[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
THE FEDERAL RESERVE'S SEMIANNUAL
MONETARY POLICY REPORT
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
JULY 10, 2024
__________
Printed for the use of the Committee on Financial Services
Serial No. 118-102
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
_______
U.S. GOVERNMENT PUBLISHING OFFICE
56-907 PDF WASHINGTON : 2024
HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRANK D. LUCAS, Oklahoma MAXINE WATERS, California, Ranking
PETE SESSIONS, Texas Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
FRENCH HILL, Arkansas, Vice EMANUEL CLEAVER, Missouri
Chairman JIM A. HIMES, Connecticut
TOM EMMER, Minnesota BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia JUAN VARGAS, California
WARREN DAVIDSON, Ohio JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin RITCHIE TORRES, New York
ANDREW GARBARINO, New York SYLVIA GARCIA, Texas
YOUNG KIM, California NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee
Matt Hoffmann, Staff Director
C O N T E N T S
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Page
Hearing held on:
July 10, 2024................................................ 1
Appendix:
July 10, 2024................................................ 59
WITNESSES
Wednesday, July 10, 2024
Powell, Hon. Jerome H., Chairman, Board of Governors of the
Federal Reserve System......................................... 5
APPENDIX
Prepared statements:
Powell, Hon. Jerome H........................................ 60
Additional Material Submitted for the Record
Garcia, Hon. Sylvia:
Federal Reserve Bank of Dallas, ``Unprecedented U.S.
immigration surge boosts job growth, output,'' dated July
2, 2024.................................................... 64
``Budgetary Effects of the Surge in Immigration''............ 71
Hill, Hon. French:
Letter to Chairman Powell re: National Settlement Service and
Fedwire Funds Service, dated July 8, 2024.................. 75
Chairman Powell's speech, ``Monetary Policy in the Time of
COVID,'' dated August 27, 2021............................. 78
Powell, Hon. Jerome H.:
Written responses to questions for the record from Chairman
McHenry.................................................... 101
Written responses to questions for the record from
Representative Barr........................................ 106
Written responses to questions for the record from
Representative Beatty...................................... 127
Written responses to questions for the record from
Representative Donalds..................................... 129
Written responses to questions for the record from
Representative Garbarino................................... 131
Written responses to questions for the record from
Representative Garcia...................................... 134
Written responses to questions for the record from
Representative Hill........................................ 136
Written responses to questions for the record from
Representative Horsford.................................... 141
Written responses to questions for the record from
Representative Kim......................................... 143
Written responses to questions for the record from
Representative Luetkemeyer................................. 148
Written responses to questions for the record from
Representative Sherman..................................... 151
Written responses to questions for the record from
Representative Wagner...................................... 157
THE FEDERAL RESERVE'S SEMIANNUAL
MONETARY POLICY REPORT
----------
Wednesday, July 10, 2024
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:06 a.m., in
room 2128, Rayburn House Office Building, Hon. Patrick McHenry
[chairman of the committee] presiding.
Members present: Representatives McHenry, Lucas, Posey,
Luetkemeyer, Huizenga, Wagner, Barr, Williams of Texas, Hill,
Loudermilk, Davidson, Rose, Steil, Meuser, Fitzgerald,
Garbarino, Kim, Donalds, Flood, Lawler, Nunn, De La Cruz,
Houchin; Waters, Velazquez, Sherman, Scott, Green, Cleaver,
Himes, Foster, Beatty, Vargas, Gottheimer, Gonzalez, Casten,
Pressley, Horsford, Tlaib, Torres, Garcia, Williams of Georgia,
Nickel, and Pettersen.
Chairman McHenry. The Financial Services Committee will
come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
Today's hearing is entitled, ``The Federal Reserve's
Semiannual Monetary Policy Report.'' We like creative titles
here, and that is our traditional title for our Humphrey-
Hawkins hearing.
I will note at the outset that this hearing has a hard stop
at 1 p.m., which we will strictly observe, and which seems only
humane.
I will now recognize myself for 4 minutes for an opening
statement.
Thank you, Chair Powell, for being back with us today.
With prices increasing more than 20 percent since President
Biden took office, inflation remains top of mind for American
families. In fact, only a quarter of Americans describe current
economic conditions as good or excellent, according to the most
recent data from Gallup's Economic Confidence Index.
Despite President Biden's gaslighting, inflation was not 9
percent when he took office. The out-of-control inflation we
are experiencing now is something that this Administration did
not inherit but is a product of their policies and their
overspending.
The nearly $2-trillion partisan and fiscally-reckless
spending as a part of the American Rescue Plan poured fuel on a
smoldering inflationary fire. After a delayed response to
runaway inflation, the Federal Open Market Committee (FOMC) has
acted with a historic pace of interest rate hikes to ease the
pain caused by Democrats' failed economic policies.
The Fed is trying to tame these flames, but it is a
response not to the actual disease, but to Democrat policies
here on Capitol Hill and the Administration.
So far this year, inflation has been more persistent than
many, including the Fed, previously expected. There is still
work to be done to reach the Fed's 2-percent target.
As I have repeatedly said, the commitment to independence
of the Federal Reserve is of the utmost importance, and it is
critical, especially in a political year like this.
Chair Powell, just as you did in previous Administrations,
you must not allow politics to cloud the Fed's monetary policy.
However, despite your best efforts, the Fed independence
remains at risk. And, unfortunately, calls are coming from
inside the building.
Under Vice Chair Barr, the Fed's regulatory and supervisory
agenda has become politicized. Most notably, the development of
the Basel III Endgame proposal has been a mess. This process
has been cloaked in opaque standards and timelines set at
meetings of unaccountable global governance bodies.
The Fed has promised to process 410 almost universally-
negative comments, public comments, regarding the unjustified
and underanalyzed initial proposal.
Recent press reports, which seem to be the only way
Congress gets details on the Basel III Endgame progress, and
your comments yesterday, indicate the Fed will finally conduct
a long-overdue quantitative impact study. That is welcome. And,
if true, this is a promising, promising development.
Chair Powell, the last time you testified before this
committee, you stated that the initial Basel III Endgame
proposal will undergo, ``broad and material changes.''
Yesterday in the Senate, you said the Board supports
reissuing the updated proposal for public comment. I am
concerned that press reports also claim the Fed will tuck any
changes to the proposal into this quantitative impact study.
That study, including the substantial changes to the proposal,
would then be issued for public feedback with a relatively
paltry comment period.
I will reiterate to you here what I have said to you in
private: Broad and material changes to the Basel III Endgame
necessitate a full reproposal. Full stop. Failure to do so will
result in an immediate Congressional Review Act vote out of
this House of Representatives as quickly as we can possibly
process it.
Now, it doesn't have to be this way, and I think the Fed
adhering to its long-standing principles here is highly
important, especially with this interagency process.
I will close with this. Your steady and capable apolitical
leadership of the Federal Reserve has shepherded our economy
through extreme uncertainty. We now find ourselves in the midst
of a new type of uncertainty surrounding the leadership of our
nation. Doubts, fear, and panic often lead to bad decision-
making and even worse policy.
I urge you to reject outside political pressure in this
volatile time and stay the course for the good of the American
people and our economy as a whole.
Thank you for your service, and I yield back.
I will now recognize the ranking member of the committee,
Ms. Waters, for 4 minutes.
Ms. Waters. Thank you very much, Mr. Chairman.
And welcome back to the Honorable Jerome H. Powell,
Chairman of the Board of Governors of the Federal Reserve
System.
Chair Powell, as we saw with the latest jobs report, the
labor market remains strong, and the economy is surging.
Despite inheriting an economy from the prior Administration
that had the worst jobs record since the Great Depression,
President Biden has now overseen a record 15.7 million jobs
created since he took office, with 206,000 new jobs created
just last month.
Not only that, but under the Biden Administration, we are
witnessing low unemployment rates, rising wages, and
stabilizing prices for goods and services. This is not only
because of President Biden's strong leadership but also because
of the historic legislation signed into law by President Biden,
which has resulted in lower costs, created more jobs, rebuilt
our infrastructure, supported small businesses, eliminated
mostly junk fees, wiped out more than $144 billion in Federal
student loan debt for 14 million borrowers, and cut child
poverty in half.
President Biden is and will continue to advance policies
that are providing good-paying jobs and an economy that works
for everyone.
Now, while I am pleased to see that inflation is declining,
the latest data makes it clear that housing remains the number-
one driver of core inflation. Since 2020, house prices have
increased by nearly 50 percent, with Americans now spending on
average over 30 percent of their income on housing. This is a
top priority for Democrats but remains an afterthought for
Republicans.
Earlier this Congress, I reintroduced my comprehensive
housing legislation package including the Housing Crisis
Response Act, which provides more than $150 billion in fair and
affordable housing investments, representing the single-largest
investment in affordable housing in our nation's history.
These funds would create nearly 1.4 million affordable and
accessible homes, bring down housing costs for all, and revive
the American Dream of homeownership. Committee Democrats are
committed to getting this bill across the finish line, and
continue to hold out hope that our Republican colleagues will
finally join us in this effort.
Unfortunately, extreme MAGA Republicans are not just
ignoring housing inflation; they are advancing their Project
2025 manifesto that would dismantle U.S. democracy and the
economy as we know it today. Project 2025 is authored by almost
two dozen former Trump White House staffers and Trump
Administration officials. It was compiled and published by the
ultra far-right Heritage Foundation, whose CEO recently
declared that they are, ``in the process of a second American
Revolution, which will be bloodless if the left allows it to
be.'' And, if that kind of talk reminds anyone of the rhetoric
we heard in the lead up to and on January 6, 2020, it should.
Project 2025 promotes radical ideas to materially undermine
the Federal Reserve, if not effectively abolish it. MAGA wants
to put you out of a job, Chairman Powell.
So, I look forward to your testimony and to hearing from
you, a Republican who was first nominated by President Trump,
about your thoughts on the importance of the Federal Reserve
and the work you have done to help our economy.
And I yield back.
Chairman McHenry. The gentlelady yields back.
I would note for the record that Jerome Powell was
initially nominated by President Obama to the Board of
Governors of the Federal Reserve System before being nominated
by President Trump as Chair.
I now recognize the gentleman from Kentucky, Mr. Barr, who
is also the Chair of our Financial Institutions Subcommittee,
for 1 minute.
Mr. Barr. Thank you, Mr. Chairman.
Welcome, Chairman Powell.
Runaway inflation and the increased interest rates
necessary to confront it continue to hammer Americans,
especially those living paycheck to paycheck. Workers and
families feel the pain, making everyday purchases at high
prices in the grocery aisle and at the pump. They have suffered
years of eroding purchasing power in their paychecks under the
Biden Administration's economic management. Heightened mortgage
rates make it prohibitive for new homebuyers to reach the
American Dream of a starter home for their family.
I am pleased that the Fed is resolute in getting inflation
under control. And I am pleased that you have committed to an
apolitical approach to this. I am not pleased by the Fed's
opaque, unjustified, politicized, and underanalyzed regulatory
proposals, which will ultimately hurt all Americans. We need to
know where the Fed is going on its fundamentally-flawed Basel
III Endgame proposal and its opaque regulatory approach.
I yield back.
Chairman McHenry. The Chair now recognizes the ranking
member of our Financial Institutions and Monetary Policy
Subcommittee, Mr. Foster, for 1 minute.
Mr. Foster. Thank you, Chairman McHenry, and Ranking Member
Waters.
I would also like to thank you, Chair Powell, for joining
us today and for the role you have played in combating
inflation and supporting a stable economic recovery.
While the Presidency is often the focus of political
pronouncements about macroeconomic conditions, there is no
question that it undersells the importance and the independence
of the work of the Federal Reserve Board.
While actions taken by the President and Congress certainly
play a significant role, monetary policy decisions made by an
independent Federal Reserve are the big dog in shaping
macroeconomic conditions that shape economic outcomes for
millions of Americans. And work continues on inflation, but
significant progress has been made to bring the country in line
with the Fed's 2-percent target.
The good news is that macroeconomic policy is working as
designed. Well-calibrated monetary policy with fiscal support
from the American Rescue Plan, the Infrastructure Investment
and Jobs Act, and the CHIPS and Science Act has powered strong
job creation and low unemployment, while staving off a
recession that many thought inevitable--and far better, I
should point out, than our peer countries--while Democrats are
committed to supporting our efforts to cut costs for American
families.
I yield back.
Chairman McHenry. We will now welcome the testimony of
Jerome Powell, the 16th Chair of the Federal Reserve Board of
Governors.
Chair Powell, you will be recognized for 5 minutes to give
an oral presentation of your testimony. And without objection,
your written statement will be made a part of the record.
You are now recognized for 5 minutes.
STATEMENT OF THE HONORABLE JEROME H. POWELL, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM (FED)
Mr. Powell. Chairman McHenry, Ranking Member Waters, and
members of the committee, I appreciate the opportunity to
present the Federal Reserve's Semiannual Monetary Policy
Report.
The Federal Reserve remains squarely focused on our dual
mandate to promote maximum employment and stable prices for the
benefit of the American people. Over the past 2 years, the
economy has made considerable progress toward the Federal
Reserve's 2-percent inflation goal. And labor market conditions
have cooled, while remaining strong. Reflecting these
developments, the risks to achieving our employment and
inflation goals are coming into better balance.
I will review the current economic situation before turning
to monetary policy.
Recent indicators suggest that the U.S. economy continues
to expand at a solid pace. Gross domestic product (GDP) growth
appears to have moderated in the first half of this year,
following impressive strength in the second half of last year.
Private domestic demand remains robust, however, with slower
but still solid increases in consumer spending. We have also
seen moderate growth in capital spending and a pickup in
residential investment so far this year. Improving supply
conditions have supported resilient demand and the strong
performance of the U.S. economy over the past year.
In the labor market, a broad set of indicators suggests
that conditions have returned to about where they stood on the
eve of the pandemic, strong but not overheated. The
unemployment rate has moved higher but was still at a low level
of 4.1 percent in June. Payroll job gains averaged 222,000 jobs
per month in the first half of the year. Strong job creation
over the past couple of years has been accompanied by an
increase in the supply of workers, reflecting increases in
labor force participation among individuals aged 25 to 54 and a
strong pace of immigration. As a result, the jobs-to-workers
gap is well down from its peak and now stands just a bit above
its 2019 level. Nominal wage growth has eased over the past
year. A strong labor market has helped narrow longstanding
disparities in employment and earnings across demographic
groups.
Inflation has eased notably over the past couple of years
but remains above the committee's longer-run goal of 2 percent.
Total Personal Consumption Expenditures (PCE) prices rose
2.6 percent over the 12 months ending in May. Core PCE prices,
which exclude the volatile food and energy categories, also
increased 2.6 percent. After a lack of progress toward our 2-
percent inflation objective in the early part of this year, the
most recent monthly readings have shown modest further
progress. Longer-term inflation expectations appear to remain
well-anchored, as reflected in a broad range of surveys of
households, businesses, and forecasters, as well as measures
from financial markets.
Our monetary policy actions are guided by our dual mandate
to promote maximum employment and stable prices for the
American people. In support of these goals, the Committee has
maintained the target range for the Federal funds rate at 5\1/
4\ to 5\1/2\ percent since last July, after having tightened
the stance of monetary policy significantly over the previous
year and a half. We have also continued to reduce our
securities holdings. At our May meeting, we decided to slow the
pace of balance sheet runoffs starting in June, consistent with
the plans released previously. Our restrictive monetary policy
stance is helping to bring demand and supply into better
balance and to put downward pressure on inflation.
The Committee has stated that we do not expect it will be
appropriate to reduce the target range for the Federal funds
rate until we have gained greater confidence that inflation is
moving sustainably toward 2 percent. Incoming data for the
first quarter of this year did not support such greater
confidence. The most recent inflation readings, however, have
shown some modest further progress. And more good data would
strengthen our confidence that inflation is moving sustainably
toward 2 percent.
We continue to make decisions meeting by meeting. We know
that reducing policy restraint too soon or too much could stall
or even reverse the progress that we have seen on inflation. At
the same time, in light of the progress made both in lowering
inflation and in cooling the labor market over the past 2
years, elevated inflation is not the only risk we face.
Reducing policy restraints too late or too little could unduly
weaken economic activity and employment. In considering
adjustments to the target range for the Federal funds rate, the
Committee will continue its practice of carefully assessing
incoming data and their implications for the evolving outlook,
the balance of risks, and the appropriate path of monetary
policy.
Congress has entrusted the Fed with the operational
independence that is needed to take a longer-term perspective
in the pursuit of our dual mandate of maximum employment and
price stability. We remain committed to bringing inflation back
down to our 2-percent goal and to keeping longer-term inflation
expectations well-anchored.
Restoring price stability is essential to achieving maximum
employment and stable prices over the long run. Our success in
delivering on those goals matters to all Americans.
I will conclude by emphasizing that we understand that our
actions affect communities, families, and businesses across the
country. Everything we do is in service to our public mission.
Thank you. I look forward to your questions.
[The prepared statement of Chairman Powell can be found on
page 60 of the appendix.]
Chairman McHenry. Thank you, Chair Powell.
I will now recognize myself for 5 minutes for questions.
Chair Powell, let's begin with this question. The Basel III
Endgame--I know you had questions about it yesterday, but I
think we need further clarity. In your testimony about Vice
Chair Barr's discussions with the Federal Deposit Insurance
Corporation (FDIC) and with the Office of the Comptroller of
the Currency (OCC) on the next steps for the Basel III Endgame,
you mentioned potential changes have been made to the original
Basel III Endgame, that a lot of progress has been made, and
that the Board is very close to agreeing on the substance of
those changes.
But the next steps, that is really what I want to get into.
Let's go through the mechanics of what happens next. If the
Fed, the OCC, and the FDIC agree on the substance of whatever
changes you are going to make, what happens then? Walk us
through the mechanics as you anticipate it.
Mr. Powell. Okay. We are very close to having exactly that
agreement on the substance of the proposed changes pursuant to
those talks.
The next question is how to proceed. And it is my view and
the strong view of a number of Board Members that the
appropriate thing to do is to take that new proposal and
publish it along with the effects of the quantitative impact
survey, and put that out for comment again and receive comments
on that, and then take some time to review those comments
before finalizing the regulation.
And that is a discussion we are having with the other two
agencies now. We have not been able to reach agreement on a
path to do that, but that is something that we think is the
right way to do it. That is what we have done in similar
situations. There aren't that many similar situations. But when
we see broad and material changes to an important regulation,
we think, let's go out again and give all the commenters
another chance to comment.
Chairman McHenry. Yes. And that also avoids serious lawsuit
risk and the risk that will Congress step in and overturn this
rulemaking using the Congressional Review Act.
I think the other agencies, if they are not agreeing with
the Fed, they are running against the independence of the
Federal Reserve.
This is not a trifling matter of policy. This is a matter
of real substance for the independence of the Fed and the
rulemaking at the Federal Reserve, and I think we should be
able to keep the independence of the Fed separate, especially
in this political environment.
But opening up a new comment period means you have to get
consensus from the Board of Governors on the policy. You have
to get the agreement of the scandal-plagued Chair of the FDIC
or the five-member board of the FDIC. You have to get agreement
by the acting Comptroller of the Currency. These people should
not have real standing with the Fed on a matter of serious
policy, especially with a Chair of the FDIC who is being ousted
by his own party as soon as they can get a replacement
confirmed.
It is an absurd thing that the Fed has to go to an Acting
Comptroller of the Currency, and a guy who is going to be out
of a job very soon at the FDIC, and get agreement. But thank
you for listening.
Is the quantitative impact analysis going to include the
interplay with the stress test, the global systemically
important bank (G-SIB) surcharge, and all of the other capital
charges here? Will that be a part of the quantitative impact
analysis?
Mr. Powell. It will be in this proposal, which does include
changes to the G-SIB surcharge, but does not include the stress
test.
Chairman McHenry. But the goal here with the quantitative
impact is to actually measure the impact of these rules as
enacted, based upon existing regulatory structures?
Mr. Powell. That is right.
Chairman McHenry. Okay. So, let's get into the question of
a balance sheet as quickly as we can. Two and a half years ago,
you stated that, ``The Committee intends to slow and then stop
the decline and size of the balance sheet when reserve balances
are somewhat above the level it judges to be consistent with
ample reserves.''
That was 2\1/2\ years ago. Where are we in this question of
what are ample reserves?
Mr. Powell. The balance sheet--the runoff in the portfolio
is now, I think, $1.7 trillion so far. So, we have made quite a
lot of progress, but we think we have a good ways to go.
And as I mentioned, and as you just mentioned, we have now
slowed the pace really with a view to getting as far as we can
without creating frictions and disruptions that might cause it
to prematurely stop shrinking.
Going a little bit slower might actually enable us to go
further. We think we have quite a ways to go. It's very hard to
be precise about it. It is really a question of supply and
demand. And we will find that level with a little bit of a
buffer on top of it, and that is where we will stop.
Chairman McHenry. Okay. Thank you for your testimony.
The ranking member, Ms. Waters, is recognized for 5
minutes.
Ms. Waters. Thank you very much.
Chairman Powell, are you familiar with Project 2025?
Mr. Powell. Not really, no.
Ms. Waters. Have you heard about it?
Mr. Powell. I really don't focus on these things at all.
Ms. Waters. You don't focus, but you know there is
something known as Project 2025?
The reason I am asking you is because one proposal is to
get rid of the Fed's dual mandate to promote not only stable
prices, but also maximum employment. This is your mandate.
These are mandates, right?
Mr. Powell. Yes.
Ms. Waters. This is what you do. Is that right?
Mr. Powell. Yes, we do serve a dual mandate. That is right.
Ms. Waters. And so, if there was anything that would get
rid of the mandate, what would it do to our economy? What would
it do to our country?
Mr. Powell. The question of which mandate we serve is very
much a question for Congress. My own view has been that the
dual mandate has served us well. This is something Congress can
change and change back to a single mandate. There are,
however----
Ms. Waters. What do you do to get maximum employment?
Mr. Powell. Basically, we have one tool on the economy, and
that is, we raise and lower interest rates. We at the Fed
certainly do believe that the dual mandate has been a good
thing, and it has enabled us to--it has not stopped us from
controlling inflation when that was the thing that needed to be
done.
Ms. Waters. Of course, I understand you may not have seen,
heard, or read about Project 2025. Are you familiar with an
effort in the country to get rid of diversity and inclusion?
Mr. Powell. I see these things mentioned. But, honestly, we
are pretty focused on our task, which is maximum employment and
price stability. We are strong supporters of diversity at the
Fed, as you know.
Ms. Waters. Are you aware that I created a Subcommittee on
Diversity and Inclusion in this committee?
Mr. Powell. Yes, I remember that.
Ms. Waters. And do you think that getting rid of diversity
and inclusion interferes with your ability to really realize
the mandate of maximum employment?
Mr. Powell. I have spent most of my career in the private
sector, and what I observed was that really successful
institutions in the United States--companies, organizations--
generally are those that do a really good job on diversity and
get the best out of people and attract a broad, diverse range
of talents to the table, and people feel comfortable speaking.
That is the way we feel about it at the Fed, and that is
what we have been doing and will continue to do.
Ms. Waters. And do you think it is important not only to
have diversity and inclusion in the public sector but in the
private sector also?
Mr. Powell. Yes. And as I mentioned, if you look at very
successful American companies, you will very often see that
they are good at that. They are good at hiring, attracting,
investing in, and keeping diverse talent. That is one of things
that our really good U.S. public companies do well.
Ms. Waters. Have you seen improvement during your tenure
where diversity and inclusion has created opportunities for
more jobs and helped to reduce the unemployment rate?
Mr. Powell. I think you see over the course of my long
career a big change in diversity and inclusion, and you see
that in the private sector and the public sector. And I think
that is generally progress. I do.
Ms. Waters. Under the work of this committee and the
subcommittee, as chaired by Mrs. Beatty, she was able to gather
important data about what was going on in the private sector.
And what she discovered was that many of the CEOs and others
welcomed the opportunity to learn more and to do better and to
get assistance. And we saw improvement with diversity and
inclusion. Have you seen that?
Mr. Powell. There is no question. If you talk to CEOs, they
get this. If you want to attract the best talent in our country
now, you need to be committed to these things.
Ms. Waters. I would like to compliment you on the job that
you have been doing. And I would like to compliment you on
keeping us informed about inflation. Not only do I welcome you
here today, I look forward to working with you for years to
come.
I yield back. Thank you.
Mr. Powell. Thank you.
Chairman McHenry. The gentleman from Arkansas, the Vice
Chair of the committee, Mr. Hill, is now recognized for 5
minutes.
Mr. Hill. I thank the Chair.
Chair Powell, thanks so much, and welcome back to the
committee.
I want to pick up where Senator Tim Scott and Chair McHenry
left off and reiterate my strong support for your comment
yesterday in the Senate about the need to repropose the Basel
III Endgame.
The Supreme Court's precedent, I think, makes it clear that
if a rule undergoes broad and material changes from the
proposal to the final rule, the public must be given a
meaningful opportunity to review and comment on those changes.
You generally share that view, I think. Is that right?
Mr. Powell. Yes.
Mr. Hill. And I am looking forward to seeing the results of
the Quantitative Impact Study and the separate comment period,
as well as the interagency agreement that you referenced
yesterday.
Because of the Dodd-Frank Act's role, and Fed Vice Chair
for Supervision Barr's role, and the Fed's role, would it be
fair to say the Fed is the first among equals on proposing a
rule like this? In other words, does the Fed have a supremacy
position on determining whether it should be fully reproposed
or not, or do you view it strictly as a collaboration? I'm just
curious about your view on that.
Mr. Powell. I would say it is strictly collaborative. And I
would say that our discussions with the FDIC, which Vice Chair
Barr has actually been conducting, and the OCC have been very
productive so far. So, I want to make sure to say that.
We have continued to work our way through this, and I
believe we will get fairly soon to a resolution of the
remaining process issue.
Mr. Hill. Good. Let me turn from that subject to the
court's recent decision to overturn the so-called Chevron
Doctrine.
Many of us believe this was the first step to reining in
decades literally of an unprecedented, uncontrolled growth in
the administrative state. And I think all of us, at least on
this side of the aisle, are certainly saying to the Federal
Reserve and other Federal agencies in our jurisdiction that we
want to reassert Article I authority over the direction that
independent agencies work.
Would it be fair to ask you to certify that because of this
change in Chevron, the Fed would commit to promulgating new
rules only if they are at the direction of an explicit
congressional authorization?
Mr. Powell. I think, first of all, we are studying that and
several other decisions that have just come down in the last
week or two. So, I haven't got anything definitive for you on
that. I think you know us to be an organization--I know us to
be an organization that is strongly committed to the rule of
law. The Supreme Court says what the law is.
Mr. Hill. Yes.
Mr. Powell. We will always do what we believe the law is.
Mr. Hill. I will submit that question maybe in more detail
in writing, and maybe you will have a chance to reflect on
that.
Back in February, you were on, ``60 Minutes,'' and you said
the U.S. budget deficit, the national debt is unsustainable. Do
you still view that the U.S. is on an unsustainable fiscal
path?
Mr. Powell. I do. I think I tried to be clear that the
level of the U.S. debt is not itself unsustainable, but the
path that we are on is unsustainable, and I don't think that is
controversial.
Mr. Hill. I think many of us certainly agree with that. And
we know that when the deficit is at 3 times the economic growth
rate and growing, it is of concern. And it has contributed to
inflation. Just 3 years ago, in Jackson Hole, Wyoming, you gave
a speech where you were confident that inflation was
transitory, which I think we have come to realize is not the
case.
This hearing is sort of a can't-miss opportunity for the
Fed to demonstrate some humility on the monetary policy
decisions which some on this side of the aisle particularly
think have made inflation worse.
In your August 2020 Jackson Hole speech, you said the
flexible average inflation targeting framework regarding 2
percent--that you would let it run above 2 percent.
Was the Fed blinded by the previous 20 years of global
change that was deflationary and not--you were not alert enough
in 2020 to be more cautious about that change in policy?
Mr. Powell. We were certainly mindful of a long period of
time in which there had been very low interest rates but also
very low inflation, suggesting that the neutral interest rate
must have fallen quite substantially. That was the standard
view.
The thing we didn't see coming was the pandemic. It is not
like everything went off the rails. It is like we had this
pandemic, and it really changed the way the economy was
working. We had a big crisis. We did a lot of things.
The concerns that led to us--those concerns that we were in
a world of very low interest rates all the time.
Mr. Hill. But now, wouldn't you say we are in a very
opposite situation where, because of reshoring and tariffs and
other----
Mr. Powell. I was going to----
Mr. Hill. ----policies that are----
Mr. Powell. I was going to----
Mr. Hill. ----quite inflationary?
Mr. Powell. I would say this. Right now, we have the policy
rate in the mid-fives, right? And we see the policy as
restrictive. But clearly, the interest rates, the neutral
interest rate must have moved up at least in the short term.
So, I think that is the question we will be asking ourselves in
our review which begins at the end of this year----
Mr. Hill. We look forward to that.
Mr. Powell. How much of what----
Mr. Hill. I yield back to the chairman.
Mr. Powell. ----we did in that time period is relevant to
the new world where rates appear to be higher.
Chairman McHenry. The gentleman from Georgia, Mr. Scott, is
recognized for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman.
And welcome, Chair Powell. It is great seeing you. The last
time I saw you, we had the gracious pleasure of you visiting
with me in my office, and we discussed a great variety of
things. Thank you for that visit.
Now, Chair Powell, this year the Fed tested 31 banks, up
from 23 last year. Is that correct?
Mr. Powell. I believe that is right, yes.
Mr. Scott. And by estimating losses, revenues, expenses,
and capital level under hypothetical stress scenarios, we did
that, correct?
Mr. Powell. Yes.
Mr. Scott. And all 31 banks remained above their minimum
common equity Tier 1 capital requirements after observing
losses of nearly $685 billion. Is that correct?
Mr. Powell. Yes, that is correct.
Mr. Scott. Yes, I wanted to get those figures out and
provide you with--you may have heard this, but I want to share
with the nation, because your Vice Chair Barr made this
statement. And I wanted to put in the record his exact quote
from this great achievement.
He said, ``Our goal of our stress test is to help ensure
that we have enough capital to observe losses in a highly
stressful scenario, and this test shows that we do.''
I thought that was a great statement of your record.
Now, let me ask you my question. It is simple. Will the
2024 Fed stress test results have an impact on how prudential
regulators roll out a new and updated capital proposal?
Mr. Powell. The two are really two different things. There
is the Basel III capital proposal, and there is the stress
test. And really the Basel III, as I have mentioned and we have
discussed, we are almost ready to put forward for further
comment a revised proposal with material and broad changes to
it.
The stress tests are a different thing. And, of course, we
realize we have to adapt those over time and be open to
changes. And it has evolved significantly over time, but it is
really a separate thing from the Basel III Endgame.
Mr. Scott. Give us a little bit more information on the
Basel III, because I worked with you with this. Our work goes
all the way back to the Obama Administration when we responded
to that crisis with our banks and finance.
You and I worked that up where we came up with the hardest-
hit program to help those who were suffering with, those States
that were suffering with high unemployment and at the same time
high home foreclosures, and we were successful. And we have
established that program, and it is still going on and helping
many of our States.
But I want to also share what is happening around the world
as a result of our activities. The European Union is now set to
delay key parts of its bank capital rules by more than a year
so that their lenders will not be at a disadvantage. Over in
Canada, it is important to note that their banking regulators
have also delayed for another year, imposing high capital rules
on countries' banks at the risk of making them uncompetitive.
And the Swiss National Bank is highly unlikely now to adopt
a proposed 15-percent capital requirement for UBS and other
Swiss banks. And the Bank of England has issued a near-final
proposal to increase U.K. bank capital by 32 percent.
I think this is all of a measure of your great work and
that of your Vice Chair, and I just wanted to let you have a
comment on that, please.
Mr. Powell. Sure. We are committed to finalizing this
proposal. Our banks are going to live with these rules for a
long, long time. The main thing is to get it right, and that is
what we are doing.
What we do in the end will be consistent with the Basel
agreement, and it will also be consistent with what other
comparable large jurisdictions are doing.
Mr. Scott. You are doing a great job. Keep up the good
work.
Chairman McHenry. We will now recognize the gentleman from
Pennsylvania, Mr. Meuser, for 5 minutes.
Mr. Meuser. Thank you very much, Mr. Chairman.
And thank you very much, Chairman Powell, and also, thank
you for continuing to indicate that you will look at the
entirety of the economy, the whole economy. I appreciate that.
One of the nation's largest banks recently warned in a
memo, and it has also been voiced by smaller banks, that the
current pace of regulations, such as changes to capital
requirements and lowering debit charge interchange caps, could
lead to new fees associated with checking accounts and other
increased costs for small businesses. This comes amid expiring
tax provisions that are sunsetting, as we speak, that are
critical for small business, such as the R&D tax credit,
interest deductibility, and bonus depreciation.
This does raise the question: Are you considering how these
regulations and tax increases will directly work against your
mandate to achieve 2-percent inflation?
Moreover, with the proposed changes to Basel III, it is
crucial to ensure that all stakeholders have a voice in this
process, which you are stating will occur, and a Basel
reproposal and adequate comment period are certainly very
welcome.
So, Chairman Powell, yesterday in the Senate, you mentioned
that the majority view of the Board is to repropose Basel III
for comment period. Could you clarify if this means the
proposal will be reproposed from scratch, and any other
specifics you can provide?
Mr. Powell. Sure. We haven't reached agreement on this, as
I mentioned. We are working through this with our colleagues at
the FDIC and the OCC. And I can't tell you exactly what the
form of it will be. The sense of it would be, though, that we
are making material changes and that we would want the public
to have a chance to look at those changes in light of the way
they play off against the quantitative impact survey and they
should have a reasonable time to comment on those.
In addition, we are focused on one big area. But there are
institutions that have made comments all across the spectrum,
and we are reading all of those carefully. And we are not going
to republish all of those.
Mr. Meuser. Okay.
Mr. Powell. Some of those we can just make changes and move
forward on. It is going to be a very labor-intensive, time-
consuming process. Writing these things up takes a long time.
And we are going to get it right.
Mr. Meuser. Good. That is great.
Obviously, you know that Canada recently postponed it, as
did the EU and the U.K., and from an international competition
standpoint, it seems to make sense, so that is appreciated.
Chairman, would you agree that excessive spending,
increased taxes, and limits on domestic energy production are
causes of higher costs for business, contribute to inflation,
and tighten the labor markets, kind of running contrary to your
two mandates?
Mr. Powell. You are asking me kind of a political question
there. I am not going to--I don't want to criticize a platform
of economic fiscal policies that are not really ours to decide.
Mr. Meuser. It is really more of an economic question, but
I appreciate your answer, sir.
So, when you mentioned recalibrating policy yesterday in
the Senate hearing, was part of your thinking taking a more
holistic view of economic conditions?
Mr. Powell. Yes, very much so.
Mr. Meuser. Okay.
Mr. Powell. Yes.
Mr. Meuser. Chairman Powell, is there any data to support
so-called, ``greedflation''--that somehow, it has caused
inflation? Is there any data to support those comments?
Mr. Powell. We look at it that this inflation has been
caused by a combination of very strong demand and constrained
supply. So, it was really a high-speed collision between an
economy that was reopening.
And, by the way, there was inflation all over the world at
the same time. So, these were some common factors. But at the
same time, you had tremendous demand, for example, for
automobiles. You had constrained supply because there weren't
enough semiconductors, long story short.
Mr. Meuser. Right.
Mr. Powell. But to us, that is what this inflation is all
about. We have observed the sort of healing of the supply side,
at the same time restrictive monetary policies are weighing on
demand, and we have seen inflation coming down from the----
Mr. Meuser. Okay. So, there is no data that supports that
gouging of consumers is part of the inflation?
Mr. Powell. It has been very hard to track a connection
with earnings and things.
Mr. Meuser. Secretary Yellen mentioned that she didn't feel
that there was grocery price shock and that sort of thing.
Groceries and gasoline are the two driving problems for
American families, and certainly my constituents.
Do you believe your policies are helping to alleviate in
those two areas?
Mr. Powell. A lot of things affect--let's take energy
first. The energy prices are generally set at the global level.
We do have some effect on that.
Mr. Meuser. Sorry, Chairman Powell. I have run out of time.
Thank you.
I yield back, Mr. Chairman.
Chairman McHenry. The gentleman from Missouri, Mr. Cleaver,
is now recognized for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
And thank you, Chairman Powell, for being here.
And, in some ways, I want to follow up or at least respond
to the very civil question of why we need an independent
central bank. Your response was, ``The question you raised, if
I answered it, it would be along some kind of a political
avenue,'' and you didn't want to drive on that avenue.
So, I am also very much concerned about a lot of the
discussion. I have been on this committee for a while, and it
comes up quite often.
When the Federal Reserve was birthed around the turn of the
century, I think, 1913, 1918, something like that, prior to the
establishment of a central bank, was our country experiencing a
lot of recessions because people felt no security, particularly
the business community, in making big investments because
nobody was in control, this kind of thing? What went on just
went on.
Mr. Powell. Yes, I think the lack of a central bank between
1836 and the founding of the Fed was a period of lots and lots
of depressions. And a lot of it had to do with the crop cycle
and the banks not being able to handle the very large seasonal
swings, and there was no central bank to provide liquidity.
And that is really what gave rise to the founding of the
Fed in the early part of the last century.
Mr. Cleaver. Do you think that it is dangerous to blend
monetary policy and fiscal policy?
Mr. Powell. To blend them?
Mr. Cleaver. Yes.
Mr. Powell. We try to keep them very separate. And we try
not to express views on fiscal policy. That is for elected
people who have undergone elections and won and make those very
difficult decisions. We have a really specific narrow-but-
important mandate that we do, that you have given us. And we
try to stick to that.
So, we take your policies as given, and then we conduct
monetary policy with that.
Mr. Cleaver. I don't want to draw you into any kind of a
political response, and I have not read all of this Project
2025 document, but I read some of it online a couple of nights
ago. And whether it comes out of a 2025 or a 3089, whatever,
one of the things that I am concerned about from reading this
document is that the document argues that the Federal Reserve
is the inflation problem and eliminating the Federal Reserve,
imposing economic policy on the Fed, that does not come from
within the Fed.
So I am wondering, would you agree with any of that I just
stated, whether it came from me or Chairman McHenry or anybody
else?
Mr. Powell. I will just say, first of all, we are certainly
fair game for any criticism people have. I think we have--what
we have learned and what we know is that having an independent
central bank is really essential.
If you want to have high and volatile inflation, then the
quickest road to that would be to undermine the independence of
the central bank, of the Fed in our case. I find that view is
very widely held up here on Capitol Hill, in both political
parties.
Mr. Cleaver. So, eliminating the Federal Reserve is best
for promoting economic stability?
Mr. Powell. Yes.
Mr. Cleaver. Thank you.
I knew that the ranking member was going to come and deal
with the issue of housing. She always does. And we all
appreciate the fact that she is obsessed with it, and I like
that obsession.
But I am wondering, as we try to figure out how to deal
with this issue--oh my goodness. My time has run out.
Mr. Powell. Is that a question?
Mr. Cleaver. I didn't finish it, but I--yes, if you knew
where I was going, please.
Chairman McHenry. The gentleman's time has expired.
We will now recognize the gentleman from New York, Mr.
Garbarino, for 5 minutes.
Mr. Garbarino. Thank you, Mr. Chairman.
Chair Powell, thank you very much for being here today.
Based on some comments made today and yesterday, it appears
you have made quite a bit of progress on changes to the Basel
III Endgame proposal, and you are very close to agreeing on
some of the substance of those changes. I know you won't get
into specifics. You said that. I just don't know how deep you
won't get into them.
But I just want to confirm what you said to my colleague,
Mr. Meuser. There will be--you are not reproposing some things;
it is just going to be a partial reproposal?
Mr. Powell. What we are looking at doing are major things
that we have been working on, and there will be additional
changes that will be made, that won't be reproposed. That is
what we are working on, rather than a full, wide proposal.
Mr. Garbarino. So, it is not a complete reproposal, just a
partial one?
Mr. Powell. Yes.
Mr. Garbarino. Can you tell me which components you are----
Mr. Powell. Until it is all agreed upon and ready to go and
vetted, I am reluctant to try to get into too many specifics,
just because when you are doing these things, nothing is agreed
upon until everything is agreed upon.
Mr. Garbarino. No, I understand. I am not asking for what
specifically your changes----
Mr. Powell. I hope to be able to come to you with a really
clear answer on that soon.
Mr. Garbarino. I understand.
Mr. Powell. We are ready to go at the Fed.
Mr. Garbarino. And that is my next question. It has been
said several times that you and many of the Members of your
Board are at odds with your counterparts at the FDIC and the
OCC over how to proceed with putting out a revised proposal for
comment.
So, if the FDIC and the OCC are not yet on board with
allowing for a new comment period, who is holding up this
consensus? Is it Chair Gruenberg?
Mr. Powell. I don't want to say that we are at odds. I just
want to say we are working through this issue together and----
Mr. Garbarino. Someone has to be holding it up.
Mr. Powell. It is a discussion that we are having. And I
think it has been constructive, and I think we will try to keep
it that way.
Mr. Garbarino. Can you at least answer whether or not the
five-member FDIC Board needs to sign off, or can you just go to
the Chair?
Mr. Powell. No, I think it is the Board. And, of course,
the Comptroller is one person. The FDIC can speak for
themselves, but I do think their Board would be the question.
Mr. Garbarino. Okay. One final timeline question before I
move on. You mentioned yesterday that a reasonable prediction
would be that Basel would not be finalized until the first
quarter of 2025. Under this timeline, would it be safe to say
that implementation would then not occur until at least the
beginning of 2026?
Mr. Powell. Again, I can't that be specific. Someone asked
me, Does it sound like the first quarter of next year might be?
And I said it might.
There is a range of times it would take. The thing is, as I
mentioned, U.S. banks are going to be living with these rules
for many years. The point is to get it right, not to do it
quickly. We want to----
Mr. Garbarino. I agree.
Mr. Powell. ----do it right, listen to the comments, make
sound decisions, and move ahead in a way that gives us a
sustainable set of rules so that we won't have to come back and
fix all the mistakes.
Mr. Garbarino. Thank you.
I want to move on to another topic, long-term debt. You
mentioned yesterday that you would most likely not move forward
with other rules until people reach a place of understanding
and acceptance of a revised Basel proposal.
I hope that is the truth, as banks need to fully understand
the implications of a Basel proposal before any action is taken
on long-term debt.
Finally, Chair Powell, I would like to emphasize the need
for the Fed to conduct a comprehensive, data-driven, and, most
importantly, transparent assessment of the current liquidity
framework.
Very quickly, will you commit to conducting a public
Quantitative Impact Study and a full notice-and-comment
rulemaking before imposing any new liquidity requirements?
Mr. Powell. I didn't catch the first part of your question.
Mr. Garbarino. Will you commit to conducting a public
Quantitative Impact Study and a full notice-and-comment
rulemaking before imposing any new liquidity?
Mr. Powell. On the liquidity thing, I am not exactly sure
what we are contemplating there. We certainly contemplate
getting a full range of input from the public on that because
some of these are novel ideas and we understand that.
Mr. Garbarino. Okay. As the chairman said before, these
impact studies are very important because they show what
impacts these rules would have. I think it is very important
that we have that, because we had a mucked-up process with
Basel 2.0 and we don't want to repeat that.
I have a little time yet, so I am going to yield to my
colleague from Pennsylvania, Mr. Meuser, because I know he had
another question.
Mr. Meuser. I thank my colleague.
Chair Powell, just back to what we were talking about, the
price instability of groceries and gasoline where we do have
somewhat of an affordability crisis, as it has been termed, so
would lowering rates in near future be a pro-growth initiative?
Is that something that is being considered, that would
actually drive investments and give a clearer picture for
investments and perhaps help in these two categories, and in
the end increase in supply, as we lower those prices?
Mr. Powell. Honestly, when we think about our near-term
rate moves, we are thinking about a couple of things, the first
of which is we want to be more confident about inflation.
Mr. Meuser. My apologies, Mr. Chairman. I went over.
Mr. Powell. Sorry.
Mr. Meuser. Mr. Chairman, I yield back.
Chairman McHenry. The gentleman from California, Mr.
Vargas, is recognized for 5 minutes.
Mr. Vargas. Thank you very much, Mr. Chairman. Thank you
very much for this hearing.
And to the ranking member, thank you very much.
Chairman Powell, thank you very much for being here. We
appreciate it. In fact, I was looking at your history when they
were saying who nominated you, when you got here, and all that.
In fact, you had had public service even prior to that time,
right?
Mr. Powell. That is right.
Mr. Vargas. I thank you for your long public service to the
nation.
Mr. Powell. Thank you.
Mr. Vargas. I think it is outstanding.
Mr. Powell. I appreciate it.
Mr. Vargas. I think we all respect you deeply here.
You are pretty boring here today, to be frank.
Mr. Powell. Sorry?
Mr. Vargas. You are pretty boring here, to be frank.
Mr. Powell. Thank you. That is a high compliment.
Mr. Vargas. Yes, it is, because sometimes when you are
here, there are all sorts of cameras here, and they are
watching your every step and all. And I think there is a reason
for that, right? And that is because the economy is doing okay.
Am I wrong about that?
Mr. Powell. Take a look at our economy. We are growing at
around 2 percent, it feels like. Inflation is down to 2.5, 2.6
percent. Unemployment is at 4.1 percent. These are good
numbers.
Mr. Vargas. I hear the parade of horribles on the other
side, how the sky is falling. But I don't see the media here to
attest to that. In fact, it is just the opposite.
Did you read some of the headlines of the new government in
Britain? If not, let me read one. It says, ``New British
government inherits worst economic plight since World War II.''
In fact, there are a number of headlines like that, saying
that England is in trouble. I imagine, if you were running
their central bank, I bet you there would be a whole bunch of
media here, beating you up to find out what the hell you are
doing or what you aren't doing.
And I think the reason for that, again, is I think the
government here has done a pretty darn good job. One of the
things you said you didn't see coming was the pandemic, right?
And I am not putting words in your mouth.
Mr. Powell. Right.
Mr. Vargas. In fact, I was here. And I heard the parade of
horribles that we were going to have a recession, maybe a
depression. In fact, the country was going to fall apart. Did
it?
Mr. Powell. No, we went through a period of high inflation,
as the other countries did. And that is very challenging for
the people.
Mr. Vargas. And in fact, isn't it the case that most of
those countries had higher inflation than we did, for example,
in Europe?
Mr. Powell. Over time, there were times when their
inflation was higher, I think.
Mr. Powell. Yes, it was.
Mr. Powell. Overall, it was broadly comparable.
Mr. Vargas. Yes, in fact, I brought it up a number of times
here because there was a whole bunch of those countries that
had much higher inflation than we did.
Mr. Powell. Europe was much harder hit with the energy
issues coming out of the Ukraine war than we were.
Mr. Vargas. Sure. There is a whole bunch of other issues to
instability; they had political instability and a whole bunch
of things, obviously.
But it is interesting today that the parade of horribles
that we hear doesn't seem to manifest itself with the media or
the attention that you normally get. And that is good. I think
it is a great thing.
Now, I do want to ask a couple of questions. I do have
concerns. Basel III on housing, I think I have made those
concerns known to your office, and I won't rehash them.
But I do have issues that I want to talk to you about with
regard to climate. Obviously, you said you don't read too much
in the news. You didn't hear about Project 2025. I don't think
that is what you meant to say, and I don't want to put words in
your mouth.
When the ranking member asked you if you had heard about
it, I think you said, no. I think you have probably heard about
it, but you haven't read it.
Mr. Powell. I have seen nothing more than headlines on it.
I have devoted zero----
Mr. Vargas. Me, too.
Mr. Powell. ----energy into that.
Mr. Vargas. Yes, I don't read that wacky stuff myself
either, but I certainly read the headlines.
But the reason I ask about headlines is you obviously have
seen what has happened in Texas. You have seen what has
happened with climate change. In fact, you have testified, I
think, before that you believe in climate change. Is that
correct?
Mr. Powell. Sure.
Mr. Vargas. Yes. And what are we doing? You have taken a
number of steps, I think, that have been very positive to make
sure that we look at the risks of climate change. Could you go
over some of those?
Because that does concern me. I think that is a change that
we also didn't see--well, we saw it coming. I saw it coming. I
have been saying it for a long time, but a lot of people didn't
believe me.
Mr. Powell. If you are looking at financial regulators, you
are looking at people who have a very, very limited role in
climate. And that is just to look at the institutions that we
supervise and make sure that they understand and can manage the
risks that they are running. We are not the climate
policymakers.
Mr. Vargas. Right, right. And I am not asking that.
Mr. Powell. It has to be elected people to do that.
Mr. Vargas. Right. But you have to take a look at the risk.
Look at the risks that the insurance companies are taking. And
the banks, of course, are financing these homes, and now, you
can't get insurance on them. So, all of a sudden, you can't
rebuild.
These are risks that the banks are looking at.
Mr. Powell. We don't regulate insurance companies.
Mr. Vargas. No, but you regulate the banks.
Mr. Powell. Banks, yes.
Mr. Vargas. And these banks have mortgages on those houses,
do they not, many of them?
Mr. Powell. In many cases, they are not writing mortgages
anymore. So, that is the result we are getting, that banks are
saying they see these risks. They do.
Mr. Vargas. My time is up. But thank you again. I
appreciate you.
Mr. Powell. Thank you.
Chairman McHenry. The gentlelady from California, Mrs. Kim,
is recognized for 5 minutes.
Mrs. Kim. Thank you, Mr. Chairman.
Chairman Powell, thank you for being with us today.
Gosh, you are under a lot of pressure from all sides to
divert from our monetary policy goals. And I commend you for
your leadership and for staying focused on the core missions of
the Fed, which are price stability and maximum employment. And
thanks again for your leadership.
You have stated that it is the Fed's strong view that you
will have to reopen the Basel III Endgame proposal for comment
again, and I really urge the FDIC and the OCC to move forward
with reopening the comment period.
Chairman Powell, would broad support mean abandonment of
any modified proposal that garners mostly negative public
comments in a public comment period for the modified proposal?
Mr. Powell. Sorry. I didn't follow your question.
Mrs. Kim. Would broad support mean abandonment of any
modified proposal that garners mostly negative public comments
in a public comment period for the modified proposal?
Mr. Powell. Broad support empirically would mean a good
solid vote on the Fed Board, and I have tried not to be
specific about what that means. And it also means broad support
among the broader community of commenters on all sides. That is
what I meant by broad support.
Mrs. Kim. Got it.
Mr. Powell. Yes, that is what I meant by it.
Mrs. Kim. Thank you.
And as the Fed looks to enacting several changes to the
proposal, I would also urge you not to overlook how the Basel
Endgame proposal would disproportionately impact FBOs and
regional banks and U.S. domestic jobs because of the way the
outside operational risk is weighted. Can we get your
commitment to that?
Mr. Powell. Let me just say we are--I am not going to get
into specifics. We are well aware of those concerns. We have,
obviously, carefully digested all of the comments we have
gotten from all different sectors, and those are concerns of
which we are well aware.
Mrs. Kim. Thank you.
Let's switch gears to another matter. You have spoken on
the need of transparency. Are there any conversations at the
Fed to have more transparency and better engagement and
consistency with stress tests?
Mr. Powell. We have increased transparency in the stress
test over time. And I would say we do--if people want to write
articles and make comments that are critical of the stress
tests, we are going to read those, and we are going to think
about that. We are open to improving it.
We know that the stress test has to evolve over time if it
is to remain relevant, and I think transparency is one of those
subjects where we are prepared to listen and think about ideas.
Mrs. Kim. Definitely. I would like to see a stress test
regime that is more transparent and adaptive, identifying
unforeseen risks, so we can achieve that by being more
collaborative, I believe, yes.
I am also interested to hear from you whether you and your
fellow banking regulators have considered the cumulative impact
of any new liquidity standards with the Basel III framework and
the existing post-crisis liquidity requirement. What industry
engagement has the Board's staff held with respect to changes
to the liquidity framework?
Mr. Powell. We haven't actually made any proposals on that
yet. We have had significant industry interaction on the
proposals. And we will move, I think some time this year,
toward----
Mrs. Kim. What about the Board staff? Have they conducted
any industry-wide data collection to study the necessity for
and the impact of any changes to the existing liquidity
framework?
Mr. Powell. I think we have done a lot of investigation on
that front, but I think that this is the beginning of the
process, not the end.
We haven't published proposals yet. We are working on them.
And it is a pretty early stage.
Mrs. Kim. Thank you.
Let me quickly talk about the inflation issue. We had a
peak inflation rate of 9.1 percent in June 2022, and a lot has
been talked about it being a supply side issue and the demand
shock from the opening economy. Can you elaborate on how the
expansion in the money supply and fiscal stimulus played a role
in persistent inflation? And why is it so important to get to
the 2-percent inflation rate goal right now?
Mr. Powell. The inflation that arose here was a collision
between very strong demand as the economy reopened. Remember,
there had been fiscal transfers. We had very low rates. Those
things were done because we thought we could be looking at a
very, very bad economic time.
As it turns out, the economy reopened and demand spiked
very high. People had saved a lot of money because they
couldn't spend. And so, there was tremendous demand and there
was constrained supply. And what you got was inflation, and you
got that everywhere in the world. That is what happened.
We have made quite a lot of progress on inflation. To bring
inflation down, the Fed has been working, with restrictive
policy, on cooling demand. That has been working. And the
supply side has been healing, and the negative labor
participation shock has essentially reversed, adjusted for----
Chairman McHenry. The gentlelady's time----
Mr. Powell. So, it is kind of working out as we had
expected.
Chairman McHenry. The gentlelady's time has expired.
Mrs. Kim. Thank you very much, Mr. Chairman.
Chairman McHenry. The gentlelady from Georgia, Ms.
Williams, is now recognized for 5 minutes.
Ms. Williams of Georgia. Thank you, Chairman McHenry.
And thank you, Chair Powell, for joining us today.
As the President of the Federal Reserve Bank of Atlanta,
Raphael Bostic, has so rightly pointed out, combating economic
inequality is a critical part of the Fed's dual mandate. When
everyone in our community doesn't have the opportunity to
contribute to their fullest potential, the economy is not
firing on all cylinders.
Nowhere is this more apparent than in my home City of
Atlanta, which has more Black-owned businesses than any other
city in the country but is still among our nation's leaders in
the racial wealth gap.
I applaud you and your staff at the Federal Reserve for the
work that you are doing to make sure that the economy works as
well for the hardworking people of Georgia's, ``Fighting Fifth
District,'' as it does for those in the top 1 percent. This
includes helping to make sure that financial services are
affordable and accessible to everyone.
As the Fed moves forward with the proposed changes to
Regulation II, I know that protecting access to affordable and
accessible banking is at the top of your mind. That is why I
was concerned when I started receiving outreach about the
unintentional effects that the Reg II proposed rule would have
on marginalized communities, including my constituents in
Atlanta.
Specifically, I heard about the impact that the reduction
in interchange fees proposed by this rule could have on Bank On
certified accounts in my district and across the country. The
Bank On initiative is a partnership between financial
institutions and trusted community-based organizations to offer
low- or no-cost bank accounts to unbanked and underbanked
individuals.
Access and affordability are at the heart of the changes
that you are proposing, and I couldn't agree more with those
goals. But we have to make sure that programs designed to serve
unbanked and underbanked individuals and marginalized
communities continue to flourish.
In response to these concerns, my colleague across the
aisle, Mr. Luetkemeyer, and I sent a bipartisan comment letter
in March to you highlighting those very concerns and urging
that the final rule not negatively impact low- and moderate-
income communities.
Chair Powell, how does the Fed take into account how
regulations impact constituents who don't have an attorney or
an interest group to submit a comment on their behalf?
Mr. Powell. Let me say first, we have heard those concerns
that you raise and others have raised about aspects of the
proposed rule, and we very much understand the concerns that
are being raised.
Where we don't have comment letters, we try to be
thoughtful about the impact of our regulations, but
principally, we are looking for public comment on things.
Ms. Williams of Georgia. Thank you.
The FDIC's most recent data shows that the rate of unbanked
households is at an all-time low. The Bank On initiative has
certainly played an important role in this progress. Bank On
certified accounts are available to more than 95 percent of
low- and moderate-income households across all 50 States.
Access to low- or no-cost banking services is a door to
financial inclusion and wealth generation for marginalized
families. As written, Reg II could undo some of the enormous
progress made in the past several years.
Chair Powell, how can regulators work with members of this
committee to ensure that future proposed rules do not hinder
Americans' access to tools that enhance the Federal Reserve's
financial inclusion efforts?
Mr. Powell. We are very focused on things like Bank On, as
you pointed out, and on access to the financial system for
marginalized communities. So, we wouldn't want to do anything
to weigh on that. And we are happy to work with you and your
office on those issues.
As I mentioned, we are hearing the comments and we are
reading them and we are taking them into account as we think
about appropriate changes to the proposal.
Ms. Williams of Georgia. We will definitely follow up on
that because as we are writing these regulations, I want to
make sure that we are thinking about the real-world impact and
what it means to consumers when they are accessing financial
institutions.
I look forward to working with you to further the Fed's
financial inclusion efforts. Earlier this week, I sent you
another bipartisan letter related to the Federal Reserve's
April proposal to extend the operating hours of the Fedwire
Funds Service to 22 hours per day, 7 days per week, and every
day of the year. That was news that I was eager to hear.
This may sound like a small technical change, but it can
have a big impact on our constituents, especially for those
living in marginalized communities who live paycheck to
paycheck.
Growing up in the booming metropolis of Smiths Station,
Alabama--you have probably never heard of it, Chair Powell--but
there were limited options for loans and short-term loans.
In an area where everyone needs a car to get to work and
they have to work to eat, when money is short, any delay in
accessing a paycheck or paying a bill can disrupt your entire
household.
Extending operating hours for the Fedwire Funds Service and
the National Settlement Service will allow people continual
access to their funds outside of what we deem normal operating
hours.
And I hear the gavel. I am out of time. But I will be
following up for more conversation. Thank you.
Mr. Powell. Thank you.
Chairman McHenry. The gentleman from Nebraska, Mr. Flood,
is recognized for 5 minutes.
Mr. Flood. Thank you, Mr. Chairman.
Chairman Powell, after a year with very high inflation that
battered American paychecks, inflation rates have moderated
somewhat, however, inflation continues to linger above the 2-
percent target rate set by the Federal Reserve. In fact, the
PCE inflation index has remained above 2 percent for the last 3
years.
The Federal Open Market Committee's Statement on Longer-Run
Goals and Monetary Policy Strategy issued at the beginning of
the year stated that, ``The Committee seeks to achieve
inflation that averages 2 percent over time, and therefore
judges that, following periods when inflation has been running
persistently below 2 percent, appropriate monetary policy will
likely aim to achieve inflation moderately above 2 percent for
some time.''
Chairman Powell, does the commitment to achieve a 2-percent
average over time apply in the other direction as well?
Meaning, that if inflation remains above 2 percent for a
protracted period, would the committee instead aim for
inflation moderately below 2 percent for some time in order to
achieve an inflation average of 2 percent?
Mr. Powell. No, it doesn't.
Mr. Flood. Is it fair to say that you would need to see the
PCE index dip below 2 percent at least once in the coming
months in order to contemplate a rate cut?
Mr. Powell. No, that is not fair to say. We have said that
you don't want to wait until inflation gets all the way down to
2 percent because inflation has a certain momentum. You
wouldn't wait that long. If you waited that long, you have
probably waited too long, because inflation will be moving
downward and will go well below 2 percent, which we don't want.
Mr. Flood. What combination of factors would you need to
see in order to support a rate cut this month or in September?
Mr. Powell. Once again, I will say I am not sending any
signals on any particular date of any meeting whatsoever on
policy. I said that yesterday, and I am saying it again today.
But I will answer your question.
What we said is that we want to be more confident, we want
to have greater confidence, and that means more good inflation
readings that inflation is moving sustainably down to 2
percent, greater confidence that that is the case.
Remember, we have a dual mandate, too. We are not just an
inflation-targeting central bank. We also have an employment
mandate. So, I could also see us cutting--and we have said
this--if we saw unexpected weakening in the labor market.
And we do now see--I will speak for myself--I now see the
risks to the two mandates as much closer to being in balance. I
think for a long time, we have had to focus heavily on the
inflation mandate, but I think now we are getting to the place
where the labor market is getting pretty much in balance to
where it needs to be. And so, we are looking at both sides.
Mr. Flood. I know that the media and others have continued
to talk about the prospect of political interference with the
Federal Reserve. With an election coming up, I know you are
very aware of the heightened scrutiny awaiting the Federal Open
Market Committee meetings in July and September.
Can you use this opportunity to speak regarding the Federal
Reserve's political independence going into this election?
Mr. Powell. Sure. I would be glad to. Our political
independence is critical to our ability to do our jobs and to
sustain the faith of people across the political spectrum. And
it comes down to, we make our decisions based on economic data,
the evolving outlook, and balance of risks, and we don't take
into consideration any other factors, including political
factors.
We have a long history of doing that, and I think the
public believes we will do that. Any decision that we make on
rates, on any of our policy tools, it is going to be very well-
grounded in the data, and it will represent our best thinking
about what is best for the American public in the near- and
medium-term. And that is the promise that I will give and that
all my colleagues will give.
And that means that we are not looking at things like
election cycles. We are not looking at any of those things. We
are looking at the data, what does it tell us is the right
thing to do. When we figure that out, when we think it is time
to move, we will go ahead and move, but not until then.
Mr. Flood. I appreciate that.
Finally, I would like to raise concerns with housing costs.
While shelter is one component of the broader PCE calculation,
housing often makes up one of the largest, if not the largest
expense for many consumers. Inflation for housing remains
persistently high.
One of the characteristics of this economy is that consumer
sentiment is remarkably low. Do you think high housing costs
could be contributing to the persistently-low consumer
sentiment?
Mr. Powell. I think high prices generally--I don't think
anybody really can be super highly confident of their answer on
this. But I do think it is a fact that while inflation has come
down, prices are high. And people are paying more for things,
more for housing, more for the essentials of life such as food
and energy.
And that is how I would explain surveys. We say that the
economy is growing, inflation has come down, unemployment is
low, and all of that is true, but prices are high.
Mr. Flood. Thank you, Chairman Powell, for your answer and
your testimony.
And I yield back.
Chairman McHenry. The gentleman from New York, Mr. Torres,
is recognized for 5 minutes.
Mr. Torres. Thank you.
Chair Powell, the Fed has an inflation rate target of 2
percent. Are you waiting for both PCE inflation and CPI
inflation to fall to 2 percent or only one of those metrics?
Mr. Powell. We look at different measures, but for a
quarter of a century, the PCE inflation has been the Fed's
goal. We have defined our goal in terms of that because we
think it is the better measure of the costs and inflation that
the public actually faces.
Mr. Torres. And now, you have said that you are willing to
cut interest rates before reaching the 2-percent target. Is the
decision to cut interest rates going to be driven by reaching a
particular target en route to 2 percent, or is it driven by the
overall trajectory of the inflation rate?
Mr. Powell. It is going to be driven by the totality of the
data. There isn't a particular number that we have in mind that
we have to get to. It is more, you look at all of the data, and
the question we are asking ourselves is, are we sufficiently
confident that inflation really is moving down toward 2
percent? So, what is the underlying inflation rate looking
through the volatility?
We are also looking, as I mentioned, at the labor market,
and we are asking ourselves--we have to take into account now
maximum employment, that mandate. We are looking at both of
those in the decisions that we make.
Mr. Torres. Are you confident that the inflation rate is on
a downward trajectory?
Mr. Powell. I do have some confidence of that. I think we
have seen that over the past several years. The question is,
are we sufficiently confident that it is moving sustainably
down to 2 percent? And I am not prepared to say that yet.
Mr. Torres. Chair Powell, you announced a reproposal of
Basel III rather than a mere revision. Do you believe that the
U.S. banking system is sufficiently capitalized in the absence
of Basel III?
Mr. Powell. I have long been of the view that U.S. banks
are well-capitalized and that the level of capital in the U.S.
banking system is about right.
Mr. Torres. Okay. So if the banking system is sufficiently
capitalized in the absence of Basel III, then what exactly is
the need for Basel III?
Mr. Powell. First of all, there is no precise answer as to
the appropriate level of capital. I think we have been part of
developing the Basel standards. They create international broad
parity. It is important that we have that parity.
And it is important that we do something that is comparable
to what the other large jurisdictions are doing, and it is
consistent with Basel. And I think that is what our banks want,
that is what we want, and that will best serve the public.
Mr. Torres. But you agree we should conform without gold-
plating?
Mr. Powell. Some things we have gold-plated and some things
we haven't, but I think our Endgame proposal should be, at the
end, consistent with the requirements of Basel and consistent
with what the other large jurisdictions are doing.
Mr. Torres. Are you confident that there is no legal
conflict between the standardization recommended by Basel III
and the regulatory tailoring mandated by Congress?
Mr. Powell. I think we can work through all of that.
Mr. Torres. Okay. But if there were a conflict----
Mr. Powell. Basel doesn't impose any requirements on
anyone. There are no enforceable requirements. Every
jurisdiction does what it is going to do. Basel doesn't bind
anybody.
Mr. Torres. Right, but the regulatory framework you are
adopting would codify those recommendations.
Mr. Powell. Yes.
Mr. Torres. It could have the force of law, right?
Mr. Powell. Yes, that is right.
Mr. Torres. So, if there were a conflict between the
codified recommendations and an Act of Congress, would you
agree that an Act of Congress would supersede those
recommendations?
Mr. Powell. Yes. Sure.
Mr. Torres. Does the loss of Chevron deference have any
implications for Basel III?
Mr. Powell. It is very early days to assess. There are
several decisions that are about administrative law, and I
think it is too early for us to say.
Mr. Torres. Fair enough.
Mr. Powell. Ultimately, the question is, are the actions we
are taking in compliance with the law? And that decision says
that there will be less deference or no deference maybe to the
opinions of the agency, but that just means a court will be
making--they are answering the same question, which is, are
those actions consistent with the law?
Mr. Torres. The Fed has a target rate when it comes to
inflation. Does the Fed have a target when it comes to
quantitative tightening, like when it comes to what should be
the size of the Fed's balance sheet?
Mr. Powell. We don't have a specific target, no.
Mr. Torres. What would you consider to be a healthy size
for the Fed's balance sheet?
Mr. Powell. We define it not with numbers but with words.
We want an ample reserves regime with a buffer so that reserves
are not scarce. And we think plentiful reserves, ample reserves
is the right place to be, and we will find that empirically.
Mr. Torres. Can you put a number on that?
Mr. Powell. No, I really can't.
Mr. Torres. For 4 decades, we have had the best of both
worlds, low unemployment and low inflation. Can the U.S.
economy return to the golden age of low unemployment and low
inflation, or are we doomed to live with a new normal of higher
interest rates?
Mr. Powell. I think we have low inflation. We have had a
period here of very low--I'm sorry, of low unemployment.
Mr. Torres. We have high inflation.
Mr. Powell. We do.
Mr. Torres. So, can we have the best of both worlds?
Mr. Powell. We certainly can, and that is the plan.
Mr. Torres. Okay.
Mr. Powell. We are going to return to 2-percent inflation,
I am reasonably confident.
Some people argue that we are entering into a world of a
lot of upward inflation shocks. That would be a challenging
world. But that remains to be seen.
Mr. Torres. Thank you.
Chairman McHenry. The gentleman from Iowa, Mr. Nunn, is
recognized for 5 minutes.
Mr. Nunn. Thank you, Mr. Chairman.
And thank you, Chairman Powell, for being with us today.
Your office has done a very diligent job in working with
this body on both sides of the aisle. I chalk some of that up
to the fact that you have some very good folks from Iowa on
your staff there helping to keep the trains running on time.
So, that is excellent.
I will note that in Iowa, the average family has
experienced annual inflation of about $925-per-month just in
the last 3 years. I have six kids. We are the number-one egg-
producing State in the country. But yet, eggs for each one of
my kids went up 40 percent this past year, and multiply that by
six. I am no economist, but that adds up really quick. And I
think I am reflective of a lot of families across the country
right now.
Mr. Chairman, one of the things I would like to talk about
is what we are focused on and what your department is working
on at the Fed.
The U.S. Federal Reserve, in my opinion, should be more
focused on folks like those in my hometown of Bondurant, Iowa,
versus what is coming out of unelected bureaucrats in Brussels,
Belgium, for example, which is one of the reasons I am so
grateful that you have talked about reopening Basel III for a
conversation on what is in the best interest of the American
people. I applaud you and your team for this.
While I would like to see Basel III, candidly, scrapped
altogether, I think that there are three things in this
proposal that we have to look at immediately. One, the impact
of credit availability, especially to ensure that it won't be
tighter credit conditions on small businesses back home in
places like Iowa. Two, the ability for farmers across the
country to be able to hedge their grain, corn, soybeans, and
livestock in a new Basel III conversation. And ultimately,
eliminate the downstream effect on American banks being held to
higher standards, very clear in Basel III, than what is being
held in Europe.
With that, I want to re-address your team's attention to
the letter I sent in a bipartisan way with Senator Jerry Moran,
specifically emphasizing the negative impact of increased bank
capital requirements on the economy, our constituents, and
ultimately, our agricultural producers across the country.
First, can you confirm that the next Basel III proposal as
outlined will address concerns from our agricultural growers,
including our farmers?
Mr. Powell. Let me just say that we are well aware of the
concerns you are raising about hedging, and I am not going to
be too specific about things, but we are quite aware of those
concerns.
Mr. Nunn. I certainly hope your team gets the opportunity
to hear that because it is one of the most painful things I am
hearing back in my home district.
Would you agree that the end users' concerns could have
been mitigated maybe at the front end of this if Congress or,
say, a farmer in my district had been included in those opening
conversations?
Mr. Powell. In hindsight, perhaps that is right. But in any
case, that is the purpose of the comment period.
Mr. Nunn. I will note that 84 percent of the comments
coming from this proposal concern entities outside of banks, as
you know. A lot of those were from the agricultural industry
who felt that they had no voice in this and were a recipient of
things that really harmed their businesses.
With that, I want to read quickly--former Treasury
Secretary Larry Summers was asked about Basel, and he said,
``We are going to need to prepare for consolidation in banking
in the future, and quite possibly, some even further evolution
of lending away from banks.''
Now, I am going to note here that Iowa has over 250
community banks with assets under $7 billion. His comments are
of great concern on this consolidation.
Do you share concerns about a consolidation amongst banks
across America?
Mr. Powell. I would speak for myself. I realize that
community banks are tremendously important in their
communities, and it is not a better world when community banks
go out of business.
At the same time, if there needs to be consolidation, I
don't think we should be standing in the way of that. But we
don't want to be part of the reason why community banks are
going out of business or being forced to merge because of, for
example, high fixed costs because of regulation or other
things.
Mr. Nunn. I would agree with you, Mr. Chairman. We don't
want to be the instigator for a small bank to have to go out
and stop serving the local community.
As we look at Basel III, if it is finalized in early 2025,
does that mean we will push implementation back to 2026?
Mr. Powell. I don't know exactly what it would be, but
something like that is right. We would have a typical phase-in
process at the end of the--there's quite a lot of work to do to
get to a final rule, and then, there will be a phase-in
process. I don't know exactly what the date would be.
Mr. Nunn. Thank you, Mr. Chairman.
I just want to know kind of a timeline for my folks--there
is obviously 2026. Or take my advice, scrap it altogether, and
we can start over if we even need to do that.
Let me ask very quickly, with Chevron overturned, is there
anything the Fed is doing to identify areas where maybe we have
overregulated on the Federal side and you are still policing
right now?
Mr. Powell. Under the Chevron decision?
Mr. Nunn. Yes.
Mr. Powell. Again, our view is we are very focused on
obeying the law and reading the actual words of the law and
interpreting it according to the words that are in the law.
This is the way we approach things.
And I am not sure how much will change. Basically, a court
will be doing that with a little bit less deference to the
agency. But we think we are already interpreting the law pretty
carefully.
And, again, these are brand new decisions. There are
several of them. And it is very early. We are just studying
them now.
Mr. Nunn. Thank you, Chairman Powell. And I hope you
continue to self-police. Much appreciation to you and your
team.
And thank you, Chairman McHenry.
Chairman McHenry. I will now recognize the gentleman from
North Carolina, my friend, Mr. Nickel, for 5 minutes.
Mr. Nickel. Thank you so much, Mr. Chairman.
Welcome back, Chair Powell.
I represent a Republican-leaning, very purple district, so
my constituents sent me here to get things done. It has been
disappointing that we are on track for what I believe could be
the least-productive Congress in our nation's history.
But this committee has done some good bipartisan work on
the digital assets market structure bill and stablecoins. It is
a place where I have hope that we are going to see some action
in this Congress.
I know you and I have spoken privately about stablecoins,
and here in the House, in a bipartisan way, we have been
working diligently to pass a bill to regulate payment
stablecoins. This committee voted in favor of the legislation
in a bipartisan way last year, and there have been numerous
calls from this committee to you and to the Fed asking that you
prioritize working with Congress to help push this legislation
forward.
We have enjoyed our conversations with staff as well. Can
you commit to directing your staff to finalize and support
passage of stablecoin legislation this year?
Mr. Powell. We have been really pleased to take part in
this process and very much appreciate being included in it, and
we will stay with it. We think it is really important that we
have a Federal framework for stablecoins. And again, we will be
all in on working with you to get that done.
Mr. Nickel. Thank you very much.
A big issue for the folks that I represent is housing. The
rising cost of housing hits my constituents especially hard in
North Carolina. Our ranking member, Maxine Waters, has made
this a big priority for the work that we do in the committee.
In North Carolina, we have 343,000 households that spend
over half of their monthly income on rent, leaving little money
for other expenses like healthcare, transportation, and food.
Access to safe and affordable housing is essential to the well-
being of working families and individuals in North Carolina and
around the country.
Chair Powell, despite the strong economic trends you
mentioned in your testimony, housing prices and median rents
have increased by nearly 50 percent, and 41 percent,
respectively, since May of 2020, and they continue to rise. In
fact, housing costs continue to outpace modest wage gains.
High interest rates continue to add to those costs. For
example, high interest rates make it more expensive for home
builders to finance new housing. High interest rates also cause
landlords to charge higher rents and lead to higher mortgage
costs for would-be homebuyers.
I know that you and your colleagues at the Fed are
correctly focused on bringing down inflation, an important
goal, but have you considered that at this point, with housing
cost increases being the primary driver of inflation, keeping
interest rates high only thwarts that stated goal?
Mr. Powell. There are a couple of things that are happening
with housing. Before the pandemic, there was a pretty serious
housing shortage, and we can't do anything about that. Then,
the pandemic came along.
We really think the best thing, the most important thing we
can do for the housing market in the medium- and longer-term is
to get inflation under control so that interest rates can come
down, so that we can get back to a more normal interest rate.
No one knows exactly where interest rates will go, but they
will be lower than they are now. And the housing market supply
and demand will work their way out, and you will have a supply
of housing. There is still going to be a housing shortage at
the end of that, though.
And it is true that our policies work through interest-
sensitive spending. Housing is maybe the most interest-
sensitive form of spending, buying houses with a mortgage. We
know that we have really significant effects in that market,
and it is tough on people. But this is the path to getting
inflation down, which will bear fruit for many, many years.
Mr. Nickel. Thanks so much.
I don't think I am going to be able to get in my next
question in the limited time I have, but I wanted to give you
this opportunity, if you would like it. I have talked to you
privately about this, and I have a pretty good idea what you
will say, but if you would like to say that the economy is,
``heading for a soft landing,'' you are welcome to say, ``soft
landing,'' as much as you would like right now.
Mr. Powell. I will say that for some time, I have thought
there is a path to getting back to full price stability while
keeping the unemployment rate low. There is that path. We have
been on it. We are very, very focused on staying on that path.
I would say we are at a place now where the risks to the
two mandates are much more in balance than they were, and that
means it is not just about getting inflation down. The job is
not done on inflation. We have more work to do there. But at
the same time, we need to be mindful of where the labor market
is; we have seen considerable softening in the labor market. We
still have a strong labor market, with low unemployment, and
this is what we are very focused on continuing to work toward.
Mr. Nickel. Thank you very much.
Mr. Powell. Thank you.
Mr. Nickel. And I yield back.
Mr. Barr. [presiding]. The gentlewoman from Texas, Ms. De
La Cruz, is now recognized.
Ms. De La Cruz. Thank you, Mr. Chairman.
And thank you, Chair Powell, for being here today. I
appreciate that.
I represent a working-class area in south Texas. In fact,
my district is mostly Hispanic, one of the most-Hispanic
districts in the entire nation, over 80 percent. And my
district is also a rural community, so the topic today greatly
affects my constituents, and it is something personal for me.
That being said, the population that I represent is a
population that Federal Reserve research has shown will be
disproportionately the hardest hit in inflation.
That being said, higher prices due to Biden's induced
inflation is something not only the nation is feeling, but my
constituents are feeling. They are feeling it at the grocery
store. They are feeling it at the gas pump. Small businesses
are feeling this.
And we know that cutting back on their spending, people who
are living paycheck to paycheck, they still can't get away from
these increasing costs at the grocery store or the gas station.
So, even small changes have a big impact in rural
communities like mine. In fact, the Farm Bureau recently said
that the cost of the Fourth of July celebration had high, high,
increases. The headline reads, ``Record-High Fourth of July
Cookout Costs: Inflation Hits the Backyard.'' This report says
that costs were up 5 percent from last year, and up 30 percent
from just a few years ago, all during the Biden Administration.
Now, the Biden Administration wants us to simply forget
about the last 3 years and the pain it has caused families in
my district. They don't understand why people are unhappy about
their current economic situation. And, quite frankly, it is
angering, and it is simply out of touch with the everyday
American.
It seems obvious that until we grapple with the runaway
government spending, that, unfortunately, we are going to
continue to have runaway inflation.
Chairman Powell, can you explain to us how the excessive
government spending not only increases the national debt but
also affects inflation as well?
Mr. Powell. Sure. Let me say, first of all, we completely
understand that inflation hurts people, low- and moderate-
income people, directly and immediately in a way that it
doesn't affect even middle-class people, because when paying
more for the necessities of life when you don't have much of a
financial safety net, the pain starts right away. We get that.
So, it is for those people, among others, that we are doing
everything we can to get inflation under control and stay at
the job until it is done.
In terms of the causes of inflation, the inflation that we
are having is not that different from what other advanced
economies around the world are having.
And it really results from--inflation is low, the pandemic
comes along, we shut down the economy, and people are sent
checks to replace their income, but they can't spend that money
because they can't go to the movie theater or to a football
game because everything is closed, so savings go up. And people
aren't spending a lot.
Ms. De La Cruz. Chair Powell, I only have a minute left, so
I want to shift gears quickly. I continue to believe that the
Federal banking agencies, including the Fed, should scrap the
flawed Basel III Endgame proposal and start over.
At this point, the last thing a first-time homebuyer, a
small business owner, and constituents, as you said, low-income
people, who are rural people, for example, in my community, the
last thing they need is harder access to capital, which is
exactly what that proposal does.
The public knows it and doesn't want it either, with a
whopping 97 percent of public comments being negative for this
proposal.
Chair Powell, don't you agree that with the overwhelmingly
negative reception of this proposal, that it shows a lack of
public support?
Mr. Powell. I do think that is fair to say.
Ms. De La Cruz. Thank you. I yield back.
Mr. Barr. The gentlewoman from Colorado, Ms. Pettersen, is
now recognized.
Ms. Pettersen. Thank you, Mr. Chairman.
And thank you for your service in such difficult times. We
sign up to serve, and we don't know what is going to come our
way.
And I think about what we have been through as a country,
with a global pandemic, the economy in collapse, and what this
Congress was able to do, to infuse money to keep our small
businesses afloat, to keep critical services available, and to
make sure that we were in a position for the quickest,
strongest recovery in the world.
And while we have a lot to feel proud of, we recognize and
have had many conversations throughout this committee about the
pain points that people are continuing to feel with rising
costs. And you touched on this. I really appreciate the
discussion around housing in an earlier question because this
is the greatest inflationary cost, especially in Colorado,
where we have seen significant home price increases, and a lack
of supply. People aren't able to move because they would go to
a much higher interest rate. And then, people aren't able to
buy because they can't afford those mortgage payments.
And while you have talked about recognizing that lowering
the interest rates will actually help with addressing the
housing crisis, we still have a lack of housing supply. Can you
talk a little bit more about what is happening and that the
lower interest rates are only a piece of this?
Mr. Powell. It is a longer-term thing, and a lot of it is
that it is harder to get lots and zoning and materials and
workers. And in many, many metropolitan areas, the near-in
areas are all built up. If you look around Washington--I grew
up near Washington, D.C., and it was countryside just a couple
of miles outside the Beltway. There was no Beltway when I was
born.
But, ultimately, it is just that we don't have enough
housing, and that was true before the pandemic, and certainly,
the pandemic did slow down housing construction. I think we
will get back to a more normal economy with lower interest
rates and those sorts of things, but we are still going to have
a housing shortage.
Ms. Pettersen. Absolutely.
When I think about the other pieces of the fallout from the
global pandemic and the changes that we saw in our economy was
in commercial real estate. And I have continued to read about
regional bank failures and the risk that commercial real estate
poses in the long-term for those assets being on the books for
banks.
What is your insight on the risk that it poses for
financial stability and what we should be thinking about here
in Congress?
Mr. Powell. The commercial real estate situation, which is
significantly downtown office and related retail and things
like that, this is something the banks have been working their
way through for the last couple of years. I think it will take
more time, more years to work all the way through it.
We know from the stress tests, and from our own work, that
the large banks are going to be okay. Some of the regional
banks and smaller banks have what you would expect, which is
high concentrations in their local community of real estate. We
are aware of those. The banks are aware of it.
I think the supervisors have been around those banks making
sure they have capital, they have liquidity, they have a
reasonable, not-too-optimistic assessment of how much capital
they will need, and of how big the losses will be. So, I think
we will be working through this.
And it doesn't seem to be a systemic problem or one that
threatens broader financial stability. It does threaten bank
profitability and those sorts of things, and it will be with us
for a while. But we will just keep working our way through it.
Ms. Pettersen. And the ability to continue to loan to small
businesses because you are being locked up.
You are not going to have enough time to answer this
question, but my remaining outstanding question is around the
recent Chevron ruling and how you anticipate that impacting the
Fed's ability to adjust to the needs of the country and ensure
financial stability without being sued at every turn.
Mr. Powell. We are just looking at all these new decisions.
In its early stage, I speak under the control of my General
Counsel. I don't want to cause him to strike me.
Ms. Pettersen. That is how I feel about my staff--I mean,
not striking me.
Mr. Powell. No, but ultimately, we are already very careful
at the Fed about keeping within the law, we are really
committed to that value, and this ruling doesn't change that.
And I think we will continue to be an institution that is
strongly committed to the rule of law.
Ms. Pettersen. Great. Thank you so much.
I yield back.
Mr. Powell. Thank you.
Mr. Barr. The gentlelady yields back.
The gentleman from Wisconsin, Mr. Fitzgerald, is
recognized.
Mr. Fitzgerald. Chairman Powell, thanks for being here.
There has been a lot of talk about Basel III. I wanted to
just change the subject a little bit.
I think the long-term debt proposal should be rewritten and
reproposed as well, but at the very least, the rule needs to be
tailored as the law requires so that regional banks aren't
treated more harshly than the largest banks. In particular, the
requirement for regional banks to hold long-term debt at both
the holding company and insured depository institution, that
seems to be a burden, is what we are hearing, I think.
I just wanted to mention that I would hope that there would
be some flexibility for smaller regional banks to pre-position
resources because there obviously--there are some resources
that are lost. I don't know, lost, absorbing, I guess is the
way you would consider them in the reproposal.
Do you have any thoughts on kind of how this is playing out
right now or what this looks like?
Mr. Powell. Yes. On the long-term debt thing, we put it out
for comment. We have received quite a few comments and staff
has been analyzing them and that is something of which we are
well aware, the concerns that have been raised, and we are
thinking carefully about how to move forward on that.
The other one was pre-positioning. That is more along the
lines of the discount window and the liquidity requirements, I
take it?
Mr. Fitzgerald. Right.
Mr. Powell. We haven't made a proposal there yet. We are
thinking carefully about that. I think we are trying to learn
the right lessons from what happened last spring at Silicon
Valley Bank and a couple of other banks. And one of them is
that the discount window worked, but we could certainly
modernize it and make it more effective.
And also, we learned that bank runs are moving just a whole
lot faster, at least in that case, and that even bank runs from
10 or 15 years ago were nothing like as fast as what happened
at Silicon Valley Bank. So, we need to bake that new learning
into the liquidity requirements in some way or other.
We, again, haven't made a proposal. When we do, of course,
it will go out for comment, and we will very much want to learn
from those comments.
Mr. Fitzgerald. Very good.
There has been a clear trend of banks stepping away from
the mortgage market kind of in the face of the increased
regulation. That is my interpretation at least. Nonbank lenders
have stepped in to kind of fill that void.
Today, banks support the nonbank lenders in the broader
housing finance system through the so-called warehouse lending
for home mortgages. But I am deeply concerned that some of
the--as was mentioned by my colleagues earlier--Basel rules
could harm both bank and nonbank lenders alike, kind of
undermining the liquidity and raising the costs for homebuyers.
Let me just ask, in regards to Basel III, the Endgame
proposal, could it make housing finance less stable, I guess is
the question?
Mr. Powell. That is certainly not the intention, and we
are, again, well aware of the concerns that have been raised,
and we are certainly paying careful attention to those
concerns.
Mr. Fitzgerald. Despite the smaller issuer exemption for
the debit interchange fee cap, issuers with less than $10
billion of assets reportedly lost about 35 percent of inflation
in just interchange revenue.
Have you considered the impact that further reduction of
debt interchange will have on small financial institutions with
less than $10 billion of assets?
Mr. Powell. Yes. That is another one where we put out a
proposal. We got a lot of comments, and we are carefully
reviewing those, and we are certainly aware of the specific
concern that you raised.
Mr. Fitzgerald. As you may know, the latest FR Y-14
proposal, which is used to help collect data for Fed stress
tests, asked banks for more detailed data on bank lending to
nonbanks.
As a result, there is concern that the Fed may start trying
to indirectly regulate nonbanks and the financial risk. I just
talked to one this morning that is concerned about that.
Given those concerns raised about the lack of transparency
in its stress testing models and the potential unintended
consequences, is the Fed planning to indirectly regulate
nonbank financial institutions through these tests?
Mr. Powell. That is not the idea. The idea is we see
intermediation growing very quickly in nonbanks. And we don't
regulate them. We don't have a secret plan to regulate them or
anything like that.
But the question is, what risks are being kept inside the
banking system, which we do regulate and supervise, and what
are the relationships between these large nonbanks and banks?
We don't have a preconceived answer to that. We just want to
understand what are those business relationships like, and what
kind of risk does that mean the banks are running. That is all
it is.
Mr. Fitzgerald. Thank you, Chairman.
I yield back.
Mr. Barr. The gentlewoman from New York, Ms. Velazquez, is
now recognized.
Ms. Velazquez. Thank you, Mr. Chairman.
And thank you, Chairman Powell, for being here today.
Once the Fed is reassured that inflation is under control,
what does the path back to neutral interest rates look like?
Mr. Powell. We said that we wouldn't reduce rates until we
were confident that inflation is moving sustainably down to 2
percent. I think the question of what is neutral is going to be
an empirical question. I think it seems to me it is unlikely
that we will be going back to the very low interest rates of
the pre-crisis period, but we won't know that until we get
there, in a way.
Ms. Velazquez. And the Fed's dual mandate is comprised of
price stability and maximum sustainable employment. As the Fed
is thinking about inflation and the possibility of interest
rate cuts, how are you balancing this priority with the need to
maximize employment?
Mr. Powell. Over the past couple of years, we have had a
very strong labor market and inflation well above target and
that has led us to focus mainly on bringing down inflation.
Over the course of 2 years, inflation has come down pretty
significantly. There is more work to do there. We are not at
our target. We need to keep on that job. At the same time, the
labor market has cooled pretty significantly.
And so, I would say those two goals are now much closer to
being in balance, and that means, from a policy standpoint, we
need to be paying attention to both of them. Whereas, for the
last couple of years, we had to mostly pay attention to
inflation.
Ms. Velazquez. Chairman Powell, I have told you that I will
be asking for a status update on the Section 956 rulemaking at
every future hearing.
Since your last appearance in March, several of your fellow
regulators have issued a proposed rule. Why did the Fed choose
not to sign on to this proposal?
Mr. Powell. What we are doing is we are looking at the
current state of affairs as it relates to incentive
compensation.
As you may know, we have had guidance in place now since
2010 for all banks, and we supervise pretty significantly
around that. So, it is a very different picture than the one
that was there in 2010.
And we are asking ourselves, what is the situation today,
and how do we tailor a proposal to address the residual risk,
as opposed to what the situation was in 2010 ?
Ms. Velazquez. Yes.
In previous hearings, you said that you need to better
understand the problem in order to write the rule. In a speech
in June, SEC Commissioner Lizarraga said, ``It has been well
documented that in the lead-up to the financial crisis, pay
structures often encouraged big bets that maximized short-term
profits but ignored bigger, longer-term risks that threatened
to take down the entire financial system.''
Additionally, since your last appearance, several of your
fellow regulators have moved forward with a proposed rule. Why
have your fellow regulators and Commissioner Lizarraga been
able to understand the scope of the problem and the Fed has
not?
Mr. Powell. I think the quote absolutely makes my point,
which is, I think everyone agrees that incentive compensation
practices before the global financial crisis were not in a good
place. However, we published guidance on incentive compensation
binding on all--not binding--but guidance for all banks in 2010
after putting it out for comment. A lot of thought went into
that guidance, and now, we supervise on that guidance.
So, the situation with incentive compensation now in banks
is completely different than it was before the global financial
crisis, completely different.
Ms. Velazquez. The other regulators have been able to
figure this out and you haven't.
But let me just say, this is not how congressional mandates
work. Of all the rulemaking provisions in the Dodd-Frank, only
148 were mandatory, and of those, only 22 had a deadline of
less than a year after enactment. Section 956 was one of them.
And I hope that you come to the conclusion that it is your duty
to issue the regulation.
Thank you. And I yield back, Mr. Chairman.
Mr. Powell. Section 156 requires either a rule or guidance,
by the way. It does not require a rule.
Thank you.
Mr. Barr. The gentleman from Florida, Mr. Donalds, is now
recognized.
Mr. Donalds. Thank you, Mr. Chairman.
Chairman Powell, it is good to see you.
Let's cover a lot of different areas of ground.
According to the Bureau of Economic Analysis, since
President Biden took office, the price of goods has continued
to outpace family incomes, with prices increasing now 19.3
percent, while average weekly earnings have only increased 14.6
percent. So, families have fallen behind with respect to their
purchasing power that they are able to go and acquire goods.
What role has government spending played in creating this
untenable economic crisis?
Mr. Powell. Close that door, please. Sorry. I can't hear
very well when the door is open.
Mr. Donalds. I will repeat the question. That is fine.
Mr. Powell. No, no, I heard you.
Mr. Donalds. Oh, okay.
Mr. Powell. That door needs to be closed.
So, what role? Government spending is part of the story.
So, government spent. We had our rates really low. The pandemic
happened, and we closed the economy, and then reopened it, and
I think you saw a burst of inflation everywhere in the world,
and certainly, there were many contributors to that.
Mr. Donalds. Do you think that the President in his budget
calling for an increase of Federal spending, upwards of 5
percent increase in Federal spending across-the-board, do you
think that is going to have further implications on stubborn
inflation plaguing the pocketbooks of the American people?
Mr. Powell. It would be inappropriate for me to comment on
the President's budget.
Mr. Donalds. The only reason why I would ask, Mr. Powell,
is because, obviously, the Federal Reserve is having to respond
to various aspects of fiscal policy coming from Capitol Hill.
Regardless of the President's budget, would it be
appropriate in the current environment for Federal spending to
increase by 5 percent, 10 percent, or 15 percent?
Mr. Powell. Honestly, that is a question for elected
Representatives. We don't play a role in fiscal policy.
Mr. Donalds. Fair enough.
Is it the view of yourself and the Federal Reserve Board
that fiscal policy does create impacts on the Fed's ability to
manage monetary policy for the United States?
Mr. Powell. We take fiscal policy as a given, and we are
not commentators. We are not the Congressional Budget Office or
the Office of Management and Budget.
Whatever fiscal policy happens up here, we decline all
opportunities to be commentators on it. We take it as a given.
And that is because we didn't run for office. We don't have
that job. We stick to our knitting. And the fact that we are
independent really depends on us sticking to what our
assignment is, which is to deal with things with the economy as
it is.
Mr. Donalds. I would argue that the fiscal policy of the
United States has given you guys a lot more to deal with and
whatever the various burdens that come with it.
Unfortunately, you have to tangle with it, but the American
consumers are the ones who truly have to deal with it.
I want to move on. The Monetary Policy Report cites a
pickup in immigration as one of the major factors that has
improved the supply of labor; however, the labor force
participation rate remains below pre-pandemic levels.
What percentage of the increase of foreign-born labor
supply, to your knowledge, comes from illegal immigration?
Mr. Powell. What percentage of the--say it again, the
question?
Mr. Donalds. What percentage of foreign-born labor comes
from illegal immigration?
Mr. Powell. I think all of foreign-born labor comes from
immigration.
Mr. Donalds. No, illegal immigration.
Mr. Powell. Illegal? Sorry. I didn't get that.
Mr. Donalds. Yes, sir.
Mr. Powell. I don't know the answer to that.
Mr. Donalds. Okay. One of the things I think would be
important to help, I guess advise Congress on what to do going
forward, is if the Federal Reserve had some data in that regard
to help us make further decisions into the future.
Chairman Powell, let me ask you this one overarching
question. Obviously, interest rates, if you compare them over
the last 15 years of monetary policy, are at an elevated rate.
Does the Fed anticipate any possibility of rates being lowered,
whether it is 50 basis points, or 100 basis points, at some
point over the next year or two?
Mr. Powell. I guess if the question really is, where are
interest rates going to settle out when all of the effects of
the pandemic are really done, no one knows. This is a great
discussion to have. But I think my sense is that we probably
won't go back to that era between the global financial crisis
and a pandemic where rates were very, very low and inflation
was very low and extremely low.
There were major European countries that had negative 10-
year bond rates, negative, and that was not the case here. But
I don't think we are going back to rates that are that low.
We think that things like the neutral rate are driven by
slow-moving forces, but, ultimately, you can see the effect.
Our policy rate is over 5 percent now, and it feels like
policy is restrictive but not intensely restrictive. That
suggests that the neutral rate of interest, at least as of now,
will have risen somewhat, which means rates will be a little
higher.
Mr. Donalds. Okay. Thank you so much.
I yield back.
Mr. Powell. Thank you.
Mr. Fitzgerald. [presiding]. The gentleman yields back.
We now go to the gentleman from California, Mr. Sherman,
who is recognized for 5 minutes.
Mr. Sherman? Would you like us to move on?
Mr. Sherman. If it is Josh's turn, it is Josh's turn.
Mr. Fitzgerald. The gentleman from New Jersey is recognized
for 5 minutes.
Mr. Gottheimer. Thank you, Mr. Sherman.
Thank you, Mr. Chairman.
Chairman Powell, you have said that, ``Custody assets are
off-balance-sheet, always have been.'' Do you stand by that?
Mr. Powell. Sorry. Say that again?
Mr. Gottheimer. You have said that, ``Custody assets are
off-balance-sheet, always have been.'' Do you stand by that
statement, sir?
Mr. Powell. I think as a general matter, yes.
Mr. Gottheimer. The SEC's Staff Accounting Bulletin No. 121
(SAB 121) affects a core banking activity: custody. This
specific bulletin requires banks to put digital assets held in
custody on their balance sheet, effectively keeping banks out
of the market entirely.
Have the Fed and the SEC had conversations about the impact
of SAB 121? I just want to get a sense of your thoughts on the
policy, please?
Mr. Powell. We don't comment on the SEC's policy. They
don't comment on our policies, either. You knew you were going
to SAB 121 on that. But, honestly, it is the SEC's business,
not ours.
Mr. Gottheimer. Thank you.
Last month, you said that when evaluating inflation data,
you consider whether wage growth is outpacing productivity.
From 1979 to 2019, middle-class workers' productivity grew
about 60 percent while their wages grew by about 16 percent.
Do you consider this historical gap when considering
whether to hike rates on families who are obviously struggling
to make ends meet?
Mr. Powell. We are looking at inflation, and we are looking
at maximum employment. Those are our goals. We don't really
have the ability--we don't have a bunch of different tools for
things like what you are talking about. So really, it is just
those things.
We are, of course, really well aware of longer-run trends
like that. You have to also include benefits, though, in that
analysis, which does close that gap quite a bit. You just
mentioned wages.
Mr. Gottheimer. I appreciate that. Thank you.
Mr. Chairman, yesterday the Director of National
Intelligence said that, ``Iranian Government actors have sought
to opportunistically take advantage of ongoing protests
regarding the war in Gaza.'' They have, ``observed actors tied
to Iran's Government posing as activists online, seeking to
encourage protests, and even providing financial support to
protesters.''
As a member of the House Select Committee on Intelligence,
I am equally concerned about our adversaries meddling in our
financial system.
Can you discuss if you are working with other Federal
agencies to investigate and address foreign interference
channeled through our financial institutions?
Mr. Powell. We do take part in many of those things,
especially at the staff level. And as you know, there is a lot
of focus in the intelligence community. And it is very helpful
to the banks, the commercial banks, and to us.
But we are certainly very focused on those issues. We have
a strong team. Of course, you are never able to sleep on cyber
risk. But we just keep fighting it.
Mr. Gottheimer. I would like to switch gears to the
discount window, please.
Chairman, we have heard that the discount window is behind
the times in terms of its operations. We also continue to hear
that efforts to modernize the discount window and encourage its
use will be ineffective without reducing the associated stigma.
The usability of the discount window is an important tool
for banks that need liquidity. I just wanted to get a sense of
efforts underway to make the discount window a more realistic
option for banks that need liquidity.
Mr. Powell. It is couple of things. First, it is that we
need to modernize our infrastructure. The discount window in
our system is not a primary source of credit. It is a source
for banks that they can use under certain circumstances. But we
know that the infrastructure is a little tired, and we are
investing in that and making it more user-friendly and all
that. So, that is a big, big project that is going on.
The second point was stigma. That is a tough one. There are
a lot of ways to get after that. We are studying all of them.
In a sense, if you require banks to use the discount window,
that can help with the stigma.
I think this is a big ask. But when Congress required us to
publish the names of discount window users, that didn't help.
That doesn't help at all because banks basically say, ``We are
not going to use the discount window because people might see
us as troubled.'' And that is not what we want. We want people
to be able to freely use the discount window.
So, we have been focused on this issue for a long time. We
have not made a lot progress on it. But right now, I think we
are very focused on it.
Mr. Gottheimer. Thank you, sir.
I will yield back. Thank you.
Mr. Fitzgerald. The gentleman yields back.
We now go to the gentleman from New York, Mr. Lawler, who
is recognized for 5 minutes.
Mr. Lawler. Thank you, Mr. Chairman.
Chairman Powell, to the best of my knowledge, the last
public meeting between you and President Biden occurred on May
31, 2022. Does that sound accurate?
Mr. Powell. I am going to take your word for it.
Mr. Lawler. Okay. Have you had any private meetings with
the President since that time?
Mr. Powell. No.
Mr. Lawler. Any phone calls with the President?
Mr. Powell. No, I don't believe so.
Mr. Lawler. Is there any reason why you have not met with
or spoken to the President?
Mr. Powell. When any President calls you, you come and you
meet. But that hasn't happened.
Mr. Lawler. So, in over 2 years, with inflation still
nagging us, with costs out of control, President Biden has not
asked to meet with you in over 2 years?
Mr. Powell. I haven't had a meeting with him. He hasn't
sought a meeting. And, of course, I don't seek meetings. So,
you have the data; I don't.
Mr. Lawler. But, to your knowledge, in the last 2 years,
you have not spoken with or met with the President at all?
Mr. Powell. I shook his hand in a line once, but that
wasn't a conversation. It was just, ``Mr. President,'' and that
was it. But that was at a State dinner. I attended a State
dinner a few months ago, and I shook his hand. ``Good evening,
Mr. President,'' and that was it.
Mr. Lawler. Does that not strike you as odd that the
President has not sought to meet with you?
Mr. Powell. Not at all.
Mr. Green. Mr. Chairman?
Mr. Powell. We are an independent agency and----
Mr. Green. Mr. Chairman? Parliamentary inquiry, please, Mr.
Chairman?
Mr. Powell. I'm sorry.
Mr. Green. Am I recognized?
Mr. Powell. I want to answer your----
Mr. Fitzgerald. State your inquiry.
Mr. Green. Thank you, Mr. Chairman.
I make a point of order under Clause 4 of Rule XVII that
the gentleman's words are disorderly and violate the rules of
decorum and debate insofar as they are negatively reflecting
upon the personality of a candidate for President of the United
States.
Mr. Fitzgerald. The Congressman has not engaged in any
personality or questioned anything about anyone at this point.
I am not sure where you are going, Congressman.
Mr. Green. We have----
Mr. Fitzgerald. The Congressman is recognized.
Mr. Lawler. Thank you.
Mr. Green. Mr. Chairman----
Mr. Lawler. Thank you.
Mr. Green. Mr. Chairman----
Mr. Powell. I am happy to answer your question.
Mr. Lawler. Thank you.
Mr. Green. Mr. Chairman, I would like to continue with the
point of order.
Mr. Powell. It's not at all unusual.
Mr. Fitzgerald. What is your point of order?
Mr. Green. Mr. Chairman, we have been admonished in this
committee that we should not have words that negatively reflect
upon persons who are running for President. This would include
Mr. Trump, as well as the current President.
Mr. Lawler. Didn't the ranking member do a whole opening
monologue diatribe----
Mr. Green. Mr. Chairman----
Mr. Lawler. ----about some ridiculous----
Mr. Green. Would you please rule my friend out of order,
Mr. Chairman, until you rule?
Mr. Fitzgerald. Mr. Lawler has----
Mr. Lawler. He has already ruled.
Mr. Fitzgerald. ----not admonished or said anything
negative about the President at all. I just listened to his
comments.
So, I am going to recognize the Congressman again.
Mr. Lawler from New York is recognized.
Mr. Lawler. Thank you, Mr. Chairman.
Mr. Powell, you were trying to answer my question.
Mr. Powell. We are an independent agency. The
Administration has been very respectful of the Fed not wanting
to try to influence things like that. And I don't find it at
all unusual.
Mr. Lawler. Okay. Since you made mention of the
independence of the Fed, and I know you pride yourself on that
independence, do you acknowledge or do Members of the FOMC
acknowledge that a rate cut in September could be viewed as
political, just 30 to 60 days before an election?
Mr. Powell. Our undertaking is to make decisions when and
as they need to be made based on the data, the incoming data,
the evolving outlook, and the balance of risks, and not in
consideration of other factors. And that would include
political factors.
We will make those decisions. We have a long history of
doing that, including during election years, and that is the
undertaking we will make. Anything we do will be very well-
grounded. And it is just not appropriate for us to get into the
business of thinking about election cycles at all one way or
the other.
Mr. Lawler. Inflation year over year from May 2023 to May
2024 is up 3.3 percent, overall inflation. Energy inflation is
up 3.7 percent, food inflation is up 2.1 percent. With
inflation continuing to be a challenge, do you see a rate cut
as a possibility at this moment?
Mr. Powell. I think you are quoting the Consumer Price
Index (CPI) numbers, which are operating at an unusually high
gap to the Personal Consumption Expenditures (PCE) numbers. For
25 years, the Fed has focused on inflation, PCE inflation. And
usually, the gap to CPI is only 25 or 30 basis points. It is
more now.
So, the current PCE numbers are 2.6 percent for headline,
2.6 percent for core. And we have articulated for a good, long
period our test for being willing to consider beginning to
loosen policy. And that test is that we want to be more
confident that inflation is moving on a path sustainably down
to 2 percent, not at 2 percent but on a path sustainably at 2
percent. That is the test we have articulated.
I have some confidence, as I said earlier, that we are on a
downward path. I think if you look at the data, it is pretty
clear. But we have not said, though, that we have sufficient
confidence. And that will be a decision that our Committee
makes.
Mr. Lawler. I would just note that, obviously, CPI, the
price of goods, the price of purchasing a home, the price of a
mortgage, the cost of a mortgage has been astronomical. In
Westchester County, for instance, which I represent, the
average mortgage cost is up a thousand dollars a month, over
$12,000 a year.
Mr. Fitzgerald. The gentleman from Texas, Mr. Green, is now
recognized for his 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
And I thank Chair Powell for appearing today. I hope things
are going well with you. I know that this is a difficult time
for you. And, quite frankly, you have been at a difficult time
for a number of years. And you have proved to be quite
resilient and quite effective at what you do. So, I thank you
for what you are doing.
I do want to ask you about several things, and I hope that
I will get to them. But, first, there was a post-failure
lessons report after the failure of Silicon Valley Bank and
Signature Bank. I thought that report was pretty important. How
important is that post-failure lessons report?
Mr. Powell. It is important. We wanted to learn the right
lessons and make the right changes to both our rules but also
really to our supervisory practices more than anything else,
and we are doing that.
Mr. Green. And is this something that you believe to be
important after each incident such as what happened with
Silicon Valley Bank and the other banks?
Mr. Powell. Yes, I think we all have a lot to be humble
about, and we try to learn from events.
Mr. Green. Thank you. Let me go on to the next question,
which has to do with the banks that are small. Let's talk about
those that are less than $5 billion in total assets, yet they
are subject to the special assessments of the FDIC once their
systemic risk exception is triggered.
I would like to see them exempt from that. Do you have any
comments on that?
Mr. Powell. That is either a statutory matter or it is a
matter of the FDIC's practice. So, it is not something the Fed
really has any input into.
Mr. Green. Okay. Let's do this next, please, as time runs
out.
Would you kindly finish your commentary? You were giving a
comment on the pandemic and how the pandemic helped to generate
this inflation, and you were stopped in the middle of your
comments.
Would you go back through that, please, so that the public
at large can get a better understanding of what actually
happened with the pandemic and inflation?
Mr. Powell. I would be glad to. I think people are now--we
have had a few years to look back. I think the more years that
pass, the clearer we can see what was happening. But I think
when you look back now and you are seeing this, broadly, what
was happening was governments did a lot to support economic
activity during the pandemic on the theory that there could be
really serious economic bad times ahead.
Then, the economy reopened. And it reopened very, very
strongly. And I think, in hindsight, you can see that there was
just a lot of support for demand from fiscal policy, from
monetary policy, and that supply was constrained.
You couldn't make cars. Supply chains were tangled up.
There were shortages of so many things.
What happened was we got a burst of inflation, and the
United States got a big burst of inflation really more from
demand than other countries did.
Then, you had the war in Ukraine, which gave a big burst of
inflation, more to Europe than to us.
And so, you wind up with a situation where you just have a
lot of inflation. And our thinking, my thinking at the time was
it is going to take restrictive monetary policy and it is going
to take time for the supply side and demand side distortions
from the pandemic to unwind.
And 2023 was the year when that kind of happened. Supply
chains were fixed, the labor shortage was greatly alleviated,
and unemployment remained very low. Inflation came down by a
very large amount last year, while growth remained quite
strong. So, this was the year that kind of proved that thesis.
Now we are in 2024, and it is question of finishing the job
on inflation, which we are committed to do, while also keeping
a strong labor market, which we are also committed to doing.
And that is a balance that we have to strike in our policy.
But I think we know more now about where this came from,
because we can see what made it go away. And it was a
combination of supply and demand, as we had kind of expected.
Mr. Green. And two of the most significant factors were the
pandemic and the war with Ukraine? Is that correct?
Mr. Powell. Yes, and it is also the fact that the pandemic
summoned forth a great fiscal and monetary response, and that
contributed to really strong activity and to inflation, without
question.
Mr. Green. I am going to run out of time, but I have to
ask, if not for that monetary response--I know that it is a
counterfactual--would we have possibly gone into a depression?
Mr. Powell. That is what we thought at the time. And I
think mainstream economists were very concerned that we never
literally shut the global economy down for a period and then
tried to reopen it. We didn't know how long it would take or
how well that would go.
Mr. Green. Thank you, Mr. Chairman.
Mr. Fitzgerald. The gentleman's time has expired.
We now go to the gentleman from Oklahoma, Mr. Lucas, who is
recognized for 5 minutes.
Mr. Lucas. Thank you, Mr. Chairman.
And thank you, Chairman Powell, for testifying today.
I realize that by my questioning point in the hearing
today, probably a lot of material has been covered. But there
is never anything wrong with asking important questions a
second or third time.
You have reiterated how Members of the Board would like to
see a revised Basel proposal put out for public comment, and
you are working through the process with the FDIC and the OCC.
From my perspective, the FDIC is in a period of
uncertainty, with the current Chairman announcing he will
resign to restore confidence in his agency. And the replacement
is awaiting Senate confirmation hearings.
And, at the OCC, we have an Acting Comptroller who has not
yet been confirmed by the Senate. At the very least, given the
expected broad revisions, I hope the other agencies agree that
a complete reproposal would be appropriate.
Chairman Powell, could you give me some indication of what
the potential timeline around such a decision reproposed might
look like?
Mr. Powell. It is pretty uncertain, but I will give it a
shot.
Mr. Lucas. Please.
Mr. Powell. I will say again that these discussions we have
been having with the other two agencies have been very
constructive, and we very much want that to continue. We have
pretty good agreement on the substance, and now, it is about
the process.
So, a baseline might be that we agree on a reproposal of
some kind that gives the public a chance to see these changes
and react to them and write comment letters. And that could
happen.
It would take us a while to write it up. And then, we would
put it out for comment for 60 days. I think that couldn't
happen probably until part of the way through the fall.
Then, there would be, let's say, 60 days of comment. Then,
we get the comments. We would have to then evaluate the
comments and think carefully about them. Having done that, we
would have to write up the final version and that would take
some time.
My guess is that puts you well into next year. As I
mentioned, these are rules that the banks are going have to
live with for a long time, and we need to get them right. It is
not something we should be hurrying; we need to take our time
and get it right and make sure that we hear the comments.
This is a very big piece of regulation. A lot of things
will need to be changed. There are a lot of good things in
there. We want to come out with a good proposal, and that is
what it will take.
Mr. Lucas. To shift years on you, Chairman, the 2024 stress
test focused on commercial real estate risk, which is an area
we have all been paying close attention to here on this
committee.
Do you agree that the results showed the financial system
to be strong?
Mr. Powell. Yes, I do.
Mr. Lucas. Folks back home are always very concerned about
inflation and the period we have gone through lately, not just
the basic necessities that continue to explode but the cost of
doing business and all those other issues.
The fact is the inflation is still running above the Fed's
2-percent target, and we have seen significant price increases
in food and energy over recent years.
As you and I have discussed before, I started out as a
young farmer in 1977 in that inflationary period during the
Carter years. Then, we went through Chairman Volcker's rather,
shall we say, dramatic tightening of monetary policy. And I
still remember paying 17 percent to borrow cow feed money when
I was a student in college. I was well-collateralized, but that
was a bargain in the fact that the capital was accessible
So, I am particularly sensitive, being a part of that
generation, to the fact that if inflation isn't effectively
dealt with, it can spiral out of control.
Could you expand for a little bit more about your approach
in dealing with inflation in a way that doesn't repeat the
mistakes of the past? I just want to avoid the mistakes of the
past.
Mr. Powell. I think really one of the big lessons coming
out of the high inflation of the 1970s, which we both lived
through, is that it really is on the central bank to be on the
case and do the job and make sure that it is fully well and
truly done, and that really is up to the central bank.
Believe it or not, that wasn't fully accepted or that
wasn't necessarily the thinking. And also, the independence of
central banks was much less respected back then. So, all the
more credit to Paul Volcker for having the courage to do it.
That is an internalized lesson for people in central
banking these days. We do understand that. We are committed to
bringing inflation sustainably down to 2 percent.
Mr. Lucas. One last question in my remaining seconds. You
and the leadership of the Fed will be there the day before the
election this fall, and you will be there the day after the
election. There will still be the same people carefully
watching the Fed's responsibilities, correct?
Mr. Powell. This is my fourth Presidential election at the
Fed, and I can tell you we come to work the next day, and we do
our jobs.
Mr. Fitzgerald. The gentleman's time has expired.
Mr. Lucas. Thank you. I yield back.
Mr. Fitzgerald. We now go to the gentleman from California,
Mr. Sherman.
Mr. Sherman. Coming out of COVID, everyone said a soft
landing was impossible, and a recession was inevitable.
I want to commend you and the Administration. It looks like
we have seen a soft landing. We have continued to have
historically-low unemployment rates and historically-low
unemployment rates for people of color.
And, in the last 18 months, we have seen a 4.7 point
decline in the inflation rate as measured by the Consumer Price
Index. I realize you may not have done the calculations, but I
did the calculations, and it is the greatest decline that we
have seen in an 18-month period this century.
Do you have any reason to disagree with that?
Mr. Powell. I hope that is true, and I am glad you said it
because it is certainly a lot. I can't validate that statement,
though.
Mr. Sherman. I am sure you have a fine staff who will do
the calculation, and hopefully, we will see the press release.
When Treasury Secretary Yellen was here yesterday, I
addressed an issue with which both you and she should be
concerned. I have always opposed Operation Choke Point where,
for political reasons, banks wouldn't provide or might not
provide financial services.
Florida and Tennessee had passed laws giving anybody who is
denied a bank account or even a loan a way to claim that it was
for political reasons. And it opens up the possibility that
banks would be pressured by those laws to release their
suspicious activity reports, which are, I understand, supposed
to be private.
So, I hope you will work with the Secretary in making sure
that the laws of Florida and Tennessee do not adversely affect
our ability to deal with suspicious financial circumstances.
You have a dual mandate. And I think you have a third
mandate that is implied, because the budget deficit poses a
great risk to price stability and to keeping unemployment low.
And you don't deal with spending. You don't deal with taxation.
But in two ways, you dramatically affect the budget deficit.
The Federal Government is the biggest borrower in the
history of the world. Interest rates affect the forthcoming
budget deficit, and at times you have turned over to the
Federal Government up to a hundred billion dollars in profit.
So, I hope that you would consider whether your first two
mandates imply that you at least have to look at how your
policies affect the budgets deficit.
I hope that you will go with republication of Basel III and
insist on that. I know you are dealing with two other
regulators on that.
A recent assessment by PricewaterhouseCoopers showed that
the original proposal would lead to higher borrowing costs for
small and medium-sized businesses. And, in every way, Basel III
seemed to be slanted toward telling the banks go and put your
money on Wall Street where you just are going to have interest
rate risk, and don't loan your money to local Main Street
businesses because there is credit risk there.
And, in fact, if you had a fair system, you would mark to
market all bonds, not just those that are, ``available for
sale.''
I hope also that, as you redo Basel III, you treat energy
tax credits, green energy tax credits the same way you
currently deal with Low-Income Housing Tax Credits, that you
keep in mind the effect on the securities industry,
particularly municipal bonds, that you don't unfairly say to
local business that if it is a publicly-traded company, it
counts only 65 percent, and that you look at mortgage servicing
rights as an asset, and that you fully account for the private
mortgage insurance.
I know you give some credit for that. But, frankly, an 80
percent loan-to-value and a 90 percent loan-to-value that has
private mortgage insurance pretty much exposes the bank to the
same risk.
I will ask you one question about debit cards. You are
planning to provide only, I believe, a .3 per--3 cents
additional charge for dealing with fraud prevention. Fraud has
just skyrocketed.
Would the Fed consider increasing the fraud-prevention
adjustment before finalizing its proposal?
Mr. Powell. That is part of the comments that we have
received on the interchange rule. And it is a concern we are
aware of, and we will take that into consideration.
Mr. Sherman. I yield back.
Mr. Williams of Texas. [presiding]. The gentleman yields
back.
And the gentleman from the great State of Missouri,
Congressman Luetkemeyer, is now recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
I certainly appreciate the thoughtful gentleman from
California's remarks on some of the stuff.
But I am kind of curious how--Chairman Powell, he indicated
you have a third implied duty here to actually work with the
budget. I really thought that only the Congress had the ability
to impact the budget. We are the ones, not the Executive
Branch, not the Judicial Branch; the Legislative Branch is the
one that handles the budget.
Am I mistaken on that, Mr. Chairman?
Mr. Powell. I believe that is right.
Mr. Luetkemeyer. I don't think you want our job on top of
what you have.
Mr. Powell. No.
Mr. Luetkemeyer. One of the things that has come across my
desk in the last few weeks here is that some of the
legislatures this last year around the country have started to
pass banking laws that infringe on Federal banking laws. Have
you seen this? Are you aware of it? Do you have any thoughts on
that? Can you tell me what your thoughts may be?
Mr. Powell. Honestly, I have not seen that, and I----
Mr. Luetkemeyer. Okay.
Mr. Powell. It wouldn't necessarily come across my desk. It
might come across Vice Chair Barr's desk.
Mr. Lawler. Okay. It was just concerning because you handle
lots of banking rules and regulations, so we don't want to have
the State usurp the duties and responsibilities and the legal
ability to----
Mr. Powell. These are preemption issues?
Mr. Luetkemeyer. Yes, preemption issues is what it is all
about.
Mr. Powell. Yes, that is a big deal for the OCC issue.
Mr. Luetkemeyer. Yes, I was just curious if you had run
across any of that, and had any thoughts on it?
Mr. Powell. I haven't.
Mr. Luetkemeyer. Okay. I just came out of a committee
hearing with the House Small Business Committee a while ago.
And there was a home builder individual there, a contractor.
And he was talking about the cost of regulations, basically
$1,000 increase in costs, with about 100,000 homes across the
country not being able to be purchased because they are no
longer affordable.
And it brings up a point with regards to the cost of
regulations. Do you fall under the Administrative Procedure Act
(APA)?
Mr. Powell. Yes.
Mr. Luetkemeyer. Part of that Act is to determine the costs
of a regulation, correct, or the cost of compliance?
Mr. Powell. I don't actually know the answer to that.
Mr. Luetkemeyer. Okay.
Mr. Powell. But I know we carefully follow the----
Mr. Luetkemeyer. Okay.
Mr. Powell. ----the APA.
Mr. Luetkemeyer. To me, that is a really important point
from the standpoint of how you look at rules and regulations to
ensure that the cost is not going to be more than the economic
benefit of what you are doing. So, I would think this has to be
part of your analysis.
Mr. Powell. Certainly, we try to make our rules as
efficient as possible and to get the job done.
Mr. Luetkemeyer. One of the concerns we have is with--and I
think the gentleman talked about the credit card situation
here, Reg. II. And with regard to the Chevron doctrine
basically being rescinded, how is that going to affect your
rulemaking with regards to some of the more recent ones like
Reg. II fees and stuff, the Basel rule? Are all of those things
going to be impacted by this at all?
Mr. Powell. It doesn't change our assignment under the
Durbin Amendment to do the interchange rule. We are always
focused as an institution on compliance with the law. We are a
very law-abiding group.
Mr. Luetkemeyer. But does it narrow your ability to go
beyond or reinterpret laws and rules and things like that?
Mr. Powell. No, that would be----
Mr. Luetkemeyer. It seems to me that is what the rule----
Mr. Powell. That would be a question for the courts. The
courts will be asking the same question, which is what was
Congress' intent with that law, and that is the question we are
asking. But what they are saying is that courts will give less
deference to agencies, I think.
Mr. Luetkemeyer. Okay.
Mr. Powell. Again, these decisions were just passed down. I
was actually out of the country last week while this was all
happening. I have had no time to be briefed on any of that. I
am kind of speculating here.
Mr. Luetkemeyer. Okay. One last question.
I asked this question yesterday of Secretary Yellen. What
keeps you up at night? What is your biggest concern with
regards to your responsibilities, with regards to the economy,
with regards to the banking system? What is your biggest
concern?
Mr. Powell. For a long time, it has been cyber. And the
reason is, we know about credit crises and things like that and
financial crises, but we haven't really had something where
there is a successful cyber attack on a major financial
institution or financial market utility. That has always been
my answer.
I would actually say the number-one thing that keeps me
awake at night is the balance that I talked about before, which
is, we are at a critical time where inflation is coming down,
the labor market is cooling, and we want to get it right for
the benefit of the American people. We want to get inflation
down to 2 percent, but we want to keep a strong labor market,
too.
And trying to make decisions that give that the best chance
to happen, is the thing that I think about in the wee hours.
Mr. Luetkemeyer. We have talked about this before, too. You
really have a tough job from the standpoint that you are trying
to drive down demand, and the Administration, by spending all
this money, is trying to drive it up. It puts you in a really
big box, doesn't it?
Thank you, Mr. Chairman.
Mr. Powell. Thank you.
Mr. Luetkemeyer. I yield back.
Mr. Williams of Texas. The gentleman yields back.
The gentleman from the great State of Illinois, Mr. Foster,
is now recognized for 5 minutes.
Mr. Foster. Thank you, Mr. Chairman, and Chair Powell.
I guess when things are going well, as they currently are,
it is all of our duties to look around the curve and see the
risks that keep you up at night. So, I appreciate
Representative Luetkemeyer's question.
Over the last few years, there has been increasing interest
in synthetic risk transfers (SRTs) or credit-linked notes,
which are often used by U.S. banks to shift risk away from the
banking system and as a means of managing regulatory capital.
I have been concerned by recent reports that the buyers of
some of these SRTs may be investing in them using bank-provided
leverage, in which case the risk could just boomerang right
back into the banking system.
Frankly, when I read about this, it triggered my PTSD from
the AIG situation with credit default swaps during the
financial crisis.
Now, I understand the Federal Reserve plays a role in
approving SRTs, and in fact, issued guidance to U.S. banks
regarding their issuance last fall.
Could you say a little bit about the ways these investments
can be a safe way for banks to off-load risk and in what ways
they could become a dangerous source of contagion?
Mr. Powell. Sure. There could be a breakdown in a couple of
places in the chain, as you are obviously aware. One is just
that the risk isn't really well and fully transferred to the
buyer, and that is--the first step is: Is that risk going away
off the balance sheet in an unconditional kind of a way, in a
way that the bank understands? And it is a good thing if banks
are able to do that.
Then, the question is, is it coming back through the back
door with financing? And we are well aware of that. Banks do
tend to bring these things to us, and we look at them
carefully. We understand some of the ways it can go wrong.
But at the end of the day, if it works to reduce the risk
on a bank's balance sheet, that is something with which we
should be okay.
Mr. Foster. But there is the--well, if you could just say,
what sort of insight and control does the Federal Reserve have
into all the conditions, particularly the connection may go
through businesses that you do not have direct, nonbank
entities that you may not have direct oversight over?
Mr. Powell. My understanding is that this is a very active
dialogue we are having with banks. They want to know how this
is going to be treated. They don't want to do something that is
going to come back on them or that we will deny the treatment
on.
So, I think there is a pretty transparent set of exchanges
around how these things work. We are very clear on what we
think our requirements are. This is what I am told. We saw what
went wrong the last time, and I don't think anyone wants to
repeat, that including the banks.
Mr. Foster. If you conclude, as you are actively studying
it, that you need more visibility into certain areas of,
particularly nonbank things that may be parts of the chain of
contagion, please let us know, because it is our job to avoid
the next crisis.
I think it is my personal goal to die before we have
another financial crisis, and then I will be doing my job well.
Now, I understand also the value of SRTs in the U.S. are
relatively small, and the bulk of these are offshore. Is the
growth of this practice internationally something you are
watching closely? And is there anything that might provide a
sign of early trouble in terms of international contagion that
might creep back in?
Mr. Powell. I haven't heard that flavor of it, but I will
check on that and let you know.
Mr. Foster. Do you remember with AIG, the real problem with
AIG falling into bankruptcy is that it would immediately put a
bazillion of the European banks into violation of their capital
requirements, which was major contagion that----
Mr. Powell. Yes.
Mr. Foster. Do you have a sense of the time scale for the
liquidity proposal at this point?
Mr. Powell. I think the main thing is we have this very
large, important project on Basel III. And I think we are
pretty close to being able to move that out into the public
view again.
And I think, once we have done that, we can move on to the
other things that are there. And one of them is the liquidity
proposals, and I don't want to put a specific timeframe on it,
but we are certainly working towards that sometime later this
year, I would think.
Mr. Foster. Later this year, we would have the first view
of that?
Mr. Powell. I would think so.
Mr. Foster. Okay. I understand it is still under
negotiation between agencies, but can you say directionally the
Basel III re--the new amended proposal, is it just going to be
in the direction of sort of a weakening at watering things down
toward the current capital requirements? Or will there be areas
where it is actually strengthening them?
Mr. Powell. No, there will be a capital requirement in it
that is consistent with Basel III and a capital increase that
is consistent with Basel----
Mr. Foster. My question is, if you look at what the
original proposal was compared to what you intend to put out,
are you moving in the direction of more toward the current
situation? And if so, if you can just interpolate?
It seems like if you have comments on the proposal you put
out, you understand comments on the status quo and you are
somewhere between that, then maybe you don't need another set
of comments because everything that can be said has been said.
Mr. Powell. It is a little more complicated than that, but
that is essentially right. You have current levels of capital,
you have the proposal, and you have--which is a lot of gold-
plating--and then, you have where it is shaking out.
Mr. Foster. I was just wondering why you need more
comments.
Mr. Powell. There are many different pieces.
Mr. Foster. Okay.
Mr. Powell. The answer is there are many, many different
pieces of that.
Mr. Foster. Thank you. And I am over time.
Mr. Williams of Texas. The gentleman's time is up.
The gentlewoman from the great State of Indiana,
Congresswoman Houchin, is now recognized for 5 minutes.
Mrs. Houchin. Thank you, Mr. Chairman. And thank you to the
ranking member.
And thank you, Chairman Powell, for coming to speak with us
today. It has been a long day. Thank you for being here this
entire time.
One of the greatest strengths of our financial services
industry is the diversity of our banking system. I know
firsthand how important it is for us to maintain options and
choice for Americans, whether it is somebody looking to open a
savings account or take out a loan to start a small business.
Increasingly, however, we have seen consolidation in the
banking industry and increased difficulty for smaller financial
institutions to survive. One of the reasons for this is an
excessive regulatory burden that many of the smaller banks
face.
While this can come in the form of new proposals and
adjustments to liquidity requirements or to things like the
Basel III Endgame, it can also be due to outdated technological
capabilities at the agencies and inefficiencies in and within
the examination process.
Chairman Powell, could you just talk about what steps the
Fed is taking to upgrade technology and procurements procedures
and update training practices to ensure that the banks that you
regulate don't face unnecessary burdens?
Mr. Powell. To your point, the number of banks in the
country has been coming down for 40 years. There is
consolidation going on for a whole range of reasons, and we are
not trying to foster that. We are not trying to push that. And
we are aware that high fixed cost from regulations may be one
of the reasons for that. So, we do try to keep that in mind,
particularly for the smaller institutions.
On your question around IT and specific things, I might
take an opportunity to come back to you with somebody who is
closer to the specific supervisory practices----
Mrs. Houchin. That would be great.
Mr. Powell. It's a fair question.
Mrs. Houchin. That would be great.
And, just for reference, I was proud earlier this year to
introduce a bill, the Fostering the Use of Technology to Uphold
Regulatory Effectiveness in Supervision Act (FUTURES Act).
It is an important bill that would require our Federal bank
regulators to conduct an assessment to ensure that the
technology and training systems they are using will improve and
reduce the burden, especially on our smaller financial
institutions.
At the same time, the bill will strengthen the safety and
soundness of our financial system by keeping our regulators up
to date on the latest fintech innovation.
So, I was glad to see that Act, the FUTURES Act move
through the markup earlier this year. I certainly hope to see
it come to a Floor vote soon.
Chairman Powell, in your comments yesterday in the Senate,
you said Basel III will need a, ``meaningful revamp.'' Before
we proceed towards finalization of that rule, I was glad to
hear you say that, considering that 97 percent of public
comments on Basel III were negative, with 86 percent of that
negative feedback coming from outside the banking sector. Many
of my colleagues here today have highlighted their own concerns
with Basel III.
Given the pressure that Americans are already facing with
inflation and increased interest rates and housing market
stalls, I would urge that you take a good, long look at the
cumulative effect of this rule in context with the broader
economy, and our small and mid-sized banks, not just the larger
financial institutions.
Will a meaningful revamp include consideration of the
hardships that overregulation causes for smaller financial
institutions like those that are essential to rural communities
like mine in southern Indiana?
Mr. Powell. I think it will, yes.
Mrs. Houchin. And are you concerned about the consolidation
that we are seeing in the banking sector? I know you said it
has been going on for 40 years.
Does consolidation in the banking sector concern you? And
are you concerned that the broader effect of cumulative rules
is potentially leading to a further consolidation in the
banking sector?
Mr. Powell. Again, we don't want to be part of the reason
for that consolidation. It seems to be happening, though,
organically. We allowed interstate banking, for example. Also,
I think for a long time, the learning was that there weren't a
lot of economies of scale in banking. I think with all the
technology costs, that old learning is now not really true.
And I do think, in fact, a lot of the sort of smaller
regionals do feel that they need to grow to be able to compete
with the larger regionals. And also, the very largest banks are
also present, as you well know, in many, many communities where
they weren't 30 years ago.
So, I think people are seeing a need for scale from a
business standpoint. And we don't want to push consolidation. I
think we also don't want to stand in the way of it, if that is
what is necessary for banks to compete----
Mrs. Houchin. I appreciate that.
Mr. Powell. ----with the largest banks.
Mrs. Houchin. Thank you, Chairman Powell, again, for your
testimony.
Our financial system is really the envy of the world. We
need to make sure that small and growing institutions have the
tools they need to innovate without any undue burden. I
appreciate your emphasis on that in the meaningful revamp.
Thank you, Mr. Chairman. And I yield back.
Mr. Williams of Texas. Next, the gentleman from Illinois,
Mr. Casten, who set a record for the mile run this morning in
Washington, D.C., is recognized for 5 minutes.
Mr. Casten. Thank you, Mr. Chairman. You looked much better
and well-quaffed when I saw you this morning than me.
It's nice to see you again, Chair Powell.
Just briefly, on the Basel III reforms, you and I have
talked about the tax equity provisions and the fact that clean
energy tax equity got a 4 times risk rating relative to other
tax equity in the last version.
If there is a reproposal, can you give us any visibility on
whether clean energy tax equity will go back to the 100 percent
risk rating that it has historically had?
Mr. Powell. I am not going to give any specifics out today
because the usual arrangement is that nothing is agreed upon
until everything is agreed upon. So, I don't want to get into
the specifics.
I am hopeful that we--the three agencies--can come out
pretty soon with the whole package.
Mr. Casten. Okay. Well, the sooner, the better, even
something temporary, because there are a lot of banks that want
to participate that are, I think, more cautious than they need
to be right now. I appreciate that.
In 2021, I think you were a part of the FSOC report on
climate-related financial risk that for the first time
identified climate change as an emerging threat to U.S.
financial stability.
Do you still agree with that conclusion?
Mr. Powell. The conclusion being what again?
Mr. Casten. That climate change was an emerging threat to
U.S. financial stability.
Mr. Powell. Yes.
Mr. Casten. Yes. I raise that because I have been troubled,
as you know from some of the letters we have written, by this
April Bloomberg report that said: number one, that Fed
officials were pressuring the Basel Committee to make
disclosure of banks' transition plans optional and that
succeeded; number two, that the Fed, the OCC, and the FDIC were
pushing to limit implementation of the Basel Committee's
climate risk management principles to remove financed
emissions; and number three, that the U.S., unlike other
countries, did not propose that any of its banks be subject to
an analysis of how they incorporated climate in their credit
risk assessments.
Have any representatives from your agency attempted to
weaken the Basel Committee's work on climate risk, including by
expressing concern about the Basel Committee overstepping its
mandate with respect to its climate work?
Mr. Powell. I guess I would say it this way: The Fed does
not have a mandate of fostering an energy transition or dealing
with climate change. Some of the Northern European banks feel
that they do. They actually have that. It is in their mandate,
either explicitly or implicitly. But we don't.
Mr. Casten. But if we agree that climate change is an
emerging threat to the stability of the banking system, are you
saying you are not acting on it because you don't have the
authority or you are not acting on it because you disagree with
what you said in 2021?
Mr. Powell. When you say it is an--and I agree. There is an
emerging threat to the financial stability. That is over time.
I think looking to the banking agencies to lead the fight
on climate change is a big mistake. I think it is a job for
elected people. We don't have that mandate in the United
States.
We can do a very limited thing, which is make sure that the
institutions we supervise are aware of and can manage those
risks. We are not going to be the ones who are forcing them to
adopt plans to transition and that kind of thing. That is just
not going to happen through the banking agencies without a law
change.
Mr. Casten. Then, if it is the view of the rest of the
world that climate change is a financial risk and we are going
to regulate our banks, is it the view of the Fed that the U.S.
G-SIBs should not be required to report?
Mr. Powell. Again, we are not going to be policymakers at
the Fed. We are not going to do that. We don't have that
mandate.
A key to our independence is that we stick to the job you
have given us. And the idea that we should discover climate and
say, ``Okay, we are going to lead the fight on climate,''--if
we are going to do things like that, we should be part of the
Treasury Department.
Mr. Casten. To be clear, no one is under the illusion that
you are the EPA.
But I spoke of with Treasury Secretary Janet Yellen about
this yesterday. We have multiple States where the insurance
industry is collapsing. As you know well, something like a
third to 40 percent of U.S. wealth is tied up in real estate.
And, okay, U.S. homeowners are not G-SIBs, but in the 2008
financial crisis, we had risk that moved out of the G-SIBs onto
other entities' balance sheets. And we said, ``Well, we are not
responsible because it is an insurance company.'' Well, we
fixed that. You do now have a mandate if there is systemic risk
in the system.
So the question is, if we know that risk is moving through
the system, is the FSOC monitoring that risk? Or is it the
FSOC's view that, if I am not allowed to look at it, I am not
going to look at it, and it is somebody else's problem? Because
somebody else is the person sitting here. Right? We are going
be accountable when that risk comes--when those chickens come
home to roost.
Mr. Powell. The banks know their risks pretty well, and you
see banks and the insurance companies pulling back from lending
in coastal areas and things like that.
Mr. Casten. No, I agree. But where are they off-loading
that risk to? We have seen them putting it onto Fannie Mae and
Freddie Mac, and we have seen Fannie and Freddie try to put it
onto the reinsurance industry.
Mr. Williams of Texas. The gentleman's time is up.
Mr. Casten. The risk doesn't go away.
Mr. Powell. We don't regulate them.
Mr. Williams of Texas. The gentleman's time is up.
Mr. Casten. I yield back.
Mr. Williams of Texas. Next, the gentlewoman from the great
State of Missouri, Congresswoman Wagner, is now recognized for
5 minutes.
Mrs. Wagner. Thank you, Mr. Chairman.
And, in keeping with baseball analogies here, I think I am
batting cleanup.
Chairman Powell, welcome. In your testimony you stated
that, ``Longer term inflation expectations appear to remain
well-anchored.'' Could you please expand on that for us?
Mr. Powell. Sure. In our thinking, and in the thinking of
economists and central bankers, what the public expects about
inflation is really important because if you expect there to be
low inflation, then it probably will be low, because you are
going to make sure that is true in your daily decisions.
So, we measure them. We survey individuals and businesses
and market participants. And then, we look at market-based--you
can also derive market estimates of what inflation will be
through various instruments in the market.
And all of those suggest that people expect inflation to be
right around 2 percent over the longer term, and that has been
very stable right through this episode.
Mrs. Wagner. When you say, ``longer term,'' sir, how many
years would you be estimating? One year? Three years? Five
years?
Mr. Powell. We look at short- and medium-term inflation
expectations, too, and they tend to be more volatile, because
when inflation is high, people think that will last a few
years. But one standard thing is to look at 5-year--which is
between year 5 and year 10. That is a standard way to look--or
longer term than that.
If you just ask people in surveys over the longer term--you
maybe don't specify--but they all give you the same answer,
which is people kind of have faith that inflation will go back
down to its 2-percent level.
Mrs. Wagner. Thank you.
There has been some reporting lately on, ``shrinkflation.''
And, for our viewers, I will say this is when you pay the same
price for something as yesterday but get less of it than
before, kind of like my bag of potato chips.
Some have sought to direct attention away from the pain of
runaway inflation that we have experienced and instead blame
producers who themselves face rising costs pressures. Yet, I
haven't seen any mention of shrinkflation as an inflation cause
in any recent Monetary Policy Report.
Moreover, a Bureau of Labor Statistics article last year
looked at shrinkflation and concluded that, ``It has a
miniscule impact on overall inflation.''
Chair Powell, from the Fed's perspective and analysis, has
shrinkflation been a significant causal or amplifying factor in
the runaway inflation of the past several years, that has
imposed greater pain on American workers and households?
Mr. Powell. I would have to say, no. I would say it this
way. Packaging in the U.S. on food products and that kind of
thing is going to disclose the contents of the thing. And the
price will be what it is, and consumers can make their choice
to buy it or not. But we don't think that is a major driver of
inflation.
Mrs. Wagner. I think from a producer standpoint, it
probably is if the cost of the item is exponentially higher.
Mr. Powell. It may reflect costs on the part of the
producer. It probably does, but that doesn't mean it is a cause
of inflation as such.
Mrs. Wagner. Okay. Thank you.
Switching topics, the Federal Reserve has produced volumes
of research over the last decade highlighting the negative
consequences of the debit interchange fee cap. Some of the
economists who produced that research have even worked on this
proposed rule, the Reg. II.
Chair Powell, was the previous Federal Reserve research
demonstrating Regulation II's detrimental impacts to low-cost
checking accounts flawed, or did it have incorrect conclusions?
And, if not, then why would the Fed propose this rulemaking
when all of their research demonstrated detrimental impacts?
Mr. Powell. I am not entirely sure what research you are
referring to, but I will be happy to follow up with you on
that.
Mrs. Wagner. Yes, I hope you will, because I know we are
having this discussion about the interchange fee caps and Reg.
II. And I am concerned about going forward on that when much of
the research that we have seen from the Fed over the last
number of years says that it has quite detrimental impacts on
low-cost checking accounts. So, if you wouldn't mind, I would
love to get some answers on that.
And, also, why hasn't the Fed taken into action the higher
fraud costs that debit card issuers will incur as a result of
the new dual-routing mandate for card-not-present transactions?
I am over my time. If you could also answer that in
writing, I would be ever so grateful.
I yield back, sir.
Mr. Williams of Texas. The gentlelady yields back.
And I would like to thank Chairman Powell for his testimony
today. I know you have to get out of here.
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.
And I ask you, Chairman Powell, to please respond no later
than August 30, 2024.
With that in mind, this hearing is adjourned.
[Whereupon, at 1:02 p.m., the hearing was adjourned.]
A P P E N D I X
July 10, 2024
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