[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
MONETARY POLICY AND THE
STATE OF THE ECONOMY
=======================================================================
HYBRID HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
JUNE 23, 2022
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-89
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
48-333 PDF WASHINGTON : 2023
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 TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts JOHN ROSE, Tennessee
RITCHIE TORRES, New York BRYAN STEIL, Wisconsin
STEPHEN F. LYNCH, Massachusetts LANCE GOODEN, Texas
ALMA ADAMS, North Carolina WILLIAM TIMMONS, South Carolina
RASHIDA TLAIB, Michigan VAN TAYLOR, Texas
MADELEINE DEAN, Pennsylvania PETE SESSIONS, Texas
ALEXANDRIA OCASIO-CORTEZ, New York RALPH NORMAN, South Carolina
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:
June 23, 2022................................................ 1
Appendix:
June 23, 2022................................................ 57
WITNESSES
Thursday, June 23, 2022
Powell, Hon. Jerome H., Chair, Board of Governors of the Federal
Reserve System................................................. 4
APPENDIX
Prepared statements:
Powell, Hon. Jerome H........................................ 58
Additional Material Submitted for the Record
Hill, Hon. French:
Written statement of the American Enterprise Institute....... 63
Powell, Hon. Jerome H.:
Monetary Policy Report of the Board of Governors of the
Federal Reserve System, dated June 17, 2022................ 74
Written responses to questions from Representative Timmons... 151
MONETARY POLICY AND THE
STATE OF THE ECONOMY
----------
Thursday, June 23, 2022
U.S. House of Representatives,
Committee on Financial Services
Washington, D.C.
The committee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the committee] presiding.
Members present: Representatives Waters, Sherman, Meeks,
Green, Perlmutter, Himes, Beatty, Vargas, Gottheimer, Gonzalez
of Texas, Lawson, Axne, Casten, Pressley, Torres, Adams, Dean,
Ocasio-Cortez, Adams, Garcia of Texas, Williams of Georgia,
Auchincloss; McHenry, Lucas, Posey, Luetkemeyer, Huizenga,
Wagner, Barr, Williams of Texas, Hill, Emmer, Loudermilk,
Mooney, Davidson, Budd, Hollingsworth, Rose, Steil, Timmons,
Sessions, and Norman.
Chairwoman Waters. Good morning. Before we get started with
today's hearing, I would like to ask unanimous request to adopt
this resolution that was made available to all Members that
names our newest committee member, Mr. Norman, to his
subcommittee assignments.
Without objection, it is so ordered.
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.
Welcome back, Chair Powell, and congratulations on your
confirmation as Chair of the Federal Reserve. Since you last
came before the committee, Americans continue to struggle to
make ends meet as the prices of housing, gas, and groceries
have skyrocketed. While it is important for the Fed to fight
inflation, I would caution against any approach that ignores
the Fed's maximum employment mandate, and results in a
recession, with millions of people losing their homes and jobs.
I hope that you have noted that last week the House passed
my bill, H.R. 2543, the Financial Services Racial Equity,
Inclusion, and Economic Justice Act, which directs the Federal
Reserve to consider the impact of all of its decisions,
including setting interest rates on communities of color and
underserved communities. Congress has a role in fighting
inflation also.
Housing is one of the largest contributors to inflation,
and the housing shortage has allowed corporate landlords to
hike the rent, forcing families to make difficult cuts
elsewhere in their budgets. The Fed's interest rate hikes will
make borrowing more expensive and, thereby, could help reduce
the out-of-control housing crisis. But without action by
Congress, inflationary pressures will remain, because there is
simply not enough affordable housing being built, and there
won't be until Congress makes the necessary investments. That
is why it is so important that we pass the housing title of the
Build Back Better Act, which provides over $150 billion towards
new housing construction, modernizing existing structures for
the long term, and providing support so that people can be
stably housed.
We are also facing corporate consolidation and greed.
Without healthy competition to drive down prices,
megacorporations, driven by profit, are exploiting their
economic power to squeeze Americans to the breaking point.
Democrats in Congress put forth solutions to tackle inflation,
but my colleagues across the aisle have consistently voted
against every solution.
Let me go over some examples. Democrats passed a bill with
$28 million in funding to address the baby formula shortage,
but Republicans voted, ``no.'' We passed legislation to crack
down on price gouging from oil and gas companies, and
Republicans voted, ``no.'' Last week, Democrats passed my
Financial Services Racial Equity, Inclusion, and Economic
Justice Act, and you guessed it: Republicans voted, ``no.''
Republicans can talk about problems, but they have zero
solutions.
Let's also not forget that the Federal Reserve has more
duties beyond monetary policy. Bank mergers and banking deserts
are affecting access to credit for low-income consumers and
communities of color, and working families who turn to
cryptocurrency to generate wealth are now seeing their hard-
earned savings disappear. Now more than ever, the Federal
Reserve must work with other regulators to properly oversee the
cryptocurrency market and provide guidance on a more stable
alternative to volatile cryptocurrencies.
Lastly, the confirmations of Lisa Cook, Susan Collins, and
Philip Jefferson are historic, but more must be done to ensure
diversity at the Federal Reserve.
So, Chair Powell, I look forward to hearing your testimony
this morning.
I now recognize the ranking member of the committee, the
gentleman from North Carolina, Mr. McHenry, for 4 minutes to
give an opening statement.
Mr. McHenry. Thank you, Madam Chairwoman, and thank you,
Chairman Powell, for being here with us again.
A year ago, President Biden tried to buy support by signing
into law a $2-trillion stimulus bill. What he did was sell
ordinary Americans, who are now repaying all of that, ``free
money.'' Inflation is the worst it has been in 40 years.
American families are rethinking their long-awaited summer
vacations because they can't afford a $5-a-gallon price at the
pumps. Costs are spiraling out of control for everything from
housing and food to airfare, cars, medical care, and clothing.
Democrats are still on the hunt for the scapegoat. They blamed
oil companies, the war in Ukraine, and supply chain issues in
Asia, but let's be clear: It is the Democrats' trillions in
wasteful spending that resulted in higher grocery bills and
soaring gas prices.
President Biden continues to deny that the so-called
American Rescue Plan contributed to inflation, recently calling
that idea, ``bizarre.'' Well, economists across the ideological
spectrum, from former Clinton Treasury Secretary Larry Summers,
to Jason Furman, to Michael Strain, don't think it is bizarre.
Even the left-leaning San Francisco Fed found that the American
Rescue Plan contributed to price increases. And now, millions
of Americans need to be rescued from the Democrat's American
Rescue Plan.
I am confident that Chair Powell is taking this emergency
seriously, and as I have said many times before, I think he is
the right man for the job, and he is. But how the Fed manages
the next few months will be as critical as any other period
during the last 4 decades. No one at the Central Bank was
prepared for prices rising at a clip of 8 percent, with even
core inflation rising and running at 6 percent now. Republicans
have long warned about the size of the Fed's balance sheet, but
it grew by nearly a trillion dollars over the last 12 months
alone. And now it seems the previous predictions by the Federal
Open Market Committee (FOMC) about economic projections are
wrong, and they are altering their course. Simply put, the Fed
has its work cut out for it.
Lastly, I want to address the left's ongoing efforts to
expand the Fed's dual mandate. Republicans have been on the
record opposing this, and I hope that the skyrocketing
inflation unleashed under the Biden Administration puts an end
to these discussions. The Fed should be focused on price
stability. That should be their single-minded focus at this
moment in time. It is out of touch for Democrats to keep
pushing mission creep at the Fed when American families are
struggling to feed themselves and to get to work. The Fed is a
serious place with serious business to attend to. It needs to
focus on the middle-class, not the chirping political class.
This was true before inflation broke out, and it is all the
more obvious today.
I hope that Chair Powell will deliver that message to his
colleagues throughout the institution, and, again, I want to
thank Chair Powell for his testimony today, for his willingness
to engage with policymakers on the Hill, and for his openness
in what has been a more closed-off institution. We have a
massive cleanup, and we know that you are taking your job
seriously. And I am glad you are taking your job seriously.
And with that, Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you, Ranking Member McHenry. I now
recognize the gentleman from Connecticut, Mr. Himes, who is
also the Chair of our Subcommittee on National Security,
International Development and Monetary Policy, for 1 minute to
give an opening statement.
Mr. Himes. Thank you, Madam Chairwoman, and welcome,
Chairman Powell. Congratulations on your confirmation.
I don't remember a moment as consequential as this one for
the Federal Reserve or as potentially testing of its
leadership. I think I have to go back to the end of 2008 and
the first quarter of 2009 to think of a moment that was quite
as important, as Americans watched the economy collapse around
their ears and their jobs and assets being lost. There is a
very real possibility that Americans will be caught in a vise,
an economic vise not of their own making, between inflation,
which makes their everyday lives unaffordable, and the
possibility much contemplated by economists of a recession.
Simply put, as one of the last Members of Congress to get out
of the Chamber when it was under attack on January 6, 2021, I
don't believe that our democracy can sustain either runaway
inflation or another recession, and despite the rhetoric you
will hear all day today here, there is not a lot that we can or
will do. Much of this rests on your shoulders.
Chairman Powell, I just ask that as you make your
decisions, you think not just of the numbers and the economics,
but of the importance of sustaining this nation's democracy.
Chairwoman Waters. Thank you, Mr. Himes. I now recognize
the ranking member of the Subcommittee on National Security,
International Development and Monetary Policy, the gentleman
from Kentucky, Mr. Barr, for 1 minute to give an opening
statement.
Mr. Barr. As we face the worst inflation the country has
seen in 4 decades, I am encouraged to have Mr. Powell leading
our Central Bank, and I am hopeful that the Fed will rise to
the occasion. At the same time, it is important to remember the
following. Just last year, Democrats were ignoring inflation
warnings to pass a $2-trillion stimulus bill. They were pushing
the Fed to solve climate change and social ills, and they
flirted with unconventional monetary tools like yield curve
control. Today, as gas prices top $5 a gallon, these left-wing
ideas seem like a fever dream from an alternate universe, but
many Democrats fell for them at the time, and they will likely
pursue them again if inflation subsides.
The lesson for the Fed is clear: It needs to focus on doing
a limited number of jobs well and not get distracted by those
who want it to be all things to all people. Specifically, the
Fed should be laser-focused on its price stability mandate. And
even as you acknowledge the risk of recession, and as everyone
desires a soft landing, I encourage the Fed to have the
fortitude to prioritize defeating this inflation scourge. Chair
Powell, I hope you are hammering this message home with the
Fed, as ordinary Americans see their paychecks eaten away under
Democrat mismanagement of our economy.
Chairwoman Waters. And now, I want to welcome today's
distinguished witness, the Honorable Jerome Powell, Chair of
the Board of Governors of the Federal Reserve System.
Chair Powell, you are now recognized for 5 minutes to
present your oral testimony.
And without objection, your written statement will be made
a part of the record.
STATEMENT OF THE HONORABLE JEROME H. POWELL, CHAIR, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Powell. Chairwoman Waters, Ranking Member McHenry, and
members of the committee, I appreciate the opportunity to
present the Federal Reserve's Semiannual Monetary Policy
Report.
I will begin with one overarching message. At the Fed, we
understand the hardship that high inflation is causing. We are
strongly committed to bringing inflation back down, and we are
moving expeditiously to do so. We have both the tools we need
and the resolve it will take to restore price stability on
behalf of American families and businesses. It is essential
that we bring inflation down if we are to have a sustained
period of strong labor market conditions that benefit all. I
will review the current economic situation before turning to
monetary policy.
Inflation remains well above our longer-run goal of 2
percent over the 12 months ending in April. Total Personal
Consumption Expenditures (PCE) prices rose 6.3 percent.
Excluding the volatile food and energy categories, core PCE
prices rose 4.9 percent. The available data for May suggests
that the core measure likely held at that pace or eased
slightly last month. Aggregate demand is strong, supply
constraints have been larger and longer-lasting than
anticipated, and price pressures have spread to a broad range
of goods and services. The surge in prices of crude oil and
other commodities that resulted from Russia's invasion of
Ukraine is boosting prices for gasoline and fuel and is
creating additional upward pressure on inflation. And COVID-19-
related lockdowns in China are likely to exacerbate ongoing
supply chain disruptions. Over the past year, inflation has
also increased rapidly in many foreign economies, as discussed
in a box in the June Monetary Policy Report.
Overall economic activity edged down in the first quarter,
as unusually sharp swings in inventories and net exports more
than offset continued strong underlying demand. Recent
indicators suggest that real GDP growth has picked up this
quarter with consumption spending remaining strong. In
contrast, growth in business fixed investment appears to be
slowing, and activity in the housing sector looks to be
softening, in part reflecting higher mortgage rates. The
tightening in financial conditions that we have seen in recent
months should continue to temper growth and help bring demand
into better balance with supply.
The labor market has remained extremely tight, with the
unemployment rate near a 50-year low, job vacancies at historic
highs, and wage growth elevated. Over the past 3 months,
employment rose by an average of 408,000 jobs per month, down
from the average pace seen earlier in the year, but still
robust. Improvements in labor market conditions have been
widespread, including for workers at the lower end of the wage
distribution, as well as for African Americans and Hispanics. A
box in the June Monetary Policy Report discusses developments
in employment and earnings across all major demographic groups.
Labor demand is very strong, while labor supply remains
subdued, with the labor force participation rate little changed
since January.
The Fed's monetary policy actions are guided by our mandate
to promote maximum employment and price stability for the
American people. My colleagues and I are acutely aware that
high inflation imposes significant hardship, especially on
those least able to meet the higher costs of essentials like
food, housing, and transportation. We are highly attentive to
the risks that high inflation poses to both sides of our
mandate, and are strongly committed to returning inflation to
our 2-percent objective.
Against the backdrop of the rapidly-evolving economic
environment, our policy has been adapting, and it will continue
to do so. With inflation well above our longer-run goal of 2
percent, and an extremely tight labor market, we raised the
target range for the Federal funds rate at each of our past
three meetings, resulting in a 1\1/2\ percentage point increase
in the target range so far this year. The committee reiterated
that it anticipates that ongoing increases in the target range
will be appropriate. In May, we announced plans for reducing
the size of our balance sheet and shortly thereafter began the
process of significantly reducing our securities holdings.
Financial conditions have been tightening since last fall and
have now tightened significantly, reflecting both policy
actions that we have already taken and anticipated actions.
Over the coming months, we will be looking for compelling
evidence that inflation is moving down, consistent with
inflation returning to 2 percent. We anticipate that ongoing
rate increases will be appropriate. The pace of those changes
will continue to depend on the incoming data and the evolving
outlook for the economy. We will make our decisions meeting by
meeting, and we will continue to communicate our thinking as
clearly as possible. Our overarching focus is using our tools
to bring inflation back down to our 2-percent goal and to keep
longer-term inflation expectations well-anchored.
Making appropriate monetary policy in this uncertain
environment requires a recognition that the economy often
evolves in unexpected ways. Inflation has obviously surprised
to the upside over the past year, and further surprises could
be in store. We, therefore, will need to be nimble in
responding to incoming data and the evolving outlook, and we
will strive to avoid adding uncertainty in what is already an
extraordinarily challenging and uncertain time. We are highly
attentive to inflation risks and are determined to take the
measures necessary to restore price stability. The American
economy is very strong and well-positioned to handle tighter
monetary policy.
To conclude, we understand that our actions affect
communities, families, and businesses across the country.
Everything we do is in service to our public mission. We at the
Fed will do everything we can to achieve our maximum employment
and price stability goals. Thank you, and I look forward to
your questions.
[The prepared statement of Chairman Powell can be found on
page 58 of the appendix.]
Chairwoman Waters. Thank you very much. Chair Powell, at
your Senate confirmation hearing, you were asked about the
possibility that inflation is being driven by corporations and
concentrated sectors of the economy. You said, ``That could be
right. It could also just be, though, that demand is incredibly
strong and that they are raising prices because they can.''
We are all seeing and feeling the effects of inflation on
consumer pocketbooks, but corporate profit margins are not
hurting. In 2021, the profit margins of the S&P 500 Index
surpassed 12 percent, the highest profit margin on record, and
it is expected to be even higher in 2022. Corporate greed and
consolidation are driving higher and higher prices for
consumers above and beyond any inflationary pressures.
Just last quarter, Tyson Foods, which sells 1 out of every
5 pounds of meat sold in the United States, claimed that their
higher prices are due to rising labor and freight costs, yet
they still managed to net an additional half-a-billion dollars
in quarterly profits.
When it comes to rents, a corporate landlord recently
remarked, ``We have an unprecedented opportunity to really
press rent on renewals because the country is highly-occupied.
And so, where are people going to go? They can't go anywhere.
We have a tremendous opportunity to press both on renewing
leases for citizen residents, and to reset market rates, which
we have reset numerous times, even this year.''
This kind of blatant profiteering on the backs of
hardworking families is simply outrageous. Could you elaborate
on the role that corporations play in setting prices and how
that is affecting inflationary pressures today? Would you also
elaborate on what you meant when you said that perhaps
corporations are raising prices, ``because they can?''
Mr. Powell. Sure. Matters of concentration in the economy
represent a series of interesting questions that are largely
not settled. For one thing, it is clear that our economy has
become more concentrated, largely due to lower levels of
formation of smaller businesses; that has happened. It is not
at all clear that there is a connection between a more-
concentrated economy and, for example, inflation. And, of
course, matters of corporate concentration are outside the
jurisdiction of the Fed. Those are for the competition
authorities and really not for us to discuss.
In terms of why prices are going up, I think a lot of the
places where prices have gone up quite a bit have been
situations where supply is constrained and demand is very
strong. Take cars, for example. Demand for cars went up a great
deal. During the pandemic, people wanted to ride in cars rather
than public transportation, and they wanted to move to the
suburbs and things like that. Rates were low. The economy was
stronger than people expected. But the companies couldn't
really make more cars, because they couldn't raise their
output, because of the lack of semiconductors. So when demand
hits fixed supply, what happens is that prices go up, and
margins went up. And I think as the economy returns to normal,
we would expect those profit margins to return to more normal
levels.
Chairwoman Waters. Chairman Powell, the example that I gave
of Tyson Foods and the fact that they said that their prices
were rising due to labor and freight costs, yet they managed to
net an additional half-a-billion dollars in quarterly profits,
how do you explain that?
Mr. Powell. I am not familiar with their profit and loss
statement, but I will say, and, again, there may be particular
industries where there are competition issues. I don't know
that. It is really not our focus or our authority.
Chairwoman Waters. Do you have the opportunity to look at
rising costs and identify corporations where they are gaining
substantial profits, yet they keep raising their prices? Do you
have a way of examining that?
Mr. Powell. I think we can see that, but I think our job is
to keep maximum employment and price stability. We are not in
the business of regulating individual companies or determining
whether their actions, for example, are anticompetitive or that
sort of thing. That is more for elected people and also for the
competition authorities. We do look at that, and, again, I
think a great deal of the price increases that you saw were a
matter of supply being unable to meet demand, and the result
was prices moving up. In many cases, that was the story.
Chairwoman Waters. Thank you very much. The gentleman from
North Carolina, Mr. McHenry, who is the ranking member of the
committee, is now recognized for 5 minutes.
Mr. McHenry. Thank you, Madam Chairwoman. On this debate
about corporate profits, I would commend to the committee
Secretary Yellen's statement, where she rejects the idea that
corporate greed is to blame for inflation, and I concur. We
have a complex set of issues. The fiscal house was certainly
different than monetary policy. And the extraordinary nature of
the partisan American Rescue Plan, $2 trillion injected into a
recovering economy and Democrat policies to keep people out of
the workforce for longer than the rest of the western world
also contributed to inflation. That is a political debate here
on Capitol Hill, Chairman Powell, and that is on the political
side.
What I want to ask you about are the policy tools that you
are using. Now, certainly, you as Chair of the Fed and the
Federal Open Market Committee, took extraordinary measures in
the midst of the pandemic to ensure that we didn't have further
contagion, including extraordinary lending facilities,
purchasing securities, and keeping the Federal Funds Rate at
zero. These were the right tools at the right time. On the
fiscal side, you have to partner with bipartisan bills to keep
our economy afloat during government shutdowns, but like all
good firefighting measures, we should put them away when times
change. I want to ask you, as you put these measures away, how
do you expect the economy to respond? Let's start here. What is
your level of commitment to fight inflation?
Mr. Powell. It is unconditional, our commitment is, and the
reason is, in a particular situation, we have a labor market
that is sort of unsustainably hot, and we are very far from our
inflation target. We really need to restore price stability,
and get inflation back down to 2 percent, because without that,
we are not going to be able to have a sustained period of
maximum employment where the benefits are spread very widely
and where people's wages aren't being eaten up by inflation.
Really, it is something that we need to do, that we must do. In
order to have that kind of a labor market, we will need to do
it.
Mr. McHenry. As you pull back these emergency measures from
COVID, and you normalize rates to what they look like sort of
in the long run, how do you expect the economy to respond?
Mr. Powell. When we raise interest rates and also, to a
lesser extent, when the balance sheet shrinks, what happens is
rates go up across the economy, and financial conditions
generally tighten. And you can think of it as in interest-
sensitive spending is an important place that will be affected,
and that is things like automobiles and other durable goods. If
rates are higher, then demand for cars will moderate, will
decline a bit. The second channel would be asset prices
generally. We don't target any particular asset prices, but
higher interest rates tend to bring them down broadly. That
tends to mean a little bit less spending because people's
wealth has perhaps declined a little bit. And the third channel
can be the exchange rate where that also has disinflation
effects. So overall, we have these effects on the economy.
Our intent, of course, is to bring inflation down to 2
percent while preserving a strong labor market. As I have
mentioned, that has become significantly more challenging with
the events of the past few months, particularly the war, which
is driving gas prices up, and raising energy prices and also
food prices, and disrupting supply chains further.
Mr. McHenry. At the same time you have a massive balance
sheet. First, begin with mortgage-backed securities. As we have
a roll off of the Fed's balance sheet of mortgage-backed
securities, what are your expectations for how that affects
housing?
Mr. Powell. I think what will affect housing is the rate--
the housing industry and market are slowing down from a very,
very hot pace, and that is partially because of higher mortgage
rates. The effects of shrinking the balance sheet will be
marginal compared to the effects that we are seeing and expect
to continue to see from rates rising and rising mortgage rates.
Mr. McHenry. But what are your expectations? Can we expect
further announcements on the assets you hold and the securities
you hold? Are there going to be balance sheet announcements in
the coming weeks?
Mr. Powell. No. I would say this. We have a plan. We have
articulated it. The markets are forward-looking. They see it,
and the markets are in a good place, I think, of understanding
what we are going to do. And that is, we are going to be
allowing these securities to mature and run off our balance
sheet at a pace that we have set, and it will be $90 million or
$95 billion, I guess, by September. Now, it is about half of
that. So, that is what we have done. The idea is that will just
be on an ongoing basis in the background, and we think the
markets can handle that. Treasury issuance is way down, so we
think there will be demand for these securities, and Treasury
will then reissue them in whatever form they think is
appropriate when it relates to Treasuries.
Mr. McHenry. Thank you.
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. Chair Powell, it is
good to see you. And I know you will probably hear a lot of
political stuff going back and forth, but the American public
is trying to understand the language of which we are talking
today so that we can really understand what inflation is.
I was just recently over in Europe. There is inflation in
Europe, just like there is inflation here, although as I talked
to Christine Lagarde and others, they say the cause of the
inflation may be different. So, the causes are different. They
said that it may be demand here, but it's not a case of demand
there to resolve inflation in Europe. For example, I was in
Moldova, with a 30-percent inflation rate, and gas at $15 a
gallon; and Turkey, with an 18-percent inflation rate, and gas
at $13 a gallon. And I could name places in Europe and from
Europe to the United States. Is it that we had, whether it was
the supply chains, the China shutdown, complete shutdown, the
zero COVID policy, Russia's war in Ukraine, COVID period, isn't
just a massive storm of everything what contributes to
inflation and causes it all over the world?
Mr. Powell. Pretty much. Yes, I think that is a pretty
good--
Mr. Meeks. It is a little bit of everything, right? So if I
am talking to my constituents, trying to explain to them what
inflation is and what causes it, I would not single out any one
thing. I would probably have to talk about the conglomerate of
things, because if you take away two or three of those, we
might not be in the situation here, all of it unprecedented,
all of it really out of the control of anyone, out of the
control of the Democrats, out of the control of the
Republicans, out of the control of the President, out of the
control of other governments, isn't that correct?
Mr. Powell. Some of it is out of our control, for example,
the price of oil and most of the price of food. And to your
point, for Europe, it is much more about energy and food
prices, very difficult problems. And also, of course, the
European Central Bank (ECB) has different countries, and so
they have to worry about the spreads between different
countries, and that is a different challenge that we don't have
here. The difference here for us is we actually have a very
strong economy and well-recovered economy, so more of our
inflation is from demand, and we do have tools to deal with
demand. That is the place where we actually can work, and that
is where we are using our tools.
Mr. Meeks. And some of that was because during the crisis
that we had, we had to do certain things, the stimulus and
other things, to make sure that we kept our economy stable.
Without doing those things, we would have been in trouble. So
the things that we did, going through COVID with the stimulus,
trying to make sure people kept their jobs, kept money coming
in at the time, was what we had to do. Otherwise, we would have
been in worse shape or not have a strong economy as we have now
compared to other countries, isn't that correct?
Mr. Powell. Yes, I would say it this way, that our
inflation is a consequence of very strong demand, in part
driven by supply by what Congress did to support activity, in
part driven by what we did, but also--
Mr. Meeks. But that helped stabilize our economy at that
time, right?
Mr. Powell. It did.
Mr. Meeks. And if we did not do those things, our economy
may not be as strong as it is right now.
Mr. Powell. I think that is right.
Mr. Meeks. That is correct.
Mr. Powell. Our economy is strong.
Mr. Meeks. And let me jump to something else really
quickly, because the one other thing--I know you testified
before the Senate yesterday, and what concerns a number of my
constituents that I talk to was the question about, can we
resolve inflation without increasing unemployment, because our
folks are concerned about losing their jobs. It would be worse
if they were unemployed. My question to you is, can you speak
to what the Fed has seen during the last few years with respect
to the relationship between unemployment and inflation, and is
it possible that we can continue to have a strong labor market
while also curbing inflation?
Mr. Powell. It is certainly possible that we can, and there
is a relationship between unemployment and inflation. The
challenge now is that inflation is at a 4-decade high, and we
can deal with some of it. Some of it is really going to be
dealt with on global markets--the price of oil and that kind of
thing--and we can't affect those. But the challenge is we are
tightening monetary policy, and that is designed to drive
growth down to a level that is more sustainable and lower, give
the supply side a chance to catch up, and give inflation a
chance to come down and bring inflation down. That is what we
are trying to do.
We don't have precision tools. We raise and lower interest
rates that affects the whole economy through many channels. And
there is a risk that unemployment would move up from what is an
historically-low level. A labor market with 4.1 percent or 4.3
percent unemployment is still a very strong labor market.
Today's rate is 3.6 percent, and there are two vacancies for
every unemployed person, so that is the labor market that is
kind of overheated.
Chairwoman Waters. The gentlewoman from Missouri, Mrs.
Wagner, is now recognized for 5 minutes.
Mrs. Wagner. Thank you, Madam Chairwoman. Chair Powell,
thank you for joining us again today. I just want to start by
saying how sick and tired I am of the President's inflation
blame game. One day its Putin's fault, another it is the oil
companies, or the meat packers, or perhaps it is corporate
greed. Now, we are blaming other countries like Estonia, and
Turkey. I give you my avid assurance that no one in Missouri's
2nd Congressional District gives a rip about the price of gas
and groceries in Europe. They care about what they are at the
corner of Manchester Road and Weidman. No one in this
Administration is willing to accept responsibility for the
dismal economic situation America is in today. Inflation, sir,
more than tripled in 2021, from 1.4 to 7 percent. And from June
to the end of September 2021, inflation hovered, I think,
around 5.4 percent, and then began a steady increase until
reaching an historic 8.6 percent that is now crippling
American's spending power today.
Chair Powell, when inflation remained steady at 5.4
percent, during that period in 2021, what factors played into
the Fed's decision to keep rates at nearly zero during each
FOMC meeting in June, in July, and in September of 2021, sir?
Mr. Powell. During the summer of 2021, just giving us
hindsight, inflation was coming down month by month. If you
look at monthly readings for the Consumer Price Index (CPI), or
Personal Consumption Expenditures (PCE), they were coming down
month on month on month through September. And so that, I
think, told us that our thesis that this was going to be a
passing inflation shock was at least plausible. I think that
the data turned pretty hard in October and November, and we
very much changed our position and since then have tightened
financial conditions quite significantly. So, it was a matter
of a few months when we were really looking at this and
thinking it is going to be passing. Most macro-economists
thought that it would be a passing thing. It turned out to not
have been so far, and--
Mrs. Wagner. But we saw it move from 1.4 percent to 5.4
percent. We did have a steady period of time where, I wouldn't
say that it was declining, but I am just surprised that we
weren't moving more quickly at the Fed. I want to be honest,
sir, that the Fed, I think, underestimated actual inflation.
What do you think you missed?
Mr. Powell. We did underestimate it, and with the benefit
of hindsight, clearly, we did. It comes down to this judgment
that we had to make. It really has nothing to do with our
framework or anything like that, and every central bank had to
make the same judgment, which was looking at the supply chain
problems and the shock to labor force participation, with
millions of people out of the labor force. We had to decide
whether that was going to be a lasting thing or whether it
would kind of turn around quickly. We had very high levels of
labor force participation. Suddenly, they are much lower. The
thought was that people will come back as soon as COVID is
over. We have these new vaccines. Every American is going to
get vaccinated. We will be done with COVID by the end of the
year. Basically, these supply-side issues, broadly speaking,
just didn't get better. There were recurring waves, and that
was the judgment we had to make. We knew it could be wrong. And
I think when it was starting to look pretty wrong, we moved, we
pivoted pretty hard--
Mrs. Wagner. Now, President Biden continues--
Mr. Powell --like 7 months ago.
Mrs. Wagner. President Biden continues to say that a
recession is not inevitable, as he, his government agencies,
and Democrats, and Congress continue to spend billions and
trillions of taxpayer dollars, burdening businesses with costly
rules and regulations, and on top of it, the President refuses
to unleash American energy independence. The President's
policies continue to take inflation-taming options, I think,
off the table and hamstring the Fed's ability to focus on price
stability. President Biden not only limits the energy
production here in America, and spends trillions of our
taxpayers' money, but he also threatens tax increases and
promises to cancel billions in debt. How can you still say,
sir, that the Fed has a pathway to a soft landing for the
economy?
Mr. Powell. Our intention is to achieve inflation getting
back to 2 percent and--
Mrs. Wagner. With all I have laid out?
Mr. Powell. --with a strong labor market. I'm sorry?
Mrs. Wagner. With all I have laid out, and the increases
you are going to have to take?
Mr. Powell. As I mentioned, I think that path has gotten
more and more challenging, thanks to the effects on oil prices
and food prices really and also the supply chains from the war
in Ukraine. We never said it was going to be--
Mrs. Wagner. Not just the war in Ukraine, sir.
Mr. Powell. It is the rise in energy prices, which began in
the latest rise from February.
Mrs. Wagner. The latest rise--this has been going on for a
year-and-a-half. I appreciate the Chair's indulgence. I will
yield back the balance of my time. Thank you, Chairman Powell.
Chairwoman Waters. The gentleman from Texas, Mr. Green, who
is also the Chair of our Subcommittee on Oversight and
Investigations, is now recognized for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman. And thank you for
being here, Chair Powell. I greatly appreciate the opportunity
to share a few thoughts with you. In February of 2021, you
indicated that millions of people were out of the labor force,
which is what you have said today. Millions. And with millions
of people out of the labor force, the Biden Administration and
persons on my side of the aisle sought to do something about
that, to help those who are unemployed. The inflation that my
colleagues speak of has to do with unemployment, the help that
we gave people who were unemployed at the time. Persons who are
unemployed, Mr. Chairman, need help. They can't feed their
families. Small businesses were screaming for help.
We helped small businesses get through a turbulent time.
This was a pandemic. The vaccines had to be distributed and
developed. That is a part of that inflation that they are
speaking of. People needed rental assistance. People were
literally going to be evicted by the millions, but for the
assistance from the Biden Administration and Congress. We
wanted people to go to work. We provided some childcare. If you
want people to go to work, and schools are closed, you have to
help people through these turbulent times. They never talk
about what the inflationary costs that they speak of really
did, how it benefited American people who are suffering. They
overlooked that. They weren't going to help, and now, since
they didn't help, they are going to say everything that they
can to demean the help that was given.
They didn't vote for it. They didn't extend the hand of
friendship to people in times of need. So when they don't do
that, they have to find a way to denounce the help that was
given. It is really shameful, it is painful, and it is sinful
to hear people use the term, ``inflation,'' to indicate that
people who were unemployed shouldn't have received help. The
small businesses that were begging for help shouldn't have been
helped. Vaccines shouldn't have been distributed. People
shouldn't have gotten rental assistance. They shouldn't get
childcare.
Now, I would respect them if they would say that these are
things that they opposed, but they are not going to do that.
They use one word--inflation--and, unfortunately, our messaging
to all of the American people has been somewhat lacking. But I
want the people that I serve, who pay attention to the
supermarket more so than the stock market, to know that when
they had needed this help, we were there for them. And, Mr.
Powell, you indicated that there were millions of people out of
work in February of last year, just prior to this help accorded
people. I welcome your commentary.
Mr. Powell. Oh, you welcome my commentary. Sorry, I didn't
catch the last part. Our job is maximum employment and price
stability. We did what we did during the pandemic acute phase
and response, and you did what you did, and now we are where we
are. So, we have a job to do, and it is very important that we
do it, not least because of the people that you talk about. The
people you talk about are really suffering from inflation now
at the grocery store. And the only way we can get back to a
place where inflation is low again, get inflation back down to
2 percent and help those people, is by trying to get demand and
supply back in balance.
Mr. Green. Let me intercede and say this. You said
something that I find favor with. You said that we did what we
had to do. We were the adults in the room who did what had to
be done. Others who declined to do so can now be critical. I
yield back.
Chairwoman Waters. Thank you very much. The gentleman from
Minnesota, Mr. Emmer, is now recognized for 5 minutes.
Mr. Emmer. Thank you, Chairwoman Waters. Thank you for
holding this hearing, and thank you, Chair Powell, for your
testimony and your time here today.
Financial freedom is American freedom, and, frankly,
Americans do not have the financial and economic freedom they
need to invest in themselves, their businesses, and their
families. Unfortunately, Americans are too busy making ends
meet to focus on anything else. Inflation is running rampant
across the United States with consumer prices rising 8.6
percent in the past year, the largest price increase since
1981. From fuel, to meat, to housing, my constituents and all
Americans are suffering at the hands of this hidden tax, except
it is not so hidden anymore. It is punching Americans in the
face as my friend, Mr. Steil, put it yesterday.
How did we get here? It is pretty simple. We gave up
American energy independence, we locked down our citizens and
businesses for nearly 2 years, pumped the economy with well
over $5 trillion in what is called stimulus funds. And now, as
we recover from the pandemic, we simply do not have the energy
resources necessary to meet the increased consumer demand.
There is a history of Democrat policies we can point to that
put us in this position from refusing to adopt an all-of-the-
above energy strategy to recklessly passing $2 trillion in
partisan spending through the American Rescue Plan, despite the
fact that nearly $1 trillion of bipartisan relief was unspent.
But the bottom line is we need solutions now because inflation
is beating up the American people. We have to wake up and
realize that we cannot continue these spend-your-way-to-
prosperity policies. Everyday inflation threatens the financial
security of American families, of our constituents. We need
solutions.
Let me just return to my point about the spending. In
December 2020, we had authorized nearly $4 trillion in
bipartisan COVID relief. Yet, just 3 months later, Democrats
pushed through another $1.9 trillion with hardly any oversight
mechanism included, even though a quarter--a quarter--of all
COVID relief remained unspent. When President Biden was
recently asked if the $1.9 trillion spending bill caused
inflation, he said he didn't think the bill had even a minor
impact, and called the idea, ``bizarre.''
Chair Powell, do you agree with the President's conclusion
that the $1.9 trillion that was included in the American so-
called Rescue Plan had not even a minor impact on the inflation
we are seeing today?
Mr. Powell. I'm sorry. I wouldn't comment on what any
elected official said, and it is really not up to us to score
fiscal interventions.
Mr. Emmer. Again, sir, if you would--respectfully. I am not
asking you to comment on what the President said. I am asking
you, personally, do you believe that the $1.9-trillion American
Rescue Plan did not even have a minor impact on the inflation
we are seeing today?
Mr. Powell. We didn't comment on the Tax Cuts and Jobs Act.
We didn't comment on the CARES Act. And we won't comment on
that act from that--
Mr. Emmer. It is interesting, sir, that you won't comment
on this, but you were more than willing a year ago to talk
about inflation as some transitory something that everyone has
acknowledged now is going to be here for a while. Even though
it seems like the President's Build Back Better package, this
massive spending package, is dead on arrival, certain elements
might not be dead. Chair Powell, do you have any concerns that
if Congress injects a new round of stimulus into the current
economy, it could and, in fact, will add to the inflation we
are seeing today?
Mr. Powell. Again, it is really not our role to give you
advice on what to do. We report to Congress, not the other way
around. We are sticking to our mandate and our mission, and we
have a lot of work to do on that front and not really giving
you advice on what you should be doing. We take fiscal policy
as something that comes to us, and we deal with it as part of
everything else.
Mr. Emmer. I am very disappointed, sir. You are supposed to
be in charge of the monetary policy of this country. You are
now embarking on raising interest rates because that is the
only tool you think you have left. This is not just a dog
chasing its tail anymore, sir. This is a dog that has started
to devour its tail and its back end because of the debt that we
are carrying.
I want to thank you. You acknowledged we are in a bad spot.
We are knowingly walking toward an even worse inflation, a
recession and, God forbid, food shortages, yet we are relying
on old monetary policy tools to keep us from falling off a
cliff. Sure, we can raise interest rates over and over, but the
only way to curb in a disaster this bad is to raise the
interest rates to a catastrophic level, or, as Larry Summers
suggested, we allow unemployment to go to historical highs.
It is not feasible. We need to put ourselves on a strict
spending diet, and we have to have strict oversight on the
funds that Congress has already allocated and make sure not
even one single dollar is going to waste. And we need to put
control back in the hands of small businesses on Main Street.
Thank you.
Chairwoman Waters. The gentleman from Connecticut, Mr.
Himes, who is also the Chair of our Subcommittee on National
Security, International Development and Monetary Policy, is now
recognized for 5 minutes.
Mr. Himes. Thank you, Madam Chairwoman, and Chairman
Powell, if you will indulge me for a minute, it is important
for the American people to understand what is being said here
today because it is being said in other rooms in this building.
What the American people are seeing today is something that my
Republican Party friends have given over to recently all too
often, and that is rank dishonesty in the service of acquiring
and retaining power. A party without any resilient or
discernible principle has stumbled upon inflation. There is
inflation all over the world: Germany, Japan, Africa, South
America, the United Kingdom. There is inflation all over the
world, but the Republican Party has decided that inflation is
Joe Biden's fault or the American Recovery Plan's fault.
I have read the Monetary Policy Report from start to
finish. It mentions the Russian invasion of Ukraine, supply
chain bottlenecks, high fuel costs, and high wage growth. It
does not mention Joe Biden or the American Recovery Plan. By
the way, the American Recovery Plan is a particularly rank
piece of dishonesty. Set aside the fact that it cut childhood
poverty in half, as Mr. Green pointed out, if that isn't
something to celebrate, and to perhaps have the slightest bit
of humility as you attack it, I don't know what I can do for
you.
The American Recovery Plan, as Mr. Emmer pointed out, was
about a third to a quarter of the fiscal efforts that this
Congress made on a largely bipartisan effort to lift our
economy to the point where it is today. The chairman said
strong and well-recovered unemployment at 3.6 percent, so many
jobs out there that many of them are going unfilled. Did we
overshoot? Maybe we did, but the American Recovery Plan, this
thing that cut childhood poverty in this country in half, was
about a quarter to a third of the fiscal efforts. The other
money was supported by President Trump, but, by the way, it is
not those dollars that are still sitting in Americans' bank
accounts. It is not CARES Act dollars. No, that was supported
by the Republican Party. It is only those dollars in the
American Recovery Plan that cut childhood poverty in half.
Energy prices--I read the Monetary Policy Report, and I will
quote it: ``Because of the Russian invasion of Ukraine, oil
prices rose sharply.'' I have been around here long enough to
know that putting facts and truth out is like spitting into a
hurricane, but it is important for the American people to
understand that.
Okay. Mr. Powell, I released yesterday, and I hope you got
a copy, a White Paper on a central bank digital currency
(CBDC). It is offered with humility, because we have a lot of
issues to work out, but I hope you have had a chance to take at
least a quick look at it. I wonder if you have any reflections,
or, importantly, what are the next steps now that you have
gotten commentary from lots of people? What are the next steps
with respect to the Federal Reserve thinking about a CBDC?
Mr. Powell. I printed it out, and I have it here. I have
not had a chance to read it carefully, obviously, given all
that is going on. But I think generally, we are doing a great
deal of work. The President signed an Executive Order and parts
of the Administration are working on this. I think it is
something we really need to explore as a country. It should not
be a partisan thing. It is a very important potential financial
innovation that will affect all Americans.
And our plan is to work on both the policy side and the
technological side in the coming years and come to Congress
with a recommendation at some point, and we don't prejudge what
that would be. I know your views are very positive on it, but I
think one thing I did see in your report was the beginnings of
thinking about how Congress might authorize it. And I do think
that is a very, very important aspect of this, and it is great
to have Congress starting to think about that.
Mr. Himes. Thank you. I think I agree with that, and I
think that has bipartisan support. In my remaining minute, I am
going to ask you a question I ask you a lot, Mr. Chairman. We
are obviously seeing pretty dramatic swings in the financial
markets. Money is no longer free. We are seeing that in the
stock market, the high yield market, the equity markets, and
cryptocurrency. In my very short remaining time, Mr. Chairman,
what should we be focused on? What is concerning you with
respect to systemic risk that may develop in the face of rising
rates and rising inflation?
Mr. Powell. Basically, the financial markets have been
functioning well, and the banking system, in particular, is
very strong and well-capitalized, with lots of liquidity and a
better understanding and management of its risks. The place
where there have been issues, and we don't see them elevated at
this point, has been illiquidity in some markets relative to
where it had been historically.
Mr. Himes. Any markets in particular where you worry about
illiquidity?
Mr. Powell. No, I wouldn't say that we are seeing anything
that is particularly concerning. But I think sort of
systemically, liquidity in the Treasury market has come down
from where it was, and we have been looking for some time at
ways to address that, but the markets are clearly functioning
reasonably well.
Mr. Himes. Thank you. My time has expired.
Chairwoman Waters. Thank you. The gentleman from North
Carolina, Mr. Budd, is now recognized for 5 minutes.
Mr. Budd. I thank the Chair. Chairman Powell, thank you
again for being here. According to the Congressional Budget
Office, the Federal Government will spend an average of $545
billion per year, which was the estimate before rates went up,
and this is on interest payments on the $31 trillion of
national debt. That $545 billion is more than we spend on the
Department of Veterans Affairs. So, given that the national
debt is currently at about 125 percent of GDP, would the Fed's
commitment to tackle inflation be limited by rising interest
rates, making the servicing of the national debt even more
expensive?
Mr. Powell. No, absolutely not.
Mr. Budd. Can you explain that?
Mr. Powell. We are not in a situation where we need to
consider fiscal questions like that. The U.S. is on an
unsustainable fiscal path, meaning the debt is growing faster
than the economy, but it is not in an unsustainable position.
We can service our debt, and the markets understand that, and
we can conduct our policy without thinking about questions of
fiscal sustainability, and we do.
Mr. Budd. When your colleague, Secretary Yellen, was before
this committee, and I asked her about Federal debt, which was
then about 105 percent of GDP, she said, ``That is not a number
that I think is fiscally irresponsible.'' She also went on to
say, ``If interest rates are zero, we could substantially have
a higher debt burden.'' And in the formula in the following
questions, she alluded to Japan and the fact that it could be
about double of where we are now, meaning about $60 trillion of
debt if you use her math. Do you agree with Secretary Yellen
that having a national debt of over 100 percent of GDP is
fiscally responsible, given that interest rates can change and
that historically low-interest rates can't always be expected?
Mr. Powell. I guess I would say it this way. We are not on
a sustainable path, and we haven't been for some time, and that
means simply that debt is growing faster than the economy,
which by definition, is unsustainable. There will be a point at
which it becomes a problem of servicing the debt, buy we are
not at that point. We are not close to that point, but we will
need to get back to where revenues and spending are better
aligned. We don't need to pay the debt down. We just need to
have the economy growing as fast or faster than the debt over a
long period of time, and we must do that. I wouldn't say any
particular level. There is no level that I can point to where
there is a lot of science behind it being a problem, but we
know that the path is not sustainable.
Mr. Budd. It is interesting that you alluded to growth
being part of the solution. I want to talk about regulation for
a minute, particularly since the Biden Administration delayed
oil and gas lease sales again this week due to environmental
protests. So if we pursued policies to increase American energy
production by approving more leases and building more pipelines
to transfer that energy, and cut down on regulatory barriers to
make it easier for folks to produce energy and produce
anything, wouldn't that make a real impact on energy prices,
and inflation in general, without us needing to use the Fed to
slow the economy with monetary policy to deal with inflation?
Mr. Powell. The whole set of questions around energy are
really questions for elected people. We don't have a mandate
there. Obviously, the more supply there is, the price of
something can go down, but these are tradeoffs that you really
have to weigh as elected officials rather than--
Mr. Budd. I will narrow it for just a minute. Do you
believe that the vast amount of regulation is an impediment to
economic growth?
Mr. Powell. I will say this. We try hard at the Fed to
weigh the costs and benefits of regulation, and we do think it
is important to think about it that way because there are
benefits to regulation. But there are costs, and we don't want
the costs to be any higher than they need to be because that
does weigh on economic activity, yes.
Mr. Budd. You talk about somebody trying to buy a home, and
now they are questioning it because of the rise in mortgage
rates, and I have heard for years that the 25 percent of the
cost of a new home is due to regulation at some level. The
point I am trying to make is that we need to be very cost-
cautious with our regulations because it is constraining our
growth and the growth, ultimately, which solves this fiscal
problem. The point I am trying to make is that we have much
better tools, like deregulation, which can free up supply
rather than just monetary policy. And freeing up supply could
largely solve the inflation problem for hardworking Americans
and not send us into a recession. Again, I thank you for being
here, and, Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you. The gentlewoman from Iowa,
Mrs. Axne, who is also the Vice Chair of our Subcommittee on
Housing, Community Development, and Insurance, is now
recognized for 5 minutes.
Mrs. Axne. Thank you, Madam Chairwoman, and thank you,
Chair Powell, for being here. It is good to see you. We have
been talking inflation. Of course, we know it is hurting Iowa
families and families across the country, and all of us here
have an absolute responsibility to address this. And I
appreciate the comments of my colleague, Representative Himes,
because I have sure heard a lot of talk about how bad inflation
is from my colleagues over there on the other side of the
aisle, but I sort of haven't heard much about the solutions
that they want to provide. So I am here to work on those
solutions, and I am glad to have you here to talk with us about
that. We actually need to reduce inflation, and we have to
figure out what is driving it.
The San Francisco Federal Reserve Bank just put out some
research yesterday looking at how much inflation was driven by
supply versus demand. What they found was that supply factors
are responsible for more than half of the current level of
inflation. And, of course, I don't need to tell you that while
prices increasing are hurting people across a heck of a lot of
sectors, gas prices have really been driven up over the last
few months. Chair Powell, on gas prices, could you talk about
some of the supply constraints that have pushed gas and energy
prices higher recently?
Mr. Powell. Sure. Two big things would be: one, the price
of oil is set globally, and we just take that price; and two,
the spread that refiners earn. So, if a refinery is at capacity
and spreads are high, then you have a high spread there. And we
know that the price of oil went up quite a bit, started going
up early in the year, and it has now come down a little bit in
the last week or so. But those are the two things that have
contributed to the spike in gas prices that we saw. We did see
gas prices moving up, but they really moved up quite sharply
beginning in the early parts of this year as the war came into
focus.
Mrs. Axne. Thank you. You talked about a couple of pieces
where folks are making more money, and you talked about the
refining process in that crack spread, and I think they are
around $60 right now. So basically, what is happening is they
are making more money because supply is down. Would you agree
that increasing the supply of gas could meaningfully lower
prices?
Mr. Powell. I would say it is hard to argue with that,
sure.
Mrs. Axne. Okay. Well, the U.S. hasn't built a major
refinery since 1977, so, of course, as we know, this isn't a
recent issue. It is a long-term lack of investment with so many
parts of our economy, and you actually touched on that earlier.
Now, here is the question I would like to ask you. Will raising
interest rates help increase supply here with fuel, and are
there other economic tools to do that?
Mr. Powell. No. Really, we can't have any effect on the
price of oil or certainly the supply of energy. And the tools
are not in our hands.
Mrs. Axne. Okay. Thank you for pointing that out. I know
that the Fed absolutely wants to play a role in bringing
inflation down, but I want to make sure that we are looking at
those solutions and trying to understand what better tools we
have. Are there better options out there that you could suggest
right here?
Mr. Powell. Honestly, we are an agency with a narrow, but
important, mandate and a set of tools, and our focus is on
using our tools. We think there is a job to do on demand, and I
don't see us giving advice to Congress or other agencies on how
they might use their tools.
Mrs. Axne. Okay. I appreciate that, and hopefully, at some
other time, we can talk a little bit further about that.
I want to move on to housing. In the 2010s, we saw less
homes built than in each of the previous 4 decades, and we are
more than 5 million homes short of where we should be. Boy, do
I see that all over Iowa, in small towns, in particular. I have
talked to businesses that want to expand, but they can't do so
because there are not enough houses there, and so housing is
one of the most sensitive areas relative to interest rates. I
want to ask the same thing here: Will raising interest rates
help supply there, and are there other tools that we should be
looking at to do that?
Mr. Powell. I would agree with you there is a problem with
longer-term housing supply and the difficulty of creating
adequate housing. What our tools can do is, in the near-term
and medium-term, they can restore a better balance between
demand and supply in the housing market. You have had
extraordinarily-high housing price increases really across the
country over the last couple of years, and that is because of a
lot of demand and very low rates. And you are seeing the
housing sector slow down to some extent because of higher
mortgage rates now.
Mrs. Axne. Do you have anything that should be on our radar
or that we could be looking to do to assist with this?
Mr. Powell. I do think that these are issues for Congress
around housing supply. If you talk to builders--and we do talk
to builders; we had a group in last week--they will talk about
the longer-term issues such as lack of supply, lack of workers,
lack of appropriate zoning, and things like that. These are
national issues.
Mrs. Axne. Thank you so much.
Chairwoman Waters. Thank you. The gentleman from Indiana,
Mr. Hollingsworth, is now recognized for 5 minutes.
Mr. Hollingsworth. Good morning. It is a pleasure to speak
with you again. Before we get started on my questions, I just
wanted to comment on Representative Axne's testimony, or
conversation, or questions. I love the fact that she is
beginning to recognize how heavy the regulatory burden has been
in the refining space that has led to an underinvestment, and
the Biden war on energy, especially on American-produced
energy, continues to bear the fruit that they expected, and
that is a deep concern for Americans who are paying more at the
pump.
We collectively find ourselves in the present situation
because we failed to anticipate the future, even if that future
is inherently uncertain and probabilistic. You said a few
moments ago that we have a job to do on demand. I like that.
And in the recent past and present, I feel like the policy
signals have been unambiguous for the Fed. Inflation is at a
40-year high, the labor market is robust, unemployment is
bouncing along at multi-decade lows, and economic growth has
been very high, but I worry that that lucidity is a luxury that
is fleeting. I believe the future will be more ambiguous as we
head into a time where economic growth seems to be
approximately zero, and labor market weakness is beginning to
emerge.
I think those policy signals will be less clear going
forward. Economic growth in Q1 was negative, albeit for reasons
I think you called technical in nature, but still negative,
nonetheless. Q2 economic growth is currently projected to be
approximately zero according to the GDPNow tracker and many
economists. Weakness in the labor market, while nascent, is
beginning to emerge. Still, inflation as a lagging indicator
remains, as you put it earlier this week, very, very high. I
have certainly praised the Fed's tardy, yet sudden, total focus
on price stability, which will come, as you said, at the cost
of aggregate demand reduction. Technical reasons or not,
America will feel aggregate demand reduction where GDP growth
is already zero as a recession.
I am curious to hear your thought process in an environment
where inflation is steadying and/or coming down, but still at
multiples of your target, and unemployment is escalating
quickly, and economic growth is negative. Tell me a little bit
about how you will think about that environment and approach
that from a policy and rate-setting perspective?
Mr. Powell. I guess I would start by saying that is not the
environment we see or expect. We actually do think that growth
this year, in the second half of this year, should still be
fairly strong. It is coming down from the very high reopening
levels of last year, but the first quarter was somewhat
anomalous. Private spending was actually very healthy--
Mr. Hollingsworth. Tell me about how you think about that
environment? I assume that you could be correct, but there is a
chance you could be incorrect about that soft landing
prediction.
Mr. Powell. The way our tools work, what we are trying to
achieve is to have a moderation in demand so that supply can
catch up, which will take pressure off of resource utilization,
and inflation can come down. That is what we are trying to
achieve.
Mr. Hollingsworth. But if inflation were to come down after
that fact, demand will come down first, inflation will lag
after that where inflation remains--
Mr. Powell. That is right.
Mr. Hollingsworth. --multiples of your target, but
unemployment, because of that sagging demand, goes up. Economic
growth is depressed because of that sagging demand. Tell me how
you will think about that environment?
Mr. Powell. The way we think about it from a policy
standpoint is, of course, we raise interest rates and shrink
the balance sheet. That affects broad financial conditions and
that affects the economy. The question we will be asking is, is
our policy rate--that is the thing we control--at the right
level so that it is affecting financial conditions in the
economy in the way that we need and intend?
Mr. Hollingsworth. I want to know how you intend to affect
then where unemployment is going up and economic growth is
negative, but inflation remains high?
Mr. Powell. In that hypothetical situation, I think you
would say that would be a setting in which inflation could be
expected to come down. As I have said, we would like to see
inflation coming down as well. So, you have choices.
Mr. Hollingsworth. So you could move rates down or steady
rate escalations in advance of inflation hitting your target as
long as you saw it beginning to come down, if economic
conditions or your other mandate for employment begin to show
weakness?
Mr. Powell. As one of my colleagues used to say at every
meeting, it is the same question: Do you raise rates, leave
them the same, or bring them down? I think we would have to see
what is happening. We will try to make good judgments in real
time, but the main thing is we can't fail on this. We really
have to get inflation down to 2 percent. We are going to want
to see evidence that it really is coming down before we declare
any kind of victory, so I think we would be reluctant to cut.
Mr. Hollingsworth. This will have real cost to Americans,
so I want to make sure that we are forward-thinking about what
is going on in the real economy, not just watching a lagging
indicator that is inflation. And with that, I will yield back.
Chairwoman Waters. Thank you. The gentleman from New
Jersey, Mr. Gottheimer, who is also the Vice Chair of our
Subcommittee on National Security, International Development
and Monetary Policy, is now recognized for 5 minutes.
Mr. Gottheimer. Thank you, Madam Chairwoman. Mr. Chairman,
the most recent Consumer Price Index (CPI) report indicated
that the largest component of the CPI, shelter, both owned and
rented, has increased 5.5 percent since last year. Estimates I
have seen show apartment rental cost of 15 percent or more over
the last year. Do you believe the CPI measure of shelter costs
understates the actual increase in housing costs? And do you
have any suggestions for actions Congress can take to lower
housing costs for Americans in the short- and long-term?
Mr. Powell. There is some sense in which it might
understate costs because it is not capturing leases that
haven't turned over yet, right? So, it is really looking at
leases that are turning over.
Mr. Gottheimer. So, it is probably a higher rate?
Mr. Powell. Overall, we think it is a decent measure. And
also, remember that in the CPI, housing services has a weight
that is doubled in the measure that we look at Personal
Consumption Expenditure inflation. We think that is a better,
more-sophisticated representation of the inflation that is
actually happening in people's lives, so we would tend to look
at that.
Mr. Gottheimer. Thank you, Mr. Chairman. I do want to shift
to another issue that is covered in your June report. I have
been engaged in discussions on cryptocurrency policy and have
long warned that a run on stablecoins has the potential to
destabilize financial markets. My concerns were realized in
part last month when the so-called stablecoin, Terra,
collapsed. Your report highlighted the danger of that event and
called for congressional action to protect consumers and
financial markets. My draft legislation, the Stablecoin
Innovation and Protection Act, would establish a definition and
requirements for a qualified stablecoin, defined as
cryptocurrencies redeemable 1-to-1 for U.S. dollars. This
legislation would reduce financial instability in the markets,
protect consumers, and support innovation and fintech. It would
also create a pathway for banks and nonbanks to acquire
qualified status for the stablecoins they issue.
With Federal oversight, do you believe non-bank entities
can be reliable issuers of qualified stablecoins if they can
prove they are fully backed by cash or cash equivalents?
Mr. Powell. As you know, we have recommended that Congress
look at this, and there are many, many approaches, including
yours. The President's Working Group (PWG) did recommend that
stablecoins be issued by insured depository institutions. I
think it is great that Congress is looking at different
approaches and evaluating those questions. What you really
want, though, is you want to be sure that those entities are
appropriately regulated, and in our view, in some sense, at the
Federal level. I think it is going to be a question for
Congress, what the PWG came up with, but I think there are
different approaches.
Mr. Gottheimer. Do you have any views on whom the primary
regulator should be at all? I think that is all up to Congress.
Like with the OCC, they can pose a problem with the OCC being a
primary regulator.
Mr. Powell. For national bank charters, yes. But
stablecoins are used now principally in the capital markets, as
you know, around the platforms, the digital finance platforms,
and that is more in the bailiwick of the SEC. If they were
going to be payments stablecoins, we should be involved, and if
it is going to be about banks getting involved, it will be the
banking regulators. I think we're going to be really blessed by
a plethora of regulatory agencies in the financial sector, so
that will need to be sorted out.
Mr. Gottheimer. Do they have something, given the
challenges we have had in the last months, that is something we
have to move quickly on? Are you concerned with how long it is
taking Congress to actually act there?
Mr. Powell. I think it is very important. It is no
different than any other big technological innovation,
airplanes, for example. There comes a point at which a new
regulatory framework is needed to protect the public and
preserve innovation and competition, foster support, all of
that. But that is coming for digital finance, and I think I am
encouraged that there are now a bunch of bills and proposals
and that Congress is working on this. I think it is important
that it get done quickly, because as we have seen, these
companies can grow really quickly, and we have also seen that
they can have reverses as well.
Mr. Gottheimer. And you think, overall, the ideal role of
the Fed in overseeing stablecoins is what? Ultimately, long-
term, what is the role of the Fed?
Mr. Powell. One question is around CBDCs. Do we want a
private stablecoin to wind up being the digital dollar? And I
think the answer is no. If we are going to have a digital
dollar, it should be done by us. We don't know that we need a
digital dollar as such yet, but I think that it should be
government-guaranteed money, not private money, that is really
created for the benefit of the private issuer, so that is one
thing. I think also, we are very important in payments, so
anything to do with payments that the public is involved in, we
should be involved in that, too.
Mr. Gottheimer. Thank you so much. I yield back. Thank you.
Chairwoman Waters. Thank you very much. The gentleman from
Tennessee, Mr. Rose, is now recognized for 5 minutes.
Mr. Rose. Thank you, Chairwoman Waters and Ranking Member
McHenry, for holding the hearing today, and thank you, Chair
Powell, for being here with us. A few moments ago, Mr. Himes
noted that the American Recovery Plan--I think he meant the
American Rescue Plan--is not mentioned in the Monetary Policy
Report. Chair Powell, is it Federal Reserve practice to comment
on bills passed by Congress in the Monetary Policy Report?
Mr. Powell. No.
Mr. Rose. Turning to something that we have obviously
talked a lot about already today, inflation and rising prices
on things like food and fuel are having a devastating impact on
people all across Middle Tennessee, and indeed, across the
country. You have told us that you will not comment on fiscal
policy, but you have also previously urged Congress to support
fiscal spending, some of which caused this inflation, in my
view. Democrats are still pushing a reckless spending proposal,
although reports are that it will be smaller than the one they
tried to ram through Congress late last year.
Chair Powell, will you commit to pushing back as strongly
against reckless spending proposals that would exacerbate the
current inflation as much as you pushed Congress to support
more fiscal spending during the pandemic?
Mr. Powell. I didn't support any particular bill, but I did
say that there was more to be done. And by the way, I
completely ended that practice at the end of 2020 or 2021.
Anyway, 2020, I stopped. I completely stopped talking about
that publicly at all, and the reason I did it before was, first
of all, I was being encouraged by leadership on both sides of
the Hill in both parties. They were asking me for ideas--don't
you think we need to do something more, can you help us, and
that kind of thing. But that is all done, that is over with,
and the Fed should not play or seek to play a role in fiscal
policy. We have our own mandate. We sure need to stick to that
now.
Mr. Rose. In light of that statement, would you agree with
this statement that the analysis that the Fed had through March
of last year, and that the Administration, to some extent,
continues to advance with respect to inflation, and the policy
prescriptions have proven to be far more transitory than the
inflation itself?
Mr. Powell. If I understand your question, we did think
that these were going to be passing forces. We thought that the
shocks that were hitting, supply side shocks, we thought they
would be like oil shocks have been, where they come and go, and
other supply side shocks, commodity shocks of various kinds. As
the course of 2021 went on, it became increasingly clear,
particularly in the fall, that that wasn't going to be the
case. We weren't going to see that kind of progress, and we
pivoted, 7 months ago now, to address this with our policy
tools.
I think our judgment in real time proved to be incorrect,
but it was not an irrational judgment, and it was one that was
very widely held at the time by other central banks and
economists generally, but it wasn't about economics. It was,
how long is this going to last? Are these things that are
happening to our economy, which were unprecedented, going to
get better, for example, millions of people dropping out of the
labor force, or the problems we have with the global supply
chains? There was no model of that. We can't look at the last
20 times it happened. So for sure, in hindsight, it was not
transitory.
Mr. Rose. Thank you. The Committee for a Responsible
Federal Budget estimated that canceling Federal student loan
debt held by Americans could increase the inflation rate as
much as a half a percentage point, and would add $1.6 trillion
to the national debt. This estimate notably also did not
incorporate the possible effect that student debt cancellation
would have on increased college tuition prices.
Chair Powell, has the Fed done any analysis on the
inflationary impact of these proposals to forgive student loans
being actively considered by Congressional Democrats and the
Administration?
Mr. Powell. Not that I know of. We would look to the
Congressional Budget Office (CBO) and legislation. We tend to
start to put it in our models of the economy when we think
there is really, really likely going to be legislation.
Mr. Rose. Generally, though, would you expect forgiving
$1.6 trillion in debt, whether it is student loan debt or
credit card debt, to have an inflationary impact?
Mr. Powell. Again, I am going to leave that to CBO to score
and also the Office of Management and Budget (OMB). We do not
routinely score congressional proposals. It would get us
involved in political things, and would we be independent then?
To be independent, we need to be out of these very difficult
fiscal issues, which are really your job.
Mr. Rose. Thank you, Mr. Powell. I yield back.
Chairwoman Waters. Thank you. The gentlewoman from
Massachusetts, Ms. Pressley, is now recognized for 5 minutes.
Ms. Pressley. Thank you, Madam Chairwoman. Chairman Powell,
without question, the Fed has a role to play in healing our
economy, but as with any treatment, the wrong medication can
cause even more harm and make the patient more ill.
Chairman Powell, at your latest press conference, you
stated, ``Wages are not principally responsible for the
inflation we are seeing.'' I certainly agree with that
assessment, as do many economists. Considering that wages are
not driving inflation, why is the Fed addressing inflation with
tools which primarily impact wages, such as interest rates?
Mr. Powell. Our tools principally impact inflation, not
necessarily wage inflation, so our job is price inflation. But
I will say on wage inflation, the issue is that over time,
wages, over time, looking forward, are very important,
particularly for service companies, where most of the costs are
really in wages. And we all love to see big wage increases, but
with these increases that we have been having, some of them are
just substantially bigger than would be consistent with 2-
percent inflation.
Ms. Pressley. Thank you. Throughout today's hearing, to
that point, you have indicated that the Fed doesn't have more
precise tools at your disposal. Chairman Powell, the root
causes of the inflation we are seeing are supply chain
disruptions outside of the Fed's control, whether it is COVID-
19 lockdowns in China, or the Russia-Ukraine War, which is why
this knee-jerk response to raise interest rates is so alarming.
The Fed cannot control the factors causing inflation, but this
policy choice would plunge millions of people back into
unemployment, dampen wage growth, and tip the economy into a
recession.
There is an old adage, Chairman Powell, ``If all you have
is a hammer, everything looks like a nail.'' You have recently
said the Fed's tools, like interest rates and the balance
sheet, are famously blunt and lack precision. In that case, do
you agree that the Fed needs new tools that are more precise to
better fulfill its statutory mandate of price stability and
maximum employment?
Mr. Powell. No, I don't think we are looking for new tools.
I would just say that a big part of the inflation that is
happening is really not going to be affected by tools, but a
big part of it is going to be affected by our tools, and that
is the part that is related to demand.
Ms. Pressley. But Mr. Chairman, but by your own account,
you stated on the record that the Fed's current tools are ill-
suited to deal with the inflation we are seeing. Perhaps now is
the time to expand the Fed's toolkit to meet the unique moment
that we find ourselves in. For example, one tool that could
help the Fed tailor a more precise response to inflation is
direct credit regulation. This would allow the Fed to regulate
the availability of credit in the specific sectors of the
economy experiencing high inflation without impacting other
sectors. Would you support Congress passing legislation to give
the Fed more precise tools to tackle inflation such as this
idea?
Mr. Powell. That is not something we would seek. Of course,
it is up to Congress to make those decisions.
Ms. Pressley. But it is your own admission that your tools
are too blunt and not precise enough. What additional tools do
you believe the Fed needs to respond more precisely to
inflation?
Mr. Powell. Again, our tools are blunt, but they are the
right tools to deal with broad aggregate demand, and that is a
more important determiner of inflation than energy and food
prices, as painful as energy and food prices are. The bigger
piece of it is related to demand. We can't help with energy and
food prices, to your point, but we can help with aggregate
demand, and we do that through the tools we have. We are not
seeking a deeper involvement in the economy like you are
talking about, but, again, that is a question for Congress.
Congress can change our toolkit or our mandate.
Ms. Pressley. In this moment of overlapping crises from
supply chain disruptions to high inflation, I do believe we
need precise policies that respond to the needs of the American
people. The Fed knows that raising interest rates will not
address the root causes of rising prices, but they will just
keep doing so even at the cost of millions of working-class
people's livelihoods. We need a more sophisticated toolkit for
the era we are in to truly heal our economy and tackle
inflation responsibly. 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 for
being here, Mr. Powell. I appreciate it. Just a point of
clarification, you noted that you ended your public statements
in support of fiscal stimulus by the end of 2020. Is that
correct?
Mr. Powell. Yes.
Mr. Steil. And so it would be after that, that the
Democrats, under one-party control, passed $1.9 trillion of
additional fiscal stimulus after you had already stopped making
public statements in support of additional fiscal stimulus. Do
I have the timeline correct?
Mr. Powell. Yes.
Mr. Steil. I am not asking you to opine. I just wanted to
make sure I had the timeline correct.
Mr. Powell. I took no position publicly or privately, and
neither should the Fed Chair do so.
Mr. Steil. Understood, but your public statements in
support of additional fiscal stimulus ended in 2020. Democrats,
under one-party control, passed $1.9 trillion of fiscal
stimulus after that period of time. I just want to make sure of
the timeline. I understand. Let me be cognizant of the time we
have, and you have noted that you think the Fed should not play
a role in fiscal policy. I have grave concerns about the fiscal
policy that we have seen playing out in Washington. I am not
asking you to opine on that. Looking at 2021, we saw real GDP
growth above 5.6 percent in that year. Is that correct?
Mr. Powell. Yes.
Mr. Steil. Over 5 percent, a reasonably-robust rate, and at
that period of time, in the year 2021, we saw the Fed's balance
sheet increase by about $1.5 trillion. Is that correct?
Mr. Powell. That sounds about right.
Mr. Steil. So in that period of time, where we were seeing
reasonably-robust economic growth, the Federal Reserve was
continuing to build its balance sheet to a tune of $1.5
trillion. So, during the year 2021, the Federal Reserve
ultimately purchased about 54 percent of all Federal debt
issued by the Treasury. Is that accurate?
Mr. Powell. I don't know that. If you have the number in
front of you--
Mr. Steil. I have the number in front of me. I think it is
worthwhile. Roughly half of the Federal debt that was issued in
2021 was acquired by the Federal Reserve and placed on the
Federal Reserve's balance sheet. My concern is that it hid the
real cost of borrowing, borrowing that was being driven by the
Biden Administration at that time. And my concern is that the
Federal Reserve, by increasing their balance sheet by $1.5
trillion in a period of time when Democrats put forward a
gigantic stimulus package, after you had stopped your public
calls for requesting additional fiscal stimulus, that is all
part of the problem. It is both the fiscal policy and the
monetary policy coming together. But let me keep going here for
a moment. We paid, and we, the Federal Government, paid in debt
payments last year, $580 billion. Is that correct?
Mr. Powell. I don't know.
Mr. Steil. That is the number I have. It is about 5.8
percent of our budget fiscal side, and the projections of CBO,
interest over the next decade, one of the CBO projects, it will
triple to $1.2 trillion, but that is assuming Federal debt
remains in a range of 2.4 percent to 3.8 percent. That is the
CBO's projections to get to debt payments increasing to $1.2
trillion by the end of the decade. We are sitting here at a
period of time when the 10-year Treasury yield has crossed 3
percent, 3.16 percent, I believe, as of yesterday. A year ago,
it was 1.48 percent. So, we are already approaching the high-
interest-rate threshold that CBO has for interest on the debt
to triple.
Do you project that interest payments on the debt, the
interest payment number that is impacted by the interest rate
set by the Fed, will remain in a range of 2.4 to 3.8 percent,
or do you believe that it will be dramatically above that?
Mr. Powell. We don't publish projections on Treasury rates.
Mr. Steil. So as interest rates are moving, as you are
doing, I think appropriately so, to address the inflation
environment that we are in, the Federal Reserve doesn't project
the cost on the debt moving forward?
Mr. Powell. Internally, we don't publish, this is what I
said, but internally, of course we have a path for the 10-year,
for example, and for many, many years, it has always showed
rates returning to levels even where we are or even higher.
That is what goes into our models because we assume over time,
for example, that we are going to be shrinking our balance
sheet in the range of a trillion dollars a year in the coming
years, so that will put more supply out. That should put some
upward pressure on rates. It is not our business to project
this publicly, but our assumption is that rates will return to
levels that are somewhat higher.
Mr. Steil. Let me, for the record, state that I am very
concerned that we are going to see interest rates remain high.
The Committee for a Responsible Federal Budget notes that 50
basis points is $143 billion of year-end debt. I am concerned
that we are on a path that is very unstable. I appreciate you
being here.
Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you. 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, Chairman Powell, for coming in to speak with us
today.
Chair Powell, in the summer of 2019, which admittedly was a
different world, during a Financial Services Committee hearing,
you related to me that, ``I would look at today's unemployment
as well within the range of plausible estimates of what the
natural rate of unemployment is.'' Do you recall what the
unemployment rate was around that time in 2019?
Mr. Powell. I want to say 3.5 percent.
Ms. Ocasio-Cortez. Yes, it was 3.5 percent. And what is the
current unemployment rate today?
Mr. Powell. 3.6 percent.
Ms. Ocasio-Cortez. 3.6 percent. You also said that when
unemployment went way up, you didn't see inflation go way down.
So, you don't see inflation reacting to unemployment the way it
does because inflation seems very anchored. Again, that was at
that time.
Chair Powell, briefly, yes or no, would you say that some
of the contributing factors to today's inflation include
ongoing supply chain issues, including volatility of commodity
prices as a result of the ongoing conflict in Ukraine, and
companies also raising prices because they can?
Mr. Powell. I would say on supply side issues, for sure
those are playing an important role.
Ms. Ocasio-Cortez. And am I correct that American workers'
wage gains have actually trailed inflation? In other words,
while the cost of goods went up by 8.6 percent, on average,
wages did not increase by that much?
Mr. Powell. It depends. Some people at the lower end of the
spectrum actually have been getting positive real-wage gains.
For most people, though, inflation has been higher than their
wage increases.
Ms. Ocasio-Cortez. So on average, we have a wage growth at
about 6.1 percent, so average wages are trailing inflation. It
does seem that American workers are not primarily responsible
for the inflationary issues that we are seeing today. But
despite this, we are seeing some comments from individuals,
like former U.S. Treasury Secretary Lawrence Summers, who
earlier this year said that in order to contain inflation, the
U.S. needs 5 years of unemployment above 5 percent, or 1 year
of 10-percent unemployment. Do you agree with that assessment?
Mr. Powell. I understand how that number can be arrived at
or derived, but I think there is so much uncertainty and, in
particular, the answer is going to depend to a significant
extent on what happens on the supply side. If we do get these
supply side problems worked out, which I think is certainly
going to happen in time, then you wouldn't see anything like
that. But it is a highly-uncertain time, and our intention, of
course, is to bring down inflation while keeping the labor
market strong.
Ms. Ocasio-Cortez. I think it is important to drive home
what 10-percent sustained unemployment would look like in this
country. For context, we didn't even reach 10 percent during
the Great Recession. We did experience 10-percent unemployment
in 1982 following the Volcker shock. But in this market, to get
to 10-percent unemployment would require about 10.5 million
additional people out of work, and historically, we know that
Black unemployment is usually double that of White
unemployment, correct?
Mr. Powell. Yes, it tends to move at twice the speed, both
up and down, but certainly moving up.
Ms. Ocasio-Cortez. So when the former Treasury Secretary
says he wants 10-percent unemployment overall, he is also
saying that we need Black unemployment of nearly 20 percent or
implies that. But, Chair Powell, I do think that despite the
tools that you don't have, Congress does have tools as well.
Would you say that the following actions granted in the scope
of Congress could be deployed to impact inflation using
antitrust laws against companies that are raising prices using
their market power?
Mr. Powell. Sorry. I didn't hear the last part.
Ms. Ocasio-Cortez. Would using antitrust laws against
companies that are raising their prices have an impact on anti-
trust?
Mr. Powell. Sorry, anti-what laws?
Ms. Ocasio-Cortez. Antitrust.
Mr. Powell. Antitrust laws, okay. Sorry.
Ms. Ocasio-Cortez. No worries.
Mr. Powell. The acoustics in here are difficult.
Ms. Ocasio-Cortez. No worries. Would that have an
inflationary impact?
Mr. Powell. It is really hard to say.
Ms. Ocasio-Cortez. Would subjecting those companies to a
windfall profits tax have a potential impact on inflation?
Mr. Powell. Again, I don't--
Ms. Ocasio-Cortez. And would requiring government
contractors to keep a lid on their pricing have certain impacts
on inflation?
Mr. Powell. There is a long history of price controls when
inflation has been high, and it was not a successful one.
Really, it comes down to getting demand and supply in
alignment.
Ms. Ocasio-Cortez. And if the Fed's tools mostly impact
demand, but most of those inflationary issues could be
potentially impacted by supply, how high do you think the Fed
would have to drive unemployment to actually have an impact?
Mr. Powell. That is going to depend on a lot of things, and
ideally, we can raise rates, and it is very important that we
get inflation back down, particularly for people in the margins
of society who are suffering the most from inflation. That may
be a longer conversation, again.
Ms. Ocasio-Cortez. 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, and thank you,
Chairman Powell, for being with us today. Congratulations on
being confirmed to your second term as Chair. You have some
rocky times ahead. I wish you luck.
The last time you were here, we discussed how rising
interest rates really inflate debt servicing costs for the
Federal Government. And I know what you are going to say, that
is a concern for fiscal policymakers, the Congress, to take
into account, not the Fed, and that is mostly true. But I still
think it is worth everyone being fully aware of just how costly
servicing our debt will be now that interest rates are
returning to historically-normal levels.
According to CBO, interest payments on the debt are the
fastest-growing part of the Federal budget. CBO projects that
servicing our debt will cost taxpayers $8.1 trillion of the
tenure budget window--$8.1 trillion. And their inflation
assumptions projecting interest rates are lower than current
levels, and quite a bit lower than where rates are likely
headed to get inflation under control.
And I thank you for your efforts to get inflation under
control, but for every half-percentage point rate hike, that is
an estimated $133 billion of annual increases. I am going to
say that again: a $133 billion in annual increase in debt
servicing costs. That is just a staggering amount of money.
So we, Congress, must get our fiscal house in order. We
have to. There is no other option. The dollar's position in the
world as the global reserve currency is solid, and there are no
immediate signs of that changing, but if we continue on our
current trajectory, that will not always be a given. My
question is, are you worried that if our current fiscal path
continues--which I should note with each rate hike, looks worse
and worse--that the dollar's position in the world could be
challenged in the long term? Is that a concern?
Mr. Powell. Certainly, in the long term, the dollar is the
reserve currency, and I don't see it as particularly under
threat at the moment given the advantages that we have, which
are many. But you are right that the U.S. Federal budget is on
an unsustainable path, and we will have to deal with it, and
the sooner, the better. Unsustainable just means that the debt
is growing faster than the economy, which, by definition, over
time, can't be sustained.
Mr. Timmons. Thank you. For the record, I also want to
follow up--you stated the following as Congress considered the
Biden stimulus, ``In addition, workers and households who
struggled to find their place in the post-pandemic economy are
likely to need continued support. The same is true for many
small businesses that are likely to prosper again once the
pandemic is behind us.'' That was from your speech on February
10, 2021. I just wanted to add that in for the record.
One final question. During a meeting last week at the
International Association of Insurance Supervisors (IAIS), the
IAIS issued a consultation paper on comparability criteria,
looking at the use of the International Capital Standard (ICS)
versus the aggregation method. As you know, the U.S. has
committed to using an aggregation-like approach here in the
U.S. through the National Association of Insurance
Commissioner's (NAIC's) group capita calculation and the Fed's
proposed building-block approach. Moreover, the EU and the
U.K., through their covered agreements with the U.S., recognize
these approaches to group capital. Nevertheless, Insurance
Europe, a federation of European insurers representing more
than 95 percent of the European market, takes the view that
there cannot be two versions of an International Capital
Standard.
My question is this: Will you continue to advocate and
support the aggregation method as an alternative to the
International Capital Standard?
Mr. Powell. I am a little rusty on that, but I will say
this: I know that we are strongly committed to capital
standards that work for U.S. insurance companies.
Mr. Timmons. I get that, but I guess what I am getting at
is we have a different way of regulating insurance here in the
United States. We all know that, and it works for us, and we do
not need to let these international bodies change our way of
doing things. We need you to stand up for the American way of
doing things and for American businesses. Can you commit to
doing that?
Mr. Powell. I think that is what we are doing, so yes.
Mr. Timmons. Okay. Thank you. Madam Chairwoman, I yield
back.
Chairwoman Waters. Thank you. The gentleman from
Massachusetts, Mr. Auchincloss, is now recognized for 5
minutes.
Mr. Auchincloss. Thank you, Madam Chairwoman. And welcome,
Chairman Powell. I want to start by asking you about inflation
expectations, which, as you obviously know, can be very
difficult to dislodge once they are anchored in the mindset of
consumers, and what the Fed can do both to address inflation,
but also to convince Americans that inflation is going to be
lowering in the medium term, and thereby prevent inflation
expectations from getting anchored?
Mr. Powell. If you look at inflation expectations, and of
course we measure professional forecasters, households, market-
based break-evens, and things like that, a broad range of
things, you do see that people expect inflation to be high in
the very near term, but they expect it to come down fairly
quickly and get back to normal. So as a general matter, the
evidence is clear that people do expect inflation to come back
down to levels that are consistent with our price stability
mandate, but we haven't had a test like this. I would say we
haven't had an extended period of high inflation for a long
time, so it is not a comfortable place to be. Short-term
inflation expectations are higher, and it adds to our desire to
move expeditiously and with force to get rates up and then
ultimately to get inflation down.
Mr. Auchincloss. Building on that one degree removed, the
only thing more painful than expected high inflation is
unexpected high inflation. And it makes the degree to which
businesses and consumers do not have confidence in the Fed's
ability to control inflation or the U.S. Government at large,
makes it harder for them to make capital investments in the
long term, makes it harder to do wage negotiations. Is there a
measure of the degree of confidence that both business and
consumers have in the ability of inflation to remain low that
you are tracking so that we can try to measure the degree of
confidence people have in not having to see unexpected
inflation in the future?
Mr. Powell. First, I agree with it. Ultimately, the point
is that if the public retains confidence that inflation will
come down, their expectations remain anchored, then it will
come down. We think that is how it works.
Mr. Auchincloss. Self-fulfilling?
Mr. Powell. Right. By many, many measures, and we track
them all. We put them all in one big measure called the Index
of Common Inflation Expectations. We do that, and we publish it
at various times.
Mr. Auchincloss. It strikes me that--
Mr. Powell. And we basically send the message that
essentially, yes, inflation expectations are anchored, but as I
said, that is good, but it is not enough. We need to get
inflation down because inevitably, over time, these
expectations are going to be under pressure.
Mr. Auchincloss. It seems like you also want to track
volatility within that Index of Common Inflation Expectations
to see how much confidence people have that they are not going
to see unexpected inflation.
Mr. Powell. Yes. We look at the distribution, and if there
are some small signs, concerning signs, then we just can't
allow that. Ultimately, our whole framework is about keeping
inflation expectations well and truly anchored so that
inflation will return to that anchor.
Mr. Auchincloss. And your credibility, and that is
autocatalytic in inflation expectations, so I think it is
critical that the businesses and consumers have that
confidence.
Mr. Powell. Absolutely.
Mr. Auchincloss. Can you explain how quantitative
tightening, I guess we would call it now, is going to play into
that unrolling, the quantitative easing of the last 10 years?
Mr. Powell. Sure. It is quantitative easing in reverse. And
what quantitative easing does is, it reduces the supply of
risk-free, longer-term assets, and that tends to drive rates
down as people want those. So when we shrink our balance sheet,
what happens is the public will be holding more of that paper,
and we won't be holding it, and that should have some upward
pressure over time. Markets are forward-looking, so they are
already pricing this in.
Mr. Auchincloss. And you don't project any changes in how
are you going to do QT?
Mr. Powell. We put out a plan. We thought very carefully
about it. We have announced it. Markets have seen it, and it is
sort of priced in and I think we would intend to keep to that
plan. Of course, one of our principles is that we are always
going to be flexible if that is warranted.
Mr. Auchincloss. Last question for you in my final 30
seconds here, Chairman Powell. Can you give us an update on
FedNow and your plans for access both to established banks as
well as to financial technology companies?
Mr. Powell. FedNow is supposed to go live next year. We
believe we are on track to do that. We have people working
really hard on it. I didn't catch the last part of the
question.
Mr. Auchincloss. How are you going to make access
available? Is it going to be just for certain types of banks?
Is it going to be for financial technology companies? How are
you going to adjudicate access?
Mr. Powell. That is something we are looking at. Mainly, it
is for the broad sweep of banks, and we will have to look at
going beyond that.
Mr. Auchincloss. I yield back.
Chairwoman Waters. Thank you. The gentleman from South
Carolina, Mr. Norman, is now recognized for 5 minutes.
Mr. Norman. Thank you, Chairwoman Waters. Chairman Powell,
welcome. Would you agree that housing is a leading economic
indicator on the health of the economy or on the direction the
economy is going?
Mr. Powell. It is certainly an important indicator.
Mr. Norman. Because it affects so many different facets of
the economy.
Mr. Powell. Sorry?
Mr. Norman. Because it affects so many facets of the
economy, is that right?
Mr. Powell. I'm sorry. I am having a hard time hearing you.
Mr. Norman. Because it affects so many facets of the
economy. In other words, when you are housing, whether it is
commercial, residential, you buy a lot of products that are
across the spectrum.
Mr. Powell. It is a very important sector of the economy
for the reasons you point out.
Mr. Norman. And one of the reasons that most economists are
predicting a severe recession is housing as a leading economic
indicator. I have done that. That is where I have made my
living. Do you realize it is very simple to solve, to get the
housing to a point that it was under the previous
Administration? I am from South Carolina. People move there.
You realize in the last probably 4 months, there has been a
severe cutback, despite the fact that people are coming in and
need it, and it is because of this Administration's war on
energy and natural gas. The Fed can't regulate that. Putin
can't regulate that. It is a direct result of policies of this
Administration, and one of the reasons that it is basically
going to come to a standstill, the war on energy, and you can't
afford gas for your product. So, the war on the workforce this
Administration has waged, when you pay people not to work, it
is kind of a disincentive to go to work.
Supply chain has been mentioned, and the call I got 4 days
ago from a leading producer of chicken who cannot get corn to
feed the young chickens is kind of a problem. Interest rates,
which are at your disposal, are going to severely affect the
housing industry. When you are paying a 6-percent long-term
mortgage rate along with every other cost increase directly
caused by the policies of this Administration, the housing is
going to come to a stopping point, as it is now likely to have.
Regulations have been mentioned to you. We now face on simple
projects a regulation, and I would point out many of them
needless, to be 35 percent, 38 percent. That is, when you
combine all of these things, housing is going to take a
tremendous drop. That will affect the economy. What do you say?
Mr. Powell. I think all of those things are affecting the
economy.
Mr. Norman. Is greed, which has been mentioned here, a
leading cause of inflation?
Mr. Powell. I think it is a macroeconomic phenomenon that
is caused by the things we have been talking about.
Mr. Norman. Was greed not a factor 4 years ago?
Mr. Powell. No.
Mr. Norman. Maybe, it is a factor now. Were they just less
greedy in 2016 through 2020?
Mr. Powell. It is hard to see why they would have been.
Mr. Norman. Okay. And was Putin responsible for the low gas
prices that we experienced from 2016 to 2020?
Mr. Powell. Not as far as I know.
Mr. Norman. I don't think he had much impact. If he did, it
would be a sad state for the United States. I think one of the
Members mentioned the debt relief for college students that has
been proposed by the current Administration. How will that have
an effect on the economy? And I think the number that has been
talked about, to forgive $50,000 per student, will that affect
the inflation in the economy?
Mr. Powell. As I mentioned, we don't score these bills from
an inflation standpoint.
Mr. Norman. It wouldn't be positive though, would it?
Mr. Powell. Sorry?
Mr. Norman. I doubt it would be positive, would it?
Mr. Powell. I don't know. That is for elected folks.
Mr. Norman. And on the central bank digital currency, would
you have to have approval from Congress before the Federal
Reserve got involved?
Mr. Powell. I can't imagine that we would move forward
without authorizing legislation.
Mr. Norman. So, you would have to have the approval of
Congress?
Mr. Powell. Yes.
Mr. Norman. Thank you for what you are doing. You are using
the tools that you have at your disposal. Most of this could be
eliminated if we had a policy now that was pro-business, and
pro-growth. But thanks for what you are doing, and
congratulations on being reappointed as Chair.
Mr. Powell. Thank you.
Chairwoman Waters. Thank you. The gentleman from
California, Mr. Vargas, is now recognized for 5 minutes.
Mr. Vargas. Thank you very much, Chairwoman Waters and
Ranking Member McHenry. And Chairman Powell, thank you very
much for being here, and congratulations, I think--I am not
sure. You are running into a pretty heavy lift here going
forward, but I very much appreciate you being here today.
I believe that inflation is real, obviously, and it is
hurting a lot of people. It is the causes, I think, that are
being manipulated, and, frankly, lied about. And there is one
big criticism that I make of you, and also especially, I guess,
Secretary Yellen, which is that you haven't explained inflation
within the context of the world environment, what is happening
globally.
My good friends on the other side of the aisle love to
blame inflation singularly on President Biden and his policies.
I didn't get a chance to ask Secretary Yellen any questions
when she was here last time; I'm kind of low on the totem pole
here. But I wanted to scream, because every time, she led with
her chin, as opposed to explaining that this inflation is
global, and now that I have you here, I get to ask you some
questions. What is the inflation rate in the European Union,
overall?
Mr. Powell. I wouldn't--
Mr. Vargas. It is 8.8 percent according to Statista. Did
they receive any money from the American Rescue Plan?
Mr. Powell. Not to my knowledge.
Mr. Vargas. What is the inflation rate in Estonia?
Mr. Powell. In Estonia, I don't know. They are roughly
comparable to ours.
Mr. Vargas. It is 20.1 percent. It is not very comparable
to ours. It is over 3 times higher than ours.
Mr. Powell. I think the European democracy is similar to
us.
Mr. Vargas. Estonia. Did they receive any money from the
American Rescue Plan?
Mr. Powell. Not to my knowledge.
Mr. Vargas. How about Latvia? What is the inflation rate in
Latvia?
Mr. Powell. I have no idea.
Mr. Vargas. It is 16.8 percent. Did they receive any money
from Biden or the American Rescue Plan?
Mr. Powell. Not as far as I know.
Mr. Vargas. How about Bulgaria? 13.4 percent.
Mr. Powell. I knew that one.
Mr. Vargas. Poland. What, you knew that one?
Mr. Powell. Yes.
Mr. Vargas. I apologize. I will let you try with Poland.
How about that? They are a friendly nation, 12.8 percent. Did
they receive any money from the American Rescue Plan? And if
they didn't, why do they have inflation that is so high?
Mr. Powell. Not as far as I know.
Mr. Vargas. Why is their inflation rate so high?
Mr. Powell. In Europe, the inflation that they are seeing
is principally due, I believe, to energy prices and food
prices. It is due to the war, and it is due to the situation
with Russia being their principal energy supplier.
Mr. Vargas. They didn't receive any money, though, from the
American Rescue Plan?
Mr. Powell. Not as far as I know.
Mr. Vargas. Okay. Let's keep going. Romania 12.4, Slovakia
11.8, Hungary 10.8, Croatia 10.7, Greece 10.5, the
Netherlands--come on, you have to know the Netherlands.
Mr. Powell. Since we are going down, it would be lower.
Mr. Vargas. 10.2 percent.
Mr. Powell. See?
Mr. Vargas. But you do see that, I am glad, at this point.
Let's skip to Germany. They are very similar to us.
Mr. Powell. I am not going to guess.
Mr. Vargas. 8.7 percent. And the reason I wanted to go
through the litany of these things is that I keep hearing from
my good friends on the other side of the aisle that inflation
somehow magically exists because of Biden's policies, because
of the American Rescue Plan. Well, if that is true, then there
shouldn't be this other inflation in other countries. It is a
global phenomenon. As Clinton used to say, ``It is the economy
stupid.'' Here, it is the pandemic, obviously, and things that
happened.
We have a situation around the whole world, yet you don't
explain it globally. And I shouldn't, because I really like you
a lot, and I really do think you are doing a good job, trying
very hard, but I did want to yell at Secretary Yellen because
she didn't explain anything globally. Don't you think you have
a responsibility to the American people? I know in my district,
most people believe that inflation is only happening here,
because of the rhetoric that they hear from the other side. And
you guys, I think, have the opportunity and the responsibility
to give them the full picture, not this limited picture, and I
hope you do so.
With that, I yield back. Thank you very much, Madam
Chairwoman.
Ms. Garcia of Texas. [presiding]. The gentleman yields
back. The gentleman from Oklahoma, Mr. Lucas, is now recognized
for 5 minutes.
Mr. Lucas. Thank you, Madam Chairwoman, and actually, I
think my timing for my question is perfect. Chairman Powell, I
would like to discuss with you today an issue that is of
significant concern to me and many of my colleagues. The SEC's
regulatory agenda has more than 50 significant proposals that
are currently underway or approaching a final vote. These rules
cut across every asset class under the the Securities and
Exchange Commission's (SEC's) jurisdiction. The sheer
complexity and volume of these overlapping rulemakings could
negatively impact markets and the public that depends on them.
SEC Commissioner Hester Peirce warned that the speed and
character of these rulemakings could create dangerous
conditions in our capital markets. Now, this is against the
backdrop of the U.S. economy facing significant challenges. We
have discussed that all morning: inflation at more than a 40-
year high with substantial increases in the cost of food,
housing, and gas prices, record prices. Also, supply chain
backlogs and labor shortages continue to weigh on the economy
with consumer and business confidence plummeting. And, of
course, we are still studying the impact of the global pandemic
and the consequences of the ongoing Russian invasion of the
Ukraine.
In Oklahoma, small businesses, farmers, and ranchers are
navigating through surging energy prices and volatile
agricultural markets for inputs like grain and fertilizer. Poor
crop conditions and high commodity prices are expected to
worsen the situation throughout the summer and into the rest of
the year.
In uncertain times like this, market participants need to
seek to protect their retirement savings, to hedge risk, and to
safeguard their livelihoods. A top priority should be
supporting liquid markets to protect the U.S. economy from the
face of the substantial headwinds. I know you don't comment on
other entities within the Federal Government, and I know these
regulations that are going to have such a tremendous impact are
not coming from your area. But unfortunately, I am concerned
that the magnitude and the significance of rulemaking proposals
coming out of the SEC in such a short amount of time runs
counter to the goal. We know that regulatory uncertainty
creates an adverse market environment for economic growth and
market stability.
Chairman Powell, I will not ask you to comment on the SEC,
but could you speak to the importance of market liquidity
during periods of economic uncertainty?
Mr. Powell. Yes. One of the things they do is process
information and consider the implications of it, and it is
critical that markets be liquid enough to do that. And if that
happens, then financial conditions can adjust, and equity
prices of various kinds can adjust. And one of their big
functions is to do that and to absorb news, sometimes very
difficult news, in a way that preserves stability.
Mr. Lucas. I think Congress and the public should have the
opportunity to fully grasp the impact of the SEC's sweeping
proposals. If we really want to tame inflation, we should begin
by not making the current situation worse. The SEC's approach
will rattle markets during a time when strong capital markets
are essential to our economic growth and our constituents back
home. After all, you are working hard on the demand side of the
equation. But we in Congress and the Administration should help
with the supply side of the equation by not making it more
difficult to invest in and create more goods and services in
this country.
That said, Chairman Powell, as you have acknowledged, the
Fed's monetary policy tools can do very little to mitigate
rising gas prices. However, the increased cost of gas has an
oversized impact on consumer inflation expectations. Folks see
the price at the pump going up and experience the price-per-
gallon at an all-time high. Could you discuss how the Fed
envisions its ability to rein in inflation expectations driven
in large part by gas prices, or to put it another way, if gas
prices remain at record levels, is an aggressive response from
the Fed all but guaranteed?
Mr. Powell. If gas prices remain at the current levels they
are at, it means inflation continuing to go up. So, it isn't so
much the level as the rate of change, as you know. I think we
are mindful that even though these things are outside of our
control, the gas prices and food prices for the most part, that
adds a little bit of urgency in our wanting to get our rates
into a place where we are addressing inflation directly because
the public reacts to all kinds of inflation, not just core
inflation. Our tools tend to generally go to core inflation,
and we don't think we can use our tools to change energy
prices, but we do think that they add to our desire to get
expeditiously to the appropriate levels.
Mr. Lucas. And clearly, Congress and the Administration,
and the Majority has a responsibility to increase supplies of
resources, not discourage that.
I yield back, Madam Chairwoman. Thank you, Mr. Chairman.
Ms. Garcia of Texas. 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, and thank
you, Chair Powell, for being here as you are navigating through
all of these Federal issues during this difficult economic
time.
Chair Powell, after our hearing concludes, this committee
will be voting on a few pieces of legislation, so I am going to
take advantage of having you here to shed some light on a few
of the things that we will be considering. I can't think of a
better person to give us some insight on these issues.
The first question is, we will be voting on an amendment
that would delay the SEC's small business advocate from
conducting outreach to underserved business owners until after
gas prices drop to the pre-COVID level. Chair Powell, in your
opinion, will delaying the SEC's outreach to minority business
owners affect gas prices in any way?
Mr. Powell. With all respect, I am reluctant to comment on
proposed legislation.
Mrs. Beatty. Let me ask you this. Let's say if it is not
legislation, is there a correlation between what gas prices
would be in relation to what they were pre-COVID with
inflation?
Mr. Powell. Again, I would be expressing an opinion on
someone's amendment. If I start down that road, I don't know
where it stops. These are matters for elected people.
Mrs. Beatty. Would you say that the global markets and
inflation across the country, that we are seeing this
everywhere?
Mr. Powell. Yes, inflation is happening everywhere now.
Mrs. Beatty. I am dealing with a lot of fair housing issues
in my district, and I have a long history of working with
public housing and relocating people. And as we look at issues
with housing, do you think housing is any way tied to
inflation?
Mr. Powell. I'm sorry. I didn't catch the question. I
apologize.
Mrs. Beatty. Do you think what is happening in our housing
market is tied to inflation in any way?
Mr. Powell. Yes. Yes, it is. Housing costs are about a
third of the CPI. We call them housing services. The way it
works is, in effect, an owner of a house is charging something
called owner's equivalent rent or paying something called
owner's equivalent rent. So yes, it is an important factor in
inflation.
Mrs. Beatty. Okay. Can you tell us, in your opinion, in
light of Congressman Vargas' question, as he was giving us an
idea of how some of our colleagues are trying to tie things to
the American Rescue Plan, they are trying to tie it to us
taking care of the least of us. If it is tied to inflation, why
in other areas or countries, and they don't have the American
Rescue Plan, and how do you answer more about Mr. Vargas'
question? I know he gave you a litany. I am not trying to put
you on the spot with quizzing you on what their inflation rate
is in comparison to ours, but I think you got where he was
going with this. Is there anything else you would like to
elaborate on in relationship to where he was going?
Mr. Powell. Sure. I will just say that even though we have
a very similar inflation rate as a lot of the large European
democracies now, pretty close, there are differences between
countries. And the difference with the U.S. compared to the
European countries is that ours is more about demand. We have
areas in our economy where demand is substantially in excess of
supply. It is not mainly a feature of the European economies
where they are really feeling very, very high inflation because
of energy prices and also food prices now. That is part of our
story, too. We are also feeling energy and food prices, but we
have this other part that is more core inflation, which is more
susceptible to being managed by our tools and is really the
object of our tools.
Mrs. Beatty. My time is already up. But in light of your
response to my first question, I just need to say for the
record, I can't conceive of a single connection between gas
prices set by global markets and giving advice to small
businesses. At the same time, I have a hard time coming up with
a theory of how allowing discriminatory housing will help stem
inflation. and I think my time is up, so I yield back.
Ms. Garcia of Texas. The gentlewoman's time has expired.
The gentleman from Texas, Mr. Sessions, is now recognized
for 5 minutes.
Mr. Sessions. Thank you very much, Madam Chairwoman.
Chairman Powell, thank you very much for taking the time to be
with us today. This is important to the American people who
hear our questions. This is important for us as we weigh, and
measure, and gauge your input, which we believe is exceptional.
I have stated to you in the past that I believe that we need to
have confidence in what you are doing.
Today, I would like to, if I can, without dissecting your
thinking, use some of the words that you have provided for us
today to see your thinking. You had stated that as it relates
to the Fed, ``We don't give advice to agencies.'' Now, this is
a quote from you today, ``We don't give advice to agencies.''
Do you think that advice is different, which I do, than the
tools which you have to do your job? But I consider part of
what you do best, perhaps the Fed, is advice. Can you help me
to understand, ``We don't give advice to agencies?''
Mr. Powell. Particularly on fiscal matters, fiscal matters
affect people's lives. It affects industries, and people, and
tax levels, and spending. That, in our system, is the province
of elected people, and for someone who is an appointed person,
who hasn't stood for election, and has a very narrow mandate, I
just think that is not appropriate. If we are going to wander
into those kinds of things, then what would be the case for our
independence? If we are going to be involved in every political
issue that isn't directly connected to our work, then why would
we be independent? We should just be another agency, but we
have this independence, and I think to preserve it, we need to
stick to what we do and resist the temptation to work on every
problem, even the ones that are not assigned to us.
Mr. Sessions. Let me thank you for the answer. You do know,
however, as we were talking about student loans, it is a rather
large amount, about $1.2 trillion that is out there, and you
stated that you believe that would likely be dealt with in
legislation. Now, that is what you said, likely to be dealt
with in legislation, student debt. I think even private advice,
not within your tool structure, but this advice that we are
trying to land on would be really important because it will be,
the way I see it, the next large hit to inflation. And this is
why Republicans, or at least this Republican, says that I
believe that this Administration, and the Democratic Party, are
making friends with inflation. They are using the toolbox that
they have of politics and money and spending policies to make
friends with inflation. My point would be to you, I sure hope
that someone could send a memo to someone saying that, if you
have an opinion on that.
Next point: We have had some discussions about
unemployment. How is unemployment calculated?
Mr. Powell. You have to be actively looking for work within
the last month and not have a job to be considered unemployed.
If you are not looking, then you are out of the labor force, so
you are not participating in the labor force. Those are the
factors.
Mr. Sessions. What we want to do--some members of this
committee have wanted to look back and to say, well, perhaps
under President Trump, it was 3.5 percent, now we are 3.6
percent, so not a big difference, and yet the huge number of
jobs that are available is really the factor. When there were
no jobs, that is a problem, but to simply say, well, Trump was
3.5, now we are 3.6, everything is fair. It is all done. I
think the other advice I would love to have from the Fed is
about getting people back to work, because today, the
government has given zero instructions for Federal workers to
return to work. And I think that it is causing a mindset among
many that we don't need to go to work, thus reflected in 3.6
percent unemployment and millions of available jobs.
Mr. Chairman, thank you for taking the time to be here. It
is my hope that you would find in your toolkit advice that
becomes perhaps more important than that. Thank you, sir.
Mr. Powell. Thank you.
Ms. Garcia of Texas. The gentleman's time has expired.
The gentleman from Florida, Mr. Lawson, is now recognized
for 5 minutes.
Mr. Lawson. Thank you. I want to thank Mr. Powell and
welcome him back to the committee.
Mr. Powell, I think earlier, there might have been
something that came from one of my colleagues, and it was a
rising interest rate to combat inflation does come with a
rising unemployment rate and [inaudible] contributing to
economic recession. While White unemployment rates have dropped
to pre-pandemic levels of 3 percent and QI on 2022, the
national Black unemployment rate remains still at 6.5 percent.
And I know some things you can't say, but what suggestion can
you offer to help prevent Black and other minority communities
from facing future economic inequities as the Federal Reserve
considers continuing to raise rates in the near future?
Mr. Powell. If I heard your question correctly, it was
whether we are considering additional future interest rate
increases, sir?
Mr. Lawson. That is correct.
Mr. Powell. Yes. I think just last week, my colleagues and
I wrote down our forecast for this year, and we anticipate
ongoing rate increases over the course of this year. Yes,
additional rate increases.
Mr. Lawson. Mr. Powell, do you believe that the Fed's
current inflation projection for 2022 and 2023 remains a good
benchmark to consider, even with these vulnerability potentials
growing in the upcoming months?
Mr. Powell. I think that the latest projections that
individual FOMC participants submitted were submitted last
Wednesday, so I think they are still fresh. And there is a
range of expectations of people on the committee, but I think
they are a reasonable set of projections, yes.
Mr. Lawson. Okay. Mr. Powell, several of my colleagues on
the other side of the aisle, in debating about the Biden policy
and so forth, which I know you can't comment on, but there is a
concern where we were kind of caught off guard with the war in
Ukraine, and then, at the same time, our vulnerability of all
of the things that we depend on for other countries. In your
deliberation, when you all are working with the situation that
has arrived that came from the Russia-Ukraine war, and other
real estate, and other stress in China spilling over into the
United State, does the Fed give a recommendation back to the
Administration on how we should proceed in the future, because
we have done a lot of things with other countries and we depend
on a lot of countries for resources and so forth, and it looks
like we are becoming very, very vulnerable--well, it doesn't
just look like it; we are becoming very vulnerable to this
dependence. Do you all make a recommendation back to the
Administration on how we should proceed in the future?
Mr. Powell. No. No, sir, we do not.
Mr. Lawson. Okay. Early on, you said it is paramount that
policy position should be considered by the legislature or the
Administration. Am I correct?
Mr. Powell. I'm sorry. I lost track of what you said there.
I apologize.
Mr. Lawson. I think you stated to some of my colleagues
that those policies should be left up to the Congress or to the
Administration. You all don't really deal with that aspect of
it. Am I correct?
Mr. Powell. Which aspect of it?
Mr. Lawson. About what recommendations could be made for
all of these things that we have all showed that we depend on
from other countries. And I might not be really clear, but for
example, the gas situation with Russia, and things with
Ukraine.
Mr. Powell. No, we are not in those discussions. Those are
really discussions that happen inside the Administration: the
Treasury Department; the White House; and the other agencies.
Mr. Lawson. Okay. With that, Madam Chairwoman, I yield
back.
Ms. Garcia of Texas. The gentleman yields back.
The gentleman from Missouri, Mr. Luetkemeyer, is now
recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman, and welcome,
Chairman Powell. It has been a long morning for you, and
afternoon.
I have a question for you with regards to a quote that on
March 17th, the Consumer Financial Protection Bureau (CFPB) put
out in a blog on rising interest rates, in which they said,
``The CFPB is the arm of the Federal Reserve System that is
fully focused on consumers, ensuring that markets are fair,
transparent, and competitive.'' Do you believe that the CFPB is
an arm of the Federal Reserve, and do you have any control over
their actions?
Mr. Powell. They are an independent agency. We have no
control whatsoever over their actions. They are actually
legally a bureau. The law makes them a bureau. And our profits
that we make off of our balance sheet, we give all of them to
the Treasury Department, except the part that we give to pay
for the CFPB.
Mr. Luetkemeyer. Does that make them an arm of the Fed?
Mr. Powell. For all practical purposes, they are fully
independent in all of their--
Mr. Luetkemeyer. They are not an arm of the Federal Reserve
then. I wouldn't consider that an arm. They have a
relationship, but they are not an arm.
Mr. Powell. Technically, they are a bureau, but--
Mr. Luetkemeyer. They are not under you, so--
Mr. Powell. No.
Mr. Luetkemeyer. --how they can be an arm?
Mr. Powell. Yes, we have no supervision of them. We
collaborate with them, we coordinate with them, we talk to
them.
Mr. Luetkemeyer. This is an overreach by the Director. I
just want to make sure that everybody is on the same page. This
is a bunch of nonsense and needs to be put in its place.
Chairman Powell, you have your hands full right now. And in
this Wall Street Journal article from Tuesday, the economists
say that recessions are likely down here, which said, ``Stocks
are not bottoming very soon.'' So, we have some concerns. I
know yesterday, you were in the Senate, and there was a lengthy
discussion on inflation, which there has been here this morning
as well. In my mind, there are four root causes of inflation,
and we had economists in your chair a few weeks ago, and I had
one in my Small Business Committee a couple of weeks before
that, and I asked the same question. And I said, it looks to me
like there are four causes of inflation--monetary supply, rules
and regulations, energy and supply chain, and job problems that
we have with workers in the economy today--and they agreed that
is basically your four problems that are underpinning
inflation. I asked them to give me a percentage of each one of
them. They said roughly 40 percent for money supply, 20-20-20.
I guess my concern is that if you look at those four
causes, you are trying to help fight inflation, which is one of
your mandates, and you are really under money supply as the
only thing you have any ability to do something with. And even
then, it is probably only half of it, because Congress has
control over how many dollars are put into the system with
additional bills, like the trillion-dollar stimulus package
last year, taxes, and things like that. So, it looks like you
have a minimal amount of impact on those four things.
It looks to me, quite oftentimes, that whenever you are
trying to control the inflationary stuff with the interest
rate, it is kind of over here trying to do a little, and
something went over there. There is all sorts of stuff going
on, and the Administration seems to be at a contradiction to
some of the things you are trying to accomplish over here. Do
you ever feel like that? Do you believe that is maybe a
position that you are in right now?
Mr. Powell. We are very focused on the part of the job that
we can do and using our tools to do it.
Mr. Luetkemeyer. I understand that, Mr. Chairman. It would
seem all of these other factors fall outside your purview here.
And for you to try and manipulate it and everybody rely on you
to solve the inflation problem by tinkering with the interest
rate over here, it looks like that is a little overhyping the
situation. But one of the things that is very concerning is the
regulatory cost.
In my discussion with an economist, he said, look, this is
the Administration's own figures, last year administration cost
of compliance with new regulations was $201 billion. That is
astronomical. That is a huge cost that has to be built into all
of the small businesses and other businesses whenever they
produce products and services for sale to customers. They have
to build an additional $200 billion in costs every year. Would
you agree that is a huge driver of inflation?
Mr. Powell. It sounds like a big number, yes, and as you
know, we try at the Fed to weigh costs and benefits and take
that into consideration.
Mr. Luetkemeyer. Would you agree that those are the four
things that I said are underpinning inflation? Would you agree
that those probably are the four major problems?
Mr. Powell. Yes. Overwhelmingly, most economists would not
think of it in terms of money supply, but would think of it in
terms of supply and demand. And although there may be a role
for money supply, they would think in terms of supply and
demand being out of balance, and that is how I think about it.
Mr. Luetkemeyer. The definition of inflation I have always
heard was too many chasing too few goods and services. If you
throw more money in, you have more money to supply--
Mr. Powell. There are 40-plus years of history, and
actually, Milton Friedman, at the end, came back and said, that
is not really working anymore.
Mr. Luetkemeyer. Mr. Chairman, I just have one more--
Mr. Powell. Maybe working again, though, is the--
Mr. Luetkemeyer. --quick comment for you with regards to
this. It looks to me like whenever you are modeling--
Ms. Garcia of Texas. The gentleman's time has expired.
Mr. Luetkemeyer. --when you are trying to model and you use
it for--
Ms. Garcia of Texas. The gentleman's time has expired.
Mr. Luetkemeyer. --different things, I hope that your
models are including these things--
Ms. Garcia of Texas. The gentleman's time has expired.
Mr. Luetkemeyer. --in your modeling. I would appreciate
just 13 seconds to be able to finish my question.
Ms. Garcia of Texas. The gentleman's time has expired.
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
Ms. Garcia of Texas. Absolutely. Thank you. 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. Chairman Powell, I want to thank you for
bringing to the attention of this committee over the last
several years the systemic risk posed by tough legacy London
Interbank Offered Rate (LIBOR), some $16 trillion of
instruments where we would not know the interest rate that the
debtor is supposed to pay the creditor, and $16 trillion is a
big problem. We passed the relevant bill back in March, and for
those who think Congress can't possibly deal with a problem
until after the last minute, we passed it a year-and-a-half
before the LIBOR hit the fan. That bill requires rulemaking by
the Fed, and the rulemaking is supposed to be done by mid-
September. And that is the final step in making sure that these
LIBOR instruments are not a subject of uncertainty, because
even one basis point, the thousandth of a percentage point of
risk or uncertainty turns out to be significant when you are
dealing with $16 trillion.
Chairman Powell, can we count on the Fed getting these
regulations out by mid-September?
Mr. Powell. Yes. By the way, thank you for all of your
efforts on this technical problem, which have really helped
move it along. And in terms of the rule, yes, we know the
deadline. We know it is a tight deadline, and I am assured that
people are working very hard to meet that deadline.
Mr. Sherman. Thank you. You are shrinking your balance
sheet, and there's a lot of focus on how much you are shrinking
your balance sheet, but what also matters is the content of the
balance sheet. You can invest in Treasuries, or you can invest
in mortgage-backed securities. If you go to an all-Treasury
portfolio and sell off your mortgage-backed securities, that
will probably raise mortgage rates, and we are trying to deal
with housing inflation and housing affordability. So, whether
it is the mortgage on an apartment building that might be built
or whether it is a home mortgage, keeping mortgage rates low, I
would think, would help inflation.
Is there any possibility that you would take a look at that
and perhaps keep in your portfolio some of your mortgage-backed
securities and perhaps have a mix of mortgage-backed securities
and Treasuries on your balance sheet?
Mr. Powell. We are committed to having a mostly Treasury,
not all, but mostly Treasury balance sheet, and we don't have
that now. And Treasuries are going to start to roll off
mortgages much less. So, we have not decided to start selling
mortgage-backed securities, but we have said that we will look
at that again when this process is further along. And if we do,
I don't actually think that the things we would do would have
much of an effect on mortgage rates compared to the effects
that we have already had.
Mr. Sherman. We have obviously faced a recession risk.
President Biden says that a recession is not inevitable. Do you
agree?
Mr. Powell. I don't think that a recession is inevitable.
Mr. Sherman. Thank you. There seems to be a great debate in
this committee as to whether inflation is the result of COVID
and the effects of the Ukraine war, which affects the entire
globe, or whether they are the result of Biden and his
policies, which, believe it or not, are not applicable to
Germany, Britain, or Canada as much as we in America like to
think we are the entire world. And then, we look at inflation
rates, and we see higher month-to-month inflation rates in
Canada and Germany than here in the United States, higher year-
on-year in Germany, and in the U.K.
We are in a situation where only if you believe that Biden
is responsible for German inflation can you reach the
conclusion that it is Biden's policies that have caused
inflation in the United States, which is pretty much on a par
with what we see in other developed countries, particularly
Europe. A part of this is the idea that if Biden just gives a
speech saying we would like to see a fossil-free future, that
somehow impairs the amount of oil that is produced in the
United States and somehow then affects worldwide oil prices.
I ask unanimous to submit for the record an article from
Forbes entitled, ``U.S. Oil Companies Have Increased Drilling
by 60 percent in One Year.'' And without objection, I hope that
could be done.
Ms. Garcia of Texas. Without objection, it is so ordered
Mr. Sherman. And I would point out that we had higher oil
production in this country in the first year of Biden than in
the last year of Trump. Then, we had higher oil production in
2022 than 2021, and in 2023 we will have the highest oil
production in the United States in our history. Unfortunately,
that will probably not be the lowest gas prices in our history.
So, whether it is good or bad, we have discovered that making
speeches does not suppress oil production.
Ms. Garcia of Texas. The gentleman's time has expired.
Mr. Sherman. I yield back.
Ms. Garcia of Texas. The gentleman from Michigan, Mr.
Huizenga, is now recognized for 5 minutes.
Mr. Huizenga. Thank you, Madam Chairwoman, and it is just
so ironic that my colleague is talking about oil and pumping. I
literally just left my office with a group of folks from
Alberta. There is an alliance of six energy companies up there
that are going to get, by the way, to net zero on their carbon
emissions by 2050, but Canada supplies 62 percent of all of the
oil that is imported here in the United States, or they did.
But they can't pump it here, or they can pump it, but they
can't pipe it here because the Keystone Pipeline, which was
bought by the Canadian Government, was cancelled by this
Administration.
So, yes, we can blame the Biden Administration for some of
this inflation. And yes, they are directly responsible for gas
prices and what we are seeing here. You are trying to spread it
around that it is Putin's fault, that it is everybody else's
fault. Meanwhile, this President is flying to Saudi Arabia, and
won't go to Alberta, and won't pick up the phone and talk to
Justin Trudeau about getting Canadian North American oil here.
That is security. Let's not stop going to our adversaries and
go to our allies.
Okay. I need to take a breath here for a moment and, Mr.
Powell, I am glad you are here. And I do believe that you
attempt to be less political than maybe some of your other
predecessors. But I do want to briefly point out something that
Mr. Steil and Mr. Timmons raised earlier regarding your
comments in February 2021, as Congress was debating the Biden
stimulus. Mr. Timmons cited those comments earlier. In fact,
your quote is still highlighted on the website of the House
Budget Committee, the Majority's House Budget Committee, under
the headline, ``Experts and Leaders Agree the Country Needs the
American Rescue Plan Now.''
Your words are listed alongside quotes from the Minneapolis
Reserve Bank president, and the president of the Federal
Reserve Bank of Atlanta, and, again, this is from 2021. And I
just wanted the hearing record to reflect this timeline, first
of all, and ask you, do you think that maybe your quote should
be taken down from that website, knowing what we know today?
Mr. Powell. It is not up to me whether people take down the
quote.
Mr. Huizenga. Let me tell you, though, if you are trying to
be apolitical, that and allowing those words to stand with this
mess that has been created in the economy doesn't stand. I
guess that is up to you, but if you are going to strive for
that, I would suggest at least have some of those folks sitting
behind you--they might want to make a phone call.
Okay. We discussed during your last visit that I have long
advocated for a rules-based approach to monetary policy. We
talked about the Taylor Rule. I have suggested the Yellen Rule.
Now with your reappointment, it could become the Powell Rule. I
don't care what it is called, but I am very concerned that we
are not looking at those guideposts and having those
guideposts. I am glad to see that in the Fed's most recent
report, you did once again include a section on monetary policy
rules, which had been omitted from the previous version, and
you and I had discussed that.
I want to read a quote from the June report and then get
your thoughts, ``Although simple rules cannot capture
complexities of monetary policy and many practical
considerations, it makes it undesirable for the FOMC to adhere
strictly to the prescriptions of a specific rule. Some
principles of good monetary policy can be illustrated by these
policy rules.'' My question is, what principles do you believe
are important when the FOMC is making decisions on monetary
policy?
Mr. Powell. What principles are important?
Mr. Huizenga. And we have a minute with the quick gavel.
Mr. Powell. I think, to try to think systematically about
monetary policy and not be, fully discretionary, to try to have
a frame of reference, what are we trying to do? The Taylor
Rules, what they do is they embody the dual mandate. What you
are looking at in the standard Taylor Rule and all of the spin-
offs is, how far are you from your price stability mandate? How
far are you from your employment mandate? And that tells you it
is a frame of reference, and I think that is a useful thing to
have.
Mr. Huizenga. Okay. I have 30 seconds left, and obviously,
what I am trying to push for is more transparency from the Fed.
I also want to very quickly revisit your interaction with Mr.
Gottheimer, where you spoke about the importance of preserving
innovation and competition in the digital asset marketplace,
which I agree with 100 percent. In fact, Republicans on this
committee included that as part of their working principles
last year. Let's talk about that light touch when it comes to
legislation, however, one of my colleagues also noted that
regulators right now are being very heavy-handed, which I am--
Ms. Garcia of Texas. The gentleman's time has expired.
Mr. Huizenga. --about as well, and I will follow up with
you in writing on that, but we need to be here on how heavy-
handed the regulators are. Thank you. I yield back.
Ms. Garcia of Texas. The gentleman from Illinois, Mr.
Casten, is now recognized for 5 minutes.
Mr. Casten. It's nice to see you, Chair Powell. I want to
just start by thanking you for your service over these last
couple of years. I know you and I have talked before about how
your rhetoric, your language, making it clear to all of us and
to the nation that we needed a balanced fiscal and monetary
policy in response to the downturn, created the political space
for us to do what we did. I don't think we could have done that
without your voice, and the fact that we had as not only as
rapid a recovery, but as equitable a recovery as we did was
because we had that space. And I think history will show that
we owe you more gratitude than we have given you, and I thank
you for that. The fact that wages grew fastest for the bottom
quintile did not happen but for that fiscal policy that
complemented what you were doing.
And yet we find ourselves today with people talking about
the fear of a recession. And I would submit to you that the
fear of a recession is not because our economy is weak, but
because our democracy is weak. If we were to use our tool on
this side of the dais to say, what should we do to address
labor markets, we would reform our immigration system. What
should we do to reduce people's exposure to high-price volatile
fossil fuels? We would make massive investments in cleaner,
cheaper energy. What should we do in response to housing supply
constraints? We would invest in housing. I could go on and on.
Everything on that list is deeply, deeply partisan because the
markets are looking at the United States and saying, do people
in this line of work, those 537 of us who have the privilege to
hold federally-elected office, do we see human pain and
suffering as a problem to be solved or as a frailty to be
exploited for our political ends?
They look at my colleagues, who 2 years ago thought it was
harder to stand up to Vladimir Putin and support Ukraine, and
say they are going to do the same thing again. They look at the
talking points that all of you get every Monday which say, talk
about Biden's energy crisis, say, ``border crisis.'' I admire
your obedience. Do you have an ounce of leadership in your
bodies?
And now, we are left here in this moment, and I am not
going to ask you to opine on policies. I understand you can't
do that. But you were so eloquent 2 years ago in saying if we
don't balance fiscal and monetary policies, we are going to be
looking at a recovery that looks much more like the Great
Depression or the 2008 recession, where it was a long, slow
recovery. What concerns do you have right now if the only tool
we use to respond in this moment is monetary policy?
Mr. Powell. Honestly, as you can imagine, I am very focused
on monetary policy. And the thing that I assume you are hearing
about from your constituents at home is inflation, and that is
our assignment. It is not that we control all of it.
Mr. Casten. I guess, and I am sorry to interrupt, but we
are. But when I talked to the CFO of a manufacturing company a
month ago, he said, ``My business school teacher taught me to
do just-in-time inventory, and now I am trying to manage to
just-in-case inventory, and that requires capital.'' We talk to
chip manufacturers who are saying, ``I need money to build, but
I need a labor force to grow there, and I don't know how to do
that unless I have access to capital.'' Raising rates is great
at curtailing demand. It is also great at curtailing supply.
What concerns do you have if all we do is raise rates?
Mr. Powell. You are right. There would be supply effects as
well, for example, look at housing, if housing starts will slow
down, and I get that. But ultimately, we have a job to do,
which is to restore price stability so that the economy can
function well. It is really the bedrock of the economy, and it
is most important for the people at the lower end of the
spectrum who are now seeing their wages and savings eaten up by
inflation. We need to do that.
There are lots of other things that need to be done in the
economy and that aren't the business of the Fed, but we have
that job. And that really is our focus along with, of course,
preserving a strong labor market, the two mandates are equal.
In the current situation, the labor market is very strong. It
is extremely strong: two vacancies for every unemployed person;
3.6 percent unemployment; and wages moving up. It really is a
question of getting inflation under control, and that has to be
our focus.
Mr. Casten. I would just ask you to use your voice as
eloquently as you have over the last 2 years. I am not asking
you to tell us how to do our job, but the supply pieces matter.
And when the market is baking in a recession, I cannot justify
that logic if the only tools we use are the tools under your
purview.
Thank you. I yield back.
Ms. Garcia of Texas. The gentleman yields back. The
gentleman from Kentucky, Mr. Barr, is now recognized for 5
minutes.
Mr. Barr. Mr. Chairman, I visited with farmers in Fleming
County, Kentucky, last Friday. My constituent, Charlie Masters,
asked me to emphasize the extreme pain he and other hardworking
Americans are experiencing as a result of this inflation
crisis, and specifically told me that he couldn't afford the
skyrocketing cost of diesel fuel for his tractor. He added
that, ``I don't know how the government says the inflation rate
is 8.6 percent, because for those of us in the real economy, it
feels more like twice or three times that rate.''
That is how painful this is, Mr. Chairman. I appreciate
your humility in acknowledging that both the Biden
Administration and the Fed were wrong last year when they
assessed inflation to be transitory. Clearly, the failure to
more urgently tighten monetary policy was a serious mistake. So
while far too late, I appreciate the current commitment to
aggressive tightening, including the recent 75 basis point rate
hike. But on behalf of Mr. Masters and my other constituents
who are suffering with these price hikes, I encourage the Fed
to exercise fortitude in restoring price stability and staying
focused even in the face of financial market volatility,
staying focused on fixing the supply/demand mismatch in our
economy.
I have a question about the demand side and one on the
supply side. On the demand side, clearly within the influence
of monetary policy, the Fed has stated that its inflation
target rate is 2 percent. The inflation rate last month was 8.6
percent, and as my constituent pointed out, it feels even
worse. Given the chasm between where we are and where we need
to be, do you anticipate any effort within the FOMC to increase
its inflation target to 3 or even 4 percent? And will you
commit to resist any efforts to change the inflation target
that would make it even more difficult to anchor inflation
expectations?
Mr. Powell. No, that is just not something we would do. We
were shooting for 2 percent.
Mr. Barr. Great. And will the FOMC consider reversing the
adjustment to the inflation targeting framework that it made in
around August of 2020, to get back to a target of 2 percent?
Mr. Powell. We will revisit that in a couple of years. I
will say that is really not the story behind why inflation is
so high right now.
Mr. Barr. I acknowledge that, but given the work you all
have to do, I would offer that as a consideration for the FOMC.
What is the end point for your balance sheet reduction efforts?
Mr. Powell. It really is when the balance sheet is at a
size that we can conduct monetary policy, roughly in the range
of $2.5 trillion or $3 trillion smaller than it is now.
Mr. Barr. Okay. And we were at $4 trillion. Now, we are at
$9 trillion, or a little less than $9 trillion, so you are
saying $2 trillion or $3 trillion?
Mr. Powell. No. Sorry to interrupt.
Mr. Barr. Okay.
Mr. Powell. We look at it as a percent of GDP really, and
so we are trying to get back to roughly the level of GDP we
were at.
Mr. Barr. I see. On the supply side, you testified earlier
that supply chain issues and the price of oil are out of your
control. I respectfully disagree in part, and certainly the Fed
does not and should not implement fiscal or energy policy. But
in light of the impending confirmation of Michael Barr as Vice
Chairman of Supervision, I am concerned that the Fed's
regulatory framework could exacerbate supply constraints,
specifically, forcing banks to sideline capital that
institutions could deploy to spur business investment, gold
plating U.S. bank's capital requirements seen recently with the
Basel Committee's modification to the G-SIB surcharge in the
EU, which reduces our domestic competitiveness, and especially
the climate finance agenda and climate stress testing that
would redirect capital away from fossil energy precisely at the
wrong time when we need more, not less, investment in fossil
energy, and when a gallon of gas is $5 nationally and rising.
Do you acknowledge the role of the Fed related to business
investment regulation as further potentially constraining
supply?
Mr. Powell. We certainly do not want to be and are not in
the business of allocating credit either to or away from any
particular industry. We want those decisions to be made in the
private sector.
Mr. Barr. On the regulatory supervision side of the house,
there is a supply side impact and excessive regulation,
especially in the climate finance area, where we need more
investment in energy, and that could have an impact on your
inflation fight.
Finally, a question about Fed independence. Last week, my
Democrat colleagues passed a bill out of the House that would
add to the Federal Reserve's mandate by tasking the Board with
the additional responsibility of addressing racial and
socioeconomic disparities rather than remaining focused on
price stability.
My question is, when inflation hurts minority and low-
income populations the most, do you believe giving the Fed new
responsibilities that fall outside of its core competency would
politicize the Fed and compromise your independence precisely
when you should be focused on combating inflation?
Ms. Garcia of Texas. The gentleman's time has expired.
Mr. Barr. We would love an answer to that question, Madam
Chairwoman.
Ms. Garcia of Texas. I think Mr. Powell can submit that in
writing and forward it to you.
Mr. Powell. Then, I will just say, I think the public--
Ms. Garcia of Texas. Just very quickly then, because we
have people waiting, and you have a hard stop at 1:00.
Mr. Powell. I was just going to say that the public has
been well-served by the dual mandate, and I would be concerned
with any statutory requirement that sets us up to be
accountable for achieving things that we can't achieve with our
tools. And I do think that is a concern.
Ms. Garcia of Texas. Thank you.
Mr. Barr. Thank you. I yield back.
Ms. Garcia of Texas. The gentleman from New York, Mr.
Torres, is now recognized for 5 minutes.
Mr. Torres. Thank you, Madam Chairwoman, and thank you,
Chair Powell. As you know, one of the dominant drivers of
inflation is housing. The affordability crisis is one of supply
and demand. The demand for affordable housing far exceeds the
supply. Do you believe, as I do, that public investments in an
expanding housing supply would bring us closer to addressing
the housing affordability and housing inflation crisis?
Mr. Powell. I would agree that housing is in short supply,
and there is an issue there, but the question of how to address
that is one for you.
Mr. Torres. Okay. But if public investment had the effect
of expanding the housing supply, that would have an impact on
reducing inflation in the long run. Is that a fair assessment?
Mr. Powell. Again, I am reluctant to be drawn into
supporting--
Mr. Torres. Just an objective description of the impact; I
am not asking for you to express support.
Mr. Powell. More supply generally means that--
Mr. Torres. Lower prices, right?
Mr. Powell. --prices will be lower.
Mr. Torres. Okay. Even if you raise interest rates, prices
might nonetheless remain high because of supply chain
disruptions. Catastrophic climate change will over time open a
Pandora's box of supply chain disruptions. Is it fair to say
that catastrophic climate change, if left unchecked, will
likely lead to more inflation and not less and will likely
render the Fed less effective at reducing inflation?
Mr. Powell. Would climate change do that?
Mr. Torres. Yes.
Mr. Powell. Over a very long period of time, I think it
would be very hard to say, and it will depend on what is the
governmental response. It will depend on what is the private
sector response. It certainly has the potential. I think some
people think that dealing with climate change will put upward
pressure on inflation, though.
Mr. Torres. But in the long run, if climate change disrupts
the supply chain, that will obviously lead to higher inflation,
and that is the kind of inflation that the Fed would have the
most trouble reducing. Is that fair to say?
Mr. Powell. Yes, but, again, we are not climate
policymakers. We don't have to weigh these decisions that you
do. It is really a question for elected officials.
Mr. Torres. Regarding the President, how much higher could
the interest rate go? What does the worst-case scenario look
like?
Mr. Powell. How much higher could the interest rate go?
Mr. Torres. Yes.
Mr. Powell. No higher than it needs to go, but we think--
Mr. Torres. But what is the worst-case scenario?
Mr. Powell. I wouldn't say worst case, but I will tell you
what I think. First of all, financial conditions have tightened
very broadly, but the Federal Funds Rate, our own policy rate,
is still quite low, so we want to get it up to neutral pretty
quickly. And then after that, we think it needs to be in a
place where it is moderately restrictive, meaning above the
neutral rate, and that is only appropriate because we have
inflation at a 4-decade high. My colleagues and I wrote down
sort of a range of 3 to 3.5 percent by the end of this year,
and then maybe 3.5 to 4 percent, and that is all highly
conditional based on many, many assumptions. I think we will do
what makes sense as we go, but those are rough estimates, I
think, of what we think might turn out to be appropriate.
Mr. Torres. And then, if the Fed has a target of 2 percent,
how long will it take you to reach the target?
Mr. Powell. In forecasts, I would say generally, my
colleagues and I expect that inflation will move down over the
course of the next 2 years, much closer to the target.
Mr. Torres. My understanding is that one of your
projections is that headline and core inflation will subside in
2023 to 2.6 and 2.7 percent, respectively. Is there any
historical precedent for reducing inflation as rapidly as the
Fed is projecting?
Mr. Powell. Well, yes. Unfortunately, Paul Volcker had to
do something very much like this, on a much larger scale. And,
yes, core PCE inflation has actually tracked down a little bit
from the very hot levels of late last year and is closer to 4
percent. So, I think it is plausible that using our tools and
ideally the supply side healing, that we could get inflation
down to those levels next year.
Mr. Torres. As I understand that, there are two models of
CBDCs, intermediated and disintermediated. The Fed can either
operate through the commercial banking system or it can enable
consumers to have direct accounts with the Fed. Which approach
are you inclined to favor?
Mr. Powell. Intermediated.
Mr. Torres. Intermediated.
Mr. Powell. We actually don't have legal authority to
provide accounts to anyone but depository.
Mr. Torres. The Fed has said it does not intend to proceed
with the issuance of a CBDC without clear support from the
Executive Branch and Congress. Do you see congressional
authorization as a policy preference or as a precondition for
creating a CBDC?
Mr. Powell. I think we will need to have an authorizing
law, and I think we haven't decided whether we think this is in
the public's interest. If we do, we will come to you.
Mr. Torres. But as a matter of law, is that a policy
preference? What is your view?
Mr. Powell. It is a matter of law.
Mr. Torres. As a matter of law.
Mr. Powell. Yes.
Mr. Torres. I see my time has expired, so I yield back.
Ms. Garcia of Texas. The gentleman from Arkansas, Mr. Hill,
is now recognized for 5 minutes.
Mr. Hill. Thank you, Madam Chairwoman. Mr. Chairman, thank
you for being on the Hill this week. We greatly appreciate it,
and I wanted to change subjects. You have had a lot of good
interaction today, and I wanted to talk a little bit about a
rising interest rate environment and the impact on the Fed
itself.
The New York Fed released projections for the Fed's balance
sheet as a part of its annual overview of its 2021 open market
activities. And they announced to the public that the Fed
portfolio could run a projected loss of about $300 billion
through 2024 as interest rates continue to rise, since you have
an enormous Vegas in the world, I guess, fixed income
portfolio. The Fed's most recent financial statements for the
first quarter show an unrealized capital loss of $450 billion
during the quarter.
My first question is, does the Fed need a positive capital
cushion in order to carry out its mission as our central bank?
Mr. Powell. No, we don't.
Mr. Hill. Can you explain to people, why not?
Mr. Powell. Sure. What we do is, our liabilities--our
currency, for example, is a liability to us, and we don't pay
any interest on it, but we own the countrary asset, which is
Treasury bills, so we actually have substantial earnings. And
we give those to the Treasury Department by law over the course
of the year, and we have given a trillion dollars' worth of
those earnings to the Treasury Department over the years, so we
don't retain it as capital because we don't need it. It is
literally not required for us to conduct the operations and do
monetary policy. We don't. We have a very thin sliver of
capital, but it is sort of symbolic. We are not a private
institution.
Mr. Hill. So as interest rates increase and you have to pay
out interest on reserves, and you have about $9 billion, I
think, of operating expenses, there is a point in this interest
rate increase where potentially you would be at an operating
loss, I would take it, and that you would not be having a
profit to distribute to the Treasury. Is that possible?
Mr. Powell. Yes, that can happen, but, again, it will have
no effect whatsoever on our ability to conduct policy, and it
is not something we would consider in setting policy.
Mr. Hill. Right, and you just would treat that as a
deferred asset. Is that right? This is money you owe back to
the Treasury when you start making a profit. You would write
that deferred asset off, right?
Mr. Powell. Exactly right, and we will pay it back down to
zero.
Mr. Hill. Since the Congress has imposed on the Fed an
obligation to pay for the Consumer Financial Protection Bureau,
all their operating expenses, they just send you a memo and ask
you to pay for that when you don't have cash, is that added
into that deferred account assets?
Mr. Powell. Yes, as a practical matter, it would be. It
would be very small.
Mr. Hill. It is not small compared to your overall
operation, but it is one of those errors that I think Congress
made honestly by imposing on our independent central bank an
obligation to, in theory, fund budget operations. In
retrospect, over the last 10 years, do you agree
philosophically, that ideally, the Fed earnings wouldn't be
earmarked for a particular budget operation?
Mr. Powell. In a perfect world, we would fund agencies
through different means. Many of them are self-funding. They
get funding.
Mr. Hill. Yes, I agree with you. I think it ought to be on
appropriations. I have always felt that way. I think it puts
the Fed in an unusual position here as rates rise and your
earnings may go negative as you pay out more earnings than you
obtain in unrealized losses. This just puts that in mind.
Let me thank you. The last time we were together and you
were before the committee, we noted in the review that the
rules regarding potential monetary policy rules had not been
included in the report to Congress, so thank you for putting
those back in to the Congress. And I heard you talk to Senator
Tillis yesterday about the importance of rules. Can you tell us
again how you use rules like the Taylor Rule to help guide you
in an interest rate policy?
Mr. Powell. They are just embedded in the work that we do,
deeply embedded, and basically any time you make a forecast,
you have to make an assumption about monetary policy. So, what
you do is you use some form of a Taylor Rule, and there are
many different iterations at this point. But more fundamentally
than that, we do try to be systematic in monetary policy and
rules. You can consult rules and help.
Mr. Hill. In the few seconds remaining, the Taylor Rule
indicates, I think, that short-term rates might be in the range
of 6 percent. You are not there yet, obviously, to fight
inflation. How do you get there and over what period of time?
Mr. Powell. The real test is that financial conditions need
to be in a place where they are causing the desired outcome in
the economy. There has been so much tightening that isn't
reflected in the overnight rate yet, so, really, we have done a
whole lot more than the changes in the overnight.
Mr. Hill. I thank the chairwoman, and I yield back.
Chairwoman Waters. Thank you. Thank you very much, and I
thank the gentleman.
The gentlewoman from North Carolina, Ms. Adams, is now
recognized for 5 minutes.
Ms. Adams. Thank you. Thank you, Madam Chairwoman, and
Chair Powell. It's good to see you again. I am happy that we
can now congratulate you on your confirmation as you continue
to serve as Chair. Also, I am delighted that Dr. Lisa Cook, an
HBCU graduate and the first Black woman on the Fed Board, and
Dr. Philip Jefferson, the 4th Black man, and someone who
teaches in my district at Davidson, have joined you as well.
We have discussed before how concerned I am about the
housing market, and according to your February Monetary Policy
Report, our housing shortage has been intensified by the
growing cost of construction materials. Chair Powell, how do
you think the Fed's interest rate increase will impact the cost
of construction?
Mr. Powell. I think it is leading to a slowdown in the
housing market. You are seeing fewer buyers. You are seeing
housing starts move back. The housing market is going to be
cooling off. It has been very, very hot. Price increases have
been extraordinarily high, and one of the channels through
which monetary policy works is interest sensitive spending in
particular. So, I do think it doesn't directly affect
construction costs, to your question, but many housing
builders, many home builders do work on borrowed money, and it
will certainly affect their profits and their activities.
Ms. Adams. Thank you. I have heard firsthand from
construction firms from affordable housing providers in my city
and my county, and many others, about the increase in
construction costs, and how seriously hampered these groups are
in building more affordable housing. So yes, I think we need to
really pay a lot of attention to it, and it is really of
concern. Thank you very much, and knowing that I am out of
time, you probably are as well.
Thank you, Madam Chairwoman. I yield back.
Chairwoman Waters. Thank you so very much. I would like to
thank Chair 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.
This hearing is adjourned.
[Whereupon, at 1:01 p.m., the hearing was adjourned.]
A P P E N D I X
June 23, 2022
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