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


                                                      S. Hrg. 116-387


                THE SEMIANNUAL MONETARY POLICY REPORT 
                             TO THE CONGRESS

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

                                HEARING
                               
                               BEFORE THE

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

                     ONE HUNDRED SIXTEENTH CONGRESS

                             SECOND SESSION

                                   ON

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

                               __________

                           FEBRUARY 12, 2020

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
                                
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                                


                Available at: https: //www.govinfo.gov /
                
                               __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
42-742 PDF                  WASHINGTON : 2021                     
          
--------------------------------------------------------------------------------------

            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania      JACK REED, Rhode Island
TIM SCOTT, South Carolina            ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska                  JON TESTER, Montana
TOM COTTON, Arkansas                 MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota            ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
MARTHA McSALLY, Arizona              DOUG JONES, Alabama
JERRY MORAN, Kansas                  TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota           KYRSTEN SINEMA, Arizona

                     Gregg Richard, Staff Director

                Laura Swanson, Democratic Staff Director

                        Catherine Fuchs, Counsel

                Brandon Beall, Professional Staff Member

                 Elisha Tuku, Democratic Chief Counsel

                Corey Frayer, Professional Staff Member

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                    Charles J. Moffat, Hearing Clerk

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                      WEDNESDAY, FEBRUARY 12, 2020

                                                                   Page

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

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

                                WITNESS

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

              Additional Material Supplied for the Record

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

                                 (iii)

 
         THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS

                              ----------                              


                      WEDNESDAY, FEBRUARY 12, 2020

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:32 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

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

           OPENING STATEMENT OF SENATOR SHERROD BROWN

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

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

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

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

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

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

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

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

    As I have stated in past hearings, it seems to me that 
technological innovations in this space are inevitable and the U.S. 
should lead in developing what the rules of the road should be.
    During this hearing, I look forward to hearing your thoughts on 
these important issues, and about work the Fed is engaged in to 
appropriately address them.
    Chairman Powell, thank you for joining us today.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR SHERROD BROWN
    Thank you, Chairman Crapo. Chair Powell, welcome back to the 
Committee.
    Before we start, I want to stay a few words about what happened 
last night, which culminated with President Trump withdrawing the 
nomination of Jessie Liu, who was scheduled to appear before this 
Committee tomorrow.
    I heard some of you, my colleagues and my friends, say that the 
President would be chastened by impeachment. Some of you told me you 
knew what he did was wrong, you admit he lies, but that this wasn't bad 
enough to rise to the level of removal from office--he'd learned his 
lesson.
    It's pretty clear he's learned a lesson--the lesson he can do 
whatever he wants, abuse his office, and he'll never, ever be held 
accountable.
    He's gone on a retribution tour--starting at the prayer breakfast--
a prayer breakfast if you can believe that--continuing through the East 
Room, where many of you were in the audience. He removed Col. Vindman, 
a patriot and Purple Heart recipient who spent his life serving our 
country.
    He removed Ambassador Sondland, a Trump appointee, after he 
testified to the quid pro quo.
    And yesterday he continued the tour, interfering at the Department 
of Justice and strongarming political appointees to overrule career 
prosecutors. Those attorneys withdrew in protest--from the case, and in 
at least one case, resigned entirely from the Department entirely.
    We cannot give him a permanent license to turn the presidency and 
the Executive branch into his own personal vengeance operation. I'm 
afraid that is what we're seeing. No one should be above the law.
    Now, turning to the matter at hand. Welcome, Chair Powell.
    Earlier this week, Bloomberg reported on a profitable and fast-
growing Spanish company. ``Grifols'' has opened up branches in 36 
States. They buy and sell plasma--a nice, clinical sounding word that 
means ``blood.'' Americans who are struggling to make ends meet are 
lining up to sell their blood to put food on the table. The blood 
harvesting business is booming, and Grifols stock is doing great.
    It's hard to think of a better metaphor for Trump's economy.
    On Monday, the S&P 500 and Nasdaq both reached record highs. In 
2019, JPMorgan Chase had the best year for any U.S. bank in history, 
with $36 billion in profits. Big corporations are spending hundreds of 
billions of dollars on stock buybacks and dividends. On paper, the 
economy has been expanding uninterrupted for over 10 years.
    But if you talk to the vast majority of people who rely on 
paychecks, not investment portfolios to earn a living, you get a very 
different story. They've been bleeding for years.
    Most families don't understand why the harder they work, sometimes 
at more than one job, the harder it's getting to afford pretty much 
everything--childcare, health care, rent, college tuition.
    The people in this room may remember last September, when the 
financial industry went into a panic over a benchmark interest rate 
passing 10 percent.
    Wall Street faced uncertainty, so the Fed leapt into action. Smart 
Government employees came up with a plan that led to the Federal 
Reserve lending about $200 billion every day into financial markets 
through a mechanism that hasn't been used since the financial crisis. 
That's right--$200 billion.
    Let me be clear--I don't think it's wrong for the Federal Reserve 
to be creative and make sure the economy keeps working. It's in 
everybody's interest for banks to keep lending money, and credit to 
keep flowing so businesses can invest and manufacture, and consumers 
can buy houses and cars.
    My problem is this--when Main Street faces uncertainty, no one at 
the Fed jumps to action or gets creative. And we certainly don't see 
tweets from the President demanding corporations raise wages for their 
workers.
    It's hard for families to understand why Wall Street gets worked up 
about a 10 percent interest rate when so many families are lucky if the 
payday lender down the street charges them less than 400 percent.
    Small businesses who are having trouble making payroll don't have 
access to so-called repo funding at their local Fed branch. The Fed 
doesn't take action when its own research has found that 40 percent of 
Americans don't have the cash to cover a $400 expense in an emergency.
    Nobody raises alarm bells when 40 million Americans predict they'll 
miss at least one credit card payment, which means $1.2 billion in late 
fees will flow from the pockets of struggling families to 
ultraprofitable banks.
    ``Serious People'' haven't dropped everything to bring down the 
cost of housing or raise wages once they found out that one-in-four 
renters are paying more than half their income toward housing.
    People look at that and they see two different economies--and two 
different responses. We hear a lot about the divides in this country 
between Red and Blue, rural and urban, the coasts and the heartland--
but people in all those places feel like no matter how hard they work, 
they can't maintain any real economic security. The real divide I see 
is between those whose problems are considered an ``emergency,'' and 
those whose struggles Wall Street and large parts of Washington have 
decided they can ignore.
    The Fed needs to get creative for the people who make this country 
work--particularly because it's become pretty clear that the President 
and the Majority Leader aren't about to.
    President Trump brags about a soaring stock market that he's pumped 
up with deficit-busting, trillion dollar tax breaks for billionaires--
and now he wants to pay for those tax cuts by cutting Medicare and 
Medicaid and Social Security.
    He lies about a ``blue collar boom,'' when in my own State of Ohio, 
job growth has been anemic or nonexistent, and manufacturing jobs are 
stalling compared to when he took office. And now he wants to kill a 
loan program that was giving the community of Lordstown a little bit of 
hope that manufacturing jobs would come back.
    Chairman Powell, you and your highly capable staff at the Fed have 
been proactive and creative in protecting Wall Street and the money 
markets from this President's erratic behavior. And we're all 
appreciative of that.
    But what I hope to hear from you today is how you're going to be 
proactive and use that same level of creativity to make this economy 
work for everybody else.
    Thank you, Mr. Chairman.
                                 ______
                                 
                 PREPARED STATEMENT OF JEROME H. POWELL
       Chairman, Board of Governors of the Federal Reserve System
                           February 12, 2020
    Chairman Crapo, Ranking Member Brown, and other Members of the 
Committee, I am pleased to present the Federal Reserve's semiannual 
Monetary Policy Report.
    My colleagues and I strongly support the goals of maximum 
employment and price stability that Congress has set for monetary 
policy. Congress has given us an important degree of independence to 
pursue these goals based solely on data and objective analysis. This 
independence brings with it an obligation to explain clearly how we 
pursue our goals. Today I will review the current economic situation 
before turning to monetary policy.
Current Economic Situation
    The economic expansion is well into its 11th year, and it is the 
longest on record. Over the second half of last year, economic activity 
increased at a moderate pace and the labor market strengthened further, 
as the economy appeared resilient to the global headwinds that had 
intensified last summer. Inflation has been low and stable but has 
continued to run below the Federal Open Market Committee's (FOMC) 
symmetric 2 percent objective.
    Job gains averaged 200,000 per month in the second half of last 
year, and an additional 225,000 jobs were added in January. The pace of 
job gains has remained above what is needed to provide jobs for new 
workers entering the labor force, allowing the unemployment rate to 
move down further over the course of last year. The unemployment rate 
was 3.6 percent last month and has been near half-century lows for more 
than a year. Job openings remain plentiful. Employers are increasingly 
willing to hire workers with fewer skills and train them. As a result, 
the benefits of a strong labor market have become more widely shared. 
People who live and work in low- and middle-income communities are 
finding new opportunities. Employment gains have been broad based 
across all racial and ethnic groups and levels of education. Wages have 
been rising, particularly for lower-paying jobs.
    Gross domestic product rose at a moderate rate over the second half 
of last year. Growth in consumer spending moderated toward the end of 
the year following earlier strong increases, but the fundamentals 
supporting household spending remain solid. Residential investment 
turned up in the second half, but business investment and exports were 
weak, largely reflecting sluggish growth abroad and trade developments. 
Those same factors weighed on activity at the Nation's factories, whose 
output declined over the first half of 2019 and has been little 
changed, on net, since then. The February Monetary Policy Report 
discusses the recent weakness in manufacturing. Some of the 
uncertainties around trade have diminished recently, but risks to the 
outlook remain. In particular, we are closely monitoring the emergence 
of the coronavirus, which could lead to disruptions in China that spill 
over to the rest of the global economy.
    Inflation ran below the FOMC's symmetric 2 percent objective 
throughout 2019. Over the 12 months through December, overall inflation 
based on the price index for personal consumption expenditures was 1.6 
percent. Core inflation, which excludes volatile food and energy 
prices, was also 1.6 percent. Over the next few months, we expect 
inflation to move closer to 2 percent, as unusually low readings from 
early 2019 drop out of the 12-month calculation.
    The Nation faces important longer-run challenges. Labor force 
participation by individuals in their prime working years is at its 
highest rate in more than a decade. However, it remains lower than in 
most other advanced economies, and there are troubling labor market 
disparities across racial and ethnic groups and across regions of the 
country. In addition, although it is encouraging that productivity 
growth, the main engine for raising wages and living standards over the 
longer term, has moved up recently, productivity gains have been subpar 
throughout this economic expansion. Finding ways to boost labor force 
participation and productivity growth would benefit Americans and 
should remain a national priority.
Monetary Policy
    I will now turn to monetary policy. Over the second half of 2019, 
the FOMC shifted to a more accommodative stance of monetary policy to 
cushion the economy from weaker global growth and trade developments 
and to promote a faster return of inflation to our symmetric 2 percent 
objective. We lowered the Federal funds target range at our July, 
September, and October meetings, bringing the current target range to 
1\1/2\ to 1\3/4\ percent. At our subsequent meetings, with some 
uncertainties surrounding trade having diminished and amid some signs 
that global growth may be stabilizing, the Committee left the policy 
rate unchanged. The FOMC believes that the current stance of monetary 
policy will support continued economic growth, a strong labor market, 
and inflation returning to the Committee's symmetric 2 percent 
objective. As long as incoming information about the economy remains 
broadly consistent with this outlook, the current stance of monetary 
policy will likely remain appropriate. Of course, policy is not on a 
preset course. If developments emerge that cause a material 
reassessment of our outlook, we would respond accordingly.
    Taking a longer view, there has been a decline over the past 
quarter-century in the level of interest rates consistent with stable 
prices and the economy operating at its full potential. This low 
interest rate environment may limit the ability of central banks to 
reduce policy interest rates enough to support the economy during a 
downturn. With this concern in mind, we have been conducting a review 
of our monetary policy strategy, tools, and communication practices. 
Public engagement is at the heart of this effort. Through our Fed 
Listens events, we have been hearing from representatives of consumer, 
labor, business, community, and other groups. The February Monetary 
Policy Report shares some of what we have learned. The insights we have 
gained from these events have informed our framework discussions, as 
reported in the minutes of our meetings. We will share our conclusions 
when we finish the review, likely around the middle of the year.
    The current low interest rate environment also means that it would 
be important for fiscal policy to help support the economy if it 
weakens. Putting the Federal budget on a sustainable path when the 
economy is strong would help ensure that policymakers have the space to 
use fiscal policy to assist in stabilizing the economy during a 
downturn. A more sustainable Federal budget could also support the 
economy's growth over the long term.
    Finally, I will briefly review our planned technical operations to 
implement monetary policy. The February Monetary Policy Report provides 
details of our operations to date. Last October, the FOMC announced a 
plan to purchase Treasury bills and conduct repo operations. These 
actions have been successful in providing an ample supply of reserves 
to the banking system and effective control of the Federal funds rate. 
As our bill purchases continue to build reserves toward levels that 
maintain ample conditions, we intend to gradually transition away from 
the active use of repo operations. Also, as reserves reach durably 
ample levels, we intend to slow our purchases to a pace that will allow 
our balance sheet to grow in line with trend demand for our 
liabilities. All of these technical measures support the efficient and 
effective implementation of monetary policy. They are not intended to 
represent a change in the stance of monetary policy. As always, we 
stand ready to adjust the details of our technical operations as 
conditions warrant.
    Thank you. I am happy to take your questions.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                     FROM JEROME H. POWELL

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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


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

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

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


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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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


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

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

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

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

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

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

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


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

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

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

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

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


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

Q.1. Agriculture and Rural Lending--I asked your colleague Vice 
Chairman Quarles, and Chairs McWilliams and Hood, about this 
when they were before this Committee in December. I have been 
hearing for the last year or more from community bankers in 
Montana that examiners seem more concerned lately when that 
their bank or credit union may be overly concentrated in ag. 
This is a hard issue for rural communities--we don't want to 
further jeopardize these farmers who are already fighting to 
survive against Trump's trade disaster and difficult growing 
seasons, but we cannot let these challenges take community 
banks down with them. Access to banks in these rural areas is 
critical to communities, and we've already seen too many close.
    I'm focused on making sure that we support our farmers and 
ranchers and their families through the current challenges 
facing the agriculture sector, while continuing to prioritize 
the safety and soundness of our community financial 
institutions.
    What are the risks to these banks as farmers are 
increasingly overleveraged and continue to struggle with the 
repercussions of these ongoing trade wars, extreme weather 
happening more and more frequently because of our changing 
climate, and persistently low commodity prices?
    Does this pose a threat to rural America?
    What can and should we be doing in these communities?
    From a banking perspective, are you concerned about how 
this will effect community banks across rural America?

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


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

Q.1. Monetary Policy--In 2018, the Fed began a review of the 
strategy, tools, and communications it uses to conduct monetary 
policy. \1\
---------------------------------------------------------------------------
     \1\ Board of Governors of the Federal Reserve System, ``Review of 
Monetary Policy Strategy, Tools, and Communications'', June 25, 2019, 
https://www.federalreserve.gov/monetarypolicy/review-of-monetary-
policy-strategy-tools-and-communications.htm.
---------------------------------------------------------------------------
    Describe the implications of the apparent decline in the 
neutral rate of interest for future recessions and economic 
downturns.
    Do you believe the Fed's current monetary policy tools will 
be sufficient to alleviate an economic downturn?

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

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

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

Q.3. President Trump has repeatedly advocated for negative 
interest rates, arguing that they would boost economic growth. 
\4\ Do you agree? Describe the implications of negative 
interest rates.
---------------------------------------------------------------------------
     \4\ NBC News, ``Trump Keeps Pushing `Negative' Interest Rates. 
What Would That Mean for Your Wallet?'' Ben Popken, September 23, 2019, 
https://www.nbcnews.com/business/consumer/trump-keeps-pushing-negative-
interest-rates-what-would-mean-your-n1056546.

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

Q.4. Former Fed Chair Bernanke has argued that the decline in 
the rate may be partly due to structural factors such as 
demographic and technological change. \5\ Do you agree?
---------------------------------------------------------------------------
     \5\ The Brookings Institution, ``The New Tools of Monetary 
Policy'', Ben Bernanke, January 4, 2020, https://www.brookings.edu/
blog/ben-bernanke/2020/01/04/the-new-tools-of-monetary-policy/.
---------------------------------------------------------------------------
    If so, is the Fed proactively thinking about the trends in 
these structural factors and how they could impact the 
effectiveness of monetary policy in the future?

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

Q.5. In response to developments in overnight lending markets 
in September 2019, the Fed began conducting repo operations to 
``stabilize money markets and provide reserves to keep the 
Federal funds rate within its target range.'' \7\
---------------------------------------------------------------------------
     \7\ Board of Governors of the Federal Reserve System, ``Monetary 
Policy Report'', February 7, 2020, https://www.federalreserve.gov/
monetarypolicy/Files/20200207mprfullreport.pdf.
---------------------------------------------------------------------------
    Some have pointed to the repo market concentration, with 
the largest banks being almost exclusively responsible for 
engaging in transactions with the Fed and lending that money 
out. \8\ Can you describe the implications of the concentration 
levels of the current repo market structure and how the 
concentration of participants has impacted the Fed's recent 
interventions?
---------------------------------------------------------------------------
     \8\ Wall Street Journal, ``Big Banks Loom Over Fed Repo Efforts'', 
Daniel Kruger, September 26, 2019, https://www.wsj.com/articles/big-
banks-loom-over-fed-repo-efforts-11569490202.

A.5. In the last few months of 2019 and into early 2020, the 
Federal Reserve's reserve management purchases of Treasury 
bills and the Open Market Desk's repurchase agreement 
operations (repo) kept the aggregate quantity of reserve 
balances above the level that prevailed in early September 
2019. These operations therefore ensured an ample supply of 
reserves to the banking system as a whole and so contributed to 
relatively calm money market conditions during the end of the 
2019 and early 2020. Notably, these operations likely 
contributed to stable conditions in short-term funding markets 
in the period immediately preceding the recent economic and 
financial turbulence. Thus, our repo operations have 
contributed to the orderly functioning of U.S. financial 
---------------------------------------------------------------------------
markets as a whole.

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

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

Q.7. Financial Stability--In previous questions regarding the 
Fed's response to climate change, you have claimed that the Fed 
uses ``its authorities and tools to prepare financial 
institutions for severe weather events.'' \10\ At the same 
time, science has clearly demonstrated that extreme weather 
events are becoming increasingly common as a result of climate 
change. \11\
---------------------------------------------------------------------------
     \10\ Letter from Federal Reserve Chairman Jerome H. Powell to 
Senator Elizabeth Warren, April 18, 2019.
     \11\ National Oceanic and Atmospheric Administration, ``Report: 
Climate Change Is Making Specific Weather Events More Extreme'', 
December 9, 2019, https://www.noaa.gov/news/report-climate-change-is-
making-specific-weather-events-more-extreme.
---------------------------------------------------------------------------
    To the extent that these weather events continue becoming 
more common and having a greater impact on the business cycle 
itself, do you believe that it would be appropriate for the Fed 
to more explicitly consider the risks associated with climate 
change in its decision making?

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

Q.8. Do you believe it would be appropriate for the Fed to hire 
economists that specialize in climate economics to address 
these changes? Should the Fed hire natural scientists to inform 
economic models? Do you have any plans to do so?

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

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

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

Q.10. The most recent report from Shared National Credit (SNC) 
Review program conducted jointly by the Fed, Federal Deposit 
Insurance Corporation (FDIC), and Office of the Comptroller of 
the Currency (OCC), stated that ``credit risk associated with 
leveraged lending remains elevated'' and ``lenders have fewer 
protections and risks have increased in leveraged loan terms 
through the current long period of economic expansion since the 
last recession.'' \12\
---------------------------------------------------------------------------
     \12\ Board of Governors of the Federal Reserve System, Federal 
Deposit Insurance Corporation, Office of the Comptroller of the 
Currency, Board of Governors of the Federal Reserve System Federal 
Deposit Insurance Corporation Office of the Comptroller of the 
Currency, ``Shared National Credit Program: 1st and 3rd Quarter 2019 
Reviews'', https://www.federalreserve.gov/newsevents/pressreleases/
files/bcreg20200131a1.pdf.
---------------------------------------------------------------------------
    Please explain how the Fed monitors and evaluates the 
credit-risk management practices of a financial institution to 
ensure that these procedures, some of which are untested, will 
be sufficient during an economic downturn.

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

Q.11. Do you believe that the Interagency Guidance on Leveraged 
Lending \13\ issued in 2013 is sufficient to address the risks 
associated with leveraged lending, particularly with respect to 
the growth of nonbank lenders?
---------------------------------------------------------------------------
     \13\ Federal Reserve Board of Governors, Federal Deposit Insurance 
Corporation, Office of the Comptroller of the Currency, ``Interagency 
Guidance on Leveraged Lending'', March 21, 2013, https://
www.federalreserve.gov/supervisionreg/srletters/sr1303a1.pdf.
---------------------------------------------------------------------------
    Describe how the Fed monitors compliance with that guidance 
and what actions are taken when a bank is found to have 
inadequate credit risk protections.

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

Q.12. Increasingly, the riskiest leveraged lending is occurring 
outside the banking system.
    Do those loans currently pose a risk to financial 
stability? If not, please explain why and under what 
circumstances the Fed would begin to judge them a threat to 
financial stability.
    Many of these nonbank lenders fall into a regulatory gap. 
What tools does the Federal Government have to mitigate the 
risks from the growth of leveraged lending and the 
deterioration of the terms of those loans?

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

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

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

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

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

Q.15. Much of the criticism of the other agencies' plan focuses 
on the lack of analysis demonstrating the economic impact of 
the changes. However, according to Governor Brainard, the Fed 
has conducted some analysis with relevant data and would like 
to publish that data so the public can provide feedback.
    When does the Fed anticipate doing so?
    Do you believe it is important for any new metrics included 
in a new CRA plan are grounded in data?
    Do you believe that it is important for the public to have 
ample time to examine these data to provide input and ensure 
that reforming this critical civil rights law is done 
correctly?

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

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

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

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

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

Q.18. On January 30, 2020, the Fed finalized a rule to 
determine ``when a company controls a bank or a bank controls a 
company.'' \18\
---------------------------------------------------------------------------
     \18\ Board of Governors of the Federal Reserve System, ``Federal 
Reserve Finalizes Rule To Simplify and Increase the Transparency of the 
Board's Rules for Determining Control of a Banking Organization'', 
January 30, 2020, https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20200130a.htm.
---------------------------------------------------------------------------
    Reporting has indicated that the rule could allow private 
equity funds to control a greater portion of a bank's equity 
and thereby allow private equity investors to influence the 
operations of banks. \19\ Given the various risks associated 
with the private equity business model and documented research 
that demonstrates that private equity investments in financial 
companies can increase the risk profile of those companies, 
\20\ do you believe that this rule increases the level of risk 
in the financial sector?
---------------------------------------------------------------------------
     \19\ New York Times, ``The Fed Wants To Loosen Rules Around Big 
Banks and Venture Capital'', Jeanna Smialek and Emily Flitter, January 
30, 2020, https://www.nytimes.com/2020/01/30/business/economy/volcker-
rule-banks-venture-capital.html.
     \20\ Harvard University, ``Private Equity Ownership, Risk-Taking, 
and Performance in the Life and Annuities Industry'', Divya Kirti and 
Natasha R. Sarin, April 2, 2018, https://scholar.harvard.edu/nsarin/
publications/private-equity-ownership-risk-taking-and-performance-life-
and-annuities-industry.

A.18. The final rule is intended to simplify and proved 
transparency to the Board's control standards by codifying a 
comprehensive control framework in regulation. The final rule 
is generally consistent with current practice, with certain 
targeted adjustments, and therefore is not expected to 
materially change the level of risk in the financial sector. In 
addition, nothing in the final rule would limit the ability of 
the Board to take action to address unsafe and unsound 
---------------------------------------------------------------------------
practices or conditions or other issues.

Q.19. In her statement, Governor Brainard suggested that it 
will be important to ``monitor the ownership structures of 
banking organizations in light of this control framework and 
industry trends'' and ``how the control framework interacts 
with other regulations that involve ownership thresholds.'' 
\21\
---------------------------------------------------------------------------
     \21\ Board of Governors of the Federal Reserve System, ``Statement 
by Governor Lael Brainard'', January 30, 2020, https://
www.federalreserve.gov/newsevents/pressreleases/brainard-statement-
20200130a.htm.
---------------------------------------------------------------------------
    Do you agree with Governor Brainard?

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

Q.20. If so, please describe how the Fed will monitor these 
ownership structures and how the Fed will determine if there is 
a financial stability risk associated with a banking 
organization's ownership structure?

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

Q.21. Supervision--In Wells Fargo's Q4 2019 Earnings Call, 
newly appointed CEO Charlie Scharf acknowledged the bank's many 
misdeeds, claiming ``we made some terrible mistakes and have 
not effectively addressed our shortcomings.'' \22\
---------------------------------------------------------------------------
     \22\ Bloomberg, ``Q4 2019 Earnings Call'', Wells Fargo, January 
14, 2020.
---------------------------------------------------------------------------
    These comments suggest that Wells Fargo has not made 
substantial progress in remedying the issues at hand. In a 
written response to me in 2018, you stated that the terms of 
the Fed's current Consent Order require that ``the firm must 
make significant progress in remedying its oversight and 
compliance and operational risk management deficiencies before 
relief from the asset growth restriction would be 
forthcoming.'' \23\ Do you agree with Mr. Scharf that Wells 
Fargo still has a long way to go before the asset cap can be 
removed?
---------------------------------------------------------------------------
     \23\ Letter from Federal Reserve Chairman Jerome H. Powell to 
Senator Elizabeth Warren, May 10, 2018, https://www.warren.senate.gov/
download/20180510-powell-response-re-wells-fargo.

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

Q.22. In a recent speech, Fed Vice Chair for Supervision Randal 
Quarles suggested that Fed bank supervisors use of MRAs should 
be limited, and that they should only be permitted to 
institutions ``to violations of law, violations of regulation, 
and material safety and soundness issues'' \24\--a severe 
narrowing of Fed's authority.
---------------------------------------------------------------------------
     \24\ Federal Reserve Vice Chair for Supervision Randal K. Quarles, 
``Spontaneity and Order: Transparency, Accountability, and Fairness in 
Bank Supervision'', January 17, 2020, https://www.federalreserve.gov/
newsevents/speech/quarles20200117a.htm.
---------------------------------------------------------------------------
    Does the Fed have any plans to alter the process, 
standards, and requirements under which MRAs and/or MRIAs are 
issued? If so, when do you expect to formally announce those 
changes?
    How will you be announcing these changes?
    Will you put in place a formal notice and comment process 
so that outside experts and consumer advocates can review and 
comment on any proposal?
    When do you anticipate implementing these changes?
    The 2013 guidance on the communication of supervisory 
findings states that standardization of the terms MRAs or MRIAs 
``facilitates the Federal Reserve's national systems of record 
for information related to examination and inspection issues'' 
and ``enables the Federal Reserve to access information about 
supervisory issues and remediation efforts and aids in the 
identification of systemic and programmatic challenges facing 
banking organizations supervised by the Federal Reserve.'' \25\ 
If, as proposed, certain supervisory findings will no longer be 
categorized as MRAs, how will this impact the Fed's ability to 
assess progress in addressing these challenges?
---------------------------------------------------------------------------
     \25\ Federal Reserve Board of Governors, ``Supervisory 
Considerations for the Communication of Supervisory Findings'', https:/
/www.federalreserve.gov/supervisionreg/srletters/sr1313a1.pdf.
---------------------------------------------------------------------------
    In his speech, Vice Chair Quarles referenced the 
restoration of the ``supervisory observation'' category that 
was removed in 2013. \26\ When the Fed used them, they were 
defined as ``matters that are informative, advisory, or that 
suggest a means of improving performance or management 
operation of the organization. However, senior management of 
financial institutions had the discretion to decide whether or 
not to adopt the observations. \27\
---------------------------------------------------------------------------
     \26\ Id.
     \27\ Federal Reserve Board of Governors, ``Communication of 
Examination/Inspection Findings'', January 24, 2008.
---------------------------------------------------------------------------
    Does the Fed intend to restore the ``supervisory 
observation'' category based on the same definition that was 
used prior to 2013?
    Is the Fed considering adding additional categories to 
describe supervisory communications?
    Do you believe that it is possible for a bank examination 
to uncover an issue with a financial institution that could 
pose a threat to safety and soundness but does not represent a 
legal violation? Please describe some examples.
    The impact of any proposed changes to MRAs is largely 
dependent on the definition of ``material safety and 
soundness.'' How will the Fed determine this definition?
    How will the process for remediation differ for issues that 
were previously covered by MRAs but will no longer be? How will 
the process for escalating an unresolved issue to an 
enforcement matter?
    Certain MRAs are issued on an industrywide basis. \28\ How 
would proposed changes affect the use of these types of MRAs?
---------------------------------------------------------------------------
     \28\ American Banker, ``Wells Fargo Not Alone: OCC Finds Sales 
Abuses at Other Banks'', Kevin Wack, June 5, 2008, https://
www.americanbanker.com/news/not-just-wells-fargo-occ-finds-sales-
practice-abuses-at-other-banks.

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

A.4.


    Prior to the COVID-19 crisis, women comprised just over 50 
percent of all nonfarm payroll jobs. Breaking that down by 
industry shows that women made up a much larger share of 
employment in some industries than in others (Figure 1). For 
example, women comprised just about 80 percent of all jobs in 
education and health services, by far the largest share of any 
industry. In contrast, women comprised about only 30 percent of 
all jobs in manufacturing. Women also comprised about half or 
more of jobs in a number of other service sectors, including 
leisure and hospitality and retail trade.
    The composition of employment across industries for men and 
women together has been shifting away from manufacturing, which 
largely employs men, and towards service sectors, which largely 
employs women (Figure 2). As a whole, manufacturing tends to 
pay a higher hourly rate per job than service sectors, but that 
is not true for each service sector (Figure 3). For much of the 
postwar period, manufacturing jobs paid more than education and 
health service jobs. That changed around the year 2000, when 
the average hourly pay rate in education and health service 
jobs eclipsed that rate for manufacturing jobs. Education and 
health service jobs prior to the COVID-19 crisis paid about 
$2.25/hour more than manufacturing. However, manufacturing paid 
much more than noneducation and health service jobs.
    In addition to monitoring employment trends in formal 
employment, the Federal Reserve also tracks employment patterns 
in informal gig work. Based on the Federal Reserve's recent 
``Survey of Household Economic Decisionmaking'', \6\ men and 
women are similarly likely to earn money through gig work. 
Recent research on wages in the gig economy also observes that 
among rideshare drivers, women are paid less because of 
differences in how and when they work. \7\
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     \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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