    [Senate Hearing 116-387]
    [From the U.S. Government Publishing Office]

                                                          S. Hrg. 116-387

                    THE SEMIANNUAL MONETARY POLICY REPORT
                                 TO THE CONGRESS

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

                                    HEARING

                                   BEFORE THE

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

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 SECOND SESSION

                                       ON

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

                                   __________

                               FEBRUARY 12, 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
    42-742 PDF                  WASHINGTON : 2021

    --------------------------------------------------------------------------------------

                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, 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

                                  ----------

                          WEDNESDAY, FEBRUARY 12, 2020

                                                                       Page

    Opening statement of Chairman Crapo..............................     1
        Prepared statement...........................................    38

    Opening statements, comments, or prepared statements of:
        Senator Brown................................................     3
            Prepared statement.......................................    39

                                    WITNESS

    Jerome H. Powell, Chairman, Board of Governors of the Federal
      Reserve System.................................................     6
        Prepared statement...........................................    40
        Responses to written questions of:
            Senator Brown............................................    43
            Senator Scott............................................    46
            Senator Cotton...........................................    49
            Senator Perdue...........................................    50
            Senator Tillis...........................................    52
            Senator Reed.............................................    53
            Senator Menendez.........................................    56
            Senator Tester...........................................    57
            Senator Warren...........................................    59
            Senator Schatz...........................................    73
            Senator Cortez Masto.....................................    81
            Senator Jones............................................    89
            Senator Sinema...........................................    94

                  Additional Material Supplied for the Record

    Monetary Policy Report to the Congress dated February 7, 2020....    95
    LISCC Guidance response letter submitted by Chairman Crapo.......   161

                                     (iii)

             THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS

                                  ----------

                          WEDNESDAY, FEBRUARY 12, 2020

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met at 9:32 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. The hearing will come to order. Senator
    Brown has been delayed a little bit, but I am going to go ahead
    because, as I think most people realize, we had to readjust the
    time of this hearing so that we could accommodate the fact that
    votes have been called on the floor at 10:30. That means that
    Senators are going to need to really stick to their 5 minutes,
    and even then we may not get through for everybody, and I
    apologize for that. I am sure Senator Brown and I will stick
    around for 15 or 20 minutes into the first vote so we can go as
    long as we possibly can.
        I will waive my questions. I will not waive my introductory
    statement, though, and I will start with that right now.
    Welcome, Chairman Powell.
        Today Federal Reserve Chairman Jerome Powell will update
    the Committee on monetary policy developments and the state of
    the U.S. economy.
        The U.S. economy continued to expand in 2019, exceeding 2
    percent growth for the third straight year, as the American
    people enjoy the longest continued economic expansion in
    American history.
        The labor market is strong, with the labor force at an all-
    time high of 164 million people, and the most recent jobs
    report shows that employers added 225,000 jobs in January
    alone, with the unemployment rate at 3.6 percent, remaining
    near a half-century low.
        Wages also grew in January by 3.1 percent from a year
    earlier--and this is important--making it 18 consecutive months
    that pay has grown at an annualized pace of 3 percent or more.
        Americans' view on their personal financial situations are
    increasingly optimistic, according to Gallup trends. Nearly six
    in ten Americans, or 59 percent, now say they are better off
    financially than they were a year ago, up from 50 percent last
    year.
        Tax reform in 2017 and right-sizing regulations--including
    under the Economic Growth, Regulatory Relief, and Consumer
    Protection Act in 2018--have undoubtedly helped fuel this
    strong economy and labor market.
        Americans are set to benefit even more when considering the
    effects of the USMCA and the Phase One Trade Deal with China.
        Despite this substantial progress, there are several
    external factors that could have a meaningful impact on
    economic activity and our financial markets that need to be
    better understood, including:
        The Fed's decision to maintain a significantly larger
    balance sheet in the future, including its recent decision to
    purchase Treasury bills in response to volatility in short-term
    borrowing rates;
        The Fed's future plans to maintain stability in short-term
    borrowing rates, including potential structural, market-based
    fixes;
        The risks of the transition away from LIBOR to an
    alternative reference rate and steps that should be taken to
    ensure a smooth transition and curb risks to businesses and
    financial markets;
        And, finally, the potential impact of the coronavirus on
    global commerce and growth.
        The Fed has also taken a number of important supervisory
    and regulatory actions that merit attention.
        The Fed and other Federal financial agencies recently
    proposed amendments to the Volcker Rule that would improve,
    streamline, and clarify the covered funds portion of the rule.
        That proposal builds on the agencies' simplification of the
    Volcker Rule in 2019, standing to improve market liquidity and
    preserve diverse sources of capital for businesses while
    striking the appropriate balance with safety and soundness.
        Additionally, many Banking Committee Republicans and I have
    raised serious concerns in the past with the agencies'
    supervisory and examination processes, including the use of
    guidance as rules.
        In January, Fed Vice Chairman Quarles offered a road map to
    foster transparency, accountability, and fairness in bank
    supervision, including:
        Tailoring the supervisory framework to better align with
    the categories developed under the Fed's domestic and foreign
    bank tailoring rules;
        Putting significant supervisory guidance out for public
    comment and submitting it to Congress under the Congressional
    Review Act;
        And other commonsense improvements to the supervisory
    process, such as a rulemaking that would cover the agencies'
    use of guidance in the supervisory process.
        This road map is greatly encouraging, and I urge the Fed to
    take steps to put it into motion.
        Finally, there is constant innovation, including in the
    financial services industry, to increase resources to unbanked
    and underbanked populations, reduce friction in payments, and
    increase efficiency in the delivery of financial products and
    services. Some recent examples are:
        Facebook's announcement of Libra, a new stable digital
    cryptocurrency backed by a reserve of real assets and
    leveraging blockchain technology;
        Work by global Governments and central banks to explore the
    development of central bank digital currencies, especially amid
    rumors that China's launch of a digital yuan is imminent;
        The numerous applications of distributed ledger
    technologies, including in clearing and settlement, identity
    verification, and cross-border transactions;
        And some financial institutions' adoption of public cloud
    technologies.
        As I have stated in past hearings, it seems to me that
    technological innovations in this space are inevitable and that
    the U.S. should lead in developing what the rules of the road
    should be.
        During this hearing, I look forward to hearing your
    thoughts, Mr. Chairman, on these important issues and about
    work that the Fed is engaged in to appropriately address them.
    And, again, thank you for joining us today.
        Senator Brown.

               OPENING STATEMENT OF SENATOR SHERROD BROWN

        Senator Brown. Thank you, Mr. Chairman. Chairman Powell,
    nice to have you back and thank you for your accessibility and
    the conversations you have with all of us in both parties on
    this Committee.
        Before we start, I want to stay a few words about what
    happened last night, when we got word that Jessie Liu's
    nomination had been withdrawn. She was to appear in front of
    this Committee or was going to appear in front of the Senate
    when President Trump withdrew her nomination. She was going to
    appear in front of this Committee tomorrow.
        I heard some of you, my colleagues and my friends, say that
    the President would be chastened by impeachment. Some of you
    told me you knew what the President did was wrong. Some of you
    privately told me how much you think he lies. But you also said
    publicly that was not enough to rise to the level of removal
    from office, and many of you asserted that he had learned his
    lesson, he would not do these things again, he would not,
    through illegal means, try to change the 2020 election.
        It is pretty clear the President of the United States did
    learn a lesson: the lesson he can do whatever he wants, he can
    abuse his office, he will never, ever be held accountable by
    this Senate. That was the lesson.
        He has now, since acquittal, gone on a retribution tour,
    starting at the prayer breakfast--a prayer breakfast, mind
    you--continuing through the East Room, where many of you were
    in the audience and applauded him as he personally attacked
    people who have served this country. He removed Colonel
    Vindman, a patriot and Purple Heart recipient who spent his
    life serving our country. He mocked his accent, his accent
    from--his Ukrainian accent.
        He removed Ambassador Sondland, a Trump appointee, after he
    testified to the quid pro quo.
        And yesterday--and the reason I bring this up today--he
    continued the tour, interfering at the Department of Justice,
    strong-arming political appointees to overrule career
    prosecutors. Those attorneys withdrew in protest, those
    professionals. I have no idea of their political party. They
    are professionals. They withdrew in protest from the case and,
    in at least one case, resigned entirely from the Department.
        We cannot give him a permanent license to turn the
    Presidency and the Executive branch into his own personal
    vengeance operation. You all know what is happening. Even the
    Senator that just walked out knows that it is happening. I am
    afraid that is what we are seeing, a personal vengeance
    operation. No one should be above the law.
        If we say nothing--and I include everybody on this
    Committee; I include myself. If we say nothing, it will get
    worse. His behavior will get worse. The retribution tour will
    continue. We all know that.
        Mr. Chairman, now on to the issue at hand. I welcome
    Chairman Powell back.
        Earlier this week, Bloomberg reported on a profitable and
    fast-growing Spanish company. Grifols has opened up branches in
    36 States. They buy and sell plasma--a nice, clinical-sounding
    word that means ``blood,'' as we know. Americans who are
    struggling to make ends meet are lining up to sell their blood
    to put food on the table. The blood-harvesting business is
    booming. Grifols stock is doing great.
        It is hard to think of a better metaphor for the Trump
    economy.
        On Monday, the S&P 500 and Nasdaq both reached record
    highs. In 2019, JPMorgan Chase had the best year for any U.S.
    bank in history, with $36 billion--36 thousand million
    dollars--in profits. Big corporations are spending hundreds of
    billions of dollars on stock buybacks and dividends. On paper,
    the economy has been expanding uninterrupted for over 10 years,
    although the growth the last 3 years of the Obama
    administration has been greater than the growth of the first 3
    years of the Trump administration. We know that, too.
        But if you talk to the vast majority of people who rely on
    paychecks, not investment portfolios, to earn a living, you get
    a very different story. They have been bleeding for years.
        Most families do not understand why the harder they work,
    sometimes at more than one job, the harder it gets to afford
    pretty much everything--childcare, health care, rent, college
    tuition.
        The people in this room may remember last September, when
    the financial industry went into a panic over a benchmark
    interest rate passing 10 percent.
        Wall Street faced uncertainty, so we responded. The Fed
    leapt into action. Smart Government employees came up with a
    plan that led to the Federal Reserve lending about $200 billion
    every day into financial markets through a mechanism that has
    not been used since the financial crisis--$200 billion every
    day.
        Let me be clear: I do not think it is wrong for the Fed to
    be creative and make sure the economy keeps working. It is in
    everybody's interest, Mr. Chairman, for banks to keep lending
    money and credit to keep flowing so businesses can invest and
    manufacture, consumers can buy houses and cars.
        My problem is this: When Main Street faces uncertainty, no
    one at the Fed jumps to action or gets creative. The President
    does not criticize by tweet by name the Chairman of the Federal
    Reserve when he says--he never demands corporations raise wages
    for their workers. That is not ever his criticism of Chairman
    Powell.
        It is hard for families to understand why Wall Street gets
    worked up about a 10-percent interest rate when so many
    families are lucky if the payday lender down the street charges
    them less than 400 percent.
        Small businesses who are having trouble making payroll do
    not have access to so-called repo funding at their local Fed
    branch. The Fed does not take action when its own research has
    found that 40 percent of Americans do not have the cash--think
    about that. Probably not many people in this hearing room, but
    40 percent of Americans do not have $400 in cash when their car
    breaks down to get to work to be able to fix. So they go to the
    payday lender, and then things spiral downward.
        Nobody raises alarm bells when 40 million Americans predict
    they will miss at least one credit card payment, which means
    $1.2 billion in late fees will flow from the pockets of
    struggling families to help JPMorgan Chase earn $36 billion
    last year.
        ``Serious people'' have not dropped everything to bring
    down the cost of housing or raise wages once they found out
    that one in four are paying more than half their income toward
    housing. One thing goes wrong in their life, their lives turn
    upside down.
        People look at that and they see two different economies
    and two different responses. We hear a lot about the divides in
    this country between red and blue, between rural and urban, the
    coasts and the heartland, the people who watch MSNBC and the
    people who watch Fox. But people in all those places feel like
    no matter how hard they work, they cannot maintain any real
    economic security. The real divide I see is between those whose
    problems are considered an ``emergency'' and those whose
    struggles Wall Street and large parts of Washington have
    decided they can ignore.
        The Fed needs to get creative for the people who make this
    country work, particularly because it has become pretty clear
    that the President and the Majority Leader are simply not about
    to.
        President Trump brags about a soaring stock market that he
    has pumped up with deficit-busting, trillion dollar tax breaks
    for billionaires. Deficits exceeding $1 trillion, do not hear
    much about that anymore. And now he wants to pay for those tax
    cuts--sorry, we have got a big deficit, we have got to pay for
    those tax cuts, as he said in Davos and he is saying in his
    budget--by cutting Medicare and Medicaid and Social Security.
        He lies about a ``blue-collar boom''--I heard it at the
    State of the Union that night; I was fairly incredulous--when
    in my own State of Ohio, job growth has been anemic or
    nonexistent, and manufacturing jobs are stalling compared to
    when he took office. And now in his budget, after promising
    workers in Lordstown, Ohio, ``Do not sell your homes. We will
    bring those jobs back,'' he wants to kill the loan program that
    was giving the community of Lordstown a little bit of hope that
    some manufacturing jobs actually would come back.
        Chairman Powell, you and your highly capable staff at the
    Fed have been proactive and creative in protecting Wall Street
    and the money markets from the President's erratic behavior,
    and I am glad you have. We are all appreciative of that.
        But what I hope to hear from you today is how you are going
    to be proactive and use that same level of creativity to make
    this economy work for everyone else.
        Thank you.
        Chairman Crapo. Chairman Powell, I for one commend you for
    the work that you are doing. I think that there are tremendous
    results that I expect you will discuss with us today from the
    efforts that you have undertaken. You may now make your
    statement, and then we will proceed.

    STATEMENT OF JEROME H. POWELL, CHAIRMAN, BOARD OF GOVERNORS OF
                       THE FEDERAL RESERVE SYSTEM

        Mr. Powell. Thank you very much. Chairman Crapo, Ranking
    Member Brown, Members of the Committee, I am pleased to present
    the Federal Reserve's semiannual Monetary Policy Report.
        My colleagues and I strongly support the goals of maximum
    employment and price stability that Congress has set for
    monetary policy. Congress has given us an important degree of
    independence to pursue these goals based solely on data and
    objective analysis. This independence brings with it an
    obligation to explain clearly how we pursue our goals. Today I
    will review the current economic situation before turning to
    monetary policy.
        The economic expansion is well into its 11th year, and it
    is the longest on record. Over the second half of last year,
    economic activity increased at a moderate pace, and the labor
    market strengthened further, as the economy appeared resilient
    to the global headwinds that had intensified last summer.
    Inflation has been low and stable but has continued to run
    below the FOMC's symmetric 2-percent objective.
        Job gains averaged 200,000 per month in the second half of
    last year, and an additional 225,000 jobs were added in
    January. The pace of job gains has remained above what is
    needed to provide jobs for new workers entering the labor
    force, allowing the unemployment rate to move down further over
    the course of last year. The unemployment rate was 3.6 percent
    last month and has been near half-century lows for more than a
    year. Job openings remain plentiful. Employers are increasingly
    willing to hire workers with fewer skills and train them. As a
    result, the benefits of a strong labor market have become more
    widely shared. People who live and work in low- and middle-
    income communities are finding new opportunities. Employment
    gains have been broad based across all racial and ethnic groups
    and levels of education. Wages have been rising, particularly
    for lower-paying jobs.
        GDP rose at a moderate rate over the second half of last
    year. Growth in consumer spending moderated toward the end of
    the year following earlier strong increases, but the
    fundamentals supporting household spending remain solid.
    Residential investment turned up in the second half, but
    business investment and exports were weak, largely reflecting
    sluggish growth abroad and trade developments. Those same
    factors weighed on activity at the Nation's factories, whose
    output declined over the first half of 2019 and has been little
    changed, on net, since then. The February Monetary Policy
    Report discusses the recent weakness in manufacturing. Some of
    the uncertainties around trade have diminished recently, but
    risks to the outlook remain. In particular, we are closely
    monitoring the emergence of the coronavirus, which could lead
    to disruptions in China that spill over to the rest of the
    global economy.
        Inflation ran below the FOMC's symmetric 2-percent
    objective throughout 2019. Over the 12 months through December,
    overall inflation based on the price index for personal
    consumption expenditures was 1.6 percent. Core inflation, which
    excludes volatile food and energy prices, was also 1.6 percent.
    Over the next few months, we expect inflation to move closer to
    2 percent, as unusually low readings from early 2019 drop out
    of the 12-month calculation.
        The Nation faces important longer-run challenges. Labor
    force participation by individuals in their prime working years
    is at its highest rate in more than a decade. However, it
    remains lower than in most other advanced economies, and there
    are troubling labor market disparities across racial and ethnic
    groups and across regions of the country. In addition, although
    it is encouraging that productivity growth, the main engine for
    raising wages and living standards over the longer term, has
    moved up recently, productivity gains have been subpar
    throughout this long economic expansion. Finding ways to boost
    labor force participation and productivity growth would benefit
    Americans and should remain a national priority.
        I will now turn to monetary policy. Over the second half of
    2019, the FOMC shifted to a more accommodative stance of
    monetary policy to cushion the economy from weaker global
    growth and trade developments and to promote a faster return of
    inflation to our symmetric 2-percent objective. We lowered the
    Federal funds rate target range at our July, September, and
    October meetings, bringing the current target range to 1\1/2\
    to 1\3/4\ percent. At our subsequent meetings, with some
    uncertainties surrounding trade having diminished and amid some
    signs that global growth may be stabilizing, the Committee left
    the policy rate unchanged. The FOMC believes that the current
    stance of monetary policy will support continued economic
    growth, a strong labor market, and inflation returning to the
    Committee's symmetric 2-percent objective. As long as incoming
    information about the economy remains broadly consistent with
    this outlook, the current stance of monetary policy will likely
    remain appropriate. Of course, policy is not on a preset
    course. If developments emerge that cause a material
    reassessment of our outlook, we would respond accordingly.
        Taking a longer view, there has been a decline over the
    past quarter-century in the level of interest rates consistent
    with stable prices and an economy operating at its full
    potential. This low interest rate environment may limit the
    ability of central banks to reduce policy interest rates enough
    to support the economy during a downturn. With this concern in
    mind, we have been conducting a review of our monetary policy
    strategy, tools, and communications practices. Public
    engagement is at the heart of this effort. Through our Fed
    Listens events, we have been hearing from representatives of
    consumer, labor, business, community, and other groups. The
    February Monetary Policy Report shares some of what we have
    learned. The insights we have gained from these events have
    informed our framework discussions, as reported in the minutes
    of our meetings. We will share our conclusions when we finish
    the review, likely around the middle of this year.
        The current low interest rate environment also means that
    it would be important for fiscal policy to help support the
    economy if it weakens. Putting the Federal budget on a
    sustainable path when the economy is strong would help ensure
    that policymakers have the space to use fiscal policy to assist
    in stabilizing the economy during a downturn. A more
    sustainable Federal budget could also support the economy's
    growth over the long term.
        Finally, I will just briefly review our planned technical
    operations to implement monetary policy, and the February
    Monetary Policy Report provides details of our operations to
    date. Last October, the FOMC announced a plan to purchase
    Treasury bills and to conduct repo operations, and these
    actions have been successful in providing an ample supply of
    reserves to the banking system and effective control of the
    Federal funds rate. As our bill purchases continue to build
    reserves toward levels that maintain ample conditions, we
    intend to gradually transition away from the active use of repo
    operations. Also, as reserves reach durably ample levels, we
    intend to slow our purchases to a pace that will allow our
    balance sheet to grow in line with trend demand for our
    liabilities. All of these technical measures support the
    efficient and effective implementation of monetary policy. They
    are not intended to represent a change in the stance of
    monetary policy. As always, we stand ready to adjust the
    details of our technical operations as conditions warrant.
        Thank you. I am happy to take your questions.
        Chairman Crapo. Thank you, Chairman Powell. And as I said
    before, I will not use my 5 minutes for questions. In fact, I
    will not use much of my 5 minutes at all, trying to set a
    standard for the record of the Members of this Committee.
        Before I turn the time to Senator Brown, however, and yield
    my time, I wanted to indicate that it has been brought to my
    attention that Senator Shelby, who unfortunately is not able to
    be here right now, recently became the longest-serving Member
    of the Senate Banking Committee in history.
        He began his service on the Committee on January 6, 1987,
    and has now served approximately 33 years 1 month and 6 days.
    That surpasses Senator Sparkman--interestingly, also of
    Alabama--who previously served on the Banking Committee between
    January 6, 1947, and January 3, 1979, almost 32 years. Senator
    Shelby has clearly seen dramatic changes in the financial
    services industry over those years and himself has had a
    meaningful impact on financial institutions, markets, and
    consumers during his tenure on the Committee, including as
    Chairman. I take this opportunity to thank him for his service
    on this Committee and congratulate him on this significant
    milestone.
        Senator Brown.
        [Applause.]
        Senator Brown. Is he here?
        Chairman Crapo. He is not here. I yield my time to you.
        Senator Brown. We will clap again when he comes. Thank you,
    Mr. Chairman. Thanks.
        When the Fed says it is nearing maximum employment and the
    labor market is strong, it could mean workers have one good-
    paying job, or it could mean that a worker is working under 40
    hours at three part-time jobs at minimum wage. I think this
    highlights how the economic recovery has not benefited nearly
    everyone. You hear these statistics, 40 percent, 50 percent
    of--I am sorry, 25 percent of people pay half their income in
    rent, 40 percent of Americans cannot come up with $400. So,
    clearly, it is not reaching everyone. If you have to work three
    jobs or if you are working at a job in one of the ten fastest-
    growing professions--seven out of ten of those jobs are this--
    you still cannot afford rent. Something is wrong.
        I appreciate you have been on a listening tour and I am
    looking forward to your report, but I want to know, who do you
    have at the Fed working on bold and creative ways to use the
    Fed's authority--some tools we probably do not know about--
    using your authorities to help working families that are not
    benefiting from economic growth? What can you do to make sure
    that most of our economic growth, not a sliver of it but most
    of our economic growth, ends up in workers' pockets?
        Mr. Powell. Well, our tools are not focused on
    distributional effects, really. They are focused on aggregate
    effects. We do not have those tools. Other agencies do, and, of
    course, elected officials hold really the power to address
    those issues.
        But I will say that, you know, the thrust of our review of
    monetary policy, the first we have done of this nature, is to
    assure that we have the tools to carry out the mandate you have
    given us of maximum employment and stable prices in a world
    where inflation is trending lower, where the Phillips curve is
    very flat, so that the connection between inflation and
    tightness in the economy is very, very low now, and also where
    interest rates are quite low, which creates a very challenging
    environment for us to carry out the job you have given us, and
    that is why we are doing a deep dive on issues around our
    strategy, tools, and communications.
        Senator Brown. OK. I would ask you to--and these
    conversations can take place individually, too, but I would ask
    you to be as creative as the Fed was. I just have a list here
    of extraordinary Federal actions that did not require Congress.
    I am not arguing Congress has done its job. Senator McConnell
    and the President have refused to raise the minimum wage. It
    has been stuck for 11 years at under $8. They took away
    overtime for about 2 or 3 million Americans because of
    truncating the overtime rule, tax cuts for the rich, and now
    cuts for Medicare--we know Congress is not doing its job to
    redistribute income in any way that is fair to hundreds of
    millions of Americans. We know that, but just this list
    quickly: the Maiden Lane direct purchase of assets, the Primary
    Dealer Credit Facility, converting investment banks to bank
    holding companies so they could borrow from a discount window.
        The Fed has been very creative to the country's benefit
    when Wall Street has reached difficult times, has run into
    difficult times, sometimes of their own making, but the Fed
    is--I am a supporter of the Fed. Some people with my political
    philosophy are not. And I think that you have stepped up in
    many ways. I ask you to be as creative in thinking of ways that
    this wealth is shared beyond the 1 or 2 or 5 or 10 percent who
    are doing very well, who are thrilled with the economy the way
    it is, and it just does not reach so many.
        One other question, Mr. Chairman. I am worried about risks
    in our economy. I am glad the Fed is taking leveraged lending
    seriously, incorporating it into stress tests. At the same
    time, we are seeing the financial system get more and more
    exotic. JPMorgan Chase through a supposedly unaffiliated fund
    wants to buy an electric plant in El Paso, also owns a stake in
    a nuclear power plant. That means that JPMorgan Chase could
    likely own a nuclear power plant. The Japanese equivalent of
    Amazon wants to form an industrial loan company in Utah so it
    can get the benefits of being a bank without the regulation.
    And, recently, you voted with other bank regulators to weaken
    the Volcker Rule by reversing protections in the 2013 rule
    allowing for more risky and leveraged investments.
        Are we going in the right direction? It seems the financial
    system again is getting more complex, more exotic, things
    people do not understand. Shouldn't we be focusing on
    simplifying it?
        Mr. Powell. Well, what we are focused on is maintaining
    much higher capital, much higher liquidity requirements, stress
    tests, as you pointed out, that keep the banks on their toes
    and do address in a timely way the issues of the day, and also
    resolution planning. So those are the big four important
    measures broadly that we put into place after the financial
    crisis, and we are focusing on sustaining those, making them
    more effective, and keeping them strong.
        Chairman Crapo. Senator Toomey.
        Senator Toomey. Thanks very much, Mr. Chairman.
        Welcome back, Mr. Chairman. Good to see you again. I have
    several somewhat technical questions I would like to go over
    with you, and some of them we have discussed to varying degrees
    in the past. But one is the Fed's real-time payment system. As
    you may recall, I was never convinced that this was a great
    idea for the Fed to pursue this since we have a private sector
    system in place up and running and really encouraged by the Fed
    back in the day. But I get the Board of Governors has made its
    decision.
        Here is my question for you: A number of constituents have
    expressed the concern that we are going to end up with two
    systems that are not fully interoperable. And to the extent
    that employers and financial institutions and other
    participants would be plugged into different systems, if they
    are not fully interoperable, there is a real concern that that
    is going to at a minimum diminish the ability to innovate in
    these systems going forward.
        So I guess I am wondering if you could--just briefly,
    because I do have several other topics--just address the
    question of whether it is a priority of the Fed to ensure that
    the FedNow system will be fully interoperable with the
    clearinghouse system.
        Mr. Powell. Full interoperability is the goal. It will be
    challenging to reach it, but it is a high priority to assure
    interoperability. It is something we are very focused on in the
    design stage.
        Senator Toomey. OK. And as I am sure you are aware, the
    clearinghouse system is committed to having flat fees and not
    providing discounts for volume and the size of transactions,
    provided that the FedNow system does not provide those kinds of
    discounts. Can the Fed commit that it will have uniform pricing
    on this platform?
        Mr. Powell. We have not made that commitment, and it is not
    clear that that is what our--that the banks who really wanted
    us to do this are looking for.
        Senator Toomey. Well, this is often cited as a reason why
    the Fed needed to do this, is because the private system might
    discriminate on the basis of price. So I think it is important
    that the clearinghouse system has volunteered--clearly, they
    are happy to be regulated if need be to ensure that this would
    occur. It would be really ironic and a shame if it turns out
    that it is, in fact, the Fed that makes it more expensive for
    small banks to participate.
        Let me move on to SOFR. As we have discussed, you know, one
    of the challenges of replacing LIBOR is that LIBOR has an
    embedded credit risk element, it is an interbank rate; whereas,
    SOFR is a risk-free rate because it is essentially a repo rate.
    And that mismatch could conceivably create some problems,
    especially to the extent that banks are funding themselves in
    an interbank market that is subject to spreads that SOFR may
    not reflect. And so a mismatch in assets and liabilities could
    become problematic.
        So my question is, I think yesterday you may have--and I
    did not see the transcript, so correct me if I am wrong. But
    you may have suggested that there is a thought of trying to
    introduce a credit component, some kind of credit spread or
    credit risk component to, as either a complement or an
    alternative or somehow integrate that with SOFR, and I am just
    wondering. Did I get that right? Is that something you guys are
    thinking about? Are you concerned about it at all?
        Mr. Powell. I will just quickly say that LIBOR itself, we
    cannot assume that it will be published past the end of 2021.
    So that has not changed, and everyone needs to take that on
    board. SOFR is going to be the rate that a lot of the
    derivatives go to and many, many across the broad financial
    system will go to. But a number of banks have come forward and
    said that they want to work on a separate rate, which would not
    replace SOFR but would be credit sensitive. And so they are
    doing that now, and we are working with them to support that
    process. So, you know, we are open to that, but it does not
    mean that the transition away from LIBOR to SOFR will stop. It
    has to go forward.
        Senator Toomey. OK. The last thing on my list here, the
    glitch in the repo market. As you and I discussed briefly, my
    concern is when banks choose to earn less than 2 percent on
    excess reserves when they could be earning up to 10 percent, at
    least briefly, in the repo market. It suggests that there is
    something going on here, right? They could have put their money
    into the repo market. They chose not to.
        I am not aware of an explicit rule that required that
    during the episodes when these rates spiked, but, nevertheless,
    it happened. And so I wonder, and I am a little concerned that
    there might be some kind of unspoken pressure on the part of
    regulators to favor cash on deposit with the Fed over liquidity
    in the form of repo transactions that goes beyond what is
    actually in the rules. And I am wondering, if you share that
    concern, what you think about it. I know the Fed's response has
    been to provide liquidity, and that works in a given moment.
    But if there is an underlying problem that has not been fixed,
    then isn't there the risk that the spike in repo rates could
    recur and you have to provide liquidity again. Could you
    address that?
        Mr. Powell. Sure. So there is not a preference for reserves
    over Treasurys in the LCR, but there is in the internal
    liquidity stress tests in the sense that, you know, it takes 1
    day to turn a Treasury into liquidity, just inherently there
    is. And I think the idea of putting Treasurys and reserves on
    an equal footing in terms of their treatment so that they can
    achieve liquidity is a good goal because we would--we do not
    want to tilt banks in the direction of having to have more
    reserves than they really need. As long as the overall level of
    liquidity is at the appropriate level, we do not want to tilt
    them in that direction. It may well be that we are doing that.
    You may have seen Vice Chair Quarles give a speech on this, and
    he talked about this issue at some length.
        So we are looking at ways to address that, one of which is
    just to assume that the discount window is available in that
    stress test, which is a reasonable assumption to make. But I do
    think there are things to do there, and the reason is, as you
    mentioned, there was liquidity but it did not flow, so it was
    not liquid. And so the question is why not, and we are looking
    at ways to address that that will not undermine safety and
    soundness but that will make the markets operate better.
        Senator Toomey. Thank you.
        Chairman Crapo. Senator Reed.
        Senator Reed. Well, thank you very much, Mr. Chairman. Let
    me thank you, Chairman Powell, for your leadership. Thank you
    for joining us in Providence. It was a wonderful evening.
        I think it is important, too, your efforts to ensure the
    independence of the Federal Reserve. Without an independent
    Federal Reserve, our national policymaking is, in my view,
    severely flawed, so keep up your efforts, please.
        You mentioned that we have had an expanding economy for 11
    years. By my count, that would be 8 years under President
    Obama, and 3 years under President Trump. The expansion is
    good, but there are still some issues I think we should
    address. The Pew Center put out a report in January, and they
    indicated that the share of wealth held by middle-income
    families has been falling for roughly 20 years, and I would
    like you to comment on whether it continues to fall despite
    this expanding economy. And in addition to that, they point out
    that income inequality in the U.S. has increased since 1980. If
    it is still increasing, please comment on that. And it is
    greater than in peer countries, other countries that are
    similar to us in many other aspects.
        So despite this expanding economy, if we are seeing a
    shrinkage of wealth in the middle class, and income inequality,
    those are social, political, and economic trends that I do not
    think are sustainable over time. They go to the fabric of the
    country. So are those trends continuing? And what policies can
    we adopt, both fiscal and monetary to change them?
        Mr. Powell. Those are longer-term trends that I think are
    driven by important underlying factors, many of them global. So
    I think that--I would assume that the data will continue to
    move in that direction. I think what they show is that incomes
    have been moving up across the income spectrum, particularly if
    you look at benefits and if you look at after-tax effect, it
    gets more even that way. But it has been a particularly good
    time to be at the top end of the income spectrum. I would point
    to two key problems I think we ought to address. One is low
    mobility. We actually have lower mobility from, say, the bottom
    quintile to the middle quintile or the top quintile than many
    other advanced economies. This is not our self-image as a
    country, and it is something we need to address.
        The other is just that the relative stagnation of those
    incomes in the middle and the low end, you know, we want, of
    course, prosperity to be broadly shared, and it comes down to
    really education and training and things like that that enable
    people to do well in the modern economy, which is a globalized
    economy that is less about manufacturing--and the manufacturing
    jobs are more technical than they were. So we need a workforce
    that can benefit from technology and globalization, and those
    are policies that the Fed does not have our hands on.
        Senator Reed. No, you do not have those policies, but if we
    just sit back, those trends will continue and they will cause
    even further divergence between the vast majority of Americans
    and a very small group of Americans. So it is incumbent upon
    Congress and the Executive to start taking steps. Is that fair?
        Mr. Powell. I think so. And I also think U.S. businesses
    get this very much now. If you talk to business leaders, they
    see the workforce and the need for, you know, widely shared--we
    want prosperity to be as widely shared as possible. You hear
    that all the time from business leaders and certainly
    Government leaders as well. I do think it is an important
    national priority.
        Senator Reed. Thank you.
        Just switching gears here, the Community Reinvestment Act
    is being massaged by both the Office of the Comptroller of the
    Currency and the FDIC, and there have been some comments
    critical of their efforts, not just by, you know, affordable
    housing advocates but by some banking institutions, that they
    are not doing a proper cost-benefit analysis and that their
    proposal unintentionally could discourage revitalization of
    neighborhoods that really do need it most.
        Can you let us know what role you might play and how you
    can help get it right?
        Mr. Powell. Sure. So, first of all, we are not going to
    comment on their proposal. And it is out for a proposal. I
    think all of us, including the FDIC and the OCC, are looking
    forward to seeing those comments and learning more.
        I think we do share the goal of modernizing CRA. Technology
    and demographics have really changed the delivery of banking
    services, particularly in rural areas, for example, but
    everywhere. So it is time to do that. That has not been done in
    25 years. I think we agree on the goal, which is we want it to
    be more effective, and it would help that if it were
    transparent, more objective. So I think we share objectives
    with those agencies, and we worked closely with them for a long
    time to try to get completely on the same page. We developed
    our own approach, which was slightly different, a bit
    different, and we were not able to get together in the end. But
    I think we should look at it as an ongoing process where we
    will continue to learn, and that is going to be our approach.
        Senator Reed. Again, thank you, Mr. Chairman. And I will
    stress independence one last time.
        Chairman Crapo. Senator Sasse.
        Senator Sasse. Thank you, Chairman. Chairman Powell, thanks
    for being here. We are grateful for your work.
        You have been consistently raising warning bells about what
    you have called ``the greatest threat'' to the financial
    system. You talk to many of us in private about cyberissues,
    and you said it yesterday over on the House side. I do not
    think it is breaking through. Can you summarize for us why you
    are awake at night worried about cyberattacks on our financial
    system?
        Mr. Powell. Sure. So they kind of pay us to be awake at
    night worrying about things, and I would say that if you look
    at what happened in the financial crisis, we had a game plan
    there; we implemented it over the course of 10 years. I will
    not say that it is perfect or anything like that, but we have a
    plan that is meant to address those kinds of things.
        What is new in the threat environment is, you know, the
    ongoing level of cyberthreat and the increasing sophistication
    of it, and so that is what we--we spend a ton of time worrying
    about that, and, you know, the Treasury Department has really
    been taking the lead on that, and I think, you know, we have--
    so we are very focused on it. We are focused on making sure
    that the financial institutions that we supervise are doing the
    best that they can to stay at the state-of-the-art, good
    cyberhygiene. It turns out that a lot of these things are just
    people failing to implement updating their software and things
    like that. That is where a lot of breaches happen. So, I mean,
    it is an intense focus by supervisors and by financial
    institutions, also by nonfinancial institutions. Companies that
    are in, you know, all kinds of businesses are having this now.
    It is an enormous focus. We will never say that we have--it
    never feels like we have done enough, but it is just something
    we keep trying to get better and better at, lots of resources
    on it in all the agencies and all the companies.
        Senator Sasse. And if you would concretize for us, give us
    maybe two examples of a way that you think this attack could
    have, you know, spillover efforts. How do the dominoes work
    without giving somebody a template or road map? You have talked
    in private a few times about ways that this could cause bigger
    consequences than 2008 and 2009. How would that happen?
        Mr. Powell. Without wanting to get too much into it, I
    would just say that confidence in the financial system is
    really important. The public has to have confidence in the
    financial system. And so a successful cyberattack on a payments
    utility, for example, would be challenging. We could address
    that. We could isolate it. We could fix it. But you would want
    to avoid somehow broader blows to confidence. Because when
    confidence weakens, people will take their money out. They will
    stop acting and things like that. Uncertainty and lack of
    confidence are the enemy of economic activity and growth.
        Senator Sasse. I think we need to also recognize that the
    many different conversations we have with the Chinese
    Government tend to have a benign diplomatic flavor. I think we
    should underscore what has happened this week, with the Equifax
    hack having new headlines, so the 2017 hack of Equifax which
    compromised the personal financial records of more than 30
    percent, 35 percent of all Americans. The Justice Department
    earlier this week indicted four Chinese Communist Party
    officials affiliated with military intelligence in China. This
    is not an accident. This is the same Communist Party that
    hacked the OPM records and now has moved on to Equifax.
        Can you envision scenarios where the Chinese Community
    Party was hacking into the U.S. banking system?
        Mr. Powell. Well, we need to be resilient against all
    cyberthreats, and certainly, you know, State actors are a big
    part of that. And so we are well aware of those. By the way, we
    have help from the intelligence agencies and others in the
    Government in keeping our eyes out for that.
        Senator Sasse. Shifting gears a little bit, the President's
    budget came out this last weekend, and some of us are going to
    be in the Finance Committee later today discussing the larger
    budget. We tend to have headlines that focus on whatever the
    discretionary programs are that tend to be more hot button and
    current in the news. But you have talked consistently about
    health entitlements and its challenge to the--or maybe more
    broadly than health entitlements, the inefficiencies of our
    health care delivery system. For a developed Nation, we have
    very mediocre health outcomes, and we have ridiculously high
    price tags.
        Can you talk a little bit about the consequences of U.S.
    health on competitiveness, on our larger economy?
        Mr. Powell. I would be happy to. Of course, I should start
    by saying that it is not really--we do not do fiscal policy,
    and we do not give you advice on fiscal policy. But since you
    ask, really, the budget--the biggest issue of our Federal
    budget is just its health care spending. And it is not that our
    benefits are too generous. It is that we deliver them in a way
    that is measured by the outcomes. The outcomes are perfectly
    average for a First World Nation, but we spend 6 or 7 percent
    of GDP more than other countries do. And so it is about the
    delivery, and that is a lot of money every year that you are
    effectively spending and getting nothing. And I have to leave
    it with you there. It is not for us or for me to prescribe, you
    know, fixes. But I think that really is what it is about. Those
    discretionary things, of course, are very high profile and they
    get a lot of reporting, but ultimately that is what is driving
    it.
        Again, I would stress it is not that these benefits are
    fabulously generous. They are just what people get in Western
    economies. But we deliver them at the cost of, you know, 17, 18
    percent of GDP, and others do it at 11 percent of GDP. That is
    what we should be focusing on.
        Senator Sasse. Thank you, Chairman.
        Chairman Crapo. Senator Tester.
        Senator Tester. Well, thank you, Mr. Chairman and Ranking
    Member Brown, for having this hearing. And I want to thank you,
    Chairman Powell, for your work. I did not hear all of Senator
    Reed's questions, but if it has to do with independence of the
    Fed, count me on that bloc, too. I think it is critically
    important you maintain that independence and hang to it, and I
    applaud you on your efforts thus far.
        Both the Fed, through lower rates, and Congress, through
    increased spending, through increased debt, have been taking
    actions to boost the economy during a long stretch of growth. I
    am concerned that if we do approach a downturn--and there are a
    number of indicators out there that are concerning to me--that
    our options to address a downturn are limited. I want to hear
    your perspective on what the Fed has, its ability to react to
    an economic downturn, the tools.
        Mr. Powell. Thank you. So our traditional tool, of course,
    is interest rates, and low rates are not really a choice
    anymore. They are a fact of reality, and they are likely to
    remain. So we will have less room to cut. That means it is much
    more likely that we will have to turn to the tools that we used
    in the financial crisis when we hit the lower bound.
        Senator Tester. Which is?
        Mr. Powell. Which is forward guidance, which says that we
    will keep rates low, and then it is also large-scale asset
    purchases of longer-term securities to drive longer-term rates
    down and support the economy. We will use those tools. I
    believe we will use them aggressively should the need arise to
    do so. There is no need to do that now. But we will use those
    tools aggressively.
        The sense of the review that we are undertaking of our
    strategy, tools, and communications right now and which we
    think we will announce our conclusions on in midyear is that we
    are looking to make sure that in this low rate environment,
    difficult environment for central banks and for those who we
    work for, that we are using our tools as best we can, that we
    have explored every possible way to find, you know, every scrap
    of policy space, if you will, to be able to support the
    economy.
        And then, finally, I would just stress that it is important
    that fiscal policy be in a position, as it always has been, to
    support the economy in a downturn as well.
        Senator Tester. So let me ask you this: The debt is at $23
    trillion right now? Is that about right? Something like that.
        Mr. Powell. Yes.
        Senator Tester. At what point in time do you get concerned?
    I mean, I think the budget the President just put out adds
    another $1 trillion to the debt.
        Mr. Powell. It is very hard to say at what level you get
    concerned. I would say I would be concerned now. It is really
    the rate of increase. What we need to do is have the debt grow
    slower than the economy is growing. If the economy is growing
    faster than the debt, then effectively leverage is going down,
    so debt to GDP will not be--what is happening is debt to GDP is
    going up and going up fairly quickly as these things move.
    Other countries have managed to get to very high levels, much
    more than ours, but what it means is that 20 years from now we
    will be spending those tax dollars, our children will be
    spending those tax dollars on servicing the debt rather than on
    the things that they really need. We are sending them those
    bills.
        Senator Tester. And the debt does not go down if the
    economy downturns?
        Mr. Powell. No, no, not at all. Quite the opposite.
        Senator Tester. Exactly right. It becomes much bigger of an
    issue.
        Mr. Powell. Yeah.
        Senator Tester. I want to talk about housing because it is
    a big issue I think everywhere, rural America and urban
    America. From your position, what do you see the housing
    challenge and impact on individuals and the economy?
        Mr. Powell. Housing is generally facing difficulties in
    affordability. The housing industry is doing better and
    building more houses and is profitable and housing starts are
    going up. But I think from the standpoint of the public, you
    have a squeeze going on which has to do with difficulty in
    getting lots; you know, there are just supply side constraints
    which are keeping the quantity of housing down, lack of skilled
    labor, regulations of various kinds. And so what you see many,
    many places, not just in big cities, you see housing
    affordability challenges, and it is a fairly wide-scale
    problem.
        Senator Tester. And I just want to ask this really quickly,
    because there has been a lot of debate for a number of years,
    much of it started by the Senator to my left, on GSE reform.
    Does GSE reform or lack of GSE reform have any impacts on the
    housing situation?
        Mr. Powell. I think in the long run it is very important
    that GSE reform happen, that we move forward with that. I think
    that is a big unfinished piece of business from the financial
    crisis. It is not really ideal to have the entire housing
    finance system riding on the Federal Government. In the long
    run, it would be better to move forward with something, I
    think. And I think in the long run that is a more sustainable
    basis for housing finance.
        Senator Tester. Thank you for your work. I have some other
    questions on agriculture. I will put them in the record.
        Thank you very much for your service.
        Mr. Powell. Thank you.
        Senator Brown [presiding]. Senator Rounds.
        Senator Rounds. Thank you, Mr. Chairman.
        Mr. Chairman, first of all, welcome. And I just want to
    echo what some of my colleagues have said about the
    independence of the Fed, and I think on both sides of the aisle
    you will find strong support for an independent Fed.
        I would like to begin by asking you about a rule that I
    recently filed a comment letter on, and that is the Fed's
    building blocks approach. As I mentioned in my letter, it does
    not seem to make sense for the Fed to resurrect the original
    Section 171 calculation from Dodd-Frank. I understand that this
    particular calculation unintentionally imposed bank-centric
    capital rules on insurance savings and loan holding companies,
    which have a totally different business model.
        Congress spoke very clearly through the passage of the
    Insurance Capital Standards Clarification Act that its intent
    was for banks to be regulated like banks and for insurance
    companies to be regulated like insurance companies. Given the
    clear intent of Congress, why has the Fed chosen to revisit
    Section 171? How does the Fed intend to move forward?
        Mr. Powell. Thank you for your comment. We got a number of
    comments on that issue, and we are looking at it. And, of
    course, we have looked at the law change, and the question we
    are asking is whether there is--you know, what is the nature of
    the change made in the law and does it apply here? So we will
    be reviewing those comments and, you know, considering them in
    getting to a view on that.
        Senator Rounds. As you know, one of the reasons for having
    these open discussions is to bring attention to it, and, in
    fact, I think it is a very serious issue, and I think it does
    need the full attention of the Fed, and hopefully you will get
    it resolved as quickly as possible to avoid any questions that
    may be lingering out there.
        Mr. Powell. Will do.
        Senator Rounds. I would also like to talk a little bit
    about--Vice Chair Quarles recently remarked that business fixed
    investment continues to be weak, having declined over the
    course of 2019. Do you think it is fair to say that a large
    part of this is driven by uncertainty with regards to trade and
    that businesses are waiting to see how trade tensions are
    resolved before they are prepared to make further investments?
        Mr. Powell. You know, I would say there are a bunch of
    factors that we need to look at. One is just the global growth
    slowdown, particularly in manufacturing. Another is lower oil
    prices. In the United States, a big swing factor in business
    fixed investment is drilling. Our work and that of many outside
    economists does suggest that there is also a role for trade
    policy, and uncertainty around trade policy. So, I mean, the
    short answer to your question would be yes, I do think there is
    upside there, to the extent businesses see uncertainty around
    the trade situation as having declined.
        Senator Rounds. OK. Recently, I understand that there has
    been a discussion about groupthink and about how the Fed
    approaches it within the meetings. Do you think it is important
    for the Fed Board to reject groupthink and consider a variety
    of different viewpoints?
        Mr. Powell. I do. In fact, I very much do. I am strongly
    inclined to think that you need to hear all sides of a case. In
    fact, when I was a private equity investor, I used to speak
    against my own deals just to force people to defend them, so I
    would, you know, really get a sense that I believe in things.
    So it is critical to have diverse perspectives. I really think
    we do, though, particularly through the--if you think about it,
    the Reserve Bank System guarantees from an institutional
    standpoint that we will always have diverse perspectives on
    monetary policy.
        On regulation, you know, where we get it is from the
    comments and from the disparate group of people who are on the
    Board. If you look at who is on the Board, a number of us have
    primarily private sector backgrounds, and we bring that to the
    table.
        Senator Rounds. Pretty fair to say that you can have people
    from varying points of view that can have very lively
    discussions, and yet at the end of the day still be a part of a
    very strong team.
        Mr. Powell. Absolutely. I really think it just makes you
    stronger. I do. I feel that way. And, of course, we have had
    plenty of dissent at the Fed over the years.
        Senator Rounds. Thank you. One last question. When the
    Board voted on its rule for tailoring resolutions plans last
    fall, Vice Chair Quarles gave a statement essentially saying
    that there is more that could be done when it comes to
    tailoring from a supervisory standpoint. Can you elaborate on
    how the Fed intends to move forward with this?
        Mr. Powell. So Vice Chair Quarles, as I am sure you know,
    gave a speech on that and laid out really quite a number of
    aspects of that. You know, so we are going to be--these were
    ideas. They are not quite at the stage of being proposals yet,
    but we are going to be looking at those.
        Senator Rounds. How will they be manifest? Are they going
    to come out as a rulemaking? Or are they going to come out as
    guidance?
        Mr. Powell. Some of it will be rulemaking; some of it will
    be guidance; some of it will be changes to guidance. If you
    look, there are many, many different ideas. I think the key
    thing is he highlights the tension between, you know, the right
    to due process and clarity that we depend upon from our
    Government. Right? But also with supervision, there is also a
    role for discretion and for confidentiality. So I think it is a
    very thoughtful process of looking at that and asking how can
    we make it more transparent with more due process, but still
    effective because supervision has to be firm but fair.
        Senator Rounds. Thank you.
        Thank you, Mr. Chairman.
        Chairman Crapo [presiding]. Thank you.
        Senator Warner.
        Senator Warner. Thank you, Mr. Chairman. Chairman Powell,
    great to see you again. Thank you for your good work.
        I want to make a couple quick comments, echoing what
    Senator Rounds and Senator Reed and others have said. I think
    there are a lot of our institutions' independence under assault
    these days. I share some of the concerns of Senator Brown about
    the independence of the Justice Department. I fight on a
    regular basis to try to make sure the intelligence community
    can maintain their independence.
        I would ask and frankly plead with you that, if you see
    efforts made to undermine the Fed's independence, you keep this
    Committee fully abreast. I think the Fed's independence is more
    important than ever at this point.
        I am going to also follow up on my good friend Senator
    Sasse's comments about Equifax. I share with you the belief the
    challenge that China poses. But I also think, particularly in
    the case of Equifax and the credit rating agencies broadly,
    none of us choose to be an Equifax customer, or any credit
    rating agency. That break-in, that cyberattack was due to
    sloppy behavior by Equifax, and the fact that we have not put
    in place, frankly, any enhanced rules of liability around these
    credit reporting agencies is something I hope--I know I have
    talked with the Chairman at times--that we would come back to,
    because I think while we have to be on guard, if we do not have
    at least de minimis standards and they can bake this kind of
    obscene break into the cost of business, I do not think that is
    good for anyone. And, again, I hope we are able to come back to
    that.
        I do have a bunch of questions for you as well, Chairman
    Powell. Yesterday in your testimony, you talked about this
    movement toward digital currency, something I am very
    interested in, and you indicated, you know, it is possible that
    there might be a United States-backed digital currency. We have
    the possibility of doing that. My question is: Would that be
    desirable? I get the component parts around it. A digital
    currency might provide convenience and potentially even lower
    friction costs in terms of credit to consumers. But how do we
    weigh in privacy and cyberconcerns? How would that deal with
    our retail banking system? And do you think the Fed has the
    capacity to do this without congressional approval? Go at it a
    little bit more, and then I have got one last question about
    China's role in this space. But talk to me first about the
    domestic implications.
        Mr. Powell. Sure. So you have listened the potential costs
    and benefits. The benefits would include, you know, perhaps
    greater financial inclusion, lower costs, more convenience, and
    all those things. Their risks or costs would include cyberrisk
    and fraud risk and privacy risk and things like that. So I
    think there is a lot to weigh and a lot to work on there.
        Every major central bank in the world right now is doing a
    deep dive on digital currencies, and we think it is our
    responsibility to be at the very forefront of knowledge and
    thinking about a central bank digital currency.
        Senator Warner. Would you take a positive action on that
    without congressional input? Do you feel like you have that
    authority?
        Mr. Powell. So it would depend a lot on the design choices.
    It is a good question, one that we are working on. I would say
    we are working very broadly, including working with other
    central banks around the world, on this. There is just a lot of
    thinking and experimentation and understanding that we are
    gaining. And if there is a need for--if we conclude that we
    need more authority and that this is something appropriate to
    do, then we will ask for the authority.
        Senator Warner. One of the things you mentioned yesterday--
    and I and Senator Sasse and a number of us who are on the
    Intelligence Committee are concerned about the rise of China in
    a series of areas. And I think it is clear that China may move
    quicker than us on a digital currency. You said you have got
    some visibility into what China might be doing on digital
    currency. I would love you to spell that out a little bit. Do
    you think they will use their influence through kind of Belt
    and Road investment strategy and the number of countries that
    have kind of bought into that system, that they might be then,
    you know, also buying into that Chinese digital currency? What
    would that do in terms of cross-border? What would that do in
    terms of dollar supremacy? You know, any further guidance you
    might have on your insight into China's actions in this space
    would be helpful.
        Mr. Powell. I would just say we have to assume that--what
    would that mean? We have to ask the question: What would it
    mean if China had a digital currency that had fairly wide
    adoption, including to other countries? We have got to ask
    that. I think we have also got to ask what if a private sector
    entity, you know, a large company with a large network of
    users, has a digital currency? So we are looking----
        Senator Warner. That has already popped out, and I think we
    have pretty bipartisan concerns on that one.
        Mr. Powell. That is why we are doing all this work. We
    understand. I would say Libra was something that lit a bit of a
    fire. This is something--we have been focusing on digital
    currencies for, you know, a couple decades, but it has really
    lit a fire around the world right now, so we are doing a great
    deal of work.
        Senator Warner. My time is up. I just want to say I would
    urge, having seen China's ability to move aggressively in a
    series of other areas, that you start forging that coalition of
    the willing amongst other central banks sooner rather than
    later.
        Thank you, Mr. Chairman.
        Chairman Crapo. Senator Perdue.
        Senator Perdue. Thank you, Chair.
        Mr. Chairman, thank you for being here again. It is good to
    see you. I just have one quick question in light of the time.
    You know, we have two dynamics right now that are driving the
    economy in different directions potentially. Labor is now a
    limiting factor in terms of we have got roughly 7 million job
    openings and about 5 million people looking for work. So it a
    phenomenon right now that is a limiting factor.
        On the other hand, we have low energy costs. Since 2007, we
    have doubled our output of oil such that now we are a net
    exporter of oil and gas, the largest producer in the world.
    Eight percent of our economy is energy; 15 percent of our CapEx
    is going to that today. We produce 50 percent more barrels of
    oil a day than Saudi Arabia and about 18 percent of the world's
    output. My question is: Are we in a low energy price
    environment? And what assumptions are you making then over the
    next decade? And what impact do you think that will have on
    inflation, deflation? I know you have talked about deflationary
    concerns in the past. Where are we today on that big factor in
    our economy--energy?
        Mr. Powell. So it has been transformational. If you think
    back when we were in college, if energy spiked, inflation went
    up, people got out of work, there were long lines at the gas
    pump. We now have a very large domestic energy industry which
    amounts to a shock absorber. When that happens, U.S. drilling
    goes up with the price of oil. It puts people back to work. It
    controls prices. It controls inflation.
        So we are in a situation where that particular mechanic for
    inflation going up is just not happening anymore because the
    supply response from the U.S. industry is quick and large, so
    you will not see that having sustained effects on inflation,
    and also you will not see it having sustained negative effects
    on growth, because it kind of offsets, roughly offsets the
    effect of lower energy prices at the pump. That will slow the
    economy down a bit. But the new supply that comes on will put
    people to work. It will be different people, but overall, it is
    a very different and better place to be.
        Senator Perdue. Are you concerned about the workforce
    participation rate? With the growth of jobs over the last 3
    years, workforce participation recently has bumped up a little
    bit, but it really has not moved as much as one might have
    thought.
        Mr. Powell. It is greatly a surprise to the upside, which
    is a great thing. But, remember, the prediction--basically,
    labor force, just because of demographics, participation should
    drop by about a quarter-of-a-percent a year. It has now been
    flat since 2013. We think there is more upside. So what is
    happening is labor is tight everywhere, but, actually, there is
    a supply response from the public, which is a very positive
    thing. We never thought we would see 63.4 percent labor force
    participation again. Nobody had that in their model 7 years
    ago. But that is what we have, and it is really a very positive
    thing.
        Senator Perdue. Good. Thank you, Mr. Chairman.
        In light of time, Mr. Chair, thank you very much. I yield
    back.
        Chairman Crapo. Thank you.
        Senator Schatz.
        Senator Schatz. Thank you, Mr. Chairman. Thank you,
    Chairman Powell, for being here.
        First question: How does income inequality impact economic
    growth? There is a lot of talk on the policymaking side of the
    impact on families. How does it hit your analysis? And what can
    be done on your side of the shop?
        Mr. Powell. Well, obviously people who are at the bottom
    end of the income spectrum whose incomes are not growing, their
    consumption will be constrained. You know, their consumption
    will be constrained, and their marginal propensity to consume
    out of new dollars will be high. To the extent gains are going
    to the people at the top, their marginal propensity to consume
    out of wealth will be low, so that it will not be hitting GDP;
    it will be going into savings. But those are effects that will
    show up quite gradually over time. Inequality is a gradually
    moving phenomenon.
        Senator Schatz. Talk to me about the relationship between
    productivity and unemployment. Is there a new relationship that
    is emerging? Is there any new thinking along those lines?
    Because I think the traditional analysis is as productivity
    goes up, that is basically good for the economy; but it seems
    to me that at least the way people perceive it is that those
    two things are decoupled, that productivity goes up, that does
    not mean wages go up. And I am wondering whether that is a
    change or if that is sort of more of a political overlay to
    say, hey, look, things may look good but we are still on the
    bottom eating your scraps. I am wondering whether it is more
    than that and that there is actually a change in the way you
    analyze this.
        Mr. Powell. Well, I think we are always learning. We are
    always learning, and we have seen relatively low productivity
    in the wake of the financial crisis. And it appears to be
    persistent, and that is going to mean lower wages.
        Ultimately, you need rising productivity to create rising
    standards of living. It just has to be that way. It does not
    mean in any given year you will see that. But you do see a
    pretty tight connection between--if you add in benefits, not
    just wages, but look at the full cost of employment, you see--I
    will not call it ``tight,'' but you see a connection between
    rising productivity and rising wages.
        Senator Schatz. I guess the question is they are no less
    correlated than they used to be?
        Mr. Powell. I would not say that, no. I would say, if you
    look at the moment, if you think of wages as being right around
    3 percent, productivity growth has been low, has just recently
    moved up. It recently moved up close to 2 percent. And
    inflation is 2 percent.
        Senator Schatz. The other thing I would add is that if you
    are doing total compensation, if most of the increase in total
    comp is just that the employer absorbed a 7-percent increase in
    health care costs, you know, that is not really an increase in
    wages in the traditional sense. I get that from the employer's
    standpoint it sure feels like an increase in wages. But if you
    are trying to maximize compensation, it means nothing to a
    regular person who says, ``OK, I have got no more money, but it
    cost my employer more, so I should be happy about that.''
        Let me just move on to climate. I have a couple of
    questions. What is the Fed doing in regard to climate-related
    financial disclosures? I know you are making some progress. I
    would like you to talk about that.
        Mr. Powell. I think, like others, other central banks, we
    are at the beginning of the process of understanding how
    climate change affects our work. I think one way we know that
    it will affect our work is that the public will count on us to
    make sure that financial institutions that we regulate--central
    counterparties, banks, things like that--will be robust to the
    risks that come from climate change. And we are at, as I said,
    the beginning of understanding exactly what all that means.
        In terms of disclosure, you know, it is more really an FDIC
    issue. They are the ones who regulate appropriate disclosure,
    and I think they have been doing some work on this lately.
        Senator Schatz. You had an exchange with a Member of the
    House, I think it was yesterday, and the question was whether
    we ought to be stress-testing for climate risks, and you said
    you are watching the Bank of England. I am wondering if you can
    elaborate on that.
        Mr. Powell. So they are doing stress tests which are not at
    all connected to CCAR, what would be the CCAR process, which is
    the one that relates to the amount of dividends, distributions
    that a company can have. This is more just exploratory. They
    are exploratory scenarios, and we are very closely monitoring
    that. You know, we have good relationships with all the major
    central banks, especially the Bank of England and others. So we
    will be looking at that, and it is something we will be
    thinking about. We have not made any decisions, but as I said,
    these are early days. We are actually doing, you know, a fair
    amount of work all through the Federal Reserve System on
    understanding this emerging risk.
        Senator Schatz. Thank you.
        Senator Kennedy. Mr. Chairman, thanks for being here. I
    think you are doing a great job.
        Senator Brown [presiding]. Senator Kennedy.
        Mr. Powell. Thank you.
        Senator Kennedy. Thank you, Mr. Chairman.
        Our labor force participation rate is much better, but
    compared to other OECD countries, we lag. Why?
        Mr. Powell. That is a great question. So it is a
    combination of things, no doubt. It is that educational
    attainment in the United States, which was once the highest,
    has really fallen relative to our peers, and particularly among
    lower- and middle-income people, the level of educational
    attainment has really plateaued.
        Senator Kennedy. Right.
        Mr. Powell. And that is the key thing for keeping in the
    labor market----
        Senator Kennedy. What else?
        Mr. Powell. That is one. I would say the opioid crisis is
    not helping. I would say, you know, if you think about it, both
    globalization and technology probably advantage people of
    relatively high education and do not advantage people, for
    example, in manufacturing. So if you think about what has
    happened to the manufacturing base in many, many countries, a
    lot of those jobs have either been automated or moved abroad.
    The manufacturing that we have now is very efficient and does
    not use as many people.
        Senator Kennedy. What else? Has trade played an impact?
        Mr. Powell. Sorry?
        Senator Kennedy. Trade tariffs.
        Mr. Powell. Well, I would say trade tariffs--well, through
    this period, we really have had declining tariffs since World
    War II until lately here.
        Senator Kennedy. Right.
        Mr. Powell. And we have had increasing labor force
    participation here because of the underlying strength----
        Senator Kennedy. Does the richness of our social programs
    play a part?
        Mr. Powell. It is very hard to make that connection, and I
    will tell you why. If you look in real terms, adjusted for
    inflation, at the benefits that people get, they have actually
    declined. During this period of declining labor force
    participation, they have not gone up in real terms. So it is
    not better or more comfortable to be poor and on public
    benefits now. It is actually worse than it was.
        Senator Kennedy. All right. It seems to me--and there is
    going to be a question in here, I promise. I know sometimes you
    never get one.
        Mr. Powell. That is OK.
        Senator Kennedy. It seems to me that any fair-minded person
    would have to conclude that our economy is better. I am biased,
    of course, but I think the Tax Cuts and Jobs Act worked. And we
    have seen wage increases, including, but not limited to, the
    bottom quartile. And we have seen unemployment go down. But we
    still have a problem in America, and a lot of anger, and I
    think the root--this is one person's opinion, but the root of a
    lot of that anger is that we still have too many people in this
    country who are not participating in the great wealth of this
    country, not economically, not socially, not culturally.
        I think Sanders supporters and Trump supporters have more
    in common than they realize. The American Dream has become the
    American Game to them, and they think it is fixed. Now, the
    managerial elite is doing fine, but I am talking about ordinary
    people.
        What, if any, role do you think the Fed should play in
    helping us address that?
        Mr. Powell. First of all, I think there is a lot in what
    you said. The single most important thing we can do is take
    seriously your order to us to achieve maximum employment.
    ``Maximum employment,'' that is what the law says. And that is
    what we are doing. We are using our tools to keep an eye on
    maximum employment, and I think there is no reason why the
    current situation of low unemployment, rising wages, high job
    creation, there is no reason why that cannot go on. There
    really is not. There is nothing about this economy that is out
    of kilter or imbalanced. That is the main thing that we can do.
        We do other things that are in the nature of convening. You
    know, we do a lot of research in your State and others. The
    Federal Reserve Bank will have an operation where they are
    trying to convene resources around issues of education and
    poverty and things like that in poor communities. We do not
    have the ability to spend money on it. We get community people
    around a table and try to organize things that help the
    community, as I am sure you know.
        So it is not really something we can do a lot about other
    than research and do our jobs on monetary policy.
        Senator Brown. Thank you, Senator Kennedy.
        Senator Cortez Masto.
        Senator Kennedy. If I could have another 10 seconds, Mr.
    Chairman? I was distracted because you were talking.
        Stay independent. I think you are doing a great job, and
    all of us in politics are going to give you plenty of advice.
    But call them like you see them.
        Thank you.
        Senator Brown. Senator Cortez Masto.
        Senator Cortez Masto. Thank you, Chairman Powell. It is
    great to see you again. Thank you so much for being here and
    always being responsive.
        Let me follow up on this line of discussion of maximum
    employment, and I so appreciate the conversation. You keep
    talking about a level of educational attainment that is so
    important. What do you define as that education? When you talk
    about that, what does that mean?
        Mr. Powell. Anything that gives you skills that would work
    in the workplace. That could include internships; that could
    include the kind of training that people are getting now who go
    right out of high school into a program. It is not meant to be
    limited to, you know, college as such or, you know, getting a
    liberal arts degree. It is really the acquisition of skills in
    society.
        Senator Cortez Masto. So do you think we have changed in
    society, that it is very difficult now to just graduate from
    high school and get a job that pays a decent wage for your
    family without getting some sort of additional education?
        Mr. Powell. Yes, it is. I think you see that very much. For
    people with high school degrees, their incomes have stagnated
    badly for a long time. What happens with technological change
    is that it wants higher and higher levels of skill, and if
    society provides those people and those skills, then incomes
    can go up across the board and inequality can go down. That was
    the American story for a long, long time.
        Senator Cortez Masto. Sure, but isn't part of that--and
    this is why I am curious your thoughts on this. Part of that
    also has to do with the wages and the increase in wages and the
    level of wage that you are paying. Are you saying just because
    you graduate from high school and you want that job, whatever
    that job is that you are able to do, it should be a minimum
    level of wage and should never increase, even with the gains in
    productivity that we have seen over the years?
        Mr. Powell. No, I am not saying that at all.
        Senator Cortez Masto. OK, good, because I agree with you.
    Because I think there are also people in this country--and I so
    am pleased with the high unemployment rate, but I also think--
    and they live in my State--that are working two jobs. They are
    actually working two jobs because the wages are so low. And I
    think there is a disparity that we have to do a better job of
    understanding.
        I was looking through the Monetary Report that you gave,
    and I am curious. Do you identify--because I did not see it
    here, but do you identify those individuals who are actually
    working two jobs?
        Mr. Powell. Those are identified in the data collected by
    the Bureau of Labor Statistics, yes, and----
        Senator Cortez Masto. And that is what you utilize here?
    And is that data that you can provide that gives us a better
    understanding----
        Mr. Powell. Sure.
        Senator Cortez Masto. ----of how many Americans across this
    country are actually working two jobs just to make ends meet?
        Mr. Powell. Very high level right now.
        Senator Cortez Masto. Yeah, and that is what I would like
    to see. I think that would be helpful----
        Mr. Powell. We can share that with you.
        Senator Cortez Masto. ----for us as we work with you moving
    forward.
        Just one final question because I know the votes have been
    called. You note in your opening remarks that there are
    troubling labor market disparities across racial and ethnic
    groups and across regions of the country. Can you go into more
    specifics with that statement?
        Mr. Powell. Sure, and we actually had a box in our Monetary
    Policy Report I think a year ago about rural and urban
    disparities, which are just getting wider and wider and wider,
    and it talked about, you know, what might be causing that. You
    really have a long-term trend here that is challenging for
    people in rural areas.
        In terms of racial and ethnic disparities, the African
    American unemployment rate is roughly twice that of the overall
    unemployment rate, and, you know, you see different groups. So
    it is troubling that these things would persist in this way. We
    do not have the ability to operate directly on that other than,
    again, by carrying out our mandate of maximum employment and
    stable prices.
        Senator Cortez Masto. But as you study it, what are you
    finding? Why is there that disparity? What can you point to?
        Mr. Powell. Which disparity?
        Senator Cortez Masto. The racial disparity that you just
    talked about.
        Mr. Powell. You know, I think it is tied into history, to
    our history, and there are higher levels of poverty in the
    African American community, as you know, and that is because of
    our history. But we would like to see those gaps declining more
    than they are.
        Senator Cortez Masto. OK.
        Mr. Powell. Those are not tools that we have. Tools that
    you have to do that.
        Senator Cortez Masto. But there is nothing--and what I am
    looking for is the data. There is no data or no data points
    that you are collecting that helps us identify that racial
    disparity, why it is occurring and how we can address it?
        Mr. Powell. Oh, there is lots and lots of research on that.
    We would be happy to----
        Senator Cortez Masto. That you have? That you have access
    to?
        Mr. Powell. Sure.
        Senator Cortez Masto. Perfect. That is what I am looking
    for.
        Mr. Powell. OK.
        Senator Cortez Masto. Thank you.
        Senator Scott [presiding]. Senator Tillis.
        Senator Tillis. Thank you. Chair Powell, welcome back.
    Thank you for a lot of the good work you are doing over in your
    lane.
        I do have a couple of questions. The first one that I want
    to talk about, we have seen particularly in the FDIC, a real
    stepped-up effort to take a look at guidance and other actions
    short of an APA promulgated rule to rethink and revise or
    rescind. Can you give me an idea of how that is going on in the
    Fed?
        Mr. Powell. Sure. So, you know, we have forthrightly said
    that guidance is not a rule; guidance is not binding; it is not
    the basis for enforcement actions and things like that. And we
    have made that very clear to our supervisors. So I think we
    are--you may have seen Vice Chair Quarles' speech where he
    addressed some of these issues, so we are working on that as
    well.
        Senator Tillis. If we drill down, I know you are aware of
    the GAO ruling on LISCC. There is a lot of talk here, I happen
    to agree with the discussion, that you all need to remain
    independent, but there is something that concerns me that came
    out after you received the word from the GAO or OMB, and it
    relates back to, I think, a letter your general counsel wrote
    back in June of last year, which I have it in front of me now.
    It says that you are continuing to assess the scope of the
    Federal Reserve's obligation to send supervisory guidance
    documents to Congress under the CRA.
        Does that mean you are exempt from that oversight?
        Mr. Powell. So the question is whether we are required to
    send guidance. We do send some guidance up, and, again, this is
    another one that Vice Chair Quarles----
        Senator Tillis. So what is the current position on the
    LISCC consultation from the GAO? Is it taking LISCC down?
        Mr. Powell. On LISCC, no, what we are going to do with
    LISCC is we are going to, I think, articulate clear standards
    for what firms should be in LISCC. In fact, Vice Chair Quarles
    has already laid out an approach which I think makes a lot of
    sense, which is LISCC should be for the U.S. G-SIBs, and really
    try to tie the whole approach more to the tailoring categories
    that we set up.
        Senator Tillis. Now to the other, CRA, the Community
    Reinvestment Act. I have one question. Rumors swirl around this
    building probably the way they do in the Fed and the whole of
    Government. So the question that I have relates to the Fed's
    plans for either joining with the FDIC and the OCC on the
    rulemaking. Some have said that you have provided an assurance
    to Waters that, without Governor Brainard's support, you would
    not join into that. Is that just a rumor or an assurance you
    have given Chair Waters?
        Mr. Powell. That is not how we are looking at it. What we
    are doing is we are trying to develop--we developed our own
    thinking on CRA reform, as did the OCC. They took a lot of our
    ideas, but in the end we were not able to get on the same page.
    And I am very comfortable with where we are now.
        Senator Tillis. What would be the rational basis for two
    standards?
        Mr. Powell. There are going to be two standards, anyway.
    Under the FDIC/OCC proposal, about 70 percent of their
    institutions will be able to opt out of that standard. So there
    is going to be the existing standard, and then there will be
    the new standard, assuming that they go forward with it. So
    there will be two systems, and if we do not do anything, then
    we will just be like the 70 percent of the institutions that
    they supervise.
        Senator Tillis. Is Vice Chair Quarles on point for this?
        Mr. Powell. Is he on point for this? He is----
        Senator Tillis. Wouldn't the Community Reinvestment Act be
    within his lane?
        Mr. Powell. It is certainly broadly within all of our lanes
    on the Board. We will all have to vote on this. This actually
    has always been handled by a different group, which is DCCA,
    which Governor Brainard chaired, and I asked her to take the
    lead on this. But, ultimately, it comes down--I am very
    comfortable with where we are on this.
        Senator Tillis. Thank you. I was going to ask some
    questions similar to Senator Toomey's--I will not--on FedNow.
    But I am going to submit some questions for the record that are
    just basically about the mechanics of the FedNow
    implementation, five straightforward questions.
        Thank you.
        Senator Scott. Thank you, Senator Tillis.
        Senator Jones.
        Senator Jones. Thank you, Mr. Chairman.
        Chairman Powell, thank you for being here. Let me echo
    other colleagues on both sides of the aisle regarding the
    independence of the Fed. I concur that it is extremely
    important that we maintain that independence.
        I want to ask you a little bit about home ownership. It
    kind of follows up a little bit with what Senator Kennedy was
    talking about, wealth gaps between so many Americans. It seems
    that nationwide home ownership is relatively stable, but there
    are also massive disparities in home ownership by age, race,
    and ethnicity. The African American home ownership rate fell to
    a 50-year low in 2016 at just 41.7 percent. It remains about 30
    points below white home ownership.
        Similarly, the Hispanic home ownership rate is just 48
    percent. Again, far below the white or average home ownership
    rate.
        Millennials are less likely to own a home by age 34 than
    their parents and grandparents, and I am concerned that if
    trends continue--and by that I mean to some extent we have got
    relatively--wages are rising, but they have not been rising as
    fast as we would like. Home ownership costs are increasing at a
    greater rate. So I am concerned that if these trends continue,
    a growing number of Americans are just going to get locked out
    of home ownership.
        So my question: What are the economic consequences in terms
    of both wealth building for minorities and the broader economy
    of leaving the disparity in the realm of home ownership
    unaddressed? And do you have suggestions of how we in Congress
    or the Fed can address home ownership?
        Mr. Powell. Let me say first I would agree with you that
    there are pressures on affordability which are very widespread
    that have to do with difficulty in getting land zoned and
    difficulty in acquiring workers and just costs, regulatory
    costs, material costs, that are really putting pressure on
    house prices, upward pressure. And it is, as I said, quite
    widespread around the country.
        You know, in terms of the level of home ownership, I think
    we do not want to be back in a situation where we push the idea
    of home ownership past what is financially sustainable for
    people. We kind of did that in the precrisis era. So what has
    happened is that credit is much less available now for people
    without spotless credit records, and that is a lot of what is
    behind some of the data you cited. And I think it is a good
    question. Did we move too far? I do not have a view that we
    did, but I think it is a good question to be asking on that,
    making sure that people who should have access to credit and
    can handle borrowing of that size get it.
        Senator Jones. I know Senator Cortez Masto was asking--I
    would like to get some of that same information, by the way,
    about the racial disparities because I assume there is some
    connection with that in economics as well.
        Let me, in the short time I have got left, go back to the
    lower rate of labor force participation. How can we just
    encourage that? How can we get more participation and get those
    numbers up? What can we do, what can you do, if anything, to
    try to get more folks in that participation in the market?
        Mr. Powell. So what we can do is continue to use our tool
    to support a strong labor market, and it is very good to see
    those participation rates rising to the levels that people did
    not--I mean, economists did not think we would see those levels
    again, and we are seeing them, which is a really positive
    thing.
        But, you know, longer term, that is not really a strategy.
    We need policies that will--ultimately, people have to have
    skills and aptitudes that will keep them in the labor force and
    ways that they can take part in the labor force. And I think
    that is where other Government policies come into effect. You
    know, it is a lot of education and training and also policies
    that will support attachment to the labor force. You know, we
    would be happy to sit down with you and talk about that, but
    that is important. Other countries that have leapfrogged us do
    more of those kinds of things and also have had more rising
    educational attainment, which I think all of those things will
    help.
        Senator Jones. Great. Well, thank you for that, and I look
    forward to the discussion about that a little bit.
        Thank you, Mr. Chairman. I yield back.
        Chairman Crapo [presiding]. Thank you.
        Senator McSally.
        Senator McSally. Thank you, Mr. Chairman.
        Chairman Powell, on February 2nd, the American Banker
    published an article that was titled, ``When a Small Town Loses
    Its Only Bank''. The article mentions Duncan, Arizona, which
    had only one bank and recently closed its doors. The residents
    of Duncan are now forced to drive approximately 40 miles to
    conduct any banking. Local businesses no longer have a place to
    make daily deposits or get change, and any customer service
    issues require driving long distances.
        The article states that, ``The economic implications are
    enough of a concern that the Federal Reserve has been studying
    what happens in areas where residents no longer have access to
    a local branch.''
        So my first question is: What has the Fed learned in that
    study? And why do you think this is happening? It is not just
    happening in Duncan, Arizona, but really across rural Arizona
    and rural America.
        Mr. Powell. So we published the study, as you mentioned. We
    had meetings all around the country and did research, and I
    think we did find that the loss of a branch, particularly in
    these rural communities, can be a serious blow. It is the
    availability of financial services, but it is also that a bank
    is an important civic citizen and contributes in many ways to
    that town.
        Actually, I think Duncan--I think we had an event in
    Duncan. I think that was one of our events, now that I think of
    it. So we learned that, and you see it happening--bank branches
    are going down in--have been reduced in a number of
    jurisdictions, but you see it more in rural----
        Senator McSally. Right.
        Mr. Powell. And, also, the people who are in rural areas
    are more likely to--more inclined to use a bank branch rather
    than electronic banking----
        Senator McSally. Exactly.
        Mr. Powell. ----so the effects are really significant. So
    we saw that, and it is quote a negative effect.
        Senator McSally. You know, these are banking deserts. How
    does the Fed define a ``banking desert''? Is it just about
    geographic distance needing to travel or the number of
    customers or any other economic statistics for this? And you
    are absolutely right. More people in urban areas may be using
    online banking. Rural areas have two challenges: one is they
    are possibly less inclined to do that, that is not part of the
    culture; but also we have connectivity challenges without rural
    broadband. So those two things further hurt rural communities.
        So how do you guys define ``banking deserts''? And what
    else can be done to address this issue?
        Mr. Powell. There is no accepted definition, but I think it
    is one of those things where you know it when you see it. So it
    is a place where people do not have access to basic banking
    services. Duncan would be a classic example. The fact that you
    would have to drive 40 miles to get there, that is a banking
    desert. It turns out that many of these banking deserts are
    actually in the high desert, by the way, so that is another
    indicator.
        Senator McSally. Go figure.
        Mr. Powell. But it is a real issue in rural America,
    principally.
        Senator McSally. Do you have any ideas within your role and
    our role on how we can address this issue?
        Mr. Powell. So, you know, we cannot be in the business
    ultimately of telling banks that, you know, they cannot close
    branches.
        Senator McSally. Right.
        Mr. Powell. But we can find incentives for them to support
    rural areas, and CRA reform may be one vehicle for that where
    we can move--and this is a constructive aspect of the other
    agencies' proposal, is moving to support more activity of a CRA
    nature in rural areas. So that is one idea.
        It is challenging, though. As you know, for quite a while
    now, people have been leaving rural areas and moving to the
    cities, so these are longer-term demographic pressures.
        Senator McSally. Great. I appreciate it. I look forward to
    maybe following up with you to talk more about this issue.
        Mr. Powell. Glad to do it.
        Senator McSally. Thanks. I also want to touch on the labor
    force participation and wage growth issue. I know many Members
    have already asked you about it, but it is really great to see
    so many Americans and Arizonans coming off the sidelines and
    getting back into the workforce, and we are starting to see,
    you know, wages go up as well, especially for the lower levels
    of the economic spectrum.
        Can you just touch on a little bit more the dynamics that
    you are seeing, the positive nature of that, and, you know,
    where you are seeing people coming off the sidelines and how
    wage increases are impacting?
        Mr. Powell. Sure. So it is a combination of people just not
    leaving as much and people actually coming back in. As you may
    have seen, unusually, at this point, most of the people who are
    newly employed do not come out of unemployment. They come from
    out of the labor force. So we break down everybody into
    different categories. The biggest flow I think by far now is
    from out of the labor force to employment, which is clearly a
    sign of relatively low unemployment. There are just fewer
    people that are unemployed, but also just that there are people
    who are outside the labor force who are having job
    opportunities. So that is very positive.
        The thing is we did not expect this. It is very positive,
    and we just want to do whatever we can to continue to foster
    this trend, because, you know, there is nothing like a job to
    get people's lives right and get them on a good track, so it is
    very good to see this, and we are using our tools to make sure
    that we can foster that.
        Senator McSally. Great. Thank you. I am out of time. Thank
    you, Mr. Chairman.
        Chairman Crapo. Senator Van Hollen.
        Senator Van Hollen. Thank you, Mr. Chairman. And thank you,
    Chairman Powell, and like my colleagues, I want to thank you
    for your accessibility, and I always appreciate the opportunity
    to have a fact-based conversation here.
        Before I get to some of my questions, I just want to thank
    you and the Fed for moving ahead on the FedNow system. I think
    it will save millions of Americans billions of dollars when it
    is implemented.
        Now, we passed a huge tax cut back in December of 2017. It
    dramatically increased the annual deficits and the long-term
    debt. And at that time, in December 2017, here is what
    President Trump tweeted out. He said that his tax cuts were
    going to rock the economy to growth rates of 4 percent, 5
    percent, and maybe even 6 percent.
        Mr. Chairman, the economy has not gotten anywhere near 6
    percent growth in the last 3 years, has it?
        Mr. Powell. No. We have had continued moderate growth of a
    little better than 2 percent.
        Senator Van Hollen. Right, and we have not had growth at 5
    percent or 4 percent, and, in fact, the Trump administration
    has not ever hit 3 percent annual growth, has it?
        Mr. Powell. So 2018 was marked at 3 percent, but then got
    marked down actually to 2\1/2\ percent. You never know. Maybe
    it will get----
        Senator Van Hollen. But we are having a reality-based
    conversation, so the answer is no, right? It has not hit 3
    percent; is that right?
        Mr. Powell. According to the current statistics.
        Senator Van Hollen. Yeah. And if you look at the budget
    that was just submitted by the Trump administration, they are
    predicting 2.8 percent growth for the coming year--again, very
    far from what President Trump was talking about, 4, 5, 6
    percent. But even at that number, 2.8 percent, that is higher
    than the most optimistic projections for the 2020 GDP from the
    17 FOMC members, right?
        Mr. Powell. We do not have, you know, a unified forecast.
    We do not adopt or vote on a forecast. But we do show a dot
    plot--of disclose data--and I think the median forecast would
    be in the low 2s for FOMC participants for this year.
        Senator Van Hollen. Yeah, if I look at the median forecast,
    it is actually 2 percent, and the most optimistic bullish was
    2.3 percent, still a full half percent of GDP below the
    President's projections.
        So let me now turn not from the aggregate numbers but to
    the real wages, because there has been a lot of hype lately,
    but I want to get a sense of where people really are. And,
    obviously, it is good news that the unemployment numbers have
    continued to come down on the trajectory they were following
    when President Trump was sworn in. But if you actually look at
    real compensation--and I recall from an earlier hearing your
    view is that the Employment Cost Index, ECI, is probably the
    best measure of compensation. Is that right?
        Mr. Powell. In a sense it is. They all have their little
    virtues, though.
        Senator Van Hollen. I just was looking at the numbers, and
    compensation grew by an average of 0.94 percent per year during
    President Obama's second term, and that compares to 0.63
    percent per year. This is in inflation-adjusted terms, 0.63
    percent growth in compensation under President Trump. So, in
    fact, the real compensation that workers are getting in the
    workforce was actually higher during Obama's last term compared
    to now.
        Is this a reflection of how difficult it has been to
    actually translate overall economic growth into higher real
    wages for Americans?
        Mr. Powell. Yes, it is. I mean, part of that really is that
    inflation has moved back up a little bit, which is something we
    have been actually trying to accomplish. But I think more
    broadly, though, wages have moved up from about 2 percent to
    about 3 percent now, and if you look at other expansions, even
    adjusting for productivity, you would have expected them to
    move higher than that. So it is a bit of a surprise that we
    have not seen real unit labor costs move up, which is to say
    that people are getting paid more than productivity and
    inflation in what should be a tight labor market but is not
    showing up as tight in wages.
        Senator Van Hollen. Exactly. And you say inflation went up,
    and that was the intention, but, of course, when it comes to
    real purchasing power for Americans, that is what they care
    about, whether their wages are able to make purchases.
        We do not have time to get into it, but the budget did just
    come up here. The Chairman of the Senate Budget Committee has
    announced he does not want to have a hearing on the budget. I
    hope he will change his mind. But a lot of the cuts that were
    made there include cuts to student loan opportunities and some
    of the things that you mentioned that actually could lead to
    higher productivity in the economy. So I will follow up with
    some written questions on that.
        Senator Van Hollen. Thank you.
        Mr. Powell. Thank you.
        Chairman Crapo. Thank you.
        Senator Cotton.
        Senator Cotton. Thank you, Mr. Chairman, for joining us
    again. I want to speak today about the coronavirus and its
    potential impact on the U.S. and the global economy. Yesterday
    Senator Menendez and I and a couple other Senators introduced a
    resolution honoring Dr. Li Wenliang, a Chinese doctor who died
    last week of coronavirus. What makes him unusually notable
    among the now more than 1,000 victims of the coronavirus is he
    was one of the first persons to blow the whistle on the Wuhan
    coronavirus in early December. He was silenced by the Chinese
    Communist Party. In fact, he was summoned in the dark of night
    and forced to sign a statement denouncing his warnings. And,
    unfortunately, he contracted it and died, leaving behind, as I
    understand, a wife, a small child, and another child on the
    way.
        Another example of these kind of practices I want to cite
    is the Chinese lawyer and journalist Chen Quishi. He was known
    for reporting on the conditions in Wuhan. He has since
    disappeared.
        I raise these examples, and I could multiply them at great
    length, as just simple illustration of Chinese dishonesty and
    lack of transparency in trying to handle the effects of this
    outbreak. Obviously, that has a most important impact on our
    ability to understand the virus and develop effective tests and
    a vaccine for it. But what kind of effects does it have on you
    and the Fed's ability to try to understand the economic impact
    of it, dealing with such untransparent conditions coming out of
    Beijing, as you get a grasp of what the possible impact could
    be for China, for the United States, and for the global
    economy?
        Mr. Powell. So as you point out, the real question for the
    Fed is: What is the likely effect on the U.S. economy? And I
    think we will begin to see it in economic data coming out
    fairly soon, and we do not--it is too uncertain to even
    speculate about what the level of that will be and whether it
    will be persistent or whether it will lead to a material change
    in the outlook. But we do expect that there will be some
    effects, and the effects should be substantial in China,
    important but maybe less substantial in their immediate trading
    partners. And we will know--we will be looking at the economic
    data, and I cannot really comment on the other kinds of data.
    We look at that, too, of course, carefully.
        Senator Cotton. And, of course, I would not expect that
    from the Federal Reserve. We get that from HHS and CDC and
    other agencies like that. Are Chinese economic or central bank
    officials in contact with the Federal Reserve or their other
    counterparts around the world to try to help you and your
    counterparts understand that economic impact, though,
    recognizing the dishonesty and lack of transparency of health
    officials and political leaders?
        Mr. Powell. I am absolutely sure that will be the case. You
    know, there have been some conversations, but I think it is too
    early to say. I think no one really knows. I think their focus
    now--the big focus there is containing the outbreak. And, of
    course, the central bank and the Government itself, the rest of
    the Government, have been undertaking lots of measures to
    support economic activity.
        I think certainly as they know more, we will know that,
    too. We, of course, have that kind of a relationship with their
    central bank.
        Senator Cotton. OK. I want to commend the Trump
    administration for taking decisive action a couple weeks ago to
    stop travel from China and the other steps they have done in
    terms of contact tracing and trying to get testing kits out to
    the front lines. Right now, as of this morning, I think we only
    have 13 confirmed cases in the United States. I think we can be
    confident there is more than that, but hopefully there will not
    be many more. If that remains the case, if there is not a
    widespread outbreak in the United States because of the actions
    the U.S. Government took, is the main economic risk to the
    United States the fragility of supply chains that originate in
    China? And what happens at the very beginning of those chains
    in factories which may not have any or sufficient workers?
        Mr. Powell. You are right, supply chains is an important
    issue. We do get a lot of--we import a lot of sort of
    intermediate goods from China and final goods, too, and that
    will be an issue. It will also be--our own exports there, of
    course, will be suppressed during this period. We will not get
    as much Chinese tourism. And then the other channel I would
    mention is just financial markets, which can create their own
    transmission into the economy to the extent there are really
    strong reactions in financial markets.
        So we will be looking at all of that, and, again, we do
    expect to start to pick it up relatively soon.
        Senator Cotton. OK. Thank you, Mr. Chairman. Of course, far
    and away the top priority of our Government must be the health
    and safety of our people, but we do not want to lose sight of
    the potential economic harm to our people's well-being and
    prosperity, so I appreciate your attention to this important
    matter.
        Chairman Crapo. Senator Menendez.
        Senator Menendez. Thank you. Thank you, Chairman Powell,
    for your service.
        Let me ask you something. The Northeast Corridor where I
    come from--New Jersey, New York, that region--generates about
    20 percent of GDP for the entire Nation. If we had a major
    infrastructure failure, for example, the closing of one or both
    of the Trans-Hudson tunnels into New York City, the end of the
    Portal Bridge, which is the linchpin that takes Boston to
    Washington throughout the Northeast Corridor, would that not
    create a significant economic risk?
        Mr. Powell. If it were sustained, yes. If you are talking
    about a sustained closing, that could. Things happen and then
    we fix them, and they do not show up much in GDP. But if they
    are sustained, then yes.
        Senator Menendez. Well, let me just share with you
    something I would like to bring to your attention as you look
    at these issues. Amtrak estimates that a shutdown of the
    Northeast Corridor for a single day--for a single day, talk
    about sustained issues--would cost our economy $100 million.
    Again, that is just in 1 day. So if we cannot get this
    infrastructure to ultimately be sustained--and we saw from
    Superstorm Sandy tremendous damage to the Trans-Hudson tunnel.
    They are both a century old. We have a century-plus bridge that
    does not close correctly, that stops the entire traffic across
    the Northeast Corridor, so every lawyer, every medical patient,
    every business that does intercity rail travel across from
    Boston to Washington get stopped and loses time, and if it
    cannot be closed successfully, they take sledgehammers to close
    it. That has a significant economic impact. And I would urge
    the Fed to look at that as a question about our infrastructure
    needs.
        That is why I am so frustrated by the Administration not
    seeing the importance of what we call the ``Gateway Project'',
    two new Trans-Hudson tunnels, the rebuilding of the 109-year-
    old Portal Bridge. We just got some good news on that, but
    overall, this is a project of national significance in a region
    of the country that generates 20 percent of GDP for which
    intercity rail traffic is incredibly important.
        Let me turn to the Community Reinvestment Act, which I
    think is an essential tool as one of the minority Members on
    this Committee and in the Senate against discrimination, about
    curbing redlining, meeting the needs of low- and moderate-
    income families. However, instead of strengthening this
    important civil rights law, the OCC and the FDIC released a
    proposed rule that relies heavily on a dollar ratio metric for
    measuring all of the banks' CRA activities and gives little
    value to community input.
        Mr. Chairman, why is it important for an updated CRA rule
    to focus on loan count rather than on dollar value of a loan?
        Mr. Powell. In our thinking, loan counts are important
    because they go to the very purpose of the statute, which is to
    assure the provision of credit to low- and moderate-income
    individuals and to their communities. So we think that loan
    counts are an important aspect of that, in fact.
        Senator Menendez. Do you agree with Governor Brainard that
    focusing on loan value, as the updated OCC and FDIC proposal
    does, ``runs the risk of encouraging some institutions to meet
    expectations primarily through a few large community
    development loans or investments rather than meeting local
    needs''?
        Mr. Powell. I think it is a risk, and, you know, really, as
    you know, we worked to try to get aligned, fully aligned with
    that proposal. We were not able to get there. They were not
    able to get to our proposal either. So we are going to be
    looking to see the comments on all those provisions which will
    be coming in. We will be carefully looking at those as we think
    about our path forward.
        Senator Menendez. So when you say that, did you, the
    Reserve, share its concerns about emphasizing metrics that
    place too much value on loan volumes and not on the community
    input?
        Mr. Powell. Yes, we shared all of our work, and we tried
    to--and they took many of our ideas, by the way. They
    incorporated a lot of our ideas. So----
        Senator Menendez. They did.
        Mr. Powell. Yes, they did. But we were not able----
        Senator Menendez. Will you send us what particular items
    were incorporated that you shared with them?
        Mr. Powell. Sure, and Comptroller Otting has identified
    many of them in his testimony in the House a couple weeks ago
    as ideas that they had incorporated from our work.
        Senator Menendez. But the key concern seems to have been
    ignored, in particular, the one that----
        Mr. Powell. So I think their proposal looks at both counts
    and dollars, but there are a number of differences, and----
        Senator Menendez. So a final question. Have either you or
    Governor Brainard taken the CRA proposal to the Federal Reserve
    Board yet?
        Mr. Powell. No, we have not. Really, our focus was on
    trying to get aligned around one proposal with the OCC and the
    FDIC, and now we see ourselves as waiting to learn more from
    that process.
        Senator Menendez. Well, for those communities of color,
    this is critically important, and I hope the Fed will show
    leadership in this regard and make sure that the community
    participation continues to be a hallmark of what the CRA is all
    about.
        Chairman Crapo. Thank you, and that concludes the
    questions, although I am going to come back and ask one quick
    question that was not on my list to start with. You have been
    asked a lot, Mr. Chairman, today about wages, and I just want
    to verify a statistic with you that I am familiar with. My
    understanding is that wage growth was 3.1 percent last year.
        Mr. Powell. That is average hourly earnings for the 12
    months ended December 31.
        Chairman Crapo. And did that make 18 straight months that
    the wage rate was above 3 percent, the wage growth rate?
        Mr. Powell. I would have to check that. It certainly--it
    takes you back--you really are not looking at each month. You
    are looking at it over the last--the level is 3.1 percent
    higher. We could fact-check it. That sounds right, though. That
    sounds right.
        Chairman Crapo. I think so. Well, if you would fact-check
    that and let me know, I would appreciate it.
        Mr. Powell. Will do.
        Chairman Crapo. That does now conclude the questioning, and
    for the Senators who wish to submit questions for the record,
    those questions are due to the Committee by Wednesday, February
    19th. Chairman Powell, we ask that you respond to those
    questions as promptly as you can. Again, we thank you for being
    here.
        I am late for a vote, and I am sure you have other business
    to conduct, so this Committee is adjourned.
        Mr. Powell. Thank you, Mr. Chairman.
        [Whereupon, at 11:23 a.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follow:]
                   PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
        Today, Federal Reserve Chairman Jerome Powell will update the
    Committee on monetary policy developments and the state of the U.S.
    economy.
        The U.S. economy continued to expand in 2019, exceeding 2 percent
    growth for the third straight year, as the American people enjoy the
    longest continued economic expansion in American history.
        The labor market is strong, with the labor force at an all-time
    high of 164 million people, and the most recent jobs report shows that
    employers added 225,000 jobs in January with the unemployment rate at
    3.6 percent, remaining near a half-century low.
        Wages also grew in January by 3.1 percent from a year earlier,
    making it 18 consecutive months that pay has grown at an annualized
    pace of 3 percent or more.
        Americans' view on their personal financial situations are
    increasingly optimistic, according to Gallup trends. Nearly six in 10
    Americans, or 59 percent, now say they are better off financially than
    they were a year ago, up from 50 percent last year.
        Tax reform in 2017, and right-sizing regulations--including under
    the Economic Growth, Regulatory Relief and Consumer Protection Act (S.
    2155) in 2018--have undoubtedly helped fuel this strong economy and
    labor market.
        Americans are set to benefit even more when considering the effects
    of USMCA and the Phase One Trade Deal with China.
        Despite this substantial progress, there are several external
    factors that could have a meaningful impact on economic activity and
    our financial markets that need to be better understood, including:

            The Fed's decision to maintain a significantly larger balance
            sheet in the future, including its recent decision to purchase
            Treasury bills in response to volatility in short-term
            borrowing rates;
            The Fed's future plans to maintain stability in short-term
            borrowing rates, including potential structural, market-based
            fixes;
            The risks of the transition away from LIBOR to an alternative
            reference rate, and steps that should be taken to ensure a
            smooth transition and curb risks to businesses and financial
            markets; and
            The potential impact of the coronavirus on global commerce and
            growth.

        The Fed has also taken a number of important supervisory and
    regulatory actions that merit attention.
        The Fed and other Federal financial agencies recently proposed
    amendments to the Volcker Rule that would improve, streamline, and
    clarify the covered funds portion of the rule.
        That proposal builds on the agencies' simplification of the Volcker
    Rule in 2019, standing to improve market liquidity and preserve diverse
    sources of capital for businesses while striking the appropriate
    balance with safety and soundness.
        Additionally, many Banking Committee Republicans and I have raised
    serious concerns in the past with the agencies' supervisory and
    examination processes, including the use of guidance as rules.
        In January, Fed Vice Chairman Quarles offered a roadmap to foster
    transparency, accountability, and fairness in bank supervision,
    including:

            Tailoring the supervisory framework to better align with the
            categories developed under the Fed's domestic and foreign bank
            tailoring rules;
            Putting significant supervisory guidance out for public comment
            and submitting it to Congress under the Congressional Review
            Act; and
            Other commonsense improvements to the supervisory process, such
            as a rulemaking that would cover the agencies use of guidance
            in the supervisory process.

        This roadmap is greatly encouraging and I urge the Fed to take
    steps to put it into motion.
        Finally, there is constant innovation, including in the financial
    services industry, to increase resources to unbanked and underbanked
    populations, reduce friction in payments and increase efficiency in the
    delivery of financial products and services. Some recent examples are:

            Facebook's announcement of Libra, a new stable digital
            cryptocurrency backed by a reserve of real assets and
            leveraging blockchain technology;
            Work by global Governments and central banks to explore the
            development of central bank digital currencies, especially amid
            rumors that China's launch of a digital Yuan is imminent;
            The numerous applications of distributed ledger technologies,
            including in clearing and settlement, identity verification and
            cross-border transactions; and
            Some financial institutions' adoption of public cloud
            technologies.

        As I have stated in past hearings, it seems to me that
    technological innovations in this space are inevitable and the U.S.
    should lead in developing what the rules of the road should be.
        During this hearing, I look forward to hearing your thoughts on
    these important issues, and about work the Fed is engaged in to
    appropriately address them.
        Chairman Powell, thank you for joining us today.
                                     ______

                  PREPARED STATEMENT OF SENATOR SHERROD BROWN
        Thank you, Chairman Crapo. Chair Powell, welcome back to the
    Committee.
        Before we start, I want to stay a few words about what happened
    last night, which culminated with President Trump withdrawing the
    nomination of Jessie Liu, who was scheduled to appear before this
    Committee tomorrow.
        I heard some of you, my colleagues and my friends, say that the
    President would be chastened by impeachment. Some of you told me you
    knew what he did was wrong, you admit he lies, but that this wasn't bad
    enough to rise to the level of removal from office--he'd learned his
    lesson.
        It's pretty clear he's learned a lesson--the lesson he can do
    whatever he wants, abuse his office, and he'll never, ever be held
    accountable.
        He's gone on a retribution tour--starting at the prayer breakfast--
    a prayer breakfast if you can believe that--continuing through the East
    Room, where many of you were in the audience. He removed Col. Vindman,
    a patriot and Purple Heart recipient who spent his life serving our
    country.
        He removed Ambassador Sondland, a Trump appointee, after he
    testified to the quid pro quo.
        And yesterday he continued the tour, interfering at the Department
    of Justice and strongarming political appointees to overrule career
    prosecutors. Those attorneys withdrew in protest--from the case, and in
    at least one case, resigned entirely from the Department entirely.
        We cannot give him a permanent license to turn the presidency and
    the Executive branch into his own personal vengeance operation. I'm
    afraid that is what we're seeing. No one should be above the law.
        Now, turning to the matter at hand. Welcome, Chair Powell.
        Earlier this week, Bloomberg reported on a profitable and fast-
    growing Spanish company. ``Grifols'' has opened up branches in 36
    States. They buy and sell plasma--a nice, clinical sounding word that
    means ``blood.'' Americans who are struggling to make ends meet are
    lining up to sell their blood to put food on the table. The blood
    harvesting business is booming, and Grifols stock is doing great.
        It's hard to think of a better metaphor for Trump's economy.
        On Monday, the S&P 500 and Nasdaq both reached record highs. In
    2019, JPMorgan Chase had the best year for any U.S. bank in history,
    with $36 billion in profits. Big corporations are spending hundreds of
    billions of dollars on stock buybacks and dividends. On paper, the
    economy has been expanding uninterrupted for over 10 years.
        But if you talk to the vast majority of people who rely on
    paychecks, not investment portfolios to earn a living, you get a very
    different story. They've been bleeding for years.
        Most families don't understand why the harder they work, sometimes
    at more than one job, the harder it's getting to afford pretty much
    everything--childcare, health care, rent, college tuition.
        The people in this room may remember last September, when the
    financial industry went into a panic over a benchmark interest rate
    passing 10 percent.
        Wall Street faced uncertainty, so the Fed leapt into action. Smart
    Government employees came up with a plan that led to the Federal
    Reserve lending about $200 billion every day into financial markets
    through a mechanism that hasn't been used since the financial crisis.
    That's right--$200 billion.
        Let me be clear--I don't think it's wrong for the Federal Reserve
    to be creative and make sure the economy keeps working. It's in
    everybody's interest for banks to keep lending money, and credit to
    keep flowing so businesses can invest and manufacture, and consumers
    can buy houses and cars.
        My problem is this--when Main Street faces uncertainty, no one at
    the Fed jumps to action or gets creative. And we certainly don't see
    tweets from the President demanding corporations raise wages for their
    workers.
        It's hard for families to understand why Wall Street gets worked up
    about a 10 percent interest rate when so many families are lucky if the
    payday lender down the street charges them less than 400 percent.
        Small businesses who are having trouble making payroll don't have
    access to so-called repo funding at their local Fed branch. The Fed
    doesn't take action when its own research has found that 40 percent of
    Americans don't have the cash to cover a $400 expense in an emergency.
        Nobody raises alarm bells when 40 million Americans predict they'll
    miss at least one credit card payment, which means $1.2 billion in late
    fees will flow from the pockets of struggling families to
    ultraprofitable banks.
        ``Serious People'' haven't dropped everything to bring down the
    cost of housing or raise wages once they found out that one-in-four
    renters are paying more than half their income toward housing.
        People look at that and they see two different economies--and two
    different responses. We hear a lot about the divides in this country
    between Red and Blue, rural and urban, the coasts and the heartland--
    but people in all those places feel like no matter how hard they work,
    they can't maintain any real economic security. The real divide I see
    is between those whose problems are considered an ``emergency,'' and
    those whose struggles Wall Street and large parts of Washington have
    decided they can ignore.
        The Fed needs to get creative for the people who make this country
    work--particularly because it's become pretty clear that the President
    and the Majority Leader aren't about to.
        President Trump brags about a soaring stock market that he's pumped
    up with deficit-busting, trillion dollar tax breaks for billionaires--
    and now he wants to pay for those tax cuts by cutting Medicare and
    Medicaid and Social Security.
        He lies about a ``blue collar boom,'' when in my own State of Ohio,
    job growth has been anemic or nonexistent, and manufacturing jobs are
    stalling compared to when he took office. And now he wants to kill a
    loan program that was giving the community of Lordstown a little bit of
    hope that manufacturing jobs would come back.
        Chairman Powell, you and your highly capable staff at the Fed have
    been proactive and creative in protecting Wall Street and the money
    markets from this President's erratic behavior. And we're all
    appreciative of that.
        But what I hope to hear from you today is how you're going to be
    proactive and use that same level of creativity to make this economy
    work for everybody else.
        Thank you, Mr. Chairman.
                                     ______

                     PREPARED STATEMENT OF JEROME H. POWELL
           Chairman, Board of Governors of the Federal Reserve System
                               February 12, 2020
        Chairman Crapo, Ranking Member Brown, and other Members of the
    Committee, I am pleased to present the Federal Reserve's semiannual
    Monetary Policy Report.
        My colleagues and I strongly support the goals of maximum
    employment and price stability that Congress has set for monetary
    policy. Congress has given us an important degree of independence to
    pursue these goals based solely on data and objective analysis. This
    independence brings with it an obligation to explain clearly how we
    pursue our goals. Today I will review the current economic situation
    before turning to monetary policy.
    Current Economic Situation
        The economic expansion is well into its 11th year, and it is the
    longest on record. Over the second half of last year, economic activity
    increased at a moderate pace and the labor market strengthened further,
    as the economy appeared resilient to the global headwinds that had
    intensified last summer. Inflation has been low and stable but has
    continued to run below the Federal Open Market Committee's (FOMC)
    symmetric 2 percent objective.
        Job gains averaged 200,000 per month in the second half of last
    year, and an additional 225,000 jobs were added in January. The pace of
    job gains has remained above what is needed to provide jobs for new
    workers entering the labor force, allowing the unemployment rate to
    move down further over the course of last year. The unemployment rate
    was 3.6 percent last month and has been near half-century lows for more
    than a year. Job openings remain plentiful. Employers are increasingly
    willing to hire workers with fewer skills and train them. As a result,
    the benefits of a strong labor market have become more widely shared.
    People who live and work in low- and middle-income communities are
    finding new opportunities. Employment gains have been broad based
    across all racial and ethnic groups and levels of education. Wages have
    been rising, particularly for lower-paying jobs.
        Gross domestic product rose at a moderate rate over the second half
    of last year. Growth in consumer spending moderated toward the end of
    the year following earlier strong increases, but the fundamentals
    supporting household spending remain solid. Residential investment
    turned up in the second half, but business investment and exports were
    weak, largely reflecting sluggish growth abroad and trade developments.
    Those same factors weighed on activity at the Nation's factories, whose
    output declined over the first half of 2019 and has been little
    changed, on net, since then. The February Monetary Policy Report
    discusses the recent weakness in manufacturing. Some of the
    uncertainties around trade have diminished recently, but risks to the
    outlook remain. In particular, we are closely monitoring the emergence
    of the coronavirus, which could lead to disruptions in China that spill
    over to the rest of the global economy.
        Inflation ran below the FOMC's symmetric 2 percent objective
    throughout 2019. Over the 12 months through December, overall inflation
    based on the price index for personal consumption expenditures was 1.6
    percent. Core inflation, which excludes volatile food and energy
    prices, was also 1.6 percent. Over the next few months, we expect
    inflation to move closer to 2 percent, as unusually low readings from
    early 2019 drop out of the 12-month calculation.
        The Nation faces important longer-run challenges. Labor force
    participation by individuals in their prime working years is at its
    highest rate in more than a decade. However, it remains lower than in
    most other advanced economies, and there are troubling labor market
    disparities across racial and ethnic groups and across regions of the
    country. In addition, although it is encouraging that productivity
    growth, the main engine for raising wages and living standards over the
    longer term, has moved up recently, productivity gains have been subpar
    throughout this economic expansion. Finding ways to boost labor force
    participation and productivity growth would benefit Americans and
    should remain a national priority.
    Monetary Policy
        I will now turn to monetary policy. Over the second half of 2019,
    the FOMC shifted to a more accommodative stance of monetary policy to
    cushion the economy from weaker global growth and trade developments
    and to promote a faster return of inflation to our symmetric 2 percent
    objective. We lowered the Federal funds target range at our July,
    September, and October meetings, bringing the current target range to
    1\1/2\ to 1\3/4\ percent. At our subsequent meetings, with some
    uncertainties surrounding trade having diminished and amid some signs
    that global growth may be stabilizing, the Committee left the policy
    rate unchanged. The FOMC believes that the current stance of monetary
    policy will support continued economic growth, a strong labor market,
    and inflation returning to the Committee's symmetric 2 percent
    objective. As long as incoming information about the economy remains
    broadly consistent with this outlook, the current stance of monetary
    policy will likely remain appropriate. Of course, policy is not on a
    preset course. If developments emerge that cause a material
    reassessment of our outlook, we would respond accordingly.
        Taking a longer view, there has been a decline over the past
    quarter-century in the level of interest rates consistent with stable
    prices and the economy operating at its full potential. This low
    interest rate environment may limit the ability of central banks to
    reduce policy interest rates enough to support the economy during a
    downturn. With this concern in mind, we have been conducting a review
    of our monetary policy strategy, tools, and communication practices.
    Public engagement is at the heart of this effort. Through our Fed
    Listens events, we have been hearing from representatives of consumer,
    labor, business, community, and other groups. The February Monetary
    Policy Report shares some of what we have learned. The insights we have
    gained from these events have informed our framework discussions, as
    reported in the minutes of our meetings. We will share our conclusions
    when we finish the review, likely around the middle of the year.
        The current low interest rate environment also means that it would
    be important for fiscal policy to help support the economy if it
    weakens. Putting the Federal budget on a sustainable path when the
    economy is strong would help ensure that policymakers have the space to
    use fiscal policy to assist in stabilizing the economy during a
    downturn. A more sustainable Federal budget could also support the
    economy's growth over the long term.
        Finally, I will briefly review our planned technical operations to
    implement monetary policy. The February Monetary Policy Report provides
    details of our operations to date. Last October, the FOMC announced a
    plan to purchase Treasury bills and conduct repo operations. These
    actions have been successful in providing an ample supply of reserves
    to the banking system and effective control of the Federal funds rate.
    As our bill purchases continue to build reserves toward levels that
    maintain ample conditions, we intend to gradually transition away from
    the active use of repo operations. Also, as reserves reach durably
    ample levels, we intend to slow our purchases to a pace that will allow
    our balance sheet to grow in line with trend demand for our
    liabilities. All of these technical measures support the efficient and
    effective implementation of monetary policy. They are not intended to
    represent a change in the stance of monetary policy. As always, we
    stand ready to adjust the details of our technical operations as
    conditions warrant.
        Thank you. I am happy to take your questions.
            RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                         FROM JEROME H. POWELL

    Q.1. In 2016, the Board of Governors, along with the FDIC and
    OCC, released a report to Congress and FSOC on the activities
    and investments banking entities may engage in under State and
    Federal law. That report states that supervisory oversight for
    FHCs engaging in physical commodities activities can include
    ``review of the management of risks of those activities to the
    FHCs'' and an assessment of ``adequacy of the firms' controls
    relating to physical commodities activities.'' The report also
    mentions supervisory scrutiny related to merchant banking
    activities, complementary activities, and investments. The
    report also makes recommendations to Congress, including
    repealing the authority of FHCs to engage in merchant banking
    and commodities activities, and eliminating the ILC exemption.
        An investment vehicle with significant ties to JPMorgan
    Chase has filed an application with FERC to purchase an El Paso
    franchise utility. Has the Board reviewed potential risks,
    pursuant to the supervisory activities referenced in the 2016
    report, of this purchase to JPMC?
        Has the board shared any of its supervisory documents
    related to reviews of JPMorgan Chase or the Infrastructure
    Investment Fund with FERC?
        Does the Board stand by its 2016 recommendations to
    Congress?
        Would IIF's purchase of the El Paso utility help or hinder
    Federal banking agencies' stated desire to reduce safety and
    soundness concerns raised by financial holding companies'
    exposure to risks related to physical commodities, merchant
    banking, covered investments, and complementary activities?
        What authorities does the Board have related to the
    approval of this merger and/or the permissibility of JPMC's
    relationship with IIF?

    A.1. The Federal Reserve's supervisory responsibility is to
    oversee the financial soundness of financial holding companies
    (FHC) and their adherence to applicable banking laws. To this
    end, the Federal Reserve monitors the largest of these
    institutions on a continuous basis and routinely conducts
    inspections and examinations of all of these firms to encourage
    their safe and sound operation. This supervision includes
    institutions' activities, including merchant banking and
    physical commodities activities. To conduct physical
    commodities activities pursuant to section 4(k) of the Bank
    Holding Company Act (e.g., trading on the spot market), a
    financial institution must obtain prior approval of the Federal
    Reserve Board (Board). However, pursuant to the Gramm-
    Leach centsliley Act, a FHC may make a merchant banking
    investment in a company that engages in physical commodities
    activities without prior approval. In addition, some firms are
    permitted by law to engage directly in a broad range of
    physical commodity activities, including the extraction,
    storage, and transportation of commodities. Specifically,
    section 4(o) of the Bank Holding Company Act may permit a
    certain FHCs to own, operate, or invest in facilities for the
    extraction, transportation, storage, or distribution of
    commodities, or to process or refine commodities, if certain
    statutory conditions are met regarding eligibility. To date,
    only two banking organizations--Goldman Sachs and Morgan
    Stanley--have qualified to engage in physical commodities
    activities under section 4(o).
        The Board began its review of the physical commodities
    activities of FHCs after an increase in these activities among
    FHCs during the financial crisis. The Board's review included
    an advance notice of proposed rulemaking in January of 2014,
    followed by a notice of proposed rulemaking in September 2016.
    The Board received a large number of comments from a variety of
    perspectives in response to both notices. The Board continues
    to consider the proposal in light of the many comments received
    and, as discussed above, continues to monitor the physical
    commodities activities of FHCs. The Board believes that the
    strong postcrisis regulatory and supervisory regime helped
    address financial risks from merchant banking activities,
    including market, liquidity, and credit risks. In terms of the
    2016 recommendation in the section 620 report, I would need to
    discuss those recommendations with the current members of the
    Board and consider that recommendation in light of developments
    since the report was issued, as well as current facts and
    circumstances.

    Q.2. On December 17, 2019, the Board and the FDIC announced
    they had found ``no deficiencies'' in the resolution plans
    required under 165(d) of the Wall Street Reform Act. Do you
    believe that Bank of America, Bank of New York Mellon,
    Citigroup, Morgan Stanley, State Street, Wells Fargo, Goldman
    Sachs, and JPMorgan Chase could each be resolved in an orderly
    bankruptcy without affecting financial stability?
        Do you believe that Bank of America could be resolved in an
    orderly bankruptcy without affecting financial stability?
        Do you believe that Bank of New York Mellon could be
    resolved in an orderly bankruptcy without affecting financial
    stability?
        Do you believe that Citigroup could be resolved in an
    orderly bankruptcy without affecting financial stability?
        Do you believe that Morgan Stanley could be resolved in an
    orderly bankruptcy without affecting financial stability?
        Do you believe that State Street could be resolved in an
    orderly bankruptcy without affecting financial stability?
        Do you believe that Wells Fargo could be resolved in an
    orderly bankruptcy without affecting financial stability?
        Do you believe that Goldman Sachs could be resolved in an
    orderly bankruptcy without affecting financial stability?
        Do you believe that JPMorgan Chase could be resolved in an
    orderly bankruptcy without affecting financial stability?

    A.2. The identified banking organizations have made substantial
    gains in their resiliency and resolvability since the financial
    crisis, in part due to the work that the Federal Reserve and
    the Federal Deposit Insurance Corporation have done on
    resolution plans. An important aspect of enhancing the
    resiliency and resolvability of banking organizations is making
    resolution planning an ongoing institutional aim. The
    development of resolution plans has resulted in firms
    rationalizing their structures, creating resolution strategies
    and mechanisms for their successful implementation, identifying
    and marshaling necessary resources, and considering
    resolvability as part of day-to-day decision-making. While
    these measures cannot guarantee that a firm's resolution would
    be simple or smoothly executed, the preparations have
    significantly improved the chances that any of the firms could
    be resolved under bankruptcy without Government support or
    imperiling the broader financial system. Nevertheless, given
    the uncertainties around how financial crises unfold, the Dodd-
    Frank Wall Street Reform and Consumer Protection Act's orderly
    liquidity authority remains a valuable backstop resolution
    framework.

    Q.3. When the Committee was considering S. 2155, you stated
    that the bill wouldn't require deregulating foreign banks. But
    in the Fed's October 2019 rule, you state that the Fed was
    required to weaken requirements for foreign banks because the
    law requires you to treat them similarly to domestic banks (``
    . . . the Dodd-Frank Act directs the Board to give due regard
    to the principle of national treatment and equality of
    competitive opportunity . . . '' and ``the final rule
    facilitates a level playing field between foreign and U.S.
    banking organizations operating in the United States, in
    furtherance of the principle of national treatment and equality
    of competitive opportunity'').
        When you testified in front of the Banking Committee, were
    you or your staff aware of the Dodd-Frank directive requiring
    the Board to give ``due regard to the principle of national
    treatment and equality of competitive opportunity''? If so, how
    did that directive factor into your interpretation that S. 2155
    would not require the Board to weaken regulations for foreign
    banks?

    A.3. Section 165 of the Dodd-Frank Act was enacted in response
    to the financial crisis and directed the Board to establish
    enhanced prudential standards for large bank holding companies
    and foreign banking organizations. As you observed, in applying
    enhanced prudential standards to foreign banking organizations,
    section 165(b)(2) of the Dodd-Frank Act directs the Board to
    ``give due regard to the principle of national treatment and
    equality of competitive opportunity'' The Board recognizes the
    important role that foreign banking organizations play in the
    U.S. financial sector. The provision of the Dodd-Frank Act
    concerning national treatment did not mandate that the Board
    make any changes to the enhanced prudential standards as
    applied to foreign banking organizations in light of the
    Economic Growth, Regulatory Relief, and Consumer Protection
    Act. In issuing the final tailoring rule concerning the
    application of the enhanced prudential standards to foreign
    banking organizations, the Board took into account the risks
    posed by those organizations as well as how the rule treated
    similarly situated domestic organizations. The final tailoring
    rule appropriately applies requirements based on the nature of
    those risks. The Board remains committed to the principle of
    national treatment and equality of competitive opportunity
    between the U.S. operations of foreign banking organizations
    and U.S. banking organizations.
        In particular, the enhanced prudential standards applied to
    the U.S. operations of foreign banks under the Board's final
    tailoring rule are consistent with the standards applicable to
    U.S. bank holding companies. The standards take into account
    the extent to which a foreign bank is subject, on a
    consolidated basis, to home country standards that are
    comparable to those applied to financial companies in the
    United States. Specifically, the final rule continues the
    Board's approach of tailoring the application of prudential
    standards to foreign banks based on the foreign bank's U.S.
    risk profile. For foreign banks with significant U.S.
    operations, the tailoring final rule applies a framework that
    is consistent with the framework applied to U.S. banking
    organizations. By using consistent indicators of risk, the
    final rule facilitates a level playing field between foreign
    banks and U.S. banking organizations operating in the United
    States, in furtherance of the principle of national treatment
    and equality of competitive opportunity.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                         FROM JEROME H. POWELL

    Q.1. Last week we all heard the President lay out all the ways
    this economy is booming and most importantly, working for
    everyone and not just the few at the top. Unemployment for
    minorities is down, unemployment for veterans is down, wage
    growth is rising faster for those at the bottom than for those
    at the top, labor force participation is rising, and household
    income has never been higher.
        In particular, black home ownership (4Q 2008 46.8 percent;
    4Q 2016 41.7 percent; 4Q 2019 44.0 percent) and black labor
    participation (Dec 2018 63.5 percent; Dec 2016 61.9 percent;
    Jan 2020 62.9 percent) have also increased!
        This doesn't even begin to touch on all the other important
    metrics that show how tax cuts and deregulation have helped
    propel American families into a time of economic prosperity.
        Ensuring not only my constituents in South Carolina, but
    those coast-to-coast, have the ability and access to more
    affordable credit is paramount. Often times, this is to
    purchase things like a home, a car, or an education. Things
    that require larger loans in order to invest in yourself.
        But, there are also times when Americans need access to
    credit in order to just make ends meet. This could be a $500
    loan to pay rent or $1000 for an unexpected car repair. Small-
    dollar loans are an instrument of good and we should work to
    keep the access for those loans available while increasing
    their affordability and soundness.
        I understand that the FDIC has been working together with
    the Fed and OCC to find ways to improve access to small-dollar
    loans at a more reasonable cost.
        Please answer the following with specificity:
        Do you believe that affordable access to small-dollar loans
    could help a significant number of Americans?

    A.1. On May 20, the Federal Reserve, along with the Office of
    the Comptroller of the Currency, Federal Deposit Insurance
    Corporation, and National Credit Union Administration (the
    agencies), issued small-dollar lending principles for financial
    institutions offering small-dollar loans in a responsible
    manner to meet customers' short-term credit needs. In issuing
    the principles, the agencies recognized the important role that
    responsibly offered small-dollar loans can play in helping
    customers meet their ongoing needs for credit from temporary
    cash-flow imbalances, unexpected expenses, or income
    shortfalls, including during periods of economic stress,
    natural disasters, or other extraordinary circumstances such as
    the public health emergency created by COVID-19. The principles
    follow a statement issued on March 26, 2020, by the agencies
    and the Consumer Financial Protection Bureau (CFPB) encouraging
    banks, savings associations, and credit unions to offer
    responsible small-dollar loans to consumers and small
    businesses in response to COVID-19.

    Q.2. I am focused on finding ways we can encourage small-dollar
    lending to give Americans needed access to credit through
    responsible products that do not trap them in a cycle of debt.
    I was encouraged to see that Federal Reserve Governor Bowman
    raised an important issue this week, talking about the
    importance of the Fed implementing clear third party guidance
    that is consistent across all of the Federal regulatory
    agencies.
        Can you give us an update on the work you have been doing
    with the FDIC and OCC on this and what you believe possible
    regulatory outcomes might look like in order to encourage banks
    to provide these small-dollar loans, and the benefits that
    community bankers see by innovating and working with FinTech
    platforms?

    A.2. The small-dollar lending principles referred to above that
    were issued by the agencies on May 20, encourage supervised
    banks, savings associations, and credit unions to offer
    responsible small-dollar loans to customers for both consumer
    and small business purposes. The agencies recognize that
    financial institutions are well suited to meet small-dollar
    credit needs and some already offer these products, consistent
    with safe and sound principles and subject to applicable laws
    and regulations. Further, the principles state that small-
    dollar lending programs could include effectively managed
    deployment of innovative technology or processes for customers
    who may not meet a financial institution's traditional
    underwriting standards, and that programs can be implemented
    in-house or through effectively managed third-party
    relationships. And finally, that any products offered through
    effectively managed third-party relationships would also
    reflect the core lending principles, including returns
    reasonably related to the financial institution's risks and
    costs.

    Q.3. Governor Bowman talked about the need to implement
    guidance; can you explain the pros and cons of using guidance
    in this area versus a rulemaking? And, how do we balance the
    need to create real rules of the road to encourage the small-
    dollar lending we need without creating barriers to entry?

    A.3. The Federal Reserve has long supported responsible small-
    dollar lending to meet customers' needs. Consistent with that
    view, we believe the principles issued on May 20 give financial
    institutions flexibility to structure their program in a manner
    that is safe and sound, fair to borrowers, and consistent with
    applicable laws and regulations. We also note that the CFPB has
    consumer rulewriting authority, and we are actively monitoring
    the status of the CFPB's open payday rulemaking proposal.

    Q.4. I'm sure you're familiar with my continued interest in the
    International Association of Insurance Supervisors' work on the
    ICS. I've made the point to Vice Chair Quarles that the U.S.
    insurance market fulfills a vastly different purpose than the
    European market--it doesn't make sense to regulate our insurers
    with foreign rules of the road. Doing so will compromise the
    ability of my constituents to plan for their retirement or
    manage their finances over the long term.
        There's now a concrete path for the U.S. insurance solvency
    system to be deemed equivalent to the ICS.
        Given all of the hard work you are doing at the Fed on the
    Building Block Approach (BBA) and the State Insurance
    Commissioners are doing on the Group Capital Calculation
    (GCC)--
        Please answer the following with specificity:
        How do you plan on ensuring the standards being developed
    in the U.S. will be deemed equivalent by the IAIS given the
    continued resistance you are facing from the Europeans?

    A.4. The Federal Reserve has consistently maintained that the
    European insurance capital regulation is not appropriate for
    the U.S. insurance markets, particularly our market for long-
    term products. Instead, we advocate for the U.S. approach to
    insurance regulation at the International Association of
    Insurance Supervisors (IAIS). As part of this advocacy, the
    U.S. members of the IAIS are developing an aggregation
    alternative to the Insurance Capital Standard (ICS), which
    builds on our work on the Building Block Approach and the
    National Association of Insurance Commissioner's work on the
    Group Capital Calculation. During the recent IAIS negotiations
    in Abu Dhabi, we agreed to a plan that creates a concrete path
    for the U.S. system to be recognized as equivalent. Under this
    plan, the IAIS will consult on the approach for assessing
    comparability in 2020 and 2021, finalize the approach in 2022,
    and then conduct the comparability assessment of the
    aggregation alternative. The Federal Reserve will continue to
    advocate for the U.S. approach at each of these decision
    points.

    Q.5. I think we can agree that less unnecessary regulation is
    always better. But what's best for everyone is smart
    regulation. Regulations intended to appropriately capture and
    capitalize risk. We continue to hear that with regards to the
    FRTB (the capital treatment for trading instruments) the Fed
    has taken their goal of simplicity as license to remove risk
    sensitivity and increase capital.
        The U.S. capital markets are core to the economic fabric
    and our global prowess; in fact the capital markets fund 65
    percent of economic activity in the U.S.
        Please answer the following with specificity:
        Can you ensure that U.S. regulators will right size this in
    the U.S. rulemaking?

    A.5. The 2007-2008 financial crisis revealed weaknesses in the
    U.S. financial system--too little capital, not enough liquid
    assets, and poor risk management. Since that time, the Federal
    Reserve Board (Board) and the other Federal banking agencies
    have substantially strengthened regulatory capital and
    liquidity requirements for large banks, which has significantly
    increased the financial resiliency of these firms and the
    financial system as a whole. For example, firms subject to the
    Comprehensive Capital Analysis and Review in 2019 increased
    their aggregate ratio of common equity capital to risk-weighted
    assets from 4.9 percent in the first quarter of 2009 to 12.3
    percent in the fourth quarter of 2018. This change reflects a
    total increase of approximately $660 billion in common equity
    capital, bringing total CET1 capital at these firms to over $1
    trillion in the fourth quarter of 2018. In October 2019, the
    Board finalized its tailoring rule, which more closely matches
    the regulations applicable to large banking organizations with
    their risk profile.
        We agree that regulations should evolve to keep pace with
    changes in the financial system and changes in risk. The
    revised Basel III framework, including the Fundamental Review
    of the Training Book (FRTB), is intended to deliver credible
    capital outcomes by increasing the robustness and risk
    sensitivity of the overall capital framework, and to promote
    consistent implementation of the standards across
    jurisdictions. Board staff is currently working on a proposal
    to implement FRTB. As we further develop this proposal, we will
    consider the benefits of increased risk sensitivity, as well as
    the important objectives of simplicity, transparency,
    efficiency, and safety and soundness. We will also aim to
    ensure that the proposal is appropriately tailored to the risk
    profile of banking organizations.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
                         FROM JEROME H. POWELL

    Q.1. In today's hearing, you spoke about the transition from
    LIBOR and how a number of banks have said they'd like to work
    on a rate that is separate from SOFR, i.e., a rate that is
    credit sensitive (as is LIBOR). I was glad to hear you mention
    that the Federal Reserve is working with those banks to support
    their efforts to use a credit-sensitive rate. Is Ameribor
    appropriate to use for institutions for whom it more accurately
    represents their cost of funding?
        Put another way, does the Fed support alternative benchmark
    interest rates to SOFR such as Ameribor--for the replacement of
    Libor?

    A.1. The Federal Reserve convened and supports the work of the
    Alternative Reference Rates Committee (ARRC) and views SOFR as
    a robust alternative that will help many market participants in
    the transition away from LIBOR. However, we have been clear
    that the ARRC's recommendations and the use of SOFR are
    voluntary and that market participants should seek to
    transition away from LIBOR in the manner that is most
    appropriate given their specific circumstances.
        Ameribor is a reference rate created by the American
    Financial Exchange based on a cohesive and well-defined market
    that meets the International Organization of Securities
    Commission's (IOSCO) principles for financial benchmarks. While
    it is a fully appropriate rate for the banks that fund
    themselves through the American Financial Exchange or for other
    similar institutions for whom Ameribor may reflect their cost
    of funding, it may not be a natural fit for many market
    participants.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR PERDUE
                         FROM JEROME H. POWELL

    Q.1. Fed Inflation Targeting--Since 2012, the FOMC has adopted
    an inflation target of 2 percent as part of its Longer-Run
    Goals and Monetary Policy Strategy. But as you mentioned in
    your opening statement, PCE inflation, which the Federal
    Reserve targets, was 1.6 percent last year, under your 2
    percent target once again. It has been running under this 2
    percent target for almost a decade now. As part of the
    motivation for the review of the Federal Reserve's policy
    strategy, many Governors, including yourself, have expressed
    concern over the disinflationary pressures occurring across the
    globe. If inflation expectations are anchored persistently
    lower, your interest rate policy could become less effective
    and give the Federal Reserve less room to cut in the face of
    future recession.
        As the Federal Reserve continues their review, are you
    considering alternative monetary policy frameworks, such as
    NGDP targeting, that would allow for more variability in
    inflation around the 2 percent target, including above that
    target?

    A.1. Consideration of alternative monetary policy frameworks
    has certainly been part of our ongoing review of monetary
    policy strategy, tools, and communication practices. This
    review is concerned with considering ways in which the Federal
    Open Market Committee (FOMC) can best achieve its dual mandate
    goals of maximum employment and 2 percent inflation in the
    modern-day environment--in which interest rates are likely, for
    structural reasons, to be lower, on average, than in past
    historical experience.
        With regard to the alternative strategies considered during
    the review, the published minutes for the FOMC meetings of the
    past year have described the strategies on which the FOMC has
    been briefed by Federal Reserve staff and which it has
    discussed in its deliberations in connection with the review.
    We have not discussed nominal GDP (NGDP) targeting in detail
    during this review process, as NGDP has a very imperfect
    relationship with our statutory goals of maximum employment and
    price stability.

    Q.2. Do you believe any of these alternative approaches outside
    your current 2 percent inflation target would allow the Federal
    Reserve to better achieve your congressional mandate and to
    help mitigate the lower bound problem?

    A.2. The proximity of the neutral policy interest rate to the
    effective lower bound (ELB) in the past decade was a key
    motivation for the Federal Reserve's monetary policy framework
    review of the past year. In the course of the FOMC's
    discussions during this review, we have considered how the
    choice among different strategies affects the Federal Reserve's
    ability to provide the desired amount of monetary policy
    accommodation at or near the ELB. The FOMC has not yet reached
    any conclusion about changes to our strategy that might arise
    from the review process. All the alternative strategies that we
    have considered, however, are premised on our continuing to
    have a 2 percent longer-run inflation objective as our price-
    stability goal, alongside our maximum-employment goal. This
    review is concerned with considering ways in which the FOMC can
    best achieve these dual-mandate goals in the environment of
    persistently low interest rates.
        In terms of achieving the FOMC's dual mandate goals, it is
    also important to stress that when the policy rate is in the
    vicinity of the ELB, the set of monetary policy tools
    available, and not just the choice of monetary policy strategy,
    is important. During the framework review of the past year, the
    FOMC has discussed its experience with its two main monetary
    policy tools at the ELB: forward guidance regarding the policy
    rate; and asset purchases (or balance sheet policy). We have
    considerable confidence in the effectiveness of these tools. We
    believe that they have proven their worth as valuable and
    useful means of providing additional monetary policy
    accommodation in ELB conditions.

    Q.3. Also, do you believe the current framework properly allows
    for productivity and commodity shocks or would an alternative
    system allow for broader flexibility?

    A.3. A recognition of the importance of productivity shocks and
    commodity shocks, and a consideration of their implications for
    the economy, are important for the appropriate formulation of
    monetary policy. The current monetary policy framework takes
    these shocks into account satisfactorily. Any alternative
    framework that the FOMC might consider would similarly need to
    take appropriate account of these types of shocks.

    Q.4. Basel III Revisions--Chair Powell, in the postcrisis
    world, the U.S. banks have worked to improve both their capital
    and liquidity standards. With the Federal Reserve now working
    to incorporate Basel III revisions into the U.S. regulatory
    framework, I am concerned that if the implementation is not
    done with a holistic view, these changes could have a
    compounding effect, placing far greater capital and liquidity
    constraints on financial institutions.
        For example, one of my greatest concerns is that the new
    revisions would have a lasting impact in terms of capital
    markets activity and the cost of raising capital for U.S.
    firms. This is particularly significant because unlike our
    European counterparts on the BCBS (Basel Committee on Banking
    Supervision), roughly two-thirds of all U.S. lending occurs in
    our capital markets. Furthermore, we have a deeper and more
    sophisticated capital markets structure than our counterparts
    around the world.
        Would you share your views on how capital requirements on
    capital markets activities could impact the balance between
    bank-driven and market-driven finance in the U.S. financial
    system?

    A.4. The financial crisis revealed weaknesses in the U.S.
    financial system--too little capital, not enough liquid assets,
    and poor risk management. Since the financial crisis, the
    banking agencies have increased the financial resiliency of
    banking organizations by substantially strengthening their
    regulatory capital and liquidity requirements. The final Basel
    III framework, which includes standards for market risk and
    capital market activities, is designed to produce a more robust
    regulatory framework for the largest firms and to promote
    consistent implementation of the standards across international
    jurisdictions.
        The Board of Governors (Board) recognizes the importance of
    capital markets and market-based finance in supporting economic
    activity in the United States. Because there is a close link
    between market liquidity and banking organizations' funding
    liquidity, robust capital and liquidity requirements help
    ensure that banking organizations can maintain their financial
    intermediation functions in times of financial distress.
        Consistent with the banking agencies' efforts to tailor the
    application of prudential rules to the risk profiles of firms,
    the Board will consider the implementation of the Basel III
    standards in light of its objectives to enhance the simplicity,
    transparency, and efficiency of the overall regulatory
    framework. The Board will consider the impact of any future
    rulemakings on firms and the markets to ensure that the Board's
    capital and liquidity framework continues to support the safety
    and soundness of banking organizations and U.S. financial
    stability.

    Q.5. Additionally, would you please outline the specific steps
    that the Fed is taking to ensure that these provisions are not
    done piecemeal and that overall capital is not meaningfully
    changed or increased--as you have repeatedly stated that you
    believe current capital levels are ``about right.''

    A.5. The Board is paying close attention to the overall
    coherence of the regulatory capital framework. The Board
    recently finalized the stress capital buffer requirement, which
    simplifies the capital regime by integrating the Board's stress
    test and point-in-time capital requirements while maintaining
    the current strong levels of capital. Board staff are also
    actively considering how the final Basel III standards could be
    implemented in a way that maintains overall capital and
    liquidity requirements at large banking organizations, avoids
    additional burden at smaller banking organizations, and
    supports the principles of transparency and due process. It is
    important for the Board to consider the remaining elements of
    the Basel III framework (especially the operational risk
    element and the fundamental review of the trading book) as a
    whole, and then examine that whole in the context of the
    existing framework.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
                         FROM JEROME H. POWELL

    Q.1. I am encouraged that Federal Reserve staff are working to
    update the rules governing margin eligibility of certain over-
    the-counter securities to better reflect developments in the
    OTC marketplace since Nasdaq became an exchange. Please provide
    me with an update on the progress to date, how the Federal
    Reserve is contemplating updates to the rules, and the expected
    timing of changes to the rules.

    A.1. Federal Reserve staff are developing a proposal that would
    make certain domestic and foreign over-the-counter (OTC)
    securities marginable at broker-dealers under the Federal
    Reserve Board's (Board) Regulation T. Board staff will consult
    with other securities regulatory authorities before the Board
    publishes a proposal for public comment.

    Q.2. HSBC has just announced a major restructuring that
    includes a significant reduction in its U.S. presence, and as a
    result a significant reduction in the capital it will provide
    U.S. corporations and the services it will provide U.S.
    consumers. On the global markets side, HSBC has determined that
    its U.S. returns are unacceptably low relative to what it can
    earn in other markets, primarily Asia, and announced that it
    will reduce its U.S. risk-weighted assets in those businesses
    by 45 percent; it will increase its presence in Asia in a
    corresponding amount. On the retail side, it will focus in the
    United States only on international, affluent, and globally
    mobile clients; it will continue to provide retail services to
    the U.K., Hong Kong, and Mexico. Do you believe this outcome is
    a good one for the United States? Given that HSBC is the
    world's largest trading bank, what do you believe the economic
    significance will be of its shift from the U.S. market to Hong
    Kong, where its primary clients will be in China? What role did
    the regulatory regime you impose on HSBC play in its decision?

    A.2. The Federal Reserve promotes the safety and soundness of
    individual banking institutions, including foreign banking
    organizations (FBOs) operating in the United States, and
    monitors their impact on the financial system as a whole.
        In supervising the U.S. operations of FBOs, the Federal
    Reserve monitors and reviews their U.S. business strategies in
    order to ensure that they comply with applicable U.S. laws and
    regulations, and are commensurate with each institution's risk
    appetite and risk management capabilities. As you are aware,
    the global operations of FBOs are supervised by their
    respective home-country regulators.
        The presence of FBOs in the United States brings
    competitive benefits to U.S. markets, as these firms serve as a
    source of credit to U.S. households and businesses as well as
    contribute to the strength and liquidity of U.S. financial
    markets. However, given that the large population of FBOs still
    represent only a segment of the U.S. financial system, and is
    structurally and characteristically diverse, any strategic
    shift of a single FBO would not necessarily impact the
    availability of banking services to U.S. households and
    businesses.
                                    ------

             RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                         FROM JEROME H. POWELL

    Q.1. Since 2019, the Federal Reserve has been engaged in a
    review of its monetary policy, strategy, tools, and
    communications practices. Could you please share what you have
    learned so far? What can I share with my constituents back home
    who are looking for jobs, especially those Rhode Islanders who
    are looking for jobs that pay fair and livable wages?

    A.1. An important aspect of the Federal Reserve's review of
    monetary policy strategy, tools, and communication practices
    has been a series of Fed Listens events during which
    policymakers heard from a broad range of stakeholders in the
    U.S. economy about labor market conditions, inflation, and
    interest rates. From these events, we have learned that the
    tight labor market conditions in 2019 were important for
    providing job opportunities to individuals who had had
    difficulty finding employment in the past. We have also learned
    that the tight labor market conditions were leading to creative
    solutions between employers, on the one hand, and workforce
    development groups and educational institutions, on the other
    hand, to provide requisite training and skills to new
    employees. As we saw in 2019, tight labor market conditions are
    important for delivering training and employment opportunities
    to disadvantaged communities and for achieving the Federal
    Reserve's maximum employment goal.
        Since the outset of the COVID-19 pandemic, the reported
    unemployment rate has moved up to 13.3 percent and total
    employment has fallen by about 20 million. The economic
    environment is completely different from what we were
    experiencing during the original Fed Listens events. With that
    in mind, on May 21, we held our most recent Fed Listens to
    learn how the new economic reality is affecting the public. For
    this event, we focused on the disparity of the burden from this
    crisis that households and businesses face, particularly in
    low- and moderate-income communities. We heard from a wide
    range of individuals who offered first-hand perspectives and
    ways in which they are working to address the recent problems
    through workforce development; advocacy for workers, the
    elderly, and affordable housing; academia; community
    development financial institutions; small-businesses; and
    nonprofits.

    Q.2. Can you comment on whether prior extensions of
    unemployment insurance have made it easier for workers to
    bounce back from a recession? Could stabilizers, such as
    unemployment insurance, be more successful if they are
    automatically triggered by a recession?

    A.2. As a general rule, however, I do not comment on specific
    fiscal policy or labor market policy proposals, as judgments
    about those policies that are most appropriate for the United
    States are best decided by Congress and the Administration.
    Accordingly, only Congress and the Administration can decide if
    making the Unemployment insurance (UI) system more
    automatically responsive to economic downturns is appropriate.
        Speaking broadly, though, increasing unemployment insurance
    benefits in recessions is generally thought to provide a
    significant boost to economic activity per additional dollar
    spent. \1\ UI benefits are an important source of income for
    workers who become involuntarily unemployed. Research has shown
    that UI benefits buffer income and consumption losses for the
    families of those laid off; some estimates show that each
    additional dollar of unemployment insurance benefits boost
    consumption of its recipients by roughly $0.30-0.60 on average.
    \2\
    ---------------------------------------------------------------------------
         \1\ See the Congressional Budget Office's ``Unemployment Insurance
    in the Wake of the Recent Recession'', November 2012 for a summary of
    these estimates.
         \2\ See Chodorow-Reich, Gabriel, and John Coglianese. 2019.
    ``Unemployment Insurance and Macroeconomic Stabilization'', Recession
    Ready: Fiscal Policies to Stabilize the American Economy, edited by
    Heather Boushey, Ryan Nunn, and Jay Shambaugh, 153-179. Brookings
    Institution.
    ---------------------------------------------------------------------------
        As we have seen during the COVID-19 pandemic, more than 36
    million Americans are seeking unemployment benefits. Under the
    Coronavirus Aid, Relief and Economic Security (CARES) Act, for
    example, the Government expanded the scope of unemployment
    insurance, increasing both the amount and duration of
    assistance. The amount and length of pay varies by State, but
    the CARES Act added an additional 13 weeks to every State's
    maximum pay period. The bill also created a new, temporary
    Pandemic Unemployment Assistance program through the end of
    this year to help individuals who lose work as a direct result
    of the public health emergency.

    Q.3. Taken together, how are global events--such as the
    coronavirus outbreak, Boeing's production slowdown, and trade
    tensions--impacting U.S. supply chains and the economic
    outlook, especially from the perspective of the average
    American household?

    A.3. Trade developments--including tariffs, countertariffs, and
    uncertainty about future trade policy--coincided with a
    softening in the U.S. manufacturing sector last year. While it
    is difficult to precisely determine the effects of these
    various forces on the economy, a number of studies have found
    evidence that these trade issues have restrained output and
    employment in the U.S. manufacturing sector, mostly notably by
    raising the prices of the goods manufacturers import as inputs
    to their production process and also, to some extent, by
    lowering their exports. Historically, the manufacturing sector
    in the United States has been a source of economic strength and
    of good jobs for workers at all levels of education.
        In addition to trade issues, part of the softness in
    manufacturing is attributable to the slowing last year of the
    assembly pace of Boeing's 737 Max aircraft due to safety issues
    and, more recently, to the temporary cessation of the
    production of the aircraft. The production of civilian aircraft
    and of aircraft parts accounts for about 2\1/2\ percent of
    domestic manufacturing, with supply chains that extend
    throughout the entire country and that provide jobs for many
    thousands of Americans. While Boeing and their suppliers appear
    to have kept the great majority of the workers related to the
    737 Max on their payrolls during this period, continuing to do
    so could prove more difficult if the cessation of 737 Max
    production extended far into the future.
        As for the coronavirus, the economic effects are still
    coming into focus. Early on, as the coronavirus hit China hard,
    the global supply chain was negatively affected, with China
    abruptly halting the production of materials and supplies used
    as inputs by U.S. factories. The coronavirus outbreak occurred
    during the period when U.S. manufacturers typically stockpile
    Chinese inputs, which at this time, blunted, or at least
    delayed, the full effect of the Chinese shutdowns. In March,
    Chinese factories restarted production, but they have been
    running somewhat below their full capacity even as U.S.
    producers are running through their stocks of Chinese inputs;
    the speed with which Chinese producers get back to full
    capacity before U.S. stockpiles run down will determine the
    degree to which shortages emerge or price spikes for critical
    inputs arise. Moreover, the cessation of Chinese exports also
    snarled the intricate web of cargo vessels, which also has
    affected both importers and exporters in the United States. In
    addition, a drop in Chinese tourism affected U.S. tourist
    destinations.
        The coronavirus outbreak has evolved into a global health
    crisis. While supply chain disruptions remain an issue, an
    enormous contraction in the U.S. economy has occurred that
    reflects a sharp pullback in spending by households as result
    of people engaging in both mandatory and voluntary ``social
    distancing.'' For example, consumers have severely reduced
    spending on items consumed in public social settings, on
    travel, or on items purchased in shopping malls or large
    showrooms. Job losses in April that exceeded 20 million are a
    stark reflection of the economic contraction that is
    unprecedented in living memory.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                 SENATOR MENENDEZ FROM JEROME H. POWELL

    Q.1. The FDIC will allow some of the banks it regulates the
    choice of opting into the new OCC led Community Reinvestment
    Act (CRA) regulatory framework or continue to be examined under
    the current system. One of reasons the OCC and FDIC decided to
    move forward with their own CRA proposal was to clarify CRA
    standards and reduce confusion. However, by creating a three-
    tiered system (the OCC and FDIC joint rule, the opt-in option,
    and a potential new Federal Reserve rule), the OCC and FDIC
    seem to be creating more confusion about the CRA and its
    implementation. Are you concerned the OCC/FDIC rule, with the
    opt-in option, will increase confusion among banks and
    communities about how the CRA is implemented and what qualifies
    as a CRA activity?

    A.1. While the Federal Reserve Board (Board) did not join the
    Federal Deposit Insurance Corporation (FDIC) and the Office of
    the Comptroller of the Currency (OCC) in their Notice of
    Proposed Rulemaking (NPR) revising elements of Community
    Reinvestment Act (CRA) regulation, the Board shared detailed
    analysis and proposals on CRA reform with our counterparts at
    the OCC and FDIC in the preparation of the NPR, and the NPR
    reflected considerable input from the Board. We are reviewing
    the comments that were submitted to the FDIC and OCC on the
    NPR, and expect to learn much--including important insights
    related to the aspects of the NPR that reflect our own input--
    from the review. As you may be aware, on May 20, the OCC
    separately issued a final rule to modernize CRA regulations
    that applies only to OCC-supervised banks. In light of this
    development, our ongoing analysis of CRA modernization issues,
    and our review of comments to the NPR, we are assessing a path
    forward.

    Q.2. Please describe what the aspects of the Fed's CRA proposal
    the OCC and FDIC satisfactorily incorporated into their joint
    proposal.

    A.2. We support efforts to use clear metrics to guide CRA
    performance assessments. Although the NPR put forth by the OCC
    and FDIC included a metrics approach that differed in a number
    of ways from the approach that Board staff discussed with the
    other agencies as part of our interagency discussions, the NPR
    incorporated an element of the retail metrics approach that
    Board had raised with the other agencies. Specifically, the
    proposal included retail lending metrics for evaluating each
    assessment area based on: (1) the proportion of loan
    originations that are made to low- and moderate-income (LMI)
    borrowers or small business customers; and (2) the proportion
    made in LMI communities. These retail distribution metrics
    would measure the number, rather than the dollar value, of
    loans that a bank has made.
        The OCC's overall metrics approach in their final rule,
    issued on May 20, continues to differ in a number of ways from
    the approach that Board staff discussed with the other agencies
    as part of CRA interagency discussions. Still, the final rule
    maintains retail lending metrics similar to those discussed by
    Board staff that are based on the distribution of a bank's
    loans to LMI borrowers and LMI communities in its assessment
    areas.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                         FROM JEROME H. POWELL

    Q.1. Agriculture and Rural Lending--I asked your colleague Vice
    Chairman Quarles, and Chairs McWilliams and Hood, about this
    when they were before this Committee in December. I have been
    hearing for the last year or more from community bankers in
    Montana that examiners seem more concerned lately when that
    their bank or credit union 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 Trump's trade disaster 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?
        What can and should we be doing in these communities?
        From a banking perspective, are you concerned about how
    this will effect community banks across rural America?

    A.1. Agricultural producers and the banks that serve them are
    facing many challenges due to weather and trade issues that are
    now exacerbated by the Coronavirus Disease 2019 (COVID-19). The
    financial stress experienced by many farmers and ranchers due
    to these challenges, and stresses facing banks serving the
    agricultural sector, particularly community banks, continue to
    be a priority for regulators.
        Agricultural conditions have remained weak for the past
    several years and financial stress in the sector has continued
    to increase at a gradual pace. Although agricultural loan
    delinquencies have increased gradually in recent years,
    borrower stress has not yet led to a significant increase in
    the volume of nonperforming loans. Asset quality and overall
    safety and soundness at most agricultural banks were
    satisfactory as of December 31, 2019. While most of the
    institutions currently remain in satisfactory condition, the
    impact of COVID-19 on the safety and soundness of agricultural
    banks has not fully materialized and is being monitored.
        Agricultural community banks have in-depth knowledge and
    experience in their market area that allows them to make well-
    informed credit decisions to meet the needs of their
    communities and manage risks that are associated with
    agricultural credit. We have seen agricultural lenders take a
    number of prudent steps to manage this increasing risk in light
    of persistently weak agricultural conditions. For example, as
    land values increased, these lenders reviewed their internal
    policy limits around loan-to-value underwriting requirements.
    In some instances, banks have required larger downpayments on
    new farm real estate loans or set internal limits on the amount
    they were willing to lend per acre, and relied more on
    historical values for underwriting when they observed local
    land values had skyrocketed. Additionally, some agricultural
    lenders are using credit enhancements such as loan guarantee
    programs through the U.S. Department of Agriculture's Farm
    Service Agency to appropriately mitigate credit risk to the
    bank. Moreover, agricultural banks today, compared to those of
    the 1980s, report stronger aggregate financial metrics,
    including more capital and reserves.
        The Federal Reserve continues to monitor agricultural State
    member banks to assess their risk management processes and to
    ensure prudent steps are being taken during these periods of
    weakness. In 2011, the Federal Reserve issued guidance \1\ to
    the industry on key risk factors in agricultural lending and
    supervisory guidelines for a financial institution's risk
    management practices. With consideration given to this
    guidance, examiners continue to encourage financial
    institutions to work constructively with borrowers, including
    agricultural borrowers, and consider prudent loan modifications
    consistent with safe and sound lending practices to strengthen
    the credit and mitigate credit risk.
    ---------------------------------------------------------------------------
         \1\ See SR letter 11-14 ``Supervisory Expectations for Risk
    Management of Agriculture Credit Risk''.
    ---------------------------------------------------------------------------
        More recently, the Federal Reserve joined other regulatory
    agencies in issuing an interagency statement encouraging
    financial institutions to work constructively with borrowers
    affected by COVID-19 and providing additional information
    regarding loan modifications. The agencies encourage financial
    institutions to work with borrowers, will not criticize
    institutions for doing so in a safe and sound manner, and will
    not direct supervised institutions to automatically categorize
    loan modifications as troubled debt restructurings.
        Recognizing the potential for further increases in
    financial stress among agricultural borrowers and banks, and
    the direct ties to the broader communities in which they are
    located, the Federal Reserve will continue to monitor
    conditions as they evolve. We continue to receive input on
    agricultural conditions from business contacts across the
    country through our boards of directors at Regional Reserve
    Banks, various advisory councils, and surveys, in addition to
    reports from staff who track developments in U.S. agriculture,
    and will respond accordingly.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                         FROM JEROME H. POWELL

    Q.1. Monetary Policy--In 2018, the Fed began a review of the
    strategy, tools, and communications it uses to conduct monetary
    policy. \1\
    ---------------------------------------------------------------------------
         \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. The Federal Reserve's response to COVID-19 pandemic has
    been guided by our mandate to promote maximum employment and
    stable prices for the American people, along with our
    responsibilities to promote the stability of the financial
    system. As I reported in recent testimony, in March we lowered
    our policy interest rate to near zero, and we expect to
    maintain interest rates at this level until we are confident
    that the economy has weathered recent events and is on track to
    achieve our maximum-employment and price-stability goals.
        In addition to monetary policy, we took forceful measures
    in four areas: open market operations to restore market
    functioning; actions to improve liquidity conditions in short-
    term funding markets; programs in coordination with the
    Treasury Department to facilitate more directly the flow of
    credit to households, businesses, and State and local
    governments; and measures to allow and encourage banks to use
    their substantial capital and liquidity levels built up over
    the past decade to support the economy during this difficult
    time.
        Turning to your question regarding changes in the estimates
    of the neutral Federal funds rate, though there continue to be
    a wide range of estimates, over the past two decades most
    estimates have declined significantly. A lower neutral rate
    implies that the level of the Federal funds rate consistent
    with the Federal Reserve's dual mandate of maximum employment
    and price stability is lower than in the past and hence closer
    to its effective lower bound. As a result, there likely will be
    less room to reduce the Federal funds rate to support the
    economy in economic downturns.
        However, the Federal Reserve has at its disposal other
    tools to provide economic stimulus, including forward guidance
    about the likely course of monetary policy and balance sheet
    policies (most notably large-scale asset purchases). Deployment
    of these other tools in response to the 2007-2008 financial
    crisis put significant downward pressure on the longer-term
    borrowing rates of American families and businesses, thus
    supporting the labor market recovery and pursuit of price
    stability.
        Overall, the Federal Open Market Committee (FOMC) judges
    that its existing toolkit has served the U.S. economy well over
    the past decade. The experience acquired with the use of
    forward guidance and balance sheet policies has led to an
    improved understanding of how these tools operate. Therefore,
    the FOMC can proceed more confidently and preemptively than in
    the past in using them when warranted by economic
    circumstances. The Federal Reserve also has important liquidity
    provision authority to improve confidence in the economy and
    restore calm to financial markets, thus supporting achievement
    of its maximum employment and price stability goals. In
    addition to its usual liquidity-provision authority for
    depository institutions, the Federal Reserve has, as you know,
    under section 13(3) of the Federal Reserve Act, the authority
    to provide broad-based liquidity to nondepository institutions
    in ``unusual and exigent circumstances.'' Restoring well-
    functioning financial markets through the prompt and broad-
    based deployment of liquidity provisions was a central to the
    Federal Reserve's response to the 2007-2008 financial crisis
    and is also a cornerstone of our response to the economic
    challenges caused by the COVID-19 pandemic.
        That said, the relatively low level of the neutral rate
    poses challenges for the conduct of monetary policy, and the
    FOMC is mindful of the risks posed by the effective lower bound
    in its policy deliberations. In part for this reason, the FOMC
    launched a review of its monetary policy strategy, tools, and
    communication practices in November 2018 to ensure that it has
    the right tools to fight recessions and that it deploys those
    tools promptly and effectively.
        The Federal Reserve also has tools to support liquidity
    provision and market functioning. For example, to support
    market functioning, recently we made use of the discount window
    more attractive, deployed open market operations, and opened
    three liquidity facilities \2\ with the approval of the
    Secretary of the U.S. Department of the Treasury pursuant to
    our ``emergency and exigent'' authority under section 13(3) of
    the Federal Reserve Act. Using our section 13(3) authority we
    also established eight facilities \3\ to provide more direct
    support for the extension of credit across the economy. This
    authority had been a cornerstone of our response to the
    economic challenges caused by the COVID-19 pandemic.
    ---------------------------------------------------------------------------
         \2\ The market functioning facilities include: the Commercial
    Paper Funding Facility, the Money Market Mutual Fund Liquidity
    Facility, and the Primary Dealer Credit Facility.
         \3\ These include (1) the Primary Market Corporate Credit
    Facility, (2) the Secondary Market Corporate Credit Facility, (3) Term
    Asset-Backed Securities Loan Facility, the (4) Municipal Liquidity
    Facility, (5) the Main Street Lending Program which is comprised of the
    Main Street New Loan Facility, the Main Street Priority Loan Facility,
    and the Main Street Expanded Loan Facility, and (6) the Paycheck
    Protection Program Liquidity Facility.

    Q.2. What role do you believe fiscal policy will need to play
    ---------------------------------------------------------------------------
    in the next downturn?

    A.2. The decline in the neutral rate of interest presents the
    Federal Reserve with a more challenging environment to achieve
    our dual mandate. Specifically, we face heightened risks of
    lengthy periods in which our policy interest rate is near zero.
    To address this problem we are conducting a review of our
    monetary policy strategies, tools, and communications. One
    valuable tool for stabilizing the economy during a downturn is
    fiscal stimulus. Of course, that is not part of our toolkit, it
    is the responsibility of Congress and the Administration. We
    have seen that fiscal stimulus has been helpful in restoring
    growth during many of the recessions over the past 50 years. It
    was certainly helpful during the Great Recession when the
    Federal funds rate was near zero, and the fiscal measures taken
    thus far in response to the current crisis--the fastest and
    largest response for any postwar downturn--have provided
    important support. While the overall policy response to date
    has provided a measure of relief and stability, and will
    provide some support to the recovery when it comes, COVID-19
    raises longer-term concerns as well. We know that deeper and
    longer recessions can leave behind lasting damage to the
    productive capacity of the economy through unnecessary
    insolvencies on the part of households and businesses and long-
    term unemployment. If it helps avoid long-term economic damage
    and leaves us with a stronger recovery, additional fiscal
    support though costly, could be worth it. This tradeoff is one
    for elected representatives, who wield powers of taxation and
    spending.

    Q.3. President Trump has repeatedly advocated for negative
    interest rates, arguing that they would boost economic growth.
    \4\ Do you agree? Describe the implications of negative
    interest rates.
    ---------------------------------------------------------------------------
         \4\ 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.3. The FOMC has discussed negative rates a number of times in
    the past and has judged that the setting of negative rates is
    not an attractive monetary policy tool in the United States.
    For example, as part of our ongoing review of monetary policy
    strategy, tools, and communications, the FOMC considered the
    possibility at our October 2019 meeting. As was noted in the
    minutes for the meeting, all FOMC participants judged that
    negative rates ``currently did not appear to be an attractive
    monetary policy tool in the United States.'' The FOMC sees
    forward guidance and balance sheet policies as preferable tools
    to provide additional policy stimulus when the policy rate is
    near zero percent. In reaching this conclusion, policymakers
    have noted that they see limited scope to bring the Federal
    funds rate into negative territory and that the evidence on the
    beneficial effects of negative interest rates abroad is mixed.
    Moreover, the implications of such a policy are difficult to
    anticipate, given that it is unclear what effect negative rates
    might have on the willingness of financial intermediaries to
    lend and on the spending plans of households and businesses.
    FOMC participants have further noted that negative interest
    rates entail risks of introducing significant complexity or
    distortions to the financial system. In particular, the U.S.
    financial system is considerably different from those in
    economies that implemented negative interest rate policies, so
    that negative rates could have more significant adverse effects
    ---------------------------------------------------------------------------
    on market functioning and financial stability here than abroad.

    Q.4. 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. \5\ Do you agree?
    ---------------------------------------------------------------------------
         \5\ 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/.
    ---------------------------------------------------------------------------
        If so, is 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.4. The decline in the neutral rate likely reflects the
    effects of several domestic and global structural factors,
    including population aging, a step down in the pace of
    productivity growth, and lower risk tolerance. Identifying
    structural transformations and their effects on the neutral
    rate of interest in an economy constantly buffeted by shocks is
    an inherently challenging task. Accordingly, there remains
    substantial uncertainty about the neutral rate of interest and
    the respective contributions of structural factors.
    Independently of its origins, however, the decline in the
    neutral rate of interest poses challenges for the conduct of
    monetary policy by calling for the use of tools other than
    lowering the target for the Federal funds rate to provide
    monetary stimulus once the policy rate has been lowered near
    zero percent.
        The Federal Reserve actively seeks to identify structural
    changes and their implications for the conduct of monetary
    policy. FOMC participants routinely discuss structural
    transformations during their monetary policy deliberations,
    drawing on extensive research and analysis conducted by Federal
    Reserve staff, academics, private-sector analysts, and other
    sources. Federal Reserve officials frequently address
    structural transformations in speeches, media interviews, and
    other public communications. The Federal Reserve's staff has
    released extensive research on structural transformations and
    their policy implications over time in working papers, policy
    notes, academic publications and presentations, and other
    public communications. Recently, the FOMC has discussed the
    policy implications of key structural transformations as part
    of its review of its monetary policy strategy, tools, and
    communication practices. \6\
    ---------------------------------------------------------------------------
         \6\ For an example of policymakers' discussion of structural
    transformations and their monetary policy implications, see the minutes
    of the July 2019 FOMC meeting.

    Q.5. 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.'' \7\
    ---------------------------------------------------------------------------
         \7\ Board of Governors of the Federal Reserve System, ``Monetary
    Policy Report'', February 7, 2020, https://www.federalreserve.gov/
    monetarypolicy/Files/20200207mprfullreport.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. \8\ Can you describe the implications of the concentration
    levels of the current repo market structure and how the
    concentration of participants has impacted the Fed's recent
    interventions?
    ---------------------------------------------------------------------------
         \8\ 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.5. In the last few months of 2019 and into early 2020, the
    Federal Reserve's reserve management purchases of Treasury
    bills and the Open Market Desk's repurchase agreement
    operations (repo) kept the aggregate quantity of reserve
    balances above the level that prevailed in early September
    2019. These operations therefore ensured an ample supply of
    reserves to the banking system as a whole and so contributed to
    relatively calm money market conditions during the end of the
    2019 and early 2020. Notably, these operations likely
    contributed to stable conditions in short-term funding markets
    in the period immediately preceding the recent economic and
    financial turbulence. Thus, our repo operations have
    contributed to the orderly functioning of U.S. financial
    ---------------------------------------------------------------------------
    markets as a whole.

    Q.6. If the Fed were to adopt a standing repo facility, as it
    has been considering even before the market disruption in
    September, \9\ what factors would the Fed use to determine
    which counterparties would be eligible?
    ---------------------------------------------------------------------------
         \9\ Board of Governors of the Federal Reserve System, ``Minutes of
    the Federal Open Market Committee'', June 18-19, 2019, https://
    www.federalreserve.gov/monetarypolicy/fomcminutes?0190619.htm.

    A.6. The minutes for the January 2020 FOMC meeting indicated
    that several FOMC participants had suggested at that meeting
    that the FOMC might resume before long its discussion of the
    longer-run role played by repo operations in its ample-reserves
    operating framework, and that this new discussion should cover
    the possible creation of a standing repo facility. However, the
    FOMC has not yet had such a further discussion, and no decision
    or extended FOMC deliberation has occurred regarding the
    ---------------------------------------------------------------------------
    possibility of a standing repo facility.

    Q.7. Financial Stability--In previous questions regarding the
    Fed's response to climate change, you have claimed that the Fed
    uses ``its authorities and tools to prepare financial
    institutions for severe weather events.'' \10\ At the same
    time, science has clearly demonstrated that extreme weather
    events are becoming increasingly common as a result of climate
    change. \11\
    ---------------------------------------------------------------------------
         \10\ Letter from Federal Reserve Chairman Jerome H. Powell to
    Senator Elizabeth Warren, April 18, 2019.
         \11\ 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.7. For the Federal Reserve's near-term analysis, we do take
    into account information on the severity of weather events.
    When a severe weather event occurs, we closely monitor the
    effects on local economies, assess the implications for broader
    measures of economic production and employment, and adjust our
    economic forecasts accordingly.
        For example, our staff has relied on data from the Federal
    Emergency Management Agency and the Department of Energy to
    gauge the disruptions to oil and gas extraction, petroleum
    refining, and petrochemical and plastic resin production in the
    wake of hurricanes that have affected the Gulf region. Our
    staff regularly uses daily measures of temperatures and
    snowfall from National Oceanic and Atmospheric Administration
    weather stations to better understand how severe weather may be
    affecting measured and real economic activity in specific
    areas.
        Our understanding of how economic activities will be
    affected by a severe weather event depends critically on data
    produced by the Federal statistical agencies, such as the
    Census Bureau's County Business Patterns data, which provide
    information on economic activity across geographic locations.
    In addition, our staff uses credit and debit card transactions
    data for gauging how unusual or severe weather might be
    affecting consumer spending.
        At present, we do not directly model how changes in
    temperatures over long periods of time affect economic
    activity. However, as the evidence of effects of climate change
    on the dynamics of economic activity accumulates, this evidence
    will influence our analysis and forecasts of macroeconomic
    dynamics and financial stability risks. And to the extent that
    climate change affects the economic data on which our models
    are built--including the trends and the cyclical behavior of
    investment, consumption, production, and employment--climate
    change will be incorporated in our analysis over time.

    Q.8. 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? Do you have any plans to do so?

    A.8. Addressing climate change directly is an important issue
    that Congress has entrusted to other agencies. A large body of
    natural science research on the climate implications and risks
    from the rising level of greenhouse gases is already being
    produced by the scientific community, which can be leveraged to
    inform economic research. Because of this, we do not expect to
    focus our hiring on natural scientists.
        The Federal Reserve, however, hires economists with
    doctoral training in a broad array of economic and financial
    topics, including staff with expertise in climate and
    environmental economics and related fields. Recent Federal
    Reserve staff research includes, for example, the effects of
    climate, weather, and disasters on economic and financial
    outcomes. Federal Reserve researchers and others are engaging
    in active work to better understand the specific interactions
    between climate-related risks, the real economy, financial
    stability, and the safety and soundness of financial
    institutions.
        In addition, we are leading or participating actively in
    international efforts to understand these issues, including a
    new project at the Financial Stability Board, and a new Basel
    Committee Task Force on Climate-Related Financial Risks,
    cochaired by the Federal Reserve Bank of New York's Executive
    Vice President for Supervision.
        Federal Reserve economists continue to produce research
    that informs the dialogue on climate-related economic and
    financial risks.

    Q.9. Do you support the Fed officially joining the Network for
    Greening the Financial System (NGFS)? If not, why not?

    A.9. The Federal Reserve remains engaged with the Network for
    Greening the Financial System (NGFS) secretariat and its
    members, continues to participate in its meetings as a guest,
    and is following its work closely. We continue to discuss with
    the NGFS what role the Board of Governors (Board) could
    potentially play in its work, in light of the scope of the
    Board's activities and its statutory mandate, as well as the
    constraints of the current NGFS charter.

    Q.10. 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.'' \12\
    ---------------------------------------------------------------------------
         \12\ 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 the Fed monitors and evaluates 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.10. The Federal Reserve dedicates substantial resources to
    provide oversight of leveraged loans in supervised institutions
    and closely supervises institutions with leveraged loan
    exposures through processes such as the Shared National Credit
    (SNC) review. In addition, Federal Reserve staff performs
    ongoing analysis to assess and understand the risks within the
    broader leveraged lending market.
        The Federal Reserve expects its supervised banks to have
    prudent credit underwriting practices and commensurate risk
    management processes, as well as appropriate controls,
    transparency, and communication to senior management and the
    board of directors about leveraged lending risks. Federal
    Reserve supervisors evaluate banking organizations'
    underwriting processes and risk management policies for
    comprehensiveness and internal compliance, risk appetite, limit
    structures, the independence of the risk management function
    from underwriting, the quality and reliability of internal
    audit function, timing and accuracy of internal and supervisory
    ratings processes, and information reporting to senior
    management and the board of directors. Deficient policies,
    procedures, or practices that relate to safety and soundness
    may result in supervisory actions. Our supervisory and
    regulatory policies are intended to ensure that the
    institutions we supervise can appropriately manage their risks
    through the credit cycle.

    Q.11. Do you believe that the Interagency Guidance on Leveraged
    Lending \13\ issued in 2013 is sufficient to address the risks
    associated with leveraged lending, particularly with respect to
    the growth of nonbank lenders?
    ---------------------------------------------------------------------------
         \13\ 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.
    ---------------------------------------------------------------------------
        Describe how the Fed monitors compliance with that guidance
    and what actions are taken when a bank is found to have
    inadequate credit risk protections.

    A.11. The interagency guidance on leveraged lending promotes
    prudent underwriting and risk-management practices by banks and
    it helps supervisors fairly and consistently evaluate practices
    across banks. Commercial banks remain the dominant originators
    of leveraged loans in the marketplace, though nonbank lenders
    have taken a larger share of the riskiest parts of the market.
    While the leveraged lending guidance and existing supervisory
    activity address risks associated with leveraged loans
    originating from the banking sector, the guidance and
    supervisory efforts do not apply to nonbank lenders or their
    activities. To the extent that banks have exposures to the
    nonbank lenders in the leveraged loan market, for instance
    through investments in investment-grade tranches of
    collateralized loan obligations or loans to nonbank financial
    institutions, those exposures are tested during the annual
    Dodd-Frank Act stress tests and comprehensive capital analysis
    and review. And as noted above, the Federal Reserve expects its
    supervised banks to have the appropriate risk-management
    processes and controls in place to address leveraged lending
    risks.
        As supervisory guidance, the 2013 guidance does not have
    the force and effect of law, and the Federal Reserve does not
    take enforcement actions based on supervisory guidance. If a
    bank has deficient practices relating to safety and soundness,
    the Federal Reserve may take supervisory or enforcement actions
    based on its underlying statutory authority, as appropriate, so
    that the institution addresses those deficiencies. Examiners
    may refer to the 2013 guidance to provide examples of safe and
    sound conduct related to leveraged lending activities.
    Examiners have not hesitated to issue supervisory findings
    related to leveraged lending activities in recent examinations
    when individual bank circumstances required them.

    Q.12. Increasingly, the riskiest leveraged lending is occurring
    outside the banking system.
        Do those loans currently pose a risk to financial
    stability? If not, please explain why and under what
    circumstances the Fed would 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.12. The Federal Reserve continues to monitor developments in
    the leveraged lending market, and we have been attentive to the
    risks of leveraged loans and corporate debt in general, noting
    the issue in several speeches, testimony, the June 2020
    Monetary Policy Report, and in our Financial Stability Reports,
    published twice a year. Highly leveraged companies may
    experience greater strains during a downturn than those with
    less leverage, and we are closely monitoring the effects of
    those strains on banks and other financial institutions. The
    most recent Financial Stability Report did note an uptick in
    defaults of leveraged loans along with a reduction in the
    issuance of new leveraged loans. \14\
    ---------------------------------------------------------------------------
         \14\ Board of Governors of the Federal Reserve System, Financial
    Stability Report (May 2020), https://www.federalreserve.gov/
    publications/files/financial-stability-report-20200515.pdf.
    ---------------------------------------------------------------------------
        The Federal Reserve supervises the lending and risk-
    management practices of banking organizations that are subject
    to its jurisdiction, such as State member banks and depository
    institution holding companies. Nonbank lenders that fall
    outside of the purview of the three prudential banking Federal
    regulators generally are not subject to the same level of
    oversight or transaction testing as is typical of regulated
    banking organizations. While the Federal Reserve does not
    directly supervise the lending and risk-management practices of
    these nonbanks, we have some ability to indirectly monitor
    risks from their leveraged lending activities. To the extent
    that banks have exposures to the nonbank lenders in the
    leveraged loan market, those exposures are tested during the
    annual Dodd-Frank Act Stress Tests and Comprehensive Capital
    Analysis and Review.

    Q.13. Private equity firms often finance acquisitions through
    highly leveraged loans. According to the private equity
    industry, firms acquired in these acquisitions now employ more
    than 8 million workers. \15\ In an economic downturn, what
    would you expect to happen to employment in these firms?
    ---------------------------------------------------------------------------
         \15\ Office of Senator Elizabeth Warren, Letter From Senator
    Elizabeth Warren et al. to Carmine Di Sibio, Global Chairman and Chief
    Executive Office of Ernst and Young AG, November 18, 2019, https://
    www.warren.senate.gov/imo/media/doc/Letter%20to%20Ernst%20and%20
    Young%20re%20PE%20report.pdf.

    A.13. We should be concerned about possibly excessive and broad
    build-ups of corporate debt and leverage, in any form, that
    could potentially amplify a macroeconomic downturn. Private
    equity firms often acquire companies that are troubled or where
    they believe costs could be reduced in order to improve the
    efficiency of the ongoing business. Often, these companies are
    purchased using debt at high-leverage multiples. Firms with
    higher debt-service burdens, all else equal, have less
    financial flexibility and thus are likely to be faster to
    reduce spending and at least temporarily reduce employment in
    response to a decline in their sales. That said, the propensity
    to finance with debt tends to be higher for companies or in
    industries that earn steadier cash flows and have more modest
    needs for reinvestment or research and development.
        It is difficult to know whether or how much private equity-
    owned firms might be more vulnerable that others, and the
    research on this topic finds mixed results. Although elevated
    leverage could be a source of vulnerability for some private
    equity-owned companies, private equity firms themselves may
    offer a funding backstop that could provide additional
    resilience for their companies.

    Q.14. 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 Jaw jointly enforced by the three agencies without
    the Fed last December. \16\ On January 8, 2020, Governor
    Brainard released her own alternative plan to modernize the
    CRA. \17\ You have since stated that while the entire Board has
    not yet voted on the proposal, you supported the framework she
    described.
    ---------------------------------------------------------------------------
         \16\ Comptroller of the Currency and Federal Deposit Insurance
    Corporation, Federal Register Notice, ``Community Reinvestment Act
    Regulations'', January 9, 2020, https://www.federalregister.gov/
    documents/2020/01/09/2019-27940/community-reinvestment-act-regulations.
         \17\ Board of Governors of the Federal Reserve System,
    ``Strengthening the Community Reinvestment Act by Staying True to Its
    Core Purpose'', Governor Lael Brainard, January 8, 2020, https://
    www.federalreserve.gov/newsevents/speech/brainard20200108a.htm.
    ---------------------------------------------------------------------------
        Please describe in detail the aspects of the FDIC and OCC
    plan that prevented the Fed from joining the proposal.
        Does the Fed commit to not joining a final rule that does
    not address these issues?

    A.14. Implementing and strengthening the Community Reinvestment
    Act (CRA) regulations is a key priority for the Federal
    Reserve. We have taken a close look at different approaches to
    strengthen the CRA rules in ways that further the core purposes
    of the statute, and this work will be an ongoing priority for
    us.
        There is a fair amount of agreement on the part of the
    agencies on some of the overall objectives of CRA modernization
    and some of the challenges of the current regulatory approach
    that we are all trying to address. For example, all of the
    agencies share an interest in using metrics to inform
    performance assessments with the objective of increasing the
    level of transparency and consistency in CRA examinations.
    There is also broad agreement on the need to update CRA
    regulations to reflect new ways of obtaining financial
    services, including via online channels. Finally, there is
    agreement on the need to provide more clarity on what counts
    for CRA consideration.
        On May 20, the Office of the Comptroller of the Currency
    (OCC) separately issued a final CRA rule that applies to only
    OCC-supervised banks. In light of this development, our ongoing
    analysis of CRA modernization issues, and our review of
    comments to the OCC and Federal Deposit Insurance Corporation's
    (FDIC) notice of proposed rulemaking (NPR), we are assessing a
    path forward.
        To date, my colleagues and I at the Federal Reserve have
    focused on evaluating retail lending and community development
    activities separately. Having separate retail lending and
    community development tests would allow regulators to set
    metrics based on opportunities available in a given market,
    which can differ for retail lending and community development
    financing activities. Further, having separate tests also would
    allow regulators to do full reviews of how banks use branches,
    mobile banking, and volunteer activities to meet the needs of
    their communities. We also have focused on developing a
    tailored approach in applying metrics that would enable
    adjusting those metrics to local conditions and including
    metrics that adjust across business cycles. Additionally, we
    support grounding reforms in data and analysis and relying as
    much as possible on information already reported by banks.
    Finally, while there is agreement on the need for greater
    clarity in terms of what counts for CRA credit, we need a high
    level of confidence that expanding eligible activities
    maintains the regulations' focus on low- and moderate-income
    places and households.

    Q.15. 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.
        When does the Fed anticipate doing so?
        Do you believe it is important for any new metrics included
    in a new CRA plan are grounded in data?
        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.15. As Governor Brainard discussed in January, the Federal
    Reserve constructed a database to assist our efforts in
    analyzing possible revisions to CRA, including the possible use
    of metrics. This database draws upon publicly available data,
    including data that are currently found in public CRA
    evaluations for individual banks. We believe that this is a
    valuable resource that can help give us the confidence we need
    to develop metrics and thresholds that can be used in
    evaluating CRA performance. The database also helps provide
    insight in how a proposed metrics approach would affect small
    banks and banks in different types of geographies. We shared
    the data tables with the public in early March 2020.

    Q.16. You said during the hearing that the Fed was mostly
    focused on coming to consensus with the OCC and the FDIC before
    the proposal was issued, but hasn't formally engaged since that
    time. What is the Fed's plan going forward? Will the Fed
    formally vote on the proposal to be published in the Federal
    Register and subject to the traditional notice and comment
    period?

    A.16. As noted above, on May 20, the OCC separately issued a
    final CRA rule that applies to only OCC-supervised banks. Given
    this, our ongoing analysis of CRA modernization issues, and our
    review of comments to the NPR, we are assessing a path forward.
    We remain interested in working with the other agencies on an
    ongoing basis, as we have demonstrated in our actions on CRA
    during the current crisis. For example, we recently issued a
    joint statement on assessing CRA-eligible activities that are
    responsive to the banking needs of low- and moderate-income
    households and areas as a result of actions taken in response
    to containing the coronavirus. If the Board does opt to release
    a proposal to be published in the Federal Register, we would
    plan to formally vote on it and it would be subject to a notice
    and comment period.

    Q.17. What are the consequences of having two separate CRA
    regimes for institutions with different regulators?

    A.17. We are currently assessing the OCC's final CRA rule that
    applies to only OCC-supervised banks, issued on May 20. As our
    review is ongoing, it would be premature to assess the
    consequences of having separate CRA regimes for institutions
    with different regulators.

    Q.18. On January 30, 2020, the Fed finalized a rule to
    determine ``when a company controls a bank or a bank controls a
    company.'' \18\
    ---------------------------------------------------------------------------
         \18\ 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. \19\ 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,
    \20\ do you believe that this rule increases the level of risk
    in the financial sector?
    ---------------------------------------------------------------------------
         \19\ 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.
         \20\ 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.18. The final rule is intended to simplify and proved
    transparency to the Board's control standards by codifying a
    comprehensive control framework in regulation. The final rule
    is generally consistent with current practice, with certain
    targeted adjustments, and therefore is not expected to
    materially change the level of risk in the financial sector. In
    addition, nothing in the final rule would limit the ability of
    the Board to take action to address unsafe and unsound
    ---------------------------------------------------------------------------
    practices or conditions or other issues.

    Q.19. 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.''
    \21\
    ---------------------------------------------------------------------------
         \21\ 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.19. It will be important to monitor the implementation of the
    final control rule to ensure that it is achieving its intended
    purpose. In addition, the final rule provides guidance to
    Federal Reserve System staff responsible for reviewing the
    ownership and funding structures of banking organizations as
    part of the supervisory process and to ensure compliance with
    applicable laws and regulations.

    Q.20. If so, please describe how the Fed will 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.20. The Board will continue to monitor the ownership of
    banking organizations as part of its normal supervisory
    process. The Board also will continue monitoring for financial
    stability risks through its broad program to assess the
    stability and resilience of the U.S. financial system. In
    addition, the Board must consider financial stability in
    connection with many merger and acquisition applications under
    the Bank Holding Company Act and the Home Owners' Loan Act, as
    revised by the Dodd-Frank Wall Street Reform and Consumer
    Protection Act.

    Q.21. 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.'' \22\
    ---------------------------------------------------------------------------
         \22\ 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, you 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.'' \23\ Do you agree with Mr. Scharf that Wells
    Fargo still has a long way to go before the asset cap can be
    removed?
    ---------------------------------------------------------------------------
         \23\ 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.21. The firm's remediation plans under the Federal Reserve
    Consent Order, and information on the progress of the firm, are
    confidential supervisory information. However, the Federal
    Reserve does not have a timeline for lifting the asset cap and
    does not intend to lift the asset cap until the firm has fully
    resolved its problems and adopted and implemented, to our
    satisfaction, measures that address the risk management
    breakdowns that led to the Federal Reserve's enforcement
    action.
        On a temporary and narrow basis, due to the extraordinary
    disruptions from the coronavirus, the Federal Reserve on April
    8, 2020, modified the growth restriction on Wells Fargo so that
    it can provide additional support to small businesses. The
    change will only allow the firm to make additional small
    business loans as part of the Paycheck Protection Program and
    the Federal Reserve's Main Street Lending Program. The changes
    do not otherwise modify the Board's February 2018 enforcement
    action against Wells Fargo.
        As you are aware, the Board will vote on any decision to
    terminate the asset growth restriction imposed by the Order,
    and that decision will be released to the public.

    Q.22. 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'' \24\--a severe
    narrowing of Fed's authority.
    ---------------------------------------------------------------------------
         \24\ 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.
    ---------------------------------------------------------------------------
        Does the Fed have any plans to alter the process,
    standards, and requirements under which MRAs and/or MRIAs are
    issued? If so, when do you expect to formally announce those
    changes?
        How will you be announcing these changes?
        Will you put in place a formal notice and comment process
    so that outside experts and consumer advocates can review and
    comment on any proposal?
        When do you anticipate implementing these changes?
        The 2013 guidance on 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.'' \25\
    If, as proposed, certain supervisory findings will no longer be
    categorized as MRAs, how will this impact the Fed's ability to
    assess progress in addressing these challenges?
    ---------------------------------------------------------------------------
         \25\ Federal Reserve Board of Governors, ``Supervisory
    Considerations for the Communication of Supervisory Findings'', https:/
    /www.federalreserve.gov/supervisionreg/srletters/sr1313a1.pdf.
    ---------------------------------------------------------------------------
        In his speech, Vice Chair Quarles referenced the
    restoration of the ``supervisory observation'' category that
    was removed in 2013. \26\ When the Fed used them, they were
    defined as ``matters that are informative, advisory, or that
    suggest a means of improving performance or management
    operation of the organization. However, senior management of
    financial institutions had the discretion to decide whether or
    not to adopt the observations. \27\
    ---------------------------------------------------------------------------
         \26\ Id.
         \27\ Federal Reserve Board of Governors, ``Communication of
    Examination/Inspection Findings'', January 24, 2008.
    ---------------------------------------------------------------------------
        Does the Fed intend to restore the ``supervisory
    observation'' category based on the same definition that was
    used prior to 2013?
        Is the Fed considering adding additional categories to
    describe supervisory communications?
        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 will the Fed determine this definition?
        How will the process for remediation differ for issues that
    were previously covered by MRAs but will no longer be? How will
    the process for escalating an unresolved issue to an
    enforcement matter?
        Certain MRAs are issued on an industrywide basis. \28\ How
    would proposed changes affect the use of these types of MRAs?
    ---------------------------------------------------------------------------
         \28\ American Banker, ``Wells Fargo Not Alone: OCC Finds Sales
    Abuses at Other Banks'', Kevin Wack, June 5, 2008, https://
    www.americanbanker.com/news/not-just-wells-fargo-occ-finds-sales-
    practice-abuses-at-other-banks.

    A.22. As I expressed in response to your letter of February 11,
    2020, the Federal Reserve is committed to continually reviewing
    its supervisory processes and practices in order to increase
    their effectiveness and enhance transparency, while maintaining
    a supervisory framework that promotes a safe, sound, and stable
    financial system. Fundamental to this work is our belief that
    effective supervision requires clear two-way communications and
    transparent supervisory expectations. We are working to ensure
    that our framework for supervisory communications focuses
    supervised institutions on the most important safety and
    soundness and compliance concerns identified by examiners.
        The Federal Reserve takes very seriously its role in
    supervising financial institutions under its jurisdiction.
    Strong supervisory processes and practices, including rigorous
    examination activities, are vital to that role. Critical
    components of strong supervision include evaluating banking
    organizations' activities and practices and, as warranted,
    issuing findings that require supervised institutions to take
    corrective action in a timely manner. This aspect of
    supervision promotes the adoption and maintenance of sound
    practices and helps to avert excessive risk taking. Early
    identification of supervisory concerns also helps to deter
    actions or activities that may otherwise significantly impair
    institutions' safety and soundness.
        Our overarching goal is to ensure that any changes to
    supervisory processes and practices are properly calibrated and
    would help us better fulfill our statutory responsibility to
    promote a safe, sound, and stable banking system.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ
                         FROM JEROME H. POWELL

    Q.1. According to the Federal Reserve's annual supervisory
    report for 2019, approximately 40-45 percent of financial
    holding companies (FHCs) with more than $100 billion in assets
    have a less than satisfactory rating, and thus are not meeting
    the Bank Holding Company Act standard of ``well-managed.'' This
    is a trend that has spanned more than the last 10 years. While
    we cannot know from aggregated supervisory data whether which
    firms are falling below the statutory standard year after year,
    it is a troubling trend. It suggests both a widespread failure
    of large FHCs to manage themselves well, as well as a
    persistent failure to correct their deficiencies. In addition,
    more than half of the Federal Reserve's supervisory findings
    have related to deficiencies in the governance and risk
    management of these large banks.
        Wells Fargo is one of the most recent and high-profile
    examples of poor management. Wells Fargo has been responsible
    for a string of egregious consumer abuses in several business
    units, including (a) opening over 3.5 million fake accounts;
    (b) illegally repossessing military members' cars; (c) charging
    auto loan borrowers for insurance without their knowledge; (d)
    improperly levying fees for extending mortgage rate-locks; (e)
    failing to offer mortgage modifications because of a software
    glitch that resulted in several hundred foreclosures; and (f)
    charging wealth management services for inappropriate add-on
    products and steering them into investments that generated
    larger commissions for Wells. According to a report
    commissioned by Wells' independent directors, the firm's
    sprawling organizational structure inhibited effective risk
    management.
        The Fed has responded by imposing an unprecedented asset
    cap until the company fixes its governance problems. But the
    Fed has the authority to require Wells Fargo, and other poorly
    managed FHCs, to make themselves smaller and less complex in
    order to regain control over their management.
        Do you see any benefits to institutions like Wells Fargo
    being smaller and less complex?

    A.1. Since the financial crisis, the Federal Reserve has
    subjected larger, more complex firms to more stringent
    regulatory requirements (such as the G-SIB surcharge, which
    increases with size and complexity) and comprehensive, intense
    examination focused on key risks. The Federal Reserve will
    continue to appropriately tailor its regulatory and supervisory
    regime to calibrate stringency and severity to the risks a firm
    poses to the financial system.

    Q.2. What is the Fed doing to improve governance at large,
    poorly managed firms?

    A.2. Since the financial crisis, the Federal Reserve has taken
    a number of regulatory and supervisory steps to improve
    governance at large firms in general and firms that are not
    well managed in particular. These steps built on the existing
    regulatory and supervisory framework that has for many years
    restricted firms that are not well managed.
        For example, large firms are subject to specific governance
    requirements in Regulation YY (12 CFR part 252). In addition,
    the Federal Reserve has articulated governance expectations for
    large firms in Supervision and Regulation (SR) Letter 12-17
    (Consolidated Supervision Framework for Large Financial
    Institutions), and that governance is a fundamental aspect of
    each of the three component ratings assigned to large firms
    (see SR 19-3, Large Financial Institution (LFI) Rating System).
    The supervisory programs for large financial institutions,
    which culminate in ratings assigned under the LFI rating system
    each year, include examinations and other activities that focus
    on governance. If governance issues are identified, supervisors
    direct the board and senior management to address them through
    supervisory findings and formal and informal enforcement
    actions, as appropriate. If a firm fails to address these
    issues, such actions may be escalated and lead to more
    stringent limitations on their operations, as in the case of
    Wells Fargo.

    Q.3. Has the Fed considered exercising its divestment authority
    under Section 4(m) of the Bank Holding Company Act of 1956 to
    require large FHCs that are poorly managed to shrink themselves
    until they are better able to manage themselves?

    A.3. When a financial holding company (FHC) falls out of
    compliance with section 4(l) of the Bank Holding Company Act,
    by becoming less than well-managed or well-capitalized, the
    noncompliant FHC enters into a confidential 4(m) agreement with
    the Federal Reserve Board (Board) requiring, among other
    things, that they remedy the identified deficiencies. This
    agreement is an enforcement action that permits the FHC to
    continue operating while it addresses its deficiencies. The
    agreement is approved by the Board and may be modified or
    terminated by the Board.
        Through the 4(m) agreement, the FHC is required to seek
    prior approval from the Board to engage in any new financial
    activities or to make nonbank investments or acquisitions. \1\
    The Board may also impose other restrictions on the FHC as
    appropriate. This approach incentivizes the firm to focus on
    fixing its supervisory issues.
    ---------------------------------------------------------------------------
         \1\ 12 CFR 225.83(d).
    ---------------------------------------------------------------------------
        If a noncompliant FHC fails to address the identified
    deficiencies within the specified period of time then the Board
    may require the institution to divest its depository
    institutions unless the FHC chooses to voluntarily cease all of
    its FHC-only permissible activities. The Board regularly
    assesses a noncompliant FHC's progress in remediation of
    identified issues and as part of this review considers whether
    it would be appropriate to implement other limitations or
    ultimately exercise authority to require divestiture.

    Q.4. Why has the Fed never used this authority before?

    A.4. We have found that the broad range of supervisory and
    enforcement tools that Congress as conferred on the Board have
    generally been effective in motivating institutions to
    remediate issues. These tools include the ability to issue
    examination findings that highlight Matters Requiring Attention
    and Matters Requiring Immediate Attention, as well as ratings
    downgrades. If a problem requires a more detailed resolution or
    is more pervasive at an institution, the Board can impose
    informal enforcement actions (typically in the form of
    Memorandums of Understanding) and formal enforcement actions,
    such as Written Agreements and Cease and Desist Orders, which
    may carry civil money penalties, are available tools. In
    addition, there is a range of restrictions the Federal Reserve
    may impose through 4(m) agreements short of requiring
    divestiture, such as limits on particular nonbank businesses.
        Enforcement measures may escalate depending on the severity
    or difficulty of the problem. Indeed, the decision to force
    divestiture of a depository institution or cessation of nonbank
    financial activities would be one of the most severe penalties
    that would be considered if the informal and formal enforcement
    tools exercised throughout the supervisory process did not
    result in corrective action, or if circumstances otherwise
    warrant a heightened response.

    Q.5. Under what circumstances would the Fed use this authority
    going forward?

    A.5. As discussed above, because of the severity of the action
    and the potential for unintended consequences, the Board would
    consider ordering divestiture only in severe cases where other
    options would not be feasible or effective. The risk of
    unintended adverse consequences to the broader economy would be
    a primary consideration, as would the severity and duration of
    the issues giving rise to the consideration.
        The supervisory process is focused on addressing the issues
    you have identified, including ensuring that large and complex
    organizations have robust risk management practices to ensure
    safety and soundness and compliance with consumer compliance
    laws and regulations. I welcome further discussion on ways to
    improve our current approach to this important issue.

    Q.6. While unemployment has reached record lows, those numbers
    can obscure the economic reality of working Americans. For
    example, in Hawaii, 48 percent of households have incomes that
    are not high enough to afford a basic household budget that
    includes housing, childcare, food, transportation, and health
    care. \2\ Almost a quarter of working adults in Hawaii report
    that they work multiple jobs to make ends meet. \3\ For these
    households in Hawaii and in communities across the country, the
    unemployment rate may be low, but they are not enjoying the
    financial security that should come from working full-time.
    ---------------------------------------------------------------------------
         \2\ https://www.auw.org/sites/default/files/ALICEoverview.pdf
         \3\ https://www.hawaiinewsnow.com/2020/01/31/survey-hawaii-adults-
    say-theyre-struggling-financially/
    ---------------------------------------------------------------------------
        As the Federal Reserve works to fulfill its dual mandate,
    does it consider data that provide insight into the quality of
    the jobs available or whether employment is providing wages
    that can support a basic household budget?
        If yes, what data are the Fed using and how is it using
    them?
        If no, why not?

    A.6. In fulfilling our dual mandate, the Federal Reserve Board
    looks at a broad range of labor market indicators, including
    those on the types of jobs workers have and how workers from
    different income and demographic groups are faring. We do not
    target a particular level of wages for the aggregate economy or
    for particular demographic groups. Instead, we use labor market
    indicators to assess whether resources in the economy are being
    used to the fullest extent possible without creating undue
    inflationary pressures. For example, in the recovery from the
    Great Recession, we focused attention on the number of
    individuals that were working part-time for economic reasons.
    These workers are included in the Bureau of Labor Statistics'
    (BLS) U-6 measure of unemployment. The number of these workers
    remained elevated for longer than the conventional unemployment
    rate, termed U-3 by the BLS, following the Great Recession, and
    suggested at that time that the unemployment rate alone was
    understating the number of workers who would work more if the
    demand for labor increased.
        More recently, but prior to the COVID-19 outbreak, we
    focused intently on whether disadvantaged or struggling
    segments of society were benefiting from the overall
    improvement in the labor market. Fed Listens--a series of
    events aimed at consulting with a broad range of stakeholders
    in the U.S. economy--was particularly valuable for us in this
    respect. We heard that many individuals and communities were
    only beginning to feel the positive effects of economic
    expansion, which suggested that output and employment were not
    as high as they potentially could be, at least in these
    communities. We were encouraged that wages for workers with the
    lowest incomes were rising the most and that many disadvantaged
    individuals were starting to benefit from the long expansion.
        Since the COVID-19 outbreak, we have been concerned that
    workers earning the least have suffered the most from the
    unprecedented decline in economic activity. Because these
    workers often lack the financial resources to sustain
    themselves for long without work, the potential damage to the
    economy and to economic well-being from prolonged unemployment
    is substantial. As the current situation evolves, we are
    prepared to use our full range of tools to support the economy,
    maintain the flow of credit to households and businesses, and
    promote our maximum employment and price stability goals.

    Q.7. During the hearing, you stated that in a future recession,
    the Federal Reserve would use tools that it used for the first
    time during the 2008 financial crisis, including quantitative
    easing through purchases of long-term assets and Treasury
    bills. Quantitative easing was successful in increasing the
    money supply and pushing down interest rates. But even with
    almost $2.6 trillion in quantitative easing, one quarter of
    American families lost at least 75 percent of their wealth and
    more than half lost at least 25 percent of their wealth. \4\
    And the pace of economic recovery was historically slow,
    averaging just 2 percent instead of the average of 3-5 percent
    typical of other economic recoveries.
    ---------------------------------------------------------------------------
         \4\ https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4200506/
    ---------------------------------------------------------------------------
        The problem for households who lost their homes and for the
    broader economy was that not enough of the money that the Fed
    pumped into the financial system made it into the hands of
    American households and businesses. In stead, much of the extra
    supply of money remained within the financial system and was
    poured back into the stock market. Two years after the start of
    the financial crisis, the Fed cleared the largest banks to pay
    out dividends and buy back shares. Since then, stock buybacks
    in the financial sector--and economywide--have surged. In the
    past 10 years, the financial sector spent $860 billion in stock
    buybacks, and in 2019, S&P 500 companies spent a record $1
    trillion in stock buybacks. These data suggests that the Fed's
    reliance on using the financial system as its intermediary for
    stimulating the economy in a crisis was inefficient.
        Do you think the financial system made the best use of the
    additional money supply from quantitative easing?

    A.7. The Federal Reserve's asset purchase programs were mainly
    intended to place downward pressure on longer-term interest
    rates to reduce the cost of funding to business and households.
    Academic research suggests that the purchases programs were
    successful in achieving this goal. \5\
    ---------------------------------------------------------------------------
         \5\ See Gagnon, Joseph E. 2016. ``Quantitative Easing: An
    Underappreciated Success'', Policy Briefs PB16-4, Peterson Institute
    for International Economics; and Kuttner, Kenneth N. 2018. ``Outside
    the Box: Unconventional Monetary Policy in the Great Recession and
    Beyond'', Journal of Economic Perspectives, 32 (4): 121-46.
    ---------------------------------------------------------------------------
        In addition to reducing the cost of funding, the Federal
    Reserve's asset purchase programs also appeared to have boosted
    the availability of funding to business and households through
    increased bank lending-though these effects are difficult to
    estimate precisely, as banks raise funds from various sources
    and those funds are all fungible. Nonetheless, recent academic
    research provides evidence that the asset purchase programs did
    increase bank's risk tolerance and their lending to customers.
    For example, several studies find that following the first
    round of large-scale asset purchases (LSAP) and the third round
    of LSAPs, which involved Federal Reserve purchases of agency
    mortgage-backed securities (MBS), banks with higher initial
    holdings of MBS increased lending more than banks with little
    initial MBS exposure, and were more likely to reorient their
    lending activities towards riskier loans and easier lending
    standards. \6\
    ---------------------------------------------------------------------------
         \6\ See Rodnyansky, Alexander, and Olivier M. Darmouni (2017).
    ``The Effects of Quantitative Easing on Bank Lending Behavior'', Review
    of Financial Studies, vol. 30, pp. 3858-3887; Chakraborty, Indraneel,
    and Goldstein, Itay, and MacKinlay, Andrew, 2020. ''Monetary Stimulus
    and Bank Lending'', Journal of Financial Economics, Elsevier, vol.
    136(1), pp. 189-218; and Kurtzman, Robert, Stephan Luck, and Tom
    Zimmermann (forthcoming). ``Did QE Lead Banks To Relax Their Lending
    Standards? Evidence From the Federal Reserve's LSAPs'', Journal of
    Banking and Finance.

    Q.8. In the case of a future recession, do you think the
    economy would benefit more if the Fed used its tools to
    increase the money supply in a way that put money directly into
    ---------------------------------------------------------------------------
    the hands of American households?

    A.8. The Federal Reserve is committed to using its full range
    of tools to support the economy, thereby promoting its maximum
    employment and price stability goals. For example, in the
    current economic downturn, the Federal Open Market Committee
    (FOMC) has moved quickly to cut the policy rate to near zero
    and stated that it intends to keep the rates at that level
    until it is confident that the economy has weathered recent
    events and is on track to achieve its maximum employment and
    price stability goals.
        To support the flow of credit to households and businesses,
    foster smooth market functioning, and promote effective
    transmission of monetary policy to broader financial
    conditions, the Federal Reserve has been purchasing large
    amounts of Treasury and agency mortgage-backed securities.
    Federal Reserve policies to lower short- and longer-term
    interest rates are helping-by reducing the interest payments
    that households pay on their mortgages and other loans-to put
    more money in the hands of American households. Additionally,
    by providing support for economic activity and jobs in this
    challenging time, our actions will also help to put more
    money--in the form of labor income--into the hands of American
    households.
        The Federal Reserve is also undertaking programs to provide
    stability to the financial system and to more directly support
    the flow of credit in the economy--for households, for
    businesses of all sizes, and for State and local governments.
    Many of these programs rely on emergency lending powers that
    are available only in very unusual circumstances. The Federal
    Reserve is deploying these lending powers to an unprecedented
    extent, enabled in large part by the financial backing and
    support from Congress and the Treasury. However, these are
    lending powers, and not spending powers. The Federal Reserve
    cannot grant money to particular beneficiaries, but can only
    make loans to solvent entities with the expectation that the
    loans will be repaid.

    Q.9. If American households had been able to keep up with their
    rent and mortgage payments, pay their bills, and maintain
    financial stability during the recession, do you think it would
    have enabled the U.S. economy to recover faster from the
    crisis? What do you think the impact would have been on
    household wealth today?

    A.9. During and after the 2007-2008 financial crisis and the
    Great Recession the Board and the FOMC indeed exercised their
    statutory authority to undertake a wide range of aggressive and
    unprecedented conventional and unconventional policy actions,
    including large-scale asset purchases. Although those actions
    did mitigate to a considerable extent the consequences of
    severely adverse and widespread pressures and difficulties
    facing families and businesses all across the country, very
    many American families fell behind on their rent payments or
    mortgage payments, and fell into a fragile financial state.
    Moreover, there were other Government programs, such as the
    Home Affordable Refinance Program, that allowed mortgagors to
    either lower their monthly mortgage payments or to pay down
    their loan faster by lowering their interest rates, and allowed
    them to build more equity. Such programs were more effective
    because the Federal Reserve purchases of mortgage-backed
    securities helped improve conditions in the secondary market
    for mortgages.
        Had families been able to maintain their incomes, home
    values, and other financial resources throughout that extremely
    difficult period, household wealth would likely have been
    higher than its record level at the end of 2019, but one cannot
    know just how much.

    Q.10. What tools could the Fed use to make sure that any
    increase in the money supply in a crisis gets into the hands of
    American households, rather than remaining in the hands of
    banks or shareholders?

    A.10. As mentioned above, Federal Reserve policies to lower
    short- and longer-term interest rates--by reducing the interest
    payments that households pay on their mortgages and other
    loans--help to put more money in the hands of American
    households in a crisis. Additionally, by providing support for
    economic activity and jobs in this challenging time, lower
    interest rates will also put more money--in the form of labor
    income--into the hands of American households.
        During the 2007-2008 financial crisis and more recently in
    response to the COVID-19 crisis, the Federal Reserve purchased
    agency MBS in order to support the transmission of changes in
    policy rates to mortgage rates, which are the key interest
    rates that households face when they buy a house or refinance
    an existing mortgage. Additionally, in both of these crisis
    episodes the Federal Reserve established the Term Asset-Backed
    Security (ABS) Loan Facility (TALF) to support the flow of
    credit--in the form of auto loans, credit card loans, student
    loans, and other loans--to households. The Federal Reserve took
    these actions to alleviate significant dislocations in agency
    MBS and in private label ABS markets that were impeding the
    flow of credit to households.

    Q.11. Can you provide an update on what the Fed is doing to
    address the financial risks from climate change in its
    supervisory and financial stability responsibilities? Please be
    specific about the steps you are taking. What does the Fed hope
    to accomplish in the next year?

    A.11. The Federal Reserve is focused in the near term on
    mitigating economic disruptions and supporting the efficient
    functioning of the financial system during recovery from the
    COVID-19. However, we expect to continue a number of longer-
    term supervisory and financial stability projects in the year
    ahead, including on climate-related risks. We continue to
    participate actively in analytic efforts by the Basel
    Committee, the International Association of Insurance
    Supervisors, and the Financial Stability Board, focused on
    assessing the impact of climate-related risks on the financial
    system. Federal Reserve researchers are continuing preexisting
    efforts to procure additional climate-related data and to
    pursue projects on the intersection of climate-related risks
    with supervisory policy. We also continue to engage externally
    and to identify and draw on expertise from other fields
    relevant to the assessment of climate-related risks. To the
    extent the Network for Greening the Financial System (NGFS)
    continues to hold meetings during the ongoing public health
    crisis, we also anticipate participating in those as a guest.

    Q.12. Does the Fed have the data it needs to assess climate
    financial risks?

    A.12. For the Federal Reserve's near-term analysis of economic
    and financial activity, the staff use a variety of data sources
    to measure the economic effects of weather events. These
    include, for example, data from the Federal Emergency
    Management Agency and the Department of Energy used to gauge
    the disruptions to oil and gas extraction, petroleum refining,
    and petrochemical and plastic resin production in the wake of
    hurricanes that have affected the Gulf region. Our staff
    regularly uses daily measures of temperatures and snowfall from
    the National Oceanic and Atmospheric Administration weather
    stations to better understand how severe weather may be
    affecting measured and real economic activity in specific
    areas.
        Our understanding of what economic activities will be
    affected by a severe weather event depends critically on data
    produced by the Federal statistical agencies, such as the
    Census Bureau's County Business Patterns data, as those data
    provide information on economic activity in different
    geographic locations. In addition, our staff uses credit and
    debit card transactions data for gauging how specific types of
    severe weather might be affecting consumer spending in areas
    affected by those events.
        Data remains a significant challenge in identifying,
    assessing, and managing climate-related financial risks, for
    the Federal Reserve and for other organizations, such as
    financial institutions. In addition to data on economic
    activity described above, understanding financial risks from
    climate change requires different types of data, including
    climatic, geospatial, and financial data. The challenges in
    meeting these data needs are faced by central banks and
    supervisors around the world, as well as by private financial
    institutions, researchers, and the public. The Federal Reserve
    is engaged in efforts to help bridge these gaps through
    investigating public and private data sources and through its
    work with international groups such as the Basel Committee on
    Banking Supervision.

    Q.13. Could you provide an update on the Fed's work to join the
    NGFS? Is there an estimated timeline for when the Fed would
    join, if it is going to? If the Fed joins as an observer, what
    would that mean?

    A.13. While the timeline of the NGFS's activities is in flux as
    a result of COVID-19, the Federal Reserve remains engaged with
    the NGFS secretariat and its members, continues to participate
    in its meetings, and is following its work closely. We continue
    to explore how the Federal Reserve will be allowed by the NGFS
    to participate further in a way that is consistent the full
    range of the Federal Reserve's responsibilities.

    Q.14. Do you see value in conducting scenario analyses or
    stress tests, either of individual institutions or the
    financial system as a whole, to gauge resilience to climate
    financial risk?

    A.14. The innovative and exploratory work of central banks on
    ``climate stress-testing'' is valuable, precisely because of
    the novel challenges that such an exercise poses. While
    scientific research on climate change is well developed,
    research on the specific transmission channels between climate
    change and financial risk is novel and emerging in ways that
    specifically affect many elements of traditional supervisory
    stress tests.
        As climate-related risks manifest themselves over long
    horizons, stress testing for those risks involves the challenge
    of formulating scenarios and projecting outcomes over periods
    that stretch well beyond the current stress tests. Most
    supervisory stress tests today project losses with granularity
    at horizons of 3 to 5 years. A granular analysis of the effects
    of climate on banks over a timeframe relevant for climate
    change would require predictions of output, employment, and the
    structure of the economy and financial system over a 60-year
    period. The uncertainty of such long-horizon economic forecasts
    would dramatically reduce the plausibility and relevance of the
    results.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
               SENATOR CORTEZ MASTO FROM JEROME H. POWELL

    Q.1. In your testimony before the Banking Committee, we
    discussed the percentage of people who are currently working
    two jobs in order to make ends. A recently released Census
    report found that in 2013, 8.3 percent of workers had more than
    one job, and women were more likely to have a second job--8.8
    percent versus 8.0 percent. Additionally, 6.9 percent of those
    workers worked more than two jobs. \1\ Data from the Bureau of
    Labor Statistics shows fewer workers working two or more jobs.
    \2\
    ---------------------------------------------------------------------------
         \1\ https://www.census.gov/library/stories/2019/06/about-thirteen-
    million-united-states-workers-have-more-than-one-job.html
         \2\ https://www.bls.gov/opub/ted/2018/4-point-9-percent-of-
    workers-held-more-than-one-job-at-the-same-time-in-2017.htm?viewfull
    ---------------------------------------------------------------------------
        Please share Federal Reserve research and or analysis
    related to the prevalence of workers holding more than one job.
        Why are women more likely than men to work multiple jobs?
    According to the BLS, in 2017, the multiple job holding rate
    for women was 5.3 percent, while for men it was 4.6 percent.
        What percentage of these jobs are seasonal jobs, such as a
    teacher holding a summer job?
        In 2018 and 2019, the multiple job-holding rate for black
    workers has remained higher than any other racial or ethnic
    group. Why is this disparity occurring for black workers? \3\
    ---------------------------------------------------------------------------
         \3\ https://www.bls.gov/cps/
    cpsaat36.htm#cps_eeann_mult_jobhder.f.1
    ---------------------------------------------------------------------------
        Are workers in rural areas more likely to hold multiple
    jobs than urban areas?
        Are workers in communities with higher minimum wages less
    likely to hold multiple jobs than workers with the Federal
    minimum wage of $7.25/hour?
        The Federal Reserve has a mandate to increase employment.
    What tools does the Federal Reserve have to address disparities
    in labor force participation rates including women and African
    Americans who hold multiple jobs?
        Does the Federal Reserve have any recommendations to
    Congress on policies that would mitigate these disparities of
    workers who hold two or more jobs?

    A.1. The best information on the prevalence of multiple job
    holding is from two Census surveys, the Survey of Income and
    Program Participation (SIPP) and the Current Population Survey
    (CPS). The difference between the 8.3 percent figure in the
    Census report you cite, which derives from SIPP data, and the
    close to 5 percent figure from the Bureau of Labor Statistics
    (BLS), which derives from the CPS, likely reflects the
    different definitions of multiple job holding in these two
    reports. The Census report estimates the percent of workers who
    had multiple jobs at any point during the year. The BLS reports
    the percent of workers who had multiple jobs in a particular
    week during the year. Thus, the different estimates are not
    necessarily inconsistent with each other. The BLS reports
    multiple job holding every month in its Employment Situation
    report. Data for the second week of February 2020 show that 5.1
    percent of workers held more than one job.
        The Federal Reserve Board's (Board) Survey of Household
    Economics and Decisionmaking (SHED) also collects information
    on multiple job-holding. For the fourth quarter of 2019, the
    survey found that 10 percent of adults had multiple jobs in the
    month prior to being surveyed. A variety of other information
    from the SHED on the well-being of U.S. workers is published in
    the Board's Report on the Economic Well-Being of U.S.
    Households (report), \4\ including the share of workers who
    would like more work, the share whose work schedule varies
    according to their employer's needs, and the share who would
    not use liquid savings to cover a $400 expense. While the
    report issued on May 14, 2020, found that financial
    circumstances were generally positive for most adults at the
    end of 2019, the report also included supplemental data from
    April 2020. The supplemental survey found that financial
    conditions changed dramatically for people who experienced job
    loss or reduced hours during March 2020 as the spread of COVID-
    19 intensified in the United States.
    ---------------------------------------------------------------------------
         \4\ ``Board's Report on the Economic Well-Being of U.S.
    Households'' at https://www.federalreserve.gov/publications/files/2019-
    report-economic-well-being-us-households-202005.pdf.

    Q.2. In your testimony, we also discussed labor market
    disparities across racial and ethnic groups and across regions
    of the country.
        Please provide research by the Federal Reserve related to
    the following: data on the causes of disparities in
    unemployment rates across racial and ethnic groups, why it's
    occurring, and how policymakers can address these gaps.
        Does the Federal Reserve have any recommendations to
    Congress on policies that would mitigate these disparities?

    A.2. Two papers by Federal Reserve economists on unemployment
    disparities may be of interest to you. In a Finance and
    Economics Discussion Series (FEDS) paper ``Racial Gaps in Labor
    Market Outcomes in the Last Four Decades and Over the Business
    Cycle'', \5\ Federal Reserve researchers find that: (1)
    observable characteristics (e.g., age, education, etc.) can
    explain very little of the difference in black and white
    unemployment rates; (2) disparities in unemployment tend to
    shrink as the labor market improves, but never disappear; and
    (3) higher rates of job loss drives the disparity in black and
    white unemployment rates. In a Brookings Paper titled ``Okun
    Revisited: Who Benefits Most From a Strong Economy?'' \6\
    Federal Reserve researchers find some evidence that improvement
    in labor market outcomes for blacks and Hispanics relative to
    whites are largest when the labor market becomes very tight.
    ---------------------------------------------------------------------------
         \5\ ``Racial Gaps in Labor Market Outcomes in the Last Four
    Decades and Over the Business Cycle'' at https://
    www.federalreserve.gov/econres/feds/files/2017071pap.pdf.
         \6\ ``Okun Revisited: Who Benefits Most From a Strong Economy?''
    at https://www.brookings.edu/bpea-articles/okunrevisited-who-benefits-
    most-from-a-strong-economy/.
    ---------------------------------------------------------------------------
        As described in the first paper mentioned above, the
    disparity in black and white unemployment rates is not easily
    explained. By pursuing maximum employment and price stability,
    Federal Reserve policymakers can limit the disparity to some
    extent, but the gaps that remain even when the labor market is
    very tight are best addressed by fiscal policies. Decisions
    about which policies are best suited to reduce persistent
    unemployment rate gaps are best left to Congress.

    Q.3. You also discussed the disparities between rural and urban
    areas.
        What tools does the Federal Reserve have to address this
    disparity?
        Does the Federal Reserve have any recommendations to
    Congress on policies that would mitigate these disparities?

    A.3. The Federal Reserve does not have tools to address
    persistent disparities in economic outcomes across different
    geographic areas. The tools we do have are those we use to
    pursue maximum employment and price stability for the economy
    as a whole. Our pursuit of maximum employment benefits all
    Americans, including those in rural areas. But persistent
    structural causes of rural-urban disparities are best addressed
    by fiscal policies. Decisions about which policies are best
    suited to reduce disparities between rural and urban areas are
    best left to Congress.

    Q.4. In your exchange with Senator John Kennedy (LA), you
    discussed whether there is a link between our social safety-net
    programs and participation in the labor market and argued that
    there was no link between our safety-net programs and labor
    force participation.
        Please elaborate on whether there is a link between our
    social safety-net and labor force participation, and provide
    share data or research if appropriate.
        During your comments, you noted that our safety net is not
    generous enough to discourage people from participating in the
    workforce. Please explain why you believe that our safety net
    does not discourage participation in the labor force.

    A.4. Household decisions on whether to participate in the labor
    market and seek work are affected by many factors including
    wage rates, taxes, and Government benefits. Safety-net programs
    usually link eligibility to income with the goal of improving
    the situations of lower-income households. To maintain that
    intended focus, the benefits are phased-out or unavailable to
    households with higher incomes. As a consequence, for low- and
    moderate-income households, any improvement to household
    finances from increased work is partially offset by the loss of
    benefits that occurs as household income rises. Researchers
    have found that programs with rapid phaseout of benefits, and
    the interaction among various safety-net programs, sometimes
    leads to relatively high effective marginal tax rates. This, in
    turn, may discourage work, particularly for second earners.
    Researchers also have found that programs where the phase-out
    range is relatively long, reduce potential disincentive
    effects.
        More broadly, I also would note that as the labor force
    participation rate of prime-age workers generally declined in
    the past couple of decades, both the average benefit level and
    the number of recipients of Temporary Assistance to Needy
    Families (TANF), the primary cash assistance program, also
    declined. \7\
    ---------------------------------------------------------------------------
         \7\ See, for example, figure 5 in the Congressional Budget Office
    report ``Temporary Assistance for Needy Families: Spending and Policy
    Options'', January 2015, at https://www.cbo.gov/publication/49887.
    ---------------------------------------------------------------------------
        As you know, it is up to Congress to determine how best to
    ensure safety-net programs provide the lowest work
    disincentives as possible while still achieving the social
    goals of the programs.

    Q.5. The Census Bureau is in the process of recruiting and
    hiring thousands of employees throughout the United States to
    conduct the 2020 Census. In fact, the Census Bureau estimates
    that they need to hire up to 500,000 temporary, part-time
    census takers to get the job done.
        How does today's tight labor market serve as a challenge
    for the Census Bureau to achieve their goals of hiring half-a-
    million workers?

    A.5. The Census Bureau has noted that hiring a substantial
    number of workers in a low unemployment rate environment is a
    ``big challenge.'' \8\ Indeed, in anticipation of this
    challenge, the Census Bureau raised the hourly pay for
    temporary Census workers in many locations. That said, prior to
    the COVID-19 outbreak, it currently appeared that the Census
    Bureau was on track to hire sufficient temporary workers. In
    particular, the Bureau announced in early March that
    recruitment efforts had led to over 2.6 million applicants,
    which they noted was ``more applicants than our estimates
    suggest we need to hire in every office.'' \9\ However, in
    April, the Bureau announced it was temporarily suspending field
    data collection activities due to the COVID-19 outbreak and
    that it was seeking relief to allow for an additional 120 days
    to deliver final apportionment counts. \10\
    ---------------------------------------------------------------------------
         \8\ See https://www.census.gov/newsroom/press-releases/2020/ready-
    to-hire-html.
         \9\ Id.
         \10\ See https://www.census.gov/newsroom/press-releases/2020/
    statement-covid-19-2020.html.

    Q.6. The Census Bureau increased its hourly salary to encourage
    workers to apply. In Nevada, the pay rate is between $16 and
    $18 an hour--well above our minimum wage. Do you think the
    higher wage offered by the Census will result in wage increases
    generally? Do you think the Census will increase workforce
    ---------------------------------------------------------------------------
    participation rates?

    A.6. Prior to the COVID-19 outbreak, the Census Bureau
    anticipated hiring about 500,000 workers across the U.S.,
    mostly for part-time positions expected to last only a few
    weeks. Since then, the forceful measures that we as a country
    have taken to control the spread of the virus have
    substantially limited many kinds of economic activity. As a
    result, the U.S. unemployment rate was approximately 15 percent
    nationwide in April and the rate in Nevada was about 28
    percent. With unemployment expected to remain high over the
    next several months, there will likely be many unemployed
    individuals available to fill these temporary jobs.
        Absent the COVID-19 outbreak, the Census Bureau would have
    been trying to hire workers in a very tight labor market, and
    it is possible that many of the workers would have been drawn
    in from out of the labor force. Further, if all temporary
    Census workers were to have come from out of the labor force,
    the labor force participation rate could have been boosted by
    about 0.2 percentage point during May and by smaller amounts
    during the ramp-up and ramp-down periods. However, it would
    have been likely that some temporary census workers would have
    already been employed, and taking on the census job in addition
    to their other jobs would have dampened the rise in the
    participation rate. As a point of reference, we observed
    temporary boosts of 0.2 percentage point to the national
    participation rate around the 2000 and 2010 census hiring
    cycles.
        In Nevada, as in the rest of the country, the Census Bureau
    anticipated that it would be necessary to increase the wage
    rate for temporary census workers in order to meet hiring
    goals. Although the wages offered in Nevada before the COVID-19
    outbreak were well above the State minimum wage, the pay rate
    for short-term census jobs would unlikely put pressure on other
    wages because these part-time, temporary jobs are not close
    substitutes for full-time, permanent work. That is evidenced by
    the fact that, typically, the Census Bureau hires many people
    from the sidelines of the labor market such as students and
    retirees. Moreover, many low-skilled workers in Nevada before
    the COVID-19 outbreak were earning more than the $8 per hour
    minimum wage. For instance, recent data from before the
    pandemic showed that ``Interviewers,'' the occupation most
    similar to Census survey-takers, earned an average (mean) wage
    of $15.32 per hour and a median wage of $13.82 per hour. \11\
    ---------------------------------------------------------------------------
         \11\ See https://www.bls.gov/oes/current/oes_nv.htm.

    Q.7. How important is a complete and accurate Census to the
    ---------------------------------------------------------------------------
    Federal Reserve Banks?

    A.7. The Federal Reserve's conduct of monetary policy is data
    dependent. Thus, making sound monetary policy decisions
    requires having good data, including a complete and accurate
    Decennial Census. For example, data on the labor market from
    the Current Population Survey (CPS) provides one of the most
    important readings on economic activity that we receive each
    month. The process used to construct the CPS data relies on
    data from the Decennial Census. Thus, the accuracy of the CPS--
    and therefore the efficacy of monetary policy--relies on the
    accuracy of the Decennial census.

    Q.8. Federal Reserve's Tools During a Crisis or Recession--
    Should the Federal Reserve experiment with capping yields on
    short to intermediate Treasury securities as Federal Reserve
    Governor Brainard recommended? What would be the impact of
    that?

    A.8. At the October 2019 Federal Open Market Committee (FOMC)
    meeting, FOMC participants discussed a range of topics
    associated with the FOMC's review of strategy, tools, and
    communications including the possible role of capping rates
    further out the yield curve. There are many different ways this
    type of policy approach has been employed. For example, the
    Bank of Japan has been targeting a 10-year yield with the goal
    of keeping long-term interest rates low and providing policy
    accommodation. Recently, the Reserve Bank of Australia
    established a target for shorter-maturity yields as a way of
    reinforcing its forward guidance around the likely path of its
    policy rate over the next 2 or 3 years. And in the 1940s, the
    Federal Reserve operated to keep Treasury yields across a full
    range of maturities below a schedule of caps as part of the
    governmentwide efforts to support wartime finance.
        As noted in the minutes of the October FOMC meeting, there
    are potential benefits and costs associated with the use of
    balance sheet tools to cap long-term interest rates. Capping
    longer-term interest rates could help support household and
    business spending. In addition, capping longer-maturity
    interest rates using balance sheet tools, if judged as credible
    by market participants, might require a smaller amount of asset
    purchases to provide a similar amount of accommodation as a
    quantity-based program purchasing longer-maturity securities.
    However, determining the appropriate level of a cap on long-
    term interest rates could be challenging. Moreover, maintaining
    such a cap could result in an elevated level of the Federal
    Reserve's balance sheet or significant volatility in its size
    or maturity composition. In addition, managing a cap on longer-
    term interest rates might be seen as interacting with the
    Federal debt management process.
        Policymakers have also discussed the potential role of
    targeting or capping shorter-term Treasury yields as a way of
    reinforcing forward guidance about the likely path of the
    Federal funds rate. Such policies could help to align market
    expectations about the future path of the Federal funds rate
    with the FOMC's intentions.
        At the April 2020 FOMC meeting, a few participants again
    noted the potential role of asset purchases as a tool to cap
    longer-term yields or to reinforce forward guidance. These
    topics are among the many issues being discussed by the FOMC as
    part of its review of monetary policy strategy, tools, and
    communications. As noted in the minutes of the April meeting,
    the review will most likely be completed later this year.

    Q.9. We know that some communities in our Nation do not benefit
    from wage increases, job growth, and business success.
        Do you agree with Larry Summers who said the Federal
    Reserve should promote the idea that Government spending should
    be different in depressed areas than in successful markets?

    A.9. The Federal Reserve has been charged by Congress with
    achieving maximum employment and stable prices. The tools we
    have to pursue these goals are not well suited to target the
    growth and development of individual communities. By contrast,
    fiscal and other policies that are under the purview of
    Congress are well suited for assisting depressed localities. It
    is the role of Congress and the Administration to determine how
    to best address the unequal development of these communities.

    Q.10. Do you think public spending to support economic activity
    in communities with high unemployment avoid risking a rise in
    inflation the way public spending might in more prosperous
    places?

    A.10. The Federal Reserve does not have the tools to address
    the problems of localities. Fiscal policy can be a tool to
    assist these communities through both targeted tax policies and
    spending programs. In the case where the community suffers from
    relatively high unemployment, the increased demand for local
    workers and businesses that may result from these fiscal
    policies should not lead to a problematic increase in
    inflation.

    Q.11. We know we have an affordable housing crisis. Not only
    are low-income families paying half or more of their income for
    rent, many families are unable to buy a starter home.
        What do you think the impact of the Administration's
    proposal to double the guarantee fee charged by Fannie Mae and
    Freddie Mac from 0.10 to 0.20 percentage points?
        How will this affect people seeking financing to buy a
    home?

    A.11. We monitor housing affordability carefully and are
    attentive to the effects of mortgage rates and credit
    availability on first-time homebuyers. Higher guarantee fees
    will likely raise mortgage rates for Government Sponsored
    Enterprise (GSE) borrowers as lenders pass the fee increase
    through to borrowers. However, mortgage rates are not currently
    a major barrier to affordability. Mortgage rates are at all-
    time lows and have been at the low end of their historical
    range for many years, and therefore we do not expect a 0.1
    percentage point increase in the GSEs' guarantee fee to
    materially affect housing affordability. Rather, high house
    prices and stagnating income growth are straining affordability
    for many households.
        A guarantee fee increase is unlikely to disproportionately
    affect affordability for financially constrained first-time
    homebuyers, as these borrowers tend to rely on the Federal
    Housing Administration (FHA) for financing. About half of all
    first-time homebuyers use an FHA mortgage, and first-time
    homebuyers with FHA loans tend to have lower credit scores and
    lower downpayments than those with GSE loans.
        More generally, because the change in the guarantee fee
    applies only to GSE borrowers, some of these borrowers may seek
    out other lenders if borrowing costs at the GSEs increase. The
    GSEs currently finance about 40 percent of total mortgage
    volume, while FHA and bank portfolio lenders finance the
    majority of the remainder. Competition may further limit the
    impact of the fee increase on affordability.
        It is also worth noting that a 0.1 percentage point
    increase in the mortgage rate is a very small change both
    relative to the level of the mortgage rate and relative to
    normal variation in the rate. It is not rare for daily changes
    in the mortgage rate to exceed 0.1 percentage point. Even at
    today's historically low mortgage rates, a 0.1 percentage point
    increase in the guarantee fee represents less than a 3 percent
    change in the mortgage rate and would increase monthly payments
    for new GSE borrowers by about 1 percent, on average.

    Q.12. You have spoken about the dangers of inequality. The gap
    between the richest and poorest households in the United States
    is at its highest point in more than 50 years. And household
    debt is now in excess of $14 trillion, exceeding the
    prerecession high.
        How much of our wage growth is due to increases in State
    and local minimum wages?

    A.12. In recent years, and before the onset of COVID-19, both
    increases in minimum wages and the improving labor market
    likely contributed to increases in wage rates. Many States
    increased their minimum wages even though the Federal minimum
    wage has remained unchanged. Estimates suggest that about 4
    percent of all employees are paid statutory minimum wages, and
    the effects of minimum wage increases are likely most
    noticeable for those workers.
        Separating out the effects of minimum wage increases on
    wage growth from the effects of an improving labor market is
    difficult. Recent research suggests that a 10 percent increase
    in the minimum wage results in wage growth of about 4-7 percent
    for workers that were previously below the new minimum wage.
    \12\ Extrapolating those estimates for those workers affected
    by the minimum wage increase to economywide wage growth suggest
    that increases in minimum wages have likely boosted wage growth
    some, but the improving labor market is likely responsible for
    most of the increase in wage growth we had seen before the
    onset of COVID-19. Relatedly, research by staff at the Federal
    Reserve Bank of Atlanta, again, from before the onset of COVID-
    19, finds that wage growth for low-wage workers has outpaced
    that for higher-wage workers both in States that have raised
    their minimum wage and in States where the minimum wage has not
    increased in recent years, which again points to the importance
    of the strong labor market. \13\
    ---------------------------------------------------------------------------
         \12\ See https://academic.oup.com/qje/article/134/3/1405/5484905.
         \13\ John Robertson, ``Faster Wage Growth for the Lowest-Paid
    Workers'', Macroblog, Federal Reserve Bank of Atlanta, December 16,
    2019.

    Q.13. In your testimony before the House Financial Services
    Committee, you noted that we should put the Federal budget on a
    sustainable path and reduce the Federal deficit, which is
    projected to reach over a trillion dollars this year.
        Please provide us with any statements you made about the
    impact of the Tax Cuts and Jobs Act law on the deficit. Please
    note the date you made those comments.

    A.13. For many years, I have spoken about the long term
    benefits to the economy of the Federal Government implementing
    policies that put the budget on a sustainable trajectory. The
    benefits arise generally from the effects of higher national
    saving on capital accumulation and productivity. Enacting
    policies that put the budget on a sustainable path requires
    important judgement calls by Congress about balancing the
    tradeoffs between different policy goals including equity,
    efficiency, and public sector investment. These choices are
    properly the responsibility of our elected officials. As
    Federal Reserve Chair, I believe that it is appropriate for me
    to discuss general fiscal policy principles, but to refrain
    from making judgments about particular policies. Accordingly, I
    have refrained from discussing how this particular policy, the
    Tax Cuts and Jobs Act, fits into the desired longer-term goal
    of sustainable fiscal policy.
        In addition to my comments about the benefits to the
    economy of putting longer-run debt and deficits on a sound
    trajectory, I have also spoken about the helpful role fiscal
    stimulus has played in restoring growth during many of the
    recessions over the past 50 years. Such stimulus was certainly
    helpful during the Great Recession when the Federal funds rates
    was pinned near zero, and the fiscal measures taken thus far in
    response to the current crisis--the fastest and largest
    response for any postwar downturn--have provided important
    support. While the overall policy response to date has provided
    a measure of relief and stability, and will provide some
    support to the recovery when it comes, COVID-19 raises longer-
    term concerns as well. We know that deeper and longer
    recessions can leave behind lasting damage to the productive
    capacity of the economy through unnecessary insolvencies on the
    part of households and businesses and long-term unemployment.
    If it helps avoid long-term economic damage and leaves us with
    a stronger recovery, additional fiscal support could be costly,
    but worth it. Again, this tradeoff is one for elected
    representatives, who wield powers of taxation and spending.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR JONES
                         FROM JEROME H. POWELL

    Q.1. As you know, small businesses are crucial to the Nation's
    economy. The Small Business Administration (SBA) reported that
    small businesses employ almost half of Alabama's workforce.
        In the Federal Reserve's Survey on Minority Owned Small
    Businesses it acknowledges that the majority of small business
    owners, across all races, used their personal funds to finance
    their business. Additionally, when financing is needed small
    business owners use their credit cards.
        Are you concerned about the large number of small business
    owners using their personal finances and credit cards to fund
    their business as opposed to credit from financial
    institutions? Is the sustainable in the long-term? Do you
    believe this has contributed towards the stagnant rate of new
    businesses?

    A.1. Reliance on personal funds is common among all types of
    small businesses, even larger small firms (with revenues of
    greater than $1 million), and no matter the race or ethnicity
    of the owner. \1\ That said, the Small Business Credit Survey
    (SBCS) finds greater reliance on personal resources among
    minority-owned firms. For example, about 28 percent of Black-,
    Hispanic-, and Asian-owned firms were likely to use personal
    funds as a primary funding source for business operations as
    compared to 16 percent of white-owned firms, and white owners
    are more likely to report using a business credit card (as
    opposed to a personal credit card) as compared to minority
    owners. \2\ In addition, smaller firms, newer firms, and Black-
    and Hispanic-owned businesses are among those turning to online
    lenders for capital for their businesses. \3\
    ---------------------------------------------------------------------------
         \1\ The Federal Reserve Banks. 2019. ``Small Business Credit
    Survey 2019 Report on Employer Firms'', at https://
    www.fedsmallbusiness.org/survey/2019/report-on-employer-firms.
         \2\ The Federal Reserve Banks. 2019. ``Small Business Credit
    Survey 2019 Report on Minority-Owned Firms'', at https://
    www.fedsmallbusiness.org/survey/2019/report-on-minority-owned-firms.
         \3\ Federal Reserve Bank of Cleveland and Board of Governors of
    the Federal Reserve System. ``Click, Submit 2.0: An Update on Online
    Lender Applicants From the Small Business Credit Survey 2019'', at
    https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/
    click-submit-2-0-121219.pdf.
    ---------------------------------------------------------------------------
        The present crisis posed by COVID-19 has been a challenging
    time, particularly for minority-owned businesses. Many
    minority-owned firms have lower revenues and are less connected
    to banks. For example, the SBCS indicates that black-owned
    firms are more likely than others to turn to a Community
    Development Financial Institution (CDFI). The smallest
    businesses lack both the financing options of larger businesses
    and the in-house financial expertise to tap the options that
    may be available to them. Especially during the current crisis,
    there is a significant need for technical assistance, such as
    that provided by CDFIs. In response, on May 1, the Federal
    Reserve opened up its Paycheck Protection Program Lending
    Facility (PPPLF) to nonbanks, including CDFI loan funds, to
    provide liquidity to expand their reach in lower-income
    communities.
        Moreover, as part of its broad effort to support the
    economy, the Federal Reserve developed the Main Street Lending
    Program (MSLP) to help credit flow to small and medium-sized
    businesses that were in sound financial condition before the
    pandemic. The MSLP was modified in May to expand the loan
    options available to businesses, and increased the maximum size
    of businesses that are eligible for support under the program.
    The changes expanded the pool of businesses eligible to borrow
    through the program, lowered the minimum size for certain
    loans, and adjusted other features in response to public input.
    The Federal Reserve is continuing to consider ways to increase
    the scope of this program.

    Q.2. During the hearing you mentioned that people receiving
    economic benefits like Supplemental Nutrition Assistance
    Program (SNAP), school nutrition programs, health care,
    childcare assistance, Temporary Assistance for Needy Families
    (TANF) and housing are receiving less assistance than they have
    in the past. I want to expand on the complexities of economic
    assistance particularly for workers that have to turn down pay
    raises or promotions due to benefit cliffs.
        Benefit cliffs is the sudden and unexpected decrease in
    public benefits that can occur with small increase in earnings.
    When income increases, families can lose some or all economic
    supports, but the increase in earnings does not cover the costs
    associated with losing economic support.
        The Atlanta Federal Reserve has done research into benefit
    cliffs and some States have started working on solutions to
    decrease the dramatic cliff. Do you believe there are economic
    consequences to benefits cliffs? What do you recommend for
    Congress to do to help alleviate the cliff?

    A.2. Low-income support programs include both means-tested
    transfer programs (Medicaid, Supplemental Nutrition Assistance
    Program, and Temporary Assistance to Needy Families, for
    example) and some tax credits (the Earned Income Tax Credit and
    the Child Tax Credit, for example). Safety-net programs usually
    link eligibility to income with the goal of improving the
    situations of lower-income households. To maintain that
    intended focus, the benefits are phased out or unavailable to
    households with higher incomes. As a household's income
    increases and moves into a range where benefits are phased-out,
    the ``effective marginal tax rate'' that the household may face
    can increase substantially and sometimes move up toward 100
    percent if multiple program benefits are reduced or lost. \4\
    ---------------------------------------------------------------------------
         \4\ In addition to research by economists at the Federal Reserve
    Bank of Atlanta, see also, for example, calculations by C. Eugene
    Steurle (Urban Institute) in his Congressional testimony ``Marginal Tax
    Rates and 21st Century Social Welfare Reform'' for a joint hearing of
    the Subcommittee on Human Resources, Committee on Ways and Means and
    Subcommittee on Nutrition, Committee on Agriculture, June 25, 2015, at
    https://www.urban.org/sites/default/files/publication/56291/2000275-
    Marginal-Tax-Rates-and-21st-Century-Social-Welfare-Reform.pdf; and the
    Congressional Budget Office report, ``Effective Marginal Tax Rates for
    Low- and Moderate-Income Workers in 2016'', November 2015, at https://
    www.cbo.gov/sites/default/files/114thcongress-2015-2016/reports/50923-
    marginaltaxrates.pdf.
    ---------------------------------------------------------------------------
        Evaluations of whether these programs are well-designed,
    require--to an important extent--a judgment about the relative
    importance of helping those who are struggling economically
    versus potential work disincentives. That said, it is not the
    appropriate role of the Federal Reserve to make such judgments.
    Rather, it is the role of elected officials to ascertain
    whether social safety-net programs, both on the tax and
    spending sides of the budget, are well-designed.

    Q.3. As you know, the Federal Reserve, along with the other
    four regulators, recently proposed a rule that would clarify
    the definition of covered funds under the Volcker Rule in an
    effort to increase long-term investments in companies across
    the country.
        This rulemaking should strike a balance between ensuring
    banks are able to engage in appropriate long-term investments
    in funds that can help spur innovation while not undermining
    safety and soundness.
        Do you believe that modifying the definition of covered
    funds to allow banks to provide permissible long-term
    investments to businesses in Alabama and across the country
    would threaten the safety and soundness of the financial
    industry?

    A.3. On January 30, 2020, the Board of Governors of the Federal
    Reserve System, the Federal Deposit Insurance Corporation, the
    Office of the Comptroller of the Currency, the Securities and
    Exchange Commission, and the Commodity Futures Trading
    Commission (the Agencies) jointly issued a notice of proposed
    rulemaking (NPR) \5\ addressing the covered fund provisions of
    the Volcker Rule regulations. The NPR includes provisions that
    would provide banking entities increased flexibility to invest
    in and sponsor certain funds. If finalized, the proposal may
    facilitate lending and capital investment in certain
    businesses, in particular by excluding from the definition of
    ``covered fund'' credit funds and venture capital funds, both
    of which may provide an additional conduit for banking entities
    to finance business activities, particularly in areas where
    such financing may not be readily available.
    ---------------------------------------------------------------------------
         \5\ See https://www.federalreserve.gov/aboutthefed/boardmeetings/
    files/volcker-rule-fr-notice-20200130.pdf.
    ---------------------------------------------------------------------------
        The Volcker Rule's covered fund provisions currently do not
    apply, and would not apply under the proposal, to banking
    entities' direct lending to businesses, or direct merchant
    banking investments in businesses.
        With respect to the two proposed exclusions for venture
    capital funds and credit funds, the preamble to the NPR noted
    that the Agencies do not believe that the proposed covered fund
    exclusions raise the concerns that the Volcker Rule was
    intended to address. The proposal included several eligibility
    requirements to appropriately limit the scope of the proposed
    exclusions (for example, a prohibition on banking entities'
    guaranteeing the performance of these funds). In addition, all
    of the proposed new exclusions would require a banking entity's
    investment in, and relationship with, a fund to meet applicable
    safety and soundness and conflict of interest standards.

    Q.4. Historically, wages in the manufacturing sector are higher
    than those in the service sector. Men are more likely to hold
    jobs at any skill level in manufacturing, while women are more
    likely to hold jobs in the service sector, a sector that pays
    considerably less than manufacturing.
        Women hold 77 percent of the jobs in health care and
    education--fast-growing fields in the service sector that
    eclipse the entire goods-producing sector of the economy.
        The growing number of women in the workforce reflects a
    long-running evolution away from male-dominated industries like
    manufacturing toward the service side of the economy, where
    women have an edge.
        Is the Federal Reserve aware of this pattern of an increase
    of women in the service sector workforce while earning
    significantly less than men in manufacturing workforce?

    A.4.

        Prior to the COVID-19 crisis, women comprised just over 50
    percent of all nonfarm payroll jobs. Breaking that down by
    industry shows that women made up a much larger share of
    employment in some industries than in others (Figure 1). For
    example, women comprised just about 80 percent of all jobs in
    education and health services, by far the largest share of any
    industry. In contrast, women comprised about only 30 percent of
    all jobs in manufacturing. Women also comprised about half or
    more of jobs in a number of other service sectors, including
    leisure and hospitality and retail trade.
        The composition of employment across industries for men and
    women together has been shifting away from manufacturing, which
    largely employs men, and towards service sectors, which largely
    employs women (Figure 2). As a whole, manufacturing tends to
    pay a higher hourly rate per job than service sectors, but that
    is not true for each service sector (Figure 3). For much of the
    postwar period, manufacturing jobs paid more than education and
    health service jobs. That changed around the year 2000, when
    the average hourly pay rate in education and health service
    jobs eclipsed that rate for manufacturing jobs. Education and
    health service jobs prior to the COVID-19 crisis paid about
    $2.25/hour more than manufacturing. However, manufacturing paid
    much more than noneducation and health service jobs.
        In addition to monitoring employment trends in formal
    employment, the Federal Reserve also tracks employment patterns
    in informal gig work. Based on the Federal Reserve's recent
    ``Survey of Household Economic Decisionmaking'', \6\ men and
    women are similarly likely to earn money through gig work.
    Recent research on wages in the gig economy also observes that
    among rideshare drivers, women are paid less because of
    differences in how and when they work. \7\
    ---------------------------------------------------------------------------
         \6\ See https://www.federalreserve.gov/newsevents/pressreleases/
    other20200514a.htm.
         \7\ Cook, Cody, Rebecca Diamond, Jonathan Hall, John A. List, and
    Paul Oyer. ``The Gender Earnings Gap in the Gig Economy: Evidence From
    Over a Million Rideshare Drivers'', No. w24732. National Bureau of
    Economic Research, 2018.

    Q.5. Over the last few years, the annual average earnings
    growth for American workers has remained below 3 percent. Yet
    at the same time, average house prices have increased more than
    5 percent.
        Rising housing costs coupled with relatively stagnant wage
    growth has made it hard for consumers to save for a downpayment
    and the costs associated with buying a home like inspectors and
    appraisers.
        Additionally, there are large disparities in home ownership
    between African Americans and their white counterparts. 73.1
    percent of white Americans owned a home at the end of the
    second quarter of 2019 compared to 40.6 percent of African
    Americans and 46.6 percent of Hispanic American.
        What, if any, are the consequences of not addressing the
    large home ownership disparities among minorities?

    A.5. Because a home is the largest asset for many households,
    the racial home ownership gap has implications for the racial
    wealth gap. \8\ Rising house prices increase the wealth of
    homeowners, who have locked in their housing costs to a large
    degree, while making it more difficult for renters to afford a
    downpayment. If rents continue to increase along with prices,
    it will be even more difficult for renters to save and build
    wealth.
    ---------------------------------------------------------------------------
         \8\ For an analysis of the components of the racial wealth gap,
    see https://www.federalreserve.gov/econres/notes/fedsnotes/recent-
    trends-in-wealth-holding-by-race-and-ethnicity-evidence-from-the-
    survey-of-consumer-finances-20170927.htm.
    ---------------------------------------------------------------------------
        The gaps in home ownership by race and ethnicity are a
    concern, and we included an analysis of differences in home
    ownership rates in the February 2017 issue of the Monetary
    Policy Report. There are a number of factors contributing to
    these gaps. For example, the African American and Hispanic
    populations have been more strongly affected by restrictions on
    the availability of mortgages to low-score borrowers,
    particularly in the postcrisis contraction in mortgage credit.
    However, it should be noted that the home ownership gap has
    been persistent for many decades and only widened a bit during
    the postcrisis period.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                         FROM JEROME H. POWELL

    Q.1. Businesses in Arizona are struggling to find workers with
    the skills they need. What effects have skilled labor shortages
    had on economic growth and social mobility?

    A.1. As we know, skill shortages arise in a tight labor market.
    While tight labor markets can make hiring difficult for
    businesses, they bring many benefits to workers. In particular,
    individuals without job opportunities previously are more
    likely to be employed in a tight labor market and, once
    employed, they are more likely to receive valuable training.
    The increase in skills from work experience and training can
    increase their attachment to the labor force and, perhaps,
    increase aggregate employment and economic output in the longer
    run. As a result, the advantages that a tight labor market
    provides to disadvantaged workers can increase social mobility.
        The contrast between the labor market conditions that
    prompted this question just a few weeks ago and the current
    situation highlights the scope and speed of the current
    economic downturn. The coronavirus has left a devastating human
    and economic toll in its wake. As a Nation, we have temporarily
    withdrawn from many kinds of economic and social activity to
    help slow the spread of the virus. Congress and the Federal
    Reserve have acted with unprecedented speed and force to
    address the economic consequences. The overall policy response
    to date has provided a measure of relief and stability, and
    will provide some support to the recovery when it comes. The
    Federal Reserve will continue to use our tools to their fullest
    until the crisis has passed and the economic recovery is well
    under way.
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