.
Q.7. As the nominee representing the San Francisco District,
please identify the priorities for the western region. If
confirmed, what are your goals to serve the western region?
A.7. My priorities for the western region will align with the
statutory mandate given by Congress to the Federal Reserve with
respect to promoting maximum employment, stable prices, and
moderate long-term interest rates. In formulating monetary
policy, it benefits both the western region and the entire
Nation when interest rate decisions are consistent with
endeavoring to achieve those economic objectives. In terms of
geographic representation, it is the 12 Federal Reserve Bank
presidents who are the operating arms of the Federal Reserve
System within their districts; pursuant to the Federal Reserve
Act, each of the 12 Reserve Banks is separately incorporated
and has a nine-member localized board of directors. Members of
the Board of Governors are nominated by the President of the
United Sates and confirmed in their positions by the U.S.
Senate; they are meant to ensure the democratic legitimacy of
the Federal Reserve in the sense that they represent the
Nation's financial, agricultural, industrial, and commercial
interests as a whole.
Q.8. Community Reinvestment Act--Do you support a full scope
review for CRA exams?
Do you think geographical assessment areas should define
CRA accountability both where the majority of branch lending
and the majority of nonbranch lending occurs?
If a lending exam detects a violation after a bank has been
graded for its CRA exam, do you think the bank should receive a
retroactive downgrade?
CRA regulations establish different CRA exams for banks
with different asset levels. Small banks, those with less than
$307 million in assets, have the most streamlined exam that
consists of only a lending test. Intermediate small banks
(ISB), those with assets of $307 million to $1.226 billion,
have exams that consist of a lending test and a community
development (CD) test. The CD test assesses the level of CD
lending and investing for affordable housing, economic
development, and community facilities. Large banks, those with
assets above $1.2 billion, have the most complex exams which
consist of a lending test, an investment test, and a service
test. Please identify where, if at all, you feel CRA guidelines
for small banks are unclear.
A.8. As a nominee, I am not sufficiently familiar with the
details to take a position. I have not been involved in
deliberations among the Office of the Comptroller of the
Currency, the Federal Deposit Insurance Corporation, and the
Federal Reserve regarding the Community Reinvestment Act; my
understanding is that public comments are being received, which
I have not reviewed. I do strongly support the fundamental
goals of the CRA, which was enacted in 1977, while also
acknowledging that its parameters need to be updated to reflect
changes in the way banks operate and provide services today--
particularly in providing access to credit for lower-income
communities.
Q.9. Many Democratic, Republican and Independent current and
former regulatory officials raise concerns about the bank
deregulation bill range from former Fed Chair Paul Volcker,
former Fed governor and Deputy Treasury Secretary Sarah Bloom
Raskin, former FDIC Chair Sheila Bair, former Counselor to the
Treasury Secretary Antonio Weiss, and former Deputy Governor of
the Bank of England Paul Tucker. These former banking
regulators either state that a $250 billion bank threshold is
too high to protect financial stability or that we should not
weaken the leverage rules for the largest banks, or both.
Do you share the concerns about heightened risk raised by
your predecessors? Please elaborate on your answer.
A.9. I think it is important that I have a thorough
understanding of the details of any such proposals regarding
capital standards, as well as access to the relevant analytical
information, so that I can weigh in knowledgeably on
discussions regarding this important topic. I can assure you
that I would want to preserve the substantial gains in safety
and soundness and improved resiliency of the banking sector as
part of any regulatory reform effort.
Q.10. What more can be done to shrink the gap between African
American and white unemployment? In addition to increasing
employment rates for African Americans, what can the Fed do to
increase wages and wealth for African Americans and Latinos?
A.10. By fulfilling its mandate to promote maximum employment
and stable prices, the Federal Reserve helps to establish
conditions that benefit those seeking employment. By
formulating monetary policy conducive to productive economic
growth, and by encouraging business capital investment through
low interest rates, the Fed facilitates increased productivity;
this tends to lead to higher wages based on increased economic
output, which in turn helps to reduce income inequality across
society as a whole.
Q.11. Do you support proposals to tax currency kept outside of
circulation?
If this policy were implemented, what impact would it have
on savers and low income depositors?
A.11. I am not familiar with any such proposal--and cannot
imagine any justification for taxing Federal Reserve Notes in
the private possession of holders.
Q.12. Some current Federal Reserve leaders support reducing
banks' capital requirements.
This concerns me as capital requirements have been a key
tool in restoring the safety of the financial system since the
crisis. Ensuring modest leverage ratios prevents banks from
lending out more than they can afford to, and especially keeps
them away from riskier assets like the ones that fueled the
crisis.
Do you support any changes to the current capital
requirements for financial institutions? Please elaborate on
your answer.
A.12. In general, I believe that regulations should be tailored
to the specific characteristics of individual financial
institutions based on asset size, complexity, business model,
and financial risk.
Q.13. What is your understanding of the historical evidence
surrounding the relationship between monetary policy and asset
bubbles?
A.13. It is not appropriate for Federal Reserve officials to
comment on the price of assets that are determined through
markets. The Fed's responsibility is to promote price stability
by formulating monetary policy to properly calibrate the money
supply to the money and credit needs of the economy.
Q.14. Besides monetary policy, what other tools are available
to temper asset bubbles?
A.14. Citing my answer above, it is not appropriate for Fed
officials to ``jawbone'' down the market-determined prices of
assets.
Q.15. In the years since the financial meltdown, the Federal
Reserve has played a key role in putting our economy back on
stable footing and setting the conditions for more robust
growth. Still, there have been bills introduced that would
eliminate the Fed's full employment mandate on the basis that,
according to the bill's findings ``at best, the Federal Reserve
may temporarily increase the level of employment through
monetary policy.''
Can you elaborate on how the Fed influences employment in
the short run, and discuss whether failure to use monetary
policy effectively in the face of severe downturns could do
permanent damage to the level of unemployment in the economy?
A.15. According to the Federal Reserve's own assessment, as
acknowledged in the FAQs on its own website: ``The maximum
level of employment is largely determined by nonmonetary
factors that affect the structure and dynamics of the job
market.'' But regarding using monetary policy to influence
employment, the Fed's ability to lower interest rates makes it
cheaper for firms to finance purchases of physical assets for
purposes of expanding output capabilities--property, plant, and
equipment--which, in turn, spurs hiring and boosts production.
Q.16. Critics of quantitative easing have argued that it is
incompatible with the Fed's price stability mandate; however in
discussing quantitative easing the Fed has consistently noted
that the program is designed to promote a stronger pace of
economic growth and to ensure that inflation, over time, is at
levels consistent with the Fed's mandate.
Please comment on whether the Fed's policies in recent
years have actually supported the Fed's price stability
mandate.
A.16. The inflation rate is well within the 2 percent target
established by the Federal Reserve in January 2012.
Q.17. What does the latest research tell us about the
effectiveness of the Fed's large-scale asset purchases?
A.17. Successive rounds of quantitative easing by the Federal
Reserve between 2008 and 2014 provided increasingly less
stimulus for the economy.
Q.18. Is there any evidence that the Fed's asset-purchase
program, which sought to support the economy by lowering long-
term interest rates, has been a drag on U.S. productivity as
some Republicans have suggested? Is there any evidence that the
program has created a ``false economy'' as Trump has asserted?
A.18. The extreme monetary policies conducted by the Federal
Reserve in the wake of the 2008 financial crisis, such as
imposing near-zero interest rates and engaging in massive
purchases of financial assets, impose great costs on certain
segments of the population. Savers have been punished by the
low rates, through no fault of their own, affecting plans for
paying tuition or planning for retirement. The Government's
intervention in credit markets through its agency, the Federal
Reserve, has caused price distortions that skew returns to
those most able to participate in financial markets and fueled
speculation in markets for derivatives and other sophisticated
instruments. Were the costs of such actions by the Fed
justified by economic growth that benefited Americans in
general? I would point out that GDP growth from 2009 through
2016 averaged 1.6 percent--indeed, the precise growth number
for 2016 was 1.6 percent. During those same years, unemployment
averaged 7.2 percent. Congress implemented major structural
changes in subsequent years that have changed assessments of
``secular stagnation'' into substantially positive outlooks for
U.S. economic performance. The rate of GDP growth from 2017
through 2019 has averaged 2.5 percent, more than 50 percent
higher than the prior period. The rate of unemployment is
currently half the average rate during the earlier period.
Something clearly changed, precipitating higher business
confidence and consumer confidence--and we are seeing increased
productivity, increased wage gains, and decreasing income
inequality as a result. Labor productivity is a measure of
economic performance comparing output (amount of goods and
services produced) with number of hours worked to produce those
goods and services. The productivity of American workers
increased in 2019 at the fastest annual pace in 9 years,
registering a 1.4 percent increase in the fourth quarter. Firms
increased the amount of goods and services produced by 2.5
percent in the final three months of 2019; the number of hours
workers spent on the job rose by 1.1 percent. As workers become
more productive, wages tend to increase because higher
productivity boosts profits. Also, with greater output per hour
worked, inflation tends to stay in check. All of which suggests
that having the right monetary policy in place is a necessary
but not sufficient condition for promoting productive economic
growth.
Q.19. How would the economy have likely fared in terms of
unemployment, GDP, wage growth, etc. had the Fed chosen not to
pursue its asset purchase program?
A.19. As stated above, it is not sufficient to lower interest
rates to stimulate economic growth in the absence of structural
reforms that facilitate business capital investment and provide
regulatory relief where appropriate--economic policy
initiatives that have a positive impact on business confidence
and consumer demand.
Q.20. Is there any evidence that the Fed's stimulus program has
paved the way for the next global meltdown, as Trump claimed?
A.20. Whether or when there will be a future global financial
crisis is unknowable; whether its causes can be traced to the
Fed's stimulus program is also unknowable. As I previously
stated (Question 13): It is not appropriate for Federal Reserve
officials to comment on the price of assets that are determined
through markets. The Fed's responsibility is to promote price
stability by formulating monetary policy to properly calibrate
the money supply to the money and credit needs of the economy.
Q.21. How does the Fed's balance sheet as a percentage of GDP
compare with the balance sheets of the next largest economies?
Do these countries have a dual mandate similar to the Fed?
A.21. The balance sheet of the European Central Bank is roughly
4.7 trillion euros, which is around 41 percent of the eurozone
GDP. The balance sheet of the Fed is roughly $4.2 trillion,
which is around 20 percent of GDP for the United States. The
mandate for the ECB is to maintain price stability within the
eurozone.
Q.22. It is my understanding that major central banks around
the world maintain and have drawn on their authority to
purchase a wide range of assets including corporate bonds,
commercial paper, real estate investment trusts, and equities
among other assets.
Given the broad authorities available to other central
banks, rather than shrink the Fed's tool kit, do you think
Congress should consider expanding it?
A.22. No.
Q.23. For example, with an expanded authority, could the Fed
play a useful role in supporting municipal finance, student
loan financing or other types of consumer credit during periods
where each of these sectors experienced heightened distress?
A.23. I believe it is inappropriate for the Federal Reserve to
allocate credit flows for the purposes you cite above.
Q.24. Would you support or oppose such expansion of the Fed's
authority?
A.24. I would oppose such expansion of the Fed's authority.
Q.25. As the Fed begins to shrink its balance sheet, what are
some of the negative impacts that Senate Banking Committee
Members should monitor? What concerns--if any--do you have
about shrinking the balance sheet? What will you do to monitor
the process of maturing securities to avoid a negative impact
on the economy?
A.25. It does not appear that the Fed currently intends to
shrink its balance sheet, given its stated preference for an
``ample reserves'' environment.
Q.26. As you know, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Public Law 111-203) rules are tailored
so larger banks have higher standards than smaller banks. Of
the 14 ``major'' rules issued by banking regulators pursuant to
the Dodd-Frank Act, 13 either include an exemption for small
banks or are tailored to reduce the cost for small banks to
comply. Supervision and enforcement are also structured to pose
less of a burden on smaller banks than they do on larger banks,
such as by requiring less frequent bank examinations for
certain small banks.
Do you think community banks should comply with the
requirement that loans should be made to people who can repay
them? This is called the ``know before you owe'' rule.
Community banks are largely exempt from both mortgage
origination and servicing rules because they are small
creditors with less than $2 billion in assets or service fewer
than 500 loans.
Dodd-Frank limited compensation requirements for loan
originators to prevent steering to high-cost loans. Only
originators that make fewer than 10 loans in a 12-month period
are exempt. Do you support changes to the Loan Originator
Compensation Requirements (Regulation Z)?
Mortgage Servicing Rules under Regulation X and Z are
designed to protect homebuyers from high-cost loans. Servicers
with fewer than 5,000 mortgage loans are exempted from some of
these rules. What changes do you recommend to Regulations X
and/or Z?
Do you think banks that make more than 25 mortgage loans
should share the loan and borrower characteristics through the
Home Mortgage Disclosure Act database?
Banks with assets under $50 billion are not required to
comply with the liquidity coverage ratio. Do you think they
should be? Why or why not?
Banks with assets under $250 billion are not required to
comply with regulatory capital rules. Do you think they should
be? Why or why not?
Debit card interchange fees and routing requirements do not
apply to banks that have fewer than $10 billion in assets. Do
you think banks under this size should comply with interchange
fees and routing requirements?
A.26. As previously stated, I think it is important that I have
a thorough understanding of the details of any such proposals
regarding capital standards, as well as access to the relevant
analytical information, so that I can weigh in knowledgeably on
discussions regarding this important topic. I can assure you
that I would want to preserve the substantial gains in safety
and soundness and improved resiliency of the banking sector as
part of any regulatory reform effort.
Q.27. Do you have recommendations for changes to the Bank
Secrecy or Anti- Money Laundering rules? If so, please
describe?
A.27. As a nominee, I am not sufficiently familiar with the
details of potential changes to the Bank Secrecy or Anti- Money
Laundering rules to make recommendations.
Q.28. I am very concerned about climate-related financial
risks. The most recent National Climate Assessment said the
U.S. Southwest could lose $23 billion per year in regionwide
wages as a result of extreme heat. Since you joined the Federal
Reserve Board, what have you done to prepare community banks
for long-term shifts in climate patterns, like increasing
extreme heat and more severe and more frequent storms?
A.28. I have not joined the Federal Reserve Board. I am
currently a nominee to serve as a member of the Board of
Governors of the Federal Reserve System.
Q.29. Are community banks changing how they operate to consider
these threats to the ability of their customers to repay loans?
A.29. As a nominee, I do not have access to that information.
Q.30. Are there changes to insurance policies banks should
consider?
A.30. As a nominee, I am not sufficiently familiar with the
details to be able to propose changes to insurance policies
that banks should consider.
Q.31. Some have advocated that central banks use their balance
sheet to support the transition to a low-carbon economy, for
example, by buying low-carbon corporate bonds. Do you think
Congress should consider changing the law to support ``green''
quantitative easing as an option for the Fed?
A.31. By ``changing the law'', I presume you mean changing the
mandate of the Federal Reserve from its current directive to
promote maximum employment, stable prices, and moderate long-
term interest rates. This would be a significant alteration
from the 1977 Federal Reserve Reform Act and would potentially
direct the Fed to allocate credit to a particular set of
recipients; I believe Congress should be wary of taking such a
step but that decision is clearly up to Congress.
Q.32. Which other Central Banks allow green quantitative
easing? Do you believe those models could translate to the
American financial system and economy?
A.32. My understanding is that the Bank of England is carrying
out work to include climate change considerations as part of
its macroeconomic analysis and in making its financial
decisions. Benoit Coeure, a member of the Executive Board of
the European Central Bank, stated in a November 2018 speech:
``The ECB, acting within its mandate, can--and should--actively
support the transition to a low-carbon economy, in two ways:
first, by helping to define the rules of the game and, second,
by acting accordingly, without prejudice to price stability.''
Q.33. In the Fed's Supervisory Report released November, there
was a section on merger and acquisition risks. The banking law
passed last year changed the asset threshold for a small bank
holding company from $1 billion to $3 billion. It also reduced
capital requirements and other rules for banks above $50
billion. We have seen more bank mergers since the law passed.
Do you expect to see more bank mergers this year and next year
than in previous years? How much of merger activity is due to
changes from S. 2155 and other regulatory actions?
A.33. As a nominee, I was not involved in the preparation of
that report.
Q.34. What are the risks from mergers and acquisitions?
A.34. My understanding is that the Federal Reserve rigorously
reviews potential risks associated with bank merger proposals.
Risks may include lowering the availability and increasing the
cost of credit for borrowers. It is also conceivable that the
collapse of a merged banking institution might pose elevated
risks to financial stability. But some bank mergers may
increase efficiencies without harming consumers or endangering
financial stability.
Q.35. Beyond the impacts on the customer, what are the risks to
communities when banks merge? Are you concerned about a loss of
branches? Types of products? Jobs?
A.35. As a nominee, I do not have access to the necessary
analytical data to measure these potential impacts. If
confirmed as a member of the Board of Governors, I would focus
on such questions regarding customer impact and risks to
communities from bank mergers and acquisitions.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM JUDY SHELTON
Q.1. Under what circumstances should the Federal Reserve raise
interest rates?
A.1. In conducting the Nation's monetary policy, the Federal
Reserve seeks to influence money and credit conditions in the
economy in pursuit of maximum employment and stable prices. The
first goal is defined by the Federal Reserve as having been
achieved when all Americans that want to work are gainfully
employed. The second goal was defined by former Fed Chairman
Alan Greenspan in July 1996 as ``that state in which expected
changes in the general price level do not effectively alter
business and household decisions.'' Since January 2012, the
Federal Open Market Committee has judged that inflation at the
rate of 2 percent (as measured by the annual change in the
price index for personal consumption expenditures, or PCE) is
most consistent over the longer run with the Federal Reserve's
statutory mandate regarding price stability. In accordance with
that definition, the Federal Reserve should raise interest
rates if inflation were to persistently exceed 2 percent--with
the caveat that the inflation goal is now defined as a
``symmetric 2 percent objective'' as mentioned by Chair Powell
in his most recent semiannual monetary policy report to the
Congress. Employing a symmetric approach means the Federal
Reserve would tolerate inflation running modestly above or
below the 2 percent target.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM CHRISTOPHER WALLER
Q.1. Of the 72 publications you have written since your
dissertation, how many of them opined about the merits of a
return to the gold standard or a gold-based monetary standard?
A.1. None.
Q.2. During your tenure at the St. Louis Fed, how many papers,
blog posts, or conferences has your staff written or hosted
that opine on the merits of a return to the gold standard or a
gold-based monetary standard?
A.2. I am not aware of any.
Q.3. Of the 72 publications you have written, since your
dissertation, how many were subject to peer review?
A.3. 57.
Q.4. What are the merits of looking at Average Hourly Earnings
vs. the Employment Cost Index?
A.4. Average hourly earnings ignores benefits and other forms
of employee compensation. The ECI considers all forms of
compensation. Economists typically want to know what the total
compensation is since it measures the true cost of a unit of
labor.
Q.5. Do you believe the U.S. should maintain sovereignty over
its currency?
A.5. If by this question you mean to ask whether the U.S.
should have sovereignty over the U.S. dollar, then yes. If it
means all other currencies should be banned, then no--let the
market determine which currency to use. As of now, the U.S. has
no law that I am aware of that prevents the use of any other
currencies as a medium of exchange. Nevertheless, no one in the
U.S. uses other currencies--the preeminence of the U.S. dollar
is a voluntary outcome. Now, having multiple currencies is not
efficient and having them creates unneeded exchange rate risk.
We observed this in the U.S. in the early 1800s when banks
could issue their own currencies. This is also why the world
prefers to have a reserve currency, which at present is the
U.S. dollar.
Q.6. When the Senate was considering S. 2155, the bank
deregulation bill, Chair Powell said that deregulating U.S.
regional banks wouldn't mean deregulating foreign banks. But
the Fed's October rule did just that and the Fed justified
weakening the protections at foreign banks by stating that the
law requires that you treat foreign banks equivalent to
domestic banks. The rule referred to it as ``equality of
competitive opportunity.''
Do you agree with this analysis?
A.6. I think the traditional international bank regulatory
policies of national treatment and equality of competitive
opportunity are sensible. Accordingly, I generally support
regulating the U.S. operations of foreign banks in a similar
manner as U.S. bank holding companies of similar size and risk
profile. Since foreign banks generally have shrunk in size
since the financial crisis to the point where their U.S.
presences are of similar size as U.S. regional banks, I believe
regulating the U.S. operations of foreign banks in the same
manner as large U.S. regional banks makes logical sense.
Q.7. Do you think that the October rule weakened safety and
soundness or financial stability?
A.7. No, I do not.
Q.8. In July 2019 when asked about leveraged loans, Chairman
Powell stated ``The issue is that the risk isn't in the banks''
and that the leveraged loan market was ``in a good place.''
Several days ago, the Fed announced that leveraged lending
risks would be incorporated into bank stress tests.
Do you think the Chairman was correct to say that banks
were not exposed to leveraged lending risks in July?
A.8. My understanding is that large banks participate in the
leveraged lending market in a variety of important ways. Among
other roles, banks underwrite many of the loans, find buyers
for the loans to be sold or syndicated, and finance portions of
the deal in a ``pipeline'' as terms are being settled. That
said, public information suggests that the great majority of
the credit risk associated with leveraged loans are outside the
banking system.
I believe it is important that the Board meet its
obligation to ensure that the banks it supervises are operated
in a safe and sound manner.
Q.9. If risks were not ``in the banks'' in July, what has
changed in leveraged loan markets since then that require
incorporation of this risk into bank stress tests?
A.9. I did not participate in the Board's deliberations about
the scenarios for CCAR 2020. However, my understanding is that
the scenarios usually feature a high degree of stress on
business exposures.
Q.10. The United States has long maintained the separation of
banking and commerce. However, some financial holding companies
continue to engage in physical commodities activities.
Technology firms have also expressed interest in receiving
Industrial Loan Company (ILC) charters in order to gain the
benefits of low-cost funding by being a bank without having to
divest commercial activities as required by the Bank Holding
Company Act.
Do you believe the separation of banking and commerce is
important to the stability of the United States financial
system?
A.10. I do.
Q.11. Do you believe that financial holding companies should
continue to be allowed to engage in physical commodities
activities?
A.11. In general, I am fine with financial holding companies
being able to engage in limited physical commodity activities
as long as bank capital and liquidity requirements reflect the
risk of these activities.
Q.12. Do you think recognition of ILC charters is in keeping
with the separation of banking and commerce?
A.12. The Federal Reserve does not supervise or regulate ILCs
or their holding companies. Congress generally has assigned the
responsibility of oversight of ILCs to the chartering States
and the FDIC. Any changes to this structure would be up to
Congress.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
FROM CHRISTOPHER WALLER
Q.1. It is my understanding that very few banks have opened
since the passage of Dodd-Frank, and we are seeing more banks
merging.
Why do you think this is happening?
A.1. Bank consolidation has been happening since the 1990s when
Congress eliminated branching restrictions. Since then the
number of banks has fallen from around 15,000 to under 6,000.
So prior to the 1990s, we had too many banks due to State law
branching limitations that forced the creation of banks in
order to serve customers. Since then, it has been a natural
process of shrinking the number of banks and consolidating into
more geographically diversified financial institutions that can
also achieve economies of scale. In the last decade, we have
seen some acceleration of bank consolidation, which I believe
is due to two factors: (1) FinTech/mobile banking and (2)
regulatory burden.
Q.2. Are you concerned by the consolidation of the banking
sector?
A.2. I am not except in the cases where consolidation or
closures lead to excessive concentration in local banking
markets or banking ``deserts''. The hope is that mobile banking
offsets this but there will always be activities that require
face-to-face interactions and that will be missing in these
areas.
Q.3. What would be your suggestions to the Federal Reserve on
how to encourage the opening of new banks?
A.3. The entry of new banks is likely to take the form of
virtual banks, which are internet based and essentially
borderless. Physical locations of brick and mortar banks would
have to be in areas that are devoid of banking services. In
both of these situations, it is not clear to me what the Fed
can do to encourage bank entry, as the Fed does not charter
banks. However, if confirmed, I would work to ensure that undue
regulatory burden from Fed policies is not discouraging new
bank formation.
Q.4. What risks do you believe that cybersecurity concerns pose
to the U.S. financial system?
A.4. Cybersecurity risk is serious and growing especially the
threat from State actors. Theft is always a concern with banks
but disruptions in the payment system are one of my biggest
concerns. I also worry about banks being taken hostage via
malware that takes control of their databases and account
information.
Q.5. How do you believe the Federal Reserve should address
these concerns?
A.5. The Fed addresses these concerns through its supervisory
function. In my current role, I have not been involved in
supervision, but if confirmed, cybersecurity would be a
priority for me.
Q.6. How do you believe that the Federal Reserve could improve
transparency and communication with the public?
A.6. In my 35 years in the economics profession studying
monetary policy, the increase in transparency in the Federal
Reserve and central banks around the world has been astounding.
We have gone from the Bank of England view of ``Never
apologize, never explain'' to press conferences after every
meeting for every major central bank. I believe that Chairman
Powell's decision to have a press conference after every FOMC
meeting was a very important step.
Transparency in supervision and regulation is also an
important consideration. By nature, the supervisory function
has tended to maintain the confidentiality of certain
information for a variety of important reasons. If confirmed, I
would be happy to work with you to consider additional ways for
the Fed to increase transparency related to its supervisory and
regulatory responsibilities.
Q.7. Do you believe that the Federal Reserve needs to improve
its transparency?
A.7. As I mention above, Federal Reserve transparency has
increased dramatically with regards to monetary policy but
there may be ways to improve transparency on the regulatory and
supervision part of its responsibilities.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM CHRISTOPHER WALLER
Q.1. On October 9, 2019, the President signed Executive Order
13892--``Promoting the Rule of Law through Transparency and
Fairness in Civil Administrative Enforcement and
Adjudication''.
Section 6 of the Executive order states that, `` . . .
before an agency takes any action with respect to a particular
person that has legal consequence for that person, including by
issuing to such a person a no-action letter, notice of
noncompliance, or other similar notice, the agency must afford
that person an opportunity to be heard, in person or in
writing, regarding the agency's proposed legal and factual
determinations. The agency must respond in writing and
articulate the basis for its action.''
This Executive order would clearly cover much of what the
Federal Reserve (Fed) does by way of Supervision and Regulation
letters (SRs), MOUs, and other means of agency enforcement
actions. As such:
Can you provide me with assurance that if you are a member
of the Board you will fully comply with this critical due-
process requirement?
A.1. I am not an administrative lawyer, so I cannot offer an
opinion on the details of how this Executive order applies to
the Fed. But due process is clearly a top legal principle in
this country, and I will always adopt that as my default
position in any decision I make.
Q.2. Can you please describe, in detail, the process and
timetable that you plan to implement to ensure these due
process rights are in place for regulated parties, especially
those who may be facing ``legal consequences'' as a result of
an enforcement action, as required under Executive Order 13892?
A.2. I am not an administrative lawyer, so I cannot offer an
opinion on the details of how this Executive order would apply.
Q.3. Do you believe that neither the Government Accountability
Office (GAO) or the Office of Management and Budget (OMB) have
the final word on Congressional Review Act (CRA)
interpretation? If yes, who does have ``final word'' on whether
the Fed has to abide by the CRA?
A.3. I am not an administrative lawyer, so I simply cannot
answer questions of this type without more background
knowledge. However, if confirmed, I will be firmly committed to
meeting all of our obligations under the law.
Q.4. As you know, the GAO has ruled (October 22) that the
foundational SR letters that set up the Large Institutional
Supervision Coordinating Committee (LISCC) are in fact rules
and not guidance. These guidance documents have not been
submitted to Congress.
Is the Fed legally required to stand down LISCC?
A.4. I am not a lawyer, so I cannot give an informed opinion on
this. However, if confirmed, I would support the Fed having a
clearer and public rule about which banking firms are in the
LISCC portfolio.
Q.5. If not, please explain your understanding of the CRA and
if the Fed must follow this law.
A.5. I believe the Fed must follow the law, and CRA is the law
of the land.
Q.6. Which other laws does the Fed have the ability to decide
whether to comply with?
A.6. In principle, the Fed has to comply with all laws of the
land. I see no exceptions to this.
Q.7. On October 19, 2019, the General Counsel of the Fed
submitted a letter to the GAO stating the agency is ``still
assessing'' whether they need to comply with the CRA. Do you
agree with this assessment?
A.7. Again, I am not a lawyer, so I cannot give an informed
opinion on this.
Q.8. If a joint agency Administrative Procedures Act (APA) rule
is advanced by other Federal regulatory agencies that proposes
to formalize the governance and applicability of informal
guidance, will you support and vote for this rule?
A.8. I am sympathetic to this for significant guidance that is
broad based.
Q.9. Do you believe that informal Matters Requiring Attention
(MRAs) are enforceable?
A.9. I believe that guidance is much like advice--it is given
with the intent to improve one's position and well-being.
However, if one chooses to ignore that advice then there should
be no direct consequences for not following the advice.
Q.10. Traditionally, the 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 with its ``public options for payments'', would you
relax your traditional opposition to Fed audits if all monetary
policy functions were exempt?
A.10. The Board of Governors is audited by the GAO and its
financial statements are audited by an external auditor every
year. The Board is audited by the Office of Inspector General.
All of the Reserve Banks are audited by both internal audit
functions and external auditors. I support having these audits.
Q.11. 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.
If you are confirmed, will you immediately release to the
public how much it would cost to build such a system, and
operate it annually?
A.11. As I understand it, the FedNow project is getting
underway and the architecture for this payment system is just
now being determined. Once details are firm in terms of the
estimated costs and operating costs, I will support releasing
this information to the public.
Q.12. If you are confirmed how would the Fed fund the initial
outlay--for example, would you increase prices on your existing
payments system products to fund it?
A.12. I do not know the details of how the project will be
funded. However, I believe the Fed may be able to finance this
project without increasing prices on existing payment services
if it so chooses.
Q.13. Would these outlays reduce Fed remittances to the
Treasury in the years they are made?
A.13. In the short-term, I believe so. Remittances would then
rise in out years when cost recovery is underway.
Q.14. 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.14. Once firm design and operation plans are place, the costs
should be able to be determined. If confirmed, I would be happy
to work with the Banking Committee on this issue.
Q.15. 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.15. I am not able to make that commitment without more
information on the cost and pricing plans that are currently
being studied. However, I do believe there is a strong case to
be made for uniform pricing.
Q.16. Is part of the Fed plan to require the largest banks to
join the Fed System--in effect, outlawing a private sector
option?
A.16. Not that I am aware of.
Q.17. 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.
A.17. Again, I do not have the relevant information at this
point to give an informed opinion. I do believe that under the
current ACH system the largest banks use the Fed's ACH system
voluntarily for a nontrivial percentage of their transactions.
Q.18. 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.18. I do not have the information at present to make this
calculation.
Q.19. How many Fed employees (at the Board and the Reserve
Banks) are employed to operate the ACH network?
A.19. I do not know.
Q.20. How many employees do you roughly estimate would be
employed to operate a real-time network?
A.20. I do not know.
Q.21. 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.21. ACH is a batch processing system where payment dates and
times are known well in advance, such as payroll. How private
firms would adjust their strategies from batch processing to
access real time payments, I do not know. If demand for ACH
services falls, then it seems obvious that labor would be
reallocated from ACH to RTGS.
Q.22. If the Fed offers real-time payments, why should it
continue to also be the regulator of the payments system?
A.22. The Fed has been in the payments business since its
founding and has also regulated banks since its founding. Fed
ACH and TCH EPN, as well as Fedwire and CHIPS, operate side by
side now and the Fed, or other bank regulatory agencies,
regulate the banks running The Clearing House. To the best of
my knowledge, I am not aware that the regulator/payment system
competitor structure has ever been a problem. So I would have
to know what issues, that are unique to RTGS, have arisen that
now make this an issue.
Q.23. 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.23. The Fed has dealt with cost recovery with check clearing
since 1980. Due to the expense of processing paper checks, the
Fed has greatly reduced costs by moving to a virtually all-
electronic check service in order to meet the cost recovery
requirements of the Monetary Control Act. So the Fed has a
history of complying with the law and making its operations
more efficient in order to do so. Furthermore, it is my
understanding that the payments system is run by the Reserve
Banks who have external private auditors who determine whether
or not the Fed is in compliance. If confirmed, I would be
strongly committed to complying with the Monetary Control Act.
Between independent audits and the Inspector General, I believe
the Fed is well positioned to meet its obligations, but I would
be glad to work with you on further improving oversight.
Q.24. 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.24. The request for comments was put out and based on those
comments the existing Governors on the Board of Governors made
a decision to move forward with FedNow by a 4-1 vote. I was not
part of this decision process. Consequently, I have no
information to assess what criteria were used for this
decision. However, I am aware of the concern raised by some
that the Fed acted in an unpredictable and unfair manner. If
confirmed, I would work to ensure that the Fed is transparent,
consistent, and fair in implementing all of its policies.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM CHRISTOPHER WALLER
Q.1. What do you think of Facebook's attempt to create its own
digital currency, Libra?
A.1. I have studied monetary theory for the last 20 years and I
have studied the use of privately supplied currency backed by
interest bearing assets (such as an index fund tied to the S&P
500). I published a paper on this in 2014 long before Libra was
introduced. Such a system clearly can work. However, it faces
all of the issues that banks face including money laundering,
tax evasion, privacy concerns, etc. It also subjects holders of
Libra to standard exchange rate risks that the typical Facebook
user is not accustomed to bearing. Since Libra would be
``borderless'' due to Facebook's 2 billion global users, it
creates international regulatory issues that we have not
confronted before.
For citizens of oppressive regimes or unstable monetary
systems, Libra could be great as a cheap and stable means to
make payments. Within the U.S., it is not clear it would have
such an advantage over traditional retail banking.
Q.2. Do you support or oppose Libra?
A.2. Because Libra is still in development and is still
evolving, I have not yet reached a conclusion on its merits. I
am a bit agnostic on this. Financial innovation, such as Libra,
could open up avenues for global retail payments that no one
(except monetary theorists) would have imagined 10 years ago.
At the same time, Libra presents many serious challenges,
including those discussed above. In particular, having Facebook
running such a system is concerning given its history of using
private information for its commercial advantage.
Q.3. Why specifically do you support or oppose?
A.3. See previous answer.
Q.4. Do you have any concerns that consumer privacy would be
further compromised if Facebook is successful in launching
Libra? If yes, what do you see as the biggest privacy risks
associated with Libra, both nationally and globally?
A.4. I do have concerns. Like others, I dislike the details of
my private life being used by a firm or distributed without my
knowledge to other firms. My concern is that Facebook would
have very detailed knowledge of all of my spending and use this
information in ways that are not in my best interest. Banks
currently have this information via my bank account and credit
card information, but they are limited in how they can sell
that information to third parties.
Cybersecurity is even more of a concern with Libra. All
banks have to worry about account information being, stolen but
the sheer breadth of Libra makes this a concern of greater
magnitude.
Q.5. If another currency, including a digital currency, were to
displace the U.S. dollar as the world's reserve currency, what
impact would that have on the United States and our economy?
A.5. The first impact would be in terms of financing costs of
the U.S. Government. Since the dollar is the reserve currency,
U.S. Treasuries command a premium price as reserve assets. This
lowers the cost of financing our debt. Being a reserve currency
also affects seigniorage revenues via the use of U.S. currency
around the world. Finally, since the dollar is the reserve
currency, foreign firms price their goods in terms of dollars
when trading with the U.S., which helps insulate the U.S.
economy from movements in the dollar exchange rate.
Q.6. If confirmed, what will you do to ensure that the U.S.
dollar remains the world's reserve currency?
A.6. The U.S. dollar is the world's reserve currency because
the rest of the world has confidence that its value will be
stable and it will be generally accepted around the world. The
dollar's value will be stable so long as we keep inflation low
and maintain a sound financial system. If confirmed, low
inflation and financial stability would be guiding principles
in my decision making.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM CHRISTOPHER WALLER
Q.1. Affordable Housing--Montana, and many areas of the
country, face challenges of housing availability,
affordability, and aging housing stock. As you know, this is a
significant issue for rural as well as urban areas and is one
of the largest barriers to success nationally. In Montana, lack
of workforce housing is one of the greatest inhibitors of
economic development.
What can be done to increase workforce housing and
encourage more affordable housing to be built?
What do you see as the largest barrier to affordable
housing, particularly in rural areas?
A.1. In many urban areas, land availability is the source of
supply constraints on affordable housing. This is not the case
in rural areas. In urban areas, there are enough flows of
families in and out of urban areas that it is profitable to
build houses and easy to resell. This is more difficult in
rural areas where flows in and out of small towns are
relatively low. It is risky to build and buy a house if you
think it will be hard to sell it down the road. In short,
housing is a more ``liquid'' asset in urban areas than in rural
areas. As a result, anything that can be done to make rural
housing more liquid should increase the value of housing and
entice builders and lenders to step in and provide affordable
housing.
Q.2. What role does the Fed have in supporting housing? Where
is there room for additional efforts?
A.2. The best thing the Fed can do is to keep inflation low and
stable. This will allow longer-term rates such as 15- and 30-
year mortgage rates to be low. This keeps the interest expense
down for homeowners.
Q.3. Agriculture Lending--I have been hearing for the last year
or more from community bankers in Montana that examiners seem
more concerned lately when that their institution may be overly
concentrated in ag. This is a hard issue for rural
communities--we don't want to further jeopardize these farmers
who are already fighting to survive against trade wars,
changing weather, and difficult growing seasons, but we cannot
let these challenges take community banks down with them.
Access to banks in these rural areas is critical to
communities, and we've already seen too many close.
I'm focused on making sure that we support our farmers and
ranchers and their families through the current challenges
facing the agriculture sector, while continuing to prioritize
the safety and soundness of our community financial
institutions.
What are the risks to these banks as farmers are
increasingly overleveraged and continue to struggle with the
repercussions of these ongoing trade wars, extreme weather
happening more and more frequently because of our changing
climate, and persistently low commodity prices?
A.3. It is obviously critical that the banks diversify their
lending as much as possible. Weather events and trade wars are
hopefully short duration events that can be smoothed over
across time. Persistently low commodity prices are another
issue. If they are so low that farming that product is not
financially viable over the long run, then banks may make the
difficult decision not to lend against the expected revenue
streams from those crops. That will be a painful outcome for
these communities that Congress is best equipped to address.
Q.4. Does this pose a threat to rural America?
A.4. I believe so.
Q.5. What can and should we be doing in these communities?
A.5. This is not my area of expertise so I do not feel I can
give an informed response.
Q.6. From a banking perspective, are you concerned about how
this will effect community banks across rural America?
A.6. Yes, I am. Community banks are more than just banks in
rural areas; they are THE financial lifeline for many
communities.
Q.7. Community Reinvestment Act--The CRA is a critical tool in
expanding access to financial services and credit access to
low- and moderate-income and underserved communities throughout
our country, including in rural America.
What issues will be most important to you as the Fed
considers updates to the CRA?
A.7. CRA is the law of the land and I am committed to enforcing
the law. CRA was designed in a time where banking borders were
well defined. However, in the modern mobile banking age,
banking has become borderless. Therefore, the critical
challenge, as I see it, is making CRA relevant and
implementable in an era of borderless banking.
Q.8. How will you ensure that changes you consider remain
consistent with the original purpose of this Civil Rights-era
law to bringing financial services and credit access to low-
and moderate-income and underserved communities throughout our
country?
A.8. This is a challenging issue and there are very different
views on how this can be done. I have not spent enough time on
this issue to have formed clear views on it but intend to do
so.
Q.9. How will you assess the potential impact on rural America?
A.9. As I understand the proposed changes of the OCC and FDIC
to the CRA, I do not believe small community banks will be
affected significantly. Because they are an important source of
bank funding in rural areas, I suspect the changes will have a
limited impact on rural America. However, appropriate CRA
reform could encourage larger banks to invest more in rural
America.
Q.10. Are you concerned that the Fed may move separately from
the OCC and FDIC? Why or why not?
A.10. I am concerned. Having different standards on CRA
compliance is not optimal. The three regulators ideally should
work together as much as possible with the goal of coming
together on a common set of changes.
Q.11. Banking Hemp--The 2018 Farm Bill removed hemp from the
list of schedule I controlled substances, however regulators
and Federal agencies have been slow in making changes to
reflect this.
How can the Fed improve certainty for financial
institutions providing services to this legal business?
What oversight will be necessary from the Fed?
A.11. I understand that the Fed and the other Federal banking
agencies recently issued guidance to help improve certainty
around the ability of banks to provide services to hemp-related
businesses. If confirmed, I will monitor the effects of that
guidance to determine if additional action is necessary.
Q.12. Economic Tools, Debt and Deficits--Both the Fed, through
lower rates, and Congress, through increased spending and
increased debt, have been taking actions to boost the economy
during a long stretch of growth. I'm concerned that if we
approach a downturn our options for how to address that will be
limited by our actions during this decade of expansion.
What tools does the Fed have left to react to an economic
downturn?
A.12. I believe that the Fed has sufficient tools to deal with
an economic downturn. Despite a very low neutral rate, the Fed
has other tools to deploy should it drive the policy rate to
zero. Those tools are: (1) forward guidance, (2) quantitative
easing, (3) yield curve control and, one I am not fond of, (4)
negative nominal interest rates.
Q.13. The debt is more than $23 trillion--at what point do you
get concerned about that? Is this sustainable?
A.13. Standard economic analysis shows that as long as the debt
grows at the same rate as nominal GDP (or less), the burden of
the debt will not increase. So if the real economy grows at 2
percent and inflation stays around 2 percent, then nominal GDP
will grow at 4 percent. This means that the debt can grow at 4
percent without increasing the burden of the debt. If the debt
grows faster than this and that growth does not appear to be
temporary, then I would be very concerned.
Q.14. Trade--One of my concerns about how we could end up in an
economic downturn is our trade policy over the past 2-plus
years.
What are your current views on free trade?
A.14. I am a mainstream economist and years of economic theory
has shown that free trade is the best outcome for society.
There are only a few exceptions where tariffs are optimal.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM CHRISTOPHER WALLER
Q.1. Monetary Policy--In 2018, the Fed began a review of the
strategy, tools, and communications it uses to conduct monetary
policy. \1\ If confirmed, you will be responsible, along with
the other Board members, for evaluating the results of this
review and determining if changes are appropriate.
---------------------------------------------------------------------------
\1\ Board of Governors of the Federal Reserve System, ``Review of
Monetary Policy Strategy, Tools, and Communications'', June 25, 2019,
https://www.federalreserve.gov/monetarypolicy/review-of-monetary-
policy-strategy-tools-and-communications.htm.
---------------------------------------------------------------------------
Describe the implications of the apparent decline in the
neutral rate of interest for future recessions and economic
downturns.
Do you believe the Fed's current monetary policy tools will
be sufficient to alleviate an economic downturn?
A.1. I believe that the Fed has sufficient tools to deal with
an economic downturn. Despite a very low neutral rate, the Fed
has other tools to deploy should it drive the policy rate to
zero. Those tools include: (1) forward guidance, (2)
quantitative easing, (3) yield curve control and, one I am not
fond of, (4) negative nominal interest rates.
Q.2. What role do you believe fiscal policy will need to play
in the next downturn?
In response to prior economic downturns, policymakers have
used a number of different fiscal policy tools as part of
stimulus packages including tax cuts, investments
infrastructure and emerging technologies and transfers to State
governments. Which fiscal policy tools do you believe would be
most effective?
A.2. I am not a public finance economist, so I am not prepared
to comment on which fiscal tools have the biggest impact per
dollar spent. However, my general belief is that fiscal
stimulus aimed at households is the most logical given that
consumer spending accounts for nearly 70 percent of GDP.
Q.3. Under what circumstances would you support additional
spending in response to a recession even if it adds to the
deficit?
A.3. If the recession is a mild/moderate one, monetary policy
may be sufficient to deal with the economic downturn. If it is
a severe downturn, then Congress may need to consider fiscal
policy to help stimulate the economy.
Q.4. President Trump has repeatedly advocated for negative
interest rates, arguing that they would boost economic growth.
\2\ Do you agree? Describe the implications of negative
interest rates.
---------------------------------------------------------------------------
\2\ NBC News, ``Trump Keeps Pushing `Negative' Interest Rates.
What Would That Mean for Your Wallet?'' Ben Popken, September 23, 2019,
https://www.nbcnews.com/business/consumer/trump-keeps-pushing-negative-
interest-rates-what-would-mean-your-n1056546.
A.4. I am skeptical of negative nominal interest rates. I view
them as a last resort option. Imposing a negative interest rate
on reserves is effectively a tax that has to be borne since
reserves cannot leave the system (except if converted to
currency). The incidence of the tax has to be borne by
depositors in the form of lower deposit rates, or by borrowers
in the form of higher loan rates or higher fees, or by the
banks in the form of lower profits. I do not find the evidence
---------------------------------------------------------------------------
from Europe or Japan to be supportive of using negative rates.
Q.5. Former Fed Chair Bernanke has argued that the decline in
the rate may be partly due to structural factors such as
demographic and technological change. \3\ Do you agree?
---------------------------------------------------------------------------
\3\ The Brookings Institution, ``The New Tools of Monetary
Policy'', Ben Bernanke, January 4, 2020, https://www.brookings.edu/
blog/ben-bernanke/2020/01/04/the-new-tools-of-monetary-policy/.
---------------------------------------------------------------------------
A.5. Yes I do.
Q.6. If so, should the Fed proactively thinking about the
trends in these structural factors and how they could impact
the effectiveness of monetary policy in the future?
A.6. A standard result in economic theory is that the real
return on productive capital, in steady state, is driven by
productivity growth, population growth and any `` liquidity
premiums'' on assets. The first two are out of the control of
the central bank. The latter is driven by a demand for safe
liquid assets, which the central bank may have some influence
over. A decline in the first two factors will tend to lower the
neutral rate of interest. If the liquidity premium increases,
this will also lower the neutral rate. All of these factors
impact the effectiveness of monetary policy.
Q.7. In response to developments in overnight lending markets
in September 2019, the Fed began conducting repo operations to
``stabilize money markets and provide reserves to keep the
Federal funds rate within its target range.'' \4\
---------------------------------------------------------------------------
\4\ Board of Governors of the Federal Reserve System, ``Monetary
Policy Report'', February 7, 2020, https://www.federalreserve.gov/
monetarypolicy/files/20200207_mprfullreport.pdf.
---------------------------------------------------------------------------
Some have pointed to the repo market concentration, with
the largest banks being almost exclusively responsible for
engaging in transactions with the Fed and lending that money
out. \5\ Can you describe the implications of the concentration
levels of the current repo market structure and how the
concentration of participants may have impacted the Fed's
recent interventions?
---------------------------------------------------------------------------
\5\ Wall Street Journal, ``Big Banks Loom Over Fed Repo Efforts'',
Daniel Kruger, September 26, 2019, https://www.wsj.com/articles/big-
banks-loom-over-fed-repo-efforts-11569490202.
A.7. Prior to September 2019, the general belief was that $1.4
trillion in reserves was ample enough to handle any
fluctuations in demand for any subset of institutions. The
volatility in September 2019 showed that reserves were not
flowing in the manner they should have to reduce repo market
volatility. The Fed is still trying to understand why these
flows are not occurring. In the end, by raising the level of
reserves in the system, enough liquidity was available to flow
and smooth fluctuations in the Federal Funds rate, regardless
---------------------------------------------------------------------------
of the concentration.
Q.8. If the Fed were to adopt a standing repo facility, as it
has been considering even before the market disruption in
September, \6\ what factors should the Fed use to determine
which counterparties would be eligible?
---------------------------------------------------------------------------
\6\ Board of Governors of the Federal Reserve System, ``Minutes of
the Federal Open Market Committee'', June 18-19, 2019, https://
www.federalreserve.gov/monetarypolicy/fomcminutes20190619.htm.
A.8. I would consider broadening the range of counterparties to
ensure that funds are flowing effectively through the financial
system. Since a repo facility is a secured lending facility,
the Fed faces little, if any, counterparty risk. Hence, a broad
set of counterparties means more participants to arbitrage away
interest differentials and the repo facility would cap
---------------------------------------------------------------------------
fluctuations in the Federal funds rate.
Q.9. Financial Stability--In previous questions regarding the
Fed's response to climate change, Chairman Powell claimed that
the Fed uses ``its authorities and tools to prepare financial
institutions for severe weather events.'' \7\ At the same time,
science has clearly demonstrated that extreme weather events
are becoming increasingly common as a result of climate change.
\8\
---------------------------------------------------------------------------
\7\ Letter from Federal Reserve Chairman Jerome H. Powell to
Senator Elizabeth Warren, April 18, 2019.
\8\ National Oceanic and Atmospheric Administration, ``Report:
Climate Change Is Making Specific Weather Events More Extreme'',
December 9, 2019, https://www.noaa.gov/news/report-climate-change-is-
making-specific-weather-events-more-extreme.
---------------------------------------------------------------------------
To the extent that these weather events continue becoming
more common and having a greater impact on the business cycle
itself, do you believe that it would be appropriate for the Fed
to more explicitly consider the risks associated with climate
change in its decision making?
A.9. For monetary policy, the Fed's mandate is stable prices
and maximum sustainable employment. If climate risks have an
impact on these variables, the Fed should respond in kind. For
its supervisory function, examiners will have to look at
idiosyncratic risks confronting individual bank portfolios. For
example, a bank with a real estate portfolio of assets along
the coastline will have a different risk exposure than a bank
in the Midwest with the same share of real estate assets in its
portfolio.
Q.10. Do you believe it would be appropriate for the Fed to
hire economists that specialize in climate economics to address
these changes? Should the Fed hire natural scientists to inform
economic models?
A.10. The Fed has economists who study a wide range of topics
and climate change is an increasingly popular research topic.
Concerning the Fed hiring natural scientists, I have often
thought the opposite--natural scientist research teams should
hire economists to work on their climate change models. Much
could be learned from economists who do forecasting as part of
their research and job. An example is the recent paper by Glenn
Rudebusch at FRB SF who uses economic forecasting models to
predict an ice-free Arctic and compares those predictions to
climate change models.
Q.11. Do you support the Fed officially joining the Network for
Greening the Financial System (NGFS)? If not, why not?
A.11. As Chair Powell has said, the Fed is talking with central
banks about climate change issues and the Fed is monitoring
what this group is doing. If the time comes that warrants the
Fed joining NGFS in some capacity, I am open to doing so.
Q.12. The most recent report from Shared National Credit (SNC)
Review program conducted jointly by the Fed, Federal Deposit
Insurance Corporation (FDIC), and Office of the Comptroller of
the Currency (OCC), stated that ``credit risk associated with
leveraged lending remains elevated'' and ``lenders have fewer
protections and risks have increased in leveraged loan terms
through the current long period of economic expansion since the
last recession.'' \9\
---------------------------------------------------------------------------
\9\ Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, Office of the Comptroller of the
Currency, Board of Governors of the Federal Reserve System Federal
Deposit Insurance Corporation Office of the Comptroller of the
Currency, ``Shared National Credit Program: 1st and 3rd Quarter 2019
Reviews'', https://www.federalreserve.gov/newsevents/pressreleases/
files/bcreg20200131a1.pdf.
---------------------------------------------------------------------------
Please explain how you believe the Fed should evaluate and
monitor the credit-risk management practices of a financial
institution to ensure that these procedures, some of which are
untested, will be sufficient during an economic downturn.
A.12. I have been on the monetary policy side of the Fed during
my career. Evaluating and monitoring credit risk is typically
dealt with through the supervision side of the Fed so it is
something I need to learn more about.
Q.13. Do you believe that the Interagency Guidance on Leveraged
Lending \10\ issued in 2013 is sufficient to address the risks
associated with leveraged lending, particularly with respect to
the growth of nonbank lenders?
---------------------------------------------------------------------------
\10\ Federal Reserve Board of Governors, Federal Deposit Insurance
Corporation, Office of the Comptroller of the Currency, ``Interagency
Guidance on Leveraged Lending'', March 21, 2013, https://
www.federalreserve.gov/supervisionreg/srletters/sr1303a1.pdf.
---------------------------------------------------------------------------
Do you believe these loans made by nonbanks currently pose
a risk to financial stability? If not, please explain why and
under what circumstances the Fed should begin to judge them a
threat to financial stability.
A.13. As long as the loans are not held on the books of
regulated banks, I believe the threat to financial stability is
limited. Should a group of private equity or hedge funds go
under due to failures of leveraged firms, we should not
intervene--they took a risk and should bear the consequences.
Q.14. Many of these nonbank lenders fall into a regulatory gap.
What tools does the Federal Government have to mitigate the
risks from the growth of leveraged lending and the
deterioration of the terms of those loans?
A.14. Again, if these loans are not on the books of regulated
banks, then I am generally not concerned as to whether or not
losses are absorbed by the nonbanks who hold them.
Q.15. Private equity firms often finance acquisitions through
highly leveraged loans. According to the private equity
industry, firms acquired in these acquisitions now employ 8.8
million workers. In an economic downturn, what would you expect
to happen to employment in these firms?
A.15. In a downturn, firms tend to shed labor to reduce costs
as demand/revenues fall. This happens whether they are publicly
traded or privately held.
Q.16. Regulation--The OCC and FDIC made the decision to heed to
the concerns of the Fed with respect to their plan to modify
the Community Reinvestment Act (CRA) and issued a new proposed
rule on the law jointly enforced by the three agencies without
the Fed last December. \11\ On January 8, 2020, Governor
Brainard released her own alternative plan to modernize the
CRA. \12\
---------------------------------------------------------------------------
\11\ Comptroller of the Currency and Federal Deposit Insurance
Corporation, Federal Register Notice, ``Community Reinvestment Act
Regulations'', January 09, 2020, https://www.federalregister.gov/
documents/2020/01/09/2019-27940/community-reinvestment-act-regulations.
\12\ Board of Governors of the Federal Reserve System,
``Strengthening the Community Reinvestment Act by Staying True to Its
Core Purpose'', Governor Lael Brainard, January 08, 2020, https://
www.federalreserve.gov/newsevents/speech/brainard20200108a.htm.
---------------------------------------------------------------------------
Would you have voted to join the OCC and FDIC proposal? If
not, what aspects to you disagree with? If so, please explain
why you believe it is right approach.
A.16. I have only limited knowledge and understanding as to how
the proposed reforms will impact implementation of CRA. As I
understand it, the OCC and FDIC proposal aims to be more rule
based and less judgement based than the current evaluation
process for CRA compliance. The OCC and FDIC proposal also aims
at having simpler criteria for proving compliance. Finally, the
OCC and FDIC proposal expands the boundaries as to where and
what type of activities satisfy CRA compliance. In general, I
find these principles compelling. But I am not intimately
familiar with the details of the OCC and FDIC proposal, and
cannot take a position at this time.
Q.17. Much of the criticism of the other agencies' plan focuses
on the lack of analysis demonstrating the economic impact of
the changes. However, according to Governor Brainard, the Fed
has conducted some analysis with relevant data and would like
to publish that data so the public can provide feedback.
Do you believe it is important for any new metrics included
in a new CRA plan are grounded in data?
A.17. As a research economist my instinct is to always want
decisions grounded in data. That said, I have spent 25 years
trying to develop metrics to evaluate economists research
performance. I have learned that there are no perfect metrics
and data can be structured to support or deny the validity of
any metric. So in the end, one has to use data and judgement to
choose metrics.
Q.18. Do you believe that it is important for the public to
have ample time to examine these data to provide input and
ensure that reforming this critical civil rights law is done
correctly?
A.18. Public comment is a valuable component of rulemaking. CRA
reform should be consistent with existing standards for
comments.
Q.19. Do you believe there are consequences of having two
separate CRA regimes for institutions with different
regulators? If so, what are these consequences?
A.19. While I believe it would be preferable to have a
consistent regime across all regulators, I do not have enough
information on this issue to determine the specific
consequences of having two regimes.
Q.20. On January 30, 2020, the Fed finalized a rule to
determine ``when a company controls a bank or a bank controls a
company.'' \13\
---------------------------------------------------------------------------
\13\ Board of Governors of the Federal Reserve System, ``Federal
Reserve Finalizes Rule To Simplify and Increase the Transparency of the
Board's Rules for Determining Control of a Banking Organization'',
January 30, 2020, https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20200130a.htm.
---------------------------------------------------------------------------
Reporting has indicated that the rule could allow private
equity funds to control a greater portion of a bank's equity
and thereby allow private equity investors to influence the
operations of banks. \14\ Given the various risks associated
with the private equity business model and documented research
that demonstrates that private equity investments in financial
companies can increase the risk profile of those companies,
\15\ do you believe that this rule increases the level of risk
in the financial sector?
---------------------------------------------------------------------------
\14\ New York Times, ``The Fed Wants To Loosen Rules Around Big
Banks and Venture Capital'', Jeanna Smialek and Emily Flitter, January
30, 2020, https://www.nytimes.com/2020/01/30/business/economy/volcker-
rule-banksventure-capital.html.
\15\ Harvard University, ``Private Equity Ownership, Risk-Taking,
and Performance in the Life and Annuities Industry'', Divya Kirti and
Natasha R. Sarin, April 2, 2018, https://scholar.harvard.edu/nsarin/
publications/private-equity-ownership-risk-taking-and-performance-life-
and-annuities-industry.
A.20. I did not participate in the rulemaking process, and as a
monetary economist, I am not familiar with research examining
the impact of private equity investments on banks' risk
profiles. If confirmed, I would monitor the implementation of
---------------------------------------------------------------------------
this rule to ensure no undue risk to the financial system.
Q.21. In her statement, Governor Brainard suggested that it
will be important to ``monitor the ownership structures of
banking organizations in light of this control framework and
industry trends'' and ``how the control framework interacts
with other regulations that involve ownership thresholds.''
\16\
---------------------------------------------------------------------------
\16\ Board of Governors of the Federal Reserve System, ``Statement
by Governor Lael Brainard'', January 30, 2020, https://
www.federalreserve.gov/newsevents/pressreleases/brainard-statement-
20200130a.htm.
---------------------------------------------------------------------------
Do you agree with Governor Brainard?
A.21. I believe it is important to monitor the bank ownership
structure in order to implement the regulatory framework
appropriately.
Q.22. If so, please describe how the Fed should monitor these
ownership structures and how the Fed will determine if there is
a financial stability risk associated with a banking
organization's ownership structure?
A.22. Again, I have no background knowledge on this issue, but
I look forward to learning more.
Q.23. Supervision--In Wells Fargo's Q4 2019 Earnings Call,
newly appointed CEO Charlie Scharf acknowledged the bank's many
misdeeds, claiming ``we made some terrible mistakes and have
not effectively addressed our shortcomings.'' \17\
---------------------------------------------------------------------------
\17\ Bloomberg, ``Q4 2019 Earnings Call'', Wells Fargo, January
14, 2020.
---------------------------------------------------------------------------
These comments suggest that Wells Fargo has not made
substantial progress in remedying the issues at hand. In a
written response to me in 2018, Chairman Powell stated that the
terms of the Fed's current Consent Order require that ``the
firm must make significant progress in remedying its oversight
and compliance and operational risk management deficiencies
before relief from the asset growth restriction would be
forthcoming.'' \18\ Chairman Powell has committed to me that
the Board of Governors would have a formal vote before the
Fed's asset cap on the bank could be lifted. Under what
circumstances would you vote to lift the asset cap?
---------------------------------------------------------------------------
\18\ Letter from Federal Reserve Chairman Jerome H. Powell to
Senator Elizabeth Warren, May 10, 2018, https://www.warren.senate.gov/
download/20180510-powell-response-re-wells-fargo.
A.23. Because I do not have access to supervisory information,
my knowledge of this issue is incomplete. I would only be
willing to vote to lift the asset cap when Wells has remedied
---------------------------------------------------------------------------
the identified deficiencies.
Q.24. In a recent speech, Fed Vice Chair for Supervision Randal
Quarles suggested that Fed bank supervisors use of MRAs should
be limited, and that they should only be permitted to
institutions ``to violations of law, violations of regulation,
and material safety and soundness issues'' \19\--a severe
narrowing of Fed's authority.
---------------------------------------------------------------------------
\19\ Federal Reserve Vice Chair for Supervision Randal K. Quarles,
``Spontaneity and Order: Transparency, Accountability, and Fairness in
Bank Supervision'', January 17, 2020, https://www.federalreserve.gov/
newsevents/speech/quarles20200117a.htm.
---------------------------------------------------------------------------
Do you agree that the Fed should alter the process,
standards, and requirements under which MRAs and/or MRIAs are
issued? If so, why?
A.24. I am supportive of Vice Chair Quarles' idea to redefine
the application of MRAs. As I understand it, MRAs cover a wide
range of problems that banks have--some major and some minor.
Prior to 2013 the Fed used ``supervisory recommendations'' to
deal with minor safety and soundness issues. Vice Chair Quarles
wants to reinstitute this category so that examiners have the
ability to highlight a supervisory concern that is not at
present of major concern but may rise to the level of an MRA.
Q.25. Do you believe there should be a formal notice and
comment process so that outside experts and consumer advocates
can review and comment on any proposal?
A.25. I am supportive of actions that comply with the
Congressional Review Act and the Administrative Procedure Act.
Q.26. The 2013 guidance in the communication of supervisory
findings states, that standardization of the terms MRAs or
MRIAs ``facilitates the Federal Reserve's national systems of
record for information related to examination and inspection
issues'' and ``enables the Federal Reserve to access
information about supervisory issues and remediation efforts
and aids in the identification of systemic and programmatic
challenges facing banking organizations supervised by the
Federal Reserve.'' \20\ If, as proposed, certain supervisory
findings will no longer be categorized as MRAs, do you believe
this could impact the Fed's ability to access this information?
---------------------------------------------------------------------------
\20\ Federal Reserve Board of Governors, ``Supervisory
Considerations for the Communication of Supervisory Findings'', https:/
/www.federalreserve.gov/supervisionreg/srletters/sr1313a1.pdf.
A.26. While my knowledge of this process is limited, I believe
Vice Chair Quarles' proposals would be useful and would not
---------------------------------------------------------------------------
impair the Fed's supervisory information or framework.
Q.27. Do you believe that it is possible for a bank examination
to uncover an issue with a financial institution that could
pose a threat to safety and soundness but does not represent a
legal violation? Please describe some examples.
A.27. I suppose anything is possible in this regard, but I
cannot think of an example since I have limited knowledge and
experience in the supervision process.
Q.28. The impact of any proposed changes to MRAs is largely
dependent on the definition of ``material safety and
soundness.'' How do you believe the Fed should determine this
decision?
A.28. This is clearly an issue that has been addressed by
supervision, regulation, and legal teams within the Fed and
other regulatory bodies. I look forward to engaging with
Federal Reserve staff on these issues, if confirmed.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ
FROM CHRISTOPHER WALLER
Q.1. In a recent speech at the San Francisco Fed's conference
on the economics of climate change, Fed Governor Lael Brainard
stated: ``Climate risks are projected to have profound effects
on the U.S. economy and financial system. To fulfill our core
responsibilities, it will be important for the Federal Reserve
to study the implications of climate change for the economy and
the financial system and to adapt our work accordingly.''
Do you agree with Governor Brainard that climate-related
risks fall squarely within the Fed's mandate?
A.1. The Fed's mandate is price stability and maximum
sustainable employment. Climate risks potentially affect these
two aggregate measures and that is how the Fed should respond
to them. This is how the Fed responds to a variety of external
factors--rather than responding directly to them, the Fed waits
to see their impact on inflation and employment and responds
accordingly.
Q.2. Fed Chair Jay Powell recently stated that the Fed would
likely join the Network for Greening the Financial System
(NGFS), a group of over 50 foreign central banks and financial
regulators committed to analyzing and mitigating the financial
stability risks of climate change.
As a Fed Governor, would you support joining the NGFS?
A.2. As Chair Powell has said, the Fed is talking to these
central banks and learning from them on climate risk. If the
time comes that warrants the Fed joining NGFS in some capacity,
I am open to doing so.
Q.3. Are you willing to deploy the Fed's research, supervisory,
and regulatory tools to mitigate the risks that climate change
poses to the financial system?
A.3. The Federal Reserve is already engaging in research on
climate change and will continue to do so. On the supervision
side, the Federal Reserve does work to make sure that banking
firms manage all their risks appropriately.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM CHRISTOPHER WALLER
Q.1. Do you support the continuation of the deposit insurance
fund at the FDIC? Do you recommend any changes to the Fund?
A.1. Yes. No.
Q.2. Do you believe the U.S. dollar should be tied to the value
of a commodity like gold? If so, please explain. If not, please
explain.
A.2. No. Fiat currencies have been the norm since 1971 and when
well managed have been associated with low inflation outcomes.
Fiat currencies also give the monetary authority the ability to
adjust the money supply as needed to engage in economic
stabilization.
Q.3. Do you believe the Government has a role in ensuring banks
are safe and secure?
A.3. Experience has shown that deposit insurance has worked
well in preventing systemic bank runs, which have historically
plagued the U.S. financial system. Banks pay for this insurance
and also agree to subject themselves to regulatory oversight in
order to mitigate unnecessary risks that would tip a bank into
insolvency.
Q.4. Do you support having one currency to represent the United
States, Canada, and Mexico? What do you think the impact of
such a change would be?
A.4. I do not believe one currency is warranted for North
America due to very different political and fiscal regimes in
these countries. Although one currency would eliminate exchange
rate risk, it would eliminate the use of monetary policy in
each country to deal with idiosyncratic shocks to individual
countries.
Q.5. Do you support a single global currency? What do you think
the impact of such a change would be?
A.5. The use of a single currency has its advantages in the
sense that it eliminates exchange rate risk and having to
transact in a multitude of currencies, as was the case in the
U.S. in the early 1800s. However, the use of a single currency
across countries ties policymaker's hands to use their own
currencies to deal with idiosyncratic shocks. We have seen this
arise in Europe during the last decade.
Q.6. Do you believe the U.S. dollar should continue to be the
international reserve currency?
A.6. The U.S. dollar is the world's reserve currency by choice.
It is not forced on the world. The world uses the dollar
because it has confidence that the Federal Reserve will follow
policies that maintain the value of the dollar and the
stability of the U.S. financial system, which is the best in
the world. As long as we pursue policies that maintain
confidence, the dollar will remain the reserve currency.
Q.7. Do you believe the Federal Reserve should develop its own
digital currency?
A.7. I see no need for one at this time. Essentially all
transactions in the U.S. and the world are already done
digitally so I see no gain from introducing one.
Q.8. Do you trust the accuracy and reliability of Government
statistics? If not, which ones do you doubt?
A.8. I do. All data series have issues but techniques exist for
dealing with these issues. I do not believe the U.S. Government
statistical agencies systematically distort data for political
ends.
Q.9. During your hearing, there were multiple discussions on
the independence of the Federal Reserve from political
influence.
Do you think the Federal Reserve should host events at
properties owned or affiliated with members of the
Administration, the Vice President, or the President?
A.9. No.
Q.10. Do you plan to make your decisions after consultation
with anyone in the White House?
A.10. No.
Q.11. Have you had conversations with anyone in the White House
about serving as Chair of the Federal Reserve?
A.11. No.
Q.12. Since January 2015, how many times have you stayed at
properties owned or operated by President Trump or members of
his family? Please provide location, dates of stay, and
purpose.
A.12. None.
Q.13. Community Reinvestment Act--Do you support a full scope
review for CRA exams?
A.13. I do believe that efforts to modernize the CRA are
warranted. As banking as become borderless, implementing CRA
has become more difficult.
Q.14. Do you think geographical assessment areas should define
CRA accountability both where the majority of branch lending
and the majority of nonbranch lending occurs?
A.14. I believe this is an outdated method for implementing CRA
due to changes in branching regulations and technology. Any
reforms of CRA implementation must take into account ongoing
changes that will affect the future of banking, particularly
movement towards a purely mobile system.
Q.15. If a lending exam detects a violation after a bank has
been graded for its CRA exam, do you think the bank should
receive a retroactive downgrade?
A.15. I think this is a matter of assessing who bears the
burden of the initial mistake. I was a university professor for
30 years, and if I found a mistake in my grading that should
have lowered a test score, I never went back and lowered the
grade. I viewed that as my mistake not the student's.
So if the regulator makes a mistake on the CRA exam and
then realizes it made a mistake, the punishment should not be
retroactive. The initial examiner needs to be held accountable.
Q.16. CRA regulations establish different CRA exams for banks
with different asset levels. Small banks, those with less than
$307 million in assets, have the most streamlined exam that
consists of only a lending test. Intermediate small banks
(ISB), those with assets of $307 million to $1.226 billion,
have exams that consist of a lending test and a community
development (CD) test. The CD test assesses the level of CD
lending and investing for affordable housing, economic
development, and community facilities. Large banks, those with
assets above $1.2 billion, have the most complex exams which
consist of a lending test, an investment test, and a service
test. Please identify where, if at all, you feel CRA guidelines
for small banks are unclear.
A.16. I do not have enough information on CRA exams to provide
an informed answer.
Q.17. Many Democratic, Republican, and Independent current and
former regulatory officials raise concerns about the bank
deregulation bill range from former Fed Chair Paul Volcker,
former Fed governor and Deputy Treasury Secretary Sarah Bloom
Raskin, former FDIC Chair Sheila Bair, former Counselor to the
Treasury Secretary Antonio Weiss, and former Deputy Governor of
the Bank of England Paul Tucker. These former banking
regulators either state that a $250 billion bank threshold is
too high to protect financial stability or that we should not
weaken the leverage rules for the largest banks, or both.
Do you share the concerns about heightened risk raised by
your predecessors? Please elaborate on your answer.
A.17. In general, I do not believe that $250 billion is too
high. The largest banks of concern are in the $1 to $3 trillion
dollar range in terms of assets. A bank at $250 billion is not
even in the top 10 of U.S. banks in terms of size. It is
difficult to argue that banks just below this cap are
systemically important.
Q.18. What more can be done to shrink the gap between African
American and white unemployment? In addition to increasing
employment rates for African Americans, what can the Fed do to
increase wages and wealth for African Americans and Latinos?
A.18. The Fed has very blunt tools for affecting distributional
effects across ethnic groups. The best the Fed can do is keep
inflation low and stable and keep the economy on a stable
growth path. As a result, unemployment rates of African
Americans and Latinos will be as low as possible. Real wage
growth is ultimately tied to the growth of labor productivity.
This in turn is driven by education, skill acquisition, and
capital investment. The Fed has no direct control over any of
these factors.
Q.19. Do you support proposals to tax currency kept outside of
circulation?
A.19. No.
Q.20. If this policy were implemented, what impact would it
have on savers and low income depositors?
A.20. I do not have the information to provide analysis on this
question.
Q.21. Some current Federal Reserve leaders support reducing
banks' capital requirements. This concerns me as capital
requirements have been a key tool in restoring the safety of
the financial system since the crisis. Ensuring modest leverage
ratios prevents banks from lending out more than they can
afford to, and especially keeps them away from riskier assets
like the ones that fueled the crisis.
Do you support any changes to the current capital
requirements for financial institutions? Please elaborate on
your answer.
A.21. I support the use of countercyclical capital
macroprudential policies. The Fed currently has the power to
use them but has not done so as of yet. Using this tool would
imply lowering capital ratios during downturns to encourage
bank lending. Fixing capital ratios and never adjusting them to
macroeconomic conditions is not good policy.
Q.22. What is your understanding of the historical evidence
surrounding the relationship between monetary policy and asset
bubbles?
A.22. First it is difficult to identify an asset bubble ex ante
(everyone is an expert ex post). So we would have to identify
bubbles ex post, which to my mind I can think of two: the dot-
com bubble in the late 1990s and the housing bubble in the
2000s. The dot-com bubble rose even though the Fed held the
Federal Funds rate at 5 percent and was at 6 percent at the
peak. The housing bubble started in 1996 and went up steadily
even though the Fed Funds rate went up and down from 5 percent
to 1 percent then back to 5 percent. So despite the popular
rhetoric that the Fed ``kept rates too low for too long,'' the
housing bubble was driven by something else.
Q.23. Besides monetary policy, what other tools are available
to temper asset bubbles?
A.23. That depends on two things: (1) what asset and (2)
identifying a bubble ex ante. Different assets would require
different tools and as I mentioned above, identifying bubbles
is extremely difficult.
Q.24. In the years since the financial meltdown, the Federal
Reserve has played a key role in putting our economy back on
stable footing and setting the conditions for more robust
growth. Still, there have been bills introduced that would
eliminate the Fed's full employment mandate on the basis that,
according to the bill's findings ``at best, the Federal Reserve
may temporarily increase the level of employment through
monetary policy.''
Can you elaborate on how the Fed influences employment in
the short-run, and discuss whether failure to use monetary
policy effectively in the face of severe downturns could do
permanent damage to the level of unemployment in the economy?
A.24. By lowering interest rates, the Fed attempts to stimulate
demand for interest sensitive goods like housing and durable
goods (cars for example). Presumably, by increasing demand,
firms would have to hire more labor to produce, distribute, and
sell these products. Monetary policy tends to have short run
effects on the economy, so it is doubtful that permanent damage
to unemployment would be done by not engaging in appropriate
stabilization policy.
Q.25. Critics of quantitative easing have argued that it is
incompatible with the Fed's price stability mandate; however in
discussing quantitative easing the Fed has consistently noted
that the program is designed to promote a stronger pace of
economic growth and to ensure that inflation, over time, is at
levels consistent with the Fed's mandate.
Please comment on whether the Fed's policies in recent
years have actually supported the Fed's price stability
mandate.
A.25. The Fed has pursued policies that have kept prices stable
and near its inflation target (actually below target). Thus,
the Fed has been very close in terms of achieving its price
stability mandate.
Q.26. What does the latest research tell us about the
effectiveness of the Fed's large scale asset purchases?
A.26. Academic and Fed research on the effects of QE have shown
that it had the expected effects on long-term yields. However,
the magnitude of these effects appear to have softened as QE
went on.
Q.27. Is there any evidence that the Fed's asset-purchase
program, which sought to support the economy by lowering long-
term interest rates, has been a drag on U.S. productivity as
some Republicans have suggested? Is there any evidence that the
program has created a ``false economy'' as Trump has asserted?
A.27. Productivity growth is driven by education, skills
acquisition, technological innovation, and capital investment.
The Fed has very little control over the first three, and the
last one should benefit from low real interest rates.
Q.28. How would the economy have likely fared in terms of
unemployment, GDP, wage growth, etc., had the Fed chosen not to
pursue its asset purchase program?
A.28. This is a difficult counterfactual to answer. In general,
macroeconomists would say that unemployment would have stayed
higher for longer and GDP growth would have been lower. But to
quantify those effects would require an economic model
calibrated to the data in an appropriate manner.
Q.29. Is there any evidence that the Fed's stimulus program has
paved the way for the next global meltdown, as Trump claimed?
A.29. Not that I am aware of.
Q.30. How does the Fed's balance sheet as a percentage of GDP
compare with the balance sheets of the next largest economies?
Do these countries have a dual mandate similar to the Fed?
A.30. The Fed's balance sheet peaked at around 25 percent of
GDP and has now fallen to around 18 percent of GDP. While high
by U.S. standards prior to the financial crisis, it is
substantially smaller than that of Japan or Switzerland,
neither of which has a dual mandate that I am aware of.
Q.31. It is my understanding that major central banks around
the world maintain and have drawn on their authority to
purchase a wide range of assets including corporate bonds,
commercial paper, real estate investment trusts, and equities
among other assets.
Given the broad authorities available to other central
banks, rather than shrink the Fed's tool kit, do you think
Congress should consider expanding it?
A.31. I have serious reservations about expanding the set of
assets that the Fed can buy. This truly becomes a distortion in
the markets when central banks start buying private assets.
Q.32. For example, with an expanded authority, could the Fed
play a useful role in supporting municipal finance, student
loan financing, or other types of consumer credit during
periods where each of these sectors experienced heightened
distress?
A.32. Congress is better equipped to finance these types of
lending programs.
Q.33. Would you support or oppose such expansion of the Fed's
authority?
A.33. I would oppose.
Q.34. As the Fed begins to shrink its balance sheet, what are
some of the negative impacts that Senate Banking Committee
Members should monitor? What concerns--if any--do you have
about shrinking the balance sheet? What will you do to monitor
the process of maturing securities to avoid a negative impact
on the economy?
A.34. The Fed is monitoring the size of its balance sheet to
ensure that there are ample reserves to allow the operation of
a floor system. The disruptions in September 2019 suggest that
the required level of reserves to run a floor system is higher
than originally believed. Other than that, the reductions in
the Fed's balance sheet does not appear to have had any
negative economic effects.
Q.35. As you know, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Public Law 111-203) rules are tailored
so larger banks have higher standards than smaller banks. Of
the 14 ``major'' rules issued by banking regulators pursuant to
the Dodd-Frank Act, 13 either include an exemption for small
banks or are tailored to reduce the cost for small banks to
comply. Supervision and enforcement are also structured to pose
less of a burden on smaller banks than they do on larger banks,
such as by requiring less frequent bank examinations for
certain small banks.
Do you think community banks should comply with the
requirement that loans should be made to people who can repay
them? This is called the ``know before you owe'' rule.
Community banks are largely exempt from both mortgage
origination and servicing rules because they are small
creditors with less than $2 billion in assets or service fewer
than 500 loans.
A.35. I do not know the details on these lending rules to be
able to give an informed opinion.
Q.36. Dodd-Frank limited compensation requirements for loan
originators to prevent steering to high-cost loans. Only
originators that make fewer than 10 loans in a 12-month period
are exempt. Do you support changes to the Loan Originator
Compensation Requirements (Regulation Z)?
A.36. In general, I support regulations that allow low cost
mortgage origination for households. However, I have not
studied in depth the specific issue you cite, and therefore I
do not have an opinion on changes to Regulation Z.
Q.37. Mortgage Servicing Rules under Regulation X and Z are
designed to protect homebuyers from high-cost loans. Servicers
with fewer than 5,000 mortgage loans are exempted from some of
these rules. What changes do your recommend to Regulations X
and/or Z?
A.37. This is not an issue that I have studied in depth, and
therefore I do not have a recommendation.
Q.38. Do you think banks that make more than 25 mortgage loans
should share the loan and borrower characteristics through the
Home Mortgage Disclosure Act database?
A.38. As an economist, I love data. However, I do not know the
costs and benefits borne by the banks by providing this data.
Q.39. Banks with assets under $50 billion are not required to
comply with the liquidity coverage ratio. Do you think they
should be? Why or why not?
A.39. No. I believe banks of this size can access the discount
window if they need liquidity without too much stigma from
borrowing from the Fed.
Q.40. Banks with assets under $250 billion are not required to
comply with regulatory capital rules. Do you think they should
be? Why or why not?
A.40. It is my understanding that all banks have capital
requirements.
Q.41. Debit card interchange fees and routing requirements do
not apply to banks that have fewer than $10 billion in assets.
Do you think banks under this size should comply with
interchange fees and routing requirements?
A.41. This is not an issue that I have studied, and therefore,
I would have to learn more to form an opinion on the question.
Q.42. Do you have recommendations for changes to the Bank
Secrecy or Anti- Money Laundering rules? If so, please
describe?
A.42. I do not at this time.
Q.43. I am very concerned about climate-related financial
risks. The most recent National Climate Assessment said the
U.S. Southwest could lose $23 billion per year in regionwide
wages as a result of extreme heat. Since you joined the Federal
Reserve Board, what have you done to prepare community banks
for long-term shifts in climate patterns, like increasing
extreme heat and more severe and more frequent storms?
Are community banks changing how they operate to consider
these threats to the ability of their customers to repay loans?
A.43. I have not studied or worked on this topic, and therefore
I do not have an opinion on this issue.
Q.44. Are there changes to insurance policies banks should
consider?
A.44. I have not studied or worked on this topic, and therefore
I do not have any suggestions for you to consider.
Q.45. Some have advocated that central banks use their balance
sheet to support the transition to a low-carbon economy, for
example, by buying low-carbon corporate bonds. Do you think
Congress should consider changing the law to support ``green''
quantitative easing as an option for the Fed?
A.45. I believe that is a matter for Congress to decide.
Q.46. Which other Central Banks allow green quantitative
easing? Do you believe those models could translate to the
American financial system and economy?
A.46. I have not studied or worked on this topic, and therefore
do not have an opinion to offer on this topic.
Q.47. In the Fed's Supervisory Report released November, there
was a section on merger and acquisition risks. The banking law
passed last year changed the asset threshold for a small bank
holding company from $1 billion to $3 billion. It also reduced
capital requirements and other rules for banks above $50
billion. We have seen more bank mergers since the law passed.
Do you expect to see more bank mergers this year and next year
than in previous years? How much of merger activity is due to
changes from S. 2155 and other regulatory actions?
What are the risks from mergers and acquisitions?
A.47. Mergers and acquisitions in the banking industry have
been going on for many decades. I am not aware that they have
been growing at a faster or slower pace than in past decades.
Bank mergers typically generate benefits of geographic
diversity and economies of scale. I see little risk from
allowing bank mergers and acquisitions that meet the current
statutory requirements.
Q.48. Beyond the impacts on the customer, what are the risks to
communities when banks merge? Are you concerned about a loss of
branches? Types of products? Jobs?
A.48. Bank mergers are about eliminating inefficiencies and
expanding deposit bases for lending. The world has moved from
physical banking access to borderless banking. I personally
have not stepped into a bank in over a year. This is the future
of banking and payments. Structural transformations of this
type always have winners and losers. I do feel for those caught
in banking deserts but hopefully technology will alleviate the
costs from losing physical access to banking services.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM CHRISTOPHER WALLER
Q.1. Under what circumstances should the Federal Reserve raise
interest rates?
A.1. At present, the factor most likely to warrant an increase
in the policy rate would be an increase in PCE inflation to
over 2 percent along with signs of accelerating inflation
growth. If there were substantial signs of financial stability,
reflected across a spectrum of indicators, then this too could
warrant an increase in the policy rate.
Additional Material Supplied for the Record
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