[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
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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
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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\
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\1\ https://www.kansascityfed.org/AboutUs/documents/8854/06-16-22-
Toomey-Letter-from-Esther-George.pdf
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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
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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.
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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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