[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
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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
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania JACK REED, Rhode Island
TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska JON TESTER, Montana
TOM COTTON, Arkansas MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
MARTHA McSALLY, Arizona DOUG JONES, Alabama
JERRY MORAN, Kansas TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota KYRSTEN SINEMA, Arizona
Gregg Richard, Staff Director
Laura Swanson, Democratic Staff Director
Catherine Fuchs, Counsel
Brandon Beall, Professional Staff Member
Elisha Tuku, Democratic Chief Counsel
Corey Frayer, Professional Staff Member
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
Jim Crowell, Editor
(ii)
C O N T E N T S
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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\
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\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.
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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
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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?
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\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
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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\
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\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.
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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\
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\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.
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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?
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\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.
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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\
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\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.
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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.
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\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.
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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\
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\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.
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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?
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\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
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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.
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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\
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\22\ Bloomberg, ``Q4 2019 Earnings Call'', Wells Fargo, January
14, 2020.
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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?
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\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.
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\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.
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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.
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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\
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\26\ Id.
\27\ Federal Reserve Board of Governors, ``Communication of
Examination/Inspection Findings'', January 24, 2008.
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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?
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\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).
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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.
Additional Material Supplied for the Record
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LISCC GUIDANCE RESPONSE LETTER SUBMITTED BY CHAIRMAN CRAPO
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