[Senate Hearing 118-205]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 118-205


         THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS

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

                                HEARING

                               BEFORE THE

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

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                                   ON

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

                             MARCH 7, 2023
                               __________

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


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

                    U.S. GOVERNMENT PUBLISHING OFFICE
                    
54-497 PDF                 WASHINGTON : 2024                   
                


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                       SHERROD BROWN, Ohio, Chair

JACK REED, Rhode Island              TIM SCOTT, South Carolina
ROBERT MENENDEZ, New Jersey          MIKE CRAPO, Idaho
JON TESTER, Montana                  MIKE ROUNDS, South Dakota
MARK R. WARNER, Virginia             THOM TILLIS, North Carolina
ELIZABETH WARREN, Massachusetts      JOHN KENNEDY, Louisiana
CHRIS VAN HOLLEN, Maryland           BILL HAGERTY, Tennessee
CATHERINE CORTEZ MASTO, Nevada       CYNTHIA LUMMIS, Wyoming
TINA SMITH, Minnesota                J.D. VANCE, Ohio
KYRSTEN SINEMA, Arizona              KATIE BOYD BRITT, Alabama
RAPHAEL G. WARNOCK, Georgia          KEVIN CRAMER, North Dakota
JOHN FETTERMAN, Pennsylvania         STEVE DAINES, Montana

                     Laura Swanson, Staff Director

               Lila Nieves-Lee, Republican Staff Director

                       Elisha Tuku, Chief Counsel

                  Amber Beck, Republican Chief Counsel

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                       Pat Lally, Assistant Clerk

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, MARCH 7, 2023

                                                                   Page

Opening statement of Chair Brown.................................     1
        Prepared statement.......................................    44

Opening statements, comments, or prepared statements of:
    Senator Scott................................................     3
        Prepared statement.......................................    45

                                WITNESS

Jerome H. Powell, Chair, Board of Governors of the Federal 
  Reserve System.................................................     5
    Prepared statement...........................................    46
    Responses to written questions of:
        Chair Brown..............................................    49
        Senator Menendez.........................................    51
        Senator Sinema...........................................    52
        Senator Fetterman........................................    52
        Senator Crapo............................................    54
        Senator Tillis...........................................    56
        Senator Kennedy..........................................    57
        Senator Hagerty..........................................    63

              Additional Material Supplied for the Record

Monetary Policy Report to the Congress dated March 3, 2023.......    64
Letter from Electronic Payment Coalition.........................   130
Statement submitted by Accountable.US............................   132

                                 (iii)

 
         THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS

                              ----------                              


                         TUESDAY, MARCH 7, 2023

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10 a.m., in room 216, Hart Senate 
Office Building, Hon. Sherrod Brown, Chair of the Committee, 
presiding.

            OPENING STATEMENT OF CHAIR SHERROD BROWN

    Chair Brown. This hearing will come to order. Welcome, 
Chair Powell. Thank you for doing your duty and seeming to 
enjoy it when you come to our Committee. Thank you. Seeming to 
enjoy it.
    Today we examine the Fed's actions to combat inflation, 
whether these actions are actually working, including how those 
actions affect American jobs and their paychecks. Prices are 
still too high across many parts of the economy. We know who 
feels it the most when the cost of rent and groceries go up. It 
is not the economic pundits and politicians who lecture us 
about discipline and stability. It is not the corporate 
executives who pretend they are making tough choices about 
prices while reporting record profit increases, quarter after 
quarter, and doing more and more stock buybacks.
    It is the people working hourly jobs to make ends meet. It 
is seniors on fixed income and Social Security. It is everyone 
who gets their income from a paycheck each month, not an 
investment portfolio. It is those same Americans who stand to 
lose the most if the Fed's action to curb inflation go too far. 
No matter what goes wrong in our economy--a global pandemic, a 
war in Eastern Europe, weather disasters--profits somehow 
always manage to go up. Workers are left paying the price.
    As you have noted, Chair Powell, the Fed's tools are only 
one element in our fight against inflation. It is a complex 
problem. Interest rates are a single, we know, blunt tool. 
Raising interest rates cannot rebuild our supply chain and fix 
demand imbalances from the pandemic. Raising interest rates 
will not end Russia's brutal invasion of Ukraine. Raising 
interest rates will not prevent avian flu from devastating one-
third of our egg supply or weather disasters from destroying 
key crops. And raising interest rates certainly will not stop 
big corporations from exploiting all of these crises to jack up 
prices far beyond the increase in their costs.
    Last year, corporate profits hit a record high. Corporate 
PR chiefs assured us that these companies just have to raise 
prices. Their costs are going up. The workers just want to be 
paid too much. They have no other choice, they tell us. Yet 
when you look at their profits and the executive salaries and 
their stock buyback plans, it sure does not look like 
corporations have exhausted every available alternative. It is 
so brazen.
    Even global bankers called on the Fed to identify this 
profiteering as one of the biggest drivers of inflation. Paul 
Donovan, Chief Economist of Global Wealth Management at UBS 
wrote, ``The Fed should make clear that raising profit margins 
are spurring inflation. Companies have passed higher costs on 
to consumers, but they have also taken advantage of 
circumstances to expand profit margins. The broadening of 
inflation beyond commodity prices is more profit margin 
expansion than wage cost pressures.''
    Think about that. From a chief economist at UBS. I will say 
it again. These companies have ``taken advantage of 
circumstances to expand profit margins. The broadening of 
inflation beyond commodity prices is more profit margin 
expansion than wage cost pressures,'' unquote.
    Understandably, the Fed cannot force corporations to change 
their ways or rewrite the Wall Street business model on its 
own. But the Fed can talk about it. High interest rates, 
falling wages, increasing unemployment are all hallmarks of 
failed policies that end up helping Wall Street, the largest 
corporations in the country, the wealthiest people in the 
country.
    Because, let us be clear what we are talking about when 
people use the economic speak that can cloud this conversation. 
Cooling the economy means laying off workers. Lowering demand 
means workers get fewer raises. Of course there are times when 
the Fed must act. We cannot allow inflation to become 
entrenched.
    We have seen encouraging trends, that is that that is not 
happening. And there are other ways we can bring prices down. 
Instead of lowering demand, again making people poor, laying 
people off, denying worker raises, we can speed up and 
strengthen our supply chains. We can bring critical 
manufacturing back to the U.S. We can rebuild our 
infrastructure. It is what we are doing with the CHIPS Act, 
with the Inflation Reduction Act, with the Bipartisan 
Infrastructure Bill. For the first time in decades, we are 
finally recognizing the damage that I and many of my colleagues 
warned that corporate offshoring would do to our economy.
    Look at East Palestine, Ohio, a community that Senator 
Vance and I visited a number of times recently. America learned 
about this small town last month, when a Norfolk Southern train 
derailed and spewed hazardous material into this community. 
East Palestine is more than just a disaster headline. 
Columbiana County was once the center of American ceramics 
manufacturing, at one time producing 80 percent of ceramics of 
dishware in this country--one county produced 80 percent of it.
    When I was there last week I was talking to the sheriff at 
the 1820 Candle Company. He was talking about how the last one 
closed just a few years back.
    Like so many industries these jobs moved overseas, and we 
know why. The same reason Norfolk Southern cuts costs at the 
expense of safety, eliminating one-third of its workforce in 
the last 10 years. Then you are surprised with these 
derailments? It is the same reason corporations now keep prices 
high, even as supply chains stabilize.
    It is the Wall Street business model. Chair Powell knows 
that. I know that. My Republican colleagues and Democratic 
colleagues know that. It is the Wall Street business model. 
Quarter after quarter, corporations are expected to cut costs 
at any cost. They skimp on safety. They move production 
overseas to countries where they can pay workers less because 
of trade deals that they lobbied for. And Wall Street demands 
they post profit increases, even in the middle of a global 
pandemic. That is the problem with our economy. And not only 
will higher interest rates not solve it, if they are overdone 
they will make it worse.
    We cannot risk undermining one of the successes of our 
current economy. For the first time in decades, workers are 
finally starting to get a little power in this economy. 
Unemployment is at a historic low, 3.4 percent. That is not 
just a number. That means Americans have more opportunities, 
more options, even in places that have not seen a lot in recent 
years. It means people have the power to demand raises and 
retirement security and paid sick days and some control over 
their schedules. It means more Americans have the dignity--have 
the dignity--that comes with a good job that provides for your 
family. We must here ensure that all Americans have the 
opportunity for that dignity of work.
    It is a critical time. The consequences of missteps could 
be severe.
    Mr. Chairman, two more things that affect your job. It is 
not just monetary policy that threatens American pocketbooks. 
Some of my colleagues have threatened the Nation's full faith 
and credit by holding the debt ceiling hostage for partisan 
politics. Instead of paying our bills on time they are 
essentially threatening all Americans.
    The Fifth Circuit's Consumer Financial Protection Bureau 
ruling could also cause unimaginable instability and chaos for 
families, for consumers, but also, as the Chair knows, for our 
financial system. No doubt about it. The Fifth Circuit is Wall 
Street's favorite courthouse. It recently ruled the CFPB's 
independent funding is unconstitutional. If the Supreme Court 
upholds the Fifth Circuit's ruling, it will not only devastate 
CFPB. It will threaten the independent funding of many other 
Federal agencies, including the Federal Reserve.
    I look forward to hearing at today's hearing how the Fed 
will balance its dual mandate and continue to promote an 
economy where everyone who wants a good job can find one, an 
economy that works for everyone.
    Senator Scott.

             OPENING STATEMENT OF SENATOR TIM SCOTT

    Senator Scott. Good morning, Chairman Powell.
    Sitting here looking at my prepared remarks, thinking about 
. . . there is an opening coming where Vice Chairman Brainard 
is moving on. I think it is really important for us to make 
sure that all the information that we need in order to make a 
good decision on the next nom that we have in a timely fashion. 
So I would really implore the Chair to make sure that happens, 
that every question, every questionnaire that is asked from the 
person, we get, that every Member of this Committee has their 
questions answered in a timely fashion, and that the staff has 
their answers in a timely fashion.
    Listening to Chairman Brown I thought, fascinating, truly 
fascinating. I concluded that while I know Chairman Brown 
pretty well, I am sure he is sincere in his rant.
    But let me just say this. Spending and printing trillions 
of dollars, caving to the radical left in this country, seeing 
policies posited and then implemented that led to the worst 
inflation in 40 years, seeing our inflation at 9.1 percent, 
seeing American families struggle because of the weight of the 
Government on their shoulders, seeing the devastation from 
South Carolina to Ohio is unbelievable, that the progressives 
in this country, who caused a 9.1 percent inflation, would then 
turn, somewhere besides in the mirror, to see the absolute 
devastation caused by their out-of-control spending is 
remarkable. Remarkable.
    To stop the out-of-control inflation caused by the out-of-
control spending, the Fed steps in to cool the economy. Well, 
the definition of cooling the economy is necessary because we 
have seen the most radical approach to a problem that was in 
our rear-view mirror being used as a Trojan Horse to bring in a 
level of socialism and spending that our Nation has not seen in 
my lifetime.
    The facts are very simple, when you get to 9.1 percent 
inflation in this Nation, as a kid who grew up in a single-
parent household, mired in poverty, a 40 percent today, 100 
percent just a year ago, increase in the gas prices devastates 
single mothers around this country. For seniors on fixed 
income, whose savings are being depleted, with an average cost 
just last month of a $433 increase because of inflation. For my 
friends on the other side of the aisle to look anyplace besides 
a mirror, I find stunning.
    The truth is that when your food prices go up over 20 
percent, when your electricity is up over 20 percent, you have 
to ask yourself, where in the world are they? They cannot be in 
this universe. It must be an alternate universe where, in fact, 
it is OK for us to see prices go through the roof and our 
economy not stumble but fall into a ditch. Why are we in the 
ditch? Because progressives used the pandemic as a way to usher 
in a form of spending that takes the money out of the pockets 
of everyday Americans and puts it in the coffers of the 
Government.
    There is a better way. The better way is to trust the 
American people. And when you do so, we do not have to have the 
Fed come in and raise interest rates so high to quell the 
challenges in our economy so that today versus 18 months ago 
the price of the same house, for your mortgage payment, is 
twice as high. Why? Because of the runaway spending of our 
friends on the other side of the aisle.
    I am sure I do not have time for my opening comments, but I 
will say, without any question, as I look around the country 
and I ask myself, how devastating is it that today it costs 
$433 more than it did a year ago, the answer is it is a crisis. 
When the average family in our country, just a couple of years 
ago, did not have $400 in their savings for an emergency, to 
have prices go up by this amount is devastating.
    To have a conversation about rents around the country, 
looking at the inflationary effect and the absolute devastation 
of a snarling supply chain, that we have not seen in my 
lifetime, run by my friends and the progressives, unbelievable.
    But to get to you, Chairman Powell, one of the comments 
that you have made that I think is really important, in one of 
the speeches you gave in January--and I apologize for my rant; 
I just wanted to make sure my rant was consistent with my 
friend here--it is essential, you said, that ``we stick to our 
statutory goals and authorities and that we resist the 
temptation to broaden our scope to address other important 
social issues of the day. Taking on new goals, however worthy, 
without a clear statutory mandate would undermine the case of 
our independence.''
    You further noted that, and I quote, ``Without explicit 
congressional legislation it would be inappropriate for us to 
use our monetary policy or supervisory tools to promote a 
greener economy or to achieve other climate-based goals. We are 
not and will not be a climate policymaker.''
    Do you still stand by those comments?
    Mr. Powell. I do.
    Senator Scott. Finally--we are not in the questioning now. 
I know. I get it.
    Chair Brown. You now have 4 minutes and 12 seconds.
    Senator Scott. Yes. I knew the Chairman would dock that 
from my time, and I appreciate you doing so----
    Chair Brown. With a sense of humor.
    Senator Scott. ----with a great humor. Great humor.
    Finally, several of my Republican colleagues and I sent a 
letter to you discussing Vice Chair of Supervision, Michael 
Barr's plan to conduct a holistic review of capital standards. 
I look forward to discussing those capital standards during my 
Q&A, and I will thank you for a recent conversation that we had 
that helped illuminate some of the necessary challenges that we 
face as a Nation, and your answers to it.
    Thank you, Mr. Chairman.
    Chair Brown. Thank you. Speaking of illuminating, thank 
you, Senator Scott.
    Today we will hear from Chair of the Federal Reserve, 
Jerome Powell, on monetary policy and the State of our economy. 
And I do not expect Chair Powell to weigh in on the mini-debate 
we just had, but I think we all know that the debt increase was 
much larger under President Trump and a Republican Senate than 
it has been since.
    Chair Powell, thank you for your service and your testimony 
today.

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

    Mr. Powell. Chairman Brown, Ranking Member Scott, and other 
Members of the Committee, I appreciate the opportunity to 
present the Federal Reserve's semiannual Monetary Policy 
Report.
    My colleagues and I are acutely aware that high inflation 
is causing significant hardship, and we are strongly committed 
to returning inflation to our 2 percent goal. Over the past 
year, we have taken forceful actions to tighten the stance of 
monetary policy. We have covered a lot of ground, and the full 
effects of our tightening so far are yet to be felt. Even so, 
we have more work to do. Our policy actions are guided by our 
dual mandate to promote maximum employment and stable prices. 
Without price stability, the economy does not work for anyone. 
In particular, without price stability, we will not achieve a 
sustained period of labor market conditions that benefit all.
    I will review the current economic situation before turning 
to monetary policy.
    The data from January on employment, consumer spending, 
manufacturing production, and inflation have partly reversed 
the softening trends that we had seen in the data just a month 
ago. Some of this reversal likely reflects the unseasonably 
warm weather in January in much of the country. Still, the 
breadth of the reversal along with revisions to the previous 
quarter suggests that inflationary pressures are running higher 
than expected at the time of our previous FOMC meeting.
    From a broader perspective, inflation has moderated 
somewhat since the middle of last year but remains well above 
the FOMC's longer-run objective of 2 percent. The 12-month 
change in total PCE inflation has slowed from its peak of 7 
percent in June to 5.4 percent in January as energy prices have 
declined and supply chain bottlenecks have eased.
    Over the past 12 months, core PCE inflation, which excludes 
the volatile food and energy prices, was 4.7 percent. As supply 
chain bottlenecks have eased and tighter policy has restrained 
demand, inflation in the core goods sector has fallen. And 
while housing services inflation remains too high, the 
flattening out in rents evident in recently signed leases 
points to a deceleration in this component of inflation over 
the year ahead.
    That said, there is little sign of disinflation thus far in 
the category of core services excluding housing, which accounts 
for more than half of core consumer expenditures. To restore 
price stability, we will need to see lower inflation in this 
sector, and there will very likely be some softening in labor 
market conditions.
    Although nominal wage gains have slowed somewhat in recent 
months, they remain above what is consistent with 2 percent 
inflation and current trends in productivity. Strong wage 
growth is good for workers but only if it is not eroded by 
inflation.
    Turning to growth, the U.S. economy slowed significantly 
last year, with real gross domestic product rising at a below-
trend pace of 0.9 percent. Although consumer spending appears 
to be expanding at a solid pace this quarter, other recent 
indicators point to subdued growth of spending and production. 
Activity in the housing sector continues to weaken, largely 
reflecting higher mortgage rates. Higher interest rates and 
slower output growth also appear to be weighing on business 
fixed investment.
    Despite the slowdown in growth, the labor market remains 
extremely tight. The unemployment rate was 3.4 percent in 
January, its lowest level since 1969. Job gains remained very 
strong in January, while the supply of labor has continued to 
lag. As of the end of December, there were 1.9 job openings for 
each unemployed individual, close to the all-time peak recorded 
last March, while unemployment insurance claims have remained 
near historical lows.
    Turning to monetary policy, with inflation well above our 
longer-run goal of 2 percent and with the labor market 
remaining extremely tight, the FOMC has continued to tighten 
the stance of monetary policy, raising interest rates by 4\1/2\ 
percentage points over the past year. We continue to anticipate 
that ongoing increases in the target range for the Federal 
funds rate will be appropriate in order to attain a stance of 
monetary policy that is sufficiently restrictive to return 
inflation to 2 percent over time.
    In addition, we are continuing the process of significantly 
reducing the size of our balance sheet. We are seeing the 
effects of our policy actions on demand in the interest-
sensitive sectors of the economy. It will take time, however, 
for the full effects of monetary restraint to be realized, 
especially on inflation. In light of the cumulative tightening 
of monetary policy and the lags with which monetary policy 
affects economic activity and inflation, the Committee slowed 
the pace of interest rate increases over its past two meetings. 
We will continue to make our decisions meeting by meeting, 
taking into account the totality of incoming data and their 
implications for the outlook for economic activity and 
inflation.
    Although inflation has been moderating in recent months, 
the process of getting inflation back down to 2 percent has a 
long way to go and is likely to be bumpy. As I mentioned, the 
latest economic data have come in stronger than expected, which 
suggests that the ultimate level of interest rates is likely to 
be higher than previously anticipated. If the totality of the 
data were to indicate that faster tightening is warranted, we 
would be prepared to increase the pace of rate hikes. Restoring 
price stability will likely require that we maintain a 
restrictive stance of monetary policy for some time.
    Our overarching focus is using our tools to bring inflation 
back down to our 2 percent goal and to keep longer-term 
inflation expectations well anchored. Restoring price stability 
is essential to set the stage for achieving maximum employment 
and stable prices over the longer run. The historical record 
cautions strongly against prematurely loosening policy. We will 
stay the course until the job is done.
    To conclude, we understand that our actions affect 
communities, families, and businesses across the country. 
Everything we do is in service to our public mission. At the 
Federal Reserve will do everything we can to achieve our 
maximum-employment and price-stability goals.
    Thank you. I look forward to your questions.
    Chair Brown. Thank you, Mr. Chair. There are 23 of us on 
this Committee. Almost everyone will be here today. I ask each 
of us to stay as close to the 5-minute mark as we can because 
we have votes at 11:30. So thank you all for your cooperation.
    Chair Powell, thank you. Job growth is strong as 
unemployment remains historically low. You might not know that 
from the opening statements. Many drivers of inflation are 
corporate greed, rising inequality, supply chain disruptions, 
Russia's bestiality, if you will, in Ukraine, will not get 
better because of interest rate increases. Every indication is 
that this post-pandemic economy is different.
    Should we be worried, Mr. Chair, that the Fed is treating 
this economic period as it has in the past instead of reacting 
differently?
    Mr. Powell. Thank you, Mr. Chairman. So we have been aware 
since the very beginning, and have discussed this publicly on 
many occasions, that there are some differences this time. We, 
in particular, have not seen the kind of supply side collapse 
that we saw at the very beginning of the inflation outbreak. 
Also, the outbreak of a war which had significant effects on 
commodity prices a year ago. So all that is different.
    There are also, though, some similarities. There is a 
mismatch between supply and demand. You can see that in the 
goods sector still, you saw it in housing prices going up over 
40 percent since before the pandemic, and you see it in the 
labor market where we have 1.9 job openings for every 
unemployed person.
    So we are well aware that this particular situation 
involves a mix of forces, not all of which our tools can 
affect. But there is a job here for us to do in better aligning 
demand with supply.
    Chair Brown. Understanding you have limited tools to 
address inflation, and our conversations in the past show my 
concern about continued rate increases that may not actually 
address the root cause of inflation--they hurt workers, and 
many of us content we cannot follow the same old playbook.
    Next question. Last year three banking regulators issued 
proposed updates on the Community Reinvestment Act to account 
for changes in our banking system. My question is does the Fed 
remain committed to work with FDIC and OCC to finalize a CRA 
rule, and when will that rule likely be finalized?
    Mr. Powell. Yes, we do remain committed, and I believe we 
are in broad agreement with the other two agencies on the 
revisions to the rule, so now we are in the process of writing 
all that down. That will take some time. And then after that, 
of course, it will come to the Board of Governors for a vote, 
and that will involve briefings and discussions. I cannot give 
you an exact but----
    Chair Brown. But as quickly as possible.
    Mr. Powell. Yes, but it will be some months.
    Chair Brown. Thank you. Banks weathered the shock of the 
COVID-19 shutdowns mostly because of the fiscal response 
provided by Congress. We now see a spike in loan delinquencies 
and increase in overall risk. Banks are again plowing billions, 
billions--as many other corporate leaders always defended by 
people on that side of the aisle--into stock buybacks, which 
makes me concerned if there is a downturn in the economy banks 
could end up with too little capital. That is why I am worried 
about any potential rollbacks of safeguards or regulations.
    Can you assure me that the Fed will keep capital 
requirements strong and exercise more long-term, forward-
thinking than corporate CEOs that seem to be focused on the 
short term?
    Mr. Powell. I can assure you as to the first part, that we 
will keep capital requirements strong.
    Chair Brown. I did not expect you to give me an opinion 
about your looking more forward than companies that look at the 
short-term benefits of stock buybacks.
    Mr. Chair, when you last testified I asked you about the 
risks posted by crypto assets, stablecoin, the Fed, and other 
regulated possibilities. How is the Fed evaluating the risks of 
crypto-related activities by your supervised institutions?
    Mr. Powell. So this is something we have been quite active 
in this area, and I will say that we believe that innovation is 
very important over time to the economy, and we do not want to 
stifle innovation. We do not want regulation to stifle 
innovation in a way that just favors incumbents and that kind 
of thing.
    But like everyone else we are watching what has been 
happening in the crypto space, and what we see is quite a lot 
of turmoil. We see fraud. We see a lack of transparency. We see 
run risk. Lots and lots of things like that.
    And so what we have been doing is making sure that the 
regulated financial institutions that we supervise and regulate 
are careful, are taking great care in the ways that they engage 
with the whole crypto space, and that they give us prior 
notice. We have issued, along with the FDIC and the OCC, a 
number of issuances of notices to that effect.
    Chair Brown. Thank you, and I will close with this. I have 
long pushed for the Fed to prioritize workers and for the 
leaders of the Fed reflect the diversity of our country. We 
have made progress but our work is not done. We have a new 
opening, I understand. It is not your job to appoint the new 
Fed member. And we have a number of upcoming vacancies at the 
Reserve Banks. I support Senator Reed from Rhode Island, 
Senator Menendez from New Jersey, and to her colleagues who are 
pushing for more diverse voices at the Fed.
    Senator Scott.
    Senator Scott. Thank you, Chairman. Obviously the Chairman 
and I both have strong passions about challenges that we face 
in the country. The one thing that I do believe that we agree 
on is the importance of having a strong capital market as it 
relates to making sure that Americans have the ability to 
continue to grow their businesses and solve their challenges, 
and frankly, I hope that we get there.
    Building on the same comment that the Chairman had around 
capital standards is where I am going to go with my thoughts 
today. When I think back on these last few years, it is hard 
not to recognize the extraordinary efforts our financial 
institutions of all sizes, frankly, undertook to administer a 
program like the PPP, all while weathering a shutdown of our 
global economy.
    I welcome your thoughts, but from my viewpoint, our banking 
system was resilient. Our financial institutions stepped up and 
delivered aid to support families and businesses every single 
day. That is why Vice Chair Barr's broad comments around 
holistic review of our capital troubled me so much. We should 
be laser-focused on our economy and addressing the needs of 
everyday Americans trying to forge a new future, and helping 
them open the door to opportunity.
    As you and I both know, capital and its quality must be 
continually scrutinized, but increased capital does not 
necessarily provide an increased benefit, and requiring banks 
to hold capital that is not risk-based and appropriately 
tailored to a bank's size, scope, and activities, can cause 
more harm than good. At a time of record inflation where 
everyday needs are more expensive, we should not be pursuing 
actions that are harmful. Rather, we should be supporting the 
engine of our economy, small businesses.
    While I remain greatly concerned about by the Vice Chair's 
comments, I am hopeful that you ensure this review is 
appropriate, keeping the impacts on our banking system front 
and center. We must promote and further the growth of our 
economy and thereby our people. Anything less should be 
unacceptable.
    To that end, will you commit that any ongoing capital 
review by the Federal Reserve will follow the law and that any 
follow-on regulatory proposals will be risk-based and tailored 
to an institution's activity, size, and complexity, and not a 
one size fits all?
    Mr. Powell. Yes. I can easily commit to that. You know, we 
are very strongly committed to tailoring, and I can say that 
anything we do will reflect the tailoring, which is a long-held 
principle for us and now a requirement in the law.
    Senator Scott. Yes, sir. Thank you very much.
    Two weeks ago I sent a letter with Chairman McHenry to 
Chair Gensler regarding the SEC's climate disclosure rule, 
urging him to rescind his proposal and reminding him that the 
SEC is a market regulator, not a climate forecaster. Much like 
Congress designed the SEC to protect investors to maintain 
fair, orderly, and efficient markets and to facilitate capital 
formation and not to advance progressive climate change 
policies, Congress designed the Federal Reserve to promote 
price stability and maximum employment, not to play politics.
    To that end, I find worrying the Fed's announcement of 
recent actions to consider climate-related scenarios, coupled 
with remarks by the Vice Chair of Supervision, as attempts to 
incorporate broader ESG policies into the financial service 
system. Banks are having to continue for weather-related risks 
in their risk management, but efforts that attempt to predict 
climate change far into the future fall outside the scope of 
their authority.
    Importantly, the level of speculation required in these 
models should highlight their arbitrary and capricious nature. 
At a time when our economy is suffering from historically high 
inflation, I expect our central bank to focus its time and 
resources on bringing inflation down, not on policy outside of 
its mandate.
    I noted in my opening statement a recent speech that you 
have given about the state of the Fed and how you should resist 
the temptation to broaden its scope and to address social 
issues. Do you agree that the Federal Reserve does not have the 
authority or statutory direction to use its monetary policy or 
supervisory tools to weight into the ESG or other climate 
policies?
    Mr. Powell. I do. I do. As you know, there is a tightly 
focused role that we do have, that I believe that we have, but 
I would agree with your statement.
    Senator Scott. Mr. Chairman, I have 20 seconds left. I am 
going to defer because of my earlier question in my opening 
statement.
    Chair Brown. Thank you, Senator Scott.
    Senator Menendez is close but not here yet. So Senator 
Rounds.
    Senator Rounds. Thank you, Mr. Chairman.
    Mr. Chairman, first of all, welcome. It is always good to 
have you in front of our Committee.
    As you know, both core and headline inflation have remained 
persistently elevated, and over the past 12 months real average 
hourly earnings fell by 1.8 percent, about 4 percent since 
President Biden took office.
    To make ends meet as prices increase, more Americans are 
leaning on credit cards. At the end of 2022, credit card debt 
hit a record of $930.6 billion, an 18.5 percent hike from a 
year earlier, and an average credit card balance rose to 
$5,805.
    Over the past year the Fed has acted aggressively to tame 
inflation and yet we are still seeing price increases. As we 
have discussed this several time, I recognize that it has been 
ongoing discussion, but I believe that this further proves that 
we have long been feeling the effects of a policy-induced 
inflation resulting from decisions by the Biden administration, 
primarily cutting off the resources necessary to improve an 
increased energy production.
    I continue to be concerned that if you attempt to use the 
tools that are available at this time for the Fed that I 
believe that we are going to have a challenge of not being able 
to address specifically the challenges brought out when you 
have a policy that is promoting higher prices with regard to 
energy as opposed to what you are trying to do which is to 
bring down the total overall costs.
    And I just wanted to ask, I guess, and you are going to 
think this is something that we have heard before, but do you 
believe that you currently have the monetary policy tools to 
actually reduce inflation? And I just put it in this 
perspective. In January of 2021, the CPI was 1.4 percent when 
the Biden administration began. In January of 2022--and this is 
before the Russian invasion of Ukraine--the CPI was at 7.5 
percent. Today, March of 2023, CPI is 8.5 percent.
    Would it not be fair to assess that a lot of the inflation 
that we have seen here may very well be due to policy decisions 
by this Administration?
    Mr. Powell. Senator, it is not for us to point fingers. Our 
job is to use our tools. You asked whether we have the tools to 
get this job done, and we do, over time. There are some things 
that we can affect, but over time we can achieve 2 percent 
inflation and we will.
    Senator Rounds. In other words, you have got a limited 
number of tools available to you, and the limited number of 
tools that you have are designed to impact simply the reduction 
in prices and so forth. And yet if there are competing 
interests out there that are pushing prices higher, you do not 
have the wherewithal to decide one tool versus another based on 
whether it is policy induced or whether it is a matter of a 
shortage in supplies from outside, or whether it is war 
related.
    Mr. Powell. That is right. Our tools essentially work on 
demand, moderating demand, so that is what we can do.
    Senator Rounds. So if there were policies in place that 
actually helped to reduce inflation--and I am just going to 
look at energy alone, just as a good example. If policies were 
in place that were actually allowing energy prices to come down 
in the United States, then you would have less of a need to use 
the very blunt tools that you do have right now with regard to 
increasing rate increases. Is that a fair statement, sir?
    Mr. Powell. In a sense it is. But I would just say, on 
energy we----
    Senator Rounds. I am not trying to get you to a policy 
discussion with what the President is doing on his energy 
policy. I just want to make it clear that you have to respond 
to what is in front of you, and it does not matter where the 
inflation is coming from or what is driving it up. You are 
simply trying to bring it back down to that 2 percent number 
with the only tools that you have really got.
    Mr. Powell. Yes. I will say on energy, energy has tended, 
over time, to fluctuate up and down, and it is not mainly 
affected by our tools. So the things we look at are really 
things that are tightly linked to demand in the U.S. economy, 
those we can affect.
    Senator Rounds. And I think just the fact that you have 
been increasing interest rates and yet inflation continues to 
ride up would suggest, as you have just indicated, that when 
you have high energy prices it is tough to impact that part of 
it with the monetary policy that you have got available to you.
    Mr. Powell. We focus on everything, but we also focus on 
core, in particular, which does not include energy prices. And 
what has happened is core inflation has come down but nowhere 
near as fast as we might have hoped, and it has a long way to 
go.
    Senator Rounds. Thank you. One last question. Last June, 
Vice Chairman of Supervision, Michael Barr, testified before 
this Committee that he would defend the use of the aggregation 
method as an alternative approach to the insurance capital 
standards, the ICS, proposed by the IAIS. As the final 
compatibility criteria is set to come out later this year, can 
you confirm that you share Vice Chair Barr's views on this AM?
    Mr. Powell. I will confirm that, but I will have to get 
back to you on the status of that.
    Senator Rounds. OK. Thank you. Thank you, Mr. Chairman.
    Chair Brown. Thanks, Senator Rounds.
    Senator Menendez, of New Jersey, is recognized.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Chairman, I want to take this moment to remind my 
colleagues that there are more than 62 million Latinos that 
call the United States home. We are the largest minority group 
in the country. We account for nearly 20 percent of the United 
States population. We contribute almost $3 trillion in GDP.
    Yet Latinos have no representation in the Federal Reserve's 
leadership. In the 109-year history of the Federal Reserve 
there has never--never--been a single member of the Board of 
Governors or regional bank president who has the lived 
experience of being Latino in the United States.
    And in practice that means that the voices of nearly one-
fifth of our country's people are repeatedly drowned out when 
the Fed is making critical decision on economic policy, 
decisions that affect whether a Latino family can afford their 
first home, find a job that pays a living wage, send their 
children to college, save for a comfortable retirement, or get 
a loan to expand their business.
    Right now the Biden administration has a clear opportunity 
to make history with its next nomination to the Board of 
Governors. It has identified a number of highly qualified 
Latino candidates who have dedicated their careers to the 
fields of economics, who are committed to the Fed's dual 
mandate, who will preserve the independence of the central 
bank.
    The Administration has rightly nominated and advocated for 
a number of diverse candidates with similar qualifications, 
both at the Fed and elsewhere. But despite having five 
opportunities over the past 2 years to nominate a qualified 
Latino economist to serve at the Federal Reserve, this 
Administration has repeatedly chosen not to. Representation or 
lack thereof does not happen by accident. It is a choice, and I 
hope the Administration makes the right choice with this 
nomination.
    Mr. Chairman, would you say that it is a truism that the 
United States dollar is the reserve of choice in the world?
    Mr. Powell. Yes, I would.
    Senator Menendez. And that brings us enormous benefits, 
does it not?
    Mr. Powell. Yes, it does.
    Senator Menendez. Now 12 years ago, Republican House 
brought us to the brink of defaulting on the debt for the first 
time in the history of this country, jeopardizing our credit in 
the world economy. I am getting a sense of deja vu because once 
again Republicans are recklessly demanding draconian spending 
cuts to programs that hard-working U.S. families rely on in 
exchange for allowing the Treasury Department to pay for 
spending that Congress, including most of them have already 
voted to authorize. If you want to talk about spending cuts it 
seems to me that the budget is the time to do that, but not to 
put the full faith and credit of the United States at risk.
    Chairman Powell, can you talk about the catastrophic damage 
a debt default would inflict on the economy?
    Mr. Powell. So I guess I will start, if I can, by saying 
that these are really matters between the Executive branch and 
Congress. We do not seek to play a role in these policy issues.
    But at the end of the day there is only one solution to 
this problem, and that is whatever else may happen will happen, 
but Congress really needs to raise the debt ceiling--that is 
the only way out--in a timely way that allows us to pay all of 
our bills when and as due. And if we fail to do so I think that 
the consequences are hard to estimate, but they could be 
extraordinarily averse, adverse, and could do longstanding 
harm.
    Senator Menendez. Well, I think that is a mild statement of 
what would happen. I understand. I did not ask you to engage in 
the congressional Executive branch roles. I asked you about the 
abstract question of what happens if you have a debt default.
    Is not even this constant fight putting into question the 
possibility that the United States will not honor its full 
faith and credit have consequence within the economy?
    Mr. Powell. In principal it could. I think markets and 
observers tend to watch this and tend to think that it will 
work out, and it has in the past worked out. So it needs to 
work out this time too.
    Senator Menendez. Seeing your testimony before the 
Committee, is it fair to say that you will do whatever is 
necessary to tame inflation?
    Mr. Powell. We serve a dual mandate and we will do 
everything we can to restore price stability while also serving 
maximum employment.
    Senator Menendez. And primarily that means additional rate 
increases, would it not? What other tool do you have?
    Mr. Powell. That is where we have the balance sheet. The 
shrinkage of the balance sheet will continue too, but it is 
principally rate hikes.
    Senator Menendez. So the question is when does that part of 
doing anything necessary to tame inflation come into conflict 
with your other mandate of maximum employment?
    Mr. Powell. Not now, when we have the lowest unemployment 
in 54 years, and where we have a labor market that is extremely 
tight, extremely. But that time could come, but it really is 
not now, where we are very far from our price stability mandate 
and, in effect, the economy is past most estimates of maximum 
employment.
    Senator Menendez. Thank you, Mr. Chairman.
    Chair Brown. Thank you, Senator Menendez.
    Senator Kennedy, of Louisiana, is recognized.
    Senator Kennedy. Thank you, Mr. Chairman. Chairman Powell, 
thank you for being here. Thank you to you and your team for 
helping to save the economy during the pandemic meltdown. For 
what it is worth, I am generally supportive of the actions of 
the Fed right now, and I am not going to ask you today to blame 
anybody.
    When Congress spends money it stimulates the economy, does 
it not?
    Mr. Powell. It would depend on whether that is funded by 
tax increases or not. So if there is a spending that it not 
accompanied by taxes it would have a net, at the margin, 
stimulative effect.
    Senator Kennedy. And when Congress borrows money to spend 
even more, that stimulates the economy even more, does it not?
    Mr. Powell. At the margin, yeah.
    Senator Kennedy. OK. If Congress reduced the rate of growth 
in its spending and reduced the rate of growth in its debt 
accumulation, it would make your job easier in reducing 
inflation, would it not?
    Mr. Powell. I do not think fiscal policy right now is a big 
factor driving inflation at this moment, but it is absolutely 
essential that we do slow the pace of growth, particularly for 
the areas of----
    Senator Kennedy. All right. Let us try to unpack this then. 
I am not trying to trick you. You are raising interest rates. 
You are raising interest rates to slow the economy, are you 
not?
    Mr. Powell. Yes, to cool the economy off.
    Senator Kennedy. And one of the ways you measure your 
success, other than fluctuation in gross domestic product, is 
the unemployment rate, is it not?
    Mr. Powell. Yes. One of the measures.
    Senator Kennedy. OK. So, in effect--and I am not being 
critical--when you are slowing the economy you are trying to 
put people out of work. That is your job, is it not?
    Mr. Powell. Not really. We are trying to restore price 
stability, not wages.
    Senator Kennedy. No, you are trying to raise the 
unemployment rate----
    Mr. Powell. There are a lot of----
    Senator Kennedy. ----and I know you do not like the phrase 
so let me strike it. You are trying to raise the unemployment 
rate, are you not?
    Mr. Powell. No. We are trying to realign supply and demand, 
which can happen through a bunch of channels. Like, for 
example, you know, just job openings. Job openings can----
    Senator Kennedy. All right. Let me put it another way, OK. 
The economists did a wonderful study. They looked at 10 
disinflationary periods in America, going all the way back to 
the 1950s. Disinflation is what you are trying to do. It is a 
slowing in the rate of inflation. Am I right?
    Mr. Powell. Yes.
    Senator Kennedy. In other words, prices are not going to go 
down. They just do not go up as fast. Deflation is when prices 
actually go down. You are trying to achieve disinflation, are 
you not?
    Mr. Powell. Yes, we are.
    Senator Kennedy. OK. Based on history, in the 10 times that 
we got inflation down, disinflation, since the 1950s, in order 
to reduce inflation by 2 percent, unemployment have to go up 
3.6 percent. Now that is history, is it not?
    Mr. Powell. I do not have the numbers in front of me, but 
yes, the standard has been that there have been recessions and 
downturns when the Fed has tried to reduce inflation.
    Senator Kennedy. OK. Now, right now the current inflation 
rate is 6.4 percent and the current unemployment rate is 3.4 
percent. Now if history is right--I am not asking you to, 
again, blame anybody, but if history is right unless you get 
some help, in order to get inflation down from 6.4 percent to, 
let us say, 4.4 percent, the unemployment rate is going to have 
to rise to 7 percent, based on history.
    Mr. Powell. That is what the record would say.
    Senator Kennedy. OK. And to get inflation down to 2.2 
percent, based on history, an immutable fact, unemployment 
would have to go to 10.6 percent, would it not?
    Mr. Powell. I would not----
    Senator Kennedy. That is what the history shows.
    Mr. Powell. Yeah, I do not think that kind of a number is 
at all in play here.
    Senator Kennedy. I know you are reluctant to admit it, and 
you do not want to get in the middle of a policy dispute. But I 
think it is undeniable--it is undeniable that the only way we 
are going to get this sticky inflation down is to attack it on 
the monetary side, which are you doing, and on the fiscal side, 
which means Congress has got to reduce the rate of growth of 
spending and reduce the rate of growth of debt accumulation.
    Now, I get that you do not want to get in the middle of 
that fight, but the more we help on the fiscal side, the fewer 
people you are going to have to put out of work. Is that not a 
fact?
    Chair Brown. Please answer.
    Mr. Powell. It could work out that way.
    Senator Kennedy. Sir?
    Mr. Powell. It could work out that way.
    Senator Kennedy. Yes, sir. Thank you.
    Chair Brown. Thank you, Senator Kennedy.
    Senator Reed, of Rhode Island, is recognized.
    Senator Reed. Thank you very much, Mr. Chairman. Thank you, 
Chairman Powell, for being here today.
    We saw, in the wake of COVID, the globalized supply chain 
disrupted significantly, and we are in the process, in some 
respects, of rebuilding the supply chain with the emphasis on 
sourcing in the United States. To what extent did that 
disruptive supply chain contribute to inflation, and to what 
extent will the new, if you envision it, the new supply chain 
that is located in the United States and other friendly 
countries, affect inflation?
    Mr. Powell. So the initial outbreak of inflation as all 
about spending on goods where people could not spend on 
services. So goods spending went way up and the global supply 
chain--many, many goods are imported--the global supply chain 
just collapsed, and that was the source of the original 
inflation. It has now spread over the last 2 years to housing 
and also to the rest of the service sector.
    So to your question, we are seeing goods inflation has been 
coming down for some time now. It is still too high but it is 
coming down. Housing services, in the pipeline you see the new 
leases that are being signed, and what that tells you is that 
in the next 6 to 12 months we will see that come down.
    But this big service sector that is everything else, which 
is financial services, medical services, travel and leisure, 
all of those things, that is the source of the inflation we 
have now, which had not much to do with the supply chains. That 
is where the challenge is now.
    Senator Reed. And is there anything you can do that would 
target that service area without affecting the other areas?
    Mr. Powell. There is not really. You know, our monetary 
policy tools are famously powerful but blunt.
    Senator Reed. A different topic, and that is, as you are 
probably aware, the Fifth Circuit delivered a ruling in the 
Community Financial Services Association vs. CFPB, that the 
CFPB's funding mechanism is unconstitutional. Just like the 
Board of Governors, the CFPB is a bureau of the Federal 
Reserve. Both the Board of Governors and the CFPB rely on the 
same source of funds and draw on those funds in virtually 
identical ways.
    If the Board of Governors funding starts to be found 
unconstitutional, what would the implications be for the 
country and monetary policy?
    Mr. Powell. Well, it would be very significant, but I have 
to say we have significant responsibilities but I would be 
reluctant to comment on a case that is before the Supreme 
Court.
    Senator Reed. But it is certainly something that you have 
people examine for possible ramifications.
    Mr. Powell. Yes, and the central banks tend to be self-
funding because of the way they work, and that is a key factor 
of our independence.
    Senator Reed. We have gone back and forth on the impact of 
rate hikes on workers, and you have indicated previously that 
wages have not been spiraling upwards necessarily, and that 
inflation expectations are currently stable. But the impact on 
increased interest rates are usually felt more by low- to 
moderate-income people.
    Is there any way you can work yourself out of that dilemma?
    Mr. Powell. So where we are right now, of course, is very 
low unemployment. Wages have been moderating, and they have 
been doing so without softening in the labor market, without 
rising unemployment, really, and that is a good thing. So we 
really do not know.
    The current situation is a combination of more typical 
supply and demand issues but also just things that we have not 
seen before, like the war in Ukraine, like the supply chains 
that you mentioned. So we have many usual factors, and I do not 
think anybody knows with confidence how this is going to play 
out.
    Senator Reed. Thank you very much, Mr. Chairman.
    Chair Brown. Thanks, Senator Reed.
    Senator Britt, from Alabama, is recognized.
    Senator Britt. Thank you, Mr. Chairman. Chairman Powell, it 
is great to have you here today.
    Over the past 2 years we have seen the highest inflation of 
my lifetime, driving up costs for American families across the 
board. According to the U.S. Department of Labor, the annual 
inflation rate in 2021 was 7 percent, and in 2022 it was 6.5 
percent.
    According to the U.S. Department of Agriculture, the cost 
of food went up 10 percent in 2022, and the real effect of that 
is moms and dads across this Nation that are working to put 
food on the table for their kids, for their babies, had a 
harder time doing that. This has devastated hard-working 
Americans, causing a kitchen table crisis in every corner of 
our country, as the price of food, energy, and housing have all 
skyrocketed.
    In response, the Federal Reserve has raised the Federal 
Reserve fund rate more than 4 percentage points. Being far from 
transient, inflation has remained persistent, high, and well 
above the Fed's long-run goal of remaining under 2 percent.
    In the coming year, what factors and indictors are you 
paying attention to as you and the Federal Open Market 
Committee decide on whether to increase rates?
    Mr. Powell. So I would say a couple of things to that. 
First, we are going to be looking at inflation in the three 
sectors that I mentioned: the goods sector, the housing sector, 
and then the broader service sector. And we need the inflation 
that is already underway in the goods sector to continue, and 
that is really important.
    In the housing sector we just need the time to pass so that 
that reported inflation comes down, and it is effectively in 
the pipeline as long as new leases are being signed at 
relatively small increases.
    So we will be watching very, very carefully, though, at the 
larger service sector, which is 56 percent of consumer spending 
and more than that of what is currently inflation. So that is 
one thing. We will be watching that very carefully.
    Also, we raised rates very quickly last year, and we know 
that monetary policy, tightening policy has delayed effects, so 
it takes a while for the full effects to be seen in economic 
activity inflation. So we are watching carefully to see those 
effects come into play, and we are aware that we have not seen 
the full effects yet and we are taking that into account as we 
think about rate hikes.
    Senator Britt. So when you are looking at this, obviously 
not to get into a policy discussion, but if there were an 
increase of energy production in this country do you feel like 
that would help drive down inflation?
    Mr. Powell. Well, I think over time more energy would mean 
lower energy prices. But we are very focused on what we call 
core inflation, because that is what is driven by, you know, 
really by demand. And our tools are really aimed at demand.
    Senator Britt. Right. Understood. But I feel like the cost 
of energy is not just what you pay at the pump, that it ends up 
affecting every good across this great Nation.
    Additionally, I would like to ask you about labor 
participation. So when you look at the unemployment rate, and 
we have heard my colleagues discuss people having to be 
displaced in order for us to maybe get to the inflation rate 
that we would like as a Nation, I would like to focus on the 
labor participation rate. Right now it is 62.4 percent. If 
there were an increase and people coming back into the 
workforce, would that be a positive factor with regard to 
driving us down to the 2 percent rate that you would want to 
achieve?
    Mr. Powell. I think that it would. I mean, remember, those 
people coming into jobs, that would be great because the 
economy clearly wants more people than are currently working. 
Of course, those people would then spend more, so it would not 
be a zero-sum game. But it would be great for the country and 
great for them if they were to come into the labor force.
    Senator Britt. I believe that increasing and capital 
requirements on financial institutions would have a chilling 
effect on the economy and the availability of financial 
services. Last week I joined many of my colleagues in sending 
you a letter that expressed concerns that if the Federal 
Reserve decides to conduct a, quote, ``holistic review of 
capital standards,'' as we heard Senator Scott talk about 
earlier.
    So is the Federal Reserve concerned that the impact to the 
economy of increasing capital requirements on financial 
institutions at a time when inflation remains persistently high 
would cause an issue?
    Mr. Powell. I think it is always a balance. We know that 
higher capital makes banks safer and sounder. We also know that 
you will, at the margin, provide less credit the more capital 
you have to have. But I think it is never exactly clear that 
you are at a perfect equilibrium, and it is fair question, I 
think, to look at that.
    Senator Britt. And I know, out of respect for the Chairman 
and trying to stay in my time, I will just end by saying I 
heard what you said. Obviously, as you have said, the Federal 
Reserve is not and will not be a climate policymaker. I just 
want to thank you for your public statement on that. I agree 
with you that there is a difference between policymakers and 
financial regulators, and I certainly look forward to working 
with you in the future.
    Chair Brown. Thank you, Senator Britt.
    Senator Warner, from Virginia, is recognized.
    Senator Warner. Thank you, Mr. Chairman, and Chairman 
Powell, it is good to see you again. Let me start by saying, 
depending on who is asking questions, we are either pounding 
you for how quickly we are going to drive that inflation back 
to 2 percent or pounding you on making sure that we do not push 
the economy into a recession and drive up unemployment.
    I have got to tell you, and these are maybe not the cheap 
seats, but I actually think you have done a pretty good job in 
terms of both ratcheting up rates and then starting to tail off 
a little bit. I think we all were concerned by the January 
numbers that popped up a little bit more. I wish, Mr. Chairman, 
we were actually having this hearing 2 weeks from now because 
we are going to have a lot more data later in this week and 
next week. But we have still got ways to go and the January 
numbers were concerning, but I do think your tailored approach, 
we can all second guess but I think it has been the right 
approach. And I want to commend you on that.
    I want to get two questions in. One, one of the areas that 
I am very worried about is commercial debt. I mean, we have got 
a Bloomberg story here showing we are going to hit a $6 
trillion wall this year on refinancing. Where I am particularly 
concerned is the issue around commercial real estate. As we 
recover from COVID, a lot of things are getting back to normal, 
but clearly the transformation of where people work is going 
through a fundamental transition, and I hope people do return 
more to the office, but lots of folks prefer working elsewhere.
    That is going to fundamentally change the real estate 
market on the commercial side, and I do believe we are going to 
hit potentially a cliff here of a totally unexpected problem in 
terms of commercial real estate. How are you looking at that 
issue, and recognizing there are lots of bumps coming out of 
COVID, this one seems to be more unique in nature, and how are 
you thinking about that issue?
    Mr. Powell. So the first one, on commercial debt, business 
debt generally, it has kind of been moving sideways as a 
percent of GDP, so you do not see a big spike going on or 
anything like that. However, of course there are pockets of 
concern, and particularly you pointed to the refinancing spike 
that has to happen. I have seen those come and go before. 
Generally markets can absorb them, maybe at a much higher rate 
this time. But it is something we are well aware of and 
watching carefully.
    In terms of CRE, I would agree with you. The occupancy of 
office space in many major cities is just remarkably low, and 
you wonder how that can be. Now over time some of that is going 
to be made into condominiums and things like that, since we do 
not seem to have quite enough housing in some places.
    But the question is what is the financial stability risk? 
It is not great. The largest institutions do not tend to have a 
lot of direct exposure to that. Some smaller banks actually do, 
medium- and small-sized banks do. We carefully monitor it. We 
agree that that is an area that requires a lot of monitoring, 
and I would say we are on the case.
    Senator Warner. Well, that morphed me into my last 
question, something we have talked about, and a lot of my 
colleagues have talked about the large institutions. I mean, I 
do think even some of the biggest critics of Dodd-Frank I think 
would acknowledge that our banking system is a heck of a lot 
stronger and it was able to withstand COVID in a very healthy 
way. But what we have also seen evolve is a vast amount of 
financial institutions move beyond the regulatory perimeter. 
You know, the fact that we now have way over half of the 
mortgage origination coming from nonfinancing institutions, 
because a lot of the large entities, hedge funds, other funds, 
that may be doing some of this commercial debt or some of them 
CRE debt.
    I would like you to talk generally, in the last 40 seconds 
or so, of how you think about this regulatory perimeter. I am a 
big believer and I know some of my colleagues are that we ought 
to look less at charter and look at same regulation maybe as a 
guiding principle. I know Senator Warren has been working on 
some work, and I have been working on some work around crypto 
around that area.
    But there is a vast amount of activity that is taking place 
outside the regulatory perimeter. How should we be thinking 
about that and how do we make sure that does not create the 
kind of crisis sneak-up that happened in 2008 on the 
nonregulated side of the house?
    Mr. Powell. I think you articulated the principle very 
well. It is same activity, same regulation, and that covers 
crypto and all kinds of other activities. People are going to 
assume when they deal with something that looks like a money 
market fund that it has the same regulation as a money market 
fund, or a bank deposit, and so stablecoins need some attention 
in that respect. I just think that is the basic principle.
    And you are right. So much of intermediation has moved away 
from the regulated banks, really for a long period of time, and 
we have got to keep an eye on that.
    Senator Warner. Thank you. It is something I hope we can 
keep looking at.
    Chair Brown. Thank you, Senator Warner.
    Senator Hagerty, of Tennessee.
    Senator Hagerty. Thank you, Chairman Brown, and thank you 
very much, Ranking Member Scott, for holding this hearing. 
Chairman, it is great to see you again here.
    I appreciate your presence, and I appreciate the 
opportunity to talk with you about an item that I am 
particularly concerned about, and that is the holistic review 
that Senator Britt just brought up, that Vice Chair Barr is 
conducting right now. It is generating a sense that higher 
capital requirements are on the horizon for us, and as I think 
about that in the context of what we have weathered, you think 
about the situation in 2020 was an acute, real-life stress 
test, if you will. And I think that our financial system 
navigated that admirably.
    In the past, Chairman Powell, you have told this Committee 
that our financial system has proven resilient, through 2020, 
and that the capital levels at that point in time--and I would 
note that those capital levels are multidecade highs--are in 
aggregate adequate. And I just wanted to follow up on those 
prior statements and see if you still feel that way.
    Mr. Powell. So I guess I would say it to you this way. In 
our system we have a Vice Chair for Supervision who has 
statutory responsibilities, and when a new Vice Chair for 
Supervision comes in generally they are going to want to take a 
fresh look, and that is what Vice Chair Quarles did, and Dan 
Tarullo kind of had the job on an informal basis, and that is 
what he did. So it is only natural that someone would come in 
and take a fresh look, and I think that is part of the process.
    The role of that person is to make recommendations on 
regulations and supervision to the full board. The role of the 
board is to consider those when made. And to me this just comes 
under that heading.
    Senator Hagerty. Well, as the review is underway--and I 
appreciate that context--one aspect of it seems to us an 
apparent willingness to undo the tailoring requirements that 
were enacted as part of S. 2155. And I understand that nothing 
has been finalized regarding the regulations. It is a 
concerning prospect if that is the case.
    The Fed's general counsel just yesterday alluded to undoing 
2155 by, quote, ``pushing down the Basel requirements on banks 
that were intentionally given relief in that bill.'' So I want 
to be perfectly clear that the banking regulators themselves 
cannot just simply ignore or selectively enforce the laws.
    And again I realize that the details of this study have not 
been finalized or made public, but if the proposal put forth by 
Vice Chair Barr is either unduly aggressive or appears to 
contradict the spirit of S. 2155, will you vote for it?
    Mr. Powell. I would have to--I cannot answer that in the 
abstract, of course. But I would say we are, as an institution, 
very strongly committed to tailoring, and anything we do is 
going to reflect tailoring of institutions according to their 
risk. I mean, that is a principle that we will stick with.
    Senator Hagerty. I think it is quite important again, given 
the legislative intent here and the concerns that we maintain 
that. In the face of what general counsel said just yesterday I 
appreciate your perspective in terms of keeping that in place.
    I would like to, with my next question, Chairman Powell, 
with a starting question by underscoring the importance of the 
independence of the Fed's monetary policy. Right now the 
economic picture is about as uncertain as I can remember. We 
have had large companies in the private sector who are in the 
midst of planning layoffs and forecasting serious economic 
weakness in the quarters to come, yet, on the other hand, the 
current economic data seems to be robust, inflation shows some 
signs of softening in the past several releases.
    So I just hope, Chairman Powell, that you could briefly 
tell us how you synthesize these seemingly contradictory data.
    Mr. Powell. So just quickly, at the end of last year we saw 
a couple of very promising, modest inflationary readings in 
November and December, but earlier this year some of that 
improvement was revised away. In addition, we got a very strong 
reading on inflation in January, also a very strong jobs 
reading, also very strong retail sales. And so as I pointed out 
in my testimony we are looking at a reversal, really, of what 
we thought we were seeing, to some extent, a partial reversal.
    It is still the case that we are seeing progress on 
inflation. Goods inflation has come down significantly. There 
is improvement in housing inflation in the pipeline. There is 
not a lot of improvement yet to be seen in the largest sector, 
which is non-housing services.
    So core inflation is running at 4.7 percent on a 12-month 
basis. I think nothing about the data suggests to me that we 
have tightened too much. Indeed, it suggests that we still have 
work to do.
    Senator Hagerty. In that context and thinking about where 
the tightening goes and where and when it might happen, where 
do you see the terminal Fed funds rate landing in this cycle?
    Mr. Powell. We last wrote down our assessments, individual 
assessments of that in December, and I think the median range 
was--basically people were clustered between 5 and 5.5. We are 
going to write those down again. We do it four times a year. We 
will do around the March meeting, which is on the 21st and 22nd 
of March. And as I indicated in my testimony, I think that the 
data we have seen so far--and we still have other data to see. 
We still have significant data to see before the meeting--
suggests that the ultimate rate that we write down may well be 
higher than what we wrote down in December.
    Senator Hagerty. Got it. Thank you, Mr. Chairman.
    Chair Brown. Senator Warren, of Massachusetts.
    Senator Warren. Thank you, Mr. Chairman.
    So the Fed has raised interest rates eight times over the 
last year in what has been the most extreme rate hike cycle in 
40 years. The Fed's goal is to slow inflation, and your tool, 
raising interest rates, is designed to slow the economy and 
throw people out of work. So far you have not tipped the 
economy into recession but you have not brought inflation 
entirely under control either. And maybe the reason for that is 
that other things are also keeping prices high, things you 
cannot fix with high interest rates, things like price gouging 
and supply chain kinks and war in Ukraine.
    But you are determined to continue to raise interest rates, 
so I want to take a look at where you are headed. In December, 
the Fed released its projections on the state of the economy 
under your monetary policy plan. According to the Fed's own 
report, if you continue raising interest rates as you plan, 
unemployment will be 4.6 percent by the end of the year, more 
than a full point higher than it is today.
    Chairman Powell, if you hit your projections do you know 
how many people who are currently working, going about their 
lives, will lose their jobs?
    Mr. Powell. I do not have that number in front of me. I 
will say it is not an intended consequence.
    Senator Warren. Well, but it is, and it is in your report, 
and that would be about 2 million people who would lose their 
jobs, people who are working right now making their mortgages.
    So Chairman Powell, if you could speak directly to the 2 
million hardworking people who have decent jobs today, who you 
are planning to get fired over the next year, what would you 
say to them? How would you explain your view that they need to 
lose their jobs?
    Mr. Powell. I would explain to people more broadly that 
inflation is extremely high and it is hurting the working 
people of this country badly, all of them, not just 2 million 
of them but all of them are suffering under high inflation, and 
we are taking the only measures we have to bring inflation 
down.
    Senator Warren. And putting 2 million people out of work is 
just part of the cost, and they just have to bear it?
    Mr. Powell. Will working people be better off if we just 
walk away from our jobs and inflations remains 5, 6 percent?
    Senator Warren. Let me ask you about what happens if you do 
this. Since the end of World War II, there have been 12 times 
in which the unemployment rate has increased by 1 percentage 
point within 1 year, exactly what you are aiming to do right 
now. How many of those times did the U.S. economy avoid falling 
into a recession?
    Mr. Powell. You know, it not as black and white--very 
infrequent.
    Senator Warren. I am just looking at the numbers.
    Mr. Powell. Yeah, no, no.
    Senator Warren. It actually is pretty black and white.
    Mr. Powell. Alan Blinder has written a book on this.
    Senator Warren. There have been 12 times that we have seen 
a 1-point increase in the unemployment rate in a year. That is 
exactly what your Fed report has put out as the projection and 
the plan, based on how you are going to keep raising these 
interest rates. How many times did the economy fail to fall 
into a recession after doing that, out of 12 times?
    Mr. Powell. I think the number is zero.
    Senator Warren. I think the number is zero. That is exactly 
right.
    So then the question becomes, we have got 2 million people 
out of work. Can you stop it at 2 million people? History 
suggests that the Fed has a terrible track record of containing 
modest increases in the unemployment rate. Once the economy 
starts shedding jobs it is kind of like a runaway train. It is 
really hard to stop. In fact, in 11 out of the 12 times that 
the unemployment rate increased by a full percentage point 
within 1 year unemployment went on to rise another full 
percentage point on top of that. If that is what happens this 
time we would be looking at at least 3.5 million people who 
would lose their jobs.
    So Chairman Powell, if you reach your goal and 2 million 
people get laid off by the end of this year, and then just like 
in 11 out of 12 times that unemployment has risen by a point in 
a single year, it keeps on rising and then we have got 2.5 
million people out of work, we have got 3 million people who 
get laid off, we have got 3.5 million people who get laid off. 
What is your plan?
    Mr. Powell. Well, right now the unemployment rate is 3.4 
percent, which is the lowest in 54 years, and we actually do 
not think that we need to see a sharp or enormous increase in 
unemployment to get inflation under control.
    Senator Warren. I am looking at your projections. Do you 
call laying off 2 million people this year not a sharp increase 
in unemployment?
    Mr. Powell. I would say 4.5 percent----
    Senator Warren. Explain that to the 2 million families who 
are going to be out of work.
    Mr. Powell. Again, we are not targeting any of that. But I 
would say even 4.5 percent unemployment is well better than 
most of the time for the last 75 years.
    Senator Warren. In other words you do not have a plan to 
stop a runaway train if it occurs.
    You know, Chair Powell, you are gambling with people's 
lives, and there is a pile of data showing the price gouging 
and supply chain kinks and the war in Ukraine are driving up 
prices. You cling to the idea that there is only one solution--
lay off millions of workers. We need a Fed that will fight for 
families, and if you are not going to lead that charge we need 
someone at the Fed who will.
    Chair Brown. Senator Vance, of Ohio.
    Senator Vance. Thank you, Mr. Chairman. Chairman Powell, 
thanks so much for being here. I have a question that is 
slightly far afield, but how often do you get to talk to the 
Federal Reserve Chairman, so I might as well ask it.
    To give some context here, my family comes from Appalachia. 
Particularly, my grandparents grew up in southeastern Kentucky, 
coal country, and moved to southern Ohio where I now have the 
honor of representing all of Ohio.
    You know, one of the things that you hear a lot when you 
study the regional history of Appalachia is it is often 
described as possessing a resource curse. So there is a lot of 
coal in central Appalachia that enables a certain amount of 
consumption. Obviously consumption is good. People need food 
and medicine and other things.
    But there is also a pretty good argument that for a host of 
reasons it causes mal-investment in the region, and 
consequently you have lower productivity growth, lower 
innovation, and an economy that is much less diversified and 
much less dynamic.
    I am wondering, when I think about and read about the 
history of Appalachia and the resource curse I am struck by the 
idea that you could make a similar argument about the Reserve 
currency status of the United States dollar. Americans have 
enjoyed one of the greatest privileges of the international 
economy for the last nearly eight decades, a strong dollar that 
acts, of course, as the world's reserve currency. You know that 
better than I do.
    Now this has obviously been great for American purchasing 
power. We enjoy cheaper imports. Americans, when they travel 
abroad, benefit from lower costs. But it does come at a cost to 
American producers. I think in some ways you can argue that the 
reserve currency status is a massive subsidy to American 
consumers but a massive tax on American producers.
    Now I know the strong dollar is sort of a sacred cow of the 
Washington consensus, but when I survey the American economy 
and I see our mass consumption of mostly useless imports on the 
one hand, and our hollowed-out industrial base on the other 
hand, I wonder if the reserve currency status also has some 
downsides and not just some upsides as well.
    And let me just put a final point on this, and I would love 
to get your thoughts on that, Chairman Powell. We are, of 
course, now the main supporter of a massive land war in Europe 
between the Russians and the Ukrainians. I read recently--and I 
am not going to comment on how perfect or precise these 
estimates are--but I read recently that the United States is 
trying to ramp up production from 14,000 artillery shells to 
20,000 artillery shells--that is per month--while the Russians 
are firing 20,000 artillery shells in Ukraine per day. And when 
I look at the American economy we have a lot of financial 
engineers and a lot of diversity consultants. We do not have a 
lot of people making things, and I worry that the reserve 
currency status and the lack of control that we have over our 
currency is perhaps driving that.
    I would love to get your feedback on that. What are the 
upsides and downsides of the reserve currency?
    Mr. Powell. That is a big question to try to answer.
    Senator Vance. We have 2 minutes, Chairman Powell, so 
plenty of time.
    Mr. Powell. I cannot even get started on that.
    So we are the world's reserve currency, of course, and that 
is because of our democratic institutions. It is because of our 
control over inflation over many, many, many years. The world 
trusts the rule of law in the United States, and those are the 
things. So once you are the reserve currency it is used all 
over the world in transactions, and it is the place where 
people want to be in times of stress, using dollar-denominated 
assets.
    So, of course, we benefit by being able to pay for our 
goods all over the world, pay for anything anywhere in the 
world, mostly, with dollars. That is an advantage. You know, 
there is some economic theory around it, that it also has 
burdens of various kinds, but I cannot call it all back to 
mind.
    But, you know, the other thing is it is a very stable 
equilibrium but it is not a perfect one--it not a permanent 
one, rather. So there is not any obviously candidate to replace 
the United States right now, where you can have free flow of 
capital in and out of the country, where you can really trust 
the rule of law and democratic institutions, and keeping price 
stability, which you can here.
    Senator Vance. Do you think it gives us less control over 
our own currency, the fact that it has become the world's 
reserve currency?
    Mr. Powell. Control over our currency. I am not sure--so 
essentially what we try to control is price stability, and no, 
it does not make it harder for us to keep inflation under 
control. The United States has a smaller external sector than 
most large economies. It is only about 15 percent. So main what 
affects inflation in the United States is domestic supply and 
demand.
    Senator Vance. Do you think it makes it harder for us to 
fight back against currency manipulation, to control the export 
and import controls in a way that stabilizes our own 
manufacturing sector?
    Mr. Powell. Well, I mean, what is important there is really 
the level of the dollar. And, you know, when the dollar is 
stronger obviously our wares are more expensive abroad, and 
that kind of thing. But we do not have an opinion on--matters 
of the level of the dollar are really matters for the Treasury 
Department and the elected Government, not for the Fed.
    Senator Vance. Thank you, Chairman Powell.
    Mr. Powell. Thank you.
    Chair Brown. Thank you, Senator Vance.
    Senator Van Hollen, of Maryland, is recognized.
    Senator Van Hollen. Thank you, Mr. Chairman. Chairman 
Powell, thank you for being here and for your service.
    I know the Fed is experiencing lots of challenges these 
days. I have got a couple of questions that are just, I think, 
basic yes or nos, and then some longer questions.
    Would you agree that changes in the size of corporate 
profits can be one of the factors that affects the inflation 
rate?
    Mr. Powell. Yes.
    Senator Van Hollen. Recently we saw that the employment 
cost index, which, as you know, measures the growth of wages 
and benefit costs, grew at roughly 4 percent on an annualized 
basis in the fourth quarter of 2022. Is that right?
    Mr. Powell. That is my recollection, yes.
    Senator Van Hollen. So if corporate profits were to decline 
from the extremely high levels that we saw recently, would it 
be possible to sustain the 4 percent growth rate in the 
employment cost index for an extended period of time, even as 
we get inflation down to the target of 2 percent?
    Mr. Powell. It depends on what you mean by extended period 
of time. So without a very, very large increase in 
productivity, which would be great but that we do not expect, 
you would not be able to sustain 4 percent wage inflation over 
the longer term. Over the shorter term, though, yes.
    Senator Van Hollen. So over the shorter term that would not 
be a justification in and of itself for raising rates. Is that 
right, in the short term?
    Mr. Powell. Well, so I think wages affect prices and prices 
affect wages. I think we do think that some softening in the 
labor market conditions will happen as we try to get inflation 
under control, and will need to happen.
    Senator Van Hollen. Right, but that is more a prediction 
about your efforts to fight inflation. Are you saying that 
simply looking at the current 4 percent growth rate in the 
short term is an excuse for jacking up interest rates?
    Mr. Powell. No. What I would say is that the all the data 
we look at, in the labor market, including not just that 
measure of wages but others, also unemployment, also 
participation, also job openings and quits and things like 
that. All of that, you put that into the picture and I think 
you see a labor market that is extremely tight and is probably 
contributing to inflation. I have never said it was the main 
cause.
    Senator Van Hollen. I think the larger point here, based on 
your response to that first question about growth and profits, 
is corporations have a decision as to whether or not they are 
going to pocket more for profit, which they can, or provide 
higher wages to their employees. And if you actually lowered 
your profit margins you could sustain a higher wage increase 
without violating the 2 percent inflation. Is not that right?
    Mr. Powell. Yes. I mean, when I hear profit margins, what 
we are seeing in the economy is pretty much about shortages and 
supply chain blockages. And when there is not enough of a 
product, and there is a lot of demand, which you see as prices 
going up, as the supply chains get fixed and shortages are 
alleviated you will see inflation coming down, you will see 
margins coming down, and that will certainly help with 
inflation.
    Senator Van Hollen. But profits are the margin, right? They 
are going up beyond what they were before. That means that even 
with the increase of costs because of supply chains they are 
making more profits, which again, they can do that. But my 
point is that as a contributor to inflation, as you indicated 
in response to the first question.
    Let me ask you about the tight labor market because one of 
the issues in a tight labor market is parents with kids, 
including a lot of moms who would like to go back into the 
market but are not able to do so because of lack of affordable 
childcare. The other issue is immigration, and I know that you 
have gotten some recent data on how some immigration figures 
actually have softened a little bit the tightness in the labor 
market.
    Can you just talk broadly about those two factors, 
affordable childcare and immigration, more legal immigration, 
and how they could affect labor force participation and 
therefore also reduce inflation pressures?
    Mr. Powell. On the first, we do not make recommendations or 
evaluate fiscal policy, but I will say there is research that 
shows that it helps keep women in the workforce when there is 
childcare available, which is, I think, kind of self-evident.
    Sorry, the second was----
    Senator Van Hollen. Impact of immigration.
    Mr. Powell. Immigration, yes. So what I talked about with 
you is actually, as part of the January Bureau of Labor 
Statistics report--sorry. The Employment Report for January 
comes out in early February--there is a section in there about 
more people. The Census Department has increased its estimate 
of the workforce by something like 870,000, and a significant 
of that has been immigration. And that has moved up 
participation by a little bit, and it may be part of why we are 
hearing from, in the labor market, that the really intense 
labor shortage pressures that we were hearing about in 2021 and 
2022, may be alleviating. So that would contribute to that. 
Clearly, the economy is calling for more people, with 
essentially two job openings for every unemployed person, and 
this can be a source of those people.
    Senator Van Hollen. Right. And that would reduce the 
tightness of the labor market and reduce pressures on 
inflation, right?
    Mr. Powell. It may already be doing so.
    Senator Van Hollen. Thank you.
    Chair Brown. Senator Cramer, of North Dakota, is 
recognized.
    Senator Cramer. Thank you, Mr. Chairman. Thank you, 
Chairman Powell, for being here. And I cannot resist responding 
to a few things that my friends on the left have said. For 
example, in his opening statement Chairman Brown had a long 
list of things that raising interest rates will not do. Raising 
interest rates will not fill-in-the-blank. I am going to fill 
in the blank with a couple of things. How about raising 
interest rates will not stop Senate Democrats and President 
Biden from overtaxing, overspending, overborrowing, 
overregulating?
    Chairman Brown said we should rebuild our supply chain by 
curbing offshoring, corporate offshoring. I agree. He talked a 
lot about corporate greed contributing to inflation. OK. But 
how about regulatory greed contributing to corporate greed? How 
do you expect corporations to reinvest money if you 
overregulate their ability to invest that money right here in 
the United States of America? You want to onshore some things? 
How about energy policy? How about instead of looking to 
Venezuela or Iran for oil supply, or Russia, or rather than 
looking to China for electric vehicles and chips and solar 
panels, how about we have a strategy that onshores those things 
by reducing regulations, reducing taxes, and letting those 
corporations reinvest their profits rather than stock buybacks 
or dividends?
    This idea that somehow the Federal Reserve is supposed to 
keep inflation in check while half of the Government works 
against it is mind-boggling.
    Now I know, Mr. Chairman, you do not like to comment on 
policy. You and I have gone around and around about this. You 
were anxious to advise us to spend lots of money during the 
pandemic. I do not think a lot of people blame you for that. 
You would not respond to efforts by the Biden administration 
after we were in a robust recovery from not spending so much 
money. OK, I can appreciate the change.
    But now we are in this debate between the Republicans and 
Democrats, between particularly the House Speaker and President 
on how to raise the debt ceiling, and you have made some pretty 
strong comments about raising the debt ceiling, absent from 
structural reforms that would actually help us get back to a 
reasonable growth.
    And so I warn you again, if you are going to make political 
comments, if you are going to advise us on policy, be 
consistent with it.
    Now, I want to get back to the greening of the Federal 
Reserve and these, I call them, stress tests. You can call them 
whatever we call them. But I am concerned that now the Federal 
Reserve is starting down this path. Maybe it is slightly, at 
first, about climate stress testing.
    I just want to ask you this. If we are going to go down 
that path, if the Federal Reserve is now going to become part 
of the Federal climate police force, are we going to consider 
the ramifications of having entire communities and economies, 
factories and manufacturers, you know, whatever energy 
entities, large server farms, leaving them susceptible to a 
very unreliable, very expensive energy source? Is that part of 
the stress test?
    Mr. Powell. No. Those are considerations for elected 
people, not for us. We have a narrow role to play here, but it 
is real role, and I can talk about that if you would like.
    Senator Cramer. Yeah, I would like you to, because again, 
if we are going to start doing stress tests for the six largest 
financial institutions related to climate--which really is more 
weather than climate--then are we going to consider the effects 
of an unreliable energy source at several locations throughout 
our country?
    Mr. Powell. Our only focus is on the safety and soundness 
of these institutions and do they understand and can they 
manage all of the risks that they run in their business model. 
That is our only goal. Again, we are not looking to be climate 
policymakers.
    Climate policy is clearly going to have effects on regions, 
on companies, on individuals, on countries, disparate effects, 
and that is not for unelected people like us, who have a narrow 
mandate, but I think it does touch climate. And you are right 
to be concerned that we find ourselves on a slippery slope, but 
honestly, I think the climate scenarios are something that the 
banks are already doing themselves, and climate guidance is 
something that they are looking for. They want to know how we 
are thinking about this. But we will try really hard not to get 
on a slippery slope and find ourselves becoming climate 
policymakers. It is just not appropriate for an independent 
agency.
    Senator Cramer. OK, and I completely agree and I hope you 
stick to that, and I think you ought to ask the banks to 
consider what kind of vulnerabilities that might expose.
    With regard to what Senator Warren was saying on her 
monologue, one thing about idealogues, the have the luxury of 
binary choices. You have a really big job and you have a 
single, in my mind, one and a half, maybe two missions. I think 
the first one handles the second ones OK. But it has got to be 
tough when the White House is working against you and you do 
not have to comment.
    Thank you. Thank you, Mr. Chairman.
    Chair Brown. Senator Tester, of Montana, is recognized.
    Senator Tester. Chair Powell, thank you for being here 
today, and thank you for serving in this critical role at this 
critical time. I have talked many times in this Committee, and 
I especially, right now, cannot overstate the importance of the 
Fed's independence. I said in the previous Administration. I 
say it now. We cannot be playing politics with our economy, and 
that is a fact.
    From a climate standpoint I will just tell you it is 
entirely artificial right now anyway because if you look at the 
hundreds of billions of dollars this country puts out every 
year in disasters due to climate instability, we ought to be 
asking our question, is that sustainable, because quite 
frankly, it has to be done, and I do not think it is 
sustainable. So we have got to start looking for some solutions 
on the climate side sooner rather than later.
    The Reserve has a tough job, and I really appreciate how 
you have done it--reasonable, working together, making hard 
decisions for the good of the economy. We have to get this 
right.
    So the question is, how much has inflation decreased since 
its peak?
    Mr. Powell. It depends on the measure, but meaningfully, at 
least a couple of percentage points.
    Senator Tester. OK. And has unemployment gone down as 
inflation has gone down?
    Mr. Powell. Unemployment has gone down. Yes, it has, to now 
a 54-year low.
    Senator Tester. Yeah. So the question becomes--and I always 
think back to in 1998, I bought some property, and the interest 
on that property was 10 percent in 1998, and I thought I got a 
hell of a deal, by the way. I thought it was just great.
    But the truth is interest rates have been artificially low 
for the last, what, 20 years probably? And the question 
becomes, as you look at the economy and as you try to make the 
determination whether the inflation is caused by demand or 
supply, where does all that fall in to you, your 
decisionmaking, moving forward?
    Mr. Powell. You mean the level of interest rates?
    Senator Tester. Right.
    Mr. Powell. In theory there is this thing called the 
neutral level of interest, and we know it only by its works, 
and neutral is the level that neither pushes the economy up nor 
pulls it down. And it changes over time. This is the thing 
about these important variables in economics.
    So what has happened until now is that the neutral level of 
interest went down and down and down to the point where many 
countries had zero interest rates and very low inflation. Now 
we have this series of shocks associated with the pandemic, and 
we have rates at 4.5 percent, our policy rate, and we have the 
labor market very strong, and inflation reacting somewhat, and 
it does raise the question of where is the neutral rate. 
Honestly, we do not know. I think we look at the current 
situation and we see that there is not a lot of evidence--it is 
hard to make a case that we have over-tightened it. It means we 
need to continue to tighten.
    I think we are very mindful of the lags with which our 
policy works. We do not think we need a significant increase in 
unemployment, and we are certainly not aiming for one. But we 
do think that there will be some softening in labor market 
conditions to get to 2 percent inflation.
    Senator Tester. When you are looking at interest rates I 
know we talk about energy prices here and the price of 
gasoline, and then if you go over and Europe is much, much 
higher. I am just curious. Are we comparable with interest 
rates here as with, say, Europe?
    Mr. Powell. We are very close to where Canada is. We are a 
little bit higher than where Europe is. Europe has 
traditionally had much lower inflation. They now have very high 
inflation, and they are still increasing rates. But they are a 
bit lower in terms of rates.
    Senator Tester. So if we do not get the inflation under 
control--and like I said, I think the steps you have taken have 
been reasonable and measured--if we do not get it under 
control, really what are the impacts of that?
    Mr. Powell. Well, the social costs of failure is one way to 
think about it, are very, very high. So if inflation were to 
continue at some point that will become the psychology, and 
businesses will come to expect high inflation, and that will 
make it more self-perpetuating. That will mean an up-and-down 
economy. It will mean something that looks more like what we 
have seen in periods of high inflation. Capital allocation is 
difficult in a world like that. It is not a good time for the 
economy.
    What we want to do is restore price stability, firmly, back 
at 2 percent so that we can have the kind of strong labor 
market for a sustained period that we had before.
    Senator Tester [presiding]. Once again, thank you for your 
work. Thank you for your independence. Senator Daines.
    Mr. Powell. Thank you.
    Senator Daines [presiding]. Thank you, Senator Tester. I 
will be handing it off to Senator Cortez Masto when I am 
finished up as well.
    Mr. Chairman, good to have you here today. Back in Montana, 
the number one issue I hear, certainly across the State, is the 
high cost of gas, the high cost of groceries, and overall how 
their paychecks are shrinking because of inflation. It is a 
crushing blow. It has real-life impacts. It is a top-of-mind 
issue for Montanans.
    It is also important to note the devastating impact it is 
going to have on our Nation's economic future. In fact, in 
October of last year I sent a letter to Congressional Budget 
Office Director Swagel regarding the impact that high inflation 
and the elevated interest rates would have the cost of 
servicing the Federal debt. His response painted a less-than-
rosy picture.
    But then we got CBO's updated 10-year baseline forecast in 
February, and it confirmed the truly dire situation that we 
find ourselves in. Driven by interest payments on the debt, the 
CBO now projects that cumulative deficits during the 10-year 
window--and I recognize where deficits come from. It is 
irresponsible spending here in Washington. But the cumulative 
deficits during the 10-year window will exceed $20 trillion. 
The cumulative deficit. I am not talking the debt, because it 
is going to grow the total Federal debt to more than $51 
trillion by 2033.
    Now 2033 used to sound like a long way away. We are 10 
years away. Ten years go by very, very quickly. Within 5 years 
we are going to spend more on annual interest on the national 
debt than we spend on national defense. Think about that for a 
moment. These are coming out of the CBO.
    These absolutely shocking but, quite frankly, predictable 
projections go back to a debate we vigorously had here in the 
Banking Committee. I remember when Lawrence Summers, of course, 
the former Secretary of Treasury under President Clinton, 
economic advisor to President Obama, he warned us. He said--and 
he was frankly warning my colleagues across the aisle--he said 
you cannot move forward if these purely partisan--at that time 
a $1.9 trillion spending extravaganza, we had $1 of unspent 
COVID money in December of 2020. And that passed on a purely 
partisan vote. We said it is going to start to ignite the 
inflation fires.
    So I certainly hope the President's budget, which we expect 
to see later this week, will propose pro-growth policies that 
can get us out of this mess, and I would argue almost an 
existential crisis if we look at what is going to come at us 
here over the course of the next 10 years with debt and service 
on that debt.
    Unfortunately, as the President said in his State of the 
Union address, the President said he is going to raise taxes. 
That is recipe for disaster. It is going to crush productivity, 
discourage investment, stifle economic growth even further.
    I want to turn to my questions now, Chairman Powell. You 
are raising interest rates to combat the inflation we have seen 
in the economy over the past few years. Is that correct?
    Mr. Powell. Yes.
    Senator Daines. And although this is the domain of 
Treasury, a higher Fed fund rate will mean higher borrowing 
costs. Is that correct?
    Mr. Powell. Yes, all else equal.
    Senator Daines. So I just want to connect the dots here. 
Inflation was sparked, one of the big reasons was massive 
spending here in Washington, and now we are going to be bearing 
the challenges with higher debt service over the course of the 
next several years, where we are going to see debt service 
exceeding defense spending, which as we see the threats of 
China, threats around the world, I think it is very, very 
concerning. Now as a grandfather of four, soon to be five, 
grandchildren, these are things you think about more and more 
as you look forward.
    I want to change here and talk about American energy. When 
the war in Ukraine broke out many feared that Russia would cut 
off natural gas exports and cause energy inflation to spike. 
Prices did not spike as much as anticipated due, in large part, 
to the fact that American companies stepped up to the plate.
    As of late last year, the European Union now receives more 
liquified natural gas from the United States producers than it 
does from Russian producers, and that is good thing for the 
world to see more U.S.-produced energy.
    Chairman Powell, do you believe that European and American 
inflation would have been manageable if not for American energy 
producers?
    Mr. Powell. I certainly think that our particular area of 
natural gas assets have helped Europe make the transition.
    Senator Daines. Any sense of how much worse the global 
energy picture would be if you would imagine a world where we 
are not producing and shipping energy to other countries?
    Mr. Powell. It would be hard to estimate.
    Senator Daines. Probably worse?
    Mr. Powell. Yeah, I mean, I think it has been--Europe has 
managed better than expected, and a part of that story is just 
U.S. energy exports. Also the winter was not as bad, and the 
Germans made some good decisions.
    Senator Daines. Yeah. We made some prayers. They said we 
need to pray for a warm winter for Europe and I think they got 
one, which was somewhat helpful.
    I am out of time here. I am going to send this back over to 
Senator Cortez Masto.
    Senator Cortez Masto [presiding]. Thank you.
    Chairman Powell, it is great to see you. Thank you so much. 
I know it has been a long morning. I always appreciate you 
coming to talk with us here on the Committee.
    I want to first align myself with the remarks from Chairman 
Menendez supporting a Latino nominee to the open seat on the 
Federal Reserve. It has been more than 100 years, and a Latino 
has never served on the Federal Reserve board, and I know there 
are many strong Latino economists and economic experts who 
would capably serve. So I want to put that out there.
    Chairman Powell, I also sit on Senate Finance. Right across 
the way we are talking about affordable housing. And I think 
for purposes of so many of us across the country, including in 
Nevada, when we talk about affordable housing it is also about 
workforce housing. It is about making sure families that are 
working so hard have an opportunity to keep a roof over their 
head. Right now in Nevada, if you are making minimum wage, you 
have to work 75 hours a week just to be able to afford housing.
    And so I want to talk to you about this. I was distressed 
to see in the report that activity in the housing sector has 
contracted as a result of the elevated mortgage rates, and you 
have been talking about that. I often hear from Nevadans who 
say, ``I do not know if I am ever going to own a home,'' and 
many feel resigned to being stuck in a cycle of renting.
    So Chairman, how do the Federal Reserve economists and 
leaders think about the balance between keeping interest rates 
low to spur that affordable home building and home buying while 
addressing inflation?
    Mr. Powell. We have a dual mandate from Congress, as you 
well know, which is maximum employment and price stability, and 
that is really what we take into account. And, of course, 
interest-sensitive spending is the thing that gets the most 
support when we cut rates and the thing that is most affected 
when we raise rates, and that means housing to a significant 
extent. That is not a choice that we make. That is just the way 
it works. And we only have, really, one tool, which is monetary 
policy.
    So, you know, we do not really try to use our tools to 
effect broader housing policy but really just to achieve our 
statutory goals.
    Senator Cortez Masto. It happens to just unfortunately be 
an effect as you try to achieve your statutory goal. Is that 
correct?
    Mr. Powell. Yes.
    Senator Cortez Masto. And I want to have the opportunity to 
address Senator Warren's conversation with you earlier about 
the tools that you have and the impact it has on causing, 
potentially, more people to be unemployed, and this obviously 
has an impact on their ability to afford homes as well. Can you 
address that?
    Mr. Powell. I would be glad to. I want to be clear that we 
do not seek, and we do not believe we need to have a very 
significant downturn in the labor market. And it is not just 
hope. I think if you look at the situation in the labor market 
you have got all these job openings and, in principle, you 
could reduce the job openings without seeing a really 
significant increase in unemployment. Also, you are starting 
from such a strong labor market, it seems as though you are a 
long way away from anything that looks like a recession just 
looking at the labor market by itself.
    So honestly, we do not know that we need, that there will 
need to be a really significant downturn.
    Other business cycles had quite different back stories than 
this one, and we are going to have to find out whether that 
matters or not. But I do think, and I have said all along, and 
my colleagues and I have too, that we believe that we can--
there is path to restoring 2 percent inflation with less 
significant effects on the labor market than have typically 
been seen in downturns.
    Senator Cortez Masto. And for purposes of the general 
public, the people, the Nevadans that I know that are 
struggling--we have talked about this, and thank you for always 
being willing to talk with me--we have one of the highest 
unemployment rates in the country. Our service sector was hit 
so hard. We are still at over 5 percent just in southern 
Nevada. We have high gas prices. We have grocery prices. We 
have housing prices that are high.
    So one of the things that you have commented on, and you 
just did again, but I know it was in your opening remarks, and 
it is quoted right here, and let me just say, you say, ``Our 
overarching focus is using our tools to bring inflation back 
down to our 2 percent goal and to keep longer-term inflation 
expectations well anchored.''
    For the general public, for those working families and 
people, why 2 percent? Why is getting it to 2 percent so 
important?
    Mr. Powell. So that has become the globally agreed. 
Essentially all central banks target 2 percent inflation in one 
form or another.
    Senator Cortez Masto. How does that help my Nevada 
families? How does that help people in Nevada?
    Mr. Powell. I will tell you how it does. I guess it is not 
obvious how that is. But 2 percent inflation, to have people 
believe that inflation is going to go back to 2 percent really 
anchors inflation there because the evidence and the modern 
belief is that people's expectations about inflation actually 
have an effect on inflation. If you expect inflation to go up 5 
percent, then it will, you know, if everyone kind of expects 
that, because that is what businesses and households will be 
expecting, and it will kind of happen because they expect it.
    So having a 2 percent inflation goal, which we had for many 
years, de facto we had it, then we formally adopted it in 2012, 
but for years before that we were effectively targeting 2 
percent inflation, and what that meant was that one of the 
reasons why inflation was low and predictable is having a real 
target and sticking to it, not changing it at convenient 
moments.
    So we think it is really important that we do stick to a 2 
percent inflation target and not consider changing it. We are 
not going to do that. People will be better off if the whole 
question of high inflation is just not part of their lives. 
That is kind of the definition of price stability, is that 
people live their lives without having to think about inflation 
all the time.
    Senator Cortez Masto. Thank you. I notice my time is up. 
Thank you so much.
    Senator Lummis.
    Senator Lummis [presiding]. Thank you very much, Madam 
Chairman, and welcome, Chairman Powell.
    When you are setting these rates and making these decisions 
and seeking that 2 percent magic number, are you considering 
the cost of borrowing for the United States, knowing that 
Congress has overborrowed and that we have overspent and that 
the national debt is at now at least 97 percent of GDP, and we 
are going to face challenges, of our own making. This is not 
about what the Fed has done. This is about what the Congress 
has done that you have to factor into your decisions. Do you 
think about the costs of borrowing for the United States 
itself?
    Mr. Powell. No, we do not, and we are not going to. In 
other words, that would be fiscal dominance. If we were 
constrained in our monetary policy by the budgetary situation 
of the United States--and we are not; we are clearly not--the 
path we are on is not sustainable but the level of debt that we 
have is sustainable. Put it that way.
    So we do not think about interest costs when we make 
monetary policy. We think about maximum employment and price 
stability.
    Senator Lummis. It is your opinion that the level of debt 
we have is sustainable?
    Mr. Powell. Yes. I mean, clearly we have the largest 
economy in the world. We can service this debt. That is not the 
problem. The problem is that we are on a path where the debt is 
growing substantially faster than the economy, and that is kind 
of, by definition, in the long run, unsustainable. And the way 
countries have fixed that is with longer-term programs that 
have bipartisan support and that address the actual problem in 
the budget. That is really the formula.
    Senator Lummis. Thank you. I am going to switch to 
stablecoins. You are a member of the President's Working Group 
on Financial Markets. The working group called for bank-like 
regulation of stablecoins in late 2021. Then, on January 3rd of 
this year, in a joint staff statement, the Federal banking 
agencies stated that even after the bank's capital, BSA/AML, 
and risk management, a bank issuing a stablecoin on a, quote, 
``open public or decentralized network is highly likely to be 
inconsistent with safe and sound banking practices.''
    I am going to say that again. Even after a bank's capital, 
BSA/AML, and risk management, a bank issuing a stablecoin on an 
open public or decentralized network is highly likely to be 
inconsistent with safe and sound banking practices.
    So I am a little confused about where we are headed on 
stablecoins. Does the January 3rd statement mean that the Fed 
has decided that stablecoins on a permission-less distributed 
ledger have no place in banks?
    Mr. Powell. So I think that there are real concerns about 
permission-less public blockchains, and the reason is that they 
have been so susceptible to fraud, to money laundering, and all 
of those things. So I think what you heard from the Federal 
banking agencies, in one of their reports, was that they would 
tend to look at those as not consistent with safety and 
soundness.
    Senator Lummis. And what about properly regulated 
stablecoins? Do you think they could have a place in our 
banking system?
    Mr. Powell. I certainly think that in a world of 
appropriate regulation, where the stablecoin activity gets the 
same regulation as comparable products in different places, 
then there certainly could be a place for stablecoins in our 
financial services sector.
    Senator Lummis. Thank you. The European Union, U.K., 
Australia, Switzerland, Singapore, and others have all moved 
over the last few years to create a legislative framework for 
digital assets. The European Union, in particular, is 
attempting to be a standard-setter again, like it was with its 
data protection rule.
    Is the United States in danger of being a rule taker, not a 
rulemaker, when it comes to digital assets?
    Mr. Powell. I do think it would be important for us to have 
a workable legal framework around digital activities. I think 
that is important, and something Congress, in principle, needs 
to do because we cannot really do that.
    Senator Lummis. Yeah. Thank you. Senator Gillibrand and I 
agree with you.
    One area we have already seen is in the Basel Committee on 
Bank Supervision. They proposed prudential treatment for crypto 
assets framework, setting forth banks' capital standards for 
digital assets. The Basel Committee's framework does not impose 
a capital charge for digital asset custody, whereas the SEC's 
Staff Accounting Bulletin No. 121 imposes a prohibitive capital 
charge through the back door and places consumers at risk in 
bankruptcy.
    Similarly, the Basel Committee framework allows banks to 
issue or hold digital assets on their balance sheet if the 
requisite capital is set aside.
    So back to January 3, 2023. The Fed and other bank 
regulators have said that it is forbidden for a U.S. bank to 
conduct these activities no matter the capital.
    So my question is, what does the rest of the world know 
about digital asset regulation that we do not, that the Fed 
does not?
    Mr. Powell. So as we discussed, this is an SEC staff 
accounting bulletin, and it is not something that the Fed 
issued, and I would be loath to comment directly on it.
    Senator Lummis. The issue is, and what concerns me, is that 
the Fed and other Federal banking agencies are not following 
international norms on digital asset regulation. That is just 
my comment.
    Thank you, Chairman Powell, for being here.
    I now recognize Senator Smith.
    Senator Smith [presiding]. Well, thank you, and Chairman 
Powell, it looks as if Senator Britt and I are the last people 
standing at this Committee hearing. Thank you for passing on 
the gavel to Senator Lummis. And I want to thank you for your 
service and for our recent conversation.
    And before I get into my questions I would just like to 
note there has been a good back-and-forth amongst our Committee 
around some of the big economic challenges and opportunities 
that we face in this country, and I would just like to note 
that the programs and the spending that the Ranking Member and 
some of our colleagues have blamed for inflation provided 
critical relief that kept working families and small businesses 
afloat during a global pandemic. And in fact, many of these 
policies were passed on a bipartisan basis and signed into law 
by both Republican and Democratic Presidents.
    And I also just want to add that the laws that the 
Democrats passed to lower prescription drug costs and health 
care costs and to lower energy costs for Americans are helping 
to lower basic costs for families, all of which, by the way, 
was fully paid for.
    So I return, Mr. Chair, to what you have said to me 
privately and to all of us publicly, which is what we ought to 
be looking for is striving for bipartisan solutions to find a 
path forward, and, in fact, Senator Lummis and I were just 
talking about this yesterday when it came to housing policy. So 
I just want to put that out there.
    When you and I spoke yesterday briefly we talked about the 
Community Reinvestment Act, and I know that I appreciated the 
Chair raising this point earlier in the hearing. But I want to 
just return to that briefly. I am very glad to see, it has been 
about a year since the Fed and the OCC and the FDIC issued 
their proposed rule to modernize implementation of the 
Community Reinvestment Act. I do not think that the proposal 
was perfect by any means, but it does make really important 
improvements to how, through the CRA, financial services 
organizations can serve and meet the needs of communities that 
are full of assets but lack the resources to make it happen 
like wealthy communities can.
    So I think, Chairman Powell, you indicated that you expect 
this new CRA rule to be finalized in the coming months. Is that 
what you indicated?
    Mr. Powell. Yes. That is right.
    Senator Smith. And can you just tell us, with the departure 
of Dr. Brainard, who will be spearheading the CRA efforts?
    Mr. Powell. I have asked Vice Chair Barr to be responsible 
for moving the project forward. Of course, it has to the whole 
board and everyone gets a vote on that. But he will be pushing 
it forward.
    Senator Smith. That is great. Thank you.
    And I was glad to see that disaster preparedness and 
climate resiliency were added to the definition of community 
development activities that would be eligible for the CRA 
credit, and this is important, of course, because low- and 
moderate-income folks and the communities that they live in 
often face some of the worst impacts of climate change and 
extreme weather events. This is not social engineering. This is 
dealing with the actual costs and challenges that people 
experience because of climate change.
    So, Chairman Powell, can you talk to us a little bit about 
how you see that change and how it fits with the CRA's 
overarching objectives?
    Mr. Powell. I think it fits for the reasons that you said. 
Honestly, I am a week or so away from getting a briefing on 
where the proposal lies, so I am reluctant to touch on it. 
Again, I would rather wait until after I am fully briefed on 
where that agreement came out, after the FOMC meeting.
    Senator Smith. Thank you. That is fine. I look forward to 
continuing this conversation with you----
    Mr. Powell. As will I.
    Senator Smith. ----and with Mr. Barr, and I just appreciate 
this. My view of this is that climate change and the economy 
are inextricably linked and the reality is that climate-related 
action or inaction has a direct financial impact on people and 
our economy. And was wondering if you would just be willing to 
update us briefly on some of the next steps that the Fed is 
going to be looking at as you evaluate the resilience of 
financial institutions with respect to climate risk. There is 
this pilot project that just was started in January, I think it 
was, of this year, and I am curious to know how you see next 
steps there.
    Mr. Powell. So we are doing really two things. One is we 
are doing a climate stress scenario, which the banks are 
already doing, the large banks, the six that we are working 
with. And that is really just to begin the process of 
understanding the risk that are associated with this over the 
longer term. Again, they are already doing it and it is 
something--there is a lot of learning going on, around the 
world actually.
    The other thing we are doing is providing guidance. The 
banks want clear guidance. They actually want one set of rules 
globally, the big banks that do business around the world. They 
are hoping that they are not in a world where there are just 
different regulatory regimes everywhere they go. So we are kind 
of working on that as well.
    Senator Smith. Great. Thank you very much, Mr. Chair.
    Mr. Powell. Thank you.
    Chair Brown [presiding]. Thank you, Senator Smith.
    Senator Tillis, of North Carolina, is recognized.
    Senator Tillis. Thank you, Mr. Chairman. Chair Powell, 
thank you for being here.
    In your opening statement--I was here for that--I think you 
touched on some of the interest rate-sensitive components of 
GDP and non-interest rate-sensitive components of GDP. I think 
you said that we do have a concern in the latter group--
inflation expectations, labor market tightening, et cetera.
    Can you tell me a little bit about how you are looking at 
the interest rate-sensitive and non-interest rate-sensitive 
readings and whether the Fed--what sort of Fed actions can take 
place to avoid a zero landing?
    Mr. Powell. Sure. So the housing sector, of course, 
interest-sensitive spending is the thing that is very directly 
affected by our policies, almost right away, and the poster 
child for that is housing. And so you have seen mortgage rates 
now go back up over 6 percent. You have seen housing starts 
come down. The activity in housing has declined as people are 
reluctant to get out of the low-rate mortgages they have had 
before. So housing activity is slowing down. On the other hand, 
housing prices went up in the aggregate more than 40 percent 
since the beginning of the pandemic, so we may be seeing some 
price correction on that too. So that is coming along.
    And housing inflation, which is a big part of the CPI, a 
little bit smaller part of the PCU, the inflation measures we 
follow, that we rely on, that will be coming down because of 
the slowdown in the housing market.
    I guess I would say the service sector is probably less 
interest-sensitive than that, and that is restaurants, it is 
travel services, travel and leisure, it is health care, it is 
financial services, health care services, all those services, 
and that is a big, big part of our economy. This sector is 56 
percent of consumer spending on non-energy and food.
    So it is very important, and it is about having a little 
bit softer demand and about having some softening in labor 
market conditions, we think. Our tools will work on that, but 
we do expect that that will take time.
    Senator Tillis. Thank you. I know the Chairman, in his 
opening comments, mentioned, I believe--I do not want to 
misquote him--that we have too little capital in the banking 
sector. It may be true of a couple of banking institutions, but 
how do you feel about the current capital that our broader 
banking sector, irrespective of where they are in size, what 
concerns, if any, do you have about the capital that we see out 
there already?
    Mr. Powell. So I supported all of the capital raising that 
we did. I joined the Fed in 2012, when we were in the middle of 
implementing all those Dodd-Frank increases, and I supported 
all of them, after careful thought and discussion with my 
colleagues.
    I think the new Vice Chair is doing what new Vice Chairs 
do, which is to take a fresh look and ask the question, even 
though I think we all agree capital is strong. Certainly the 
Vice Chair does. The question is, is it at the right level, and 
I think that is what happens with a new Vice Chair for 
Supervision. We do not have any proposal yet but at some point 
we will.
    Senator Tillis. Yeah. I am going to be meeting with the 
Vice Chair and we will drill down on that topic. But I was over 
in Finance Committee so I was not here, but I do now that 
several members--well, first off we know that Vice Chair Barr 
is looking at a holistic review of capital requirements. I 
think that is a good idea.
    But I have to ask a question. Does the Fed consider the 
bipartisan-passed Senate bill 2155, which is currently the law 
of the land, superior to any of the Basel requirements or any 
holistic review process. It is the law of the land. How does 
that weigh in to how these reviews go?
    Mr. Powell. So 2155 was--I think you are talking about 
tailoring.
    Senator Tillis. Yeah.
    Mr. Powell. Dodd-Frank actually called for tailoring and 
what 2155 did was it changed ``may tailor'' to ``shall 
tailor,'' and it also changed the thresholds. But tailoring is 
an absolutely bedrock aspect of our bank regulatory system, and 
anything that we do is going to reflect what we think is 
appropriate tailoring between the different sizes and risks of 
the financial institutions that we supervise and regulate.
    Senator Tillis. What we were trying to accomplish as a part 
of that--I do not expect you to respond. I know that we are 
coming to the end of the hearing--is that a holistic review of 
a financial services institution is going to reveal the fact 
that many of these financial institutions are very different 
based on the activities that they are most involved in. And 
those sorts of holistic reviews may actually result in 
increasing capital requirements for two banks that look like 
peers but not for another because of the inherent risk 
associated with their business focus. Does that make sense?
    Mr. Powell. To your earlier point, though, the law, the 
Dodd-Frank language, as amended, actually requires that we take 
those things into consideration.
    Senator Tillis. And I hope that we will.
    Mr. Powell. We will.
    Senator Tillis. Thank you.
    Chair Brown. Thank you, Senator Tillis.
    Senator Warnock is recognized, from Georgia.
    Senator Warnock. Thank you so very much, Mr. Chairman.
    Before I begin my questions, I know that this Committee 
will soon consider a new nominee to serve on the Federal 
Reserve Board of Governors, and while it has not historically 
been the case it seems to me that the board should reflect the 
diversity of our Nation, that those things are connected, 
policy and representation, are connected. And I hope that we 
will see, sitting before this Committee, a nominee that pushes 
us closer toward our ideals of e pluribus unum out, out of 
many, one, and I support Senator Menendez and others who have 
called for a diverse nominee, specifically. The fact that we 
have never had a Latino person serve on the Federal Reserve 
board I think is a huge oversight, and I hope we can move 
quickly in that directly.
    That said, my State of Georgia is in a housing crisis, like 
much of the country. The Federal Reserve Bank of Atlanta has 
designated owning a home in Atlanta as unaffordable to the 
average home buyer. But this is not just a city problem. Harris 
County, Georgia, with a population of less than 35,000, sitting 
on the border of Alabama, is also raised as unaffordable.
    In the midst of this housing crisis, the Federal Reserve 
continues to raise interest rates. This makes mortgages a lot 
more expensive for families, especially young families looking 
to buy a house. According to the National Association of 
Realtors, the share of first-time home buyers is at an all-time 
low, while the average age of a purchaser is at an all-time 
high.
    Chairman Powell, you have said that there has been, quote, 
``an imbalance in the housing market,'' but if you are a 
Georgia family, parents in their mid 30s, young children, and 
all you want is to be able to afford your first home and place 
and build equity to 1 day pass that equity on to your kids, how 
are the Fed's actions helping that family afford a home?
    Mr. Powell. Our mandate is to use our tools to foster 
maximum employment and price stability, and we are using those 
tools really now to restore price stability at a time of the 
highest inflation in 40 years. I think that the same people who 
are having high mortgage costs, if they have a floating rate 
mortgage, are also experiencing high costs for all the basic 
necessities of life. And one of our most fundamental rules at 
the central bank is to keep price stability. So we have to 
prioritize that in what we do.
    Senator Warnock. I understand the tools and the mandate, 
but my concern is that we could have a cure that is worse than 
the disease. It does not do families any good if we stabilize 
housing prices while mortgage rates continue to skyrocket. It 
does not matter to me why a house is unaffordable. Maybe the 
house is unaffordable. Maybe the mortgage is unaffordable. 
Unaffordable is unaffordable.
    How does the Federal Reserve consider the total price of 
home ownership, including cost of mortgages, in executing that 
mandate to keep prices stable?
    Mr. Powell. Housing inflation is a very important component 
of various inflation indexes, and the way that his calculated 
is the economists look at rents, and then for people who own a 
home they impute a rent, depending on the value of the home. So 
it actually does factor in. And I would say measures of new 
leases that are being signed, and new housing prices, show 
significant declines in inflation, not in price but in 
inflation. And that will play through so that overall inflation 
over the course of the next 6 months or year will decline.
    Senator Warnock. If we are seeing mortgage rates go up, yes 
or no, does this discourage folks who may have a low-interest 
mortgage rate from putting their home on the market and then 
possibly paying double the cost on a mortgage for their new 
house?
    Mr. Powell. It certainly could. People who are in a fixed 
rate, low-rate mortgage, I would assume many of them are not 
moving.
    Senator Warnock. Does raising the Federal interest rate 
change the cost of borrowing for a company hoping to develop 
new housing?
    Mr. Powell. Yes.
    Senator Warnock. Does it make it more expensive for 
suppliers to finance expanding production to meet supply needs?
    Mr. Powell. It does.
    Senator Warnock. Does it give businesses less wiggle room 
to offer higher wages and attract qualified workers?
    Mr. Powell. Indeed.
    Senator Warnock. So all of these actions have to be taken 
into account. Federal Reserve does not control housing supply 
but its action do have a massive effect on housing supply. And 
some of these housing effects, it seems to me, will be felt for 
many years, well beyond when interest rate hikes have slowed or 
rates have even gone down.
    And I know you have got a difficult job and a tough 
situation, but I just hope that the Fed will think more about 
its actions and how they affect housing supply even as it 
attempts to control housing demand. Thank you.
    Chair Brown. Thank you, Senator Warnock.
    The last questioner, I believe, is Senator Sinema, who is 
remote, from Arizona.
    Senator Sinema. Thank you, Mr. Chairman, and Chairman 
Powell, thank you for being here today.
    In raising interest rates last month by 25 basis points the 
FOMC cited Russia's war against Ukraine as a key contributor to 
elevated global uncertainty. The war has serious implications 
for global energy and agricultural markets, and as you know, 
energy inflation, in particular, can appear in the form of 
higher prices of other goods and services.
    This feels like a substantial driver of inflation overall, 
and in my mind you cannot understand the global economy fully 
without assessing the range of possible outcomes in Ukraine. As 
we have also seen, the war created new supply chain problems 
overnight and has caused abrupt price swings in select 
committees.
    How is the FOMC assessing the economic impact of the war 
and the range of potential outcomes in order to inform how it 
sets monetary policy?
    Mr. Powell. I guess there are two things to say. One is 
that the principal way that the way has affected our economy is 
really through commodity prices, grain and particularly energy 
prices. That is the main thing, and those have both flattened 
out. Energy prices globally have settled down, they are at a 
higher level, and food prices as well, to some extent.
    The second thing I would say is that it represents a 
significant risk. So the war in Ukraine, the outcome is 
uncertain. Developments there are uncertain. And you have to 
think of it as a source of potential risk to the global economy 
and to our economy.
    We look at alternative scenarios and things like that. We 
do not really do it from a geopolitical standpoint but we do, 
of course, model scenarios where commodity prices are higher 
and things that would look like what could happen from Ukraine.
    Senator Sinema. Thank you. At home, Arizona families are 
struggling to navigate this economy. Higher prices are making 
it more difficult to afford groceries, gas, rents, and airfare, 
but on the other hand, rising interest rates are crowding out 
investment and making it more difficult for first-time home 
buyers to buy a home. Inflation has also slowed housing 
development to a halt in Arizona, and as you know, Chairman, 
housing is a major economic contributor in my State.
    It is also clear that more spending comes with tradeoffs, 
and it is why attacking inflation has historically been so 
difficult and yet it is more important than ever that we get it 
under control.
    There has been much debate about a soft landing, where we 
get inflation under control without triggering a recession, 
versus a hard landing, where inflation comes down but triggers 
a painful recession. Some economists are currently saying they 
see no landing right now, that growth is actually accelerating 
and that more aggressive actions will be needed to get 
inflation under control. If true, that would be problematic.
    What do you think about that assessment?
    Mr. Powell. Well, as I mentioned earlier, I think if you 
look at the data that has been coming in since earlier this 
year, you have seen stronger labor market conditions, higher 
inflation, stronger consumer spending, and also we saw some of 
the low inflation readings from the fourth quarter of last year 
revised away. You take all of those, they may be, to some 
extent, related to things like seasonal adjustments or a warm 
January. But nonetheless, they all point in the same direction 
and they do suggest the possibility that we ultimately would 
need to raise rates higher than had been expected.
    Of course, we have two or three more very important data 
releases to analyze before the time of the FOMC meeting. Those 
are going to be very important in the assessment we have of 
this relatively recent data. We will be looking carefully at 
that, and all of that will go into making the decision, which 
we have not made, but making the decisions that we will make 
about what to do at the March meeting.
    Senator Sinema. Thank you. On February 23rd, the Fed, the 
FDIC, and the OCC released another joint statement on crypto 
assets and liquidity risks posed to banking organizations. It 
is clear that regulators see undue risk for banks in the 
current environment and are taking a more conservative 
approach.
    Do you believe these risks are inherent to crypto assets 
and how they behave, or is some of the risk the product of the 
current regulatory and policy landscape for crypto assets in 
the U.S.?
    Mr. Powell. So we are seeing, really, in the last close to 
a year now, we have seen just a remarkable set of events in the 
crypto space. Lots of companies collapsing. We have seen 
massive fraud. We have seen all kinds of things.
    I think we have to be open to the idea that somewhere in 
there there is technology that can be featured in productive 
innovation that makes people's lives better. However, in the 
near term we see, in crypto activity, lots of things that 
suggest that regulated financial institutions should be quite 
cautious in doing things in the crypto space. And we have 
issued three or four releases to the banks, along with the OCC 
and the FDIC, the Fed has, and they essentially say you really 
need to be careful here. You need to be careful. It is early 
days with crypto. There is not the appropriate regulation. We 
are learning lots about the risks, and they are many of the 
same risks that run in other parts of the financial system, but 
without appropriate regulation.
    Chair Brown. Thank you, Chairman Powell.
    Senator Sinema. Thank you.
    Chair Brown. Thank you, Senator Sinema.
    We conclude the hearing. The Fed must make sure that 
workers and families are at the center of every decision it 
makes to strengthen our economy. We have heard a lot today 
about the role that Wall Street plays in our economy too. As 
you have said, Mr. Chair, we know that higher capital 
requirements make banks safer and stronger. It allows them to 
make investments in their workers and their communities and our 
economy. That is what they should be doing instead of spending 
billions on buy-backs.
    I look forward, Chair Powell, to working with you to 
strengthen our economy.
    For Senators who wish to submit questions for the hearing 
record, these questions are due 1 week from today, Tuesday, 
March 14th. To Chair Powell, please submit your responses to 
questions for the record 45 days from the day you receive them.
    I thank my colleagues for the very, very good attendance 
today. Only one Member on each side was not here, one for 
health reasons and the other just because he is doing 12 
different things. So I appreciate all that and thanks for your 
testimony and your public service, Mr. Chairman.
    Mr. Powell. Thank you, Mr. Chairman.
    Chair Brown. The hearing is adjourned.
    [Whereupon, at 12:23 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF CHAIR SHERROD BROWN
    Today we examine the Fed's actions to combat inflation and whether 
these actions are working--including how these actions affect 
Americans' jobs and their paychecks.
    Prices are still too high across many parts of the economy. And we 
all know who feels it the most when the costs of groceries and rent go 
up--it's not the economic pundits and politicians who lecture us about 
discipline and stability.
    It's not the corporate executives who pretend they're making 
``tough choices'' about prices while reporting record profit increases 
quarter after quarter and doing more and more stock buybacks.
    It's the people working hourly jobs to make ends meet. It's seniors 
on fixed incomes and Social Security. It's everyone who gets their 
income from a paycheck each month--not an investment portfolio.
    It's also those same Americans who stand to lose the most if the 
Fed's actions to curb inflation go too far.
    Because no matter what goes wrong in our economy--a global 
pandemic, a war in Eastern Europe, weather disasters--profits somehow 
always manage to go up.
    And workers are always left paying the price.
    As you have noted, Chair Powell, the Fed's tools are only one 
element in our fight against inflation.
    This is a complex problem, and interest rates are a single, blunt 
tool.
    Raising interest rates can't rebuild our supply chains and fix 
demand imbalances from the pandemic.
    Raising interest rates won't end Russia's brutal invasion of 
Ukraine.
    Raising interest rates won't prevent avian flu from devastating one 
third of our egg supply, or weather disasters from destroying key 
crops.
    And raising interest rates certainly won't stop big corporations 
from exploiting all of these crises to jack up prices far beyond the 
increase in their costs.
    Last year, corporate profits hit a record high. Corporate PR chiefs 
assure us that these corporations just have to raise prices. Their 
costs are going up, the workers just want to be paid too much, they 
have no other choice--they tell us.
    Yet when you look at their profits and their executive salaries and 
their stock buyback plans, it sure doesn't look like corporations have 
exhausted every available alternative.
    This is so brazen, even global bankers called on the Fed to 
identify this profiteering as one of the biggest drivers of inflation.
    Paul Donovan, Chief Economist of global wealth management at UBS 
wrote ``[the] Fed should make clear that raising profit margins are 
spurring inflation . . . Companies have passed higher costs on to 
consumers. But they have also taken advantage of circumstances to 
expand profit margins. The broadening of inflation beyond commodity 
prices is more profit margin expansion than wage cost pressures.''
    Think about that--from a chief economist at UBS:
    ``They have also taken advantage of circumstances to expand profit 
margins. The broadening of inflation beyond commodity prices is more 
profit margin expansion than wage cost pressures.''
    The Fed can't force corporations to change their ways or rewrite 
the Wall Street business model on its own.
    But you could talk about it.
    High-interest rates, falling wages, and increasing unemployment are 
all hallmarks of failed policies that end up helping Wall Street, large 
corporations, and the wealthy.
    Because let's be clear what we're talking about when use the 
economic-speak that can cloud this conversation.
    ``Cooling'' the economy means laying off workers.
    ``Lowering demand'' means workers getting fewer raises.
    Of course there are times when the Fed must act. We cannot allow 
inflation to become entrenched.
    We've seen encouraging signs that isn't happening. And there are 
other ways we can bring prices down.
    Instead of lowering demand--again, making people poorer, laying 
people off, denying workers raises--we can speed up and strengthen our 
supply chains. We can bring critical manufacturing industries back to 
the U.S. We can rebuild our infrastructure.
    It's what we are doing with the CHIPS Act, with the Inflation 
Reduction Act, with the Bipartisan Infrastructure Bill.
    For the first time in decades, we are finally recognizing the 
damage that I and many of my colleagues warned corporate offshoring 
would do to our economy.
    Look at East Palestine, Ohio.
    America learned about this small town last month, when a Norfolk 
Southern train derailed and spewed hazardous material into this 
community.
    East Palestine is more than just a disaster headline.
    Columbiana County, once the center of American ceramics 
manufacturing--at one time producing 80 percent of the ceramics in the 
country.
    When I was there last week, I was talking with the sheriff at the 
1820 Candle Company, and he was talking about how the last one just 
closed a few years back.
    Like so many industries, those jobs all moved overseas.
    And we know why. It's the same reason Norfolk Southern cut costs at 
the expense of safety, eliminating a third of its workers in less than 
10 years.
    And it's the same reason corporations are now keeping prices high 
even as supply chains stabilize.
    It's the Wall Street business model. Quarter after quarter, 
corporations are expected to cut costs, at any cost:
    They skimp on safety.
    They move production overseas to countries where they can pay 
workers less, because of trade deals they lobbied for.
    And Wall Street demands they post profit increases--even in the 
middle of a global pandemic.
    That's the problem with our economy.
    And not only will higher interest rates not solve it--if they're 
overdone, they'll make it worse.
    We cannot risk undermining one of the successes of our current 
economy.
    For the first time in decades, workers are finally--finally--
starting to get a little power. Unemployment is at an historic low--3.4 
percent.
    That's not just a number. That means Americans have more 
opportunity and options, even in places that haven't seen a lot of that 
in recent years. It means people have the power to demand raises, and 
retirement security, and paid sick days, and control over their 
schedules.
    And it means more Americans have the dignity that comes with a good 
job that provides for your family.
    We must ensure that all Americans have the opportunity for that 
dignity of work.
    This is a critical time, and the consequences of missteps could be 
severe.
    Mr. Chairman, two more things that could affect you:
    It's not just monetary policy that threatens Americans' 
pocketbooks.
    Some of my colleagues have threatened the Nation's full faith and 
credit by holding the debt ceiling hostage for partisan politics. 
Instead of paying our bills on time, they're threatening all Americans.
    The Fifth Circuit's Consumer Financial Protection Bureau ruling 
could also cause unimaginable instability and chaos for consumers and 
our financial system.
    The Fifth Circuit is Wall Street's favorite courthouse.
    It recently ruled the CFPB's independent funding is 
unconstitutional. If the Supreme Court upholds the Fifth Circuit's 
ruling, it will devastate the CFPB and threaten the independent funding 
of many other Federal agencies, including the Federal Reserve.
    I look forward to hearing today how the Fed will balance its dual 
mandate, and continue to promote an economy where everyone who wants a 
good job can find one--an economy that works for everyone.
                                 ______
                                 
                PREPARED STATEMENT OF SENATOR TIM SCOTT
    Sitting here, looking at my prepared remarks . . . there is an 
opening coming where Vice Chair Brainard is moving on, I think it's 
really important for us to make sure that all the information that we 
need in order to make a good decision on the next [nomination] that we 
have in a timely fashion. So, I would really implore the Chair to make 
sure that happens. That every question, every questionnaire that is 
asked from the person, we get. Every Member of this Committee has their 
questions answered in a timely fashion, and that the staff has their 
answers in a timely fashion.
    Listening to Chairman Brown, I thought to myself: ``Fascinating, 
truly fascinating.'' I concluded that while I know Chairman Brown 
pretty well, I am sure he is sincere.
    But let me just say this, spending and printing trillions of 
dollars, caving to the radical Left in this country, seeing policies 
posited and then implemented that led to the worst inflation in 40 
years, seeing our inflation at 9.1 percent, seeing American families 
struggle because of the weight of the Government on their shoulders, 
seeing the devastation from South Carolina to Ohio--it's unbelievable 
that the progressives in this country who caused 9.1 percent inflation 
would then turn somewhere besides the mirror to see the absolute 
devastation caused by their out-of-control spending is remarkable. 
Remarkable.
    To stop the out-of-control inflation caused by the out-of-control 
spending, the Fed steps in to cool the economy. Well, the definition of 
cooling the economy is necessary because we've seen the most radical 
approach, to a problem that was in our rearview mirror, being used to 
bring in a level of socialism and spending that our Nation has not seen 
in my lifetime.
    The facts are very simple: when you get to 9.1 percent inflation in 
this Nation, as a kid who grew up in a single-parent household mired in 
poverty, a 40 percent--today, a 100 percent just a year ago--increase 
in the gas prices devastates single mothers around this country. For 
seniors on fixed income whose savings are being depleted, with an 
average cost just last month of a $433 increase because of inflation. 
For my friends on the other side of the aisle to look any place besides 
a mirror, I find stunning.
    The truth is that when your food prices go up over 20 percent, when 
your electricity is up over 20 percent, you have to ask yourself: 
``Where in the world are they?'' They cannot be in this universe, it 
must be an alternate universe where in fact it is okay for us to prices 
go through the roof and our economy not stumble, but fall into a ditch. 
Why are we in the ditch? Because progressives used the pandemic as a 
way to usher in a form of spending that takes the money out of the 
pockets of everyday Americans and puts it in the coffers of the 
Government.
    There is a better way. The better way is to trust the American 
people. And when you do so, you don't have to have the Fed come in and 
raise interest rates so high to quell the challenges in our economy so 
that today versus 18 months ago, the price of the same house for your 
mortgage payment is twice as high. Why? Because of the runaway spending 
of our friends on the other side of the aisle.
    I'm sure I do not have time for my opening comments, what I will 
say without any question, as I look around the country, and I ask 
myself how devastating is it that today it costs $433 more dollars than 
it did a year ago, the answer is it is a crisis when the average family 
in our country didn't have $400 in their savings for an emergency, to 
have prices go up by this amount is devastating. To have a conversation 
about rents around the country, looking at the inflationary effect and 
the absolute devastation of a snarling supply chain, we haven't seen in 
my lifetime, run by my friends and the progressives, unbelievable.
    Now to get to you, Chairman Powell. One of the comments you made 
that I think is really important in one of the speeches you gave in 
January. ``It is essential,'' you said, ``that we stick to our 
statutory goals and authorities, and that we resist the temptation to 
broaden our scope to address other important social issues of the day. 
Taking on new goals, however worthy, without a clear statutory mandate 
would undermine the case for our independence.''
    You further noted that, and I quote, ``Without explicit 
congressional legislation, it would be inappropriate for us to use our 
monetary policy or supervisory tools to promote a greener economy or to 
achieve other climate-based goals. We are not, and will not be, a 
climate policymaker.''
    Do you still stand by those comments? ``CHAIRMAN POWELL: `I do.' ''
    Finally, several of my Republican colleagues and I sent a letter to 
you discussing Vice Chair of Supervision Michael Barr's plan to conduct 
a ``holistic'' review of capital standards. I look forward to 
discussing those capital standards during my Q and A, and I will thank 
you for our recent conversation that we had that helped illuminate some 
of the necessary challenges that we face as a Nation and your answers 
to it. Thank you.
                                 ______
                                 
                 PREPARED STATEMENT OF JEROME H. POWELL
        Chair, Board of Governors of the Federal Reserve System
                             March 7, 2023
    Chairman Brown, Ranking Member Scott, and other Members of the 
Committee, I appreciate the opportunity to present the Federal 
Reserve's semiannual Monetary Policy Report.
    My colleagues and I are acutely aware that high inflation is 
causing significant hardship, and we are strongly committed to 
returning inflation to our 2 percent goal. Over the past year, we have 
taken forceful actions to tighten the stance of monetary policy. We 
have covered a lot of ground, and the full effects of our tightening so 
far are yet to be felt. Even so, we have more work to do. Our policy 
actions are guided by our dual mandate to promote maximum employment 
and stable prices. Without price stability, the economy does not work 
for anyone. In particular, without price stability, we will not achieve 
a sustained period of labor market conditions that benefit all.
    I will review the current economic situation before turning to 
monetary policy.
Current Economic Situation and Outlook
    The data from January on employment, consumer spending, 
manufacturing production, and inflation have partly reversed the 
softening trends that we had seen in the data just a month ago. Some of 
this reversal likely reflects the unseasonably warm weather in January 
in much of the country. Still, the breadth of the reversal along with 
revisions to the previous quarter suggests that inflationary pressures 
are running higher than expected at the time of our previous Federal 
Open Market Committee (FOMC) meeting.
    From a broader perspective, inflation has moderated somewhat since 
the middle of last year but remains well above the FOMC's longer-run 
objective of 2 percent. The 12-month change in total personal 
consumption expenditures (PCE) prices has slowed from its peak of 7 
percent in June to 5.4 percent in January as energy prices have 
declined and supply chain bottlenecks have eased.
    Over the past 12 months, core PCE inflation, which excludes the 
volatile food and energy prices, was 4.7 percent. As supply chain 
bottlenecks have eased and tighter policy has restrained demand, 
inflation in the core goods sector has fallen. And while housing 
services inflation remains too high, the flattening out in rents 
evident in recently signed leases points to a deceleration in this 
component of inflation over the year ahead.
    That said, there is little sign of disinflation thus far in the 
category of core services excluding housing, which accounts for more 
than half of core consumer expenditures. To restore price stability, we 
will need to see lower inflation in this sector, and there will very 
likely be some softening in labor market conditions. Although nominal 
wage gains have slowed somewhat in recent months, they remain above 
what is consistent with 2 percent inflation and current trends in 
productivity. Strong wage growth is good for workers but only if it is 
not eroded by inflation.
    Turning to growth, the U.S. economy slowed significantly last year, 
with real gross domestic product rising at a below-trend pace of 0.9 
percent. Although consumer spending appears to be expanding at a solid 
pace this quarter, other recent indicators point to subdued growth of 
spending and production. Activity in the housing sector continues to 
weaken, largely reflecting higher mortgage rates. Higher interest rates 
and slower output growth also appear to be weighing on business fixed 
investment.
    Despite the slowdown in growth, the labor market remains extremely 
tight. The unemployment rate was 3.4 percent in January, its lowest 
level since 1969. Job gains remained very strong in January, while the 
supply of labor has continued to lag. \1\ As of the end of December, 
there were 1.9 job openings for each unemployed individual, close to 
the all-time peak recorded last March, while unemployment insurance 
claims have remained near historical lows.
---------------------------------------------------------------------------
     \1\ A box in our latest Monetary Policy Report, ``Why Has the 
Labor Force Recovery Been So Slow?'' discusses the factors that have 
been holding back labor supply.
---------------------------------------------------------------------------
Monetary Policy
    With inflation well above our longer-run goal of 2 percent and with 
the labor market remaining extremely tight, the FOMC has continued to 
tighten the stance of monetary policy, raising interest rates by 4\1/2\ 
percentage points over the past year. We continue to anticipate that 
ongoing increases in the target range for the Federal funds rate will 
be appropriate in order to attain a stance of monetary policy that is 
sufficiently restrictive to return inflation to 2 percent over time. In 
addition, we are continuing the process of significantly reducing the 
size of our balance sheet. \2\
---------------------------------------------------------------------------
     \2\ A box in our latest Monetary Policy Report, ``Developments in 
the Federal Reserve's Balance Sheet and Money Markets'', discusses 
changes in the size of the Federal Reserve's balance sheet.
---------------------------------------------------------------------------
    We are seeing the effects of our policy actions on demand in the 
most interest-sensitive sectors of the economy. It will take time, 
however, for the full effects of monetary restraint to be realized, 
especially on inflation. In light of the cumulative tightening of 
monetary policy and the lags with which monetary policy affects 
economic activity and inflation, the Committee slowed the pace of 
interest rate increases over its past two meetings. We will continue to 
make our decisions meeting by meeting, taking into account the totality 
of incoming data and their implications for the outlook for economic 
activity and inflation.
    Although inflation has been moderating in recent months, the 
process of getting inflation back down to 2 percent has a long way to 
go and is likely to be bumpy. As I mentioned, the latest economic data 
have come in stronger than expected, which suggests that the ultimate 
level of interest rates is likely to be higher than previously 
anticipated. If the totality of the data were to indicate that faster 
tightening is warranted, we would be prepared to increase the pace of 
rate hikes. Restoring price stability will likely require that we 
maintain a restrictive stance of monetary policy for some time.
    Our overarching focus is using our tools to bring inflation back 
down to our 2 percent goal and to keep longer-term inflation 
expectations well anchored. Restoring price stability is essential to 
set the stage for achieving maximum employment and stable prices over 
the longer run. The historical record cautions strongly against 
prematurely loosening policy. We will stay the course until the job is 
done.
    To conclude, we understand that our actions affect communities, 
families, and businesses across the country. Everything we do is in 
service to our public mission. We at the Federal Reserve will do 
everything we can to achieve our maximum-employment and price-stability 
goals.
    Thank you. I am happy to take your questions.
         RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN
                     FROM JEROME H. POWELL

Q.1. Your testimony highlighted several economic risks 
impacting the banking system. To prepare for these risks, banks 
need robust capital to continue lending and serve their 
customers in an economic downturn.
    How do strong capital requirements protect the banking 
system, and how do they protect working Americans and small 
businesses?

A.1. Robust capital requirements are fundamental to the 
strength and stability of our financial system because they 
help ensure that banks are able to absorb losses and continue 
their vital role in financial intermediation, including their 
ability to lend to households and businesses, through good 
times and bad.

Q.2. During an economic downturn, what choices do banks have to 
maintain or even build capital and reduce risk to their balance 
sheets while still lending to Americans?

A.2. As a general matter, banks may maintain capital during an 
economic downturn by preserving retained earnings--for example, 
by reducing expenses or dividend payments and other capital 
distributions. They may also issue new capital instruments to 
investors. Such measures can be taken during an economic 
downturn to support lending to creditworthy borrowers.

Q.3. Capital frameworks tailored by the bank's size, activity, 
and complexity are helpful but inadequate. Capital protects 
against the unexpected; there is potential for the capital 
framework to underestimate losses and not account for emerging 
risks. A well-designed regulatory capital framework must 
include risk-based and risk-insensitive components, such as the 
supplementary leverage ratio.
    Will the Federal Reserve commit to maintaining a 
comprehensive capital framework ensuring a capital cushion 
against known and unknown risks for all banks?
    Will the regulatory capital requirements be tailored so 
that the banks presenting the greatest risk to America's 
financial stability maintain proportionally more capital than 
community banks?

A.3. Robust capital requirements are fundamental to the 
strength and stability of our financial system. The Federal 
Reserve's framework includes both risk-based and leverage 
capital standards. The risk-based capital standards, on the one 
hand, assign capital requirements commensurate with the 
riskiness of a firm's activities. The leverage standards, on 
the other hand, do not differentiate by the relative risk of a 
firm's activities, serving as a complement to the risk-based 
standards to safeguard against any imprecise assessment of 
risk. Our framework also takes into account the size and 
complexity of financial institutions, requiring countercyclical 
measures, stress testing, and increased capital requirements 
for the largest firms and simpler, less burdensome requirements 
for smaller qualifying firms. All of these requirements support 
the resilience of the financial system.
    Banks and the financial system are constantly evolving. 
Accordingly, we require financial institutions to have an 
established, robust, and comprehensive approach for 
identifying, assessing, and addressing all risks stemming from 
their unique business activities under normal and stressed 
conditions. Similarly, regulation and supervision must also 
evolve to be effective as our understanding of these risks 
deepens over time.

Q.4. Consumers, investors, and all types of market participants 
increasingly choose to make free market decisions based upon 
environmentally and socially conscious factors. This is done 
for many reasons including greater efficiency and increased 
cost savings. However, many critics call these decisions 
``misguided'' and ``harmful to the economy.'' Critics threaten 
retaliatory action against people and corporations for making 
their own choices in the free market. Do the data collected by 
and economic projections produced by the Federal Reserve 
indicate that a shift in preferences to consumer and investor 
decision making influenced by more environmentally or socially 
conscious considerations is likely to cause harm to or impair 
the economy?

A.4. Changes in preferences and technologies always have the 
potential to create disruptions for some groups of consumers or 
firms. As a result of new technologies or changes in consumer 
preferences, some firms and industries may experience an 
increase in demand for their products or services, and others 
may experience a decrease in demand. Likewise, some consumers 
may see their economic situations improve, and others may 
experience challenges. It is difficult to isolate the aggregate 
effects of a given change in preferences and technologies, but 
economists generally think that innovation and business 
dynamism in reaction to a changing landscape of consumer 
preferences or to the adoption and incorporation of new 
technologies makes for a stronger economy over time.

Q.5. Mortgage rates have tracked closely with the Fed's rate 
hikes. The average 30-year fixed mortgage rate is about 6.5 
percent, more than double that 2 years ago. Rate hikes drive a 
housing market, pushing home ownership out of reach for 
younger, lower-income Americans and reducing the supply of 
homes for sale as existing homeowners delay moving so they can 
hold onto their low-cost mortgage. Meanwhile, the wealthy and 
investors are buying up those properties that do come on the 
market with all-cash offers. In the words of the National 
Association of Realtors' chief economist: ``Only the wealthy 
are essentially buying homes. If this trend was to continue, 
that means something fundamentally is wrong with society.'' I 
agree. What can Congress and the Federal Reserve do to address 
housing market inequality--and the wealth inequality that is 
driven by housing inequality--while working to reduce 
inflation?

A.5. The large increase in mortgage rates has indeed reduced 
home purchases by lower-income households more than those by 
higher-income households. \1\ I am mindful that this is one of 
the unfortunate costs of reducing inflation. But inflation has 
also had a disproportionately large effect on households that 
spend the majority of their income on necessities like food, 
energy, and shelter. Furthermore, following through on our 
commitment to return inflation to 2 percent is essential to 
avoiding an entrenchment of higher inflation expectations that 
could require even more aggressive policy action in the future. 
It is crucial that we restore price stability because without 
it we will not achieve a sustained period of strong labor 
market conditions that benefit all. Pursuing our dual mandate 
of maximum employment and price stability is the best way for 
the Federal Reserve to promote widely shared prosperity.
---------------------------------------------------------------------------
     \1\ See Ringo, Daniel. ``Declining Affordability and Home Purchase 
Borrowing by Lower Income Households'', FEDS Notes July 2022.
---------------------------------------------------------------------------
    The Federal Reserve also uses our regulatory toolkit to 
support mortgage borrowing by lower income households. 
Specifically, through the Community Reinvestment Act (CRA), we 
(along with the Federal Deposit Insurance Corporation and the 
Office of the Comptroller of the Currency) encourage mortgage 
lenders to meet the credit needs of low- to moderate-income 
(LMI) borrowers and of borrowers living in LMI neighborhoods. 
In 2022, the banking agencies issued a proposal to modernize 
the regulations specifying how CRA is implemented. One of the 
goals of the proposal is to expand access to credit, 
investment, and basic banking services in low- and moderate-
income communities.
                                ------                                


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

Q.1. In November, the Federal Reserve released its latest 
Diversity, Equity, and Inclusion Strategic Plan. One of the 
actions listed in that plan suggests that Fed will task its 
divisions to develop action plans with relevant and measurable 
results to address underrepresented workforce demographics in 
job families like economists and senior professionals. When 
will those action plans be complete, and can you commit to 
sharing them with my office?

A.1. We appreciate your interest in the Board's Diversity, 
Equity, and Inclusion Strategic Plan and welcome the 
opportunity discuss our strategic plan and our approach for 
implementing it. Board staff are working with your staff to 
share additional information with your office.

Q.2. In Section 956 of the Dodd-Frank Act Congress instructed 
the Federal Reserve and other regulators to jointly issue rules 
to rein in the incentive-based executive compensation plans 
that contributed to the financial crisis by encouraging risky 
behavior. Congress set a deadline of May 2011 for this rule, 
but thus far no rule has been finalized. What is the status of 
this rule? Will you commit to placing this on your regulatory 
agenda as reported to the Office of Information and Regulatory 
Affairs?

A.2. The Board is actively working with the Federal banking 
agencies, Federal Housing Finance Agency, Securities and 
Exchange Commission, and National Credit Union Administration 
to implement section 956 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act. Specifically, we are preparing a 
proposal that would implement prohibitions against incentive 
compensation arrangements that could provide excessive 
compensation or lead to material financial loss and requiring 
disclosure related to incentive compensation arrangements.
                                ------                                


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

Q.1. To understand the economy and how best to respond to it, 
it is important that we better understand wage growth. 
Employers in Arizona tell me it's extremely difficult to hire 
workers, while workers in Arizona tell me that any wage gains 
they have accrued over the past few years have been largely 
wiped out by inflation. The current data are noisy and make it 
difficult to isolate and understand wage growth without 
capturing underlying drivers. Would the Federal Reserve 
consider studying and publishing a labor income measure?

A.1. There are many high-quality measures of wages that we 
consider as monetary policymakers. For example, we look at a 
number of different measures of nominal wage growth, including 
the Employment Cost Index, Average Hourly Earnings, and 
Compensation per Hour, all published by the Bureau of Labor 
Statistics (BLS). While no measure is perfect, taken as a 
whole, they provide a reasonably accurate picture of the 
behavior of aggregate wages.
    Of course, individual wage growth often differs from the 
average, and thus, it is often helpful to look at how wage 
growth differs across different groups of the population. The 
series mentioned above do this for different industries and 
occupations, and the Federal Reserve Bank of Atlanta (FRB 
Atlanta) Wage Growth Tracker does this for different 
demographic groups. The BLS's Current Population Survey, which 
is the data that underlies the FRB Atlanta Wage Growth Tracker, 
provides highly detailed individual-level data on wages. The 
Longitudinal Employer Household Dynamics dataset provides 
detailed wage data on individuals and firms. These sources, as 
well as data from the payroll processing firm ADP, are used by 
researchers at the Federal Reserve and other research 
institutions to study the behavior of wages. We are always 
looking for new and timely data to improve our assessment of 
economic activity, including wages, and we actively engage with 
other statistical agencies to encourage improvement in their 
wage measures.
                                ------                                


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

Q.1. Chairman Powell, as was raised in the hearing, the Federal 
Reserve has no tool at its disposal to stanch the loss of jobs 
and rise in unemployment that follows an increase in interest 
rates, resulting in a ``runaway train'' of climbing 
unemployment. How does the Federal Reserve model and analyze 
this longer-term effect of rising unemployment following an 
interest rate increase, and how is that data used in 
determining whether such an increase would be contrary to 
fulfilling the Federal Reserve's dual mandate?

A.1. The Federal Reserve uses a broad variety of models and 
other types of analysis to study the effect of interest rates 
(as well as broader financial conditions) on the unemployment 
rate, inflation, and economic output. Our models, as well as 
economic reasoning, suggest that the high inflation the economy 
is experiencing currently is the result of aggregate demand 
exceeding aggregate supply. These models and other types of 
analysis also suggest that higher interest rates reduce growth 
in aggregate demand, which, in the current context, would help 
bring demand back into alignment with supply and bring down 
inflation. Soft growth in aggregate demand can also lead to 
increases in unemployment. While it is possible to bring 
inflation down without a large increase in unemployment, such 
an outcome will depend on a number of factors, including the 
absence of significant adverse shocks to inflation or economic 
activity.
    When inflation is high, as it is now, the economy does not 
work for anyone. High inflation imposes hardship on households 
and businesses, and it is especially painful to those least 
able to meet the higher costs of essentials like food, housing, 
and transportation. We saw in the latter parts of the last 
expansion that a sustained strong labor market together with 
price stability produced broad benefits to households, 
particularly those in low- and moderate-income communities. The 
economy can return to a period of sustained labor market 
strength, but this can only take place in an environment of 
price stability. As a result, to fulfill our dual mandate of 
price stability and maximum employment, it is imperative that 
we bring inflation down to our 2 percent target.

Q.2. Considering the recent failure of Silicon Valley Bank, as 
well as Signature Bank and Silvergate Bank, how could have more 
thorough oversight by the Federal Reserve, such as through the 
use of stress tests as required for larger banks, helped to 
avert the crisis?

A.2. The Federal Reserve relies on a broad set of supervisory 
and regulatory tools to help assess the range of risks 
affecting large institutions, including monitoring firm 
practices for mitigating interest rate and liquidity risks.
    Capital stress testing is one of the many supervisory tools 
used to monitor large banks, and we continuously look for ways 
to expand the risk capture of the stress test. While the stress 
test that the Federal Reserve Board (Board) uses to set capital 
requirements for large banks places a significant emphasis on 
the types of credit-driven downturns that have occurred in 
severe post-war U.S. recessions, the Board has explored the 
effects of different interest rate environments in the 
supervisory stress test over the years. In recent years, the 
2017 adverse scenario featured a steepening yield curve, as did 
the 2018 severely adverse scenario. The Board is also 
investigating the use of multiple scenarios to capture a wider 
range of risks and uncover channels for contagion.
    As noted in the Review of the Federal Reserve's Supervision 
and Regulation of Silicon Valley Bank released on April 28, 
tailoring changes reduced the coverage and timeliness of Board 
stress tests for some firms. As with other findings from this 
report, we will be revisiting this approach as we seek to 
improve our supervisory and regulatory abilities.

Q.3. How did the Economic Growth, Regulatory Relief and 
Consumer Protection Act of 2018 limit the Federal Reserve's 
ability to conduct oversight of banks of a similar size to 
Silicon Valley Bank?

A.3. The Economic Growth, Regulatory Relief, and Consumer 
Protection Act of 2018 (EGRRCPA) amended section 165 of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act by 
generally raising the minimum asset threshold for application 
of prudential standards under section 165 from $50 billion in 
total consolidated assets to $250 billion in total consolidated 
assets. In addition, under EGRRCPA, the Board must make certain 
findings before applying any enhanced prudential standard to 
BHCs with total assets between $100 billion and $250 billion.

Q.4. What sort of tools and regulations that could be provided 
via legislation would support the Federal Reserve in its 
efforts to more thoroughly oversee and monitor banks to prevent 
any future failures such as those seen in recent months?

A.4. The Federal Reserve is committed to maintaining and 
enhancing its comprehensive regulatory framework for the banks 
it supervises and has numerous supervisory and regulatory tools 
available to oversee and monitor banks. These tools are 
designed to enhance the resiliency of a bank and to reduce the 
impact on the financial system and the broader economy in the 
event of a firm's failure or material weakness. Under existing 
law, we have the discretion and tools we need to improve 
supervision and regulation and are committed to doing so.
                                ------                                


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

Q.1. In its latest baselines, the Congressional Budget Office 
projects that inflation will stay above the Federal Reserve's 2 
percent target over the next few years, peaking this year and 
settling just above the 2 percent target through 2027.
    Do you agree with these projections? Will the Federal 
Reserve commit to stronger action to bring inflation back to 
its target?

A.1. The Congressional Budget Office's inflation projection--
that inflation will come down significantly and be near the 
Federal Open Market Committee's (FOMC) 2 percent objective by 
2025--is broadly in line with that of most private forecasters, 
and it is consistent with the FOMC's Summary of Economic 
Projections. Of course, all economic forecasts are uncertain, 
and that is especially so given the unprecedented situation of 
the past few years. The Federal Reserve is strongly committed 
to returning inflation to our 2 percent goal and has taken 
forceful actions to tighten the stance of monetary policy. We 
continue to closely monitor incoming information in order to 
assess the implications for monetary policy. In determining the 
extent of additional policy firming that may be appropriate to 
return inflation to 2 percent over time, the Committee will 
take into account the cumulative tightening of monetary policy, 
the lags with which monetary policy affects economic activity 
and inflation, and economic and financial developments.

Q.2. CBO projects this fiscal year's deficit to total $1.4 
trillion, almost half-a-trillion larger than expected 2 years 
ago. Taxpayers are now double paying for partisan Government 
overspending--first when the dollars flew out the door and on 
the interest of that debt. This year's annual deficit will 
become just our interest payments in a decade, more than 
doubling our $640 billion debt servicing payments, unless 
Congress acts to rein in spending and inflation.
    Mr. Powell, all other things being equal, would the Fed be 
better able to moderate interest rate increases if the Federal 
Government reins in overspending? And would moderating reduce 
both the rate and principal of our long-term debt servicing 
cost?

A.2. It is the responsibility of the Congress and the 
Administration to decide on appropriate fiscal policy. At the 
Federal Reserve, we are focused on using our monetary policy 
tools to restore price stability and are strongly dedicated to 
this goal.
    Regarding debt sustainability, as I have said previously, 
the Federal Government debt is on an unsustainable path 
insomuch as the CBO projects that Federal debt will be 
increasing, relative to the size of the economy, over the 
longer run. The details of how and when Federal debt 
sustainability should be achieved are for Congress and the 
Administration to decide, not the Federal Reserve.

Q.3. I understand that the Real Time Payment (RTP) network, the 
private sector instant payment system that's been in operation 
for years, can now reach about 65 percent of all U.S. deposit 
accounts. I also understand that the Treasury Department is not 
using RTP to get benefit payments to individuals quickly. This 
technology could have been particularly beneficial as the 
Government worked to distribute COVID relief payments at the 
height of the pandemic. Instead, I understand that Treasury is 
focusing its resources on enabling the use of the Fed's 
competing FedNow network, which is scheduled to go live later 
this year.
    On the day FedNow does finally launch, will it have the 
same reach as RTP and, if not, how long will it take to get 
there?

A.3. The Federal Reserve's overarching policy goal for the 
FedNow Service is to provide equal access to instant payments 
infrastructure to a broad range of depository institutions 
across the country. We continue to work to ensure that a large 
percentage of deposit accounts have access to the service as 
soon as possible. As we have stated previously a particular 
objective is to ensure that the FedNow Service is available to 
small- and medium-sized banks and credit unions. To that end, 
we are working closely with a number of small- and medium-sized 
banks and credit unions in the FedNow pilot program to provide 
technical assistance as they onboard to the service and conduct 
testing. In addition, we are encouraging the service providers 
who provide access to Federal Reserve payment services for 
thousands of community institutions across the country to 
accelerate access to the FedNow Service for these institutions.
    In terms of timing, at the July launch of the FedNow 
Service a limited number of depository institutions--including 
large banks, community banks, and credit unions--will be ready 
to send and receive customer payments. We expect this number to 
grow in the months following the launch as more institutions 
complete readiness activities and onboard to the service. We 
recognize that attaining broad reach for the FedNow Service 
across the thousands of depository institutions in this country 
will be a gradual process. We are committed to maintaining our 
strong level of industry engagement in the coming years to 
support these institutions, and the service providers that 
enable their use of our services, in transitioning to a round-
the-clock operating environment.

Q.4. Do you agree that instant payments would be beneficial to 
both those receiving benefits as well as the Federal 
Government? If so, will you work with Treasury toward that end?

A.4. The FedNow Service is intended to be a flexible, neutral 
platform that supports a broad variety of instant payments and 
upon which the private sector can innovate. Use cases for 
instant payments include situations where rapid access to funds 
is important for recipients, such as insurance or benefit 
payments after an accident or natural disaster and expedited 
payroll for gig-economy workers. Instant payments are also 
beneficial for helping senders manage cash flows such as last-
minute bill payments or small business payments for supplies 
upon delivery. Because instant payments are flexible and use-
case agnostic, we expect that over time, various Government 
agencies will find it beneficial to leverage instant payments 
for a variety of needs.
    The U.S. Department of the Treasury's Bureau of the Fiscal 
Service is a participant in the FedNow pilot program and is 
actively testing instant payment disbursements and collections. 
We look forward to continued collaboration with the Treasury 
Department as it prepares to join the launch of the service in 
July.
                                ------                                


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

Q.1. As I noted during the Banking Committee hearing on June 
22, I remain concerned that the Fed and its Reserve Banks 
continue a pattern of stonewalling reasonable requests for 
information. The latest example concerns the fairness, 
transparency, and consistency of Fed decisions concerning 
highly valuable Fed master accounts. Kansas City Fed President 
Esther George recently refused, once again, to provide 
information to Senate Banking Committee Ranking Member Pat 
Toomey (R-PA) regarding the unusual case of Reserve Trust's Fed 
master account. \1\
---------------------------------------------------------------------------
     \1\ https://www.kansascityfed.org/AboutUs/documents/8854/06-16-22-
Toomey-Letter-from-Esther-George.pdf
---------------------------------------------------------------------------
    But this is far from the only example. I am likewise aware 
that last year, several Reserve Banks--specifically, the Boston 
Fed, San Francisco Fed, Minneapolis Fed, and Atlanta Fed--
repeatedly refused to provide any documents in response to 
Ranking Member Toomey's inquiry about their embrace of 
politically charged social causes outside the Fed's historical 
mission and statutory mandate. \2\
---------------------------------------------------------------------------
     \2\  https://www.banking.senate.gov/newsroom/minority/toomey-
blasts-regional-fed-banks-for-refusing-to-comply-with-congressional-
request
---------------------------------------------------------------------------
    This pattern of obstruction raises concerns that Reserve 
Banks believe they can circumvent congressional oversight. As 
former Obama administration official and Brookings Institution 
scholar Aaron Klein recently remarked, ``If the Kansas City Fed 
is not accountable to Congress for regulatory decisions, then 
to whom are they accountable?'' \3\
---------------------------------------------------------------------------
     \3\ https://www.americanbanker.com/news/the-broad-implications-of-
pat-toomeys-standoff-with-k-c-feds-president
---------------------------------------------------------------------------
    Do you think it is appropriate for Reserve Banks to refuse 
to comply with requests for information and documents from 
Congress?

A.1. The Federal Reserve Board (Board) is committed to public 
transparency. The Board understands and respects the critical 
importance of congressional oversight of our activities. We 
work collaboratively and cooperatively with Members of Congress 
to provide information on a broad range of issues, and we 
expect Reserve Banks to respond appropriately to congressional 
requests for information as well. In March, the Reserve Banks 
publicly announced a systemwide effort to develop a uniform 
information disclosure policy to further increase transparency 
and accountability. I support their effort on this important 
initiative.

Q.2. What steps will you take to ensure that Reserve Banks are 
responsive to requests for information and documents from 
Congress?

A.2. Please see my response to Question 1.

Q.3. Specifically, what steps will you take to ensure that the 
Kansas City Fed complies with congressional requests for 
information concerning Reserve Trust's master account?

A.3. Please see my response to Question 1.

Q.4. I am also concerned about a recent Securities and Exchange 
Commission proposal to dramatically reinterpret the definition 
of a ``Government securities dealer,'' in which the Commission 
would require many large investors to register as broker-
dealers. This may have significant unintended impacts on U.S. 
Treasury market participation, liquidity, and resiliency.
    Was the Federal Reserve Board consulted in the development 
of this proposal?

A.4. The Federal Reserve remains committed to a safe and 
efficient market for Treasury securities. With regard to the 
proposed rule of the Securities and Exchange Commission (SEC), 
``Further Definition of `As a Part of a Regular Business' in 
the Definition of Dealer and Government Securities Dealer'', 
Federal Reserve staff has had contact with staff of the SEC 
regarding its proposal. As the SEC considers the comments it 
received on the proposal, and assesses how to move forward, our 
staff is ready to provide technical assistance as requested.

Q.5. Will you commit to consider the potential market impacts 
of this significant proposal and to engage with the other 
members of the interagency working group on Treasury markets to 
fully assess its costs and benefits?

A.5. Federal Reserve staff actively participate in the 
Interagency Working Group on Treasury Market Surveillance 
(IAWG), including in work to better understand participation in 
the U.S. Treasury market and ways in which to improve its 
resilience. A safe and efficient market for Treasury securities 
is critical to the transmission of monetary policy, and to the 
broader health of the global financial system.
                                ------                                


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

Q.1. The stated purpose of the Community Reinvestment Act 
statute is to encourage banks ``to help meet the credit needs 
of the local communities in which they are chartered consistent 
with the safe and sound operation of such institutions.'' Yet, 
the proposal would create new Retail Lending Assessment Areas 
(RLAAs) where a bank makes 100 mortgages or 250 small business 
loans. These RLAAs could span very large geographies--often 
thousands of square miles. What's more, the RLAA triggers would 
be immaterial relative to the lending volume of some banks.
    How does this aspect of the proposal not exceed the 
agencies' statutory mandate to focus on local communities?

A.1. An important aspect of the interagency proposal is that it 
sought to adapt to the expanded role of mobile and online 
banking by updating the approach for where banks are evaluated 
for their CRA performance, consistent with the statutory 
requirement to assess an institution's record of meeting the 
credit needs of its entire community. While maintaining a focus 
on bank branches, the proposal asked for feedback on evaluating 
large bank performance in areas where they have a concentration 
of mortgage or small business lending outside of where they 
have branches.
    The agencies included information in the proposal on the 
potential effects of different retail lending thresholds on 
large banks. The agencies asked for feedback on a number of 
aspects of the retail lending assessment area proposal, 
including whether a bank should be evaluated for all of its 
major product lines in each retail lending assessment area and 
whether there are alternative methods that the agencies should 
consider for evaluating outside lending that would preserve a 
bank's obligation to meet the needs of its local communities.
    The agencies are in the process of carefully considering 
the comments received on the proposal.

Q.2. According to the agencies' own analysis of historical 
data, 34 percent of ``large'' banks (banks over $2B in assets) 
would fail their Community Reinvestment Act exam in their new 
Retail Lending Assessment Areas under the proposed rule. 
Moreover, the proposal's performance benchmarks are pegged to 
the CRA performance of other banks operating in that assessment 
area, thereby making it mathematically impossible that all 
banks would perform at the satisfactory level on their CRA 
exams.
    How does this not raise safety and soundness concerns? 
Shouldn't regulatory expectations be achievable for all banks?

A.2. I agree that regulatory expectations should be clear, 
transparent, and achievable for banks. The CRA proposal sought 
to provide greater clarity, consistency, and transparency 
regarding how a bank's retail lending performance translates 
into CRA conclusions and ratings. To that end, the agencies 
proposed numerical thresholds intended to set performance 
expectations for the different Retail Lending Test conclusions. 
The agencies sought feedback on whether the proposed retail 
lending metrics and thresholds were appropriate and were set at 
the appropriate levels.
    The agencies are in the process of carefully considering 
the comments received on the proposal.

Q.3. Community Reinvestment Act modernization is likely to 
involve significant complexity, lengthy regulations, and a 
relatively short implementation period. This spells difficulty 
in implementing the regulators' expectations and is 
particularly difficult for smaller banks that lack resources 
internally and for external consultants. In the past, the 
agencies have been willing to make presentations about new 
rules, but I am concerned about the highly scripted nature of 
recent agency efforts where staff read their presentations 
verbatim and do not allow bankers an opportunity to ask 
questions or where speakers decline to answer questions. This 
approach is not conducive to banks' understanding of regulatory 
expectations, and regulators should be concerned about that.
    What preparations is the Federal Reserve making to provide 
high-quality implementation support to bankers? Do you plan to 
provide useful examples, case studies, and an opportunity to 
ask questions and get answers? Given the proposal's very short 
implementation period of one year, are you prepared to roll out 
this assistance contemporaneously with the new rule?

A.3. The comments submitted in response to the proposal 
included perspectives on the appropriate implementation period 
for a CRA final rule, including some views recommending a 
longer implementation period. The agencies are in the process 
of carefully considering these comments.
    On the question of whether the agencies plan to answer 
questions and provide other materials to support implementation 
of any final rule, we expect that there will be broad outreach 
to all stakeholders to explain the final rule. This outreach 
would begin upon release of any final rule.

Q.4. When looking at the text of the Community Reinvestment 
Act, Congress was clear that banks should be evaluated on the 
basis of where they have branch offices.
    Certainly, banking has changed considerably since the 
original passage of the CRA, but do you think that banking 
regulators should be able to vastly expand the evaluation area 
of banks without the approval of Congress and in contravention 
of the law?

A.4. The statute requires the agencies to assess an 
institution's record of meeting the credit needs of its entire 
community. As noted previously, the agencies asked for feedback 
on whether large banks should be assessed outside of branch-
based assessment areas in areas where they have a concentration 
of mortgage or small business lending. My colleagues and I are 
committed to carefully reviewing any concerns expressed by 
commenters and considering ways to address these issues in any 
final rule while staying true to the statutory authority 
granted by Congress.

Q.5. Chairman Powell, the three banking regulators are still in 
the process of updating the Community Reinvestment Act. I think 
we all agree that the CRA is an incredibly important tool to 
serve LMI communities and that the rule needs to be updated. 
However, I believe that it should be done in a way that is in 
line with the CRA statute and Congressional intent. I have 
heard concerns that the creation of retail lending assessment 
areas under the proposed rule may actually be counterproductive 
to the goals of CRA and result in changes to bank strategy so 
as to not trigger new regulatory requirements in areas where 
loan volumes are immaterial to a bank's overall business.
    Are you concerned by this potential outcome should the 
proposed rule be finalized with very few changes?

A.5. As noted previously, the agencies are carefully reviewing 
any concerns expressed by commenters, including on potential 
unintended consequences of the retail lending assessment area 
proposal.

Q.6. With the departure of Fed Vice Chair Brainard, do you have 
an update in the timing of the release of the Community 
Reinvestment Act final rule and how long banks would have to 
come into compliance with the rule?

A.6. As previously noted, the Board and the other agencies are 
still in the process of carefully considering the comments 
received on the proposal.
    As to how long banks would have to come into compliance 
with the rule, the agencies continue to review the comments and 
discuss potential alternatives to the proposal.

Q.7. Given the complexity of the proposal, it seems to me like 
banks should have plenty of time to establish the systems 
needed to be in compliance.
    Who within the Federal Reserve is taking over the 
responsibility of the CRA with the recent departure of Ms. 
Brainard?

A.7. Vice Chair for Supervision Barr is leading the CRA 
rulemaking effort for the Board.

Q.8. The Fed recently launched a pilot project for Climate 
Scenario Analysis (CSA) ``to learn about large banking 
organizations' climate risk-management practices and challenges 
and to enhance the ability of both large banking organizations 
and supervisors to identify, measure, monitor, and manage 
climate-related financial risks.'' The scenarios are based on 
those developed by the Network for Greening the Financial 
System (NGFS), of which the Federal Reserve is a member. The 
NGFS scenarios are based on a goal to reduce emissions--the net 
zero goal.
    How will the Fed and the other bank regulators ensure that, 
whether through these exercises or via other supervisory 
efforts, they are not influencing banks' decision to lend to 
specific customers and the pricing of these transactions?

A.8. The Federal Reserve's mandate with respect to climate 
change is important but narrow, focused on our supervisory 
responsibilities and our role in promoting a safe and stable 
financial system. The Federal Reserve does not dictate banking 
organizations' business decisions to lend or not lend to 
specific firms or sectors on any particular terms. Those 
business decisions should be made by the banking organizations 
themselves.
    The climate scenarios used in the Federal Reserve's pilot 
climate scenario analysis exercise with six of the largest 
banking organizations are neither forecasts nor policy 
prescriptions and do not necessarily represent the most likely 
future outcomes. Rather, they represent a range of plausible 
future outcomes that can help build understanding of how 
certain climate-related financial risks could manifest for 
large banking organizations and how these risks may differ from 
the past. The Federal Reserve anticipates publishing insights 
gained from this pilot exercise at an aggregate level, 
reflecting what has been learned about climate-related 
financial risk management practices. No firm-specific 
information will be released in connection with this pilot 
exercise, and the pilot exercise will not have direct capital 
or supervisory implications.

Q.9. Once finalized, the internationally developed Principles 
for Climate-related Financial Risk for Large Banks may alter 
the provision of financial services to certain industries and 
communities in the United States. The economic effects of this 
will be felt by all banks, which will need to adapt to the 
resulting market changes and ensure that financial services to 
vulnerable communities and customers are preserved.
    How is the Federal Reserve weighing these costs when 
considering U.S. implementation? How is the Federal Reserve 
ensuring that international rulemakings are transparent and 
that development and implementation of international standards 
aligns with the Administrative Procedures Act?

A.9. The Federal Reserve's mandate with respect to climate 
change is important but narrow, focused on our supervisory 
responsibilities and our role in promoting a safe and stable 
financial system. In light of the cross-border and cross-
sectoral nature of climate-related financial risks, the Federal 
Reserve has been engaging with a wide range of domestic and 
international stakeholders, including foreign supervisors and 
international bodies, to better understand the potential 
impacts of climate-related financial risks on supervised 
institutions and financial stability. The Federal Reserve 
approaches these engagements through the lens of our existing 
mandates and authorities, particularly those relating to the 
regulation and supervision of financial institutions and the 
stability of the broader financial system. We recognize the 
benefit of engaging with other regulatory agencies, central 
banks, and international bodies on these issues while taking 
into account the important differences across jurisdictions and 
our own domestic mandates.
    The Federal Reserve intends to work closely with the Office 
of the Comptroller of the Currency (OCC) and the Federal 
Deposit Insurance Corporation (FDIC) to issue final principles 
for climate-related financial risk management for large banking 
organizations. In December 2022, the Federal Reserve requested 
comment on draft principles; similar draft principles were 
published for comment by the OCC and the FDIC in December 2021 
and April 2022, respectively. The Federal Reserve's intention 
is for the principles to be issued as supervisory guidance, 
and, consistent with the Federal Reserve's rule on guidance, 
the principles would neither have the force and effect of law 
nor impose any new requirements on supervised institutions. As 
such, the principles would not be subject to the notice-and-
comment requirements of the Administrative Procedure Act. 
Nevertheless, the Federal Reserve proposed the draft principles 
for public comment and the Federal Reserve is considering all 
comments received in developing any final principles.

Q.10. As the Federal reserve looks at ``transition risk'' how 
will you ensure that political or other nonprudential agendas 
do not become entangled in your work? As an example, transition 
risks under one administration may look significantly different 
than they did under the next Administration.
    How does the Fed plan to account for changes in policy 
which can occur in a shorter timeframe than those that you may 
be considering? Or is transition risk analysis necessarily 
limited to shorter timeframes because of the potential for 
changes in policy direction?

A.10. The Federal Reserve's mandate with respect to climate 
change is important but narrow, focused on our supervisory 
responsibilities and our role in promoting a safe and stable 
financial system. The Federal Reserve is working to understand 
how climate-related financial risks may pose risks to 
individual banking organizations and the financial system. 
Scenario analysis can be a helpful risk management tool for 
both firms and regulators to better understand the resilience 
of supervised institutions to a range of plausible but 
uncertain climate outcomes. The Federal Reserve is currently 
conducting a pilot climate scenario analysis exercise with six 
of the largest banking organizations to evaluate the potential 
impact of climate-related financial risks on select portfolios 
across multiple scenarios. This pilot exercise is intended to 
deepen understanding of risk management practices and to build 
capacity of large banking organizations and supervisors to 
identify, measure, monitor, and manage climate-related 
financial risks.
    The pilot exercise includes physical and transition risk 
scenarios. Transition risks refer to stresses to certain 
institutions, sectors, or regions arising from the shifts in 
policy, consumer and business sentiment, or technologies 
associated with the changes that would be part of a transition 
to a lower carbon economy. The transition risk scenarios used 
in the pilot climate scenario analysis reflect different 
combinations of economic, technological, and policy assumptions 
that generate projections for economic and financial variables 
like GDP growth and carbon prices, but they do not represent 
forecasts or policy recommendations. Instead, these scenarios 
serve as useful reference points to consider how economic and 
financial variables might evolve under different sets of 
plausible conditions. The scenarios used in this pilot climate 
scenario analysis exercise are neither forecasts nor policy 
prescriptions and do not necessarily represent the most likely 
future outcomes. Rather, they represent a range of plausible 
future outcomes that can help build understanding of how 
certain climate-related financial risks could manifest for 
large banking organizations and how these risks may differ from 
the past.
    In the transition risk module of the pilot exercise, 
participating institutions will estimate relevant risk 
parameters over a 10-year projection horizon on an annual 
basis. While transition risks are anticipated to manifest over 
a longer time horizon than is typically considered for large 
banking organizations' risk management and strategic planning, 
transition risks could manifest sooner than anticipated and in 
a disorderly manner. Longer time horizons incorporate a greater 
degree of uncertainty given embedded assumptions about consumer 
or investor behavior, the pace of technological change, and 
policy developments. The pilot exercise's 10-year horizon is 
intended to balance the potential longer-term nature of 
transition risks, projection uncertainty, and desire for the 
pilot exercise to result in decision-useful information.
                                ------                                


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

Q.1. The biannual Monetary Policy Report notes that the Federal 
Reserve's net income turned negative in September 2022 and that 
losses have resulted in a ``deferred asset'' of about $36 
billion to date and that the SOMA portfolio was experiencing a 
$1.1 trillion unrealized loss as of September. 12 U.S.C. 
5497(a)(1) provides that the Consumer Financial Protection 
Bureau (CFPB) is funded by a ``transfer . . . from the combined 
earnings of the Federal Reserve System.''
    Please provide the legal justification for the continued 
transfer of funds from the Federal Reserve to the CFPB despite 
the fact that the Federal Reserve has negative net income, as 
well as any internal opinions or briefings on this issue.

A.1. Congress established the funding mechanism for the 
Consumer Financial Protection Bureau (CFPB) under the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act). Under the Dodd-Frank Act the Federal Reserve Board 
is not granted any discretion to determine the CFPB's funding 
level. Rather, the Director of the CFPB determines the funding 
needed to carry out its responsibilities, up to an annual cap. 
The Dodd-Frank Act sets the annual cap based on a percentage of 
the operating expenses of the entire Federal Reserve System 
(System). The Act also states that the funding for the CFPB 
comes from the combined earnings of the System, rather than the 
net earnings.
    It is the purview of Congress to enact any changes to this 
framework.
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