[Senate Hearing 118-549]
[From the U.S. Government Publishing Office]
S. Hrg. 118-549
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
SECOND SESSION
ON
OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU-
ANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978
__________
MARCH 7, 2024
__________
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
58-305 PDF WASHINGTON : 2025
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 M. LUMMIS, Wyoming
TINA SMITH, Minnesota J.D. VANCE, Ohio
RAPHAEL G. WARNOCK, Georgia KATIE BOYD BRITT, Alabama
JOHN FETTERMAN, Pennsylvania KEVIN CRAMER, North Dakota
LAPHONZA R. BUTLER, California 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
----------
THURSDAY, MARCH 7, 2024
Page
Opening statement of Chair Brown................................. 1
Prepared statement....................................... 43
Opening statements, comments, or prepared statements of:
Senator Scott................................................ 3
Prepared statement....................................... 44
WITNESS
Jerome H. Powell, Chair, Board of Governors of the Federal
Reserve System................................................. 5
Prepared statement........................................... 45
Responses to written questions of:
Chair Brown.............................................. 47
Senator Scott............................................ 51
Senator Fetterman........................................ 56
Senator Crapo............................................ 58
Senator Vance............................................ 58
Senator Hagerty.......................................... 63
Additional Material Supplied for the Record
Monetary Policy Report to the Congress dated March 1, 2024....... 65
Letter submitted by ACU.......................................... 130
Letter submitted to Chair Powell, Chair Gruenberg, and Acting
Comptroller Hsu................................................ 134
(iii)
THE SEMIANNUAL MONETARY POLICY REPORT
TO THE CONGRESS
----------
THURSDAY, MARCH 7, 2024
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9:53 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Sherrod Brown, Chair of the
Committee, presiding.
OPENING STATEMENT OF CHAIR SHERROD BROWN
Chair Brown. The Banking, Housing, and Urban Affairs
Committee will come to order. Chairman Powell, if you'd like to
after your opening statement, give it again, you can certainly
do that. The Fed has immense power in shaping our economy. Your
job is clear; promote stable prices and maximum employment.
Today, the cost of living is still far too expensive for
most Americans. The Fed has only one tool available to fight
those high prices; interest rates. That tool does nothing to
address the real costs. The real cost for white costs remains
too high. Corporations price gouging to boost profits and make
their shareholders richer. Higher interest rates don't force
corporations to lower their prices, but high interest rates are
raising housing costs, hindering wage growth, stifling small
businesses. We all know that.
Now's the time for the Fed to decide if it's going to make
good on its commitments to workers and to their families by
lowering interest rates, by protecting our financial system
from Wall Street executives who have used their wealth and
their power to influence economic policy and avoid
accountability for their risky bets.
Keeping rates too high for long, for too long strangles the
economy. No one wants this, and it makes it harder for small
businesses to expand and hire more workers undermining job
creation. Higher rates also stifle overdue investments that are
creating high quality, good paying jobs, and that are necessary
for us to remain the most competitive and innovative economy in
the world. High interest rates are raising housing costs,
higher and higher for families, families already facing a tough
market with too few options and too high prices.
I hear from so many Ohioans who feel trapped. Those who
rent feel like they'll never be able to afford to buy. Those
who already own their homes, feel like they'll never be able to
afford a larger one if they decide to grow their family. If
they're fortunate enough to have an interest rate from a couple
years ago, they obviously don't want to give it up.
It limits their choices, it limits the housing supply, and
by driving up construction costs, higher rates make it even
harder to build new apartments and homes, so we have even less
supply at exactly the same time when it's harder to afford a
mortgage. Families are stuck delaying the purchase of their
first home, and rent or renting for longer. That cycle drives
rents up even further.
Americans pay a steep price for higher interest rates.
Continued high rates are not going to make life less expensive
for workers and their families. We know why prices are high
years after supply chains have improved. It's the same cause of
so many of the problems our economy; corporations want bigger
profits to reward their executives.
In 2022, at the peak of inflation, corporate profits soared
to historic levels. That's not hyperbole, that's fact.
Corporate profits soared to historic levels. As you know, where
those profits went, right into the pockets of their top
executives. That same year, the largest multinational
corporations gave out nearly $1.5 trillion, $1.5 trillion
dollars in stock buybacks and dividends.
Americans today pay more for groceries than they have in 30
years. Every time you go to a grocery store. Ohioans pay for
corporate executives' bonuses and stock buybacks every time you
go to the grocery store. Grocery shoppers are paying for
corporate executive bonuses and stock buybacks.
The biggest corporations are always finding new ways to
charge people more to increase their profits. Fast food
restaurants, big stores, are experimenting with electronic
price tags so they can change prices constantly making it
easier to sneak prices up little by little, making it harder
for people to comparison shop and find the store at the lowest
price.
Many companies increase their profits by charging more for
less. The media started calling it shrinkflation. Senator
Casey, our colleague from Pennsylvania, has particularly been a
leader pointing this out. A bottle of Gatorade used to be 32
ounces. Now it's 28 ounces, but the price hasn't gone down, and
if anything, it's gone up a bit. It's why I introduced
legislation that would stop that kind of deceptive corporate
practice. It's the kind of solution we need to take on
corporate price gouging. It has nothing to do, Mr. Chairman, as
you know, with higher interest rates.
The Fed doesn't only set monetary policy. You also make the
rules that keep our banking system safe and sound, and
consumers money safe. We've had some positive development, Mr.
Chair, since the last time you testified in June, like the
update to the Community Reinvestment Act. Thank you for your
work on this. This took years of listening carefully to all
stakeholders. It was long overdue. We'll be watching to make
sure you implement this quickly. So banks are fulfilling the
purpose of the Community Reinvestment Act. I spoke to Ohio
bankers yesterday, most of them small banks, they understand
the importance of this.
You also issued an updated capital requirements proposal
called Basel III, the subject of much discussion in this
Committee. Strong capital requirements are how we ensure if
Wall Street bets don't pay off, shareholders and investors are
on the hook, not taxpayers. Too many examples in this
Committee, in this Congress, in this country, of tax hold tax
payers holding the bag for corporate misfeasance, and
malfeasance, and greed.
We need these guardrails in place. I urge you to remain
committed to protecting the public despite the massive amount
of money big banks and their lobbyists are spending trying to
kill these taxpayer protections. Let's finish the job. Let's
finalize Basel III.
Last year's bank failures also demonstrate the dangers of
letting the banks chip away at rules and oversight. It's
entirely predictable. Bankers desperate to increase their
already massive profits take big risks that undermine our
economy. When things go wrong, bank executives come to
regulators with their hands out, accepting no responsibility.
It's why Congress must finish the job and pass our bipartisan
RECOUP Act. Senator Scott and I worked on 21 to 2 in this
Committee to hold senior bank executives accountable when they
gamble with customers money.
When the biggest banks exercise special privilege, they do
so at the peril of our broader economy. We've seen that too
many times. We know that's a source of so much that's wrong in
this country; big corporations using their power and influence
to write the rules of our economy to the benefit of them, and
their executives, and their investors, to the detriment of
everyone else.
It's why I stand up for workers, and why I stand up for
their right to organize. It's why I stand up to take on
railroads, and drug companies, and the biggest banks, and
corporations who time and time again try to rewrite the rules
to increase their profit margins.
Chair Powell, I look forward to hearing you from you today,
thank you, and how the Fed will work to promote an economy
where everyone who wants a good job has the opportunity to find
one.
Senator Scott.
OPENING STATEMENT OF SENATOR TIM SCOTT
Senator Scott. Thank you. Chair Powell, thank you for
coming this morning. Good morning. Appreciate you being here,
certainly. In 3 days, March 10th, it'll be the 1-year
anniversary of the failure of the Silicon Valley Bank. SVB
marked the third largest bank failure in U.S. history, and
certainly the largest since the 2007/2008 financial crisis.
I've said it many times before, and I'll say it again
today, that there were three major components to SVB's failure.
First, the bank was rife with mismanagement. Second, there was
a clear supervisory failure, and our regulators were certainly
asleep at the wheel. And third, President Biden's reckless
spending caused record high inflation, which resulted in
drastic interest rate hikes and tremendous loss.
When you print and spend trillions of dollars at the end of
Covid, we should not be surprised that we have record high
inflation. Record high inflation translates into, today still,
40 percent higher for gas for your car, 30 percent higher for
your food, 20 percent higher for your energy costs. The
devastation the average American is facing because of
Bidenomics is undeniable, but certainly measurable.
So I'm glad to spend some time talking about the state of
our economy. An economy that has been ravaged, as I've just
spoken about, by inflation, suffering under the weight of an
open border and millions of illegal immigrants and drowning in
disastrous regulations. I hear from my constituents all the
time that inflation and an unsustainable cost of living
continue to impact their families. For far too many, the
American dream seems further and further out of reach than ever
before. And frankly, the past 3 years of this Administration's
failed policies have landed us right in that spot.
In fact, last month, Treasury Secretary Yellen sat before
this Committee and attempted to spin a narrative of how strong
the economy is, how well-off consumers are, and how much people
have in the bank thanks to Bidenomics. But in the midst of
this, she also admitted that many prices are not going down.
In fact, she said, and I quote, ``We don't have to get
these prices down.'' Tell that to the mechanic working in South
Carolina. Tell that to the teacher trying to put gas in the
tank. It is simply unacceptable because the truth is that
Americans are now spending more of their income on food than
they have in 30 years. The truth is that housing affordability
remains at its lowest level in 40 years.
But inflation isn't the only concern I'd like to raise. I'd
also like to address the economic impacts of illegal
immigration. During your recent interview on ``60 Minutes'',
you stated that over time, the U.S. economy has benefited from
immigration. Let's be clear, America is a Nation of immigrants,
no doubt. But when we talk about illegal immigration today, we
must also face the dire reality that our towns and our cities
are suffering from the adverse impacts of illegal immigration
facilitated by the Biden administration's open, unsecure, and
unsafe southern border.
Because of President Biden's policies, we've seen over 7
million illegal immigrants cross our borders in just 3 years.
By the time this election happens this year in November, the
numbers suggest it could be as high as 10 million illegal
immigrants coming into our country. So we cannot have an honest
conversation about the benefits of legal immigration in our
labor force without also addressing the elephant in the room.
Our country is strained. Our economy is strained under the
weight of illegal immigration.
In fact, recent reporting has highlighted that cities and
States across our country are struggling to keep pace, and some
have been forced to cut public services to Americans in order
to fund the cost of feeding and housing illegal immigrants. One
clear example we saw in New York City were the poorest kids in
the city. Minority kids in the city were stuck at home because
the city was using the schools to house illegal immigrants.
Another example, the city of Denver recently announced that
some of its employees may have their hours cut in order to
reallocate funds toward the city's migrant crisis.
How in the world is that fair to Americans? It's not. We
must get the legal immigration crisis under control because if
we don't, our local economies will continue to be crushed, and
opportunities will continue to be stripped from our citizens
and their families.
Finally, as if inflation and the negative impacts of
illegal immigration were not enough, the tsunami of regulatory
red tape coming from our financial regulators further threaten
economic opportunity across the board. For months, we've heard
bipartisan criticism of the Fed's Basel III Endgame proposal,
which will restrict lending and access to credit for those who
need it the most. I was certainly pleasantly surprised to hear
your comments about Basel III and your thoughts on its future,
when 97 percent of the comments that you receive are negative.
That's good news. Good news for the American consumer. Good
news for entrepreneurs who would like to start a business, but
do not have access to capital. Perhaps even good news for
millennials who would love to become a first-time home buyer.
The opposition to Basel III comes from a diverse array of
interests; from community leaders, farmers, to housing groups.
We've even heard opposition in this very room on this very
Committee from Democratic Senators.
I look forward to hearing your testimony, and looking
forward to asking some questions as well.
Chair Brown. Thank you, Senator Scott. We're here today as
we do every 6 months, at least, from Chair of the Federal
Reserve, Jerome Powell, on monetary policy and the state of our
economy. Please proceed. Thank you for your service to our
country.
STATEMENT OF JEROME H. POWELL, CHAIR, BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Mr. Powell. Thank you, 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 today.
The Federal Reserve remains squarely focused on our dual
mandate to promote maximum employment and stable prices for the
American people. The economy has made considerable progress
toward these objectives over the past year. While inflation
remains above the FOMC's objective of 2 percent, it has eased
substantially, and the slowing in inflation has occurred
without a significant increase in unemployment. As labor market
tightness has eased and progress on inflation, has continued
the risks to achieving our employment and inflation goals have
been moving into better balance. Even so, the Committee remains
highly attentive to inflation risks, and is acutely aware that
high inflation imposes significant hardship, especially on
those least able to meet the higher costs of essentials like
food, housing, and transportation. The FOMC is strongly
committed to returning inflation to its 2 percent objective.
Restoring price stability is essential to achieve a sustained
period of strong labor market conditions that benefit all.
I'll review the current economic situation before turning
to monetary policy.
Economic activity expanded at a strong pace over the past
year. For 2023 as a whole, gross domestic product increased 3.1
percent, bolstered by solid consumer demand, and improving
supply conditions. Activity in the housing sector was subdued
over the past year, largely reflecting high mortgage rates.
High interest rates also appear to have been weighing on
business fixed investment.
The labor market remains relatively tight, but supply and
demand conditions have continued to come into better balance.
Since the middle of last year, payroll job gains have averaged
239,000 jobs per month, and the unemployment rate has remained
near historical lows at 3.7 percent. Strong job creation has
been accompanied by an increase in the supply of workers,
particularly among individuals aged 25 to 54, and a continued
strong pace of immigration. Job vacancies have declined, and
nominal wage growth has been easing. Although the jobs-to-
workers gap has narrowed, labor demand still exceeds the supply
of available workers. The strong labor market over the past 2
years has also helped narrow longstanding disparities in
employment and earnings across demographic groups.
Inflation has eased notably over the past year, but remains
above the FOMC's longer-run goal of 2 percent. Total personal
consumption expenditures prices, or PCE prices, rose 2.4
percent over the 12 months ending in January. Excluding the
volatile food and energy categories, core PCE prices rose 2.8
percent, a notable slowing from 2022 that was widespread across
both goods and services prices. Longer-term inflation
expectations appear to have remained well anchored as reflected
by a broad range of surveys of households, businesses, and
forecasters, as well as measures from financial markets.
After significantly tightening the stance of monetary
policy since early 2022, the FOMC has maintained the target
range for the Federal funds rate at 5.25 to 5.5 percent since
its meeting last July. We have also continued to shrink our
balance sheet at a brisk pace and in a predictable manner.
Our restrictive stance of monetary policy is putting
downward pressure on economic activity and inflation. We
believe that our policy rate is likely at its peak for this
tightening cycle. If the economy evolves broadly as expected,
it will likely be appropriate to begin dialing back policy
restraint at some point this year.
But the economic outlook is uncertain, and ongoing progress
toward our 2 percent inflation objective is not assured.
Reducing policy rates restraint too soon or too much could
result in a reversal of progress that we've seen in inflation,
and ultimately require even tighter policy to get inflation
back to 2 percent. At the same time, reducing policy restraint
too late or too little could unduly weaken economic activity
and employment. In considering any adjustments to the target
range for the policy rate, we will carefully assess the
incoming data, the evolving outlook, and the balance of risks.
The Committee does not expect that it will be appropriate to
reduce the target rate until it has gained greater confidence
that inflation is moving sustainably toward 2 percent.
We remain committed to bringing inflation back down to our
2 percent goal, and to keeping longer-term inflation
expectations well anchored. Restoring price stability is
essential to set the stage for achieving maximum employment and
stable prices over the longer-run.
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.
Chair Brown. Thank you, Mr. Chairman.
Now, you've acknowledged the Fed likely waited too long to
raise rates when prices shot up in 2021. We can't make that
mistake again, Mr. Chair, at the expense of workers. If the Fed
waits until unemployment starts increasing, it may be too late
to cut rates in time to save American jobs. Why shouldn't the
Fed act now to prevent workers from losing their jobs rather
than reacting after the fact?
Mr. Powell. So we're well aware of that risk, of course,
and very conscious of avoiding it. And what we expect and what
we're seeing is continued strong growth, a strong labor market,
and continuing progress in bringing inflation down, if that
happens, if the economy evolves over that path, then we do
think that the process of carefully removing the restrictive
stance of policy can and will begin over the course of this
year.
Chair Brown. I mean, I know we've had this conversation
publicly here, and privately also, that working people are hit
the hardest with inflation. They're also hit the hardest when
companies try to cut costs with layoffs. This town too often
seems to forget that maximum employment is part of the Fed's
dual mandate.
Let me ask you about bank supervision. Senator Scott
mentioned that last year's bank failures illustrate the need
for strong oversight. SVB grew too big, too fast. Fed
supervision didn't react decisively enough. The Fed in response
undertook an assessment of its supervisory process to identify
and address gaps related to the speed, the force, the agility,
if that's the right word, if it's supervision.
Explain what concrete steps the Federal Reserve's taken to
strengthen supervision in any specific areas where work to make
improvements is ongoing.
Mr. Powell. So this is a very broad area of work. There
are, you know, many, many people in the Federal Reserve System
who are involved in supervision, thousands of them, and there's
a rule book. And so there's been careful study, and thought,
and a lot of listening to understand how we can meet those
goals. Being quicker and more effective, basically, is how I
would say it.
If you look at Silicon Valley Bank, we weren't quick
enough, and we weren't effective enough where we were in. And
so, we're working hard to develop a new rule book and another
other set of practices, which is still going to be evidence-
based and fair, but it's going to involve earlier interventions
and more effective ones. And, you know, I think this is work
that's ongoing, and will be for some time.
Chair Brown. Thank you. The job of the Fed, of all public
officials, is to serve the American people, not their stock
portfolios. We've seen abuses in this body. We've seen abuses
at the Federal Reserve. I wrote to you last month asking the
Fed to identify substantive penalties for board officials who
violate the trading rules. Where is that in the process, and I
expect these rules in place before the next monetary policy
hearing in 6 months. Where is it?
Mr. Powell. So our own Inspector General gave us six things
to work on. I read the list from beginning to end, and the
sixth one was what you said, and I just said, we're going to do
all of these. Let's get going. So we've done five of them, and
we're working on the sixth.
Chair Brown. And it will be finished within 6 months when
you're back?
Mr. Powell. I want to get it right. I certainly hope so,
and expect so.
Chair Brown. Expect so is a better answer than hope.
So one last question. More and more many companies use
algorithms that combine competitors' price information to
engage in what they call dynamic pricing or surge pricing. You
know that corporate PR teams worked hard on this. Just another
way for corporations to make it harder for consumers to seek
out lower prices and to pad corporate profits. Are you
concerned that the wide adoption of these price gouging
strategies, these pricing schemes, if you will, will contribute
to inflation?
Mr. Powell. I mean, I think it works both ways. Let me say
this, you know, we're well aware of this trend, and we're
monitoring it. Remember that prices go down when there's no one
in the store, and they go up when there are a lot of people. If
you're doing dynamic pricing--same thing with the ride
companies. It works both ways. I don't know that it will have
implications for inflation. It would certainly have
implications for consumers who need to be informed.
Chair Brown. You think that this kind of surge pricing
might lower prices overall?
Mr. Powell. I mean, my understanding is that the idea is
that in slow periods, prices actually go down, and in busy
periods they go up.
Chair Brown. But these are sophisticated economists working
for these big companies, and they're not going to do things to
lower their profits.
Mr. Powell. You know, I think the price mechanism is
incredibly important in our economy. I think we need to give
companies the freedom to do that as long as they're not fixing
prices, or failing to disclose the nature of the price changes
to the public.
Chair Brown. I have a few seconds. Research has indicated
constrained supply was behind a significant amount of the
inflation we've seen over the last few years. If the supply
chain, for instance, of autos had been more resilient, or if
there had been more housing availability, would that have made
your job easier?
Mr. Powell. Yes. In a word, yeah. A big part of the
inflation was--and we saw it in 2023--when the supply chain
problems unwound and when the labor supply shock that we had
unwound as well. We saw inflation come down very quickly in the
second half of the year. But it is also down to, you know,
tight monetary policies playing a role as well.
Chair Brown. Which leads me to the to the plea with you to
speak out about inflation, about the contribution of corporate
profits and greed to inflation. Thank you.
I'm done.
Senator Scott. Oh, I know you are done.
Chair Brown. You find yourself agreeing with me more and
more often? Is that why? Senator Scott. That would be a
nightmare and I'm awake.
[Laughter.]
Senator Scott. So what I would say, however, is that the
fact of the matter is that so often, if in fact, 60--I actually
listened to what you said, which was remarkable; the fact that
60 percent of Americans today can't afford a $1,000 emergency.
I can't imagine how the average millennial affords a down
payment for a home. I can't imagine how they take into
consideration when they're looking at a snapshot of their
financial future fixing, and repairing, or having a plan for
obsolescence that happens for every homeowner in the country.
So, I think the issue is far more complicated, and would love
to delve into that over the next 4 minutes and 18 seconds.
But my first question is a combination between the
challenges of illegal immigration and crime. It seems like
every single week there's another story of another city
underwater attempting to feed and house millions of illegal
immigrants and American taxpayers are footing that bill.
Like I mentioned in my opening statement, just recently in
Denver, we saw city workers having their hours essentially
zeroed out so that the city could allocate more resources for
the illegal immigrants. In San Francisco, they say that the
average cost between San Francisco and Oakland because of crime
is almost $4 billion.
Couple that with in New York, you see Governor Hochul
bringing out the National Guard and the State Police to help
reduce the impact of crime. At the same time, Mayor Adams says
he needs more money because the state of affairs from illegal
immigrants in the city devastating the economy, scaring the
citizens, and reducing the opportunity for business as usual to
return to New York City.
So my question is, can you explain how our economy is
expected to continue shouldering the burden and the costs
because of illegal immigration? And what, if any, information
do you have as it relates to the impact of this surge of crime
in our major cities on the economic outcomes of those cities?
Because I heard the discussion that when you have more folks in
the store, you have more shoppers. Except for these days, when
you have more folks in the store, sometimes they're just there
to steal.
Mr. Powell. So you quoted my statement earlier, and it was
an accurate quote for which I thank you. But I would say right
before that, what I said was immigration policy, very
important, very much under discussion, and it's none of our
business. We don't set immigration policy, and we don't comment
on it, so.
Senator Scott. But you commented on immigration. So my
point though is that when you're going to tell a story, please
tell the whole story, especially when the Nation is frustrated
by nearly 10 million folks by the end of this year coming to
the country and having the kind of negative impact on prices,
on crime, on the challenges that everyday Americans, especially
Americans living in the poorest parts of America face on a
daily basis.
Mr. Powell. So as you accurately quoted, I was referring--I
said over time----
Senator Scott. Yeah.
Mr. Powell. ----so I was referring to the history, which
with you agreed. So I was staying as far as I possibly could
from the current political context, and it's really not
appropriate for us. We're independent. We like to remain that
way, and the way we do that, one of the ways is by staying out
of political issues that we really aren't assigned. And so, the
kinds of issues you're talking about are very, very real. I
don't deny that, but they're really not for us.
Senator Scott. So the Fed does not consider the impact of
10 million illegal immigrants coming to our country and the
cost associated with those illegal immigrants, the impact on
States like New York, or California, or Illinois, where the
devastation of crime ravishing the poorest Americans has an
impact. We don't take that into consideration.
Mr. Powell. So we do, and so does the Congressional Budget
Office. We do try to estimate population, and we try to
estimate the effective immigration, legal or illegal on the
size of the workforce, and on GDP. If you look at the
Congressional Budget Office, as you probably know, a detailed
assessment of all the things like that, we don't really have a
way--and we do look at the finances in the aggregate of State
and local governments--that's in the hiring that they do. So
that's something we look at, but we wouldn't do a very specific
assessment like that. I mean, CBO probably would, but we
wouldn't do that.
Senator Scott. Thank you.
Chair Brown. Thank you, Senator Scott. Senator Menendez of
New Jersey is recognized.
Senator Menendez. Thank you, Chairman. Before I begin my
questions, I want to celebrate that in the past year, we have
seen the first Latino Federal Reserve Governor and the first
ever Latino Federal Reserve Bank president. These are historic
milestones that show we are finally making progress. Something
that I have been at for quite some time to the leadership of
our economic institutions. So I want to applaud that, and Mr.
Chairman, I hope that progress can continue and extend to the
rest of the Federal Reserve staff.
Mr. Powell. Thank you.
Senator Menendez. I agree with my friend, the Ranking
Member, that when you tell a story, you should tell the whole
story. Mr. Chairman, are you aware of the Washington Post,
February 27th article that says, ``The economy is roaring.
Immigration is a key reason''?
Mr. Powell. I don't recall that, but I would've read it.
Senator Menendez. Let me read it to you. ``Immigration has
propelled the U.S. job market further than just about anyone
expected, helping cement the country's economic rebound from
the pandemic as the most robust in the world.'' It goes on to
say, ``Economists and labor experts say the surge in employment
was ultimately key to solving unprecedented gaps in the economy
that threatened the country's ability to recover from prolonged
shutdowns.''
Would you take issue with those statements?
Mr. Powell. You know, there are a lot of adjectives and
adverbs in there that you wouldn't see in Fed world, but the--
--
Senator Menendez. Take out the adjectives and give me on
the substance.
Mr. Powell. Yeah. The story is, I think, broadly that there
was a very significant increase in the size of the workforce
last year, and it was happening all during the year, and we
were wondering what it was.
And the answer was it was really two things. It was labor
first participation, but it was also immigration. And if you
look at the Congressional Budget Office numbers, it kind of
makes sense because there was a lot of growth, wages were
coming down, the economy is bigger, and those are probably in
part effect.
This is without making any judgments on immigration or
immigration policy, but I think that's an economic fact.
Senator Menendez. I'm not suggesting that. I'm just
suggesting the facts are that we had 10 or 11 million jobs that
were going unfulfilled in our economy. They lacked the
productivity that is necessary for success economically. And as
part of that, clearly, immigration helped fuel part of our
revival coming out of the pandemic.
In fact, those were the people who were the essential
workers when the rest of us were staying home. So I agree we
need to do what is necessary to have a regularized border, but
I also think that just to create the context of immigration as
a scourge is absolutely wrong.
Let me turn to another question. In my view, the sticky
inflation we've been seeing in the housing sector is
principally due to the massive nationwide housing shortage. The
Fed's Monetary Policy Report attributes the shortage to
restrictive zoning, high interest rates, and tighter
underwriting by banks. I would also add to that list
underfunding of key HUD programs that shore up and expand our
supply of affordable housing. If the housing supply shortage
continues to grow, are we likely to see continued housing
inflation?
Mr. Powell. Yes, we are.
Senator Menendez. And housing's already becoming less and
less affordable for low- and middle-income Americans. According
to the National Low Income Housing Coalition's 2023 Out of
Reach report, a worker earning the minimum wage in New Jersey
would have to work two full-time jobs to afford a modest one-
bedroom rental home at fair market rate. Do you agree that
increasingly unaffordable housing is a problem for the economy?
Mr. Powell. I think there are two things going on. One is a
longer-term housing shortage, and the other is the pandemic
effects and the associated higher interest rates, which are
things that will pass through. When all that passes through and
rates are normalized, we'll still have the underlying housing
shortage and it's going to be causing upward pressure on
housing prices.
Senator Menendez. Now, the Monetary Policy Report noted
that, ``Home purchases by low-income households have fallen
disproportionately more because mortgage lenders impose
maximums on the ratio of a borrower's debt service payments to
the borrower's income.''
I'm worried about how this dynamic will interact with the
recently proposed capital requirements proposal, which
according to analysis from the Urban Institute, would
disproportionately the cost of mortgages for Black, Hispanic,
and low- and moderate-income borrowers.
Given this, isn't there a risk that if the capital rules
implemented without changes, that it could make it even harder
for disadvantaged borrowers to attain home ownership?
Mr. Powell. There is a risk like that, and we're very
focused on it.
Senator Menendez. And hopefully you're working to mitigate
it?
Mr. Powell. Yes.
Senator Menendez. Thank you, Mr. Chairman.
Chair Brown. Senator Rounds from South Dakota.
Senator Rounds. Thank you, Mr. Chairman.
Chairman Powell, welcome back. Look, first of all, I've
appreciated the way that you've approached the discussions in
front of this Committee, and I understand your desire to stay
as neutral as possible with regard to the politics involved in
an election year. But I do have some questions here
specifically with regard to the Basel III Endgame proposal.
An analysis of that proposal found that 97 percent were
either opposing it or expressing substantial concerns. In the
hearing last March on the Monetary Policy Report, you stated
that the Federal Reserve is a consensus organization, and you
said, and I quote, ``I will do everything I can, possibly, do
to bring people together in consensus and have a capital
framework that could be broadly supported.''
My question to that is, do you currently believe that there
is a consensus on this capital framework?
Mr. Powell. I believe that we will have one. I'm fairly
confident that we will have such a consensus when we do move
forward.
Senator Rounds. So we could expect that you will probably
not call a vote on the proposal until you believe that there is
a consensus?
Mr. Powell. I think that's right. I mean, we're just in the
process of digesting the comments and then making the
appropriate changes.
Senator Rounds. Thank you. As you are aware, I've waited
several times on the concerns that I have with regard to Basel
III Endgame, including I'm concerned about the lack of
transparency, the negative effects on mortgage lending and home
affordability by disincentivizing banks from offering high loan
to value loans that primarily help first-time home buyers and
low to modern income borrowers.
I'm concerned that the proposal will make buying a home
harder than it already is for many, and further down the road,
I fear that it could disincentivize mortgage lending from the
largest banks, particularly with regard to the secondary market
and their impact on even smaller banks that do business with
them.
Would you be willing to withdraw the proposal or re-propose
with significant modifications, particularly addressing the
concerns that I and others have on this Committee raising,
specifically, with regard to the impact? And I'm thinking of
Freddie and Fannie, in particular, and what the impact might
be. What would you see as the process involving those
particular issues?
Mr. Powell. So on those issues, we're well aware of and
very focused on those issues. We haven't decided what to do
about that yet, but we get it on those issues.
In terms of process, we're not at the stage of making that
decision. I will say, if it turns out to be appropriate when we
get to that point for us to re-propose parts or all of the
thing, then we won't hesitate to do so.
Senator Rounds. OK. Thank you. It makes me feel a little
bit better because I do think there are some very serious
problems that would occur if the Basel III Endgame as proposed
goes into effect. And most certainly, am hoping that the
Federal Reserve will find a consensus on this, and it sounds
like that may very well include some significant modifications
if it were to be brought at all. Is that a fair statement?
Mr. Powell. I expect there will be material and broad
changes to the proposal before it comes back to the Board for
consideration.
Senator Rounds. Thank you, sir. With regard to the economy
today, a limited level of price growth is believed to help
facilitate economic expansion, reduce the risk of recession,
and help businesses and consumers' plan. However, during the
Biden administration, we saw inflation climb to 13 percent, and
those prices are now the new norm.
I know that you make it a policy not to comment on the
Administration's fiscal policy, but it is well known that--I
really do believe that high inflation and high prices have been
a direct result of President Biden's policies, failed in many
cases, and that the Federal Reserve has, and that the Federal
Reserve has limited tools to address some of the problems that
these policies created.
We talk about supply side versus demand side on these
costs. What have been some of the unintended consequences from
raising the Federal funds rate as rapidly--as you felt that you
had to as the chair and as the Committee--I know that we talked
a little bit about SVB and the failure there, their inability
to look at treasuries and the increasing interest rates and so
forth.
But can you talk a little bit about some of the things that
you've seen that were negative with regard to trying to respond
to those high inflation rates?
Mr. Powell. Yes. So high interest rates are hard for
businesses. They're hard for people. They're the tool that we
have to use to bring inflation down. And our job at this time,
when high inflation comes, it is the Fed's job to restore price
stability. And that's what we're doing.
You point to the losses in banks. That was a very
substantial thing, and obviously the supervisors, and that was
us, you know, didn't get to that problem. We were aware of it,
but we didn't probably appreciate it enough.
Another surprise, though, is that we were able to get this
far and get inflation down this quickly without seeing a big
increase in unemployment, and that's just a great result.
That's just a surprise. It's not consistent with the historical
record, but it's a really positive thing.
Senator Rounds. Thank you. And I just know that the only
tools you got available were demand side tools.
Mr. Powell. Yeah, that's right.
Senator Rounds. Thank you. Thank you, Mr. Chairman.
Mr. Powell. Thank you.
Chair Brown. Senator Warner of Virginia is recognized.
Senator Warner. Well, thank you, Mr. Chairman. Chairman
Powell, it's great to see you. You know, I would point out to
my good friend from South Dakota, I do think, you know, if we'd
gone back 1 year to 18 months ago, nobody would've predicted
the soft landing.
And I know you're not ready to declare victory by any
means, but the fact that inflation has come down, and I
actually think some of the things like the CHIPS Bill, the
Infrastructure Bill, and some of President Biden's policies
have actually kept the economy growth rate at the levels that
have allowed you to bring down inflation without seeing a
dramatic rise in unemployment. And again, that'll be something
we'll probably have the opportunity to litigate over the next 8
or 9 months.
I want to take my time on issues around less about monetary
policy and more about regulation. You know, I think we can
never presume that we're out of the woods on financial
stability as we saw with the New York Community Bank yesterday,
the stock plunge and the capital infusion. You know, one area
that I raised with you a year ago and I'm going to reraise
today, and that is nonbank lending.
The fact that nonbank lending to non-financial firms now is
actually exceeding regulated bank lending. And let me be clear,
you know, the nonbank financial sector has done productive
things in our society over the years. But when folks like
former New York Fed President, Dudley, and former Fed Governor
Grosvenor recently said that they had worries about this
reliance on the nonbank financial sector could lead to overall
economic lack of stability, I guess, what do you think--I've
got a three-part question.
What do you think are the risks as we see this push-out
effect of more and more lending going outside the regulated
perimeter to the nonbank sector? How much do we really know
about these institutions? And one of the things, they have very
smart, sophisticated investors, but one of those very smart,
sophisticated investors said, ``Well, hey, we don't like the
lending profile right now, and we want you to not make any
additional loans for the next 6 to 9 months.'' Do you think our
system would be able to pick up the slack?
Mr. Powell. So we have the regulated banking system where
you've got a lot of transparency, you've got deposit insurance,
you've got access to the discount window and all those things;
regulation. If you go outside that, most of the funding that we
see now in these vehicles is sophisticated investors who are
actually limited partners, meaning they can't pull their money
out. They've signed a contract. They've funded these deals.
And so, what you see now in the nonbank financial sector is
significantly that kind of thing. So it doesn't have the run
risk. The point is, the bigger it grows and the more diverse it
gets, it is happening outside the regulatory perimeter. And you
worry that when there is another crisis, you'll be surprised,
but there'll be ways that that financial structure too can
break down, and it does break down, in ways we don't
anticipate.
So I think we need to be smart about the way--
intermediation is absolutely moving out of the banks into the
capital markets and into nonbank financial institutions. That's
what's been happening for a long, long time. I just think we
need to be thoughtful about understanding where the risks are
emerging.
Senator Warner. And that sophisticated investor may
rightfully say, hey, we don't want you to lend anymore for a X
period of time. But that may then, at that moment of crisis,
mean that the lending capabilities completely dry up.
And one of the things I never completely understood until I
got a little better explanation recently, why the large,
regulated banks weren't more complaining about this nonbank
lending. But as I got to understand a little bit more of the--
and again, I'm not per se criticizing on the nonbank lending,
but many of the regulated banks actually lend to these large
institutions. So they make money off of those relationships,
and maybe that's, again, an explanation of why they're not
being more critical.
I only got 40 seconds left, but I would like to come back
to another thing that we've talked about a lot, and that is the
question of use of the discount window. I believe one of the
original tools that the Fed had I know banks say, well, we're
concerned about the stigma. I've got some legislation that
would actually require mandatory use of the discount window.
I'd love your comment on that.
And also, just the idea that having the mechanics of the
discount window open, potentially even 24/7, because we saw
with SVB, they won, they didn't know how to use it. But two, if
they wanted to use it in the nonbank hours, could they get
access?
Mr. Powell. There's a lot of work to do on the discount
window. You're absolutely right. It needs to be brought up
technologically into the modern age. We need to do more to
eliminate the stigma problem. And we need to make sure that
banks are, you know, actually able to use it when they need to
use it. And, you know, that's a broad work program that we're
on right now, and it's very important.
Senator Warner. I know you're working on it, but I would
look forward to working more, and I'd invite other colleagues.
I really do think before we start adding a whole host of other
regulatory issues, we ought to use some of the tools that are
out there.
Chair Brown. Senator Tillis of North Carolina.
Senator Tillis. Welcome, Chair Powell, and Gus sends his
regards. If you have time after the hearing, you ought to go by
and see him. He's a dog in our office, but----
Mr. Powell. I don't want to disturb his nap.
Senator Tillis. But thank you for being here. I want to get
back on this Basel III proposal. Senators Lummis, Coons,
Gillibrand, and I, sent a letter indicating our concerns with
the current proposal, but I think it's also worth noting that
the number of other organizations, a diverse group that are not
normally aligned on policy. You've got Bank Trades, National
Housing Conference, NAACP, Habitat for Humanity, National
Community Reinvestment Coalition, the list goes on, who have
concerns with the current proposal.
Here's my concern. I think we're trying to make the best of
what was foundationally a bad proposal. And so, I'm in the
category of people who think that it should be re-proposed,
because I think one of the reasons why I did not support Mr.
Barr's nomination is I felt like we were going to be here.
I mean, it was pretty clear to me before he ever got
confirmed on the Board that we were going to be in this place
some months or years later. And here we are. And I think that
the industry felt the same way. All of these stakeholders, some
of them are in banking trades, some of them are on the other
side of the spectrum.
So, I'd like to cast my vote or provide some weight to the
idea that we should re-propose it. And what we ought to do is
talk about the reality of increasing capital, or that the
prospect of increasing capital requirements doesn't concern me.
I think the prior Fed supervisor made comments publicly that
maybe we needed to raise capital standards.
But what we did here in this proposal, and I heard in that
dialog, is let's deal with puts and takes. Let's talk about
raising capital requirements, but let's also talk about
reducing the cost of the regulatory burden today if we can do
it responsibly.
There's no evidence of that in the current proposal, and I
think that that may actually produce a different set of
comments that would be instructive to a final proposal that I
think realistically will include some increasing capital
requirements.
So over what time horizon do you think we would expect to
either try to make the best of this foundation, or go back and
take a look at it at a new foundation and re-propose it?
Mr. Powell. You know, we're going to work through it as
quickly as we can and should. I will say it's more important to
get it right than it is to do it fast. We're not in a hurry,
but my guess is we'll work this out over the course of this
year.
Senator Tillis. Yeah. Well, you know, if you take a look at
the outsized cost of operational risks, the long list of
concerns that I have publicly and privately expressed on the
current proposal, I do think sometimes it's easier to knock
down what I think is a poor foundation and build a better
house. So again, just wanted to make that comment publicly.
The question about shrinkflation. I tell you some of these
words that we come up with. But, you know, President Biden's
using the idea of shrinkflation and you know, chastising
manufacturers for creating smaller portion sizes for potato
chips--I'll use that as one example.
But if you have rising input cost, and you're not able to
control that, and you're in a marginal business to begin with,
and now you're saying you can't even reduce the quantities, how
does a business that's not making a profit make that work?
Mr. Powell. I mean, we see inflation at the aggregate level
as a mismatch between supply and demand. And as we've seen
supply get better, and we've seen demand cool off a bit--it was
very hot coming out of the pandemic. We've seen inflation
coming down.
Senator Tillis. We saw food inflation between 2010-2021 at
18 percent over 11 years, and over the last 3 years, we've seen
it at 21 percent. I think that we have an industry that's
trying to actually provide products that that consumers want,
and now they're being chastised for trying to figure out how to
make the numbers work.
So this whole idea of shrinkflation is just confounding to
me. I'm going to submit some for the record. I want to stay on
time.
But I have a question. I think the Chair mentioned, and if
I misunderstood this I'm sure the Chair will clarify, but I
thought in his opening comments he suggested that stock
buybacks and paying out dividends were a key factor in
inflation. Do you, as just a matter of policy, see stock
buybacks and dividends is one of the top five reasons we're
experiencing the inflation when we have right now?
Mr. Powell. First, I guess I see stock buybacks and
dividends as just the same thing in a different form. And I
don't know, I wouldn't comment on anything that the Chair even
may have said. I'd like to avoid that.
Senator Tillis. I'm not going to ask you about policy
because I think you're consistent on that, but I just can't
imagine that if we decided to outlaw stock buybacks and
dividend payments, that would have a material effect on
inflation.
So, I'm not going to ask you to respond to that, but there
are some people that by inference you could assume that they
think that that would be helpful. For one, I'm not an
economist, but I just can't imagine that it would be, you know,
one of the things that would make your job easier. Can you at
least opine on that?
Mr. Powell. Banning stock buybacks and dividends?
Senator Tillis. Yeah.
Mr. Powell. Yeah. I think that would be quite a change in
our capital markets.
Senator Tillis. Me too.
Mr. Powell. I mean, this is just money going back to
shareholders from companies----
Senator Tillis. Me too.
Mr. Powell. ----that have nothing to do with it.
Senator Tillis. Thank you, Mr. Chair.
Chair Brown. Well done, Senator Tillis. Senator Smith of
Minnesota is recognized.
Senator Smith. Thank you, Mr. Chair, and thank you Chair
Powell. It's great to see you here, again. I appreciate your
testimony, and I'm going to focus my questions on housing and
housing affordability.
As you have well pointed out, overall, prices have
moderated considerably since the Fed began raising rates. Yet,
housing costs have remained stubbornly resilient or high
leaving us really no closer to addressing the affordability
crisis that I think that we have, and was there well before the
pandemic.
Shortly before the Fed began tightening, Chair Powell, and
you came before the Committee, I asked you about how higher
interest rates could exacerbate this unaffordability problem
that we have by making mortgages more expensive and also
hindering housing development. And I think that at the time you
argued that we have excess housing demand during the pandemic,
and that was kind of at the root of higher costs, and that your
goal, the Fed's goal, was to bring demand closer in line with
supply.
So, my first question is this. So the housing market has
cooled significantly over the last 2 years. Is it your view
that it is cooled enough so that housing supply and demand is
better in balance? And following on that, you know, given the
Fed's limited tools, understanding that, at what point will you
think that you've done all that you can to lower housing
demand?
My view is that we're well past time in Congress to take
action on the housing supply side, but I'm interested in how
you see this dynamic.
Mr. Powell. So, you know, we're not focused so much on
housing and housing inflation. We're really focused on the
aggregate, which is also goods and our non-housing services.
That's way more than half of PCE inflation. There are things in
the housing sector that we didn't fully anticipate. One of them
was just that people in very low interest rate homes, with very
low interest rate mortgages aren't selling.
Senator Smith. Right.
Mr. Powell. So the quantity of homes that's available is
incredibly low, and that's why there's very little in the way
of existing home sales. And that drives up existing home sale
prices, but also new home sale prices. So again, there's two
sets of factors. There's the longer-run issue, and then there's
the factors associated with the pandemic, and the inflation,
and our response to it. I think as the overall inflation
continues to come down and rates then come down, you'll see the
housing market start to heal and get better, and housing
affordability should go up again. But you're still going to be
left with the longer-term problem of supply.
Senator Smith. Right. I think that's right. I mean, what I
see in Minnesota is that higher interest rates are of course,
driving up the cost of construction. They're driving up the
cost of mortgage rates. You're seeing people who aren't leaving
a house that maybe is a little too small for them because they
can't afford it. You know, just as you're saying, people are
staying in there and their homes longer. And so there's sort of
this double whammy of construction slowing at the same time
that there is this great need to address housing supply.
One of the things that you know, is happening, it's
interesting, a recent analysis by Zillow found that the monthly
mortgage payment on a--let me get this right. A recent analysis
by Zillow found that the monthly mortgage payment on a $343,000
home, assuming 10 percent down payment, is about $2,200 a
month.
OK. So, $2,200 a month. That means the cost of owning a
typical home is higher than 30 percent of median income, which
is kind of the measure of affordability. And so, we've got a
lot of issues with people just being priced out of the home of
the housing market.
So from where I sit, the cumulative issues of higher
mortgage rates are just really a challenge, and until we can
get to the bottom of that, we're going to have a hard time
addressing the housing affordability challenge that we have.
Would you like to comment on that?
Mr. Powell. Yes. I agree with all of that. I mean, we don't
actually--home prices don't actually go into the calculation of
inflation. It's really rents and----
Senator Smith. Right.
Mr. Powell. ----owner's equivalent rent. But I agree the
housing market is in a very, very difficult situation. And, you
know, the sooner we can get back to price stability and restore
interest rates to lower levels, the sooner it can start
healing.
Senator Smith. Yeah. Thank you. Thank you, Mr. Chair.
Chair Brown. Thank you, Senator Smith. Senator Kennedy of
Louisiana is recognized.
Senator Kennedy. Mr. Chairman, thank you for being here.
Thank you for your service. I think I've said before, I believe
you and your team probably saved the world economy during the
pandemic economic meltdown when the whole world wanted dollars
by establishing the currency swap line. So, I thank you for
that.
You gave an interview, Mr. Chairman, on February 4th of
this year to CBS, 60 minutes, I think. Is that right?
Mr. Powell. Yeah.
Senator Kennedy. I ordered a transcript of that hearing,
which I read. I learned a lot reading it. You were asked a
question about inflation, and you were asked a question about
prices declining. And here was your response. I'd like to quote
you, if that's OK. ``So the prices of some things will decline,
others will go up, but we don't expect to see a decline in the
overall price level. That doesn't tend to happen in economies
except in very negative circumstances.''
Did I quote you accurately?
Mr. Powell. I believe you did.
Senator Kennedy. OK. Later in the interview, you were asked
about the national debt. Do you recall that?
Mr. Powell. I don't actually, but I'm sure that's right.
Senator Kennedy. OK. Well, at least according to the
transcript, your answer was, and again, I'm quoting you, ``In
the long run, the United States is on an unsustainable fiscal
path. The U.S. Federal Governments on an unsustainable fiscal
path, and that just means that the debt is growing faster than
the economy. So it is unsustainable.'' Do you remember saying
that?
Mr. Powell. I've said that many times. I think that's
uncontroversial.
Senator Kennedy. OK. Later in the interview, you said, I
want to quote, ``You know, I would just say this, integrity is
priceless. And at the end, that's all you have. And we plan on
keeping ours.'' Is that an accurate statement?
Mr. Powell. Yes, it is.
Senator Kennedy. OK. That's why I want to ask you about the
FDIC. Have you read the article in the Wall Street Journal
entitled, ``Strip Clubs, Lewd Photos, and Boozy Hotel: The
Toxic Atmosphere at Bank Regulator, FDIC''.
Mr. Powell. I think I did read that a couple months ago.
Senator Kennedy. Did you read the article entitled, I quote
again, ``FDIC Lawyer Stayed on Paid Leave for Weeks After Child
Porn Arrest''.
Mr. Powell. I don't remember that one.
Senator Kennedy. OK. Did you read the article entitled,
also in the Wall Street Journal, quote, ``FDIC Chair Known for
Temper Ignored Bad Behavior in Workplace''.
Mr. Powell. I read so much. You know, I can't--I remember
the broad story, but not particular stories.
Senator Kennedy. Did you read the article in which a former
female employee of the FDIC allegedly recalled her male
colleagues saying women needed to use sex to get ahead at the
FDIC?
Mr. Powell. I do not recall that. No.
Senator Kennedy. OK. Did you read the article in which a
female risk management examiner during a lunch with a male
examiner said she had become friendly with that examiner, and
he complained to her about his marriage, allegedly telling her
he wasn't getting enough sex. And she allegedly said,
``Obviously, if I walked --'' or he allegedly said,
``Obviously, if I walked into this office and you were naked,
I'd fuck you right here.''
Mr. Powell. I do not remember that, and I think I would.
Senator Kennedy. OK. Do you remember the article about Mr.
Randall Ditch, a supervisory examiner in Denver who allegedly
was demoted in 2014 to a non-supervisory examiner position in
Tulsa after having sex twice with a subordinate female
employee, and a number of other rule violations?
In this article, it says, allegedly, Mr. Ditch had urged
the woman, ``Do not be a pussy,'' and drink a shot of whiskey
during work hours, the records show. Do you recall that at all?
Mr. Powell. I do not recollect that.
Senator Kennedy. OK. Here's my question, I could go on for
a while----
Chair Brown. You could go on, but you're not going to go
on. So you've passed your 5 minutes. Do your question once.
Senator Kennedy. Sir?
Chair Brown. Senator Kennedy, your time is already expired.
You can do one. You did 5 minutes. Consumed the whole 5 minutes
with your monologue of----
Senator Kennedy. Well, you did 6 minutes. I timed it.
Chair Brown. I asked my----
Senator Kennedy. You did 6 minutes.
Chair Brown. Senator Kennedy, for months I have let you go
way over the 5 minutes. You get your question----
Senator Kennedy. But you did 6 minutes.
Chair Brown. I Chair this Committee.
Senator Kennedy. I understand. You still did 6 minutes.
Check the record.
Chair Brown. I'm going to order you--you're going to be at
6 minutes and 15 seconds if you continue this argument, or
you're going to ask your question.
Senator Kennedy. I'll ask my question. I just wanted the
record to be clear, Mr. Chairman.
Mr. Chairman, in light of these allegations, if they're
proven, how can the FDIC lead this charge for Basel III
Endgame, which is going to turn the banking community upside
down?
Mr. Powell. I don't know how I would make the connection to
Basel III. I'll say it's deeply troubling things, obviously,
but again, you know, as you point was, if proven, and I mean, I
think we have to decide Basel III on its merits. And we're not
looking to the FDIC to lead this, by the way. We're looking at
the Fed to do what the Fed thinks is right. That's what we're
going to do. We don't look to, and they don't look to us to
lead them.
Chair Brown. Thank you, Chair Powell. Senator Butler is----
Senator Kennedy. Thank you----
Chair Brown. ----recognized.
Senator Kennedy. ----Mr. Chairman.
Mr. Powell. Thank you.
Chair Brown. Senator Butler is recognized.
Senator Butler. Thank you so much, Chair, and Chair Powell.
Good to see you in person, and thanks for the time to talk.
I want to pick up a little bit where Senator Smith was in
relationship to housing, housing affordability, and hopefully
draw a little bit on the point that you were making about
rents. It definitely is an important crisis in my State of
California, and I know across the country where, at least,
according to the California Department of Housing and Urban
Development, renters in San Diego are paying about 50 percent
of what is--they're spending more than 50 percent of what is
considered affordable.
And statewide, the majority of renters, more than 3 million
households, are spending more than 30 percent toward rent.
Nearly one-third, more than 1 in 5 million households pay more
than 50 percent of their income toward rent. And the Chicago
Fed President, Goolsbee, even referred to housing as a missing
piece of the puzzle in the Fed's path to lower inflation.
So to the continued conversation, and I know a point that
you've made that about how inflation has a disproportionate
impact on lower income households who are focused on spending
more of their monthly budgets on housing, how is the Fed's
monetary policy impacting the supply of affordable rentals?
Mr. Powell. I don't know that we're affecting the supply of
affordable housing. If you think of affordable housing as
something that's connected to some sort of Government program,
that's not our bailiwick. I mean, our interest rates do affect
the affordability of housing, though.
Senator Butler. And there was a key point that you made in
an earlier, I think, reference about--and in your response to
Senator Smith about the monetary policy and the calculation of
rents. Can you just spend a couple--just briefly talk about
that? I want to have one last issue I want to get to before I
run out time.
Mr. Powell. It's hard to talk about it briefly. It's
actually very conceptually challenging to think about housing
inflation. Do you include the cost of financing it? Do you
include the sale prices? And the answer is, we don't. We
convert ownership into an imputed rent, and that's two-thirds
of homes are owned, and then we actually measure rents. But,
you know, leases only turned over once a year. So you look at
market rents, and then, you know, what's happening with newly
signed leases, maybe very different from what was happening a
year ago.
So it's complicated, but the good thing is it, we
understand all that, and we look through that. We look at
housing services overall as one of the three important
categories, along with non-housing services, and goods
inflation.
Senator Butler. Thank you for that. And in the line of
affordability and housing, again, sort of very general, I
think, to the broad monetary policy and state of our economy
and unique to California--and I raised this with Secretary
Yellen when she was here as well. The insurance gaps that are
presenting themselves due to the impact of climate change, and
where 1 in 5 residents in California live in areas of that risk
flooding. And all 58 counties have a history of flood damage.
And we are seeing more and more home insurance providers,
actually withdrawing from, from the State.
You and I had talked a little bit about this in our
preparation for today's conversation. Can you talk to me about
or share with us how it is that you--or what you think the
impact might be of this sort of protection gap in insurance
coverage on the overall stability of financial institutions in
the broader economy?
Mr. Powell. So it is clear that insurance of various
different kinds, housing insurance, but also automobile
insurance, and things like that, that's been a significant
source of inflation over the last few years. And it's to do
with a million different factors. It's nothing that we control
from a regulatory or a supervisory standpoint.
You know, in the longer-term, companies are withdrawing
from writing insurance in some coastal areas. And you've got to
think 10 years from now, how are you going to get housing
insurance? And, you know, maybe the Government will have to
step in, but it's a significant issue.
Senator Butler. Thank you, Chair Powell.
Mr. Powell. Thank you.
Chair Brown. Senator Vance of Ohio is recognized.
Senator Vance. Thanks, Mr. Chair, and my gratitude to you
and the Ranking Member for doing this hearing. And thank you
Chairman Powell, for being here. It's good to see you, again.
I think these hearings are always very important. Actually,
gives us an opportunity to sort of provide some oversight to
what's going on with the Fed, and better understand some of the
things that you guys are doing that affect our constituents.
And I wanted to sort of focus on the Basel III regulations,
Chairman Powell, and specifically, the way that there have been
various proposals to sort of draw them down to focus on the
regional banks. And to just go back to sort of one of the most
significant crises, obviously in our banking sector, of course,
the collapse of SVB and First Republic.
You know, you and I have spoken in private, and I believe
in public, but one of the concerns that I have is when we talk
about increasing capital requirements on the banks, if the
banks were under higher capital requirements in the run-up to
the crisis, there's maybe an argument that SVB, for example,
would've bought more long-term treasuries which, of course,
would've exposed their balance sheet to even more treasury bond
risk. And that, of course, would've maybe hastened the collapse
of SVB.
And, I guess, I want to start here with, you know, when we
talk about some of the Basel regulations, what was the original
intent? In other words, what was the original sort of proposal
for which banks would fall under those regulations in which
would escape them?
Mr. Powell. You mean this time around or earlier on?
Senator Vance. This time around.
Mr. Powell. So it's the 37 largest banks. Well, there's
four categories of banks, including the G-SIBs, and this is
down through the fourth category. The proposal that's out there
now, I think, does extend to category 4, as well as 3, 2, and
1.
Senator Vance. So what's the minimum assets under
management that you guys have proposed under----
Mr. Powell. $100 billion.
Senator Vance. ----the current Basel regulations?
Mr. Powell. $100 billion.
Senator Vance. $100 billion.
Mr. Powell. Yeah.
Senator Vance. And sort of that sort of gets to my concern
here because I know there's some discussion about whether you'd
apply them at $700 billion of AUM or $100 billion of AUM. And
maybe you could just sort of walk me through that decision
process at the Fed, where you guys are, and what would sort of
justify drawing down from a $700 billion threshold to $100
billion threshold?
Mr. Powell. So there's the G-SIBs. There's----
Senator Vance. Of course.
Mr. Powell. ----the eight identified G-SIBs, and then
there's one category 2, I guess, and then there are the big
regionals. And those tend to be, you know, big regional banks,
and they're category 3, and one of them is a 2, I guess. But
they have a different tailored level of regulation. Then
category 4 had significant tailoring.
And the question is, you know, we have to ask the question,
since SVB was a category 4, we've got to ask the question what,
if anything, needs to be changed in the way they were
regulated, supervised from a capital liquidity standpoint.
So there was tailoring all the way down. And then below
$100 billion, of course, those are community banks, and that's
a different regime as well. This makes sense. We want to have a
diverse banking sector that's a great benefit to our country
and very unusual for an advanced economy. So it's something we
want to preserve.
Senator Vance. Yeah. And I'm sure you know, Chairman
Powell, but just to put this on the record, I mean, a lot of
the commercial lending, a lot of the real estate lending, a lot
of the consumer lending, about half of that lending, consumer
lending is provided by the regional banks. I believe the
Huntington in my home State of Columbus is the number one SBA
lender in the entire country.
So to your point, I think these do provide incredibly
important benefits to our economy. And, you know, you hear a
lot of people talk about the American economic miracle, and I
do wonder if part of that is because we don't have the same
type of financial system that has sort of dominated in Western
Europe and other First World economies.
I'm curious, in the process of amending the Basel
requirements, I mean, have you guys made a decision about where
to set the threshold yet, and when do you expect to set that
threshold?
Mr. Powell. We haven't made any final decisions. We put out
for proposal some months ago, a proposal, and we've gotten a
lot of comments, as I'm sure you're aware. We're chewing
through those and digesting them, and we're just at the
beginning now to sit down and talk about the changes that we
will appropriately make to the original proposal.
Senator Vance. And when do you expect to sort of issue a
final proposal?
Mr. Powell. I think it's going to take some time. I think
it's more important to do it right than it is to do it fast. My
guess is we'll get through this and be done over the course of
this year, but it could be faster than that. It could be slower
than that.
Senator Vance. So I'm wondering, just being mindful of
time, I have about 30 seconds left. Would you be willing to
commit to say that in the process of amending, the Fed will
remove the regional bank draw down and limit Basel's
application directly to the G-SIBs, or $700 billion, or above?
Mr. Powell. I can't get that specific at this point, but,
you know, we're clearly looking at the whole tailoring issue.
Senator Vance. OK. I appreciate that. And again, I just
repeat, Chairman Powell, given what actually happened with the
banking sector with SVB and First Republic, I just encourage
you guys not to apply a regulation that doesn't actually solve
the underlying problem. I fear that if you apply this to banks
of $100 billion dollars and above, you actually are doing just
that.
So with that in mind, I'll yield. Thanks, Mr. Chair.
Chair Brown. Thanks, Senator Vance. Senator Tester of
Montana is recognized.
Senator Tester. Yeah. Thank you, Chairman Brown, and thank
you for being here, Chair Powell. We appreciate your work in a
difficult situation, but I think you've done a really good job.
And so thank you for that.
The success at the Fed on your mandate for strong
employment and stable prices is critical for small businesses,
on Main Street, for farmers, for ranchers, for Montana
families. You follow all the metrics. From your perspective,
where is the economy at now, and where's it going?
Mr. Powell. You know, the economy's growing at a healthy,
sustainable, solid, strong pace. And that's one thing. Second
thing I'd say is the labor market is very strong and quite
tight still. 3.7 percent unemployment for the last 24 months.
That's the longest period since, you know, 50 years. And the
third thing is inflation. Inflation was too high. It's come
down very sharply since the beginning of last year. If you look
at the 12-month number, the headline number has come down from
the 5s down to 2.4. And the core number is at 2.8. I think it
was at 4.9 a year ago.
So these are big declines. So we're in a very different
place and a healthy place. We are going to use our tools to try
to keep that strong economy, keep that strong labor market
while we continue to make progress on inflation.
Senator Tester. One of the areas where there has been
inflation, and I don't exactly know where it's at now, but food
rose quite rapidly. And by the way, I'm a farmer. We didn't get
much of that. In fact, we didn't get any of it. Prices now
compared to what they were a year ago are actually off compared
to whether 6 years ago, they're up, but compared to whether a
year ago they're down.
And so my question to you, Chairman Powell, is there
anything you can do specifically to deal with food costs as the
Fed?
Mr. Powell. I'm telling a farmer his business, but if you
look at the food cost to the consumer, part of that is
commodity costs. And that was partly spiked as, you know,
because of Ukraine; grains and oil and that kind of thing. But
the rest of it is a lot of costs in the supply chain from when
it leaves the farm to get, you know, collected, and processed,
and trucked around, and then put on the shelves, and then the
stores.
You know, and all those costs are just part of the general
economy. So as the labor market cools off from its overheated
status 2 years ago, you will see, and you have seen, you know,
food inflation flattening out. And so, you know, the really
high rates of inflation have come down. The prices, of course
have not.
Senator Tester. Correct. I would just say that cattle's
doing better. Grain actually has dropped in price at the farm
gate, and I don't want to get into that debate with you at all
because we probably agree, but it'd take too long, take too
much time. We got other stuff to talk about.
Mr. Powell. I'd be learning from you.
Senator Tester. You've discussed in previous hearings the
impacts that the pandemic shut downs and supply chain issues
have had on economies globally. How does the U.S. economy look
today compared to our competitor Nations, particularly China?
Mr. Powell. Well, I start with the advanced economies. You
know, we're doing the best of anybody. We've got the strongest
growth and the lowest inflation of the advanced economies.
China is a whole different story. China's having, you know,
significant difficulties with its economy right now, and
they're in a very different place, certainly, than we are.
Senator Tester. And so to repeat that, what I heard you say
is that the economy of the United States is basically in better
shape than any other economy in the world.
Mr. Powell. Any other major economy. Yes.
Senator Tester. OK. Look, one of the other challenges out
there is housing in communities all across this country,
whether you're in Montana, whether you're in a city in Ohio.
Workforce housing in particular is a top priority, top
commodity, so to speak. Plenty of folks, great organizations
are working to address this. I meet them every day, and I
appreciate the work they're doing. But how do these housing
supplies issues show up in the data that the FOMC uses to make
decisions?
Mr. Powell. So housing prices don't go into the data.
Housing stats, and renovations, and things like that are just
business activity and that shows up. But when it comes to
inflation, we convert ownership into an imputed rent, and then
we look at rents. That's how we look at all that. So, we're not
directly affected by changes in housing prices, but over time,
those will drive rents up.
Senator Tester. So is it fair to ask, are there economic
trends that you see for housing?
Mr. Powell. Yes. So there's two big things going on. One is
we have this underlying shortage of housing, and it's due to
things like, you know, difficulties of zoning, a lot of them
close in to cities, places that are already built, and so more
difficult to get zoning, more difficult to get people and
materials, and all that. That's one thing, and that's not going
away.
Then there's just a ton of things happening because of the
pandemic, because of inflation, because of higher rates. And
those are in the short-term, they're weighing on the housing
market. But as rates come down and that all goes through the
economy, we're still going to be back to a place where we don't
have enough housing.
Senator Tester. Well, once again, thank you, Chairman
Powell, for your work. I very much appreciate it.
Thank you, Chairman Brown.
Mr. Powell. Thanks.
Chair Brown. Thanks, Senator Tester. Senator Cramer of
North Dakota.
Senator Cramer. Thank you, Mr. Chairman.
Chairman Powell, good to see you. Thank you for being here.
It's been a rather uneventful couple of days for you
considering you've spent 2 days in this place, and I'm not
going to upset that, by the way, just so you know. But I did
appreciate your response earlier to Senator Scott when he asked
about immigration, and you said, you know, the Fed hasn't been
assigned that.
So I want to bring up something else you haven't been
assigned to, that you and I have talked about over the years,
and that, of course, is climate; the role of climate in your
job, the role of climate risk in banking. And you've often
said, I think the most common statement was, ``We should stick
to our knitting,'' I think, is one of yours. ``Stay in our
lane,'' similar to what you said, probably to Senator Scott.
But that said, in October, the Fed, the OCC, the FDIC,
issued climate guidance, as you know, for management of covered
institutions. And so, I'm just kind of curious, did Congress
somewhere along the line give the Fed authority over climate
policy as well, or is that another one of those things that
somebody just took on? And I realized you're not the dictator
of the Fed, only the chairman of the Fed, but I'd be interested
in, as the chairman, your views on it.
Mr. Powell. Our assignment is the safety and soundness of
banks, in that they understand and can manage the risks that
they face. That's our assignment.
And we said in climate world, we would do two and only two
things. One of them was to do illustrative climate scenarios so
that--you know, the banks are already doing this. The large
banks who are subject to, they're already doing it because
they're doing business internationally and they don't have any
choice.
So we said we'd do that, and we also said that we'd offer
guidance not on the level of climate risk or anything like
that, just on what you had to do to be in a position to assess.
For my thinking, that's it. That's what we're doing. There are
no new initiatives. We're not going to change our capital
requirements to reflect climate risk or anything like that. I'm
really determined that we are not a climate policymaker, and
that that is really the business of elected officials.
Senator Cramer. Very good. Thank you. I'm going to bring up
one other topic, I don't know if it's been brought up today,
and that's Central Bank Digital Currency. And I think from a
lot of my friends out there, I think there's--some--well, I
know there's some confusion. I mean, I'm easy to confuse, but
there are a lot of people that get confused about what is meant
by the Administration's admonition to continue researching,
experimenting, looking at some sort of, you know, Central Bank
Digital Currency.
I think people back home look at that and go, oh my gosh,
you know, they're going to control this now. And could you
maybe just differentiate a little bit what people think of in
terms of a Bitcoin, or their held digital currencies versus
what essential bank digital currency, who, in my view, should
emulate cash, right? It still should be about the dollar, not
about some different kind of currency.
Could you just sort of help people back home better
understand why they shouldn't be quite so frightened?
Mr. Powell. First of all, I want to say that we're nowhere
near recommending or let alone adopting a central bank digital
currency in any form. But the idea is that as technology has
evolved, money has become digital, so.
But the Government doesn't issue digital money. It's
digital. If you look at your bank account, people don't hold
those physical dollars. They're digital. So the thought was
that the Government could create a digital form of money that
people could then transfer among themselves.
Now, of course, that raises a concern that if that were a
Government account, that the Government would see all your
transactions, and that's just something we would not stand for,
or do, or propose here in the United States. That is how it
works in China, for example, but that's not what we're--if we
were to ever to do something like this, and we're a very long
way from even thinking about it, we would do this through the
banking system.
The last thing we would want, we the Federal Reserve would
want, would be to have individual accounts for all Americans or
any Americans for that matter. Only banks have accounts at the
Fed, and that's the way we're going to keep it. So it's just
really--it's a question of following technology as it evolves
and in a way that serves the public better. People don't need
to worry about a central bank digital currency. Nothing like
that is remotely close to happening anytime soon.
Senator Cramer. That was very helpful. Thank you, Mr.
Chairman. Thank you, Chairman.
Chair Brown. Thank you, Senator Cramer. Senator Cortez
Masto of Nevada is recognized.
Senator Cortez Masto. Thank you, Mr. Chairman. Chairman
Powell, great to see you, again. Thank you for all of your good
work.
I want to talk a little bit about the commercial real
estate and what's happening there. The Financial Stability
Oversight Council's 2023 Annual Report identified commercial
real estate as a financial risk. And the Fed's monetary report
also noted commercial real estate prices continue to decline,
especially in the office, retail, and multifamily family
sectors. I'm especially concerned that because of the low
levels of transactions in the office sector prices have not yet
fully reflected the true decline in the value.
So can you expand on the emerging risks the Federal Reserve
has identified in the commercial real estate market, one? And
then, I'm curious, can you discuss the compound risks
identified in commercial real estate lending, particularly at
banks with large CRE concentrations and high fractions of
uninsured deposits?
Mr. Powell. Sure. Let me see. I think there are just very,
very few transactions in commercial real estate right now,
particularly in the troubled areas. So, it's not a question of
prices still falling, it's a question that you don't have that
kind of price discovery. You just have to assume that the
prices are very low and have come down a lot.
So, on commercial real estate we have a secular change in
people working from home. This is one big part of it. That
means that in many cities, the downtown office district is very
underpopulated. There are empty buildings in many major and
minor cities, and it also means that all the, you know, retail
that was there to service the thousands and thousands of people
who work in those buildings, they're under pressure too, and
banks will have made loans to many of those buildings. Not all
of them, but many.
So this we've known for some years. And so, what do we do?
We have identified the banks that have high commercial real
estate concentrations, particularly office and retail, and
other ones that have been affected a lot. We identify them, and
we are in dialog with them around, you know, do, do you have
your arms around this problem? Do you have enough capital? Do
you have enough liquidity? Do you have a plan? You're going to
take losses here. Are you being truthful with yourself and with
your owners?
And so we've been working with them. And so for some time
we've been doing that, and this is a problem that we'll be
working on for years more. I'm sure there will be bank
failures, but this is not the big banks. If you look at the
very big banks, it's not a first order issue for any of the
very large banks. It's more, you know, small- and medium-sized
banks that have these issues. We're working with them, we're
getting through it. I think it's manageable is the word I would
use, but it's a very active thing for us and the other
regulators, and it will be for some time.
Senator Cortez Masto. Thank you. Do you have concerns?
Well, let me just ask you this. As you're talking with these
small- and medium-sized banks, because we know that there's
always could be a contagion, which we've seen in the past. Do
you have concerns that if they fail, that somehow this is going
to impact the, the financial sector, and are you prepared and
trying to address that and prevent that from happening?
Mr. Powell. We're trying to stay ahead of that. So we also
reached out to banks that had high concentrations of uninsured
deposits, and particularly underinsured deposits and a lot of
commercial real estate in the office sector. So we're well
aware of that issue, and we just trying to stay ahead of it on
a bank-by-bank basis and overall. And so far, we've been able
to do that.
Senator Cortez Masto. Thank you. Let me jump to another
issue that has been on my radar. The Federal Housing Finance
Agency's report on the Federal Home Loan Banks concluded that
the distinction between the FHLBanks' role and that of the
Federal Reserve Discount Window as lender of last resort has
not been clear, especially during times of market stress.
During the 2023 banking turmoil, we saw banks rely on
advances from the Federal Home Loan Banks and didn't even have
relationships with the Federal Reserve to use its discount
window. I know you've talked a little bit about this with
Senator Warner, but how is the Federal Reserve working with the
Federal Home Loan Banks to ensure that banks establish
protocols to borrow from the Fed's discount window prior to
times of stress?
Mr. Powell. So we work with the Federal Home Loan Banks
because in many cases, banks were moving their loan from the
Federal Home Loan Bank to the Fed. So, we need to have smooth
transfer. We need to be in good touch with them.
Even more important than that though, is that banks, any
bank in the United States, needs to be in touch with the
discount window, know how to be able to access it, be able to
access it, have appropriate collateral, have control of that
collateral. You know, in many cases it was just incredibly
inefficient and took a long time for banks to actually go
through that function.
The Federal Home Loan Banks are actually ahead of us in
technology. We know that we need to really invest in technology
to modernize the discount window, and also we need to do more
to get our banks, all of them, in touch with the discount
window in a way that they can use it quickly, should they need
to do so.
Senator Cortez Masto. Thank you.
Chair Brown. Thank you, Senator Cortez Masto. Senator
Hagerty of Tennessee is recognized.
Senator Hagerty. Thank you, Chairman Brown. Welcome,
Chairman Powell.
Under your tenure, Mr. Chairman, the Fed has taken the
stance that the 2 percent inflation target shouldn't be viewed
as a snapshot in time, but rather it needs to be achieved,
``sustainably.'' When inflation was running well above the 2
percent target back in 2021 and early 2022, the Fed was patient
and allowed rates to offset the below target inflation that had
occurred in the years prior.
It strikes me as odd now that while we're still well above
target inflation and have been well above for the prior year,
markets seemed to expect the Fed to immediately cut even before
we've breached the 2 percent inflation threshold.
So my question is, if the inflation rate reaches 2 percent,
would that be considered a return to the target rate on a
sustainable basis, or is it still the case that inflation would
need to more or less overcorrect to well below 2 percent before
the Fed makes the rate cut adjustments?
Mr. Powell. So we it would take us a while to really get
comfortable that inflation had settled in sustainably at 2
percent, but that's not our test for changing interest rates.
Interest rates right now are well into restrictive territory.
They're well above neutral. And we've said we would not wait
for inflation to get down to 2 percent because if you wait,
that monetary policy works with long and variable lags.
So we've said, you know, for some years that that we would
start restoring the Federal funds rate to a more normal, almost
neutral level. We're far from neutral now.
Senator Hagerty. Yeah.
Mr. Powell. And so, assuming the economy moves along the
lines we expect, we do plan on starting the process of dialing
back restrictions.
Senator Hagerty. I'm just trying to square and look for the
symmetry. I know we sort of allowed the economy to overshoot
when inflation was high, and we sort of made up for prior years
of low inflation. I'm trying to square that with the fact
that----
Mr. Powell. We didn't actually do that. We adopted a
framework that said we would do that, but then suddenly a few
months later, we got almost an explosion of very high
inflation. That's not what we were looking. We said, you know,
moderately above or modestly above 2 percent. This was not
modestly above 2 percent, and we reacted--we thought that the
mistake we made was we thought that that inflation would go
away----
Senator Hagerty. That it was transitory.
Mr. Powell. Transitory. Which means it goes away quickly
without effort by us. We figured out at the end of '21 that
that was not the case and we acted.
Senator Hagerty. And you don't seem see that same abrupt
dynamic coming the other way. You're more comfortable with
that?
Mr. Powell. No. Look, I think we're in the right place,
which is we're waiting to become more confident that inflation
is moving sustainably at 2 percent. When we do get that
confidence and we're not far from it, it'll be appropriate to
begin to dial back the level of restriction so that we don't
drive the economy into recession rather than normalizing policy
as the economy gets back to normal.
Senator Hagerty. Yeah. Can we go to the balance sheet and
talk about that? We've seen a dramatic expansion of the Fed's
balance sheet over the past couple of decades. In 2005, it was
at $800 billion. It's at $7.5 trillion today. It's doubled
since the pandemic was underway, and through quantitative
tapering, the Fed is attempting to reduce its footprint.
And the concern I have is, on the other hand, Government
spending tends to just continue to be profligate. We're running
now a trillion-dollar deficit every 100 days, and we're
flooding the market with treasury debt, and we're push putting
upward pressure on interest rates as a result.
And what I think that is lost on many of us here is that
the spending levels will only make your job harder when it
comes to lowering interest rates. Not to mention there's a
tacit expectation that the Fed step in once the markets can no
longer absorb our new issuance.
I think this is a very serious problem. I think it deserves
more attention, and I think we're now at a point where your
objectives may be, you know, very much at odds with the
behavior of our fiscal policy.
And am I missing something here, Mr. Chairman, or does
increased net issuance by the Treasury lead to higher rates?
Mr. Powell. I mean, in principle, more supply should lead
to modestly higher rates, but that's not going to affect what
we do. That's not a problem for us. Our balance sheet
normalization is running very much as expected. We've decreased
the size of our holdings by almost $1.5 trillion, and----
Senator Hagerty. I hear you. I just think it's troubling
that we continue to put fiscal pressure by continuing to put--
again, we're running a deficit of $1 trillion every 100 days,
and the issuance is required to deal with that, or putting a
lot more pressure, I think, on the Fed, and again, making your
job harder. I think we need to take that into consideration.
Another component of this topic your colleague, Governor
Waller, said he'd liked the Fed to shift its holdings toward a
larger share of short-term treasuries. In fact, prior to the
financial crisis, about a third of the Fed's holdings were in
bills. Now they're around 3 percent of your total securities
holdings.
Do you share the goal with Governor Waller, and if so, how
long will it take us to get there?
Mr. Powell. Take a while. You know, that's an issue--in our
FOMC meeting in a couple of weeks, we're going to have our
first really deep dive on what to do with the balance sheet.
That's one of the issues. I don't think we'll deal with that at
this meeting, but over time, you know, you'd love not to own a
lot of MBS, and I can see a case for shortening the maturity.
But it's not something, you know, that would happen quickly,
we're not actively looking at that. That's sort of a longer-
term aspiration that I think he was saying.
Senator Hagerty. Just one final point, Mr. Chairman. You
and I have talked about this before. We're in an election year.
You're getting a lot of pressure, I hear, from lawmakers to
adjust rates. I'm not telling you to raise rates or lower
rates, but I'm just here to emphasize the fact that the
credibility of the Fed depends on your remaining data-driven.
The credibility of our currency as the reserve currency of the
world depends on that, and I encourage you to continue to
maintain that posture.
Thank you.
Mr. Powell. Will do.
Chair Brown. Thanks, Senator Hagerty. Senator Warren of
Massachusetts.
Senator Warren. Thank you, Mr. Chairman.
So, it's been a year since we had the second, third, and
fourth largest bank failures in American history. Greedy bank
executives were part of the problem, and the Fed as the chief
regulator of the biggest banks was part of the problem. Under
your leadership and direction, the Fed steadily weakened rules
for the biggest billionaire banks. Exactly the banks that
failed last March. In other words, Chair Powell, you failed to
do your job to keep these big banks in line.
Now, when these banks blew up, you went into spin mode,
promising that the Fed would do better. After years of hemming
and hawing, you finally agreed to put in place Basel III rules
that would strengthen capital standards for the biggest banks,
and I mean the biggest banks. These are the Fed's proposed rule
would apply to only 37 of the Nation's 4,500 banks. Only the
banks that have $100 billion or more in capital.
Now, Chair Powell, when you testified before this Committee
last June, I asked you about taking responsibility for bank
failures. And you said, ``The main responsibility I take is to
learn the right lessons from this, and to undertake to address
them so we don't have a situation like this where we had
unexpectedly a large bank fail and spread contagion into the
banking system.''
And as part of learning those lessons, you also said that,
``you agree with and support,'' Vice Chair for Supervision
Barr's recommendations for strengthening the Fed's rules and
supervisory practices for the big banks, and that you are,
``confident they will lead to a stronger and more resilient
banking system.''
So, I just want to be clear. You haven't backed down from
any of your comments from a year ago, have you, Chair Powell?
Write lessons, don't let this happen again, supporting Vice
Chair Barr's recommendations, which includes stronger capital
standards?
Mr. Powell. No.
Senator Warren. You still stand by all that?
Mr. Powell. Yeah.
Senator Warren. Good, good. I'm glad to hear that. Now, I
understand that those 37 big banks don't like higher capital
rules because they are like insurance. You know, they would
make the bank safer, but they cost a little money and would nip
into the bank's profits. So, these 37 banks are swinging their
very considerable weight around to try to weaken the capital
rules. They've spent tens of millions of dollars running ads
during Sunday night football, and millions more for an army of
lobbyists to try to twist arms here in Congress.
Impressive spending, but who exactly are they trying to
impress? A man on the inside? You know, despite all you said
last year when the banks failed about supporting Vice Chair
Barr's recommendations to strengthen rules for big banks,
public reporting now says that you are driving efforts inside
the Fed to weaken the capital rule.
You even told the House Financial Services Committee
representatives yesterday that you think it's, ``very
plausible,'' that you withdraw the rule. As one analyst put it,
``I don't think they will pass a final rule without Powell's
support,'' suggesting that the rules will have to be weakened,
``to appease Powell.''
So, Chair Powell, I'm having trouble reconciling the
statements you made last year, which you say you hold onto,
statements you made when the headlines were all about three
giant bank failures, and now, your reported efforts to quietly
weaken the rules that would strengthen capital standards for
giant banks and prevent more bank failures.
So let me just give you a chance to clarify the record
here. Are you committed to finalizing the strongest version of
the Basel III capital rules this year?
Mr. Powell. Let me first say that we have taken and are
taking many more steps to deal with the problems that revealed
themselves with Silicon Valley Bank, and that's around
supervision, we have a strong liquidity----
Senator Warren. I appreciate that, but I'm just asking
about the Basel III rules. The ones that you have been required
for years now to put in place and have dragged your feet on.
Mr. Powell. The Basel III rules are not directly related--
they're not the thing that is directly related to Silicon
Valley Bank. As you point out, they're a longer-run thing. And
I would just say that we put them out for comment, we got the
comments, anybody's free to go read the comments.
My view is that it will be appropriate to make material and
broad changes to that before we finalize it. And in terms of--I
didn't say----
Senator Warren. Material and broad changes to strengthen
the rules?
Mr. Powell. Material and broad changes, and, you know,
we're talking about what that'll mean in the end. I did not say
that we would withdraw the rule. You know, there's a concept of
re-proposal, and I said we hadn't made a decision on that. But
if that turns out to be appropriate in the view of the Board of
Governors, then that's something we would look at doing.
Senator Warren. So everything you said a year ago about
supporting the vice chair, who is responsible for writing these
rules?
Mr. Powell. You and I had a long colloquy.
Senator Warren. Yes, we did.
Mr. Powell. If you read it again, it's on your----
Senator Warren. That I have.
Mr. Powell. ----website, you will see that I'm doing
exactly what I said I would do in the colloquy.
Senator Warren. No. You said you would support Vice Chair
Barr to get us strong rules, and now he is putting out rules--
--
Mr. Powell. No. That was about Silicon Valley Bank.
Senator Warren. ----and you're talking about reproposing.
Mr. Powell. The vice chair of supervision has every right
to bring proposals to the Board. That has happened. But as I
made clear in our colloquy, you're not the comptroller of the
currency. When I do monetary policy, I have one vote. There are
11 other voters, and that's the way it works. It's not
different for the vice chair for supervision.
Senator Warren. You are the leader of the Fed, and when the
heat was on last year, you talked a lot about getting tougher
on the banks. But now the giant banks are unhappy about that,
and you've gone weak kneed on this. The American people need a
leader at the Fed who has the courage to stand up to these
banks and protect our financial system.
Thank you, Mr. Chairman.
Chair Brown. Senator Daines of Montana is recognized.
Senator Daines. Chairman, thank you. Chairman Powell,
thanks for being here. Good to see you. I can tell you,
Montanans are continuing to see the impacts across the board
from inflation that's been brought on by the policies of this
Administration and by my colleagues across the aisle. And I
commend you for the job you have done in trying to reign in
inflation, and I encourage you to continue the fight despite
political pressures you may face. Last time I checked, it's
going to get a little more political around here between now
and November.
I'm also encouraged, contrary perhaps to my colleague from
Massachusetts, I'm encouraged by your comments yesterday that
there will be broad changes to the Basel III proposal, which as
it's currently proposed, would've significant detrimental
impacts to credit cost and availability to small businesses.
And last, I commend your answer yesterday that the Fed is
not a climate agency, and considering the impact of climate
change is not a factor in achieving your given mandate,
Congressional mandate, of maximum employment and stable prices.
Mr. Chairman, I recently joined many of my colleagues in
writing to you about my concerns about the long-term debt
proposal that would mandate regional banks issue new long-term
debt. I'm concerned that this will have a disproportionate
impact on smaller regional banks because they're required to
hold their long-term debt at both the parent holding company
and insured depository bank levels.
Could you explain how this aligns with the tailoring
requirements set forth in the financial reform bill that we
passed back in 2018, Senate Bill 2155.
Mr. Powell. So I have a longer-term debt proposal that
aligns with that. So, first of all, that's been out for comment
on that one. The comments are in, we're reviewing it. So I
don't want to say too much, but the theory of it, in the first
place, was that they're not--those banks are not subject to the
living will process to the extent that the G-SIBs are. And this
was sort of meant to be a middle step to make them more
resolvable without imposing all of the burdens that we impose
on the 8 G-SIBs to have very elaborate resolution plans. So
that was the thinking, I think, on the calibration of it and
all that.
We have voluminous comments. We're looking at them, we'll
make an assessment, and move forward as appropriate.
Senator Daines. Well, thank you. And I know our smaller
regional banks would be happy to hear that thoughtful
deliberation.
Mr. Chairman, understandably, you've had to raise interest
rates to fight the fires of inflation brought on by reckless
Democrat spending. However, a major side effect of that is the
impact the rising rates are having on the cost of servicing the
out-of-control national debt. Senator Haggerty alluded to this
a bit in his questioning minutes ago.
Looking at CBO reports, interest payments on our debt will
increase 32 percent this year, and will now exceed spending for
the entire defense department. I have significant concerns.
Many do here in Washington. Many Americans do that we've
eventually reach a point where fiscal policy and monetary
policy converge. Meaning, that the Fed would ultimately have to
worry about the impact rate-setting would have on Government
debt or even potentially the risk of a default.
Chairman Powell, I know fiscal policy is not in your
purview, but could you ever foresee a situation where fiscal
irresponsibility snowballs to a point that the Fed would have
to factor this into its decisionmaking?
Mr. Powell. You know, I think we're a long way from that,
and that's a terrible place to be. That's a place where some
poor, emerging market countries have found themselves over the
years. For the United States to get that point, I think it's
unlikely, but I do think that--and it's not our business, we
should stay out of this fiscal business--but I'll say what
other Fed chairs have said, which is we really need to get back
to that discussion about fiscal sustainability.
And both sides need to get together. The kinds of things
that have to happen can only be done on a bipartisan basis, and
so I really hope that we go back to a place where those
discussions are happening again.
Senator Daines. I've heard from a number of stakeholders
about upcoming changes to liquidity regs, including a new ultra
short-term liquidity requirement. As with any policy decision,
establishing the facts matters. It's important that financial
regulators have a complete, thorough understanding of the
financial environment before releasing a half-baked proposal
rule or guidance.
My question is, what do you believe is a sufficient time
period that would allow your agency to accurately calibrate
new, sound, and reasonable liquidity requirements?
Mr. Powell. That is a great question and when we're
struggling, particularly, with all the other things that are
going on. You know, we're looking at some--and this is in
response to Silicon Valley Bank--we're looking at some
liquidity innovations, and we're asking ourselves; which form
should that take and how long should it be out for come and
that sort of thing. We're not ready to do that yet, but that's
the question we're asking.
Senator Daines. Follow-on question then I'm finished, Mr.
Chairman. Will you confirm that prior to the Federal Reserve
issuing any new liquidity requirements, it will first conduct
all necessary data collection that would allow for meaningful
analysis of all potential policy options?
Chair Brown. And please keep your answer short, Mr.
Chairman.
Mr. Powell. Maybe.
Chair Brown. That's very short. Thank you.
Mr. Powell. We can talk about this more, but I don't want
to make a really specific commitment like that without talking
to the people who are, you know, carefully in touch with this,
but that, that is the right thought.
Senator Daines. Thanks, Chairman.
Chair Brown. Thank you. Senator Fetterman from Pennsylvania
is recognized.
Senator Fetterman. Well, seniority----
Chair Brown. Well, he got here last. Although if Senator
Warnock sits down in the next 5 seconds, he's next. So, Senator
Warnock, are you ready, or you want to go to in 5? You're oh so
generous with each other.
Senator Warnock. I'm happy to have the junior colleague go
first.
Chair Brown. Senator Fetterman's recognized.
Senator Fetterman. ----much, much better with time.
Senator Warnock. OK.
Chair Brown. All right. Senator Warnock is recognized from
Georgia.
Senator Warnock. Thank you very much, Mr. Chairman. Banks
spending on buybacks is rising again, and their consumer small
business banking revenue has sharply increased. Interest rates
are high, yet the interest being paid to depositors, ordinary
working families, working people with bank accounts, not a lot
of money. In Wall Street, accounts remain low.
Chairman Powell, I'm concerned that when banks don't
increase the interest rates on bank accounts, families are
losing out on dollars that could be in their pockets. Again,
they don't have the kinds of portfolios that some of the folks
in this room would have. Is that good for the economy, and are
you concerned that banks under your supervision are doing this?
Mr. Powell. Are not paying sufficient?
Senator Warnock. That's correct.
Mr. Powell. That's a question I haven't heard. Of course,
they have the option of putting their money in money market
funds, and banks compete with each other. But I'll be happy to
look into that. I hadn't heard that concern.
Senator Warnock. You know, and I think it is worth taking a
look at many lower-income individuals and families. Again, they
don't have some of the sophisticated products yet. Money
markets are available, but we saw high interest rates, and that
not being reflected in what depositors are able to benefit
from. Could those individuals and families benefit from a high
interest rate on their deposits?
Mr. Powell. Sure, and, you know, for a long time we had a
lot of mail from people to the Fed saying, you know, you should
raise interest rates because we're not getting anything on our
checking accounts. So, we solved that problem.
Senator Warnock. I don't think we're asking for that, but
given the reality, the question, yeah. So let me pivot. The
Monetary Policy Report states that while demand for housing has
fallen, the strong labor market has kept prices high. That
matches what I've been seeing in Georgia. Too many folks can't
afford a home.
According to the Monetary Policy Report, mortgage rates
were averaging around 7 percent last month. That's tough for
lower-income home buyers. Increases of just the percentage
point or two can be the difference between owning a home or
not. Are you concerned about this interplay between lower
demand, yet stubbornly high prices, and what it means for folks
trying to buy a home? And what do you think is driving these
high prices?
Mr. Powell. So the housing market is in a very challenging
situation right now. You have this longer-run housing shortage,
but at the same time, you've got a bunch of things that have to
do with the pandemic, and the inflation, and our response with
higher rates.
So you have a shortage of homes available for sale because
many people are living in homes with a very low rate mortgage
that they can't afford to refinance. So they're not moving,
which means the supply of regular existing homes that are for
sale is historically low, and very low transaction rate.
That actually pushes up prices of other existing homes and
also of new homes, because they're just not enough supply. The
builders are busy, but they're running into, you know, all
kinds of supply issues still around zoning, and workers, and
things like that. So, it's quite challenging.
And of course, rates are high. So people who are buying, a
lot of the buyers are cash buyers or are able to actually pay
without a mortgage because mortgages are expensive. I will say
the first problem of supply is a longer-run problem.
The other problems associated with low-rate mortgages, and
high rates, and all that, those will abate as the economy
normalizes and as rates normalize. But we'll still be left with
the housing market nationally where there's a housing shortage.
Senator Warnock. There's no question we have a supply
issue. And this issue of high prices, lack of supply, of
course, disproportionately impacts some communities more than
others. According to the Monetary Policy Report, the employment
rate for the Black prime age labor force that is between 25 and
54 years of age reached a historical peak in 2023.
The gap between Black and White prime age employment
dropped to a nearly 50-year low at around 3 percent. We can
appreciate progress, but a 3 percent gap is still significant.
Would you agree that it is important to continue focusing
on narrowing this gap, and if so, what tools does the Federal
Reserve have to do this work?
Mr. Powell. It's very important, and the single best thing
we can do is get prices under control, get inflation under
control so that we can have a long expansion with--the record
is clear that a long expansion really gives significant
benefits to people at the low end of the income spectrum
because the labor market gets very tight, inflation is low, and
they benefit more than anybody. So that's where we were before
the pandemic, and we'd like to get back to that place.
Senator Warnock. Thank you so very much. I think there's
some other legislative tools that Congress could use, and I'm
happy to continue to work with the chair in the ways that we've
already done to improve that rate, that difference. Thank you.
Chair Brown. For sure. Thank you, Senator Warnock. Senator
Lummis from Wyoming is recognized.
Senator Lummis. Thank you, Mr. Chairman. Welcome. It's nice
to see you, Mr. Powell.
My first question is about CDBCs. There's been some chatter
lately on the social media that people are concerned about the
Fed creating a CDBC without legislative authorization. You and
I have discussed that before, and as you know, there are other
means other than a CDBC that could use digital assets to create
a secure and instant payment system other than a CDBC.
So the question is this, do you still agree that the
Federal Reserve cannot introduce a U.S. Central Bank Digital
Currency without Congressional authorization?
Mr. Powell. Yes, I do.
Senator Lummis. Thank you. That really calms people's
fears. The people who are concerned that we could end up with
something like the digital you warned that is used as a means
of surveillance. So I think that that will calm some of those
discussions down. Thank you so much.
My next question is about your core CPE. Now, as you know,
there's a disconnect between how you measure inflation and how
the American people see inflation, because the American people
are spending their money on gasoline, and food, and rent,
things that have gone up a lot. And they hear about these
improvements in the economy that they're not seeing in their
everyday lives.
So can you explain what measures you use to evaluate
inflation? And just explain to the American people why you
don't factor in the things they spend money on every day like
food and gasoline.
Mr. Powell. Actually, we do. Our statutory target is
inflation. It's not core inflation. And if you look at headline
inflation over the last 12 months, that's it. That's our goal.
It's 2.4 percent. Core inflation is actually higher than that.
It's 2.8 percent. And the reason is that some energy and food
prices have come down, and those don't count in core.
So our overall legal target is headline inflation, which
is, you know, it's our best effort to capture the cost of
living that people face. It's not perfect. You have to make all
kinds of judgments that aren't easy. I mentioned housing
earlier. How do you measure housing inflation? Lots of issues,
but that's what we target.
The reason we look at core, though, is that headline
inflation tends to be more volatile, and it tends to be pushed
around by commodity prices, which really don't relate to the
overall state of the economy. Is it tight as it's loose? So
core tends to be a better predictor of overall inflation than
overall inflation is. I know that's complicated, but ultimately
though, our target is headline inflation, which does include
food and energy.
Senator Lummis. Mr. Chairman, I'd like to include a letter
in the record that Senator Tillis, and I, and two Democrats on
this Committee have submitted with regard to Basel III.
Chair Brown. Without objection.
Senator Lummis. Thank you very much. My question is this;
what do you think is more likely that it will be harder for
consumers to buy a house and small business to obtain a loan
under Basel III, or will lending just migrate outside the
banking system, which may be harder to assess because it's
opaque?
Mr. Powell. I'm sorry, I didn't get your question. I
apologize.
Senator Lummis. OK. So with regard to Basel III, and if
there are more constraints on lending activity, what is more
apt to be the consequence of that? That it's harder for
consumers to buy a house or a small business to get a loan, or
that lending just migrates outside of the traditional banking
system.
Mr. Powell. So if there were anything that constricted
credit in the banking system, they would probably be both
things. Probably there'd be fewer loans made, but in addition,
there would be non-bank lenders that are more than happy to
make that loan.
Senator Lummis. I have a chicken in the egg question here.
Starting with TARP in 2008, there has been a very aggressive
printing of U.S. dollars up until today. And it particularly
went on hyperdrive during that 22-month period of Covid.
So my question is, which comes first? Congress spending
more and so you respond by printing more money, or are they
separate considerations?
Mr. Powell. I think it's hard to get my mind around that
question. We don't print money to fund the deficit. That's not
what happens. But when the Government borrows, it borrows. The
Government borrows to fund deficits is what happens.
Senator Lummis. Right. And so that would indicate to me
that you do respond, because we, in deficit spending, are
creating a demand to borrow, and you're responding by----
Mr. Powell. Well, we're not making loans though. You know,
we're not lending money to the Government. We're not financing
these deficits.
Senator Lummis. And so, there's no chicken in the egg
relationship?
Mr. Powell. There's not really. No, no. I'd have to think
about this. I've got to think about the way--why don't we
continue this?
Senator Lummis. Yeah, I'd love to. And your thoughts
earlier about fiscal sustainability and how we can work with
you, and bipartisan maybe next year, to address these issues.
You know, when you say things, you have to be careful because
what you say sends ripple effects outside of this building, but
it would sure be nice if we could sit down with you on a
bipartisan basis and have those discussions in a frank way.
Chair Brown. Thank you. Senator Lummis. Senator Fetterman
of Pennsylvania is recognized.
Senator Fetterman. No, no----
Chair Brown. All right. Senator Van Hollen of Maryland is
recognized.
Senator Van Hollen. Let me start by thanking Senator
Fetterman for his allowing me to question. Mr. Chairman, good
to see you.
Real wages are up, right? That's good news.
Mr. Powell. Yes. Over the last couple of years you know,
wages have been going up more than inflation. Real wages
broadly are up.
Senator Van Hollen. That means more families have more
spending power in their budgets, right?
Mr. Powell. Yes.
Senator Van Hollen. Worker productivity's up, right?
Mr. Powell. Yes, it is.
Senator Van Hollen. Corporate profits are up, right?
Mr. Powell. I believe so.
Senator Van Hollen. And worker productivity is rising
faster than corporate profits, right?
Mr. Powell. I don't know the answer to that. That may well
be right.
Senator Van Hollen. The charts I show suggest that. So that
would indicate that unless, you know, corporations decide to
pocket as profits more of the gains they get from their
workers' labor, that we should be able to continue to have
increases in real wages. Is that right?
Mr. Powell. Yeah.
Senator Van Hollen. And so, it's important, I think, that,
you know, people recognize that these corporations are doing
better than ever, and they are deciding now to essentially
return the gains made through their workers' productivity,
which is going up more, to shareholders. Obviously,
shareholders, we're going to get a profit. But the question is
whether or not workers share in that profit to the extent of
their worker productivity.
And as you know, we've seen a great gap over decades
between rising worker productivity and real wages, and we're
hoping to close that gap. Would you agree that it would be good
for a more inclusive economy if worker wages tracked worker
productivity increases?
Mr. Powell. I think if you include benefits, that's a
significant part of that gap. I've looked into that, but not
for some years. But I mean, generally speaking, people's
compensation should equal--should be over time, equal to
increases in productivity.
Senator Van Hollen. I appreciate that. And I also want to--
there's the tradeoff on workers' wages, and there's also an
issue with price gouging, right? So we have seen record
profits, we've also seen very high prices these corporations
are charging for things like groceries.
Now, I listened to a little bit of exchange with the
chairman earlier, and of course I think your answer was, you
know, people will charge what consumers will pay. But it should
be known that these corporations are reaping much larger
profits now than they were pre-COVID, for example, right?
Mr. Powell. I mean, some of them are. I'm not super focused
on individual corporate profits, but yeah, corporate profits, I
gather, have been high overall.
Senator Van Hollen. Right. I mean, they're high for a
couple reasons. One is that they're charging consumers, for
example, the grocery stores a lot of money. And the other would
be if they're not sharing the benefits of labor productivity
with their employees.
So I think because we've heard a lot claims by some of our
Republican colleagues about the causes of price increases, I
think it's very important that American consumers recognize
that corporations are choosing to charge them more at the
grocery store or engaging in things like shrinkflation rather
than--in order to have more of their profits.
Let me turn briefly to a letter that I sent to the vice
chair of supervision and some of the other Federal regulators
in January of this year regarding the Basel III capital
requirements, and I support the overall effort on Basel.
We did raise concerns with respect to a specific issue,
which is the harmful, and we think unnecessarily harmful impact
it could have on clean energy tax credit investments. And all
of the regulators testifying that day, including the vice
chairman, said they recognized this was a significant issue and
hoped to address it. Would you agree with that?
Mr. Powell. Yes, I would.
Senator Van Hollen. Thank you. Thank you, Mr. Chairman.
Thank you, Senator Fetterman.
Chair Brown. Thank you, Senator Van Hollen. Senator
Fetterman of Pennsylvania is recognized.
Senator Fetterman. Yes, I love that. All right. So it's
great to be here with you today.
Now, I don't know, maybe some people in America were
talking about a cookie that was $18, and I was alarmed, and I
hope we investigate that there is a cookie that costs $18. And
do you believe that an anecdote on Twitter about a cookie that
costs $18, is that reflective of our economy and where we're at
or not?
Mr. Powell. I certainly hope not. I don't do much shopping
these days, but that sounds like a pretty expensive cookie.
Senator Fetterman. Yeah. And now, I believe that the
American economy now is the envy of the world after everything
right now, correct?
Mr. Powell. We are, yes. We're performing very well
compared to our peer group.
Senator Fetterman. Yeah. Pretty great. And is it fair to
say that the stock markets are all up at record highs, right?
Mr. Powell. Pretty close.
Senator Fetterman. Yeah. And inflation has been pretty
effectively addressed, right?
Mr. Powell. It's been coming down sharply since the middle
of last year. Yes. We've got a ways to go on that, but we've
made a lot of progress.
Senator Fetterman. And corporate profits are pretty robust.
Is that fair?
Mr. Powell. I believe it is.
Senator Fetterman. OK. Well, if we can agree that--and I
don't understand why more people seem to be talking about a
cookie that cost $18, but that seems to be against the evidence
as well. But given that now since things are pretty great, and
we're in a really great place, but now I am concerned, and
there's rumors going around that Basel they're going to change
and they're going to reducing the capital, right?
And, I guess, I'm concerned about that because I don't know
why we would want to--and also, I wouldn't want the record to
reflect on you're much smarter than I am, but I would be
concerned that things are in a really great place right now. We
can all agree on that. I would be concerned to change something
like that because I wouldn't want to have something again like
what happened with SVB, and I just wanted to get your take on
that.
Mr. Powell. Sure. So U.S. banks are well capitalized, and
generally speaking, they're quite well capitalized, and we're
not talking about reducing current capital levels at all.
Really, in the Basel III Endgame, capital may well go up.
And what we're talking about is whether the proposal that
was put out by the bank regulatory agencies, including the Fed,
and which has now been the subject of quite a lot of comment
whether--you know, what changes will be appropriate to that.
That's what we're talking about. We're not talking about
reducing existing capital requirements.
Senator Fetterman. Oh, OK. Well, and then I also want to
play off of a comment made by my colleague from Tennessee, and
I actually agreed with him, and he's concerned about the
deficit. About it is $1 trillion for every 100-dollar-days.
So now, if the Federal Government had added $3.5 trillion
to the deficit by extending the Trump tax cuts, would that
increase or decrease inflation?
Mr. Powell. So I'm going to fall back on our long-time
reluctance to comment on fiscal policy. We take year to fiscal
policy decisions, whatever they may be. We take them as they
are and we conduct monetary policy to achieve 2 percent
inflation, but we don't score inflation. CBO does that. They'll
make a judgment on that, but it's not something we do because
we're an independent agency, and that requires us to stay the
heck out of politics.
Senator Fetterman. So I don't want to put you on the spot,
but would those kind of tax cuts help addressing inflation or
inflame inflation?
Mr. Powell. I don't know what the effects would be on
inflation. I do know, broadly speaking, we need to get to a
place where revenues and spending are better aligned. And I
think everybody knows that. And, you know, I think we used to
talk about this a lot 10 years ago, and we're not talking about
it so much anymore. That's understandable. The pandemic was a
special thing, but I do think it would be great to get back to
that on a bipartisan basis.
Senator Fetterman. OK. Well, I have about 30 seconds left.
I just want to go on the record. I think you've done a really
great job, and I think our economy--and I do agree that it is
the envy of the world as well. And I'm confused that more
people are talking about cookies, or McDonald's meals, and
those kinds of a thing. It's not reflective on the strength of
this as well too, and I just want to thank you for your
service.
Mr. Powell. Thank you, sir.
Senator Fetterman. Mr. Chairman.
Chair Brown. Thank you, Senator Fetterman. That's the last
question. And thanks for your generosity and yielding to
colleagues whom you got here before.
Thank you, Chair Powell, for joining us today, and every 6
months, and sometimes more often. I look forward to working
with you in your work to strengthen our economy. Senators who
wish to submit questions for the hearing record are due 1 week
from today, March 14th.
To Chair Powell, please submit response to those questions
for the record no more than 45 days from the day you received
them. Thank you again for your testimony.
Mr. Powell. Thank you, Mr. Chairman.
[Whereupon, at 12:05 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
The Fed has immense power in shaping our economy. Your job is
clear: promote stable prices and maximum employment.
Today, the cost of living is still far too expensive for most
Americans. The Fed only has one tool available to fight those high
prices--interest rates. And that tool does nothing to address the real
cause for why costs remain too high: corporations price gouging to
boost their profits and make their shareholders richer.
High rates don't force corporations to lower their prices--but high
interest rates are raising housing costs, hindering wage growth, and
stifling small businesses.
Now is the time for the Fed to decide if it is going to make good
on its commitment to workers and to their families--by lowering
interest rates and protecting our financial system from Wall Street
executives who have used their wealth and power to influence economic
policy and to avoid accountability for their risky bets.
Keeping rates too high for too long strangles the economy.
No one wants this. It makes it harder for small businesses to
expand and hire more workers, undermining job creation.
Higher rates also stifle overdue investments that are creating
high-quality, good-paying jobs and that are necessary for us to remain
the most competitive and innovative economy in the world.
And high interest rates are raising housing costs higher and higher
for families who were already facing a tough market with too few
options and too high prices.
I hear from so many Ohioans who feel trapped: those who rent feel
like they'll never be able to afford to buy. And those who already own
their homes feel like they will never be able to afford a larger one if
they decide to grow their family. If they're fortunate enough to have
an interest rate from a couple of years ago, they don't want to give it
up.
That limits their choices, and it limits the housing supply.
And by driving up construction costs, higher rates make it even
harder to build new apartments and homes--so we have even less supply
at exactly the same time when it's harder to afford a mortgage.
Families are stuck delaying the purchase of their first home and
renting for longer. And that cycle drives rents up even further.
Americans are paying a steep price for high interest rates. And
continued high rates are not going to make life less expensive for
workers and their families.
We know why prices are high years after supply chains have
improved. It's the same cause of so many of the problems in our
economy:
Corporations want bigger profits to reward their executives.
In 2022, at the peak of inflation, corporate profits soared to
historic levels. And you know where those profits went--right into the
pockets of their top executives.
That same year, the largest multinational corporations gave out
nearly one-and-a-half-trillion dollars in stock buybacks and dividends.
Americans today pay more for groceries than they have in 30 years.
And Ohioans are paying for corporations' executive bonuses and
stock buybacks every time they go to the grocery store.
And the biggest corporations are always finding new ways to charge
people more to increase their profits.
Fast food restaurants and big stores are experimenting with
electronic price tags, so they can change prices constantly--making it
easier to sneak prices up little by little, and making it harder for
people to comparison shop and find the store with the lowest price.
And many companies increase their profits by charging more for
less--the media has started calling it ``shrinkflation.'' Your bottle
of Gatorade used to be 32 ounces, now it's 28 ounces--but the price
hasn't gone down. If anything, it's gone up a little bit.
It's why I introduced legislation that would stop that kind of
deceptive practice.
That's the kind of solution we need to take on corporate price
gouging--and it has nothing to do with higher interest rates.
The Fed doesn't only set monetary policy. You also make the rules
that keep our banking system sound and consumers' money safe.
We have had some positive developments since the last time you
testified in June, like the update to the Community Reinvestment Act
rule. Chair Powell, thank you for your work on this--this took years of
listening carefully to all stakeholders and was long overdue. We'll be
watching to make sure you implement this quickly so that banks are
fulfilling the purpose of the Community Reinvestment Act.
You also issued an updated capital requirements proposal called
Basel III.
Strong capital requirements are how we ensure that if Wall Street's
bets don't pay off, shareholders and investors are on the hook--not
taxpayers.
We need these guardrails in place. I urge you to remain committed
to protecting the public, despite the massive amounts of money big
banks and their lobbyists are spending to try to kill these taxpayer
protections. Let's finish the job and finalize Basel III.
Last year's bank failures also demonstrate the dangers of letting
the banks chip away at rules and oversight.
It's entirely predictable--bankers desperate to increase their
already-massive profits take big risks that undermine our economy. And
when things go wrong, the bank executives come to regulators with their
hands out, accepting no responsibility.
It's why Congress must finish the job and pass our bipartisan
RECOUP Act--it passed this Committee 21-to-2--to hold senior bank
executives accountable when they gamble with customers' money.
When the biggest banks exercise special privilege, they do so at
the peril of our broader economy.
And we know that's the source of so much that's wrong in this
country: big corporations using their power and influence to write the
rules of our economy to the benefit of them and their executives and
their investors--and to the detriment of everyone else.
That's why I stand up for workers and their right to organize.
It's why I stand up to take on the railroads and the drug
companies, and the biggest banks and corporations who time and time
again try to rewrite the rules to increase their profit margins.
Chair Powell, I look forward to hearing from you today how the Fed
will work to promote an economy where everyone who wants a good job can
find one.
______
PREPARED STATEMENT OF SENATOR TIM SCOTT
Chair Powell, thank you for coming this morning. Good morning--
appreciate you being here.
In three days, on March 10, it will be the 1-year anniversary of
the failure of the Silicon Valley Bank.
SVB marked the third largest bank failure in U.S. history and
certainly, the largest since the 2007-2008 financial crisis.
I've said it many times before, and I'll say it again today, there
were three major components to SVB's failure: first, the bank was rife
with mismanagement; second, there was a clear supervisory failure and
our regulators were certainly asleep at the wheel; and third, President
Biden's reckless spending caused record high inflation, which resulted
in drastic interest rate hikes and tremendous loss.
When you print and spend trillions of dollars at the end of COVID,
we should not be surprised that we have record-high inflation. Record-
high inflation translates into today, still, 40 percent higher for gas
for your car, 30 percent higher for your food, 20 percent higher for
your energy costs.
The devastation the average American is facing because of
Bidenomics is undeniable, but certainly measurable.
So I'm glad to spend some time talking about the state of our
economy--an economy that has been ravaged--as I've just spoken about--
by inflation, suffering under the weight of an open border and millions
of illegal immigrants, and drowning in disastrous regulations.
I hear from my constituents all the time that inflation and an
unsustainable cost of living continue to impact their families. For far
too many, the American Dream seems further and further out of reach
than ever before.
And frankly, the past 3 years of this Administration's failed
policies have landed us right in that spot.
In fact, last month, Treasury Secretary Yellen sat before this
Committee and attempted to spin a narrative of how strong the economy
is, how well-off consumers are, and how much people have in the bank,
thanks to Bidenomics.
But, in the midst of this, she also admitted that many prices are
not going down.
In fact, she said, ``we don't have to get these prices down.''
Tell that to the mechanic working in South Carolina, tell that to
teacher trying to put gas in the tank.
It is simply unacceptable.
Because the truth is that Americans are now spending more of their
income on food than they have in 30 years.
The truth is that housing affordability remains at its lowest level
in 40 years.
But, inflation isn't the only concern I'd like to raise. I'd also
like to address the economic impacts of illegal immigration.
During your recent interview on ``60 Minutes'', you stated that
``over time. the U.S. economy has benefited from immigration.''
Let's be clear, America is a Nation of immigrants--no doubt.
But when we talk about illegal immigration today, we must also face
the dire reality that our towns and our cities are suffering from the
adverse impacts of illegal immigration facilitated by the Biden
administration's open, unsecure, and unsafe southern border.
Because of President Biden's policies, we've seen over seven
million illegal immigrants cross our borders in just 3 years. By the
time this election happens this year, in November, the numbers suggest
it could be as high as 10 million illegal immigrants coming into our
country.
So, we cannot have an honest conversation about the benefits of
legal immigration in our labor force without also addressing the
elephant in the room--our country is strained, our economy is strained,
under the weight of illegal immigration.
In fact, recent reporting has highlighted that cities and States
across our country are struggling to keep pace, and some have been
forced to cut public services to Americans in order to fund the costs
of feeding and housing illegal immigrants.
One clear example. we saw in New York City, where the poorest kids
in the city, minority kids in the city, were stuck at home because the
city was using the schools to house illegal immigrants.
Another example--the city of Denver recently announced that some of
its employees may have their hours cut in order to reallocate funds
toward the city's migrant crisis. How in the world is that fair to
Americans? It's not.
We must get the illegal immigration crisis under control because if
we don't, our local economies will continue to be crushed and
opportunities will continue to be stripped from our citizens and their
families.
Finally, as if inflation and the negative impacts of illegal
immigration were not enough, the tsunami of regulatory-red tape coming
from our financial regulators further threatens economic opportunity
across the board.
For months we have heard bipartisan criticism of the Fed's Basel
III Endgame proposal, which will restrict lending and access to credit
for those who need it most.
I was certainly, pleasantly surprised to hear your comments about
Basel III and your thoughts on its future. When 97 percent of the
comments that you receive are negative that's good news. Good news for
the American consumer, good news for entrepreneurs who want to start a
business but do not have access to capital, perhaps even good news for
millennials who would love to become a first-time homebuyer.
The opposition to Basel III comes from a diverse array of
interests--from community leaders, to farmers, to housing groups. We've
even heard opposition in this very room, on this very Committee, from
Democratic senators.
I look forward to your testimony and looking forward to asking some
questions as well.
______
PREPARED STATEMENT OF JEROME H. POWELL
Chair, Board of Governors of the Federal Reserve System
March 7, 2024
Chair Brown, Ranking Member Scott, and other Members of the
Committee, I appreciate the opportunity to present the Federal
Reserve's semiannual Monetary Policy Report. The Federal Reserve
remains squarely focused on our dual mandate to promote maximum
employment and stable prices for the American people. The economy has
made considerable progress toward these objectives over the past year.
While inflation remains above the Federal Open Market Committee's
(FOMC) objective of 2 percent, it has eased substantially, and the
slowing in inflation has occurred without a significant increase in
unemployment. As labor market tightness has eased and progress on
inflation has continued, the risks to achieving our employment and
inflation goals have been moving into better balance.
Even so, the Committee remains highly attentive to inflation risks
and is acutely aware that high inflation imposes significant hardship,
especially on those least able to meet the higher costs of essentials,
like food, housing, and transportation. The FOMC is strongly committed
to returning inflation to its 2 percent objective. Restoring price
stability is essential to achieve a sustained period of strong labor
market conditions that benefit all.
I will review the current economic situation before turning to
monetary policy.
Current Economic Situation and Outlook
Economic activity expanded at a strong pace over the past year. For
2023 as a whole, gross domestic product increased 3.1 percent,
bolstered by solid consumer demand and improving supply conditions.
Activity in the housing sector was subdued over the past year, largely
reflecting high mortgage rates. High interest rates also appear to have
been weighing on business fixed investment.
The labor market remains relatively tight, but supply and demand
conditions have continued to come into better balance. Since the middle
of last year, payroll job gains have averaged 239,000 jobs per month,
and the unemployment rate has remained near historical lows, at 3.7
percent. Strong job creation has been accompanied by an increase in the
supply of workers, particularly among individuals aged 25 to 54, and a
continued strong pace of immigration. Job vacancies have declined, and
nominal wage growth has been easing. Although the jobs-to-workers gap
has narrowed, labor demand still exceeds the supply of available
workers. The strong labor market over the past 2 years has also helped
narrow long-standing disparities in employment and earnings across
demographic groups. \1\
---------------------------------------------------------------------------
\1\ A box in our latest Monetary Policy Report, ``Employment and
Earnings Across Demographic Groups'', discusses differences in labor
market outcomes among segments of the population.
---------------------------------------------------------------------------
Inflation has eased notably over the past year but remains above
the FOMC's longer-run goal of 2 percent. Total personal consumption
expenditures (PCE) prices rose 2.4 percent over the 12 months ending in
January. Excluding the volatile food and energy categories, core PCE
prices rose 2.8 percent, a notable slowing from 2022 that was
widespread across both goods and services prices. Longer-term inflation
expectations appear to have remained well anchored, as reflected by a
broad range of surveys of households, businesses, and forecasters, as
well as measures from financial markets.
Monetary Policy
After significantly tightening the stance of monetary policy since
early 2022, the FOMC has maintained the target range for the Federal
funds rate at 5\1/4\ to 5\1/2\ percent since its meeting last July. We
have also continued to shrink our balance sheet at a brisk pace and in
a predictable manner. Our restrictive stance of monetary policy is
putting downward pressure on economic activity and inflation.
We believe that our policy rate is likely at its peak for this
tightening cycle. If the economy evolves broadly as expected, it will
likely be appropriate to begin dialing back policy restraint at some
point this year. But the economic outlook is uncertain, and ongoing
progress toward our 2 percent inflation objective is not assured.
Reducing policy restraint too soon or too much could result in a
reversal of progress we have seen in inflation and ultimately require
even tighter policy to get inflation back to 2 percent. At the same
time, reducing policy restraint too late or too little could unduly
weaken economic activity and employment. In considering any adjustments
to the target range for the policy rate, we will carefully assess the
incoming data, the evolving outlook, and the balance of risks. The
Committee does not expect that it will be appropriate to reduce the
target range until it has gained greater confidence that inflation is
moving sustainably toward 2 percent.
We remain committed to bringing inflation back down to our 2
percent goal and to keeping longer-term inflation expectations well
anchored. Restoring price stability is essential to set the stage for
achieving maximum employment and stable prices over the longer run.
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. Commercial real estate (CRE) investments make up a
substantial share of economic activity--nearly 3 percent of
total GDP in 2022. Commercial banks hold approximately $3
trillion in CRE debt. In the latest Federal Reserve Monetary
Policy Report, the Board writes, ``Commercial real estate (CRE)
prices continued to decline, especially in the office, retail,
and multifamily sectors, and low levels of transactions in the
office sector likely indicated that prices had not yet fully
reflected the sector's weaker fundamentals.'' \1\ Community and
regional banks have substantial CRE holdings potentially making
them more vulnerable to financial stress as prices decline.
---------------------------------------------------------------------------
\1\ https://www.federalreserve.gov/publications/files/20240301-
mprfullreport.pdf
---------------------------------------------------------------------------
In light of recent events, what is the Fed's view of the
risks CRE poses to the banking system, and how is the Fed
confronting those risks through its supervisory activities?
Commercial banks have been a significant source of credit
for multifamily housing. \2\ Millions of Americans live in
multifamily housing.
---------------------------------------------------------------------------
\2\ https://www.nmhc.org/research-insight/quick-facts-figures/
quick-facts-investment-returns-on-apartments/quick-facts-mortgage-debt-
outstanding/
---------------------------------------------------------------------------
What steps is the Fed taking to monitor emerging risks
unique to the multifamily housing sector?
A.1. As noted in the April 2024 Financial Stability Report, \3\
the banking system remains resilient, with sound capital and
liquidity levels in the fourth quarter. However, the value of
commercial real estate (CRE) property prices remained high
relative to rental income, particularly for the office sector.
---------------------------------------------------------------------------
\3\ See https://www.federalreserve.gov/publications/files/
financial-stability-report-2024
0419.pdf.
---------------------------------------------------------------------------
CRE has been a supervisory focus for the Federal Reserve.
As noted in our May 2024 Supervision and Regulation (SR)
Report, \4\ Federal Reserve supervisors remain focused on
monitoring banks with concentrations in CRE loans. Supervisors
are particularly focused on assessing whether risk management
practices at these banks are commensurate with the level of
concentration and the composition of a bank's CRE loan
portfolio. The Federal Reserve is also closely monitoring
banks' CRE lending in the multifamily sector.
---------------------------------------------------------------------------
\4\ See https://www.federalreserve.gov/publications/files/202405-
supervision-and-regulation-report.pdf.
---------------------------------------------------------------------------
As part of the supervisory process, examiners, when
appropriate, develop supervisory plans and conduct examinations
to assess CRE risks specific to a bank and the risk
characteristics of its CRE loan portfolio by property sector.
For a bank with a CRE loan concentration, examiners complete
procedures to appropriately assess the activity and the
associated risks to the bank. When there are weaknesses in risk
management practices or safety-and-soundness issues, examiners
make recommendations to a bank to address the weaknesses, or
when the matter is more serious, examiners will take
supervisory action.
In June 2023, the Federal Reserve along with the Federal
Deposit Insurance Corporation, National Credit Union
Administration, and the Office of the Comptroller of the
Currency issued an interagency Policy Statement on Prudent
Commercial Real Estate Loan Accommodations and Workouts. \5\
The interagency policy statement was issued to assist financial
institutions, given current challenges and risks facing CRE
lending. The statement is a principles-based resource for
financial institutions to consider when engaging with borrowers
experiencing financial difficulties. While this interagency
policy statement is only one part of the Federal Reserve's
larger supervision program and broader outreach efforts to
inform the public and industry of CRE risks and supervisory
expectations, it reinforces a key message to the industry that
financial institutions should work prudently and constructively
with creditworthy commercial borrowers experiencing financial
difficulties. It also clarifies that such a message applies in
all stages of the economic cycle. The interagency policy
statement is further intended to promote supervisory
consistency among examiners, enhance the transparency of CRE
loan accommodation and workout arrangements, and ensure
supervisory policies and actions do not inadvertently curtail
the availability of credit to sound borrowers.
---------------------------------------------------------------------------
\5\ The Supervision and Regulation Letter 23-5 is available at
https://www.federalreserve.gov/supervisionreg/srletters/SR2305.htm.
Q.2. Chairman Powell, diversity of perspectives and experiences
are critical for the Fed as it makes decisions that affect all
Americans. The Fed has made good progress in recent years at
improving racial and gender diversity within its leadership,
but it's also critical that there are voices represented beyond
just the business and financial realms and leaders with ties to
the communities they serve. This year the Cleveland and
Philadelphia Reserve Banks will be selecting new Presidents.
Both Presidents will serve as FOMC voting members and act as
regional economic policy leaders for their respective
districts. The Board's input in this process weighs heavily on
the presidential committee's final decision.
Additionally, the Board selects three Class C Directors for
each of the 12 Federal Reserve Regional Banks. These directors
oversee management of the Regional Banks and select their
bank's president. It is vital that Class C Directors can speak
to the local needs of workers, consumers, community banks, and
the business community.
Please describe the Fed's recent efforts to increase
thought diversity and select leaders with connections to
Federal Reserve districts across the System's leadership?
A.2. The Federal Reserve System (System) is committed to
fostering and leveraging diversity at all levels of our
organization. My colleagues and I agree that we make better
decisions on behalf of the American people when we draw from a
rich pool of perspectives and experiences.
The Board of Governors (Board) works closely with each of
the Federal Reserve Banks (Reserve Banks) to identify and
recruit highly qualified directors who can contribute to the
System's understanding of economic conditions in their
respective Districts and the Nation. As you noted, we have made
significant progress in increasing gender, racial, and ethnic
diversity among directors, and we are committed to maintaining
these gains. Collectively, nearly 70 percent of current Class C
and Class B directors, who represent the public and are
responsible for selecting their Reserve Bank's leadership, are
diverse in terms of gender and/or race/ethnicity.
Further, the current Class C and Class B directors provide
the System with a window into the economic well-being and
interests of workers, families, consumers, and communities
through their affiliations with a wide array of sectors and
industries, as well as organizations, such as labor unions,
nonprofits, hospital systems, and colleges and universities.
The Reserve Banks also benefit from the perspectives of their
Class A directors, including community and regional bankers,
who are elected by the member banks in their respective Federal
Reserve Districts to represent those banks. And as you know,
the Class A directors do not have a role in selecting Reserve
Bank leadership.
Using the lessons from recent searches for Reserve Bank
presidents and other senior System leaders, the Board has
communicated clear expectations to ensure that the search
process is robust, transparent, fair, and inclusive, and
generally conforms to best practices. Recent Reserve Bank
president searches have all emphasized the importance of
executive leadership and community engagement in addition to
policymaking capabilities. Additionally, the search committees
proactively reach out to their District's communities and
constituencies and engage with the public through digital media
and events and solicit nominations of candidates. My colleagues
and I at the Board, as well as the search committees, are
committed to continue conducting robust searches to identify
the best leaders.
Q.3. The Bank Holding Company Act requires the Fed to consider
the effects of the proposed transaction on the convenience and
needs of the community to be served when assessing mergers and
acquisitions. Yet the Fed approved the formation of Truist,
which went on to close nearly one thousand branches and still
plans to close more after missing financial targets, which the
merger was supposed to assure.
What is the Fed doing to make sure that future merger
decisions do not result in the surviving entity failing to meet
its communities' convenience and needs?
A.3. The Federal Reserve Board (Board) takes seriously its
responsibility to review bank merger proposals under the
relevant statutory factors set forth in the Bank Holding
Company Act of 1956 (BHC Act). These factors include the
financial and managerial resources of the organizations
involved and of the proposed combined institution; the
convenience and needs of the communities to be served by the
resulting institution; the Community Reinvestment Act
performance of the involved depository institutions; the
effectiveness of the parties in combatting money laundering;
and the effects of the proposal on competition and financial
stability.
Q.4. The Fed is the only one of the three banking regulators
that hasn't moved officially to review its merger policy.
When can we expect to see the Fed release an update to its
bank merger guidance?
A.4. The Federal Reserve currently is reviewing its bank merger
framework to determine whether any adjustments would be
appropriate to improve our merger analysis. This includes a
review of each of the statutory factors that the Federal
Reserve must consider in evaluating merger proposals. As part
of this process, Board staff have been engaging in discussions
with staff of the other banking agencies regarding our bank
merger frameworks, and with staff of the U.S. Department of
Justice regarding its ongoing review of the joint bank merger
guidelines.
Q.5. The Fed also has a financial stability mandate for
mergers, but it approved an acquisition by Silicon Valley
Bank--then an already fast-growing institution that quickly
rose to become one of the 25 largest banks in the country--
acquiring another multibillion-dollar bank without noting any
concerns about financial stability risks.
What is the Fed doing to make sure that future merger
decisions do not create or exacerbate systemic risks to
financial stability?
A.5. The Board has developed a comprehensive, multifaceted
framework for evaluating how a particular proposed merger may
affect risks to financial stability. Under the framework, the
Board analyzes five key factors: (i) the size of the resulting
firm; (ii) the availability of substitute providers for any
critical products or services offered by the resulting firm;
(iii) the interconnectedness of the resulting firm with the
banking or financial system; (iv) the extent to which the
resulting firm contributes to the complexity of the financial
system; and (v) the extent of the cross-border activities of
the resulting firm. These metrics are intended to capture the
systemic importance of the combined organization and the
incremental effect of the transaction on the systemic footprint
of the acquiring institution. The Board also considers
qualitative factors indicative of the relative degree of
difficulty of resolving the resulting firm, such as the
opaqueness and complexity of a firm's internal organization.
Further, the Board considers the resulting firm's global
systemically important bank score and factors that may mitigate
the effect of a proposed transaction on financial stability.
However, the Board has been clear that these factors are not
exhaustive or dispositive, and that any analysis under the
financial stability factor is holistic.
Q.6. A growing share of workers engage in ``gig'' work or other
forms of part-time employment. While part-time work can be
useful for many workers who have other familial or personal
responsibilities, like attending school, workers in alternative
work arrangements often have unpredictable or inconsistent
hours, leading to greater financial insecurity.
Please explain how the Fed considers alternative work
arrangements including ``gig'' worker or part-time workers in
its monetary policy decision making?
A.6. As part of our statutory mandate to promote maximum
employment and stable prices, we monitor a variety of labor
market data, including data on part-time employment, to assess
the extent to which labor is underutilized. The available data
on part-time employment indicates whether individuals are
working part time for economic reasons (e.g., because they
could not find full-time work or because of a period of weak
demand at their employer) or for non-economic reasons (e.g.,
because they are students, have childcare responsibilities, or
have other family or personal obligations that precludes full-
time work). Individuals working part time for economic reasons
could work more if demand was higher and so provide an
indication of the position of the economy relative to maximum
employment. An unusually large amount of part-time work for
economic reasons, for example, could suggest that the economy
is relatively far from maximum employment.
The share of workers working part time for economic reasons
was 2.8 percent in April, well toward the lower end of the
range for this metric over the past 30 years. Over the past
year, as the unemployment rate has increased slightly, so has
the share of workers working part time for economic reasons,
suggesting that the labor market remains tight, but not quite
as tight as it was a year ago.
If unemployment remained low, but an elevated number of
people were working part time for economic reasons, this might
suggest the economy was below maximum employment, and we would
take that into consideration. Of course, any assessment of the
position of the economy relative to maximum employment would
also take into account a large variety of other labor market
indicators.
Q.7. Efforts are currently underway to increase public safety
communications on the National Mall. The National Mall has long
been a difficult place to deploy critical communications
infrastructure, but there remains a public safety and homeland
security imperative to ensure first responders can communicate.
FirstNet Authority provided my office a copy of a letter it
sent the Federal Reserve on November 16, 2023, requesting a
meeting and discussing the possible installation of FirstNet
wireless equipment on property managed by the Federal Reserve.
Please provide an update on the Fed's involvement in this
initiative and any ideas the Fed may have to help address the
challenges with public safety communications.
A.7. Federal Reserve staff often engage with entities that are
interested in procurement or services opportunities with the
Board. We would be happy to follow-up directly with your staff
on this issue.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
FROM JEROME H. POWELL
Q.1. The Federal Reserve (Fed) announced in October 2023 that
it would undertake a supplemental data collection to better
understand the effects of the Basel III Endgame proposal. \1\
Subsequently, during a fireside chat on January 9, 2024, Vice
Chair Barr indicated that the public would have an opportunity
to comment of the results of the Fed's analysis of the data.
\2\
---------------------------------------------------------------------------
\1\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20231020b.htm
\2\ https://whfdc.org/events/EventDetails.aspx?id=1812706&group=
---------------------------------------------------------------------------
Does the Fed intend to reopen the comment period on the
Basel III Endgame rule to allow for comments on the data
results? If not, how does the Fed plan to provide the public
with an opportunity to comment?
What, if any, data does the Fed plan to release as part of
the results?
Will independent analysis of the data collected be
possible?
A.1. We have received voluminous substantive comments on the
capital proposal, as well data from the quantitative impact
studies. We are in the process of reviewing and assessing the
data and the comments received on the proposal. While we have
not yet made any decisions on how to proceed, I am confident
that the final product will be one that is analytically well-
grounded and will have broad support among the Board of
Governors (Board) and the public.
Q.2. In response to a question regarding whether the Fed was
willing to withdraw the Basel III Endgame proposal or re-
propose with significant modifications, you stated, ``[I]n
terms of process, we're not at the stage of making that
decision. I will say if it turns out to be appropriate, when we
get to that point, for us to propose parts or all of the thing,
then we won't hesitate to do so.'' You went on to state, ``[I]
expect there will be material and broad changes to the proposal
before it comes back to the [sic] board for consideration.''
Do you agree that ``material and broad'' changes to any
Federal agency proposal would require additional notice and
comment periods to allow the public an opportunity to review
and comment to ensure transparency and accountability in the
rulemaking process? If not, please explain.
What is a realistic timeline for when the Fed and the other
Federal banking agencies would decide to withdraw or re-propose
the Basel III Endgame proposal?
A.2. We have received voluminous substantive comments on the
capital proposal, as well data from the quantitative impact
studies. We are in the process of reviewing and assessing the
data and the comments received on the proposal. While we have
not yet made any decisions on how to proceed, I am confident
that the final product will be one that is analytically well-
grounded and will have broad support among the Board and the
public.
Q.3. In response to questions regarding the impact of rising
interest rates on the affordability of housing and whether
housing supply and demand are in balance, you stated, ``There
are things in the housing sector that we didn't fully
anticipate, and one of them was . . . that people in homes with
very low interest rate mortgages aren't selling. So, the
quantity of homes that's available is incredibly low and that's
why there's very little in the way of existing home sales and
that drives up existing home sale prices but also new home sale
prices.''
Please explain what the Fed anticipated would happen to
housing supply and demand when interest rates were raised in
response to inflation.
Has the Fed considered what impact significant additional
demand stimulus would have on housing affordability in the
current supply constrained housing market? If yes, please
explain.
What would that mean for homeowners, renters, and the Fed's
ability to bring down inflation?
A.3. Rising mortgage rates typically reduce overall demand in
the residential real estate market. The run-up in rates through
late-2023 contributed to an increase in typical mortgage
payments for new borrowers that caused home sales to fall
sharply. \3\ However, several other factors have supported
underlying demand for housing and prevented significant price
declines, including the robust job market and the increased
prevalence of remote work.
---------------------------------------------------------------------------
\3\ For more details, see the box ``Recent Housing Market
Developments'' in the March 2024 Monetary Policy Report.
---------------------------------------------------------------------------
Housing supply has also faced constraints from both short-
and long-term factors. In the short term, higher interest rates
and tighter underwriting by banks significantly increased
builders' costs of financing, thereby discouraging new
construction. In addition, a variety of longer-term factors--
including zoning and other regulatory hurdles and shortages of
labor and materials--have prevented construction from keeping
up with underlying demand.
The interplay between demand and supply has unfolded
differently across different segments of the housing market.
High mortgage rates have discouraged some potential sellers
with low rates on their current mortgages from moving, which
has kept the existing home market unusually thin. Indeed, there
has been a dramatic reduction in the number of people both
selling and bidding on homes. The shortage of available
existing homes for sale has pushed some remaining homebuyers
toward newly constructed homes and supported a modest rebound
in single-family construction since the middle of last year. In
contrast, after rising to historically high levels in 2022,
multifamily construction starts have fallen more recently in
response to builders' concerns about oversupply (which is
showing up in falling occupancy rates and a slowdown in rents).
Q.4. Last October, the Fed took the unprecedented step of
issuing principles for climate-related financial risk
management. The ``principles'' function as guidance,
instructing financial institutions on how they should be
conducting business as it relates to with climate risks. You
stated when the guidance was adopted, ``It is not the Fed's
role to tell banks which businesses they can and cannot lend
to, and this guidance is not intended to do so.'' \4\ Governor
Bowman warned when voting against the guidance, `` . . . I am
concerned that the guidance could be used by the Federal
Reserve and other Federal banking agencies to pursue climate
policies leveraging the opacity of the supervisory process.''
\5\
---------------------------------------------------------------------------
\4\ https://www.federalreserve.gov/newsevents/pressreleases/
powell-statement-20231024b.htm
\5\ https://www.federalreserve.gov/newsevents/pressreleases/
bowman-statement-20231024b.htm
---------------------------------------------------------------------------
What safeguards are in place to ensure that this new
guidance will not be abused by regulators to push political
climate agendas?
A.4. The Federal Reserve neither prohibits nor discourages
financial institutions from providing banking services to
customers of any specific class or type, as permitted by law or
regulation. The decision regarding whether to make a loan or to
open, close, or maintain an account rests with the financial
institution, so long as the financial institution complies with
applicable laws and regulations.
In October 2023, the Federal Reserve, jointly with the
Federal Deposit Insurance Corporation and the Office of the
Comptroller of the Currency, finalized Principles for Climate-
Related Financial Risk Management for Large Financial
Institutions (the principles) that provide a high-level
framework for the safe and sound management of exposures to
climate-related financial risks for large financial
institutions, those with $100 billion or more in total assets.
The principles are squarely focused on prudent and appropriate
risk management, reflecting that the Federal Reserve's
responsibilities with respect to climate change are narrow and
tightly linked to our responsibilities for bank supervision.
The Federal Reserve is not--nor do we seek to be--a climate
policymaker.
Q.5. Given that the joint banking agencies issued the Basel III
Endgame and Long-Term Debt proposals a little over a month
apart and closed the comment period for both proposals on the
same date:
Do the agencies plan to finalize both rules at the same
time?
Has the Fed conducted any analysis on the combined impact
of the two proposals?
A.5. We are in the process of carefully considering comments on
all aspects of the proposals, including how each proposal would
interact with other rulemaking proposals and impact the U.S.
economy and regulated firms. While we have not yet made any
decisions on how to proceed, I am confident that the final
product will be one that is analytically well-grounded and will
have broad support among the Board and the public.
Q.6. The Federal Reserve Bank of New York recently detailed the
rise in household debt, increasing 1.2 percent in the fourth
quarter of 2023. \6\ The data also reflects that credit card
and auto loan delinquencies are continuing to rise, with bank
credit card loan delinquencies now at their highest level in
over a decade. \7\
---------------------------------------------------------------------------
\6\ https://www.newyorkfed.org/newsevents/news/research/2024/
20240206
\7\ https://fred.stlouisfed.org/series/DRCCLACBS
---------------------------------------------------------------------------
Is the Fed concerned with this increasing trend amongst
borrowers?
Did the Fed consider short-term borrowing costs and a
potential increase in debt and delinquency when making the
decision to quickly increase interest rates in response to
inflation?
A.6. Although credit card balances on the whole have risen over
the past year, this largely reflects a continued reversal of
declines seen in the early stages of the pandemic. Adjusted for
inflation, credit card balances have reached their prepandemic
levels (as of the fourth quarter of 2023).
Credit card delinquency rates fell to near-record lows
during the pandemic; they have since risen above their
prepandemic levels and currently stand at about their long-run
average starting from the early 2000s (excluding the period of
the 2007-08 financial crisis and its aftermath). The rise in
delinquencies to date is not likely to have material effects on
the aggregate economy or on financial stability, but we will
continue to monitor developments and the resulting implications
for the economy.
Q.7. On February 15, 2024, the Federal Reserve released for the
first time four hypothetical scenarios in addition to its
annual stress tests. \8\ The Fed contends that these
hypothetical scenarios will help provide insight into the
resiliency of the U.S. banking system and will not have an
impact on bank capital requirements.
---------------------------------------------------------------------------
\8\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20240215a.htm
---------------------------------------------------------------------------
Will the results of these scenarios be used by bank
examiners in the supervisory process?
Will the results of these scenarios factor into a firm's
CAMELs ratings?
A.7. In February 2024, the Federal Reserve Board released the
hypothetical scenarios for its annual stress test, which helps
ensure that large banks can lend to households and businesses
even in a severe recession. Additionally, for the first time,
the Board released four hypothetical elements designed to probe
different risks through its exploratory analysis of the banking
system. The exploratory analysis will not affect bank capital
requirements. The elements of the exploratory analysis will
complement the 2024 stress test by providing aggregate banking
system results against different economic and financial
conditions. The exploratory analysis can inform supervisory
analysis and deepen our understanding of the resilience of the
banking system. Exploratory analysis will not determine capital
requirements or firms' ratings.
Q.8. According to a USDA forecast released in February--weak
commodity prices, high interest rates, and lingering
inflationary pressures will likely sink farm income for a
second straight year in 2024. Persistent inflation continues to
elevate costs for farmers and ranchers on inputs ranging from
labor to equipment to fertilizer. There is widespread concern
amongst our agricultural producers and lenders that weakening
commodity prices will make it difficult for farmers and
ranchers to turn a profit in the near future, resulting in a
credit squeeze with reverberations across rural economies.
While our agricultural producers and lenders recognize the
cyclical nature of their industry and the need to prepare for
near-term ups and downs, they should not have to worry about
constraints that will limit the ability of banks to serve
America's food producers. There is also a growing awareness of
the Basel III Endgame proposal's impact on farmers and
ranchers' access to capital and cost of borrowing, as well as
the role banks have in providing market stability and price
discovery functions.
How does the Fed plan to address the uneven inflation
recovery for our farmers and ensure future credit availability?
Does the Fed plan to thoughtfully address the concerns
raised by stakeholders in the agriculture sector with the Basel
III Endgame proposal? If so, how?
A.8. We have received voluminous substantive comments on the
capital proposal, as well data from the quantitative impact
studies. We are aware of the concerns that commenters have
raised about the impact of the rule on the agriculture sector.
We are in the process of reviewing and assessing the data and
the comments received on this issue and other aspects of the
proposal. I am confident that the final product will be one
that is analytically well-grounded and will have broad support
among the Board and the public.
Q.9. It seems that the Fed, along with the other banking
regulators, have been on a crusade to promulgate as much new
regulation as possible. Regulations touching everything from
climate change, mergers and acquisition, liquidity
requirements, and just about everything in-between. For
regulated entities and policymakers alike, it is extremely
difficult to keep pace with the flood of proposals being rushed
out. Financial institutions are now spending countless hours
and millions of dollars just to understand these new rules and
proposals, let alone comply with them.
How often, if ever, has the Fed analyzed the combined
impacts and costs of all the new regulations to banks, other
industries, consumers, and our economy?
A.9. Congress and the American people rightly expect us to
achieve an effective and efficient regulatory regime that keeps
our financial system strong and protects our economy, while
imposing no more burden than is necessary. Striking this
balance is critical, but it is also challenging. Therefore,
public input and thoughtful deliberation are essential.
Proposals put forward by the Board are accompanied by economic
impact analyses. Where appropriate, those analyses acknowledge
the potential interactions of the proposals with other
regulations. In addition, many of those proposals, and notably
the Basel III Endgame and the Long-Term Debt proposals
requested comment on the interaction with other outstanding
proposals.
Q.10. During the March 6 hearing before the House Financial
Services Committee, you indicated that the Fed is working on a
package of liquidity measures which directly address the
Silicon Valley Bank (SVB) failure.
Does the Fed intend to gather and analyze thorough data and
information prior to releasing a proposed rule or guidance?
What is the timeline for release of a proposal addressing
these liquidity measures?
A.10. The events of the first half of 2023--in particular, the
unprecedented level and speed of deposit outflows at a few
firms--have underscored the importance of liquidity risk
management. In light of this experience, the Board is carefully
considering how we supervise and regulate liquidity risk. Any
changes to our liquidity rules would be expected to go through
the normal notice and public comment process.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR FETTERMAN FROM JEROME H. POWELL
Q.1. We are a year out from the Silicon Valley Bank blow up and
bailout. Isn't it true that increasing capital requirements, as
the Fed is proposing in its NPRM, would reduce the costs and
likelihood of bailing out greedy, mismanaged banks like SVB?
Do you stand by the Fed's assessment that the NPRM to
increase capital requirements will increase lending costs by
just 3 basis points?
A.1. We have received voluminous substantive comments on the
capital proposal, as well data from the quantitative impact
studies. We are in the process of reviewing and assessing the
data and the comments received, including those on the impact
of the proposal on lending costs. I am confident that the final
product will be one that is analytically well-grounded and will
have broad support among the Federal Reserve Board (Board) and
the public.
Q.2. Your predecessor, Paul Volcker, once said that ``just
about whatever anyone proposes, no matter what it is, the banks
will come and claim that it will restrict credit and harm the
economy . . . it's all [baloney].'' \1\ Do you agree that
claims about increasing capital requirements are without merit?
---------------------------------------------------------------------------
\1\ Jeff Connaughton, ``The Payoff: Why Wall Street Always Wins'',
Prospecta Press, 2012, p.200.
A.2. We have received voluminous substantive comments on the
capital proposal, as well data from the quantitative impact
studies. We are in the process of reviewing and assessing the
data and the comments received. I am confident that the final
product will be one that is analytically well-grounded and will
---------------------------------------------------------------------------
have broad support among the Board and the public.
Q.3. All the big banks claim that increasing capital
requirements would be terrible because equity funding is
allegedly so much more expensive than debt funding. Yet many
American companies are funded primarily through equity. Apple,
for example went for decades without issuing debt, funding its
operations through equity and not issuing dividends. The big
banks do the exact opposite: loading up on debt and shoveling
their earnings out to shareholders as fast possible.
Did Steve Jobs somehow mismanage Apple by not loading up on
debt like the big banks do?
What benefits, if any, do working Pennsylvanians get from
letting federally insured banks remain highly leveraged and
shovel profits out the door as fast possible?
A.3. We have received voluminous substantive comments on the
capital proposal, as well data from the quantitative impact
studies. We are in the process of reviewing and assessing the
data and the comments received. I am confident that the final
product will be one that is analytically well-grounded and will
have broad support among the Board and the public.
Q.4. Do you agree with SEC Chair Gensler that stablecoins are
basically just poker chips at the crypto casino? Aren't
stablecoins just the newest quote-unquote ``safe'' asset that
will blow up the economy and get bailed out?
A.4. Payment stablecoins are a form of private money, subject
to the same run risk as all such forms of money. Depending on
their specific design and use case, stablecoins may pose risks
to U.S. consumers, financial institutions, and the broader
payment system, especially if they grow to a large scale. Any
instrument that is claimed to represent the U.S. dollar must be
well-regulated to protect U.S. households and businesses. The
principle of ``same risk, same regulation'' will ensure an even
playing field for stablecoins versus more traditional forms of
money-like assets. This principle iterates that when crypto
companies are engaging in the same activities as traditional
financial intermediaries, leading to the same risks, they
should be subject to the same rules.
As described in the interagency President's Working Group
on Financial Markets ``Report on Stablecoins'' in 2021,
legislation from Congress is integral to ensuring risks
associated with stablecoins are adequately managed. \2\ The
report also noted that stablecoins, if appropriately regulated
and well-designed, could support faster, more efficient, and
more inclusive payment options. Any legislation on stablecoins
should include a Federal statutory prudential framework for
stablecoins that fully addresses the risks they pose.
---------------------------------------------------------------------------
\2\ See https://home.treasury.gov/system/files/136/
StableCoinReport-Nov1-508.pdf.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
FROM JEROME H. POWELL
Q.1. Last September, the Federal Reserve, the Federal Deposit
Insurance Corporation and the Office of the Comptroller of the
Currency proposed a rule to require certain large bank holding
companies to issue and maintain a minimum amount of long-term
debt.
My Republican colleagues on this Committee and I, led by
Senator Britt, sent you a letter on January 17, highlighting
our concern that the lack of tailoring in the Long Term Debt
proposed rule contradicts the statutory requirements of the
Economic Growth, Regulatory Relief, and Consumer Protection Act
(S. 2155).
The proposed rule fails to apply tailoring principles and
treats Category II, III, and IV financial institutions in an
identical fashion for purposes of long-term debt issuances. It
also imposes an additional burden to category II-IV banks by
requiring them to issue LTD at both the parent holding company
and bank level, where U.S. Globally Systemically Important
Banks, or ``G-SIBs'' need only to issue LTD from the parent
company.
Chair Powell, will you commit to tailoring the LTD final
rule, in accordance with the spirit and letter of S. 2155?
A.1. Differentiating regulatory requirements based on the
characteristics of banking organizations has long been an
important feature of the Federal Reserve Board's (Board)
regulatory framework. I am committed to maintaining the
strength and diversity of the banking system so that it can
continue to provide financial services and access to credit for
households and businesses. It is important that our regulation
and supervision reflect the size and risks associated with
different firms. The proposal invited the public to comment on
the Board's proposed differentiation of the long-term debt
requirements, and whether the Board should adjust the proposed
application and scope of the rule. We are in the process of
carefully considering these and other comments received on the
proposal. While we have not yet made any decisions on how to
proceed, I am confident that the final product will be one that
is analytically well-grounded and will have broad support among
the Board and the public.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR VANCE
FROM JEROME H. POWELL
Q.1. In 2020, the Federal Reserve gave BlackRock assurances
that, as long as they stay below 25 percent ownership of a
bank, they will not be labeled Bank Holding Companies (BHCs).
The Federal Reserve has also given State Street and other asset
managers similar commitments. However, as you may know, this is
not the only trigger in the Bank Holding Company Act to be
designated a BHC. Another criteria that can trigger a BHC
designation is whether a company ``directly or indirectly
exercises a controlling influence over the management or
policies of the second company.''
And I should note that when the Federal Reserve granted
these assurances, your agency also required the asset managers
make various commitments. One of these states that the asset
managers will not ``exercise or attempt to exercise a
controlling influence over the management or policies of any
Bank or any of its subsidiaries.''
While I appreciate the Federal Reserve requiring these
commitments, I'm concerned that both the regulators and the
public lack insight into whether the asset managers are abiding
by these requirements. As you may know, BlackRock, Vanguard,
and State Street file shortened beneficial ownership
disclosures--13G filings rather than 13D filings--due to their
status as passive investors. As a result, the public and
regulators lack insight into their stewardship activities and
more specifically, insight into their engagement with
executives at, and boards of, banks and other portfolio
companies in which they are invested.
Given this, I'm worried the big three asset managers may
not be abiding by their commitments and instead hiding
pertinent activities from the Federal Reserve, SEC, and other
regulators.
With that in mind, will the Federal Reserve reevaluate
assurances made to State Street and BlackRock regarding BHC
designation and consider labeling them BHCs if the asset
managers continue to avoid disclosing their corporate
stewardship activities?
A.1. Asset managers invest on behalf of their clients in
regulated banking entities, including Federal Reserve Board-
regulated banking entities. A number of asset managers have
engaged in discussions with Federal Reserve Board (Board) staff
about how and when statutory control requirements apply to
their investment activity in Board-regulated banking entities.
As a result of this engagement, some asset managers have
provided commitments to the Board to limit their investments,
activities, and relationships with respect to Board-regulated
banking entities. In each case, the asset managers have
committed that they will not ``attempt to influence the
dividend policies; loan, credit, or investment decisions or
policies; pricing of services; personnel decisions; operations
activities (including the location of any offices or branches
or their hours of operation, etc.); or any similar activities
or decisions of any Board-regulated banking entity or any of
its subsidiaries.'' \1\
---------------------------------------------------------------------------
\1\ See the appendices in Letter from Scott G. Alvarez, General
Counsel, Board of Governors of the Federal Reserve System, to Satish M.
Kini, Debevoise & Plimpton LLP (April 11, 2013), at https://
www.federalreserve.gov/supervisionreg/legalinterpretations/bhc-
changeincontrol
20130413.pdf; Letter from Mark E. Van Der Weide, General Counsel, Board
of Governors of the Federal Reserve System, to Anne E. Robinson,
Managing Director, General Counsel and Secretary, The Vanguard Group,
Inc. (November 26, 2019), at https://www.federalreserve.gov/
supervisionreg/legalinterpretations/bhcchangeincontrol20191126a.pdf;
Letter from Scott G. Alvarez, General Counsel, Board of Governors of
the Federal Reserve System, to Jeffrey Hare, DLA Piper LLP (April 27,
2016), at https://www.federalreserve.gov/bankinforeg/
LegalInterpretations/bhc-changeincontrol20160427.pdf; Letter from Scott
G. Alvarez, General Counsel, Board of Governors of the Federal Reserve
System, to Satish M. Kini, Debevoise & Plimpton LLP (June 15, 2017), at
https://www.federalreserve.gov/bhc--changeincontrol20170615.pdf; Letter
from Mark E. Van Der Weide, General Counsel, Board of Governors of the
Federal Reserve System, to Donald S. Waack, Mayer Brown LLP (April 5,
2018), at https://www.federalreserve.gov/bhc-
changeincontrol20180405.pdf; Letter from Mark E. Van Der Weide, General
Counsel, Board of Governors of the Federal Reserve System, to William
J. Sweet, Jr., Skadden, Arps, Slate, Meagher, and Flom LLP (December 3,
2020), at https://www.federalreserve.gov/supervisionreg/
legalinterpretations/blackrock-letter-20201203.pdf; and Letter from
Mark E. Van Der Weide, General Counsel, Board of Governors of the
Federal Reserve System, to Robert J. Rhatigan, Dechert LLP (May 6,
2021), at https://www.federalreserve.gov/supervisionreg/
legalinterpretations/virtus-letter-20210506.pdf.
---------------------------------------------------------------------------
These commitments are conditions imposed in writing in
connection with the interpretive letters, and firms that fail
to comply with their commitments are subject to the Board's
enforcement authority. \2\ Like other investors that provide
commitments to the Board, asset managers are required to
certify their compliance with the commitments on request. For
example, BlackRock and Vanguard provided such certifications in
April 2024 and March 2023, respectively.
---------------------------------------------------------------------------
\2\ See 12 U.S.C. 1818.
---------------------------------------------------------------------------
The Board can and does monitor the ownership levels of
investors, including asset managers, in Board-regulated banking
entities in several other ways. Every parent bank holding
company and savings and loan holding company is required to
file annual reports with the Board. Among other things, this
report requires each holding company to list each securities
holder that owns, controls, or holds with the power to vote 5
percent or more of any class of voting securities of the
holding company as of its fiscal year end. \3\ This information
allows Federal Reserve staff to monitor ownership levels in
Board-regulated banking entities (including ownership by asset
managers) and ensure compliance with filing obligations under
the Bank Holding Company Act, Home Owners' Loan Act, and the
Change In Bank Control (CIBC) Act. Furthermore, during an
inspection of a holding company, Federal Reserve supervisors
also review and discuss the composition and strategy of the
firm's board of directors and management with the firm's
management. The inspection provides supervisors visibility into
whether there are any change of control or undue influence
issues, including with respect to the influence of asset
managers. Additionally, for any asset manager that files a CIBC
Act notice with the Board, the Board typically requests a list
of all entities in which the asset manager has an equity
investment over a certain threshold, and the percentage of
voting equity owned.
---------------------------------------------------------------------------
\3\ See ``Instructions for the Preparation of the Annual Report of
Holding Companies, Reporting Form FR Y-6, Report Item 3: Securities
Holders'', GEN-9 (Effective December 2022), at https://
www.federalreserve.gov/apps/reportingforms/Download/
DownloadAttachment?guid=63605a60-09b7-4bf5-b0cc-c931beb9b0b1.
Q.2. You noted insurance prices are rising due to ``a million
different factors.'' Isn't it true that since the COVID-19
pandemic inflation in insurance cost inputs have risen faster,
and higher on a cumulative basis, than broader inflation?
For auto insurance this might include cost inputs such as
used cars and trucks values, motor vehicle parts and equipment,
and motor vehicle repair and maintenance costs. For homeowners
insurance this might include costs inputs such as single-family
residential construction trade services and labor, rent of
shelter and household furnishings and operations.
Can you share the extent to which these costs have risen
since the COVID-19 pandemic in comparison to broader CPI or
PPI, for the same time period?
In comparing CPI and PPI data from the Bureau of Labor
Statistics for these specific insurance cost inputs and
inflation in premiums for private passenger auto insurance and
premiums for homeowners insurance, could you share if insurance
premiums are keeping pace with these cost inputs, meaning as
high and as fast?
A.2. Insurance plays an important role in transferring risk to
the financial sector participants best positioned to manage and
hold it. While the Federal Reserve does not regulate the way
insurance is provided or the types of insurance provided, a
significant erosion in the availability and affordability of
insurance could have adverse effects on the broader economy.
Gaps in insurance protection can have consequences for
homeowners, businesses, and State and local governments, as
well as for the value of their assets. These effects in turn
may impact the safety and soundness of supervised institutions,
the stability of the financial system, or the broader economy.
Although comprehensive and timely data to monitor trends in
insurance markets are limited, some evidence suggests that the
cost of certain types of insurance (e.g., motor vehicle
insurance and homeowners' insurance) has risen much faster than
overall inflation. According to the consumer price index (CPI),
vehicle insurance premiums are up more than 40 percent since
December 2019, and the cost of vehicle maintenance and repair
(likely the largest cost factor for insurers) has increased 35
percent. Data from the National Association of Insurance
Commissioners suggest insurance revenues, a rough proxy for the
price of insurance, have also risen faster than overall
inflation. \4\ Specific comparisons between cost inflation and
insurance rates are difficult due to lags between when insurers
experience claim costs and when they reflect them in rates.
Insurance rates also reflect competitive decisions and, in some
States, regulatory rate approvals.
---------------------------------------------------------------------------
\4\ Homeowners insurance is out of scope for the CPI. The CPI
includes ``rental equivalence'' to measure the cost of home ownership,
and insurance costs are assumed to be captured by owners' equivalent
rent, so there is no easy way to gauge the precise impact.
---------------------------------------------------------------------------
The recent rise in insurance costs reflects a combination
of factors, including rising home and vehicle prices, an
increase in the cost of materials and labor for repairs, a rise
in the cost of reinsurance, changes in postpandemic driving
behaviors, greater building in high-risk areas, litigation
rules and trends, and growing losses from more frequent or
severe weather events. Mitigation actions that reduce the
likelihood or severity of insurance claims may help in reducing
increases in insurance premiums.
Insurance availability reflects individual insurer
decisions balancing several factors. Some of the key
considerations include: the extent to which insurers are
confident that they can measure and price the risks they are
assuming; the extent they can charge a premium that reflects
the risk, their input costs, and their financial and
competitive goals; the extent that coverages fit their
strategic and risk management goals; and any constraints from
regulation and capital capacity. Insurance insolvencies also
have the potential to affect the availability and affordability
of insurance.
Government-run insurance programs can provide support to
markets where private insurance coverage is insufficient. As
you note, there may also be other measures, such as those
related to loss prevention, that are effective in maintaining
the availability and affordability of private insurance
coverage.
Q.3. Aside from these economic factors, there may be other
factors, such as growth in exposures in high weather risk
regions, increasing litigation, and regulatory environments.
Could you expand on these various other factors that are
significantly contributing to rising insurance costs?
A.3. Please see my response to Question 2.
Q.4. In your testimony you mentioned some companies ``are
withdrawing from writing insurance'' in certain regions and
made reference to the effects of ``insurance coverage on the
overall stability of the financial institutions in the broader
economy.''
Would you agree that it is a prudent business decision to
take steps to de-risk if a company is not allowed to charge the
premiums indicated by the costs being assumed?
To ensure companies are well positioned financially to
cover future liabilities, would you agree it is important for
an insurance company to maintain a high ``Financial Strength
Rating'', and ratings downgrades stemming from issues such as
diminished capital and surplus due to excessive losses and
delays in rate approvals, can have financially adverse
consequences on a company?
You noted the Fed is ``monitoring the rising costs of
insurance and its impacts on macro economy''. Would you agree
that it negatively affects consumers if insurance companies
become insolvent because rates are ``inadequate'' and premiums
too low? Would you agree that it negatively affects the broader
financial sector if insurance companies become insolvent
because rates are ``inadequate'' and premiums too low?
A.4. Please see my response to Question 2.
Q.5. You noted the increases in insurance prices have ``been
adding meaningfully to inflation.'' Would you agree that
insurance company solvency, much like any business, depends on
revenue streams that are adequate to cover costs and expenses?
This means, in the insurance context, insurance departments
must approve adequate rates, which is charged as premium, to
ensure a functioning insurance market? And is it appropriate to
compare current overall inflation measures with the increases
in insurance premiums needed because rates have been suppressed
in some markets for several years?
A.5. Please see my response to Question 2.
Q.6. In your testimony you pondered whether ``the Government
will have to step in'' due to a lack of insurance. To ensure a
healthy and functioning insurance market, companies must be
able to charge an adequate rate to cover their losses and
expenses. Though, with rising losses and underlying cost
inputs, would you agree the Government should incentivize the
adoption and enforcement of building codes and proven
mitigation and resiliency measures to reduce risk, which as a
result, could significantly improve affordability and
availability by reducing overall losses?
A.6. Please see my response to Question 2.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGERTY
FROM JEROME H. POWELL
Q.1. In reference to the Federal Reserve's consideration of
potential changes to proposed rules to strengthen capital
requirements for large banks (the ``Basel proposal''), you
stated: ``[My] guess is this can be done this year, but it
could be faster than that.''
If the Basel proposal is resubmitted, will the Federal
Reserve provide a public comment period that is the same
duration as the public comment period for the initial proposal?
If not please provide context as to why this would not be the
case.
A.1. We have received voluminous substantive comments on the
capital proposal, as well data from the quantitative impact
studies. We are in the process of reviewing and assessing the
data and the comments received on the proposal. While we have
not yet made any decisions on how to proceed, I am confident
that the final product will be one that is analytically well-
grounded and will have broad support among the Federal Reserve
Board and the public.
Q.2. There has been significant concern raised about the
mortgage capital provisions in the Basel proposal.
Are there any concerns raised in comment letters that the
Fed is currently working on addressing?
A.2. We have received voluminous substantive comments on the
capital proposal, as well data from the quantitative impact
studies. We are aware of the concerns that commenters have
raised about the mortgage capital provisions. We are in the
process of reviewing and assessing the data and the comments
received on the proposal. While we have not yet made any
decisions on how to proceed, I am confident that the final
product will be one that is analytically well-grounded and will
have broad support among the Federal Reserve Board and the
public.
Q.3. The Fed currently holds about $2.6 trillion of mortgage-
backed securities (MBS) in its securities portfolio, about a
quarter of the total MBS market. Kansas City Federal Reserve
President Esther George has stated that Fed officials agree in
principle that the central bank's securities portfolio should
only include assets issued by the U.S. Treasury--not those
backed by mortgages.
How is the Fed considering the effects of reducing its MBS
footprint on housing markets?
A.3. The Federal Reserve conducts monetary policy in pursuit of
its statutory mandate to promote price stability and maximum
employment. In response to the pandemic, the Federal Reserve
purchased large volumes of Treasury securities and agency
mortgage-backed securities (MBS) in the amounts needed to
ensure smooth market functioning and the effective transmission
of monetary policy to broader financial conditions. With the
economic recovery well along, the Federal Reserve began to
gradually reduce the size of its securities holdings beginning
in June of 2022 consistent with its previously announced
principles and plans for reducing the size of the balance
sheet. \1\ Since then, the Federal Reserve's securities
holdings have declined by about $1.6 trillion.
---------------------------------------------------------------------------
\1\ See https://www.federalreserve.gov/newsevents/pressreleases/
monetary20220126c.htm and https://www.federalreserve.gov/newsevents/
pressreleases/monetary20220504b.htm.
---------------------------------------------------------------------------
At present, the Federal Reserve's agency MBS holdings stand
at about $2.4 trillion and are running off at a pace of about
$15 billion per month. As noted in the Federal Open Market
Committee's (FOMC) statement of Principles for Reducing the
Size of the Balance Sheet, in the longer run, the FOMC intends
to hold primarily Treasury securities in the Federal Reserve
System Open Market Account (SOMA) portfolio, thereby minimizing
the effect of Federal Reserve holdings on the allocation of
credit across sectors of the economy. The gradual pace of
runoff of agency MBS implies that returning to a SOMA portfolio
that consists primarily of Treasury securities will take some
time. For example, the SOMA annual report includes some
illustrative projections for the Federal Reserve's balance
sheet. \2\ In these projections, agency MBS holdings decline by
about $1.6 trillion over the next 10 years. The agency MBS
market has adapted well to the gradual reduction in the Federal
Reserve's holdings and that process seems likely to continue to
proceed smoothly, with the Federal Reserve's presence in this
market continuing to diminish over time.
---------------------------------------------------------------------------
\2\ See https://www.newyorkfed.org/medialibrary/media/markets/omo/
omo2023-pdf.pdf.
Additional Material Supplied for the Record
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]