[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
MONETARY POLICY AND THE
STATE OF THE ECONOMY
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VIRTUAL HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
JULY 14, 2021
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-37
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
45-384 PDF WASHINGTON : 2022
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas
BILL FOSTER, Illinois FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
RITCHIE TORRES, New York JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts BRYAN STEIL, Wisconsin
ALMA ADAMS, North Carolina LANCE GOODEN, Texas
RASHIDA TLAIB, Michigan WILLIAM TIMMONS, South Carolina
MADELEINE DEAN, Pennsylvania VAN TAYLOR, Texas
ALEXANDRIA OCASIO-CORTEZ, New York PETE SESSIONS, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
C O N T E N T S
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Page
Hearing held on:
July 14, 2021................................................ 1
Appendix:
July 14, 2021................................................ 55
WITNESSES
Wednesday, July 14, 2021
Powell, Hon. Jerome H., Chairman, Board of Governors of the
Federal Reserve System......................................... 5
APPENDIX
Prepared statements:
Powell, Hon. Jerome H........................................ 56
Additional Material Submitted for the Record
Powell, Hon. Jerome H.:
Monetary Policy Report of the Board of Governors of the
Federal Reserve System, dated July 9, 2021................. 61
Written responses to questions for the record from
Representative Jesus ``Chuy'' Garcia....................... 137
Written responses to questions for the record from
Representative Sylvia Garcia............................... 140
Written responses to questions for the record from
Representative Vicente Gonzalez............................ 144
Written responses to questions for the record from
Representative Jim Himes................................... 149
Written responses to questions for the record from
Representative Trey Hollingsworth.......................... 152
Written responses to questions for the record from
Representative Al Lawson................................... 155
Written responses to questions for the record from
Representative John Rose................................... 158
Written responses to questions for the record from
Representative Nikema Williams............................. 160
MONETARY POLICY AND THE
STATE OF THE ECONOMY
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Wednesday, July 14, 2021
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 12 p.m., via
Webex, Hon. Maxine Waters [chairwoman of the committee]
presiding.
Members present: Representatives Waters, Maloney, Sherman,
Meeks, Scott, Green, Cleaver, Perlmutter, Himes, Beatty,
Gottheimer, Axne, Casten, Torres, Lynch, Adams, Tlaib, Dean,
Ocasio-Cortez, Garcia of Illinois, Garcia of Texas, Williams of
Georgia, Auchincloss; McHenry, Lucas, Luetkemeyer, Huizenga,
Wagner, Barr, Williams of Texas, Hill, Emmer, Zeldin,
Loudermilk, Mooney, Davidson, Budd, Kustoff, Hollingsworth,
Gonzalez of Ohio, Rose, Steil, Timmons, Taylor, and Sessions.
Chairwoman Waters. The Financial Services Committee will
come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
As a reminder, I ask all Members to keep themselves muted
when they are not being recognized by the Chair. The staff has
been instructed not to mute Members, except when a Member is
not being recognized by the Chair and there is inadvertent
background noise.
Members are also reminded that they may only participate in
one remote proceeding at a time. If you are participating
today, please keep your camera on. If you choose to attend a
different remote proceeding, please turn your camera off.
Members who were unable to ask questions in our February
24th hearing with Chair Powell will be given priority to ask
their questions today, and we will return to our normal order
of recognition once those Members have asked their questions.
Before we begin, I will recognize myself to call up the
resolution offered by Ranking Member McHenry naming Republican
Members to subcommittees. Copies of the resolution were made
available in advance. So, without objection, the resolution is
adopted.
Today's hearing is entitled, ``Monetary Policy and the
State of the Economy.'' I now recognize myself for 4 minutes to
give an opening statement.
First, I would like to welcome back Chair Powell. We are
delighted to have you with us today. Much has happened since
the last time you testified on the Fed's Monetary Policy Report
in February. Since then, Democrats passed and President Biden
signed into law the American Rescue Plan. Because of the
American Rescue Plan, more than 58 percent of adults in the
United States have been fully vaccinated, and businesses are
reopening.
More than 3 million jobs were added to our economy in the
Biden Administration's first 5 months, the most in any
President's first 5 months, compared to just over 2 million
jobs created during the first 12 months of Trump's reckless
tenure. And the latest jobs report shows that 850,000 jobs were
added to the economy in June alone, a tremendous increase that
beat market expectations.
Simply put, without the American Rescue Plan and the
extraordinary leadership from the Biden Administration and
Democrats in Congress, our economy would not be on the track to
recovery. But we still have more work to do to put this crisis
firmly behind us and build a more resilient economy for the
future. For example, while the unemployment rate continues to
fall, joblessness remains higher for Black and Latinx workers
than it does for White workers. To be clear, we will not have a
full recovery without closing this gap.
Also, while inflation has risen in recent months, Chair
Powell, you and other experts have attributed this to short-
term factors. Consumer demand is way up with people once again
dining out, buying cars, and purchasing homes, but supply
chains haven't yet kept up with this pace, which as a result,
has led to higher prices. I think the Fed is right when they
say that this dynamic will subside, but I expect the Fed to
continue to monitor high prices as it fulfills its dual mandate
to promote price stability and full employment.
At the same time, Congress should be considering whether it
is better to address semiconductor shortages and soaring home
prices through smart investments or face higher interest rates
from the Fed.
The COVID-19 pandemic disrupted life for all of us and
shifted the way we think about the economy. We see this in the
huge number of women and people of color who have left the
workplace. We see this in a generation of young people weighed
down by student loan debt. And we see this in the surprising
percentage of workers who have quit their jobs, even as the
unemployment rate remains elevated. We are in a moment of
transformation that requires a fresh approach and investments
that will close the racial wealth and income gaps, address
climate change and our childcare crisis, and finally, end
homelessness.
The Fed must also play a central role in this economic
transformation. The Fed must ensure that our economy recovers
equitably, reverse deregulatory actions that rolled back rules
for Wall Street, and shore up protections so that our financial
system is less vulnerable to shocks.
Whether by partnering with the Treasury to implement a
framework focused on climate change and financial stability,
exploring a Central Bank Digital Currency (CBDC), and
implementing faster payments or strengthening its outdated
approach to bank mergers, the Fed must fulfill its role in
ensuring a strong and inclusive recovery.
Chair Powell, I look forward to your testimony this
afternoon.
And I now recognize the ranking member of the committee,
the gentleman from North Carolina, Mr. McHenry, for 4 minutes.
Mr. McHenry. Thank you, Madam Chairwoman.
Chairman Powell, welcome back, albeit virtually.
There is a great deal of uncertainty right now. What I am
certain of is this: You have earned and deserve another term as
Chair of the Federal Reserve. You have proven to be a steady
hand throughout this pandemic and our ongoing recovery, and you
have defended the independence of the Fed. Thank you for your
service and your leadership.
Now, we are going to spend the next 3 hours telling you
everything you have done wrong, but you do deserve another
term. In all seriousness, though, the Federal Reserve needs to
be laser-focused on our economic recovery. Instead, I am seeing
more headlines about the Fed's actions to address issues like
climate change. While a noble cause, this should be something
originating in Congress, not in the central bank.
As far as our economic rebound, we are facing some very
serious challenges. Simply put, America has a jobs problem. Not
long ago, there weren't enough jobs, but that is not the case
at this time. There are more than 9 million jobs waiting to be
filled. Employers across the country are competing for labor,
offering signing bonuses, back-to-work incentives, and higher
wages. The National Federation of Independent Business (NFIB)
released a survey yesterday reporting that 63 percent of small
businesses have already increased wages to attract workers. We
should be seeing a boom in return to work, but we are not.
Throughout the spring, job numbers continued to fall short
of expectations. Yes, the June report showed that 850,000 jobs
were added, but this misses the larger picture. The labor force
participation rate remained unchanged at 61.6 percent. The
number of long-term unemployed Americans has increased by
233,000, and companies continue to struggle to hire enough
workers to meet their business needs. We need a plan to get
people back to work, not just in the short term, but in the
long term. That is what we should be focused on.
I wish my Democrat colleagues felt the same way. Instead,
they want to continue the spending binge they are all about on
a laundry list of progressive ideas that have no hope of
bipartisan support, and have nothing to do with getting
Americans back to work. The $2 trillion COVID package that was
passed in March wasn't enough spending for them. Now, we are
hearing that Senate Democrats want as much as $3.5 trillion in
new spending, and to increase taxes on businesses of all sizes.
And on top of that, another trillion for hard infrastructure.
None of this is sustainable. This spend-first-and-ask-
questions-later approach to fixing our economy will not work.
Our economy simply cannot handle this level of spending. Long
term, it will lead to sluggish growth, persistent unemployment,
and a declining standard of living. Simply put, the Democrats
are addicted to spending. Taxpayers, families, and business
owners will bear the consequences.
We should instead focus on creating the kind of real
economic growth that has proven to be enduring and stable. That
means a focus on regulatory relief, sound money, and a
competitive tax system. This will deliver the kind of broad
prosperity that defines our uniquely American system of free
enterprise. To have a recovery that works for all Americans, we
need to get Americans back to work.
Madam Chairwoman, thank you for holding this hearing.
I would like to welcome our newest Republican member of the
committee, a gentleman who is not new to Congress but is a
returning Member of Congress, and has been on leave--he left
the House Banking Committee, and he has been on leave with the
Rules Committee. And under our Rules, he gets to come back to
his home base that he left years ago. And so, we are grateful
to have Pete Sessions back with us on this committee and in
this room, and we look forward to his service. We have so many
great Texans on this committee, and we are glad to have him on
the committee as well.
And, with that, Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you very much.
And welcome back, Pete Sessions. We are glad to have you
back.
At this time, I will recognize the gentleman from
Connecticut, Mr. Himes, for 1 minute.
Mr. Himes. Thank you, Madam Chairwoman.
And, Chair Powell, welcome once again before the committee.
We are going to be hanging on your every word today with all
that is going on out there.
Mr. Chairman, 3 weeks ago, I had the privilege of being
appointed by the Speaker to Chair the Select Committee on
Economic Disparity and Fairness in Growth. I have reason to
believe that the ranking member may also come from this
committee and that membership will come from this committee as
well.
Mr. Chairman, I was enormously gratified to see a statement
you made in May to the National Community Reinvestment
Coalition when you said, ``The Fed is focused on these long-
standing disparities because they weigh on the productive
capacity of our economy. We will only reach our full potential
when everyone can contribute to and share in the benefits of
our prosperity.''
Mr. Chairman, as you know, we are seeing economic
disparities in this country that we have never seen before, and
I appreciate you making the case that apart from the moral
issue, there is a profound economic reason to address those
disparities inasmuch as it is damaging our productive capacity.
The committee looks forward to working with you on this issue
in a bipartisan way, and I really thank you for highlighting
that. And we will ask you to continue to reflect on what the
Fed can do to address those sorts of disparities.
And, with that, I look forward to your testimony, and I
yield back.
Chairwoman Waters. Thank you very much.
I now recognize the gentleman from Kentucky, Mr. Barr, for
1 minute.
Mr. Barr. Thank you, Madam Chairwoman.
And, Chairman Powell, welcome back to the committee. I join
the ranking member's view that you have earned another term.
The Consumer Price Index (CPI) data released yesterday,
though, does paint a grim picture. Inflation is accelerating at
the fastest pace in 13 years. The 5.4 percent year over year
increase is the highest since August 2008. Core CPI surged to
4.5 percent, the sharpest increase in almost 30 years, and 47
percent of small businesses raised average selling prices in
June, the highest share since 1981.
Let's be clear: Inflation is a tax hike on everyday
consumers and small businesses. While accommodative monetary
policies, supply chain bottlenecks, and increased consumer
demand associated with reopening the economy are contributing
to the rise in prices, reckless government spending and the
prolonged policy to pay people not to work are exacerbating the
problem. The Biden Administration's desire to tax and spend
compromises any hope we have that this inflation is transitory
and paints us into a corner of lasting inflation that will
decrease the purchasing power of American consumers and small
businesses.
I look forward to today's testimony about the real and
immediate risk of higher inflation.
I yield back.
Chairwoman Waters. Thank you very much.
I would like to take this moment to welcome our
distinguished witness for today, the Honorable Jerome Powell,
the Chair of the Board of Governors of the Federal Reserve
System.
You will have 5 minutes to summarize your testimony. You
should be able to see a timer on your screen that will indicate
how much time you have left, and a chime will go off at the end
of your time. I would ask you to be mindful of the timer, and
quickly wrap up your testimony if you hear the chime.
And without objection, your written statement will be made
a part of the record.
Chair Powell, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF THE HONORABLE JEROME H. POWELL, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Powell. Thank you, Chairwoman Waters, Ranking Member
McHenry, and members of the committee. I am pleased to present
the Federal Reserve's semi-annual Monetary Policy Report.
At the Fed, we are strongly committed to achieving the
monetary policy goals that Congress has given us: maximum
employment; and price stability. We pursue these goals based
solely on data and objective analysis, and we are committed to
doing so in a clear and transparent manner.
Today, I will review the current economic situation before
turning to monetary policy.
Over the first half of 2021, ongoing vaccinations have led
to a reopening of the economy in strong economic growth,
supported by accommodative monetary and fiscal policy. Real
gross domestic product this year appears to be on track to post
its fastest increase in decades. Household spending is rising
at an especially rapid pace boosted by strong fiscal support,
accommodative financial conditions, and the reopening of the
economy. Housing demand remains very strong, and overall
business investment is increasing at a solid pace.
As described in our Monetary Policy Report, supply
constraints have been restraining activity in some industries,
most notably in the motor vehicle industry, where the worldwide
shortage of semiconductors has sharply curtailed production so
far this year.
Conditions in the labor market have continued to improve,
but there is still a long way to go. Labor demand appears to be
very strong. Job openings are at a record high, hiring is
robust, and many workers are leaving their current jobs to
search for better ones. Indeed, employers added 1.7 million
workers from April through June. However, the unemployment rate
remained elevated in June at 5.9 percent, and this figure
understates the shortfall in employment, particularly as
participation in the labor market has not moved up from the low
rates that have prevailed for most of the last year.
Job gains should be strong in the coming months as public
health conditions continue to improve, and as some of the other
pandemic-related factors currently weighing them down diminish.
As discussed in the Monetary Policy Report, the pandemic-
induced declines in employment last year were largest for
workers with lower wages, and for African Americans and
Hispanics. Despite substantial improvements for all racial and
ethnic groups, the hardest-hit groups still have the most
ground left to regain.
Inflation has increased notably and will likely remain
elevated in the coming months before moderating. Inflation is
being temporarily boosted by base effects as the sharp
pandemic-related price increases from last spring drop out of
the 12-month calculation. In addition, strong demand in sectors
where production bottlenecks or other supply constraints have
limited production has led to especially rapid price increases
for some goods and services, which should partially reverse as
the effects of the bottlenecks unwind. Prices for services that
were hard hit by the pandemic have also jumped in recent
months, as demand for these services has surged with the
reopening of the economy.
To avoid sustained periods of unusually low or high
inflation, the Federal Open Market Committee (FOMC) monetary
policy framework seeks longer-term inflation expectations that
are well-anchored at 2 percent, the FOMC's longer-run inflation
objective. Measures of longer-term inflation expectations have
moved up from their pandemic lows and are in a range that is
broadly consistent with the FOMC's longer-run inflation goal.
Two boxes in the July Monetary Policy Report discuss recent
developments in inflation and inflation expectations.
Sustainably achieving maximum employment and price stability
depends on a stable financial system, and we continue to
monitor vulnerabilities here. While asset valuations have
generally risen with improving fundamentals as well as
increased investor risk appetite, and household balance sheets
are on average quite strong, business leverage has been
declining from high levels, and the institutions at the core of
the financial system remain resilient.
Turning to monetary policy, at our June meeting, the FOMC
kept the Federal funds rate near zero and maintained the pace
of our asset purchases. These measures, along with our strong
guidance on interest rates and on our balance sheet, will
ensure that monetary policy will continue to deliver powerful
support to the economy until the recovery is complete. We
continue to expect that it will be appropriate to maintain the
current target range for the Federal funds rate until labor
market conditions have reached levels consistent with the
Committee's assessment of maximum employment, and inflation has
risen to 2 percent and is on track to moderately exceed 2
percent for some time.
As the FOMC reiterated in our June policy statement, with
inflation having run persistently below 2 percent, we will aim
to achieve inflation moderately above 2 percent for some time
so that inflation averages 2 percent over time, and longer-term
inflation expectations remain well-anchored at 2 percent.
As always, in assessing the appropriate stance of policy,
we will continue to monitor the implications of incoming
information for the economic outlook and would be prepared to
adjust the stance of monetary policy, as appropriate, if we saw
signs that the path of inflation or longer-term inflation
expectations were moving materially and persistently beyond
levels consistent with our goal.
In addition, we are continuing to increase our holdings of
Treasury securities and agency mortgage-backed securities
(MBS), at least at their current base, until substantial
further progress has been made toward our maximum employment
and price stability goals. These purchases have materially
eased financial conditions and are providing substantial
support for the economy.
At our June meeting, the Committee discussed the economy's
progress toward our goals since we adopted our asset purchase
guidance last December. While reaching the standard of
substantial further progress is still a ways off, participants
expect that progress will continue, and we will continue these
discussions in coming meetings. As we have said, we will
provide advance notice before announcing any decision to make
changes to our purchases.
To wrap up, we understand that our actions affect
communities, families, and businesses across the country.
Everything we do is in service to our public mission. The
resumption of our Fed Listens initiative will further
strengthen our ongoing efforts to learn from a broad range of
groups about how they are recovering from the economic
hardships brought on by the pandemic. We at the Federal Reserve
will do everything we can to support the recovery and to foster
progress toward our goals of maximum employment and stable
prices.
Thank you. I look forward to our discussion.
[The prepared statement of Chairman Powell can be found on
page 56 of the appendix.]
Chairwoman Waters. Thank you very much, Chairman Powell.
And I would like to clarify that the end time for this
hearing is 3 p.m. Pacific time, and 12 p.m. Eastern time. So,
thank you very much.
And at this time, I would now like to recognize myself for
5 minutes for questions.
Chair Powell, I want to understand some of the data behind
the recent inflation figures, specifically as they relate to
housing and home prices. According to the Monetary Policy
Report we are discussing today, ``New construction, home sales,
and residential improvements have all been well above pre-
pandemic levels, and demand has outpaced supply, as
construction has been limited by material shortages and sales
have been constrained by low inventories.''
Demand for housing clearly outweighs the supply of housing.
Chair Powell, you said that this is a problem of first-time
home buyers for sure. Can you elaborate on what you meant by
that?
Mr. Powell. Housing prices are moving up across the country
at a high rate, and I suppose the good news is that this is not
driven by the kind of reckless, irresponsible lending that led
to the housing bubble, which in turn led to the last financial
crisis. Those kinds of things are not happening, at least so
far. Nonetheless, housing prices are moving up and, of course,
that makes it more difficult for entry-level buyers to get into
the housing market. So, that is a concern.
I will also point out, though, that a number of things are
driving up housing prices, and certainly, low rates are part of
that. There are also changes in preference. Because of COVID,
people have wanted to move out of cities and into surrounding
areas. So, single-family housing demand has been quite high. In
addition, prices have been driven up by material shortages and
things like that, which we would hope would be alleviated.
Chairwoman Waters. Okay. So, Chairman Powell, a lack of
supply and constraints around the housing stock are a fact in
the recent increase in the housing cost. If the Fed were to
raise interest rates, what do you project the impact would be
on addressing housing supply challenges?
Mr. Powell. It wouldn't have any affect on the supply side,
as I think you are suggesting. There are limitations around the
availability of some raw materials and of labor and of zoning
and things like that, and nothing we can do can really affect
that. It is true that interest rates are one factor that is
supporting demand, but we really can't do much about the supply
side.
Chairwoman Waters. Conversely, do you expect that
increasing the housing supply would help alleviate inflation?
Mr. Powell. Sure, I do think that more housing supply, if
demand were to remain constant, would certainly imply that
prices would stop going up as much as they have been.
Chairwoman Waters. The Great Recession was long, slow, and
inequitable in part because fiscal support provided by Congress
was insufficient, and we left too much up to the Fed to
stimulate the economy through low interest rates. I believe
strongly that we cannot repeat that mistake. And as I look
around at what is causing surging prices, I see a lot of places
where more investment will help with long-term economic growth,
especially more housing.
Congress and the Biden Administration have a job to do
right now. It is for this reason I am reintroducing my Housing
is Infrastructure Act this week, to ensure that Congress
finally makes long-overdue investments in the housing market.
This bill will provide an historic investment of more than $600
billion to ensure that affordable housing is available all
across the country.
As you know, I am focused very much on housing, and I
understand that there is a great need for affordable housing.
Homelessness is increasing all over this country, and some
cities have given up on even trying to control the camps that
are popping up on sidewalks and under bridges.
How important do you think investment in housing is to this
economy?
Mr. Powell. The housing industry is a big one, and the
problem of affordable housing is a big one too, albeit it is
largely outside of the ambit of the Fed's responsibilities, but
it's certainly a very important issue. And I think, as you
point out, the rise in homelessness in the face of a very
strong recovery is actually evidence of the unevenness of the
recovery, which is something we try to keep in mind as well.
Chairwoman Waters. Thank you very much.
I will now recognize the ranking member of the committee,
Mr. McHenry, for 5 minutes for questions.
Mr. McHenry. Chair Powell, thank you for being back here.
We have a lot of debate about monetary policy, but fiscal
policy is also an important discussion.
Chair Powell, I recognize that you have a say over monetary
policy but not fiscal policy. That is the responsibility of
Congress. But, Chair Powell, when Congress enacts new spending,
does the Fed incorporate that new spending into its economic
projections?
Mr. Powell. Yes, we do. Of course, we don't--as you know,
we don't comment on or try in any way to play a role in fiscal
policy, in particular, fiscal policies; but, yes, we take it as
an external factor that we would factor into our models and
into our assessment of the economy.
Mr. McHenry. Okay. That spending impacts the course of the
Fed's decision-making. And the Fed will follow, in essence,
right? You have no say over it, but you will incorporate that
into your decision-making. Will adding another $4.5 trillion in
new spending impact the Fed's decision-making?
Mr. Powell. I should be clear, it is one of many factors
that we consider. Our focus is on maximum employment and price
stability. One thing would be--you would want to know how much
of it is paid for and that kind of thing, but sort of the net
deficit spending would enter into anybody's projections of the
economy, and ultimately into projections of the labor market,
and of inflation over time. It is hard to say exactly how
without knowing a lot of the details, because it also matters
what money is spent on and over what period of time and that
sort of thing.
Mr. McHenry. Sure. So, the spend rate matters, but fiscal
policy, both tax and spend policy, impacts the Fed's decision-
making. For those in Congress who are saying that irresponsible
spending won't impact the Fed's decision-making, it won't
impact our economy long term, that certainly is not in keeping
with how these decisions are made.
I want to switch subjects a little bit. Chair Powell, as
you know, there has been great interest in central bank digital
currencies (CBDCs). Many countries, like China in particular,
are focused on establishing a CBDC. You indicated earlier this
year that the Fed would study it and issue a White Paper on the
subject. What is the status of that report?
Mr. Powell. We expect to publish a report around--it could
be early September, plus or minus, right in that timeframe. And
the status of it is--and we are working hard on it right now,
but let me tell you what it is really. We are going to address
digital payments broadly. So, that means stablecoins. It means
crypto assets. It means the CBDC. That whole group of issues
and payment mechanisms, which we think are really at a critical
point in terms of the appropriate regulation, and in the case
of a central bank digital currency laying out, really,
questions for the public to respond to about what good it can
do, and what the cost and benefits of it would be. We want to
begin, really, a major public consultation across many
different groups, including Congress, of course, on a CBDC and
also on stablecoins and crypto.
Mr. McHenry. There are certainly advantages to a central
bank digital currency or a faster payment system, but there are
also risks. That is the case, right? This is not a riskless
proposition; it is a pretty bold proposition for the Federal
Reserve, is it not?
Mr. Powell. Yes. And we will lay out the possible potential
benefits. We will put those out on paper, and also the
potential risks that are undertaken. And I think those have
been written up in many forums around the world, and I think
both are real, and a lot depends on the U.S. institutional
context and on why we would need a central bank digital
currency and how you weigh those costs and benefits. That is
really the nature of the exercise.
Mr. McHenry. Stablecoins certainly have some advantages in
terms of a faster payment system, and have some of the
attributes of a CBDC, but there are some risks with stablecoins
right now, are there not? Are there concerns you have about
stablecoins?
Mr. Powell. Yes. I think the issue--stablecoins are a lot
like money market funds or bank deposits or a narrow bank,
depending on the terms of it and that kind of thing. But
without the regulation--and I think we have a tradition in this
country where the public's money is held in what is supposed to
be a very safe asset. We have a pretty strong regulatory
framework around bank deposits, for example, or money market
funds. That really doesn't exist for stablecoins. And if they
are going to be a significant part of the payments universe,
which we don't think crypto assets will be, but stablecoins
might be, then we need an appropriate regulatory framework
which, frankly, we don't have.
Mr. McHenry. Thank you.
Chairwoman Waters. Thank you very much.
Clarification: This hearing will end 3 p.m. Eastern time,
and 12 p.m. Pacific time. Why didn't somebody say something?
Mr. McHenry. It is a relief for all of us.
Mr. Powell. I am relieved, Madam Chairwoman.
Ms. Tlaib. Yes. We don't like interrupting our chairwoman.
That is why. We knew you would figure it out.
Chairwoman Waters. Thank you. The gentlewoman from New
York, Mrs. Maloney, who is also the Chair of the House
Committee on Oversight and Reform, is now recognized for 5
minutes.
Mrs. Maloney. Thank you for that correction.
Chairwoman Waters. You are welcome.
Mrs. Maloney. Chair Powell, it is very good to see you
again. Last month, when you testified before the House Select
Subcommittee on the Coronavirus Crisis, you and I discussed the
current economic recovery, and I expressed concern, along with
other Members, about prematurely cutting off this recovery by
raising interest rates too soon.
I want to touch on a related topic today, and that is the
Fed's asset purchases. As you know, the Fed is currently
supporting the economy by purchasing $120 billion a month in
Treasuries and mortgage securities, and the Fed has said that
it will continue these purchases until, ``substantial further
progress has been made toward the committee's maximum
employment and price stability goals.''
The minutes from last month's Fed meeting stated that the
Fed is continuing its asset purchases because participants
generally did not believe that the goal of, ``substantial
further progress,'' has been made yet. And I agree. I think it
is far too early for the Fed to start tapering its asset
purchases and holding back on its support for the economy.
So, Chairman Powell, would you please elaborate on what you
believe, ``substantial further progress,'' looks like? What do
you need to see happen before you will support tapering the
Fed's asset purchases?
Mr. Powell. I would say this: We didn't try to write down a
particular set of numbers that would capture what we meant by
that, and it would have been complicated and not particularly
worthwhile, so we thought. We said, ``substantial further
progress,'' which is similar to what we did during the recovery
from the global financial crisis years ago. We had a similar
set of words for when we would taper asset purchases.
The thing is, it is very difficult to be precise about it,
because with maximum employment, there aren't three or four or
five or six metrics that you can point to; it really is a very
broad range of things, including wages, unemployment, levels of
employment, participation, all of those things. So we just
said, ``substantial further progress.'' And we also said that
we would provide advance notice, well in advance of actually
tapering, understanding that this is somewhat of a
discretionary test and that we don't want to surprise the
markets or the public. So, we will provide lots of notice as we
go forward on that.
By the way, we have another FOMC meeting a couple of weeks
from today, and we will have another round of discussions on
this very topic.
Mrs. Maloney. Great. Thank you.
Chair Powell, in May, President Biden took action, through
an Executive Order, to address the serious threat that the
climate crisis poses to our economy, and we are seeing numerous
examples of that changing climate in extreme weather events
that resulted from this threat. For example, we saw extreme
heat across the Pacific Northwest, which will have cascading
effects on the U.S. economy.
And part of that Executive Order was tasking Secretary
Yellen with assessing climate-related financial risks through
the Financial Stability Oversight Council (FSOC), of which the
Fed is a member. And I know the Fed presented on climate risk
during the first FSOC meeting of this year.
Can you provide us with an update on the Fed's current work
with FSOC on this topic, and the Fed's broader work to address
climate change in our financial system, particularly how these
risks can impact our broader economy through supply chain
disruptions or disruptions to massive industries such as
agriculture?
Mr. Powell. Sure. I would be glad to. The Fed's work on
climate change really exists as part of our preexisting
mandates for supervising financial institutions and for the
overall stability of the financial system. As far as individual
financial institutions are concerned, as supervisors, we want
them to be aware of and capable of managing and understanding
all of the risks that they run, including the risks to their
business activities and business model from climate change. We
are in the beginning stages of working up a program that will
engage with the financial institutions and make sure that
happens.
On the financial system more broadly, we have an
overlapping effort that looks carefully at the broader
financial system and asks, how will climate change affect
financial markets and other financial institutions that are not
banks, for example, insurance companies and many others like
that, asset managers?
So, those are really two efforts that we are working on,
and that is what we reported on to the FSOC.
Mrs. Maloney. My time has expired. Thank you very much.
I yield back. Thank you.
Chairwoman Waters. The gentlewoman from Missouri, Mrs.
Wagner, is now recognized for 5 minutes.
Mrs. Wagner. Thank you, Madam Chairwoman.
And, Chairman Powell, thank you for being here with us
again today. You and I have discussed at length my very grave
concerns with higher inflation and the increased cost that
consumers and businesses are experiencing today. In February,
you appeared before this committee and reiterated that the
price spikes are only temporary and said they will decrease in
time and inflation will move towards your goal of 2 percent.
I can tell you that the families and businesses that I
represent in Missouri's Second Congressional District aren't
feeling that these price spikes are very temporary. I am
concerned with the most recent Consumer Price Index data
showing price increases that are much higher than expectations.
Housing costs, as we have discussed here, are skyrocketing.
Food costs are higher. Electricity and gas prices are up. Even
travel and hospitality costs have seen a great increase. I
understand that some of these increases are due to supply chain
disruptions and labor shortages, but to have prices
consistently higher across-the-board than they were forecasted
to be is deeply troubling as we look toward a strong economic
growth for the rest of the year and beyond as we pull out of
this pandemic.
Chairman Powell, is it the Fed's policies or the Biden
Administration's policy that is surrounded with massive
spending that is causing consumer prices to skyrocket?
Mr. Powell. I can't really address that. I can tell you why
I think we are having this inflation that we are having now.
First of all, you are right, the incoming inflation data have
been higher than expected and hoped for, but they are actually
still consistent with what we have been talking about. The very
high inflation readings are coming from a small group of goods
and services that are directly tied to the reopening of the
economy. It is new cars, used cars, rental cars, hotel rooms,
airplane tickets, things that we understand that connection,
but--
Mrs. Wagner. With all due respect, Chairman Powell, it is
housing, it is appliances, it is food prices, it is
electricity, it is gas. Tell me, to what extent is the Federal
Reserve willing to see consumer prices increase before
intervention is necessary?
Mr. Powell. We are monitoring the situation very carefully,
and we are committed to price stability. And if we were to see
that inflation was remaining high, and remaining materially
higher above our target for a period of timec, and that it was
threatening to uproot inflation expectations and create a risk
of a longer period of inflation, then we would absolutely
change our policy as appropriate.
Mrs. Wagner. Unemployment is still well above the 3.5
percent figure it reached prior to the pandemic, and the labor
force participation rate remains lower than in February of
2020. Now, a lot of that is because the Administration is
still, frankly, paying people not to work, while job openings
remain high, at 9.2 million.
In the FOMC minutes from June, some participants believed
that the unemployment rate of 3.5 percent that the previous
Administration achieved is not feasible.
Chairman Powell, with 9.2 million job openings, and many
employers raising wages and offering hiring bonuses, et cetera,
what is causing some members of the FOMC to believe a 3.5
percent unemployment rate is not achievable?
Mr. Powell. I don't know that anyone said that. I didn't
hear anyone say that 3.5 percent unemployment--
Mrs. Wagner. It is in the minutes. It is in the minutes
from June.
Mr. Powell. No, it is not. It must be something else. It
must be something that says--you might say that about labor
force participation, for example, or employment to population,
but I don't think--I didn't hear anybody say that we couldn't
get back to 3.5 percent unemployment.
In any case, I don't believe that. Let me just say that. I
don't believe that. I think it is a long road back. It took us
quite a long--it took us 8 years of an expansion to get to 3.5
percent, but I think there is every reason to think that we can
get back to that level.
Mrs. Wagner. With a vaccine readily available, and small
businesses with unfilled positions, what do you believe is
causing the unemployment rate to remain steadily above 3.5
percent?
Mr. Powell. I think you are right that the demand for labor
is very, very high, with all-time record job openings, and
there are also significant numbers of unemployed people. The
market doesn't seem to clear, and I think some factors are
weighing on labor supply, people going back to work. We think
that with those factors such as school reopenings and perhaps
also unemployment insurance, those things will pass, and we do
think that, as a result, there will be very strong job
creation.
Mrs. Wagner. Thank you, Chairman Powell. My time has
expired.
And I yield back.
Chairwoman Waters. The gentleman from New York, Mr. Meeks,
who is also the Chair of the House Committee on Foreign
Affairs, is now recognized for 5 minutes.
Mr. Meeks. Thank you, Madam Chairwoman. And welcome back,
Chairman Powell.
As you know, the Biden Administration recently issued an
Executive Order promoting competition in the American economy
and encouraging the attorney general, in consultation with the
primary Federal banking agencies, to update existing guidelines
on bank mergers, to provide more robust scrutiny on these
transactions. And I support this Executive Order, considering
the impact that bank [inaudible] can have on communities of
color.
Now, compliance with the Community Reinvestment Act (CRA)
is an important measure that the Department of Justice (DOJ)
and the Fed considered during the bank merger review process.
And as you know, I publicly supported the Fed's direction in
modernizing CRA regulations so that things like the bank merger
review process can adequately reflect the economic needs of
today.
Can you please explain how the Fed plans to coordinate with
the DOJ in light of the bank merger Executive Order, and will
the Fed's Community Reinvestment Act reform efforts and the
DOJ's bank merger updates happen in silos or in tandem?
Mr. Powell. Thank you. We actually coordinate pretty
closely with the Department of Justice on banking and trust
standards. We each look at each merger, and so we understand
each other. And we would look forward, to the extent Justice, I
think, under the Executive Order, is encouraged to take a fresh
look at bank merger standards. We would, of course, closely
coordinate and try to understand what is going on. We haven't
made any decision to change our merger standards, but we would
certainly monitor that carefully and act appropriately.
Again, I can't presume to know what will happen out of
this, but it is a process that we will go through in
coordination with Justice.
Mr. Meeks. The coordination is important, I believe, to act
in tandem so that there are not several different CRA rules and
regulations that come out, as we have talked about with the OCC
and others. So, I appreciate the Fed making sure that there is
some continuity in that regard and working in tandem.
Also, the pandemic has really disrupted the housing market,
as was indicated by the chairwoman. I look at the
disproportionate number of Black and Brown homeowners,
particularly in my district, as well as in New York City at
large.
Now, in the pandemic's early days, the Fed rightfully
intervened and purchased mortgage-backed securities (MBS) in
the billions, which helped keep the interest rates low, I
understand. However, we have also experienced a rise now in
housing prices, which some attribute to the Fed's asset
purchases, although others cite supply chain challenges.
I understand the debate at the Fed as to how quickly it
should taper its MBS purchases, but what are some of the
economic factors you are considering as you weigh both sides of
this argument?
Mr. Powell. Housing prices are going up because of both
demand and supply reasons. And you touched on them,
Congressman. On the supply side, it is prices of raw materials
and lack of labor, labor costs, zoning difficulties, all of
those things. So, it is not just a demand story.
On the demand side, low interest rates are certainly making
mortgages cheaper and, therefore, supporting prices in housing.
That is certainly a factor. There are other factors too.
Household balance sheets are very strong right now because
people were kind of forced to save because they couldn't go on
trips, and they couldn't go to restaurants for a year. So,
there are big amounts of savings on people's balance sheets.
All of that goes into demand for housing.
Sorry. Your question on that was what?
Mr. Meeks. What are some of the economic factors that you
are considering, in that argument--
Mr. Powell. Mortgage-backed securities (MBS), in
particular. Interest rates--our low interest rates and Treasury
purchases and MBS all go into creating a low interest rate
environment and go into mortgage rates. Mortgage-backed
securities purchases really work a lot like Treasury purchases.
They aren't especially important in what is happening with
housing prices. Nonetheless, they clearly are a factor among
factors.
This is one of the things that we will be considering as we
go through this process of evaluating what to taper and in what
form, what will be the composition of asset purchases going
forward. Those are all issues that we will be discussing at
this next meeting in a couple of weeks.
Mr. Meeks. Thank you. My time has expired. I yield back.
Chairwoman Waters. Thank you very much.
The gentleman from Indiana, Mr. Hollingsworth, is now
recognized for 5 minutes.
Mr. Hollingsworth. Good afternoon, Chairman Powell. I
appreciate you being here, and I certainly appreciate you
answering our questions. I know this remains a tricky time in
the recovery, and our collective understanding about the Fed's
effort and reasoning here is very important.
I have a long preamble that I hope ends at a question, so
take a little bit of a journey with me.
First and foremost, I want you to know I am in no way
besmirching the good work the Fed has done over the last year.
The extraordinary economic cessation necessitated extreme
action, and you took that action with vigor. I am thankful for
that, and my view on that is unchanged.
Second, my question is not meant to imply that you need a
hawkish stance. I think we can all agree that monetary policy
is very accommodative at present, perhaps at the furthest end
of the accommodative side of the spectrum as is conceivable. I
am merely questioning the degree of accommodative stance, not
asking to return to a restrictive side of the spectrum.
Third, I have on many occasion endorsed your new
symmetrical approach to inflation target. I believe this is
exactly the right answer. My question today is not tied to
recent inflation numbers, nor would I prognosticate about
whether it is transitory or not, whether it is a monetary
phenomenon, a demand phenomenon, nor the magnitude of what it
may reach.
But here is the crux of my question. I think there is a lot
of data out in the economy showing that it is a wash in
liquidity. A panoply of statistics indicate the tremendous/
unprecedented increase in liquidity over recent years. In
recent weeks alone, you have raised the reverse repo rate to
.05 percent, and the uptake on that product has been
tremendous, which in and of itself is a reaction to money
markets being overwhelmed with liquidity, which in and of
itself is a reaction to bank deposits being overwhelmed. Yet,
the ultra, ultra accommodative stance by the Fed continues.
And when asked about this over the last few months--and I
think you indicated this in your earlier testimony--I have
heard you say that there needs to be further healing in the
labor market for that ultra, ultra accommodative stance to
change.
I agree with this. There is much room to go, but what I
don't understand about that answer is that a cornucopia of
evidence suggests that challenges in the labor market are not
related to monetary policy and, frankly, aren't susceptible to
monetary policy's aid. The Fed's--and no indictment on the
Fed--monetary policy writ large isn't the right vehicle and
doesn't have the right tools to resolve skills mismatch, to
resolve work/no work incentive balancing, and to resolve
geographic mismatch. As you said earlier, there isn't a lack of
demand in the job market.
Getting to the specifics of my question, I believe the Fed
is significantly distorting the financial economy for very
little, if any, maybe marginal impact on the real economy. To
couch specifically inside your mandate, are you jeopardizing
long-term full employment and price stability by virtue of
extreme monetary policy and picking up very little short-term
benefit in full employment?
I wondered if you might talk about your reasoning and your
colleagues' reasoning for remaining and retaining that extreme
accommodative stance, and using the labor market as
justification, despite significant evidence indicating that the
labor market needs are not monetary policy-related.
Mr. Powell. I would just say this: Policy is highly
accommodative. That is correct. We are a long way from full
employment. We have, as you know, 5.9 percent unemployment, and
the true number is actually substantially above that. So, we
have a ways to go. And we see everything that you see, but I
guess what we see is that our task for tapering asset purchases
is an appropriate one, and we are making progress toward that.
We are, in fact, considering--
Mr. Hollingsworth. Just to needle into that for a second,
we are making progress. I do not believe that progress is a
result of that monthly asset purchases, and I think I have seen
significant evidence which indicates that monetary policy isn't
making an impact on that. Other factors are making an impact on
that. And I wonder whether the financial distortion that is
occurring--and by its nature, monetary policy--isn't causing
long-term problems for very little short-term gain?
Mr. Powell. I guess that is where I would differ, is I do
think monetary policy is supporting demand and demand broadly
in the economy, and the recovery of the weak sectors and all of
that. So, it is still appropriate that monetary policy be
highly accommodative.
Mr. Hollingsworth. You believe that the difference between
$60 billion and $120 billion or zero billion and purchasing
$120 billion is a material impact on the point at which we will
reach full employment?
Mr. Powell. It is hard to say that with any specificity,
but yes, I think our overall policy stance is appropriate. And
as you know, we are very much in the process of walking down
the road and asking those very questions, and first on
tapering. But I also think we are a good ways away from maximum
employment. And one of the conditions for lifting interest
rates is that we are at labor market conditions that are
comparable in the range of maximum [inaudible].
Chairwoman Waters. Thank you very much. The gentleman's
time has expired.
The gentleman from Massachusetts, Mr. Lynch, is now
recognized for 5 minutes.
Mr. Lynch. Thank you, Madam Chairwoman.
And, Chairman Powell, thank you so much for your
willingness to help the committee with its work.
I was very pleased to hear in your opening remarks that the
Fed plans an open dialogue with the public and with
stakeholders regarding CBDCs, as well as cryptocurrency
generally. I think that is much-needed. And I am very proud of
the fact that the Boston Fed, under the leadership of Eric
Rosengren, has been working with MIT in their cryptocurrency on
this digital dollar for the United States and for the Fed.
I am a little bit worried about the pace, though. We see--I
think there are 86 separate central banks that are already
engaged in this. Do we risk sacrificing the primacy and the
reserve currency status by, I think some would argue, slowness
in response to this? And does this dialogue that you envision
stretch out the timeline for adopting, say, a digital dollar
for the United States? Does it delay that considerably?
Mr. Powell. Actually, I think the opposite. I think this is
the beginning of--we think--accelerating that decision process.
We have a lot of work left to do on the technical side and on
the policy side, but a critical part of it is just the public
consultation.
But on reserve currency, the U.S. is the reserve currency.
There really isn't a good competitor out there, because all of
the things you need to be the reserve currency, really the
United States has them. We are not in danger of losing it,
certainly not to China, which doesn't have an open capital
account and that kind of thing. It is the kind of status that,
as you well know, lasts for many, many years.
I am really concerned about getting this right. It does
carry risks, but it does have benefits. It is quite specific to
the institutional context of each country, and I want to get it
right. We are the reserve currency. We have first-mover
advantage by virtue of that. So, I think it is way more
important to get it right than it is to do it fast.
Mr. Lynch. Fair enough.
Let me ask you another question. It is a little off topic,
but recently, China has taken somewhat hostile action against
initial public offerings (IPOs) being launched in the United
States. Didi, the ride-hailing business in China, is one of the
recent examples. The Chinese government has offered several
different reasons for wanting these Chinese companies to
register in China versus in the United States. They have given
various reasons for that, the security of data being one of
them.
I was wondering if you had--this is probably a better
question for SEC Chairman Gensler, but I wondered if you had
any thoughts on that, about what the ultimate reasons were for
China taking that action?
Mr. Powell. Yes. I would pass that to my friend, Gary
Gensler. I think it is right over his home plate there for him.
I will just say it is important that we have open capital
accounts and open capital markets and global rules that we all
abide by. But I don't know how to address that one, because it
is really for the SEC.
Mr. Lynch. Okay. And, lastly, do you think that--I have 1
minute left. Do you think that maybe more swift action on a
digital currency for the Fed would have a calming effect on the
variety and the number of cryptocurrencies and stablecoins that
we see are coming out? Wouldn't that be a more viable and
reliable alternative than having all of these hundreds and
perhaps a thousand different cryptocurrencies emerging?
Mr. Powell. I think that may be the case, and I think that
is one of the arguments that are offered in favor of a digital
currency, is that particularly, you wouldn't need stablecoins,
you wouldn't need cryptocurrencies if you had a digital U.S.
currency. I think that is one of the stronger arguments in its
favor.
Mr. Lynch. That is great.
Madam Chairwoman, I yield back. Thank you.
Chairwoman Waters. Thank you very much.
The gentleman from Ohio, Mr. Gonzalez, is now recognized
for 5 minutes.
Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman.
And thank you, Chairman Powell.
I want to pick up where my friend, Mr. Hollingsworth, left
off and focus specifically on the unemployment piece. And,
frankly, when I talk to my businesses back home, where I am
currently seated, the two biggest issues that they face, in
particular small businesses, are employment, not being able to
get people back to work, and inflation. So, this is a timely
hearing right in your wheelhouse.
First, with respect to unemployment, in the Monetary Policy
Report, you cite several factors that are keeping people out of
the workforce, most of which--or all of which--are virus-
related, so, early retirements, caregiving responsibilities,
fear of COVID, and expanded unemployment benefits.
Using those factors which you cited in the Monetary Policy
Report as responsible for diminished employment, would you
agree that the zero interest rate posture is not a primary
driver of getting people back into the workforce today?
And maybe said differently, do you think if you lowered us
to negative interest rates, that would materially change the
unemployment rate?
Mr. Powell. Let me try to answer that this way. I would
agree with you that the most important thing--it would be very
important if we were to see a significant increase, as we
expect we will see, in labor supply, just showing up in the
form of better matching in the labor market.
There are all these open jobs, and there are many, many
unemployed people, but they just don't seem to be matching up,
and maybe there is a speed limit on that.
But in any case, as those factors wane, we should see more
of that, and that is probably of first order importance at this
time.
Mr. Gonzalez of Ohio. Okay. So, not the rate of interest.
And I think that is important because the commitment is to keep
rates at zero until we get back to full employment, but we know
what is happening, is it is inflating asset bubbles, it is
pushing people further and further out on the risk curve.
I would argue it is creating systemic risk in a variety of
markets. And so, I would just encourage you all to consider
that.
And now moving on to the inflation bit, the common refrain
from the Fed has been that inflation is transitory, there is
nothing to worry about, and you will maintain rates at zero
until inflation is moderately above 2 percent for, ``some
time.'' And you have said that a handful of times here.
We are looking at 4 consecutive months now, including the
previous month, at over 5 percent. So, how long is, ``some
time,'' and what factors are you looking at that will tell you
whether this is transitory or something more systemic?
Mr. Powell. Okay. Let me say first on maximum employment,
even after this expected wave of supply comes, it is likely
that we will still be short of maximum employment, and at that
time, support for demand will be appropriate.
That is why we wouldn't see that it is time to raise
interest rates now, because we think it will take some time,
even after this, to get there.
So, getting to your inflation question--
Mr. Gonzalez of Ohio. Which is basically, how long is,
``some time?'' Because it keeps being used, ``We will keep it
low for some time.''
Mr. Powell. The answer really is, it depends. You are
really asking about that part of the guidance and how do we
think about that. Right now, of course, inflation is not
moderately above 2 percent. It is well above 2 percent. And it
is nothing like, ``moderately.''
So the question will be--and this will be a question for
the committee, where does this leave us in 6 months or so when
inflation, as we expect, does move down, how will that part of
the guidance work?
And it will depend on the path of the economy. It really
will. It may be that we will look back and see it as having
been met. It may be that we won't. We are not going to address
that right now. But it is a good question.
Mr. Gonzalez of Ohio. Okay. Thank you.
I want to switch to stablecoins and pick up where Mr.
McHenry left off, specifically on Tether.
In recent months, there has been increased scrutiny of the
stablecoin Tether due to concerns regarding the assets backing
the coin, particularly the amount backed by commercial paper,
as opposed to U.S. dollars, which is what they originally said.
President Rosengren of the Boston Fed said that Tether does
create a challenge and that we need to take seriously what
happens when people run from these instruments very quickly.
Do you share these concerns? And is that the sort of thing
that you will be looking at and providing guidance on with the
White Paper?
Mr. Powell. Yes. Absolutely, yes. Commercial paper is
short-term overnight obligations of companies, and most of the
time they are investment grade, most of the time they are very
liquid, and it is all good.
But in both of the last two financial--during the acute
phase of the crisis, the market just disappears, and that is
when people will want their money.
It is really simple. These are economic activities that are
very similar to bank deposits and money market funds, and they
need to be regulated in comparable ways. That is how I see it.
Mr. Gonzalez of Ohio. I yield back.
Chairwoman Waters. Thank you. The gentleman's time has
expired.
The gentleman from New York--I'm sorry, from New Jersey--
Mr. Gottheimer, is now recognized for 5 minutes.
Mr. Gottheimer. Thank you, Chairwoman Waters, and it is
definitely New Jersey.
Chairwoman Waters. Yes.
Mr. Gottheimer. And thank you, Chairman Powell, for being
here today.
The State and Local Tax (SALT) deduction cap jammed through
Congress in the 2017 tax hike bill raised taxes for the
majority of families in my district. These are my community's
teachers and first responders, small business owners, young
people trying to start a family, all groups who are struggling
in this pandemic and now trying to get back on their feet.
When you were before this committee earlier this year with
Treasury Secretary Yellen, the Secretary said that the SALT cap
led to, ``disparate treatment,'' and that she would work with
me to ensure that the inequities caused by the cap would be
remedied.
Chairman Powell, is increasing disposable income for
households a crucial tool to stimulate the economy and ensure
that our communities see the economic activity necessary to
help small businesses come back from the pandemic? And do you
think SALT is a part of that solution, reinstating the SALT
deduction?
Mr. Powell. We have really important jobs and powerful
tools, but one of them is not fiscal policy. We don't really
want to play a role on that. So, I would have to leave that
with you.
Mr. Gottheimer. Okay. I figured that would be your answer,
but I was going to ask it anyway.
I will turn to inflation, since there have been lots of
questions today about that.
Given the movements we are seeing in inflation across
commodities, housing, and wages, should we be concerned about
what happens to long-term interest rates once the Fed stops
purchasing long-dated Treasuries? And if long rates go up, what
will happen, do you believe, to the economy?
Mr. Powell. I wouldn't want to make a forecast. It is very
hard to forecast long-term rates. If anybody had forecasted
that we would be able to borrow the amounts we have borrowed in
the last 10 years, and that the Federal funds rate would be at
1.--the 10-year, sorry, the 10-year Treasury would be at 1.4
percent--no one would have forecast that. So, it is really hard
to say.
There is tremendous demand for U.S. Treasuries around the
world. We are the safe asset. We are the reserve currency. And
in any case, our role is to do maximum employment and price
stability, and not fiscal policy.
Mr. Gottheimer. Since the Fed is by far the largest buyer,
you don't think that long-term rates will go up meaningfully
when this occurs, when you stop?
Mr. Powell. Honestly, they may or may not. Markets, as you
know, work through expectation. So if markets foresee what we
are going to do, then presumably, to some extent at least, what
we are going to do should already be baked in. And it is very
hard to predict markets' reactions to these things.
But one of the reasons we are being so very transparent is
that markets will incorporate the timing and the form of the
taper that we are going to ultimately undertake here, because
we will have sort of communicated it well in advance.
Mr. Gottheimer. Thank you.
Chairman, you said that one of the causes of the inflation
that consumers are experiencing is from supply bottlenecks.
Some of these supply issues are being attributed to strains on
supply chains because America's infrastructure is unable to
take on the increased demand as our economy reopens.
Would you agree that these bottlenecks would be alleviated
in part through the robust direct investment in infrastructure,
addressing our issues with roads and bridges, rails and ports,
and that spending in long-term infrastructure projects would
help in keeping inflation under control?
Mr. Powell. Again, I wouldn't want to be seen as supporting
any particular bill or form of spending. I do think it is
clear, though, that investments in infrastructure, in good
infrastructure, can add to economic potential, provided the
money is well spent.
But, again, I don't want to--it is not appropriate for me
to get involved in these discussions you are having.
Mr. Gottheimer. I understand. I will espouse one, a
bipartisan infrastructure package from the Problem Solvers
Caucus in the House, working with a bipartisan group in the
Senate, to try to get investment in infrastructure into law and
our economy back on track, and set up for long-term success.
I believe that will obviously help deal with some of the
challenges we are facing in making these investments in roads
and bridges and rail and energy infrastructure and broadband
connectivity, all crucial to ensure that America remains
competitive on the global stage.
Last question there on the global stage, China spent about
$3.7 trillion in infrastructure outside of the United States
last year. Are you concerned at all about China's activity on
this front and the spending they are doing outside the United
States?
Mr. Powell. The issues of international economic relations
are really with the Treasury Department and the State
Department, not with us.
Mr. Gottheimer. I will yield back, Madam Chairwoman.
Thank you so much, Chairman Powell, for being here today.
Mr. Powell. Thank you.
Chairwoman Waters. Thank you very much, Mr. Gottheimer, and
you forgot to add housing--
Mr. Gottheimer. Sorry. I meant to add it. Pardon me. You
are right, Chairwoman Waters.
Chairwoman Waters. The gentleman from Tennessee, Mr. Rose,
is now recognized for 5 minutes.
Mr. Rose. Thank you, Chairwoman Waters, and Ranking Member
McHenry.
And thank you, Chairman Powell, for being here today and
for your leadership throughout the pandemic and now during our
economic recovery. I am going to go ahead and dive right in.
Chair Powell, in November the Fed took important steps to
provide temporary relief for certain community banking
organizations which experienced an unexpected and sharp
increase in assets due to their participation in Federal
coronavirus response programs, such as the Paycheck Protection
Program.
That regulatory relief is in effect until December 31st of
this year, and since that deadline was put into place, the
Biden Administration, along with House Democrats, passed a $2
trillion bill that will have an impact that extends past the
end of the year.
Do you believe that the end-of-year deadline is sufficient,
and would you be open to extending the regulatory flexibility
past that date?
Mr. Powell. I don't know, to be perfectly honest. I would
be happy to take a look at that and get back to you.
I am well aware of the programs and of the deadline, but I
don't have an informed view of whether they would be need to be
extended. But I will look into it.
Mr. Rose. In building off of that, I hear constantly as I
visit with community banks back here in middle Tennessee, that
regulatory compliance continues to be one of their top expenses
or costs.
I think this brings up the broader question of whether we
should be looking into permanently raising the threshold for
increased regulatory and reporting standards for community
banking organizations?
What are your thoughts on that, Chair Powell? Is that
something you would support?
Mr. Powell. Again, I would have to look at that.
I will say that we are very well aware of the pressures
that are added to community banks because of fixed regulatory
costs. You need to be bigger with fixed costs, and we try hard
not to be part of the problem.
We see community banks under pressure. We see the number
diminishing. And we have a whole subcommittee, led here by
Governor Bowman, a former banker, that is designed to stop that
sort of thing from happening. But it is something we work on
all the time.
Mr. Rose. I would just encourage you to do that, and to
look at those thresholds, because what I hear repeatedly, and
as a former director of a small national bank, community bank
here in my community, it appears that the dramatic increase in
assets resulting from the fiscal stimulus and other measures
may not be as transitory as we would have first expected, and
has increased the balance sheets of these banks dramatically.
So, I hope you will take a look at that.
In June, the unemployment rate was 5.9 percent, a far cry
from the 3.5 percent pre-pandemic. Labor force participation
has not moved up from the low rates that have prevailed for
much of the past year.
In the Monetary Policy Report you submitted to the
committee, you write that enhanced unemployment benefits have
allowed workers to reduce the intensity of their job search.
Chair Powell, do you believe that the most recent stimulus
in the American Rescue Act is the reason for prolonged high
unemployment rates? And has it, in fact, slowed down our
economic recovery?
Mr. Powell. There are a bunch of factors, there are four or
five--I think Mr. Gonzalez or somebody went through them--and
it is very hard to untangle them. But it may be that
unemployment insurance, for example, enables people to look a
little bit longer and try to find a better job. And in the long
run, that will be better for the economy.
We are going to find out, though, because the enhanced
unemployment insurance will be gone within 60 days, and in many
States, it is gone already. We will be able to look at the
data. And it is too early to say, by the way. We can't really
see a difference between States that have and haven't
eliminated that. So, we are going to be able to see.
My own suspicion is, it is one of a number of factors and
it interacts with the other factors, and it will be really hard
to get a clear answer on exactly how important that is.
Mr. Rose. How could another $3.5 trillion, as proposed by
Senate Budget Committee Chair Sanders, further stifle our
economic recovery?
Mr. Powell. That would seem to be a question for you
really. Again, I don't comment on fiscal policy, and I would
really leave that one with you, if I could.
Mr. Rose. Switching gears a little in my remaining time, I
want to talk about the Global Systemically Important Bank (G-
SIB) surcharge.
Throughout the pandemic our largest banks remained strong
and stable due to high asset quality and robust capital and
liquidity positions.
I believe that over the years, the G-SIB surcharge has
worked as it was intended, and if the G-SIBs do not maintain a
sufficient capital cushion to absorb losses, it could undermine
our economy. It seems that I am out of time, but I would
welcome your response for the record to the questions I will
submit.
Mr. Powell. Thank you. I am happy to do that.
Mr. Rose. I yield back, Madam Chairwoman.
Chairwoman Waters. Thank you very much.
The gentlewoman from Pennsylvania, Ms. Dean, is now
recognized for 5 minutes.
Ms. Dean. Thank you, Madam Chairwoman.
And, Chairman Powell, it is always good to be with you and
to learn from what you are doing in your role.
I, too, thank you for your steady leadership and
stewardship over the course of your tenure, but maybe never so
important as over the course of the last 18 months and moving
forward.
I also thank you for your recognition that this recovery
has not been even. While we are enjoying a regrowth in our
economy in really robust ways, I appreciate that you recognize
it has not been even across all sectors.
I wanted to continue the conversation around inflation, and
I say this as somebody who wants to be able to translate this
to my constituents, I prefer plain English whenever possible
I really appreciate your testimony around inflation. But if
we talk about supply chain and the vulnerabilities that come in
as a result during this economic reopening, the supply chain
with manufactured goods, driving what is called transitory
inflation.
You cite, in your own testimony, the car industry. The
biggest example may be the price of used cars, up 10 percent in
April alone, and a number of factors, one of which is a
particular worldwide shortage of semiconductors, slowing down
the rate of new car manufacturing, therefore, causing dealers
to have fewer cars on the lot, and buyers moving more toward
pre-owned. All of these things are inflationary.
What are your thoughts? And how can I explain this to my
constituents? Around this level of inflation, in these smaller
groups of goods and services, what should we be watching? And
if you could, again in plain English, what is the Fed doing in
terms of this temporary, or what might be called transitory
inflation?
Mr. Powell. We always have the issue, and central banks
generally always have the issue of looking at price increases
and asking whether they are really threatening inflation. By
inflation, we mean year after year after year prices go up.
And if something is a one-time price increase, then you
don't react to it with monetary policy because, frankly, the
way monetary policy works would be by slowing down the economy,
slowing down the recovery and, therefore, reducing inflationary
pressure. So, you wouldn't react to something that is likely to
go away.
We have to look at this current situation where we have a
number of categories of goods and services where inflation is
moving up, as I mentioned, higher than we expected, and a
little bit more persistent than we had expected and hoped.
But we look at them and we look at the story, and the
story, as you mentioned, around used cars and new cars and
rental cars is all kind of the same story; it is a shortage of
semiconductors.
There is also very high demand for various reasons. People
are using less public transportation. They have money because
they haven't been able to spend it. And it is just a perfect
storm of high demand and low supply.
And it should pass. Unless we think there is going to be a
multiyear shortage of used cars in the United States, we should
look at this as temporary. And we very much think that it is,
and so do all of the forecasters I have seen think that these
price increases for used cars and new cars will top out.
And then, in all likelihood, at some point in the future,
and we can't say exactly when, they will decline, because
supply will come back.
Ms. Dean. And do you think rather than--I appreciate that,
those recommendations and what your actions are.
Is this a time, when you see this kind of transitory
inflation, of a need for greater public or private investment?
Mr. Powell. I think what investment does is, it raises the
potential growth rate of the country and makes workers more
productive and companies more productive and countries more
productive and that raises living standards.
And more of it is generally better. As long as it is money
well-invested, then it is worth looking seriously at, at any
time.
Ms. Dean. I agree, and I would not call any of the things
that we are trying to do irresponsible spending. I think you
have demonstrated and the economy is demonstrating that our
investment has been responsible spending, to the growth of our
economy, and to the growth of working-class families.
I want to pivot to another thing that I care very much
about, which is credit rating agencies. Last session, in a
bipartisan way, I had the opportunity to work with Chairwoman
Waters and Representative Barr, to introduce H.R. 6934, the
Uniform Treatment of NRSROs Act, which requires the Fed to
treat all nationally recognized statistical rating
organizations (NRSROs) uniformly so that more creditworthy
companies could have access to the emergency lending.
I knew I would run out of time. I don't know if you would
be able to speak to the NRSROs' expansion?
Mr. Powell. Just briefly, I guess.
At the very beginning of the crisis, we really had to get
these facilities up and running, and we just kind of worked
with the Big Three.
We then consistently expanded, over and over again expanded
the group of agencies that we work with, as you know. I would
be happy to talk about this more offline, if you would like.
Ms. Dean. Thank you so much.
Thank you. I yield back.
Chairwoman Waters. Thank you.
The gentleman from Wisconsin, Mr. Steil, is now recognized
for 5 minutes.
Mr. Steil. Thank you, Madam Chairwoman.
And thank you, Chairman Powell, for being here today.
I want to stay on the topic of inflation. As you know, I
have been a bit of a broken record on this issue because it is
so important to families in Wisconsin and across our country.
In fact, the prospect of rising inflation--I brought this
up in our committee last July, and again last December, and in
those hearings, you continued to suggest that you are not ready
to take action to head off inflation. And yesterday, we
received more data confirming that prices are continuing to
rise.
And inflation is not an abstract concern. Although the
White House social media team put out information that a Fourth
of July barbecue went down 16 cents from last year, and the
Biden Administration can claim what they want, but families are
seeing rapid price increases with their own eyes.
Now, I know it is not your role to comment on fiscal
policy, but I am very concerned about President Biden's
spending plans and its impact on inflation.
Last month's increase in consumer prices of 5.4 percent was
the largest jump that we have seen since August of 2008, right
before the financial crisis.
And over the past year, used cars have gone up 30 percent.
Plane tickets have gone up 24 percent. Shoes are up 7 percent.
We have seen increases in coffee, sugar, cotton, and propane,
all double digits, and higher material costs have added $36,000
to the price of a new home.
I know you have responded to inflation concerns by saying
that the price increases we are seeing are temporary and they
will subside as supply chain and labor markets return to normal
after COVID.
But even if it is partially the case that inflation
expectations may be changing and rising, the prospects of a
more persistent impact--in fact, a poll conducted recently
showed that 87 percent of Americans said they are concerned
about inflation. And on Monday, the New York Fed reported that
consumers expected to see higher inflation over the medium
term.
Can you comment on how the Fed responds to signs that
consumers are beginning to expect more persistent inflation?
Mr. Powell. Sure. We monitor that. We think inflation
expectations are very, very important. In a way, if businesses
and households think that inflation should be 2 percent, then
it probably will be 2 percent, because they will expect that,
and they will demand that, in fact.
We monitor inflation expectations through surveys of
households, surveys of experts, and the market. As you know,
you can get inflation compensation readings out of the
difference between Treasury Inflation-Protected Securities
(TIPS) and regular Treasuries.
We look at all of those things. I would say that they all
went down as a group at the beginning of the pandemic, which is
not good, and they have all moved back up as a group just about
to a level that is in the range of consistent with our 2
percent inflation goal over time.
We watch this very carefully, and we would be very
concerned if they were to move persistently and materially
above 2 percent, and we would react to that.
Mr. Steil. Let me build on this discussion. I want to just
build on the distinction between transitory and persistent
inflation, in particular how it impacts home prices.
According to the Case-Shiller Index, home prices have risen
more than 14 percent over the past year. That is a very
significant increase, and it is enough to put home ownership
out of the reach of some Americans.
Meanwhile, the Fed is continuing to buy around $40 billion
in mortgage-backed securities.
And here is my concern. If inflation is, in fact, as you
suggest, temporary, does the potential abatement of inflation
present a potential for a reset of housing prices?
And if so, what are the likely impacts on homeowners, and
what will be the impact on the Fed's MBS holdings?
Mr. Powell. Housing prices, as I am sure you know, don't go
directly into inflation. Housing is an asset, and housing
prices are not a factor in inflation. What is a factor are
rents. And then, in effect, what the economists do is they take
the value of a home and they impute a rental cost to it. They
add it in. It is just the way they do it.
Housing prices went up 15 percent overall last year. That
is too much. That is much higher than would be a normal level
for housing prices to go up. I don't know what housing prices
will do in the future.
But there is just a lot of demand. As you know, people want
to live in the suburbs now, they want to move out of cities,
they want bigger houses. They have saved all this money because
they couldn't travel and go to restaurants. There is a lot of
demand.
So, even if mortgage rates go up, as they ultimately will,
I think we will be looking at a lot of demand. Then the
question will be, how much supply can be brought to the market?
And that is really out of our control. But, as you know, when
you look around your district, it is a question of zoning, it
is a question of materials, labor, all of those things.
Mr. Steil. But if I could, if we zero in the material
costs, we have seen about a $36,000 increase in costs due to
the material cost, largely inflation--look at lumber and other
areas--maybe we can continue this discussion offline, but I
appreciate your time, as I am out of time, and I will yield
back.
Mr. Powell. I would be glad to do that.
Chairwoman Waters. Thank you.
The gentlewoman from North Carolina, Ms. Adams, is now
recognized for 5 minutes.
Ms. Adams. Thank you, Madam Chairwoman.
And thank you, Chairman Powell, for being back with us.
Like my colleagues, I want to touch on inflation.
You have described current inflationary pressures as
transitory and cited supply bottlenecks and temporary factors
like the high price of lumber as the reason why inflation has
been high in recent months.
And though this may be temporary, these bottlenecks have
had real-world consequences. For example, my local housing
partnership had to pause the construction of an affordable
housing site because of a funding gap caused by the spike in
lumber prices.
And while lumber prices can be tied to the previous
Administration's actions, I know that many are still concerned
about the rise in core prices. So, I am hoping that you can
help us put some of these concerns to bed.
Would you tell us why you believe that the recent inflation
trends are temporary as the economy reopens, and what other
factors are playing into the upward pressure on prices?
Mr. Powell. I would be glad to try.
As you know, all of these industries kind of shut down a
little more than a year ago on the expectation that we were
looking at a really bad, difficult time. And then, sooner than
expected, the economy has reopened, and demand for housing and
demand for many other things--cars, you name it--is really
high, because people saved money. With all of the congressional
fiscal support, more than 100 percent of income lost was
replaced.
Really, the consumer is in very good shape to spend. And
what is happening is, there is a lot of demand. But on the
supply side, it is just hard. They can't build enough houses.
There isn't enough lumber.
You mentioned lumber prices. Lumber prices went way up, and
they have gone way down. They are still twice as high as they
were before the pandemic came, but they are way off their high.
We don't know it, but we think that will be the pattern at
least for some of these things, where they go very, very high
and then they come down as supply and demand come together, as
more supply comes online to meet the higher demand.
So, we have a very large but ultimately very flexible
economy. It will adapt, we believe. It is not one of those
economies that is rigid and has a lot of structural rigidities
in it. It will adapt, and fairly quickly, just as it adapted to
the pandemic much more quickly and better than, frankly, people
expected.
So, I think that will happen. And when that happens, we
should see--I don't say that prices will come back down, but
the level of inflation will return to more normal levels.
Ms. Adams. Okay. Yes. Even with the unemployment rate still
elevated near 6 percent, there are reports that employers are
offering higher wages and incentives to attract workers back to
work in the workforce. And I have always said that working hard
isn't enough if you don't make enough.
So, Chairman Powell, to what do you attribute the trend of
workers receiving incentives to reenter the workforce? And does
the Fed view these conditions as favorable even if the reasons
for them are not?
Mr. Powell. We are seeing this particularly in service
industries where there are still lots and lots of job openings.
And for many people who used to work in service industries, in
relatively low-paid jobs, what we are seeing is incentives to
go back.
There clearly is a very, very high level of demand for
people to come into these jobs. And for whatever reason, people
are taking a little bit of time to maybe look for a better job.
And knowing that they are going to go back--these are
people who were working in February 2020. They want to work.
These are people who want to work.
But they may be taking a little bit of extra time in many
cases to look for a job that pays better or that they like
better. Or their preferences for working from home may have
changed. They might want to find a job where they can work from
home. Who knows?
But in any case, we are seeing difficulty in matching jobs
and people up. And there really isn't a precedent. We can't
look back and see the last time that this happened; there is no
last time that this happened. So, we are kind of finding out as
we go.
But I really do think, come back in 6 months, and there
will be a whole lot of these people back to work, and wages
will have moved up a little bit for people at the low end, and
that is not a bad thing.
Ms. Adams. Okay. Great. Thank you so much, and thank you
for joining us today.
Madam Chairwoman, I yield back.
Mr. Powell. Thank you.
Chairwoman Waters. Thank you very much.
The gentleman from South Carolina, Mr. Timmons, is now
recognized for 5 minutes.
Mr. Timmons. Thank you, Madam Chairwoman, for holding this
hearing.
And thank you, Chair Powell, for being with us today and
sharing your insight on recent developments in our economy.
We have all seen the inflation numbers. Some may say it is
only temporary, that this was bound to happen coming out of the
pandemic, and there may be some truth to those arguments.
But I think any economic observer realizes that usually
with things like this, there is not a singular issue causing
our trouble but rather several converging factors.
What is most frustrating, I think to me, is that despite
the very real inflation we are experiencing, temporary or not--
and that is yet to be truly determined--and it seems that while
you, Mr. Chairman, are still firmly in the transitory inflation
camp, the Federal Open Market Committee minutes showed that
there is an increasing amount of disagreement on the Board of
Governors on just how temporary it may be.
And what is most frustrating to me about this entire
episode is that after all of the fiscal stimulus that Congress
has provided for the economy since March of last year, and now
even with the greatest levels of inflation that we have seen
since the financial crisis, this Congress is seriously
considering spending several trillion dollars more, and most
likely it will nowhere near be paid for.
And I know you will not speak to the merits, or lack
thereof, of any specific pieces of legislation, and I am not
asking you to. But as the Chair of the Federal Reserve, where
one of your statutory mandates is inflation control, could you
provide us an expectation of the type of inflation we should be
prepared for if Congress was to spend another $3 trillion in
the next few months? And let's just say that only $1 trillion
of that would be paid for with an assortment of tax increases.
Mr. Powell. No, I wouldn't really be able to provide you a
real time. That is what the Congressional Budget Office will be
happy to do, is make that forecast for you. That is not
something I can do here on the spot.
Mr. Timmons. I had a feeling that would be the answer, but
I think the answer to this question is obvious. The high levels
of inflation we are seeing would only increase and stick around
longer. We would certainly not have transitory inflation if we
poured that amount of fiscal gas on the fire.
I also think the labor shortage we are seeing is a big
piece of this puzzle, as several of my colleagues have already
alluded to. Dozens and dozens of businesses in my district
cannot get people to return to work, and have critical
businesses in their supply chain with the same problem. This is
creating scarcity, which results in higher inflation.
In South Carolina, we are returning to work at a
drastically higher rate than the rest of the country. Our
unemployment claims are down 93 percent from the pandemic high
last year, leading the country in this regard.
A recent survey showed that 1.8 million people have turned
down work because of the overly-generous unemployment benefits,
and that is a large chunk of that 9 million person labor gap we
keep mentioning.
Could this problem be avoided if Congress simply removed
disincentives to return to work, such as the unemployment
benefits that in many States are in place through September?
Mr. Powell. I think that has already happened. Those will
be expiring in September. By the end of September, essentially
all of those benefits are gone. And in many States, they are
already gone, as you know in South Carolina. So, we will see
that.
I think whatever effect those things are having now, it
won't last much longer.
Mr. Timmons. Well, South Carolina depends on businesses in
other States, and when those States are not able to produce
whatever is being supplied to South Carolina, it is creating a
problem for my State. So, I just think that we have created a
disincentive to return to work, and that is not good.
One last question on inflation. If the Fed were to move to
increase interest rates, one result would be the increased debt
service cost to the Federal Government's $30 trillion-plus
debt.
Is that a factor that you would take into consideration
when deciding to potentially change the benchmark rate?
Mr. Powell. No, absolutely not.
Mr. Timmons. So, hundreds of billions of dollars in
increased cost to our debt service is not a factor in that?
Mr. Powell. No. First of all, the market will anticipate
that we are raising rates, so it is probably baked in to some
pretty significant extent.
Second, we borrow all across the curve. So, when we raise
short-term rates, it doesn't necessarily have a big effect on
the government's borrowing costs very quickly.
In any case, we are here to achieve maximum employment,
price stability, financial stability, supervise the banks, and
look out for the payment system. We are not in a position of
considering the--and the United States doesn't have to be in a
position where that kind of consideration gets into monetary
policy, and it will not.
Mr. Timmons. The United States doesn't have to right now,
so I guess, hopefully, we will always be in that position.
I have a couple of questions on cybersecurity, but I will
submit those for the record. And thank you for your time.
With that, Madam Chairwoman, I yield back. Thank you.
Chairwoman Waters. Thank you very much.
The gentleman from Massachusetts, Mr. Auchincloss, is now
recognized for 5 minutes.
Mr. Auchincloss. Thank you, Madam Chairwoman, and thank
you, Chairman Powell, for being with us this afternoon.
Many of my colleagues have asked some really terrific,
probing questions about inflation in the short term and the
effects on our economy and on getting back to work. I want to
zoom out a little bit and ask about more long-term effects.
One of the trends over the last, at least 25 years, has
been the increasing returns to capital relative to the returns
to labor, and there have been a lot of good theories about why
that is happening, from undermining workers' organizing power
to increased automation and technology.
But it is clear that it would require sort of a
discontinuous event to break that trend, and this pandemic
seems like it could be. We are seeing that businesses that are
striving to get people back into the labor force and back to
work are offering higher wages, more flexibility, and better
benefits, really both quantitative and nonquantitative
remuneration for employment.
Do you think that the COVID-19 pandemic could be a
discontinuous event that could actually change the balance
between returns to labor versus returns to capital, whether it
could give sort of a secular jolt to workers' bargaining power
in the long-term?
Mr. Powell. I don't know. There are so many things that are
possible, and there will be things that cut in different
directions.
A lot of what we have seen is just increasing returns to
education, and people with relatively low skills and education
having stagnant incomes and wages, and people at the high end,
with lots of education, receiving very high levels of
compensation.
And a lot of that is just that productivity is amplified by
technology and knowledge and the ability to use it and by
globalization, too. So, there are a lot of factors that go into
that.
The pandemic will do a number of things, but it would hard
to assess which way it will point. It is a good conversation to
have.
Mr. Auchincloss. I hear your point about the increasing
returns to education and technology. Certainly, that has been
evident in Massachusetts in the life sciences and clean energy
and cybersecurity spaces.
But there is also a huge portion of the workforce,
primarily service economy workers, whose jobs are not
automatable, they are not routine either manually or
cognitively, and they can't be automated. And even they have
had downward pressure on their wages in the preceding decades.
But now we are starting to see an uptick in what they can
command in the labor market. And for them in particular, do you
think that they can have persistent wage increases over the
next few years as we recover?
Mr. Powell. I know the research you are referring to, and
that is very important research that shows exactly what you
suggest. And if you saw people at the lower end getting paid
more, it would be hard for anybody to be against that.
Could we be seeing that? What we are seeing is sort of
entry level--people going into jobs in the service sectors,
which tend to be relatively low paid, we are seeing--that is
where we are seeing the pay increases.
It would be hard to say that is a bad thing in and of
itself. You would want to see people getting paid well who are
at the bottom end of the income spectrum.
Everyone was celebrating when wages were going up for
people more in the bottom quartile in the last couple of years
of the last expansion. I don't know anybody who didn't
celebrate that. So, it is possible, and we will have to see.
Mr. Auchincloss. Let's put forward as a premise that we do
see some of that wage inflation for the service economy--how
concerned should we be that inflation for basic staples would
eat up that increased purchasing power and actually be, on net,
a negative?
Mr. Powell. It is hard to say. Service companies, a lot of
them, do operate on a relatively modest margin and have a
tendency to pass those wage costs along over time. These are
hard questions to answer in the abstract.
Part of what is happening, though, is there will be more
automation in these jobs, and we are seeing that. For a lot of
these jobs, we are going to find out how much those jobs can be
done with automation because businesses--we have been hearing
this for a year and a half--are really looking hard at that
now.
Over time, though, that can make the people who remain in
those jobs more productive, and their wages can go up as a
result.
Mr. Auchincloss. I appreciate your time, Chairman Powell.
I yield back.
Chairwoman Waters. Thank you very much.
The gentleman from Oklahoma, Mr. Lucas, is now recognized
for 5 minutes.
Mr. Lucas. Thank you, Madam Chairwoman, and I appreciate
that.
Chairman Powell, it has been my observation that we are all
the product of our experiences, and the things that happened to
us in our younger lives tend to scar us forever.
My grandparents were young men and women in the Great
Depression of the 1930s. The Dust Bowl in western Oklahoma and
the Southwest scarred them for life. My grandparents, to the
day they died, were afraid the Great Depression was coming
back.
My parents were young men and women in the 1950s, and
experienced a horrendous drought in the Southwest United
States. To the day he died, my father was convinced that this
rain was the last rain, it would never rain again.
I was a beginning farmer and a college student in the 1978
to 1982 period when we went through the last, what I would
describe almost as super inflation spike, coming out of the
Carter years, and when your predecessors decided to strangle
inflation out of the system, it was really hard on me and a lot
of people across this great country.
So, like my parents and grandparents, as I see this 5.4
percent year-over-year number in the June Consumer Price
Indexes, I am nervous about this. When I borrowed cow seed
money in 1981 at 20 percent, that made an impression on me.
I am nervous, and I guess my question to you is, how much
longer can we sustain numbers like this before you become
nervous?
Mr. Powell. As I have said before, we do expect that we
will be able to see whether the narrative we are feeling turns
out to be right, and I would say we would be able to see that.
It won't take forever for us to be able to see that.
And if we do see that inflation expectations are moving up
or inflation is on a path to remain well above our goals and at
risk of setting us off on a period of high inflation, then we
will use our tools to guide inflation back down to 2 percent.
In the end, it will be transitory, and people need to have
faith in the central bank that we will do that.
But we won't do it just because--honestly, it would be a
mistake to do it at a time when we really do believe--and
virtually all forecasters do believe--that these things will
come down of their own accord as the economy reopens. It would
be a mistake to act prematurely.
We really have to weigh the risks of the two things, and at
a certain point, the risks may flip. But right now, the risks
to me are clear.
Mr. Lucas. I appreciate that, Mr. Chairman. And just
understand, like my elders of two generations before, I will
sleep with one eye open until these numbers begin to come down.
And if they do not, then I realize, like your predecessors, you
will have to take the necessary action.
Along that line, Chairman, you made clear that the Federal
Reserve expects the labor force participation to gradually
improve, and we are all optimistic and hopeful about that. And
the Monetary Policy Report also highlights that maximum
employment could look much different than it was prior to
COVID-19.
Can you discuss with us what you see as the potential long-
lasting effects on the labor market, and how the FOMC will
approach the question of what maximum employment should be
moving forward in the new norm, whatever the new norm is in the
post-COVID world?
Mr. Powell. Sure. I would say that patience will
characterize our approach on that.
But what we saw at the end of the last expansion was people
staying in the labor market more than would have been predicted
by the numbers.
And so, labor force participation kept moving up, up, up,
to numbers that people didn't think we would see again, well
above 63 percent, and sustained there for a couple of years,
which was an upside surprise.
What we have seen since the pandemic is a wave of
retirements. And we won't really know the implications of that
for some years, but it could just be that it was a catch-up for
the people who stayed in the labor market.
I guess the point is, we can't really know what labor force
participation is going to be and what the trend will be, and
what the right number is going to be.
Ultimately, though, you will be able to tell with wages.
One of the features of our new framework is that we think if we
don't see upward pressure on inflation and on wages, then we
are not going to say that the labor market is tight, even if
unemployment is really low and participation is high. We won't
see that.
But if we do, then that will tell us that maybe it is, and
we will have to see where those numbers are. I think that, as I
mentioned earlier, there is a degree of humility that
forecasters need to have. We have much to be humble about. And
this is another area where that is appropriate.
Mr. Lucas. Thank you, Chairman Powell.
And thank you, Chairwoman Waters. I yield back.
Chairwoman Waters. The gentlewoman from New York, Ms.
Ocasio-Cortez, is now recognized for 5 minutes.
Ms. Ocasio-Cortez. Thank you so much, Madam Chairwoman.
And thank you, Chair Powell, for being here with us today.
As has been alluded to throughout this hearing, we have
seen that supply bottlenecks and pandemic-related factors have
been one of the primary reasons that have led to price
increases.
Whether it is computer chip complications delaying the
production of new vehicles, and prompting a rush on used
vehicles, the price of lumber, shipping container logistics, et
cetera, we know that these price increases were not caused by
changes in interest rates. They were caused by supply chain
complications.
Now, just to reiterate, you have said that these price
increases are transitory, correct?
Mr. Powell. Yes. We said that we think they will be. Of
course, we lack certainty on that. But we do believe that is
the case.
Ms. Ocasio-Cortez. Thank you. And if drivers of rates of
inflation are supply chain issues and potential areas of
underinvestment, do you think that these issues are best
resolved through investments, making that supply chain more
resilient, or higher interest rates?
Mr. Powell. If we see things that are temporary or
transitory, and that should move through and go away because
they are associated with an event, the opening of the economy,
then it would be inappropriate for us to tighten policy, which
really the point of is to slow down economic activity and slow
the recovery. It would be inappropriate. It is a difficult
judgment to make, though, is the thing.
Ms. Ocasio-Cortez. Thank you.
Recently, the Bureau of Labor Standards (BLS) reported that
the first 3 months of 2021 were the best quarter of wage growth
since at least 2001.
Now, my concern, just to be frank, is that a misplaced
diagnosis playing out with inflation could cause the Federal
Reserve to prematurely raise rates and constrain wage and
employment gains that have been beneficial to millions of
Americans.
This means that if we do take that step back, millions of
Americans, especially marginalized communities, will be left
with limited opportunities to be employed at an adequate and
livable wage.
In fact, the FOMC is projecting multiple interest rate
increases before the end of 2023 and before they project
achieving the pre-pandemic unemployment rate. And at the June
FOMC meeting, the median FOMC members' projection of the
longer-run employment rate was about 4 percent, correct?
Mr. Powell. Yes, that is right.
Ms. Ocasio-Cortez. Yet before the pandemic, the
unemployment rate reached 3.5 percent without triggering
inflation, correct?
Mr. Powell. That is right.
Ms. Ocasio-Cortez. And in fact, in 2019, despite some pick-
up in wage growth, especially at the bottom, there didn't
appear to be any signs of the economy overheating.
And as you said in November 2019, the benefits of long
expansion are only now reaching many communities, and that
there is plenty of room to build on the impressive gains
achieved so far.
If indeed there was still room to expand in the months
before COVID, that suggests that with time, the economy can
return to a trend of GDP and employment above the one it was
experiencing before the crisis.
Now, do you believe this to be the case? Do you believe
that the long-term longer run implies that 3.5 percent is too
low, and do you think that we will be able to reach lower
unemployment and higher labor force participation levels than
the pre-pandemic ones?
Mr. Powell. Oh, I have every reason to think, and I do
think, that we will be able to get back to 3.5 percent
unemployment.
Participation is very much affected [audio malfunction]. I
am quite sure we can get to high levels of participation again.
Ms. Ocasio-Cortez. Okay. Thank you.
And to disaggregate a little bit kind of on this line
between monetary and fiscal policy, what we saw was that [audio
malfunction] The World Bank recently summarized estimates from
market forecasters that the United States may be the only
country that will leave the pandemic with higher GDP than pre-
pandemic projections have estimated.
It is enormous success, and that is, GDP will actually be
higher as a result--or after COVID [audio malfunction].
Would you say that some of the fiscal policy interventions,
like the American Rescue Plan, stimulus checks, et cetera, have
played a role in that outcome?
Mr. Powell. Oh, yes, I think so. The forecast of many is
that by the middle of next year, we will be above the prior
trend, not the prior level, but the prior growth trend, which
is an incredible achievement. And I attribute that to the CARES
Act. And the fiscal policy that went so far so fast I think
will in history [audio malfunction].
Ms. Ocasio-Cortez. Thank you very much.
Chairwoman Waters. Thank you. The gentlelady's time has
expired.
The gentleman from Texas, Mr. Sessions, is now recognized
for 5 minutes.
Mr. Sessions. Thank you. Thank you very much, Madam
Chairwoman, and it is good to see you, Chairman Powell. Thank
you very much for joining us today.
I wanted to have you take the majority of my time to talk
with us about your 12 regional banks and what they are seeing
across the country for recovery, as you see it, and these
banks' reporting of their successes and the things that they
see as perhaps things that are inhibiting or causing you to
think about your national plan around the country.
Thank you.
Mr. Powell. You would like me to talk about that a little
bit?
Mr. Sessions. Yes, sir.
Mr. Powell. Okay. I would be glad to.
One of the great features of our system is that we have 12
Reserve Banks around the country, and they are in every
community in the country. And they come back, and they extract
a lot of data, a lot of information on not just businesses, but
also universities, health centers, and everything. The story
they are telling is like what we have been talking about today.
You have very fast growth and a lot of money out there to spend
on the part of people. You have a lot of churn in the labor
market. People are quitting their jobs at incredibly high
rates. Typically, that happens when labor markets are really
tight. This happens to be happening while there are a lot of
unemployed people. So, we have never seen anything like this,
and they bring back reports about that.
Businesses have a hard time finding people. People are
looking for better jobs. They are taking a little bit more time
to find it, to find the appropriate job. That is one thing.
There is also a lot of unevenness. You still have sectors
of the economy that are struggling to get back to where they
were. A number of them are above where they were. Housing, for
example--we are building more houses. We have been building
more houses than we had really seen since the global financial
crisis.
People see price pressures broadly across the country, as
we have discussed here today, that comes back. If you look at
our Beige Book, you will see that broadly. It is in raw
materials and to some extent in wages. You will see that as
well.
It is all of the things we have been talking about. It
would be hard to summarize it. But we really do get a very
nuanced picture around different areas of the country,
different sectors of the economy, which I think is a tremendous
benefit to our policymaking process and also to the public.
I hope that is helpful.
Mr. Sessions. Waco, Texas, that I represent, was the first
City in Texas to get back to its employment rate pre-COVID, and
it was done through a series of things, but I think mostly
because people really did not have an opportunity to have an
underpinning of money that was coming in. They had to go to
work. We are not a big government town. People get out and
work.
And I want to join my colleagues in saying, first of all,
thank you for taking the time to be before the committee again
today.
But in that process, I hope that there is healthy debate
that you not only encourage within your system, but you also
recognize that there are a good number of Republicans who
believe that the government propping up the system is
inhibiting actually people taking jobs, getting back to GDP as
opposed to Consumer Price Index raises, and that we really see
that the short- and long-term answer would be people getting
jobs, going back to work, schools reopening, and the success of
not only the marketplace, but the stability of America as we
have known her.
I will be interested over the next few months in your
evaluation about what is working and what is not working, if
you are able to spot that in the markets and actually give
feedback to States and Governors and the President and
certainly this committee on the facts and factors that seem to
be successful.
I think that success that you have said today is getting us
to a 2 percent inflation rate. I don't have any problem with
that at all. I could buy that.
But getting to necessarily us, because we want to say
somebody wants a better job, but we have record numbers of
people leaving, I think we need to point to successes. And I
hope one of those factors is also employment.
I want to thank you again for taking the time to be here
And, Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you very much.
The gentleman from New York, Mr. Torres, is now recognized
for 5 minutes.
Mr. Torres. Thank you, Madam Chairwoman.
And Chairman Powell, thank you for being with us.
I have a few questions for you based largely on a recent
New York Times op-ed written by Karen Petrou. In the op-ed, Ms.
Petrou points out that lower interest rates benefit those with
assets rather than those with savings, thereby deepening
inequality.
Do you agree with that assessment?
Mr. Powell. No, I don't agree with that assessment.
The bottom line with interest rates is that low interest
rates support a strong labor market. They support demand and
they support a strong labor market. And you saw this during the
course of the last long expansion, a very strong labor market.
And all of the people that we talk to--and we talk to many,
many people out in the country who either live in or represent
low- and moderate-income communities or both, and they never
come in and say, ``Wow, you really should raise interest rates
because you are increasing [inaudible].'' We literally never
hear that from them.
What we hear is, they really like our policy, they like our
focus on maximum employment. To say you want to focus on
maximum employment, that goes in the direction of having a
supportive monetary policy. That is really what I would say to
that.
Wealth inequality is something that goes up, by the way,
over the course of a business expansion, because people who own
homes and businesses and stocks and bonds and things like that,
as the economy is healthy for a period of 10 years, they are
going to benefit in their wealth.
Does anyone seriously argue that we should try to stop that
from happening by raising rates at the cost of putting people
at the bottom end of the income spectrum back to work? No, of
course we wouldn't do that.
So, I think we are doing the right thing with what we do.
And we are ultimately giving people a shot to get a good job
and get a good wage and accumulate that wealth.
Mr. Torres. I am going to quickly interject. In the same
op-ed, Ms. Petrou points out that companies are taking out
cheap debt not to finance investments and infrastructure and
workforce alone but, rather, to finance larger profits and stop
buybacks.
What is your response to that argument?
Mr. Powell. I think businesses make rational decisions
generally about what they should invest in, and when they
should give money back to their shareholders. What that has to
do with monetary policy is not clear to me. I see an economy
that created 3.5 percent unemployment and wage gains for the
lowest-paid people over the last 2 years or so of the last
expansion, and all of that in the context of low interest rates
and accommodative monetary policy. So, I guess I am just not
seeing that.
Mr. Torres. I know the Fed has a statutory obligation to
promote price stability and maximum employment. What are your
thoughts on the relationship between monetary policy and
inequality? What do you take to be your obligations with
respect to wealth inequality in America?
Mr. Powell. We don't take inequality as a mandate. We have
these disparate outcomes in the economy over the years, which
have, frankly, in some cases, gotten worse and we see those as
weighing on the potential for the economy. I think everyone
does. If you don't have a chance to take part in contributing
to, and then benefiting from the economy, then the economy is
not all that it can be.
Now, what can the Fed do? We can support maximum
employment. That is what we can do. We can push the job market
to a place where--consistent with our price stability
obligations where jobs are widely available. Really, though, we
can't be the lead on that. It is fiscal policy, education, and
things like that, that are really going to matter much more
over time than monetary policy, but I think it is appropriate
for us to call it out and to use our tools as we can.
Mr. Torres. And my final question before my time expires is
about the multifamily housing market. In New York City, we draw
more than half of our revenues from real estate, and when real
estate fails, it has implications for a wide range of actors.
It has implications for tenants who suffer from deferred
maintenance. It has implications for property owners. It has
implications for local governments, which depend heavily on
property taxes and sewer and water fees. And it has
implications for the financial system that might have an
interest in those properties.
What role can the Fed play in shoring up multifamily
properties and real estate [inaudible]? And that will be my
final question.
Mr. Powell. We really can't directly operate on that. I
would say what we do is we supervise banks who do lending and
we make sure that they have good risk management practices and
conduct themselves professionally and with appropriate care in
the loans that they make, and have capital for losses, should
they have them.
Chairwoman Waters. Thank you very much. The gentleman's
time has expired.
The gentleman from Missouri, Mr. Luetkemeyer, is now
recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
And welcome, Chairman Powell. It is good to see you again.
I always enjoy our conversations.
You have been asked a lot of questions today on a wide
range of topics, and by the time you get to the end of the day
here, it seems like everything has already been asked. I have a
whole bunch of questions here and you pretty well got them all.
Let me go back and kind of clarify a few things that I have on
my end from the standpoint of concerns, also, as the ranking
member on the House Small Business Committee.
These things affect small businesses as well, a lot of
things you have been talking about today. And one of them that
has really been harmful is this $300 unemployment benefit. This
morning, there was a Morning Consult poll that came out which
said that 1.8 million people turned down jobs due to the
unemployment benefits. Recently, there was another poll which
said that 40 percent can make more staying home and drawing
this benefit than they can by going to work.
You indicated a while ago that you look at all
vulnerabilities. It would seem to me that this would be a
vulnerability that you need to be factoring into your equations
for the economy and the projections. Would you agree with that?
Mr. Powell. The thing is, those enhanced unemployment
benefits are lapsing now, in many States already lapsing, and
lapsing at the Federal level by September. In macroeconomic
time, that is a short period of time. I do think that
unemployment insurance has been interacting with other things,
like the lack of childcare, like schools being closed in a lot
of places, fear of COVID, various things, and I think you will
see that is no longer a factor come the fall. It may take a
while for things--
Mr. Luetkemeyer. I would agree with that, but I would hope
that you would agree also that it is a factor. Right now, in
your projections, when you see that some States--and, in fact,
I have an article right here from the The Wall Street Journal
just a couple of weeks ago which indicates that Americans are
leaving unemployment rolls more quickly in States cutting off
benefits. That is the headline. So, it seems to me that would
be an extraneous variable or vulnerability that you would be
taking into consideration.
I guess that is just my point, that small businesses are
directly affected by this. The number of folks is staggering
when you start looking at those sort of things with the
concerns that they have.
I have another issue that I want to talk to you very
quickly about here with regards to the International Monetary
Fund (IMF). I don't know if you saw this article, but I saw an
article today with regards to--it said the Biden Administration
backed an IMF proposal to issue an unprecedented $650 billion
worth of special drawing rights this year alone, which will
also help reshape the international financial system.
Would you like to comment on that? That seems to be--have
you seen the article or are you aware of it?
Mr. Powell. I am familiar with the issue, and it is very
much an issue for the Treasury Department and maybe for you,
but it is not an issue for the Fed. We don't have any role in
that at all.
Mr. Luetkemeyer. The article goes on to talks about
affecting the reserve currency status of the United States. So,
I would think that would be a pretty important take on that for
you, would it not?
Mr. Powell. Yes. Again, the Special Drawing Rights (SDR)
issue has to do with funding the IMF. It would be hard to say
that single action will be the thing that threatens our status
as the reserve currency. And the Fed doesn't own the reserve
currency issue; that is an issue we share with other parts of
the government as well.
Mr. Luetkemeyer. Just quickly, I know the Chinese are
trying to compete economically with us. Would you say that they
are trying to weaponize their economy against us to try and
take us over? Would that be a fair statement?
Mr. Powell. I would go so far as to say we certainly are in
a strategic and economic competition with China, but
ultimately, these questions about competition with other
countries are really for the Administration, not for the Fed.
Mr. Luetkemeyer. With respect, sir, this hearing is about
monetary policy and the state of the economy. It would seem to
me that things that would affect the economy, challenges to our
economy, would be something that we would talk about,
especially when it is monetary policy. And it would seem that
the Chinese--if our money and investment money is going over
there to empower and help their economy against our economy, it
seems to me that would be something of interest to you, would
it not?
Mr. Powell. Those are issues that are absolutely in the
province of the Treasury Department and the Administration and
the Congress. You have given us helpful tools and independence
and all that, and if we wander all over the landscape taking on
issues that are really not assigned to us, then I would have a
hard time explaining to you why we should be independent.
Mr. Luetkemeyer. Okay. Mr. Chairman, I appreciate your
conversation this morning. You and I are really going to
disagree on this one, but I think it is a very important issue
with regards to our economy. Thank you very much.
And I yield back, Madam Chairwoman.
Chairwoman Waters. Thank you. The gentleman's time has
expired.
The gentlewoman from Ohio, Mrs. Beatty, who is also the
Chair of our Subcommittee on Diversity and Inclusion, is now
recognized for 5 minutes.
Mrs. Beatty. Thank you so much, Madam Chairwoman, for
holding this hearing today, and I thank our ranking member as
well.
But also, let me just thank my friend, Chairman Powell.
Thank you so much for being here and for always being willing
to reach out and discuss, whether it is monetary policy or if
we are looking at forecasting of what the future looks like, on
the state of the economy.
First, I know you don't weigh in directly, but I think it
is worth me noting that as I have been looking at the vacant
seats, there is a vacant Governor seat at the Federal Reserve
that has not been appointed yet. I know it is appointed by the
President, but just as an FYI to you, I would like to see
someone nominated with more diversity. We have had long and
ongoing conversations about diversity.
We have heard a lot because of the pandemic, and as you
stated in your Monetary Policy Report--which I have had an
opportunity to go through, thank you--we have heard a lot about
housing costs, lumber, et cetera, but housing is so important
to us. I serve on the Housing Committee, and purchasing homes
has continued to have an upward trajectory, especially in
cities in the Midwest, like my city.
And despite the strong housing market, the Federal Reserve
has continued to purchase mortgage-backed securities at $40
billion per month. Can you briefly explain the Federal
Reserve's thought process on the need for these purchases and
if these purchases will have any effect on the cost of housing?
Mr. Powell. Sure. We buy Treasuries and mortgage-backed
securities, and we really buy them for the same reason. They
are not intended to provide support directly to any industry,
including the housing industry. That said, low interest rates
and asset purchases like that do keep longer-term interest
rates low. They do support low mortgage rates, which does
directly support the housing industry. But it is not that we
are looking at the housing market and thinking, this is for the
housing market; it is really more that we want to support
overall demand, and we want to support demand because we are
still a long way from maximum employment. And we think it is
appropriate.
Even once people start going back to work at higher rates,
which we expect later this year, we still think it will be--
some time will have to pass for us to get all the way back to
that place where we were in February of 2020, or a place like
that [inaudible]
Mrs. Beatty. Let me quickly go to my second question. In
the first few months of 2021, the price of lumber--as we heard
earlier--skyrocketed to more than $1,730 per thousand board
feet in May. But in the last few months, as suppliers have come
back online, prices have plunged 60 percent, and now are
negative for the year.
Is this the type of transitory inflation that the Federal
Reserve was anticipating? And how do you differentiate between
the rising prices due to supplier constraints as a result of
the pandemic and the potential long-term inflation?
Mr. Powell. Broadly, yes. That is the kind of thing that I
wish we had seen more of. Lumber, of course, is a great
example, but we would like to see a bunch more examples. But it
is the same story. It is a situation where there is a shortage,
there is a lot of demand, supply can't react, and prices go up.
In the case of lumber, there is just a lot of buying, almost
panic buying. We may be seeing some of that with used cars
right now where we have very, very high rates, but that is one
of the things we expect is that our very flexible economy will
equilibrate supply and demand and you will see inflation move
down and maybe even have the prices themselves move down as we
get here.
Mrs. Beatty. And that is a great answer, because that is
another reason when we talk about infrastructure, we should be
talking about housing and the supply and demand for housing.
My last is basically a statement, in my last 30 seconds. In
your report, you have an area that is called, ``Special
Topics,'' and it talks about the uneven recovery in the labor
force participation. You might want to take a look at it,
because it makes a true statement that factors are still
contributing to the disparities with certain populations,
whether it is age, poverty, or race. Black Americans are not
listed.
And let me make it very clear, when we talk about
unemployment rates, when we say it is great for America, it is
double in the negative for Black folks; we are still
struggling. You mentioned Hispanics, but there is no mention of
Black Americans. So, I would like somebody to take a look at
that, because we still are dealing with very high unemployment
rates.
Mr. Powell. Thank you.
Chairwoman Waters. Thank you very much. The gentlelady's
time has expired.
The gentleman from Michigan, Mr. Huizenga, is now
recognized for 5 minutes.
Mr. Huizenga. Thank you, Madam Chairwoman.
There has been a lot of discussion about lumber from my
colleague from Ohio, who just discussed that as to whether that
may or may not indicate transitory inflation [inaudible]
Actually buys lumber. One of the things that I do is, we have a
real estate development firm as a family, and we are also in
the sand and gravel operation, so I am intimately involved in
construction.
I can tell you that the lumber that I had to buy at the
beginning of this year, which is currently being used to build
a home that is hopefully going to be occupied--it was going to
be at the beginning of August, but now it looks like it is
going to be more like the middle of September because of supply
constraints, labor constraints, demand, and all of the things
that are going on. I am not going to be able to lower the price
of that condominium because of current lumber prices. Those are
baked in and fixed.
And that is why I think a lot of my colleagues aren't
really understanding the effects of what those price increases
mean in the longer run. And at the end of the day, I wish I
could go back and rewrite that contract, but when it is already
stick and concrete in the ground and it is going up and it is
has a roof on it, I can't do that. So, that is going to be a
problem with which I think this Administration is going to have
to wrestle.
And, Mr. Powell, I know you have had a lot of discussions
about inflation today. I am not going to dive too deep into it,
but I needed to make sure that I lent my name, and as people
are having the tally of who was bringing up inflation, I wanted
to be one of those people. I didn't think I would find myself
in agreement with Larry Summers on some of his concerns about
what has been going on with inflation, but whether it is Larry
Summers or the National Federation of Independent Business
(NFIB), which is saying that nearly half of their members--by
the way, I am also a member of the NFIB--have had to do price
increases, which are affecting their customers.
We have to keep an eye on inflation. And my parting thought
on this is, and what I am afraid of is, we won't know it is too
late until, frankly, it is too late. And that is the problem
with having such a retrospective look-back when you are diving
into those numbers.
You don't have to respond to that. You are welcome to, if
you would like to. But I do want to hit on the London Interbank
Offered Rate (LIBOR). That is something that has not been
brought up today. You have been very committed in your support,
as well as other financial regulators, of completing the
conversion away from the LIBOR [inaudible] benchmarks.
It is absolutely essential, I do believe, to provide a
little certainty for those tough legacy LIBOR contracts, and
you have expressed that in the past. You have also stated in
previous testimony that although the Secured Overnight Funding
rate (SOFR) will serve a significant part of the market, you
said, ``Market participation should seek to transition away
from the London Interbank Offered Rate (LIBOR) in the manner
that is most appropriate given their specific circumstances.''
Now, I have heard from many financial institutions in
Michigan and across the country that the Secured Overnight
Financing Rate (SOFR) doesn't necessarily fit all of their
needs for their various sized institutions. In the last few
weeks, we have heard rhetoric coming out of members of the FSOC
about the need to put parameters on the choice that financial
institutions have to determine which benchmark replacement
works best for their institution, their customers, or their
lending activity.
And while I agree there needs to be a standard for
qualified labor replacement rate, I am concerned that some of
the most recent statements sound like the Federal Reserve and
other U.S. financial regulators may be changing their previous
views before this committee suggesting that SOFR, based on the
repo market, a market dominated by the largest money center
banks, should be imposed on every institution and borrower as a
one-size-fits-all solution.
So, Chair Powell, is the Federal Reserve's view that there
should be a choice among qualified benchmarks as it relates to
those regional and community institutions that believe they are
more appropriate options, other than SOFR, given their business
model, lending activity, size, and customer base?
Mr. Powell. Yes. Honestly, I think we have been pretty
clear on that. We think the use of SOFR is voluntary and market
participants can use other suitable replacement rates if they
see fit.
Mr. Huizenga. So, SOFR needs to be put into legislation or
does there need to be more of that hard legacy escape and
certainty on that?
Mr. Powell. I do think we need legislation for the hard
tail, as you say. I think it would be appropriate to have SOFR
in the legislation, but not as an exclusive thing. It is going
to be the rate for--at least for capital markets and
derivatives and things.
Mr. Huizenga. I look forward to continuing this
conversation.
Mr. Powell. I would be glad to.
Mr. Huizenga. Thank you.
Chairwoman Waters. Thank you very much.
The gentleman from California, Mr. Sherman, who is also the
Chair of our Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets, is now recognized for 5
minutes.
Mr. Sherman. Thank you.
I want to thank and agree with the ranking member that our
witness deserves a second term. I want to thank Josh Gottheimer
for bringing up the importance of the State and local tax
deduction. And Mr. Huizenga focused our attention on LIBOR and
its great importance. And, Mr. Chairman, I know you have
testified just how critically important it is that we have
Federal legislation in that area.
I do want to correct any misconceptions about the
legislation that I am proposing. It is not the purpose of the
Federal Government to impose SOFR on any institution anywhere
in the country that writes a good instrument and specifies
whatever rate they want.
I am old enough to remember that most mortgages that were
adjustable were 11th District cost of funds, whatever they want
to use. The question is, do we want to have a voluntary system
where the instrument doesn't specify what rate to use? And if
voluntary means, well, the creditor volunteers one rate and the
debtor volunteers another rate, then my friends in the trial
lawyer field will have a heyday.
The focus here is not to force anything on anybody if they
draft an instrument that specifies what they want. But if they
have an instrument from which no one can determine what is the
amount of interest to be paid, we need to provide that answer.
We have to do it in a way that we are not indicating that SOFR
is the standard to be used in instruments going forward. It is
not the Federal rate, it is not the preferred rate, it is not
the rate that small banks will choose to use in many cases in
their instruments in the future.
I want to thank Chairman Powell for his testimony in the
past on the importance of wire fraud. I am disappointed that
you are not moving toward a payee-named system for wire fraud,
but I am pleased that you are looking at other ways to make
sure that we don't have people who wire their money to account,
``12345,'' thinking it is going to the person they are buying a
house from and instead it is going to a Nigerian prince.
I also want to applaud the Fed for consistently, year after
year, remitting $50- or $100 billion to the Federal Treasury
and, in effect, profit. And I know that this is unintentional
but I think you should focus on it because it is very
important.
As to a Federal digital currency, Chairman Powell, is it
the intention that any such currency would fully implement the
know-your-customer and anti-money laundering standards?
Mr. Powell. We are at the very early design stages, but the
answer to your question is going to wind up being yes.
Mr. Sherman. Good. And you have said that crypto wouldn't
become a currency. Crypto means hidden, and that is the great
advantage that cryptocurrencies will have over a Federal
digital currency, because they are designed to be crypto,
hidden from the U.S. Government, especially the IRS. And, of
course, that pleases what I call the anarchists, pseudo-
patriots, who half of the time are telling us that the Federal
Government needs to enforce laws and have a strong foreign
policy and enforce our sanctions and achieve our national
security goals without deploying our troops, and spend the
other half of their time being delighted whenever anyone
strikes a blow for liberty by evading our tax laws or sanctions
laws, et cetera.
Looking at fiscal policy, you can't determine or project
monetary policy without some guess as to what our deficit will
be. What do you use when you tell us what you are intending to
do with the monetary policy? What is your expectation on the
level of the Federal debt?
Mr. Powell. It is not so much the level of the Federal
debt. What we are looking at is basically spending and deficit
spending and that kind of thing. And by the way, the
assumptions we make are in the middle of the road. It is just
what the Congressional Budget Office (CBO) said.
Mr. Sherman. My time has expired. Thank you.
Chairwoman Waters. Thank you very much. The gentleman's
time has expired.
The gentleman from Kentucky, Mr. Barr, is now recognized
for 5 minutes.
Mr. Barr. Good afternoon, Chairman Powell. It's good to see
you. Thanks again for your leadership.
Inflation is the topic of the day. I want to talk a little
bit about timing and communication of normalization, with the
backdrop of accelerating inflation. And I understand your
position that some of this is transitory, and supply chain
bottlenecks that could work itself out. I also recognize the
slight change in the inflation-targeting framework under which
you are working.
But I do worry that if inflation expectations continue to
rise, regardless of these supply chain issues that resolve
themselves, you could have a self-fulfilling prophesy and
inflation could get away from the Fed.
My question is, given the fact that the FOMC has committed
to communicating any shift in the pace of asset purchases well
in advance to ensure market stability and clarity for market
participants, I worry that these movements in CPI and other
inflation metrics in recent months have proven to be pretty
rapid and significant. Is there a risk of upward price
pressures outpacing the Fed's preferred timeline for
communicating adjustments in its balance sheet policy and when
you start the tapering process?
Mr. Powell. No, there is nothing in the guidance or in our
framework that would prevent us from doing the right thing at
the right time.
Mr. Barr. Okay. So, you do not believe that inflation could
move so quickly that the Fed would be forced to make asset
purchase adjustments or even increase the Fed funds rate
precipitously without the requisite communications runway?
Mr. Powell. That is a separate question. I am just saying
we can deal with whatever happens with inflation within the
context of our framework and within the context of our
guidance. I don't expect the outcome that you are talking
about, which would be very surprising if something like that
happened, where we really had to move very quickly. It doesn't
tend to work that way, but I think we are in a good position to
move as is appropriate no matter which way things go.
Mr. Barr. You probably saw, Chairman Powell, The Wall
Street Journal article today, ``Higher Inflation is Here to
Stay For Years, Economists Forecast.'' What do these economists
have wrong, that the Fed has right? In other words, why is the
consensus at the FOMC that, maybe with the exception of Mr.
Kaplan with the Dallas Fed, that this is transitory as opposed
to a sticky inflation? Why, in your judgment, or the FOMC's
judgment, are these economists wrong? And speak to this issue
about self-fulfilling inflation expectations and why that is
not a concern.
Mr. Powell. Okay. I will come back to that. I don't have
that survey in front of me, but I think that, and you can
correct me here, the median estimate for inflation for 2022 was
less than 2.5 percent, and that is CPI, or maybe it was PCE, I
don't know. But that would be much more consistent with our
framework than with what our critics are saying. That would be
very much in the range of what FOMC participants are expecting,
or at the high end of it, but within that range.
So, I think that is what you may have in front of you,
Congressman, I don't know. I don't have that.
Mr. Barr. Here is what we as Members of Congress are
hearing, and I know you get this data and also anecdotal
evidence filtering up through your district banks. But I just
spoke to the Chamber of Commerce in central Kentucky at
lunchtime today. This inflation concern is real. It is not just
that lumber prices are up and the home builders are upset. And
it is not just that the fixed-income seniors are upset because
the price of food is up, and the restauranteurs are having to
pay more for food, and the trucking companies and the commuters
are having to pay more for fuel costs.
We are hearing, according to the National Federation of
Independent Business (NFIB), that 47 percent of small
businesses raised average selling prices in June. That is the
highest since 1981. I hope this is transitory, but I hope the
Fed is hearing the same thing that we are hearing.
Mr. Powell. We are. As you know, we have a great network
through the Reserve Banks. We hear that through a loudspeaker
every day. We are absolutely hearing that.
Let me get to your earlier question. If you want, I can go
back to expectation.
Mr. Barr. Sure.
Mr. Powell. That is absolutely the thing we monitor
carefully, and we don't see any problems on that front. But if
expectations do move up in a way that is troubling, which is to
say materially above and for a persistent time, we would be
concerned and we would react to that.
Mr. Barr. I appreciate your vigilance, Mr. Chairman.
And I yield back.
Chairwoman Waters. Thank you very much.
The gentleman from Missouri, Mr. Cleaver, who is also the
Chair of our Subcommittee on Housing, Community Development,
and Insurance, is now recognized for 5 minutes.
Mr. Cleaver. Thank you, Madam Chairwoman.
And thank you, Chairman Powell, for being here with us
today. And let me preface my one question by saying that we
have been working with your staff on the issue of the Community
Reinvestment Act (CRA). Our chairwoman has made affordable
housing appropriately and necessarily the major issue of our
time, and hopefully the whole nation is going to be focused on
it even as we are struggling with the short-term inflation. So,
thank you for your participation and support. I hope the OCC
can participate as seriously as your staff has done.
But my one question is, although I represent Missouri's
Fifth Congressional District, I was born and raised--and all of
my family members are still--in Texas. A local TV station down
in Dallas did an investigation, and it was very alarming
because they found that the lack of banking services in low-
income and minority communities in Dallas County south of I-
30--I don't expect you to be familiar with that--but the
Community Reinvestment Act requires that banks draw assessment
areas that meet the credit needs of entire communities. And
this TV station, WFAA, found that 20 percent of banks in Dallas
County drew maps that exclude all or parts of southern Dallas
County. And in one example, a bank in Dallas County was found
to service all of Ellis County, where I was born, and
Somervell, Hood, Parker, and Tarrant Counties, which are Fort
Worth counties, but only the half of Dallas County which is
above I-30. And the Federal Reserve identified no evidence of
discrimination.
The CRA, though, requires that the assessment areas contain
entire counties, cities, or towns, and not arbitrarily exclude
low- to moderate-income geographies. I am just rambling on, but
let me ask you the question, and that is, what more needs to be
done to ensure that bank assessment areas incorporate not only
tracts where banks have significant activity, but also low- to
moderate-income or minority communities which are within the
same geographical areas, where lower bank activity actually may
reflect a legacy of redlining or discrimination in the housing
and finance sectors?
I apologize for going on and on, but I needed to go through
all of that to get that question to you.
Mr. Powell. Thank you. And you or your staff brought this
article to the attention of our staff, who brought it to my
attention, and I have had a chance to look at it. And, yes, it
is very troubling on its face, the article. And it just shows
that we need real vigilance in making sure that banks honor
their obligations to serve minority communities, low- and
moderate-income communities and minority communities within
their operating areas.
So, that one got our attention, and we can't talk about
individual institutions, of course, but we take this very
seriously, and we appreciate your bringing it to our attention.
Mr. Cleaver. Thank you, Mr. Chairman.
I yield back, Madam Chairwoman.
Chairwoman Waters. Thank you very much, Mr. Cleaver.
The gentleman from Texas, Mr. Williams, is now recognized
for 5 minutes. And we are certainly going to hear about what is
happening in the automobile industry.
Mr. Williams of Texas. Thank you for that lead-in, Madam
Chairwoman.
Chairman Powell, I am actually sitting here in one of my
car dealerships in Texas and listening to how used car prices
are driving inflation, which they do, but with that in mind, I
cannot say that this is the very best time to trade your car
in. You are going to get more than you ever thought you would
get. But it is an issue. The idea that used cars are
appreciating is something that you would have never thought you
would have said, but we are seeing it as we speak, and that is
the truth.
I want to thank you for coming today. And yesterday, I had
the pleasure of speaking with some Main Street American
business leaders, of which I am one, as you know, and how they
have been recovering from the COVID-19 pandemic in the Small
Business Committee where we talk to them.
Some of the issues that were brought up were that these
businesses were having trouble finding workers, as we talked
about today; inflation increasing and the cost of goods, and
that they are purchasing from their large suppliers, they are
paying more; and then the threat of tax increases.
Now, one business owner in my district from Cleburne,
Texas, and Congressman Cleaver knows where that is, reminded us
that this isn't very complicated. Small businesses operate on
very tight margins and any increase in the tax rate is
detrimental to their ability to operate. Specifically, he
mentioned that they were looking to plan out their capital
expenditures for next year. They have already begun investing
less simply because of the threat of higher corporate and
capital gains taxes coming in 2022.
I want to make sure that the factors that the Federal
Reserve is tracking, which could be a drain on the economy, are
aligned with what Main Street America's fears are that we are
hearing from business people all over the country and certainly
in our States and our districts.
So, Chairman Powell, as you look at the economic outlook of
our small businesses and the country moving forward, can you
talk about some of the factors that could be limiting growth,
to which the Federal Reserve is paying attention?
Mr. Powell. I would be glad to. I have to say, the first
thing that comes to mind is difficulties, challenges in hiring.
We are hearing that very, very widely. If you look at our Beige
Book, in all districts, small businesses are having a hard time
hiring. And it is, again, widespread, and we think that will
abate, though, as the factors that I talked about today passing
will be gone later this year and we will see a lot of hiring.
That is one.
I think there is a lot of optimism. There is a lot of
demand. People have money to spend, so we are hearing positive
things about that. I know people are very worried about
inflation too. We hear that loud and clear from everybody. It
is really going through the economy and through every business.
And as we have discussed a lot here today, it does have the
feeling of something that is associated with the reopening of
the economy and that things should settle down as the economy
is fully reopened and supply and demand recalibrate and maybe
prices move around and people get into their new jobs and we
are in a new normal, I hope, soon. But as of right now, this is
something that is on every small businessperson's mind.
Mr. Williams of Texas. Thank you. I wanted to get your
quick take on the speed with which the private sector was able
to get COVID relief money to those in need. We have not seen
the same success through the SBA's shuttered venue program,
which was created back in December, and still hadn't gotten out
the money to many of these struggling businesses.
Moving forward, do you think we should be looking to get
the private sector more involved as we deal with distributing
government aid?
Mr. Powell. That is a question for you. I will say, if I
may, the real way that our emergency lending programs worked
was they agitated or they supported as a backstop private
markets to work. And having the private markets step in and
make the loans was just so much better than having us make the
loans and having those done. In that sense, it really worked,
the backstops did. They didn't have to make the loans because
the market started working and that is always a better answer.
Mr. Williams of Texas. Thank you. Quickly, can you
elaborate on what the Financial Stability Board (FSB) means
when it says that climate-related risk might be transferred or
amplified, and can you give me a quick potential scenario or
example?
Mr. Powell. Without having it in front of me, I think what
the FSB would mean about that is that the financial sector,
financial institutions could amplify a risk and it would be
along the lines of changes in the climate that had very bad
effects on a particular agricultural area, for example, over
time, and that bank failures have a way of amplifying shocks
rather than absorbing them.
Mr. Williams of Texas. Okay. Thank you.
I yield back, Madam Chairwoman. And just in closing, this
is a great time to buy a car.
Chairwoman Waters. Thank you very much.
The gentleman from Georgia, Mr. Scott, who is also the
Chair of the House Agriculture Committee, is now recognized for
5 minutes.
Mr. Scott. Madam Chairwoman, I just want to say that my
great colleague, Congressman Williams, is not only just a great
entrepreneur in the car business, he is also one of the great
all-star third basemen for my Atlanta Braves in Major League
Baseball.
Chairwoman Waters. That is right.
Mr. Scott. Yes, indeed.
Chairwoman Waters. That is right. Thank you for reminding
us.
Mr. Scott. He is a good man.
Chair Powell, it is good to have you back.
Last month, you stated before the House Select Subommittee
on the Coronavirus Crisis that, ``A recent decline in commodity
prices was evidence that price pressures will cool as supply
bottlenecks from reopening the economy are worked out and
stimulus fails, maintaining that our concurrent inflation is
temporary and would eventually move back to a 2 percent
target.''
I want to ask you, while there is no doubt that soaring
prices for commodities have fueled a sense of optimism for our
farmers, our agriculture producers, this growing season, given
the volatility around the price of commodities, are your views
on price pressures still the same today?
Mr. Powell. I would say, we continue to see prices come in
and, this week, exceed our expectation. And that is not what we
are hoping to see, but this latest CPI reading was above where
forecasters thought it would be, pretty much all forecasters.
But, yes, it is still the same story. It is still the same
parts of the economy that are producing this inflation. It is a
pretty narrow group of things that are producing these high
readings. But we are anxious, like everybody else, to see that
inflation pass through.
Mr. Scott. Thank you for that answer. And I agree that a
return to a more stable inflation rate would indeed be
advantageous to our economy. But as we know, the increase in
commodity prices drives up consumer prices over the long-term,
even after inflation returns to normal. And, unfortunately,
wage increases will not keep pace, creating real hardship for
people on fixed incomes, retirees, and many of our low-income
households.
Let me ask you this: Considering how the incremental wage
increases failed to keep pace with the rising costs of living,
can you elaborate for us on what trends the Fed expects to see
between commodity inflations and earnings, at least until we
have returned to a 2 percent inflation rate?
Mr. Powell. We don't have any ability to forecast commodity
prices any more than anyone else does. They do what they are
going to do. Again, our expectation is that, over time, the
reopening of the economy will be a process that we go through
and that these imbalances that we are seeing will abate, and we
hope that happens sooner--it is very difficult to say exactly
when that will happen. It seems likely that it will happen, but
the amounts by which inflation will move up and the timing of
it passing through are very hard to predict.
Mr. Scott. How much time do we have? How much longer will
we be in this thrust? You feel confident it will happen. What
is your best estimate about when we will be back to normal?
Mr. Powell. Before we get fully vaccinated, I think we will
know generally whether this framework for understanding it is
the right one. So, we would want to begin to see more things
like what happened with lumber. We would want to begin to see
more of these prices flatten out and then perhaps come down,
hopefully as lumber did. That is what we would like to see.
Ultimately, though, price stability is half of our mandate.
And if we see inflation moving up in a way that is really
troubling and that risks a period of troublingly high
inflation, then we will use our tools to bring inflation back
down to 2 percent.
Mr. Scott. Thank you very much, Chairman Powell. And you
are doing a great job. Keep it up.
Chairwoman Waters. Thank you very much. The gentleman's
time has expired.
The gentleman from Arkansas, Mr. Hill, is now recognized.
Mr. Hill. Thank you, Madam Chairwoman.
And it is great, Chair Powell, to see you, to have you back
before the committee. All of our members really appreciate the
chance to visit and seek your wisdom on all of these topics.
I do hope the Fed is right that this persistent inflation
that we are experiencing--record high inflation for many, many
years is, in fact, transitory. It's super important, too, for
families here in central Arkansas who only have $48,000 in
median income, and they are all telling our offices that they
are seeing such persistent and large price increases from their
grocery cart to their gas to their home improvement projects.
And it is a bigger difference for them than it is for some
economist at the Federal Reserve who makes $175,000 a year, and
gets to work from home, and doesn't bear all of those normal
challenges that a family here in Arkansas does. So, I hope the
FOMC is right that it is transitory.
Since the beginning of January 2021, the balance sheet of
the Fed has increased by $750 billion. We are now over $8
trillion at the Federal Reserve. And as we have talked about
today, you continue to purchase about $120 billion in assets
per month: $80 billion in U.S. Treasuries; and $40 billion in
agency MBS.
Of the total balance sheet, that makes up about 29 percent
of agency MBS and about 63 percent in the U.S. Treasury
securities. Is that approximately right?
Mr. Powell. That sounds about right.
Mr. Hill. And, Chair Powell, isn't it true that the recent
July Monetary Policy Report outlined that, ``the housing sector
remains remarkably strong.'' I know you have testified some
about housing, but do you agree that is what the Monetary
Policy Report says?
Mr. Powell. Yes.
Mr. Hill. Given the acceleration of home prices that you
and I talked about back in February when you were before the
committee, and the vigorous expansion of mortgage lending, is
it really necessary to be buying the $120 billion of assets a
month, particularly as it relates to the MBS portion? What is
the logic in maintaining that MBS portion?
Mr. Powell. Really, we look at the whole things that we are
buying. It is Treasuries and mortgage-backed securities, and
they have roughly the same kind of effect on the economy,
either of them. MBS maybe have very modestly greater effects on
housing, and that is not why we were buying them in the first
place.
But as you know, we are in a process of looking at tapering
those purchases. We had a meeting about it back in June. We
have another one in a couple of weeks. And if we continue to
make progress toward our goal that we articulated last year,
then you will see us begin to reduce those purchases.
Mr. Hill. I noted that Fed Governor Waller made some
comments after the recent meeting, saying that right now, the
housing markets were on fire and don't really need any other
unnecessary support. Will that be taken into consideration as
you look to that taper and the potential design of how one
would taper?
Mr. Powell. Yes. I would say the timing and the composition
of the taper are the two main things, along with whether we are
meeting our goal of substantial further progress in December.
Those will be in the conversation for sure.
Mr. Hill. And help me with something that is a flow of
funds contradiction for me. We have this massive--I know you
don't refer to it as QE, so I won't; I will be differential to
you--stimulus, and buying $120 billion of securities monthly,
and yet we have seen huge spikes in the Federal Reserve's
reverse repos, which in turns drains that liquidity back out of
the system, soaking it up.
How does that make sense to an ordinary review? And I do
think your description in the Monetary Policy Report was good,
but how does that make sense to the markets?
Mr. Powell. The first repo facility is really there to keep
the Federal funds rate in the target, and for a couple of big
reasons, there has been downward pressure on short-term rates.
Mr. Hill. Wouldn't that indicate that there is just not
that much demand to take those liabilities and invest them in
assets in the banking system, that maybe we have essentially
way, way too much liquidity on the books of the banks?
Mr. Powell. You could say there is a shortage of safe short
assets, you know [inaudible], and so that is why that is
happening. There is just a shortage of T-Bills, not a lot of T-
Bills, and the Treasury general account is shrinking down too,
so--
Mr. Hill. Last topic, and we can answer this offline, but
Congressman Himes and I have introduced the 21st Century Dollar
Act to help our strategy for the U.S. dollar. I am interested
if you are going to maintain the cut-off date for our
international swaps through December 31st.
Mr. Powell. Those swaps really work. They did a great job,
as you know. They were a fundamental part of our program to
stabilize the global financial markets and dollar funding
markets, in particular, which are really important for our
economy. We have extended them to December 31st. I made a
decision not to extend them beyond that. I don't know that we
would unless conditions change.
Mr. Hill. Thank you. I yield back.
Chairwoman Waters. Thank you very much.
The gentleman from Illinois, Mr. Foster, is recognized for
5 minutes.
Mr. Foster. Thank you, Madam Chairwoman.
I would like to, first, extend my apologies for having
missed most of this hearing. We have actually found something
more interesting than Fed Monetary Policy, which is a hearing I
was chairing in the House Science Committee on the origins of
the coronavirus, which was, I have to say, a rather interesting
subject.
And I also would like to thank my colleague from Arkansas
for stealing the question that I intended to ask about the
differential effects of buying mortgage-backed securities
versus other government-guaranteed assets. And I appreciate
your answer to that.
One of the good things the Fed has been doing for the last
several years is instead of just publishing household net worth
as if there was only one consumer in the country, actually
publishing it by wealth slices. And you can see in your
numbers, for example, that the top 1 percent wealthiest have
about a third of the wealth in our country; the next 9 percent
have about another third; and then between 50 percent and 90
percent have pretty much the last third; and the bottom half,
according to the numbers by the Federal Reserve, have only 2
percent of the wealth. And this is very much related to how you
model the economy, because there are many of the policies that
we are thinking of implementing and many of the effects of your
policies that have very different effects on the top versus the
bottom. For example, things that affect stock market valuations
essentially only affect the top 10 percent of the United
States.
Do you incorporate that in your modeling, when you are
trying to look into the future? Are you now using economic
models that look at the different behavior of the different
wealth strata in the United States?
Mr. Powell. Yes, where it is appropriate. For example,
those are much higher marginal propensities to consume among
people at the lower end of the income spectrum, and lower at
the top, we do incorporate those. Again, where it is
appropriate, we do that, yes. Also, in modeling monetary
policy, it matters as well.
Mr. Foster. Certainly. If you have, sir, some sort of
write-up on that, that you could get to us, I would very much
appreciate it. Because I think that getting the coefficients
there correct is really important to understanding how your
policy decisions are going to affect not just the American
economy.
Do you have any general feelings on the apparent disconnect
of the stock market with the feelings of ordinary families?
There were instances during the COVID crisis where there was a
scream of pain from the general public, and yet the stock
market was hitting record highs. What is your thinking on that?
Mr. Powell. I never express an opinion on the level of the
stock market, but remember what the stock market is doing, it
is pricing in future cash flows, as you well know. So, it is
thinking ahead and, I think, in this particular--what happened
last year was pretty early on. At the beginning, there was this
crash, and then pretty early on, after the CARES Act passed and
the things that we did, markets really recovered very quickly,
beginning pretty early, looking ahead to what became a pretty
strong recovery. And markets were more right than a lot of
forecasters were, because the recovery did exceed expectations.
I can't comment on the actual level, though.
Mr. Foster. And are you fairly satisfied with your response
to the stress on the Treasury's market? Do you need any new
tools? Would you like to have any more--what is the current--or
the thinking in retrospect on that?
Mr. Powell. I think the work is not done there. I think we
are in the middle of bringing that work to a conclusion about
what went wrong, what are the right tools, how deep out into
the tail do we need to insure, and all of those questions, I
think, will come around. I don't think we are done with that
project at all. I think this will be over the next 12 months,
probably. There will be a lot of ideas and discussion. The idea
of central clearings is out there. There are a lot of ideas.
Mr. Foster. Just the imbalance of supply and demand may
have been one of the critical factors there. And what you did
there may actually have been very important in preserving the
dollar's position as the currency that you want to have your
country's economy connected to. And so, that was well done.
Anyway, thank you, again. You are doing a heck of a job,
and the end of the tunnel is in sight, and I hope we will all
come out of this in good shape.
Mr. Powell. Thank you.
Chairwoman Waters. Thank you very much.
Ladies and gentlemen, Members, we have a hard stop that we
negotiated with Mr. Powell, and he is going to have to leave
now, and so we will not be able to call on any more Members at
this time. But those who were not able to raise their questions
or to make their statements will be first in line when he
returns.
I would like to thank Mr. Powell for his testimony today.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to this witness and to place his responses in the record. Also,
without objection, Members will have 5 legislative days to
submit extraneous materials to the Chair for inclusion in the
record.
With that, this hearing is adjourned.
[Whereupon, at 2:57 p.m., the hearing was adjourned.]
A P P E N D I X
July 14, 2021
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