[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
MONETARY POLICY AND THE
STATE OF THE ECONOMY
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HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 11, 2020
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-85
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
42-819 PDF WASHINGTON : 2021
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California ANN WAGNER, Missouri
GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri STEVE STIVERS, Ohio
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut SCOTT TIPTON, Colorado
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio FRENCH HILL, Arkansas
DENNY HECK, Washington TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
RASHIDA TLAIB, Michigan DAVID KUSTOFF, Tennessee
KATIE PORTER, California TREY HOLLINGSWORTH, Indiana
CINDY AXNE, Iowa ANTHONY GONZALEZ, Ohio
SEAN CASTEN, Illinois JOHN ROSE, Tennessee
AYANNA PRESSLEY, Massachusetts BRYAN STEIL, Wisconsin
BEN McADAMS, Utah LANCE GOODEN, Texas
ALEXANDRIA OCASIO-CORTEZ, New York DENVER RIGGLEMAN, Virginia
JENNIFER WEXTON, Virginia WILLIAM TIMMONS, South Carolina
STEPHEN F. LYNCH, Massachusetts VAN TAYLOR, Texas
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
C O N T E N T S
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Page
Hearing held on:
February 11, 2020............................................ 1
Appendix:
February 11, 2020............................................ 57
WITNESSES
Tuesday, February 11, 2020
Powell, Hon. Jerome H., Chairman, Board of Governors of the
Federal Reserve System......................................... 5
APPENDIX
Prepared statements:
Powell, Hon. Jerome H........................................ 58
Additional Material Submitted for the Record
Powell, Hon. Jerome H.:
Written responses to questions for the record from Chairwoman
Waters..................................................... 63
Written responses to questions for the record from
Representative Beatty...................................... 81
Written responses to questions for the record from
Representative Budd........................................ 82
Written responses to questions for the record from
Representative Cleaver..................................... 83
Written responses to questions for the record from
Representative Green....................................... 95
Written responses to questions for the record from
Representative Heck........................................ 96
Written responses to questions for the record from
Representative Hill........................................ 99
Written responses to questions for the record from
Representative Sherman..................................... 104
Written responses to questions for the record from
Representative Tlaib....................................... 107
MONETARY POLICY AND THE
STATE OF THE ECONOMY
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Tuesday, February 11, 2020
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:10 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the committee] presiding.
Members present: Representatives Waters, Velazquez,
Sherman, Meeks, Clay, Scott, Green, Cleaver, Perlmutter, Himes,
Foster, Beatty, Heck, Vargas, Gottheimer, Gonzalez of Texas,
Lawson, Tlaib, Porter, Axne, Casten, Pressley, McAdams, Wexton,
Lynch, Adams, Dean, Garcia of Illinois, Garcia of Texas,
Phillips; McHenry, Wagner, Lucas, Posey, Luetkemeyer, Huizenga,
Stivers, Barr, Tipton, Williams, Hill, Zeldin, Loudermilk,
Mooney, Davidson, Kustoff, Hollingsworth, Gonzalez of Ohio,
Rose, Steil, Gooden, Riggleman, Timmons, and Taylor.
Chairwoman Waters. The Financial Services Committee will
come to order. Without objection, the Chair is authorized to
declare a recess of the committee at any time.
Today's hearing is entitled, ``Monetary Policy and the
State of the Economy.''
I now recognize myself for 4 minutes for an opening
statement.
I would like to welcome back Chairman Powell. As I
discussed earlier, at our last hearing with you, I remain very
concerned about the President's efforts to interfere with the
Federal Reserve's (Fed's) independent monetary policy. A recent
news story noted that Trump has tweeted over 100 times about
the Fed since your nomination. Many of those tweets appear to
be attempting to exert pressure on the Fed.
Chairman Powell, you and the Federal Reserve Board of
Governors must not be swayed by these aggressive tactics. In
upholding the Fed's independence, you should also be mindful of
public perception. Of course, Trump continues to try to claim
credit for economic growth that was put in motion by the
policies of President Obama, Congressional Democrats, and the
Federal Reserve. His irresponsible trade war and the GOP tax
scam have blown up the national debt, slowed our economic
growth, and harmed hard-working American families. Trump
continues to squander this inherited economy.
Let me note that I am, however, disappointed in the Fed's
efforts to deregulate megabanks, most recently by proposing to
further roll back the Volcker Rule. The Dodd-Frank Act made our
financial system safer, but it depends on agencies like the Fed
to prudentially use the tools available to monitor and mitigate
threats to our economy.
The committee is carefully monitoring the developments in
the repo market and the Fed's response. The Fed should not
arbitrarily reduce liquidity requirements in response to the
repo market disruption, as some on Wall Street have asked for.
Instead, the Fed should make appropriate adjustments to promote
a well-functioning repo market, while ensuring we have strong
capital rules that can't be gamed through window dressing, a
practice where banks alter their balance sheet to appear less
risky and reduce their capital levels.
In addition, the riskiness of various financial assets is
increasing as climate change poses a more serious risk to our
economy. The Fed and other regulators should utilize financial
stability tools under the Dodd-Frank Act, such as incorporating
climate-related losses into supervisory stress tests of big
banks to address this growing risk.
I would also like to discuss recent developments with
Community Reinvestment Act (CRA). We have had a series of
hearings on this issue, and I am very concerned about OCC
Comptroller Otting's harmful proposal to turn CRA into the
Community Disinvestment Act and allow banks to escape their
obligation to make responsible investments in the communities
where they are chartered. I urge the Fed to take a careful,
deliberate approach to any changes to the implementation of the
CRA and to not join Comptroller Otting's misguided efforts.
Fed Governor Brainard's statement that, ``It is more
important to get the reforms done right than to do them
quickly,'' is absolutely correct. The OCC and the FDIC should
heed that advice as well and extend the public comment period
as community banks, State regulators, community and civil
rights groups, and committee Democrats have called for so that
all stakeholders have an opportunity to voice their concerns.
I also encourage the Fed to keep a watchful eye on
Facebook's efforts to launch a cryptocurrency and a digital
wallet, which, as we discussed at our last hearing, could have
profound implications for monetary policy and compete with our
own U.S. dollar. In light of the many risks Facebook plans to
create, I, along with other Democrats, have called on Facebook
to halt their plans until Congress can examine the issues
associated with a big tech company developing these digital
products and take action.
I look forward to your testimony today, Chairman Powell,
and to discussing these matters.
I now recognize the ranking member of the committee, the
gentleman from North Carolina, Mr. McHenry, for 4 minutes for
an opening statement.
Mr. McHenry. Thank you, Chairman Powell, for appearing
before us once again.
Under the Trump Administration, we have the best economy
that we have had in decades. The numbers are irrefutable. We
added 225,000 new jobs in January, and the unemployment rate is
essentially at its lowest level in half a century. This
prosperity is being shared by all Americans, including African
Americans and Hispanics, whose unemployment rate reached record
lows last year.
The prime-age labor force participation has reached 2.2
million people who were previously out of the workforce, and
not surprisingly, consumer confidence has increased
dramatically since the month before the President's election.
Every Member of Congress should celebrate these remarkable
outcomes which have resulted from Republican leadership on pro-
growth policies like tax reform and regulatory rightsizing.
But sustaining our economic prosperity also hinges on the
Federal Reserve having good policy. The central bank is
currently undertaking a review of its monetary policy framework
to determine the tools it may need in the future.
Chairman Powell, I raise the concern that we have
regulatory policy that is impinging upon your capacity to make
proper monetary policy, and that is why I think it is important
that you have a regulatory review of the limitations that those
regulations can put on your broader monetary policy decisions.
That includes systemic risk concerns that I have raised, as
well as open market operations, well, especially the open
market operations, and the repo market.
I thank you for your prompt response to my questions about
the repo market operations, but I am not sure there has been a
satisfactory answer as to what caused the market spike in the
first place, and that is troubling.
I have also voiced my concerns with the transition from the
London Inter-Bank Offered Rate (LIBOR) reference rate. Nine
months later, I am still concerned consumers will be impacted
by the transition. We still have contracts written to the LIBOR
reference rate, and given the recent volatility in the repo
markets, I am concerned about the subsequent volatility in
consumer-facing products, including mortgages, auto loans,
business loans, and other consumer loans as this new reference
rate is derived from secured overnight financing.
At previous hearings, I have spoken about the cyber threats
posed to our financial institutions and your institution, and
China in particular. Yesterday's news about the Equifax data
breach is deeply troubling and is a wake-up call to every
single policymaker that we need to take the threat of China and
the Chinese communist regime quite seriously. If we are not
taking them seriously, have no fear, they are taking us very
seriously. And now, they have basically all of our data, too.
So, the spillover effects of this question of Chinese
policy is significant, not just for cybersecurity, but with
what we are seeing with the coronavirus and the destabilizing
effects it has on global health. I know you are not a global
health expert but you can give us some sense of your
measurement techniques in response to these economic changes
that are being driven out of the coronovirus challenge in
China, and the spillover effects it has on its neighbors and
the supply chain as well, that is derived through China.
The nature of the Chinese regime may not fit neatly into
the Fed's risk assessments. The Fed has acknowledged, in its
Financial Stability Report, that cyber risks don't fit neatly
either. But the risks are real. Even though our data is limited
coming out of China, and the limited data we have, we question
still, we should reflect appropriately upon what we know and
how we respond as an American Government and to the Western
world in response to these threats, both cyber and health
risks, and the spillover effect it has on our economy.
Again, Chairman Powell, thank you for being here. Thank you
for your openness. Thank you for your approach as Chair of the
Federal Reserve, to be in the language of the people rather
than simply the language of the PhDs.
With that, I yield back.
Chairwoman Waters. I now recognize the Chair of our
Subcommittee on National Security, International Development
and Monetary Policy, Mr. Cleaver, for one minute.
Mr. Cleaver. Thank you, Madam Chairwoman. Mr. Chairman,
first of all, I appreciate very much your willingness to travel
around the country to do 14 of those Fed Listens sessions. You
held one of them in Kansas City at the Fed building, and I
think it is a rare opportunity for most people to get a chance
to sit down in a room and discuss economics with the Fed
Chairman. So, thank you very much.
When you came to Kansas City, people were sitting around
the table with you and giving you a picture of their struggles
and strifes in trying to make it in the economy, and people
were also concerned about inflation. They believe that it is
like toothpaste; once it gets out, it is hard to get it back
in. So, we are concerned about it, but also appreciative of
your work, and I look forward to getting a little further into
this as we proceed with the hearing.
Thank you, Madam Chairwoman.
Chairwoman Waters. I now recognize the subcommittee ranking
member, Mr. Hill, for one minute.
Mr. Hill. Thank you, Madam Chairwoman. Chair Powell, thank
you for being here today. We appreciate your willingness to
come and field our questions and provide your insights.
I want to take just a moment and echo the comments of the
ranking member on the Community Reinvestment Act. I know this
has received a lot of attention. I read Governor Brainard's
very comprehensive view on the topic, and we had Comptroller
Otting here recently to discuss the OCC's point of view.
As a former community banker, it is my view that we really
should have ultimately one approach to CRA among the financial
services regulatory agencies. I have had 40 years of dealing
with inconsistency in delivery of regulatory proposals, so I do
think ultimately, it would be productive for us to have one
approach to that regulation and to modernize it for the digital
world that we live in today.
I look forward to your presentation today, and, Madam
Chairwoman, I yield back.
Chairwoman Waters. Thank you. I want to welcome to the
committee our distinguished witness, Jerome Powell, Chairman of
the Board of Governors of the Federal Reserve System. He has
served on the Board of Governors since 2012, and as its Chair
since 2017. Mr. Powell has testified before the committee
before, and I do not believe he needs any further introduction.
Without objection, your written testimony will be made a
part of the record.
Mr. Powell, you are now recognized to present your oral
testimony.
STATEMENT OF THE HONORABLE JEROME H. POWELL, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Powell. Thank you very much, Chairwoman Waters, Ranking
Member McHenry, and members of the committee. I am pleased to
present the Federal Reserve's semiannual Monetary Policy
Report.
My colleagues and I strongly support the goals of maximum
employment and price stability that Congress has set for
monetary policy. Congress has given us an important degree of
independence to pursue these goals based solely on data and
objective analysis. This independence brings with it an
obligation to explain clearly how we pursue our goals. Today, I
will review the current economic situation before turning to
monetary policy.
The economic expansion is well into its 11th year, and it
is the longest on record. Over the second half of last year,
economic activity increased at a moderate pace and the labor
market strengthened further, as the economy appeared resilient
to the global headwinds that had intensified last summer.
Inflation has been low and stable but has continued to run
below the Federal Open Market Committee's (FOMC's) symmetric 2
percent objective.
Job gains averaged 200,000 per month in the second half of
last year, and an additional 225,000 jobs were added in
January. The pace of job gains has remained above what is
needed to provide jobs for new workers who entered the labor
force, allowing the unemployment rate to move down further over
the course of last year. The unemployment rate was 3.6 percent
last month and has been near half-century lows for more than a
year.
Job openings remain plentiful. Employers are increasingly
willing to hire workers with fewer skills and train them. As a
result, the benefits of a strong labor market have become more
widely shared. People who live and work in low- and middle-
income communities are finding new opportunities. Employment
gains have been broad-based across all racial and ethnic groups
and levels of education. Wages have been rising, particularly
for lower-paying jobs.
Gross domestic product (GDP) rose at a moderate rate over
the second half of last year. Growth in consumer spending
moderated toward the end of the year following earlier strong
increases, but the fundamentals supporting household spending
remain solid. Residential investment turned up in the second
half, but business investment and exports were weak, largely
reflecting sluggish growth abroad and trade developments.
Those same factors weighed on activity at the nation's
factories, whose output declined over the first half of 2019
and has been little changed, on net, since then. The February
Monetary Policy Report discusses the recent weakness in
manufacturing. Some of the uncertainties around trade have
diminished recently, but risks to the outlook remain. In
particular, we are closely monitoring the emergence of the
coronavirus, which could lead to disruptions in China that
spill over to the rest of the global economy.
Inflation ran below the FOMC's symmetric 2 percent
objective throughout 2019. Over the 12 months through December,
overall inflation based on the price index for personal
consumption expenditures was 1.6 percent. Core inflation, which
excludes volatile food and energy prices, was also 1.6 percent.
Over the next few months, we expect inflation to move up closer
to 2 percent, as unusually low readings from early 2019 drop
out of the 12-month calculation.
The nation faces important longer-run challenges. Labor
force participation by individuals in their prime working years
is at its highest rate in more than a decade. However, it
remains lower than in most other advanced economies, and there
are troubling labor market disparities across racial and ethnic
groups and across regions of the country. In addition, although
it is encouraging that productivity growth, the main engine for
raising wages and living standards over the longer term, has
moved up recently, productivity gains have been subpar
throughout this long economic expansion. Finding ways to boost
labor force participation and productivity growth would benefit
Americans and should remain a national priority.
I will turn now to monetary policy. Over the second half of
2019, the FOMC shifted to a more accommodative stance of
monetary policy to cushion the economy from weaker global
growth and trade developments and to promote a faster return of
inflation to our symmetric 2 percent objective. We lowered the
Federal funds target range at our July, September, and October
meetings, bringing the current target range to 1\1/2\ to 1\3/4\
percent. At our subsequent meetings, with some uncertainties
surrounding trade having diminished and amid some signs that
global growth may be stabilizing, the Committee left the policy
rate unchanged.
The FOMC believes that the current stance of monetary
policy will support continued economic growth, a strong labor
market, and inflation returning to the Committee's symmetric 2
percent objective. As long as incoming information about the
economy remains broadly consistent with this outlook, the
current stance of monetary policy will likely remain
appropriate. Of course, policy is not on a preset course. If
developments emerge that cause a material reassessment of our
outlook, we would respond accordingly.
Taking a longer view, there has been a decline over the
past quarter-century in the level of interest rates consistent
with stable prices and the economy operating at its full
potential. This low interest rate environment may limit the
ability of central banks to reduce policy interest rates enough
to support the economy during a downturn.
With this concern in mind, we have been conducting a review
of our monetary policy strategy, tools, and communication
practices. Public engagement is at the heart of this effort.
Through our Fed Listens events, we have been hearing from
representatives of consumer, labor, business, community, and
other groups. The February Monetary Policy Report shares some
of what we have learned. The insights we have gained from these
events have informed our framework discussions, as reported in
the minutes of our meetings. We will share our conclusions when
we finish the review, likely around the middle of the year.
The current low-interest-rate environment also means that
it would be important for fiscal policy to help support the
economy if it weakens. Putting the Federal budget on a
sustainable path when the economy is strong would help ensure
that policymakers have the space to use fiscal policy to assist
in stabilizing the economy during a downturn. A more
sustainable Federal budget could also support the economy's
growth over the long term.
Finally, I will briefly review our planned technical
operations to implement monetary policy. The February Monetary
Policy Report provides details of our operations to date. Last
October, the FOMC announced a plan to purchase Treasury bills
and conduct repo operations. These actions have been successful
in providing an ample supply of reserves to the banking system
and effective control of the Federal funds rate.
As our bill purchases continue to build reserves toward
levels that maintain ample conditions, we intend to gradually
transition away from the active use of repo operations. Also,
as reserves reach durably ample levels, we intend to slow our
purchases to a pace that will allow our balance sheet to grow
in line with trend demand for our liabilities. All of these
technical measures support the efficient and effective
implementation of monetary policy. They are not intended to
represent a change in the stance of monetary policy. As always,
we stand ready to adjust the details of our technical
operations as conditions warrant.
Thank you. I look forward to the discussion.
[The prepared statement of Chairman Powell can be found on
page 58 of the appendix.]
Chairwoman Waters. Thank you. I now recognize myself for 5
minutes for questions.
In December of 2019, when the OCC and the FDIC issued a
notice of proposed rulemaking on Comptroller Otting's proposal,
the Federal Reserve did not join this proposal. FDIC Board
Member Martin Gruenberg voted against Comptroller Otting's
proposal, describing it as, ``a deeply misconceived proposal
that would fundamentally undermine and weaken the Community
Reinvestment Act.''
And in remarks last month, Federal Reserve Board Governor
Brainard said that, ``Given that reforms to the CRA regulations
are likely to set expectations for a few decades, it is more
important to get the reforms done right than to do them
quickly. That requires giving external stakeholders sufficient
time and analysis to provide meaningful feedback on a range of
options for modernizing the regulations.''
Chair Powell, Governor Brainard also suggested, in a speech
last month, that the Federal Reserve created a database of
6,000 public CRA evaluations, looking at how various CRA
investments support low- and moderate-income communities. Has
the Fed used this database to evaluate how bank activities
would be assessed under the OCC's and the FDIC's proposal for
CRA?
Mr. Powell. If I understood your question, it was whether
we have used our database to evaluate their proposal?
Chairwoman Waters. That is correct.
Mr. Powell. I am not totally sure we have. Maybe I can
provide a little context, if that is appropriate, if I may,
which is just that we do agree that this is a good time to
update CRA in light of changing technology and demographics,
and we agree on the goals. We have put a lot of work into this.
We tried hard to get on the same page and weren't able to do
that. We have some different ideas.
Chairwoman Waters. Does the Fed intend to do this
assessment?
Mr. Powell. Excuse me?
Chairwoman Waters. Do you intend to do the assessment that
I referenced regarding the database to evaluate bank activities
and how they would be assessed under the OCC's and FDIC's
proposal for the CRA?
Mr. Powell. The real point of that database was for us to
create our own set of metrics. We want to be very, very sure
that what comes out of this is a proposal that, from us, will
leave all major participants in CRA better off. And so, we
think it is important that each metric, each change that we
make is grounded in data, and that was the purpose, to help us
develop our thinking and our proposals, and that is essentially
what we have been using it for.
Chairwoman Waters. Given the magnitude of reform in CRA
regulations, do you think the comment period should be extended
to allow the public to weigh in on such an important
undertaking?
Mr. Powell. That is really a decision for the OCC and the
FDIC.
Chairwoman Waters. I know it is their decision, Mr. Powell,
but what do you think?
Mr. Powell. I think it is not our role to comment on their
proposal. We have our own work and our own ideas that we would
be happy to share. But it is really up to them to make that
decision.
Chairwoman Waters. Are you completing your assessment? Are
you continuing to look until you come to a final decision?
Mr. Powell. We are.
Chairwoman Waters. Don't you think the public should have
an opportunity to have more time to do that also?
Mr. Powell. And they will, when the time comes. I think for
the time being, what we are doing is we are looking forward to
reading the comments on the proposal. I think we will all learn
quite a lot from those comments, and we will be able to
incorporate that thinking and whatever changes are made to the
proposal. There may be substantial changes to the existing
proposal coming out of the comments. Our view is that we want
something that will leave everybody better off and will have
broad support, and that is what we are going to be working on.
Chairwoman Waters. As you may be aware, all of the
Democrats on this committee urge regulators to provide a public
comment period of at least 120 days on any major CRA reform,
instead of the 60 days that the OCC and the FDIC have provided.
Community banks, state regulators, and community groups have
called on these agencies to extend the comment period.
And even though you said it is not your place to comment on
whether or not this should be extended, I wish you would think
about this. As you have said, it is important for the public to
be able to comment, review what you are thinking, and if you
change your mind, let us know, about commenting on whether or
not we should extend the comment period.
You don't have to respond to that. Thank you very much.
The gentleman from North Carolina, Ranking Member McHenry,
is recognized for 5 minutes.
Mr. McHenry. It always is rich, right? When somebody else
has a negative comment about the Federal Reserve, that is bad,
but when I, as a policymaker on the Hill, have a negative
comment about the Fed, it is good, right? So it is all about
the eye of the beholder when it comes to the political debate
here in Washington.
Congress made a decision over 100 years ago to outsource
monetary policy to the Federal Reserve. You are a construct of
law, you are given independent operations, and you have a set
term of office. And so, the independence of the Fed for
monetary policy is appropriate and is longstanding.
Every President in the last 100 years has had some private
criticism, and we have found out at some point about that
criticism, either through press reports at the time, or later,
in some biographer's work about the President.
But here on the Hill, we can make negative comments about
the Fed and attack the President for having negative comments
about the Fed. Right? All of this stuff is just rich politics.
Let's get down to the essence of this.
You are the biggest regulator in town when it comes to the
financial world. I have concerns that I want to address that
are regulatory in nature, that I think impinge upon monetary
policy, the repo market, for instance. You said these
operations are temporary in nature. Is that still true?
Mr. Powell. Yes. Our expectation is that we will continue
our bill purchases at least into the second quarter, and
continue repo operations at least into April.
Mr. McHenry. Into April.
Mr. Powell. The sense of that is, though, that we are
building up a level of reserves to a level that will mean that
we don't have to be involved in open market operations on an
ongoing basis, and that is going to take that period of time.
And as the underlying level of reserves rises due to our bill
purchases, the need for repo will decline, and sometime around
the middle of the year we will reach that level of ample
reserves, and from that point forward the balance sheet will
grow at trend demand for our liabilities, and will continue to
expand with the economy.
Mr. McHenry. Are you doing a review on your capital
requirements for financial institutions that should be
participating in the repo market?
Mr. Powell. I think we have reviewed supervisory and
regulatory practices that may be affecting the flow of
liquidity. Our main focus, of course, is the Federal funds
market, and our ability to transmit our policy decisions
smoothly into the money markets through the Federal funds rate.
What happened last September, in early September, was that
there was unusual tightness and volatility, and we attribute
that to the fact that what appeared to be ample levels of
liquidity didn't flow where they might have.
And so, we are really doing 2 things. One, we are raising
the underlying level of liquidity, by raising reserves to a
level that is higher than we had thought we needed, and that
process, as I mentioned, will take until the middle of the
year--
Mr. McHenry. So, part of that is a supervisory assessment
as well, to make sure that the policy is being driven in terms
of the institutions?
Mr. Powell. That is right.
Mr. McHenry. Okay.
Mr. Powell. We have been doing that since September.
Mr. McHenry. I raised this in my opening statement, about
China. You have spoken publicly about your assessment, your
thinking as you see what is happening with China's response to
the coronavirus. We wish them well. We have high hopes that
they are going to be able to tackle this crisis, this public
health crisis they are facing.
But walk me through your thinking in assessing the
situation in China now, in terms of the economics, and that
potential spillover effect.
Mr. Powell. I will just quickly start by saying again that
we find the U.S. economy to be in a very good place, performing
well. We see signs of global growth bottoming out. We see
reduced trade policy uncertainty. Overall, in the background,
we see strong job creation. All of this happens in the context
of a good, strong U.S. economy.
And into that picture comes the coronavirus, and so the
question is, what do we think about that? Of course, first, we
observe the human tragedy, which is terrible to watch. But the
question for us really is, what will be the effects on the U.S.
economy? Will they be persistent? Will they be material? That
is really the question.
I think we know there will be effects on China, through
some part of the first half of the year, and China's close
neighbors and major trading partners in Europe as well as Asia,
and we know that there will likely be some effects on the
United States. I think it is just too early to say. We have to
resist the temptation to speculate on this. And so, we will be
watching that carefully, again, and the question we will be
asking is, will these be persistent effects that could lead to
a material reassessment of the outlook?
Mr. McHenry. So, a question of length, length of time, and
whether or not this is a temporary disruption?
Mr. Powell. Yes.
Mr. McHenry. Thank you.
Chairwoman Waters. The gentlewoman from New York, Ms.
Velazquez, is recognized for 5 minutes.
Ms. Velazquez. Thank you, Madam Chairwoman. Chairman
Powell, I would like to follow up on Chairwoman Waters'
question on CRA. What aspects of the proposed changes to the
CRA do you find most troubling?
Mr. Powell. Again, what I would like to do, if I may, is
not so much comment directly on the other proposal but talk
about how we are looking at this. And I will mention the areas
in which we have differences.
Ms. Velazquez. Okay. I hear that. I hear you and I respect
it. But I would just like to ask you, if the Fed is unable to
reach an agreement with the OCC and the FDIC on a joint rule,
do you expect the Fed to issue its own proposal?
Mr. Powell. We haven't made a decision on that yet. Right
now, our focus has been on trying to get on the same page. We
haven't been able to do that. Now, our focus is going to be on
learning from the process, and I think we will learn a lot.
Ms. Velazquez. Are you meeting regularly with the OCC and
the FDIC on this issue?
Mr. Powell. We did for a long time. We are not currently
meeting with them on this--
Ms. Velazquez. Would you agree with Governor Brainard's
comment that it is more important to get the rule right than to
do it quickly?
Mr. Powell. Yes. I think that has been our approach and
will continue to be.
Ms. Velazquez. Thank you. Chairman Powell, as you know,
Representative Porter and I have been concerned by banks'
growing reliance on cloud-based service providers for data
storage needs. Does the Fed have all the access authority it
needs, or are there any contractual or legal limitations
restricting the Fed's ability to obtain the data held by third
parties that it needs to properly understand and manage this
growing reliance?
Mr. Powell. I think we do have the legal authority that we
need. We are able to look into third-party service providers,
and we are doing that more and more because of, as you
mentioned, the prominence and size of the growing importance of
these cloud service providers.
Ms. Velazquez. Thank you. I yield back.
Chairwoman Waters. The gentlewoman from Missouri, Mrs.
Wagner, is recognized for 5 minutes.
Mrs. Wagner. I thank the chairwoman, and thank you for
being here, Chairman Powell. We are all very interested, since
it just happened on January 29th, despite the repo spike. I
know the ranking member mentioned it. I know you are in the
middle of your review and such. I have a little more specific
question: Could this repo market turmoil be symptomatic of
deeper difficulties for the financial system?
Mr. Powell. It doesn't appear to be at all. Since we took
the measures we took in early September, repo markets and money
markets have been functioning very smoothly. There hasn't been
a return to the volatility. They are functioning very normal,
really, including over year-end. So, we haven't had any return
to that. It is pretty clear that the measures that we took
directly addressed the problem. When the medicine is working,
you can really see, and it seems to be working well here.
Mrs. Wagner. And we had a confluence of things happening
just, I know, at that time, with the quarterly Federal taxes
due along with the Treasury auction of debt, of upwards of
over, I think $78 billion, wasn't it?
Mr. Powell. Yes.
Mrs. Wagner. Do you think that was a function of perhaps
this fluke, would you call it?
Mr. Powell. We knew all that, though. The thing is, we knew
that. And what we had done is, we had asked banks to tell us,
what is your lowest comfortable level of reserves?
Mrs. Wagner. Right.
Mr. Powell. We got those numbers and we added them up and
we put a buffer on top of it, and it still suggested that there
was plenty of reserves in the system. And this happened, and I
think that makes us think, because we knew about those big--
Mrs. Wagner. Right. Those are definitely on the horizon.
And when you are doing your review, I hope that you will find
that there isn't anything symptomatic of some deeper
difficulties, and we look forward to that.
Turning the page, Chairman Powell, in December of last year
I asked Vice Chairman Quarles for an update on the status of
updating the global systemically important bank (G-SIB)
surcharge and plans for finalizing the stress capital buffer
proposal, which I understand will require a reproposal with a
comment period.
In January, Vice Chairman Quarles delivered a speech where
he spoke about bringing, ``reasonable transparency to several
aspects of the Federal Reserve's supervisory and regulatory
framework.'' Last week, the Fed released the CCAR stress test
scenarios. To my knowledge, there has been no progress or
update on the status of the stress capital buffer, apart from
continued assertions by you and Vice Chair Quarles that aspects
of the proposal will be incorporated in the 2020 CCARs.
Given the acknowledgement by principals at the Fed of the
importance of transparency, I guess I am concerned about the
lack of transparency in this process. When can we expect
progress on this proposal that has been in process now, I think
since April of 2018?
Mr. Powell. We do continue to expect and intend that the
core of the stress capital buffer will be incorporated into the
framework in time for the 2020 stress test. So, we are moving
along on that and we are on track to do that.
Mrs. Wagner. You do feel on track to do that, then?
Mr. Powell. Yes.
Mrs. Wagner. Okay. Committee Republicans have underlined
the importance of cyber threats as a potential systemic risk.
We have recently seen malware attacks undermine government
infrastructure, and according to research last month by
economists at the New York Fed, a simulated cyber attack on
just one major U.S. bank could have spillover effects impacting
38 percent of the wholesale payments ne2rk.
What can the U.S. do better, Chairman Powell, in order to
prioritize this constant flow of cyber risks and strengthen the
resilience of our financial sector?
Mr. Powell. I think we can keep, and have to keep doing
what we are doing, which is to make this really a top, if not
the top supervisory priority, not just for the banks but for
the Fed and for institutions across the American landscape. We
have very high expectations, particularly of the largest banks,
on their ability to fend off cyber attacks. We are constantly
meeting inside the government to make sure that our system is
resilient and redundant and strong against cyber attacks.
But there is never a feeling that you have gotten to a
place of comfort on that. We just have to keep working, and it
is staying in the minute, learning what the new attacks are,
making sure that the banks are doing basic housekeeping, and
all of that is very much ingrained, and we will just have to
keep at it, I think, for a long time.
Mrs. Wagner. Thank you. My time has expired. Thank you so
much for being here again, Chairman Powell, and I yield back.
Chairwoman Waters. The gentleman from California, Mr.
Sherman, who is also the Chair of our Subcommittee on Investor
Protection, Entrepreneurship, and Capital Markets, is now
recognized for 5 minutes.
Mr. Sherman. I have a couple of responses to what the
ranking member had to say. Yes, the stock market is way up.
Wages are up a bit more than 1 percent in real terms, after
inflation. Wages at the bottom have risen, chiefly in those
States where we raised the minimum wage. And when we have a
Democratic Majority in both Houses, we will raise the minimum
wage nationwide and deal effectively with those States that
have not seen such an expansion of wages at the bottom.
I have grown, not quite old, but I have spent many decades
in this room. I have seen your predecessors. And every time
they come in, and the Republicans attack them for expansionary
monetary policy, both traditional and newfangled. And now, we
have a new President, and all of a sudden, they are pushing on
the other side.
All I will say is that I have consistently, from the days
of Mr. Greenspan, been pushing for somewhat lower interest
rates and an expansionary policy, particularly quantitative
easing, because you returned $55 billion to the Treasury last
year, and that is, I know, not your purpose, but think of the
kids who will get an education because we could fund aid to
local education. Think of the medical research and the lives
that will be saved because we were able to fund medical
research. I don't think the $55 billion should be regarded as
an irrelevancy or an embarrassment.
And finally, as to the jobs growth we have seen recently, I
do need to point out the jobs grew much faster in the last 3
years of the Obama Administration than the first 3 years of the
Trump Administration. It is as if Trump inherited a plane, as
he inherited so much else, the plane was on automatic pilot,
and it was going in the right direction, and he hasn't managed
to completely screw it up.
We have an issue that I think ought to be completely
bipartisan, and that is LIBOR. It is going to hit us in a
couple of years. Chairman Powell, should Congress simply give
the Fed the right to prescribe backup rates when the debt
instruments do not do so, or should we adopt the Secured
Overnight Financing Rate (SOFR), or what can we do, and
hopefully do this year, and actually solve the problem 12
months in advance?
Mr. Powell. On LIBOR, as you know, our process is ongoing
and we are really committed to having the banks ready by the
end of next year to switch over, away from LIBOR in case it is
no longer published. That date is--
Mr. Sherman. They need to know legally what to switch over
to and we want to avoid the multi-billion-dollar lawsuits when
somebody can say, it should be this instead of that. They not
only have to have the technology to make the switch, they have
to know legally what they are supposed to do.
Mr. Powell. If we need a Federal law change, we will let
you know.
Mr. Sherman. You have less than 2 years. Have you figured
out whether you need a Federal law change, or--
Mr. Powell. I don't think that we think we need a Federal
law change.
Mr. Sherman. If you could get us an answer, because there
are people who want to wait around until 2 or 3 months before
things blow up and then come to Congress and say, ``Now, fix
it.'' Two years is actually too short a time, because we are
empowering the economy today because you and I are talking
about this, and there is this slight risk out there of
litigation and uncertainty with regard to legacy LIBOR, and we
ought to take that off. That is one of the things we can do to
help the economy. So, I hope that you will act within a month
to let us know what you propose, rather than wait until next
year.
Another area that we have talked about before is the wire
transfer system. We have seen $150 million lost to scams, and
those scams arise chiefly because when you wire money, you do
so to a number but there is no payee identified. The British
have gone to a confirmation of payee system. The International
Standards Organization has prescribed changes that would
require at least identification of payee. We don't. I know you
have raised issues of State law. I have analyzed it. I can't
see what would prevent the Fed from prescribing what the wire
transfer system would be.
And it looks like I will have to ask you to get back
promptly for the record on that question.
Chairwoman Waters. The witness is requested to provide an
answer in writing for the record.
The gentleman from Oklahoma, Mr. Lucas, is recognized for 5
minutes.
Mr. Lucas. Thank you, Madam Chairwoman. Chairman Powell,
during your testimony before the Joint Economic Committee last
year, you were asked about what steps the Federal Reserve is
taking to assess the impacts of climate change on our financial
system. In your testimony, you made the distinction between the
purely informative stress test for climate risk that the Bank
of England does and what the U.S. stress testing regime under
CCAR does, which is impact and inform capital requirements for
capital distributions.
My understanding is the Bank of England is conducting
research and asking financial institutions to think through
their portfolios and how they could be impacted, but they are
not currently integrating those measures in the capital
requirements. Would you outline some of what the Fed is doing
in terms of research and engagement on global climate risk?
Mr. Powell. Sure. I should begin by saying that climate
change is a very important issue that Congress has largely
assigned to other agencies. It does play into our work,
however, as it relates to the public's very reasonable
expectation that we would make sure that the financial sector
of the banks and the utilities that we supervise are resilient
against the longer-term risks from climate change.
We are in the very early days of understanding what all
that means. And there is work going on around the world at
central banks to try to figure that out. You talked about the
Bank of England stress tests. Those are not intended to inform
current capital requirements, but more to understand what might
be the effects on banks from climate change.
Mr. Lucas. Are you planning on joining the Ne2rk for
Greening the Financial System?
Mr. Powell. We haven't made a decision about that. We have
always attended their meetings. I guess my theory is when you
join an organization like that, you are not necessarily signing
up for everything that everybody there believes. You can
benefit from the work that is being done there, and we are kind
of doing that now. We have not made a decision about
membership.
Mr. Lucas. Vice Chairman Quarles recently outlined changes
that would increase supervision transparency and
accountability, and I was encouraged by those comments and will
be following this closely, of course. One change the Vice
Chairman outlined is that the Federal Reserve should restore
supervisory observations which will allow notice of a
supervisory concern without it rising to the level of a matter
requiring attention. Can you tell us what the timeline is that
you see on those proposals to improve supervision?
Mr. Powell. The timeline is hard to say. I would just say
that what the Vice Chair did was he pointed to this tension
that exists between very fundamental expectations and due
process, transparency, and fairness around everything the
government does, and should be associated with that, but also
with supervision, which, by its nature, is private and somewhat
discretionary, nonpublic, and confidential, really.
He pointed out that tension and the need to shed more light
on that and to ask whether there are places where supervision
needs to incorporate more of that due process. I think that is
a very healthy thing to think about and it is something we will
be working on.
Mr. Lucas. In light of the coronavirus, Chairman, I can't
help but think about, as a young man, as a boy, I spent a lot
of time around my grandparents, and my great-aunts and great-
uncles. They were born just after the previous century, so
their tales of first-hand experience in the pandemic of 1918
and 1919 were very graphic, as it rolled through rural western
Oklahoma.
And the reason I bring this up is their description of that
particular virus, at that particular time, in that particular
rural society was literally--it brought everything to a stop
for weeks in rural western Oklahoma. My mother's family and my
father's family were very fortunate. No one died from what was
called the Spanish flu, but it brought society to a stop.
The reason I ask that is, with 43,000 cases worldwide, and
the critical impact in China, could you describe for a moment
how China and its neighboring countries are responding to the
economic impact of coronavirus, in general, and from the
perspective of your fellow central bankers in those countries?
Mr. Powell. I think they are really responding now to the
outbreak and containing it, and the Chinese government has
obviously taken very strong measures on that. You see
businesses closing down in the affected areas. You see that
sort of thing.
In terms of the economy, as you asked, the People's Bank of
China has done a number of things to support economic activity,
and I think you can expect the Chinese government to do lots of
things to support economic activity, and they have said that
they are open to cushioning the economic effects. We are not
able yet to estimate the size of the economic effects. There
are many estimates out there, but I think you will see
governments acting in Asia, particularly in China, to offset
those.
Mr. Lucas. Thank you, Mr. Chairman. I yield back, Madam
Chairwoman.
Chairwoman Waters. The gentleman from New York, Mr. Meeks,
who is also the Chair of our Subcommittee on Consumer
Protection and Financial Institutions, is recognized for 5
minutes.
Mr. Meeks. Thank you, Madam Chairwoman. Welcome, Mr.
Chairman.
Let me touch quickly, initially, on asymmetrical growth. It
has been discussed at length in my community and others that 40
percent of Americans don't have adequate savings for a $400
emergency, and similarly, one in five Americans skips essential
health care or fails to pay important monthly bills due to the
lack of funds. Finally, a large share of the population is also
underbanked or unbanked, and we have talked about that a lot in
the subcommittee which I Chair.
My first question to you is, why haven't circumstances
improved for low- and moderate-income Americans more rapidly in
the past few years, given the so-called state of the economy?
Mr. Powell. The pattern was that at the beginning, it was
more people who had just left the labor force, perhaps made it
right back in. What we really have seen, though, in the last 2
or 3 years has been wages moving up the most at the bottom end
of the wage scale. So, we do see, during this very long
expansion, significant effects now in low- and moderate-income
communities, and it is great to see. As I mentioned, with our
Fed Listens events, we have been hearing quite a lot about
that. So, that is very positive.
More to your point, though, waiting for the 9th, 10th, and
11th year of an expansion isn't really a strategy. We do see
those things now because the labor market is strong. But
really, we need other programs to address the longer-run needs
of those communities other than just the business cycle and
monetary policies.
Mr. Meeks. During this period of time, would you say that--
a number of us have been arguing, and finally we are moving
toward a $15-an-hour minimum wage for individuals on the
bottom. Would you think that has something to do with helping
them also, the fact that many States have adopted a $15, or a
higher minimum wage than what had been put in place?
Mr. Powell. I will answer your question directly. Let me
first say, though, that we, of course, don't take a position on
the minimum wage. That is a classic tradeoff that legislatures
have to--
Mr. Meeks. I understand.
Mr. Powell. The research on exactly what is driving up
wages at the lower end does suggest that there is a role there
for the minimum wage increases. States that have had minimum
wage increases have seen--there is a noticeably higher
increase. But really, it is much broader than that, and the
bigger factor just is very low unemployment and a strong labor
market, high job creation. That is the main driver.
Mr. Meeks. The other concern that I have, because it also
seems as though, as unemployment goes lower, et cetera, it
still, when you look at Black unemployment, it still remains
nearly double that of white unemployment. And it seems to stay
that way where the cycles are a down cycle or an up cycle. Are
there any signs of how we close those gaps, because there are
always these gaps that seem to happen between the African-
American community and whites, where it is a good economy but
the gap stays the same.
Mr. Powell. There are persistent gaps and they are very
troubling, and they are not, in the long run, something that
monetary policy can address. It really is up to other policies,
by governments, State and local governments, the Federal
Government, and frankly businesses, to do what they can to
close that gap. What we have is an interest rate tool, and what
we can do is support the goals you have given us: maximum
employment; and stable prices. We see positive effects from
that. But over the longer run, broader policies of education
and other things would help with that issue.
Mr. Meeks. Thank you. Let me ask, I know Chairwoman Waters
asked some questions on CRA. There were some questions that
came up that maybe you can answer. The framework that was put
forward by Governor Brainard not too long ago, is that the same
framework of the Federal Reserve Board? There are some saying
it is just her opinion and it is not that of the Board. Maybe
you can clear it up. Does the Board see similarly as Governor
Brainard?
Mr. Powell. We actually haven't taken a proposal to the
Board yet, but no, that represents the thinking--she has been
working on this; I asked her to lead this effort for us. She
has been the head of that committee for some time. I am very
comfortable with the thinking that is in that speech, and I
support that set of ideas and that approach. But it is not at a
place where we can say, this is a proposal from the Fed,
because we haven't taken it to the Board yet.
Mr. Meeks. Thank you.
Chairwoman Waters. The gentleman from Florida, Mr. Posey,
is recognized for 5 minutes.
Mr. Posey. Thank you, Madam Chairwoman. Mr. Chairman, the
world is experiencing dramatic growth in the space economy, and
many are marveling, actually, at the expansion of civilian
space launches. I represent the Kennedy Space Center, and
obviously we are really excited about all that. Several
estimates put the current level of global space economy at well
over $400 billion a year, with a growth rate of 8 percent from
2018 to 2019.
In December, the Bureau of Economic Analysis announced the
creation of a Space Economy Satellite Account, a new
collaborative effort to measure the relative importance of the
space sector on the U.S. economy, with a special emphasis on
the growing commercial space segment. This effort will use
input from industry experts, and multiple government agencies,
obviously. I recall, over the years, that the Atlanta Fed has
applied its expertise to report on the economy of the space
district.
First question, can you work with me to ensure that the
Federal Reserve joins this multiagency effort with an eye to
avoiding financial bottlenecks and keeping this important space
industry on a path to a healthy growth rate?
Mr. Powell. It is the first I am hearing about it, but I am
happy to assure you that we will take a close look at that, and
if it is something that would be productive, we would take part
in it.
Mr. Posey. Great. Over the years, we have developed a
rather expansive policy of Federal Reserve independence, and I
believe in ensuring the freedom of the Fed to act independently
on a day-to-day basis to manage our economy and the critical
payment system. I would not expect a Member of Congress or
other officer of government to insert himself or herself into a
decision by the Federal Reserve Chair, the Board, the Open
Market Committee, or the Fed monetary policy entity. Congress
does not direct day-to-day monetary policy, and Congress also
does not direct generals on battlefields, nor should we.
However, the U.S. Government Accountability Office (GAO)
routinely conducts policy audits of defense policy and
strategy, yet the GAO is restricted from conducting policy
audits on the Federal Reserve. I am challenged to understand
how policy audits of critical national defense strategy is okay
but policy audits of the Fed are off limits. The defense
industry is at least as sensitive as monetary policy, and I
would like your thoughts on that.
Mr. Powell. Sure. GAO doesn't do policy audits on the Fed
constantly, all over the place at the Fed, just with one
exception, and that is our specific monetary policy function.
Congress chose, long ago, to create one step of distance away
from the GAO in order to underline our independence. I think
that was a wise move. I think changing that would clearly be
seen by the public as a diminution of our independence. We do
look to this committee and to the equivalent committee on the
Senate side for oversight on monetary policy in our system of
government. Our road to oversight and transparency runs right
through this committee and the Senate Banking Committee, as
well. Anyway, that is what I would tell you about the GAO.
Mr. Posey. What do you think makes the Fed more immune to
review than Defense? What is the rationale behind that, do you
think?
Mr. Powell. Again, everything we do, on payments and
financial regulation, every single thing we do is subject to
GAO audit. These are policy audits. It is not like a financial
audit. The public should understand that we are audited. Our
business model is actually about as simple as that, as a very
small, not complicated, and we are constantly audited.
What this exemption does is it prevents the GAO from coming
in and looking at and assessing individual monetary policy
decision, which Congress saw fit, you saw fit, your Congress
saw fit to carve out of the law. And again, I think it was an
appropriate thing to do, and I think it would be unwise to take
a step back from that. I don't see any harm that it is doing.
Mr. Posey. The former Chairpersons of the Fed have
indicated they simply did not want to be second-guessed on
their decisions, that the public really doesn't have a right to
know. I find that illogical, quite frankly, and that is why I
asked you these questions.
Mr. Powell. We are very transparent. We publish minutes. We
publish transcripts.
Mr. Posey. I know. ``We publish everything.''
Mr. Powell. We are not hiding anything.
Mr. Posey. We publish everything ``but''--I think that the
``but'' exemption is overdue.
Chairwoman Waters. The gentleman from Missouri, Mr. Clay,
who is also the Chair of our Subcommittee on Housing, Community
Development, and Insurance, is recognized for 5 minutes.
Mr. Clay. Thank you, Madam Chairwoman, and thank you,
Chairman Powell, for being here today.
For most of the constituents in my Congressional district,
they are not focused on the dial maintained in the 30,000 level
but simply trying to make ends meet. In fact, the St. Louis
Fed, in an essay, as part of this Demographics of Wealth
series, examined the connection between race or ethnicity and
wealth accumulation over the past quarter century. It was the
result of an analysis of data collected between 1989 and 2013.
Through the Federal Reserve Survey of Consumer Finances, more
than 40,000 heads of households were interviewed over those
years.
Median Hispanic and Black wealth levels are about 90
percent lower than the median white wealth level, yet median
income levels of Hispanics and Blacks are only 40 percent
lower. The larger ratio wealth gap could be due to Hispanics
and Blacks investing in low-return assets like housing, as well
as borrowing at higher interest rates. Hispanics and Blacks
could also feel less of a need to save for the future, because
society's progressive old-age safety net programs will replace
a relatively larger share of the normal incomes they earn
during their working years.
Could you comment on why many communities continue to lag
and how the Fed, via its monetary policy, might seek to address
some of the underlying factors that have led to gross
inequality?
Mr. Powell. What we can do, and what we have been doing, is
to take seriously your order to us to seek maximum employment,
and that is what we are doing. And I think we just learned,
because we have been watching what has been happening, that
unemployment can be lower than many had expected, without
raising inflationary or other concerns. So, that is what we can
do, and we will continue to do, and I think that is showing up
in communities everywhere. I think other governmental and other
tools are necessary to address longer-run problems, though.
Mr. Clay. Such as, how do we address the pay inequity? How
do we impress upon corporate America that it does this country
no good to have a persistent pay inequity among its workers,
especially when you look at the disparities in the races and
the pay inequity?
Mr. Powell. I will say that I think it is important that
those issues be addressed. It is really not for the Fed to
prescribe the measures to address them. We need to stay in our
lane. We do have this grant of independence, including the GAO
exemption, and I think to keep that, we need to stay within
what you have given us to do, which is maximum limits, stable
prices, supervise the banks, look after the financial space.
Mr. Clay. On another subject, will the Federal Reserve
release its own proposal on the Community Reinvestment Act, one
that takes into account the needs of low- and moderate-income
communities?
Mr. Powell. We haven't made a decision on that yet. I think
our focus right now is on the ongoing process of the other
agencies' proposal and the comments. I think we are going to
learn a lot from those comments, and I suspect there will be
changes to that proposal coming out of the comments. So, we
have not made a decision about our own proposal.
Mr. Clay. Traditional monetary policy works through a
single economy-wide variable, a single interest rate, or
perhaps the money supply of growth of credit. Credit policy, by
contrast, aims at directing credit in specific forms towards
specific groups of borrowers. Credit policy consists of a
central bank operation targeting specific segments of the
private debt and security market.
What is your view of shifting from traditional monetary
theory to one that involves the use of more tools in order to
enhance borrowing to segments of society?
Mr. Powell. I think that has historically not been a
function of the Fed and of central banks generally. We have, as
you pointed out, one tool, which is our interest rate policy.
When you are talking about affecting different sectors of the
business community or of the population, that really should be
another agency or Congress itself in fiscal policy, rather
than--
Chairwoman Waters. The witness is requested to provide an
answer in writing for the record.
Mr. Clay. My time is up. I yield back. Thank you.
Chairwoman Waters. The gentleman from Missouri, Mr.
Luetkemeyer, is recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman, and welcome,
Chairman Powell. It is always good to see you, sir.
I am sure you saw the speech and probably read or heard the
speech by Vice Chairman Quarles on the need to reform banking
supervision. One area I think needs clarity in the supervision
regime is the role of guidance. I pushed regulators to clarify
the use of guidance, and in 2018 they came out with an
interagency statement on guidance. However, Vice Chairman
Quarles, in his speech, urged an additional step, doing a
rulemaking of the role of guidance. This fits with the Trump
Administration's recent actions out of the Office of Management
and Budget (OMB).
My question is, do you believe we need an official
rulemaking out of the Fed on the role of guidance?
Mr. Powell. We have not made a decision on that. Like the
other agencies, we are evaluating the OMB memo. As you know,
guidance is not enforceable, and so we do understand that.
Guidance is not a rule.
Mr. Luetkemeyer. When Mr. Quarles was here recently, I
think he made the comment that he intended to look at all the
guidance and separate out what he believed needed to be under
rule and the rest of it then be clarified as strictly guidance.
I think that is a great approach, but the question is, do you
anticipate a rule to be able to do that and enforce that in the
future? Are you looking at trying to do that?
Mr. Powell. That is something we are looking at, and we are
looking at our guidance and asking if some of it is more like a
rule.
Mr. Luetkemeyer. Okay. Mr. Quarles also discussed how
regulations have a framework under the Administrative Procedure
Act (APA), but there is no real framework for supervision, and
he used the Large Institution Supervision Coordinating
Committee (LISCC) as an example of supervision that was
conducted without appropriate oversight and does not have
specific guardrails. In fact, the GAO said this should have
been conducted as a rulemaking. Do you believe we need to
change LISCC, and what should we do to the firms that are
already under this regime?
Mr. Powell. I would agree that it is appropriate that we
draw brighter lines around LISCC membership, and as Vice Chair
Quarles mentioned in his speech recently, that is the path we
are on.
Mr. Luetkemeyer. Okay. Very good. Something that is kind of
concerning to me is the fact that we have a lot of banks and
nonbanks that are in the home mortgage lending space. Nonbanks,
in general, were lending roughly $250 billion in 2016. This
next year, it is anticipated to triple, to $750 billion. In
2019, nonbanks originated 85 percent of all loans sold into
securitization guaranteed by Ginnie Mae, 53 percent of loans
sold to Freddie Mac, and 60 percent of the loans sold to Fannie
Mae. And nonbank mortgages make up 87 percent of the Federal
Housing Administration's (FHA's) portfolio.
In the most recent Financial Stability Oversight Council
(FSOC) report, nonbank mortgage originators were designated as
a potential systemic risk. You are a member of FSOC. Can you
explain that, or would you like to talk about that a little
bit?
Mr. Powell. Sure.
Mr. Luetkemeyer. And do you have any concerns over that?
Obviously, FSOC did.
Mr. Powell. As you mentioned, we have looked at that at
FSOC, and I believe it was part of the recent annual report,
the thought being that these are now very, very important
channels through which mortgages are originated. And in the
case of a downturn, the banks have high capital, they have lots
of regulation, lots of liquidity, and that is in a good place.
But these institutions are sometimes funding themselves with
credit lines, which might not be available. So, there is risk
there, and we are in the process of assessing that and
determining what to do about it.
Mr. Luetkemeyer. Do you have a timetable on that?
Mr. Powell. We have highlighted it as a risk, and we are
doing work on it.
Mr. Luetkemeyer. Do you have a timetable on when you might
come out with a statement and say what you will or will not do,
and if you want to do something, what it might be?
Mr. Powell. I can get back to you on that. This is
something that the Treasury has the lead on.
Mr. Luetkemeyer. Okay. Very good. One of the things that
concerns me a little bit also, with regards to home lending, is
just the stack of forms you have to go through. We had a
gentleman here who represented, it was actually a credit union
at the time, but the stack was literally ``this tall.'' And I
asked him how many pages were in there and he said,
``Congressman, we don't measure by the page. We measure by the
pound.'' And I said that this is how off the charts we have
gotten, when you have a stack of papers ``this tall'' to do a
home loan.
I have talked to the FDIC and the CFPB, and hopefully we
can engage you in a way to kind of reduce that down to where it
is manageable, but there are protections in there for the
consumer when he or she signs for a loan, and there is enough
information that allows the bank and the regulators to see it.
But this has to change. This can't continue to grow. This is
crazy. Do you have an opinion on that?
Mr. Powell. A lot of that stuff is legally mandated by
Federal or State law.
Mr. Luetkemeyer. I realize that.
Mr. Powell. To the extent it is not, then we do try to make
assessments about what is necessary and what is not. But it is
a big challenge, I would agree.
Mr. Luetkemeyer. Thank you. I just want to note for the
record that I did not ask a question about Current Expected
Credit Losses (CECL) today. Thank you very much, Mr. Powell.
[laughter]
Chairwoman Waters. The gentleman yields back. The gentleman
from Georgia, Mr. Scott, is recognized for 5 minutes.
Mr. Scott. Welcome, Chairman Powell. It's good to have you
here.
Chairman Powell, concerning LIBOR, the Alternative
Reference Rates Committee (ARRC) is pursuing, in New York,
legislation to address legacy contracts in New York State.
Would the Fed support Federal action in that regard?
Mr. Powell. Mr. Scott, actually, it is some members of the
ARRC. The Alternative Reference Rates Committee itself is not
seeking legislation, but some members have approached the New
York Legislature.
In terms of the need for Federal legislation, we have not
reached a point where we think it is going to be necessary. We
have no plans to do that. If we do believe that Federal
legislation is necessary, we will come tell you, and by the
way, we understand that that is not something you can do in 24
hours. So, we know that the time for that is soon.
Mr. Scott. Very good. Let's move over to Great Britain for
a moment. The UK regulators have been very direct with their
financial institutions, and they recently established a goal
for their institutions to cease LIBOR-based lending by the
third quarter of 2020. Why has the Fed not been so direct, and
do you have plans to set codes and guidelines for your
regulated institutions?
Mr. Powell. Yes. We will do that at some point. You may
have seen that Fannie Mae and Freddie Mac have said that they
won't accept LIBOR-referencing mortgages after some point later
this year. So, that sort of thing will begin to happen now, I
think well in advance of the deadline, which is the end of
2021.
Mr. Scott. Okay. And Chairman Powell, your Fed Board
recently finalized its rule on tailoring the hopes of providing
more clear and well-defined risk indicators to determine the
regulatory requirements that are placed on firms based on their
size and risk. But the Board has never disclosed nor provided
clear and quantitative criteria under which firms are placed
under its enhanced supervisory regime, the Large Institution
Supervision Coordinating Committee (LISCC). And even your Vice
Chairman, Mr. Quarles, recently gave a speech where he said
this. He said that he would like to align that portfolio with
the tailoring categories and make the designation criteria
transparent. And you even recently indicated you agreed on the
need for brighter lines.
Could you outline what changes the Board is considering
making in this supervisory framework?
Mr. Powell. We are just in the process of working out the
specifics, but I would agree that we should provide more
clarity around what is a LISCC firm, and that is really going
to be the Category One firms--
Mr. Scott. Thank you. Now, you are a great man and a good
friend. I respect you tremendously. But Chairman Powell, the
Fed is the axle of our financial system. You are the most
powerful regulator. And I want you to stand back up to
Comptroller Otting on this business of him coming with this
rulemaking change to the Community Reinvestment Act. Let him
know that you not only have a mandate for inflationary monetary
policy, you have a dual mandate which includes employment,
jobs.
And here is the other thing: You need to remind Comptroller
Otting that this piece of legislation, this law, the Community
Reinvestment Act, is precious to the nation, but is precious to
African Americans more than anybody. Because it wasn't the
Civil Rights Act, it wasn't the Voting Rights Act, that dealt
with the big issue facing African Americans: Financial
stability. The 2 anchors for financial stability are owning a
home, and having a job. And this bill was the bill that
outlawed redlining, which kept African Americans out. He needs
to back off of that. You need to assume your power in this, and
let him know we are serious, and to back off this rule change.
Chairwoman Waters. The gentleman from Ohio, Mr. Stivers, is
recognized for 5 minutes.
Mr. Stivers. Thank you, Madam Chairwoman. I appreciate you
holding this hearing. Good morning, Mr. Chairman. How are you
doing today?
Mr. Powell. Great, thanks.
Mr. Stivers. Great. Thanks for being here. I want to do
some yes-or-no questions. You covered them in your testimony,
but just to remind everybody, the labor participation rate is
now 83.1 percent, which has increased in the last 3 years. Is
that correct?
Mr. Powell. I think that is prime age.
Mr. Stivers. Sorry. Prime age. That is the prime-age
adults. Sorry. Yes.
Has it increased or decreased in the last 3 years?
Mr. Powell. I believe it has, yes.
Mr. Stivers. And wage growth has outpaced inflation for
workers in the last 3 years. Well, at least, it is currently
outpacing inflation, correct?
Mr. Powell. Yes, it is.
Mr. Stivers. And wage growth has actually gone up by about
3 percent in the last few quarters, on an annualized rate. Is
that correct?
Mr. Powell. Over the last few years, if you look at a range
of measures, then you would see wages moving up at about 3
percent.
Mr. Stivers. And we have record low unemployment rates for
African Americans and Hispanics. Is that correct?
Mr. Powell. That is correct.
Mr. Stivers. So, the fundamentals of the economy are in
pretty good shape. Would you say that is correct?
Mr. Powell. I would, and I did.
Mr. Stivers. And you did. Thank you for that testimony.
Your colleague at the Atlanta Fed stated recently that,
``an economic expansion does not die of old age.'' I think that
is a great quote. Given that the fundamentals of the economy
are strong, do you think many businesses and investors are
trying to talk themselves into a recession?
Mr. Powell. I don't think so, and I certainly hope not.
There is no reason why the expansion can't continue. There is
nothing about this expansion that is unstable or unsustainable.
Mr. Stivers. Great. I think the fundamentals are strong,
but I think a lot of people are worried, and I hope that they
don't talk themselves into a recession. I agree with you on
that.
Given that about two-thirds of all lending in capital
formation occurs in the capital markets, I am curious to hear
what the Federal Reserve is doing to actually coordinate with
the Securities and Exchange Commission (SEC) and the Commodity
Futures Trading Commission (CFTC) as prudential regulators for
the capital markets, to make sure that there is actual
coordination on the capital markets.
Mr. Powell. The SEC and the CFTC really have primary
regulatory authority for those markets, and we have supervisory
regulatory authority over the banks. Where we overlap really is
in financial market utilities, where we regulate some, and the
SEC regulates some, and the CFTC regulates some, and we
collaborate on all that. So, we collaborate pretty closely on
that.
Mr. Stivers. I would urge you to increase that
collaboration, because the lines between securities, banking,
and capital markets are blurring more than ever before, and I
would ask you and Vice Chairman Quarles to redouble your
efforts for that coordination, because I do hear from some of
the firms that are regulated that they feel like it is not
coordinated. If you could redouble those efforts, I think that
would pay dividends to the American investor and the American
economy.
I have a couple of other quick questions. What do you think
the most significant risk to the financial system is today?
Mr. Powell. I have to start by saying that I think the
financial system is strong and has been materially strengthened
since the financial crisis, particularly the banks--high
capital, high liquidity, and stress tests keep them on their
toes, and they have real resolution plans. None of that was
really in place before. So, I think the financial system is
generally in a good place.
The thing that we worry about a lot is cyber attacks. I
think we have a great game plan for traditional issues like bad
loans and things like that. Cyber attacks is really the
frontier where you should worry. And we work very, very hard on
that. All of the agencies do. We all work together. The
institutions themselves work very hard. But that, I would say,
is a major focus.
Mr. Stivers. Thank you, and an interesting note, Mr.
Chairman, you are in line with the CEOs of the biggest
institutions. I asked them the same question, and the
consensus, although not complete agreement, unanimous
agreement, was that cyber attacks were the issue. I think
Congress needs to focus on it, and I think our regulators need
to focus on it.
Two quick things, because I am running out of time. I know
you are focused on the transition between LIBOR and SOFR. Some
people have asked that question. I hope you will pay particular
attention to the impact on both small businesses and our
community banks as we make that transition. They are
particularly vulnerable. And with regard to the repo market, I
hope you will continue to focus on the origins of the problem
that caused it. Some are regulatory, and some are market-based.
And I know you are focused on it. You and I have had private
discussions about it. But I would like to see that solved in a
way that you don't have to provide Federal Reserve capital at
the end of every quarter, at the end of every year, so if you
can stay focused on those things, that would be good.
I am out of time. Thank you, Mr. Chairman.
Mr. Powell. Thank you.
Chairwoman Waters. The gentleman from Texas, Mr. Green, who
is also the Chair of our Subcommittee on Oversight and
Investigations, is recognized for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman. Thank you for
appearing today, Mr. Powell.
Mr. Powell, this is an observation, not a criticism. You
have indicated that the fundamentals are strong. However, you
also indicated at the last FOMC press conference that you were
a bit surprised that wages have failed to move up despite being
well into an expanding economy, sustained levels of
historically low unemployment, and increased labor force
participation.
The fundamentals are strong, yet nearly half, 42.4 percent,
of working Americans in 2019 made less than $15 an hour. The
fundamentals are strong. A good many of the people in my
Congressional district, Mr. Powell, are more concerned about
the supermarket prices than the stock market. When they go to
the supermarket, they are concerned about the price of Procter
& Gamble products, not the stock market price of Procter &
Gamble itself. The stock market means nothing to them. It is
what they have to pay for products in the supermarket.
This brings me to my question. Has there been a study to
give us some sense of what a $15-an-hour wage will do for the
economy? Has the Fed done such a study?
Mr. Powell. The Fed has not. That is not something we would
do.
Mr. Green. Let me just address that, if I may. I don't mean
to be rude, crude, and unrefined, but let me just call to your
attention a study that I found quite interesting: The Carbon
Disclosure Project, a good project. Based on thousands of
disclosures, you have concluded that the 500 largest companies,
by market capitalization, are exposed to a trillion dollars in
risk.
Now, someone could argue that that is probably not
something that you ought to do, although I understand that
climate change is something that is important to the Fed
because it will have a global impact. But I think you can take
a closer look at this. You are the ultimate authority on price
stability, on wages. Let's have a study to determine what
impact a $15-an-hour minimum wage will have on the economy, a
wage disclosure project, if you will. Give me some thoughts,
Mr. Powell. Can you help us, please?
Mr. Powell. There is a great deal of research that has been
done on minimum wages, and I don't know of a particular one,
but there has to be somewhere research on what a Federal $15
wage increase--
Mr. Green. I agree with you. I agree. I have read a few.
But they don't come from the Fed. They don't come from the
entity that has the dual mandate of price stability and
employment. It would mean something to working people if we
could get such a study, notwithstanding what others have done.
And these are observations, Mr. Powell, not criticisms. I have
enjoyed visiting with you. Notwithstanding what others have
done, this would be meaningful to working people.
By the way, I think $15-an-hour is not enough as a minimum
wage. I think it ought to be at least $20 now, but I will still
settle for $15 if we can get that.
So can we work with you, discuss with you the possibility
of a wage project?
Mr. Powell. Again, I will go back and talk to our labor
people who know this issue very, very well, and many of them
have published on these issues.
Mr. Green. I am going to thank you for that. I have 46
seconds left, and I am going to applaud you for it, personal
applause.
Madam Chairwoman, with that, I will yield back the balance
of my time.
Chairwoman Waters. Thank you very much. Is the gentleman
requesting to have an answer in writing for the record on this
question to the Chairman?
Mr. Green. Yes, Madam Chairwoman. Thank you.
Chairwoman Waters. The witness is requested to provide an
answer in writing for the record. Thank you.
The gentleman from Kentucky, Mr. Barr, is recognized for 5
minutes.
Mr. Barr. Thank you, Madam Chairwoman. Chairman Powell,
welcome back to our committee, and I want to first touch on
your testimony about the importance of fiscal policy in
supporting the economy. In general, what would you say is the
lag time associated with a major change in fiscal policy?
Mr. Powell. It can tend to be long, as you know. With
monetary policy, we can go into a room and change interest
rates, and we do. Obviously, fiscal policy tends to take a lot
of work and some time.
Mr. Barr. Let me ask the question this way. Fiscal policy
has changed profoundly in the past 3 years. Tax cuts,
deregulation, a less-restrained energy sector, a pullback from
the Dodd-Frank Act, repeal of the individual mandate, new trade
deals. Are any of these policy changes impacting current
economic conditions?
Mr. Powell. I am sure they are, but of course, we don't try
to assess that. That is not really what we do when we look at
the economy. But yes, they would affect it.
Mr. Barr. As you noted in your testimony, the U.S. economy
is presently exceptionally strong. Since the 2016 election, 7
million new jobs have been created. The unemployment rate is at
a 50-year low. More Americans are employed today than ever
before. Wage growth is the highest in a decade, and the lowest-
income workers have been seeing the fastest pay increase,
growing at 16 percent since the 2016 election.
And just over the weekend, this was the headline of the
Wall Street Journal, which I am sure you follow. And the
reporting was that a tight U.S. labor market is drawing
Americans off the sidelines at a record rate. Despite this,
after last week's State of the Union speech, Speaker Pelosi
said that it was ``appalling'' to hear the President, ``try to
take credit'' for an economy he inherited.
Chairman Powell, I am not going to ask you to weigh in or
arbitrate a domestic political dispute, but when the FOMC
conducts monetary policy, given what you said about the lag
time of fiscal policy, is it fair to say that this President's
policies are impacting today's economic conditions?
Mr. Powell. At a high level, of course they are.
Mr. Barr. Let me follow up on Representative Wagner's
question about the G-SIB surcharge. In your response to our
letter, you maintained that you aim to have the ``key
components'' of the stress capital buffer finalized in time for
the 2020 CCAR. Can you describe in more detail what the key
components are and a more precise timeline, given that the Fed
announced last week scenarios for the 2020 CCAR?
Mr. Powell. I think the timeline is--we do intend, and we
will put into effect, the core of the stress capital buffer in
time for the 2020 CCAR cycle, so that is coming right up. I
prefer to leave the exact details of that to--they are still
being worked out. But it will happen in a timely way for the
2020 cycle.
Mr. Barr. I understand. Let me try to get just a little bit
more detail. Is it still the Fed's view that the activation of
the countercyclical capital buffer is a suitable replacement
for the dividend add-on in light of the Board's Financial
Stability Report from November, which stated that the
vulnerabilities have not significantly changed?
Mr. Powell. We haven't made a decision on that, on using
the countercyclical capital buffer versus the other approach.
We have not made a decision on that.
Mr. Barr. Okay. Thank you for that. We are looking forward
to that decision.
Final question. The Business Roundtable, as you probably
remember, announced last summer that it was redefining a
corporate purpose to elevate so-called stakeholders ahead of
shareholders. A large investment firm recently announced its
intent to divest of fossil energy, effectively limiting
investment options for clients to a subset of sectors that
check the environmental social governance box.
I am concerned that firms which arbitrarily limit
investment offerings based on social and political pressure may
choke off capital to perfectly legal, productive, and
profitable sectors of our economy and cause retail investors to
miss out on returns that they need to fund their futures.
As a leading voice on the Financial Stability Oversight
Council, will you commit to raising this issue with your
colleagues at FSOC and urge that body to examine the extent to
which a misallocation of resources away from shareholders to
serve unrelated political errants might stifle capital
formation, compromise investor returns, and ultimately
undermine financial stability?
Mr. Powell. I don't know that I totally understand your
concern, but I will be happy to discuss it with you.
Mr. Barr. The concern is that if shareholders are not a
prime concern of corporate boards of directors, if stakeholders
who have no ownership interest in the company are the focus of
a corporation, then I would submit that there is a tremendous
risk of misallocation of resources away from maximum
shareholder returns. And I would like FSOC to take a look at
that.
Mr. Powell. I will bring that to the authorities at the
FSOC.
Mr. Barr. Thank you. I yield back.
Chairwoman Waters. The gentlewoman from Ohio, Mrs. Beatty,
who is also the Chair of our Subcommittee on Diversity and
Inclusion, is recognized for 5 minutes.
Mrs. Beatty. Thank you to the chairwoman and to the ranking
member, and thank you, Chairman Powell, for being here today.
Let me also acknowledge the advocates in their green T-shirts
for being here today, and thank you for coming to my office
yesterday and sharing what I thought was valuable information
with my team. I appreciate you sitting through the hearing.
Chairman Powell, in the latest edition of the Federal
Reserve Survey of Consumer Finances that was published in 2017,
it gave the breakout between whites, Blacks, and Hispanics, as
it related to their net worth. And we have heard the
statistics. I think my colleague, Congressman Meeks, talked
about it, and I am sure some others, so I will spare going
through all of those details.
But what is very interesting to me is, while that data
seems great for those who are researching the issue, is there
any way your office could break it down by regions or cities?
Because when we go back home, this is one of the number one
things that I am hearing. People are coming into my office,
once you get through health care, and this couples in with jobs
and education, they are saying, we look at the wealth gap that
is getting wider. It is not coming in. And while we are talking
about unemployment rates being better, many people have to work
2 and 3 jobs just to try to survive. Someone talked about the
minimum wage. Certainly, as we are advocating for a higher
number, it is not enough. In my district, you would have to
make somewhere between $18.70- and $20-an-hour to be able to
have a livable wage.
The first question is, can this information be localized,
to a region or to a city, to help us as Members of Congress
when we go back home?
The second thing is, I just recently introduced a bill
closing the racial wealth gap, which requires the Federal
Reserve to further break down the data. And this is something
that I didn't realize until really studying the Federal
Reserve, listening to some of the individuals like the folks
here today. They have some really good ideas.
And my second question is, could you tell me if you would
entertain having your folks look into wage as a measure?
Because oftentimes, many folks don't work a full-time job, but
they have a wage. Could we be a little more creative in looking
at the data based on some of the things that I am hearing from
the group who came in? And I am sure they have met with your
folks and you know some of their issues.
I will start with, can it be localized? Can we entertain
looking at some of the things that they think we should look at
when we calculate or present all the good news, that is not the
good news, for many of the individuals sitting here, or in my
district?
Mr. Powell. I think you are probably making some of our
data people very happy back at the Board of Governors.
Mrs. Beatty. Okay.
Mr. Powell. They love to cut the data different ways, and
we do learn. Every time we do that, we learn things. I don't
actually know the precise answer to your question of whether we
can do it regionally or in what dimensions we can, but we would
be happy to look into that for you.
Mrs. Beatty. And what about some of the individual ideas
about looking at wages in your calculation?
Mr. Powell. Yes. I think we can do that.
Mrs. Beatty. So, your folks would be willing to work with
them on some of the ideas, for a starting point of discussing
it?
Mr. Powell. Yes.
Mrs. Beatty. Because now, we are marrying the people with
the power, and what a good win-win that would be for all of us,
since we are really talking about all of our lives, and
especially those who have to work a little harder than some of
the rest of us.
The next thing is, will your agency work with my office? I
am so excited about this bill, and as I understand it, part of
the reason for asking for the data is the Federal Reserve
actually collects the data that sets the policies that then get
married with the allocations that come back to the districts. I
want to make sure I am on the right path when I go back home
and I say, ``I have a bill that is asking the Federal Reserve
to collect data that can help us in the end.'' Is that in the
ballpark?
Mr. Powell. Yes. We should actually get the experts to talk
directly to you and your staff and tell you what we do and how
we do it and how that might be useful. I don't know that we
need legislation at all, but we certainly have excellent
sources of data and we do cut them different ways. Why don't we
just follow up with you on that?
Mrs. Beatty. Thank you.
Chairwoman Waters. The gentleman from Colorado, Mr. Tipton,
is recognized for 5 minutes.
Mr. Tipton. Thank you, Madam Chairwoman, and Chairman
Powell, thanks for taking the time to be here this morning. I
want to follow up a bit on the CRA. We have had a fair amount
of conversation on that, and I just wanted to be able to have
the clarity that the Fed has been involved with the CRA
process, with the OCC and the FDIC. Is that correct?
Mr. Powell. From the very beginning.
Mr. Tipton. Great. And I also wanted to get some clarity.
Were you comfortable not only with Governor Brainard making the
speech but the content of her speech in regards to the CRA?
Mr. Powell. Yes.
Mr. Tipton. Okay. What extent has the Fed been--I know you
are talking about doing some of the analysis of comments coming
in--able to work on CRA modernization?
Mr. Powell. From the very beginning of the process we said
yes, that sounds like a great idea. It is a good time to update
CRA. Let's try to make it more transparent, more objective.
Let's try to make it more effective in serving the intended
beneficiaries. And so, we too went around the country. I think
we had 29 events around the country where we talked to
different groups of people about CRA, their experience with
CRA.
And it turned us in a particular direction. We had a bunch
of ideas, and it is unfortunate that we weren't able to get on
the same page. We weren't able to really agree completely with
their approach, and they weren't able to completely agree with
ours. But we continue to push, and we continue to learn. And I
would agree with Mr. Hill's earlier comment that ideally, you
would have one agreed-upon set of standards.
Mr. Tipton. I would agree with that as well. I think that
harmonization is something that we certainly ought to strive
for.
I was really encouraged reading your comments in your
statement that people who live and work in low- and moderate-
income communities are finding new opportunities. Wages have
been rising, particularly for lower-paying jobs. That is an
area that I have a lot of concern on. In my State of Colorado,
I represent the rural areas, and we oftentimes have 2
economies, where the metropolitan areas, resort areas have been
doing well, but rural areas have continued to often struggle.
We are now starting to actually see some of that real movement.
When we are looking at that CRA reinvestment back, talking
about the community banks, I really would encourage you to look
at the OCC and FDIC proposal. I believe they do reach farther
into rural America.
And you talked about policy. Have you done any assessment
in terms of the Opportunity Zones that were included in the Tax
Cut and Jobs Act? We are certainly seeing some benefits and
some investments coming into rural areas in my district. Are
those some of the policies that we need to be looking at?
Mr. Powell. I am not aware of any research that we have
done on Opportunity Zones, but we probably have, truthfully. In
the System, I would imagine we have done research on that, and
we will be happy to share it with you.
Mr. Tipton. Great. Thank you. And Fannie Mae and Freddie
Mac just took some steps, talking now about SOFR, to be
accepting SOFR-based mortgages. And I have noted that other
agencies have been taking this step separately. Is there any
kind of uniform effort at a high level to coordinate the
adoption of SOFR?
Mr. Powell. Yes, there is, very much so, and we are doing
that. We are coordinating with the other agencies and with the
market participants as well. And you will see more of that. You
will see more instances in which LIBOR will no longer work,
will no longer be usable in particular contexts, and that is
what Fannie and Freddie did this week, or announced this week.
Mr. Tipton. And to follow up on Mr. Stivers' question in
regards to community banks, do you see any pluses or minuses,
in regards to using SOFR over LIBOR for community banks?
Mr. Powell. Yes. I think LIBOR itself is really a problem
in the sense that there is no guarantee that the rate will
continue to be published after the end of 2021. But there is a
question about having a credit-sensitive rate in addition to
SOFR. SOFR will be the main substitute for LIBOR, but we are
working with the regional and some of the larger banks too,
about the idea of also having a credit-sensitive rate, and that
is something that is ongoing.
Mr. Tipton. Okay. We have had a little conversation about
the coronavirus, China, the impacts on the economy. The
President just signed into law the United States-Mexico-Canada
Agreement (USMCA). Do you see that as creating a runway for
further economic expansion in the U.S., for job opportunities
and wage growth?
Mr. Powell. We don't give advice on trade policy, but I
would just say this, that I think the signing and the enactment
and implementation of USMCA will be a positive, at least in the
sense that it removes uncertainty around trade policy. And I
think that has been part of the issue of the last year or so,
not knowing what the rules of the game are going to be. And I
think getting those rules settled is certainly a positive
thing.
Mr. Tipton. Great. Thank you. My time has expired.
Chairwoman Waters. Thank you. The gentleman from Illinois,
Mr. Foster, is recognized for 5 minutes.
Mr. Foster. Chairman Powell, first off, I would like to
thank you for facilitating our meeting with Governor Brainard,
the meeting that Representative Hill and I had on digital
currency. We really enjoyed that, as well as the meeting with
the staff, who were excellent, and it is great to see how
plugged in they were to this issue.
In a speech last week, Governor Brainard highlighted, ``The
role of central bank digital currencies is in ensuring that
sovereign currencies stay at the center of each nation's
financial system.'' Do you agree with her characterization?
And, in particular, do you think that establishing a digital
dollar would help ensure that the U.S. dollar continues to
serve as the core of the U.S. and the world's financial system?
Mr. Powell. To take the first part of that, I think having
a single government currency at the heart of the financial
system is something that has served us well. It is a very, very
basic thing that really hasn't been in question. And I think,
before we move away from that, we should really understand what
we are doing. So, I think preserving the centrality of a
central, widely accepted currency that is accepted and trusted
is an enormously important thing.
I think whether a digital currency moves us along that path
or not is an open question. As you know, every major central
bank is currently taking a deep look at that; we feel like that
is our obligation. Technology has now made this possible. The
private sector is innovating. They are doing it. I think it is
very much incumbent on us, and other central banks, to
understand the costs and benefits and tradeoffs associated with
a possible digital currency.
Mr. Foster. How would you characterize your state of
progress on this, compared to other countries--the Swedish
central bank developing an e-krona, well, the Chinese. One of
the reasons there was so much concern about the Libra project
is they would immediately have scale if they just rolled out
the product. Another entity in a position to do that is the
Chinese government, to roll out at scale, using their already
established payment-by-cell-phone systems. They would
immediately have the scale comparable to Facebook, if they
rolled that out.
How would you characterize our ability to respond to this
potentially competitive threat?
Mr. Powell. We are working hard on it. We have a lot of
projects going on, a lot of efforts going on, on that right
now. We haven't had the problem that many--you mentioned
Sweden. A lot of the northern European economies have moved
away from cash, to a remarkable degree, and that really has not
happened in the U.S. economy, even though it seems like it must
have happened with our kids not using cash very much.
Nonetheless, the amount of cash in the U.S. economy continues
to grow at faster than nominal GDP.
Mr. Foster. But if you look at the curve of adoption of
payment by cell phone, it starts slowly, and then all of a
sudden, it just happens. So, it seems like that transition can
happen in a period of just a couple of years, and so we have to
be able to respond. If that is the driving factor, then we have
to be in a position where we can respond by rolling out, for
example, a digital dollar, on a couple-of-year timescale.
Mr. Powell. I completely agree with that, and I think,
frankly, Libra really lit a fire under that, and it was a bit
of a wakeup call that this is coming fast, and could come in a
way that is quite widespread and systemically important, fairly
quickly, if you use one of these big tech ne2rks like Libra
did.
So, we are working hard on it. We fully appreciate the
importance of making quick progress. We have not decided to do
this, though. I think there are many questions that need to be
answered around a digital currency for the United States,
including cyber issues and privacy issues. Many, many
operational alternatives present themselves. And so, we are
going to be working through all of that and doing that work
early and responsibly.
Mr. Foster. Do you feel as though you have adequate
visibility into what the Chinese are doing on this? Do you have
sort of working-level contacts that give you some idea of what
their rollout is likely to do, likely to look like?
Mr. Powell. Yes. We certainly have that. But they are in a
completely different institutional context. There are things
that--for example, the idea of having a ledger where you know
everybody's payments, that is not something that would be
particularly attractive in the United States context. It is not
a problem in China.
But nonetheless, we are following--
Mr. Foster. But from a competitive point of view, they are
claiming they are going to roll it out on the Belt and Road
countries sometime very quickly. And so, I urge you to keep the
fire lit. Thank you.
Mr. Powell. Thank you.
Chairwoman Waters. The gentleman from Texas, Mr. Williams,
is recognized for 5 minutes.
Mr. Williams. Thank you, Madam Chairwoman, and thank you
for coming back to our committee, Chairman Powell. We
appreciate it.
With baseball season slowly approaching, I wanted to make
sure of one thing before I continue, that you still are on,
``Team Capitalism.''
Mr. Powell. Oh, yes.
Mr. Williams. Thank you. I appreciate that.
Experian recently released their 2019 Consumer Credit
Review, and I wanted to read a section from the report because
I think it accurately depicts the state of our economy. As you
know, I am a Main Street business guy and the economy is really
good right now.
``Indeed, the U.S. economy exceeded expectations. Record
job growth caused unemployment rates to drop to historic lows
while the stock market flexed throughout the year. Consumers,
in return, showed their confidence as they continued to borrow
and spend energetically, most recently evidenced by the strong
2019 holiday shopping season.''
The report goes on to say that, ``consumer credit scores
reached an all-time high in 2019, at an average of 703. This
translates to people being able to get better rates to borrow
money, to buy a house, to get a small business loan, or
whatever they need financing for in order to live out their
American dream.''
Chairman Powell, what should we be focusing on in this
committee to continue the explosion in new jobs that we have
seen over the past few years?
Mr. Powell. Honestly, I think the focus for me really ought
to be on things that address, what are our longer-run issues
that can be addressed by legislation? And there are really two
important things. One is labor force participation. What are
the things that you can do, that we really can't do, that will
help people stay more attached to the labor market? We still
have low labor force participation compared to essentially all
of our economic competitors.
And the other one is productivity, what is it that drives
productivity? It is a stable legislative environment. It is a
legislative and administrative environment that supports growth
and innovation and investment and those sorts of things.
Those would be my main focuses.
Mr. Williams. I know you are aware of the Fed's work on the
international insurance capital standard that is being
developed for the world. I have had my reservations about
entering into an international agreement that does not conform
with our current State-based approach to regulating our
domestic insurance companies. One particular piece of the
international standard that I want to ask you about is the
flexibility that our government was given to develop an
equivalent solvency standard that would better fit our
insurance ecosystems.
My question to you is, how does the Fed plan on ensuring
the standards being developed in the U.S. will be deemed
equivalent by the international group, given this continued
resistance you are facing from the Europeans?
Mr. Powell. I can just say that we will not be a part of
approving any international standard that doesn't accommodate
our own American insurance regulatory framework.
Mr. Williams. That is great. We are leaders, not followers.
Some of my colleagues on the other side of the aisle have
called for a financial transactions tax. I think this is an
extremely short-sighted approach to raising revenue that will
greatly impact the amount and the ways that Americans save for
the future. Additionally, the thought that adding an extra
layer of taxation to other assets so redundant since capital
gains taxes are already in place, and they should be lowered,
that take away money from successful investments.
If we want to further expand economic growth, we need to
focus on continuing to lower the personal and corporate tax
rate so Americans can keep more of their hard-earned income,
and businesses can invest that profit back into their
operations.
So, Chairman, can you explain how implementing a financial
transaction tax would impact the U.S. economy?
Mr. Powell. I think I need to stay in my lane here. We
don't do fiscal policy, and if I start commenting on particular
taxes, I am worried about where that might go.
Mr. Williams. I understand that. But I will tell you, from
a Main Street standpoint, it will really hurt the economy, an
extra layer of tax. We need to actually cut taxes.
Looking at financial trends across the world, and with
being in business for over 50 years, like myself, one data
point that catches my eye are negative interest rates. Can you
help me understand the economics behind negative interest rates
and talk about the potential threats that this phenomenon poses
to financial stability?
Mr. Powell. A number of countries around the world, as you
know, face the problem of what do you do when your policy rate
gets to zero, and some of them actually went below zero. The
United States chose not to. We chose not to at the Fed. We used
other tools when we got to the lower bound, and those were
forward guidance and large-scale asset purchases.
I think, going forward, our inclination would be to rely on
the tools that we did use as opposed to negative rates. So,
that is our instinct, is that in the U.S. context, that is not
a tool we are looking at. The question about intermediation is,
when you have negative rates, does it wind up creating downward
pressure on bank profitability, which limits credit expansion?
Mr. Williams. Right.
Mr. Powell. And there is some evidence of that. In any
case, we are watching other institutions around the world who
have done that and we will be able to see what the results are.
Mr. Williams. Thank you for being here.
Chairwoman Waters. The gentlewoman from Michigan, Ms.
Tlaib, is recognized for 5 minutes.
Ms. Tlaib. Thank you, Madam Chairwoman. Chairman Powell, I
don't know if you know this, but in 2013, Detroit filed for
Chapter 9 bankruptcy, which was marked as the largest municipal
bankruptcy filing in U.S. history.
In July, when you were here, I asked you why, if the
Federal Reserve is willing to backstop or support big banks and
corporations during periods of credit market distress, we
wouldn't want to make equally sure that State and local
governments had access to credit, as well. And you mentioned
that you didn't have the authority to lend to local and State
governments.
Madam Chairwoman, I would like to submit for the record,
Section 14(2)(b) of the Federal Reserve Act, asserting that the
Federal Government actually does have the authority to buy
municipal debt.
Chairwoman Waters. Without objection, it is so ordered.
Ms. Tlaib. Chairman Powell, given that you actually do have
the authority, can you explain to me why the Federal Reserve
shouldn't ensure that State and local governments have access
to funding during times of distress?
Mr. Powell. We have, as you know, limited authority, I
think it is to buy short-term municipal obligations. We did do
that in the 1970s briefly, and have not done it since. I think
a series of FOMCs and Fed Chairs, in all kinds of different
political environments, have thought of that as something that
is not appropriate really for us, in the sense that it is
government finance. That is to be dealt with by fiscal
authorities rather than by the monetary authority. We focus on
the job you have given us, which is maximum employment and
stable prices, and to some extent, also with other agencies, we
work on financial stability and bank supervision, as opposed to
the solvency of State and local governments.
Ms. Tlaib. Yes or no? The Federal Reserve reserves the
ability to open emergency lending facilities? Is that accurate,
in stabilizing the economy?
Mr. Powell. Well, yes, to financial institutions, we do.
Ms. Tlaib. So when the Fed steps in to rescue banks in a
crisis, is that because you believe their role in the economy
is vital?
Mr. Powell. It is really because we had no choice. It was
to prevent the financial system from collapsing in 2007 and
2008.
Ms. Tlaib. No. My City filing bankruptcy was devastating to
so many retirees, sir. For 40 or 50 years, they worked for the
City of Detroit, and saw their pensions completely diminished,
gone.
Do you not believe that the governments of Detroit and
Puerto Rico also play a vital role that should be preserved,
even if a financial crisis makes it hard for them to borrow
money?
Mr. Powell. What I believe is that is not a job for the
Fed, which has a particular role and particular authorities.
And lending to State and local governments and supporting them
when they are in bankruptcy is not part of our mandate.
Ms. Tlaib. We are going to strongly disagree. I believe you
do have the authority.
Now, you have mentioned that in the face of another
financial crisis, you would use the same tools of expanding the
balance sheet and purchasing long-term bonds, in other words,
more of the same. Correct?
Mr. Powell. Yes.
Ms. Tlaib. I am afraid that simply is not good enough, and
I think your predecessors, former Chairs Yellen, and, I
believe, Bernanke, seem to agree, based on remarks both gave
last month. For instance, Chairman Bernanke has suggested a
money-financed fiscal program might be helpful during the next
recession. Do you agree that would be helpful?
Mr. Powell. I think that is really an untested and not
widely-supported perspective. I don't believe Chairman Bernanke
said that a money-supported fiscal policy would be something
that we should do. I know that there has been a group of people
who have pushed that idea, but I don't think it included former
Chairman Bernanke. You may have seen something that I haven't
seen.
Ms. Tlaib. I know, and Chairman, look, the Federal
Government is supposed to be about people, and I don't see that
we are treating pensioners in a city like the City of Detroit,
which is frontline communities that have really been hit hard
by the financial recession--they keep saying Detroit is coming
back. If I show you neighborhoods, they will tell you, ``We
don't know what you are talking about,'' because poverty has
actually increased, and access to housing has decreased. We
need to start reflecting and understanding that I believe the
Federal Reserve Act actually gives us authority to help and
treat, just like we bailed out big banks, that we can do the
same for our people, the residents of the City of Detroit.
I thank you for that, and again, I would ask you and push
you to look at this from a different lens versus the same old
process, which I believe hasn't really worked for working-class
people.
Thank you so much, and I yield back.
Chairwoman Waters. Thank you. The gentleman from Arkansas,
Mr. Hill, is recognized for 5 minutes.
Mr. Hill. Thank you, Chairwoman Waters. And again, Chairman
Powell, welcome back to the House Financial Services Committee.
I want to thank you for your discussion that you had with Dr.
Foster a few minutes ago. I, too, want to thank you for your
work with Governor Brainard and our discussion that we had with
the Governor and the staff about the concept of a digital
dollar and the work being done at the Treasury about that.
I won't belabor some of the points that Representative
Foster made, but there are a couple of comments that I would
have for you on that. Would you advise our committee, or ask
the Fed to advise our committee, what legal authorities the
Federal Reserve might require in order to consider the use of a
digital dollar?
Mr. Powell. Yes. That is a good question, and it is one we
are looking at. A lot of it would depend on the design of that
currency.
Mr. Hill. Exactly. And one thing we also talked about, and
we have had a lot of discussions in our Fintech Task Force
about, is Europe's approach to this idea of a payment provider
license, which is now part of their financial services code.
Part of the open banking movement, and the idea that one would
have a regulatory license here in the United States for being a
payment provider--it might be a bank or it might be a nonbank--
is that something that the Fed is looking at as well?
Mr. Powell. I wouldn't say we are specifically focused on
that, but more broadly, it is, we think, a good idea to look at
the whole landscape of oversight of our payment system, and
that would be a piece of that. As you may know, Governor
Brainard talked about that in another of her speeches last
week.
Mr. Hill. Right. Thank you for that.
Last month, the Chinese regulators bailed out Hengfeng
Bank. It was a $14 billion loan that they arranged through one
of their sovereign wealth funds. The Chinese banking assets, at
$41 trillion now, are 47 percent of world GDP.
Does instability in the Chinese banking industry pose a
financial threat to the global financial system? Is it a
financial virus, like they have already contributed a physical
virus?
Mr. Powell. Generally, as I am sure you are aware, China
has had very high debt-to-GDP for an economy at its stage of
development, and that includes the banking system. And the
government has actually, for several years now, been taking
measures, led, I think, by the central bank, to try to control
the growth of debt, and they have stuck to that through the
last couple of years, even though those were challenging years
economically for them. So, it is something that they are
addressing.
The other thing to say is that they have plenty of fiscal
power. If you look at it fiscally, they have plenty of power to
respond to a downturn.
I wouldn't go so far as to say that their debt is a
systemic threat to the world economy or anything like that, but
it is something that they need to address, and they are
addressing it.
Mr. Hill. I think it is something that deserves review. Mr.
Barr talked about their misallocation of resources. At 47
percent of global GDP, that seems like an over-allocation in
the banking sector in China, and it could pose a threat to our
system.
In your report, on page 24, you talk at length in your
financial stability section about the decline in bond yields,
about how, particularly in the high-yield market, the ratings
have fallen. And I was looking at a mutual fund annual report
the other day and it says of particular concern is the
continuing high rate of issuance of BBB bonds, the lowest
category of investment-grade-rated bonds. If the economy
stumbles, rating downgrades issues could be a flood of fallen
angels. And this particular mutual fund said they are staying
away from the lower end of the high-yield market.
Are you concerned about the high-yield market?
Mr. Powell. That is the so-called BBB cliff, and the idea
is that there are a handful of very large issuers, which, if
they were downgraded, would then be non-investment grade, and
the idea is that some holders are not permitted by the terms of
their agreements with their investors to hold non-investment
grade, and it would trigger sales. So, that is an issue we have
been monitoring for some time now, really.
With leveraged lending more generally, yes, we are
monitoring it very carefully. You do see low compensation for
risk taken. You see high leverage. You see a lack of covenants.
You see all of that. I think it is a complicated picture,
though. That paper is now largely held in CLOs and mutual funds
and exchange-traded funds rather than on bank balance sheets,
and those vehicles tend to be stably funded, in the sense that
their liabilities are actually longer than the expected
maturing of the underlying instruments.
Mr. Hill. But it is still a source of financial concern to
the FSOC, I would think, and therefore I commend you for noting
it in the report, and I thank you for your continued attention
to it.
I yield back. Thank you.
Chairwoman Waters. The gentleman from Illinois, Mr. Casten,
is recognized for 5 minutes.
Mr. Casten. Thank you, Madam Chairwoman, and thank you,
Chairman Powell. I appreciate you sticking around all the way
to the bottom of the dais here.
If I get elected 8 more times, fingers crossed, I will have
as much experience in this line of work as I do in the energy
sector. I still come here primarily as an energy nerd, and I
have a real concern that we are not dealing with the realities
of climate change scientifically. We understand this, really,
what it means to have rising sea levels, but we haven't really
thought about what it means to have an accelerating rate of
change. Compound interest confuses people, and compound changes
in the environment, we don't even really think about it as well
as we should.
Just a couple of data points that I hope all of us can
appreciate. The first evidence that hominids made fire is a
cave a million years old. James Watt invented the steam engine
244 years ago and ushered in the Industrial Revolution, and 50
percent of all the CO2 we have ever emitted as a special is
since Back to the Future came out in 1985.
It is this massively accelerating shift, and if we went to
zero CO2 tomorrow, we are looking at 2 feet of sea level rise
coming. The more realistic trends we are on is at least 6 feet
of sea level rise coming, and at that level, there is estimated
about $23 trillion of economic loss to the system, $900 billion
of U.S. property at risk, before factoring in debt losses and
pulling out of insurance. And there are some serious systemic
risks to the economy if we leave those unaddressed.
I just want to understand a little bit how you and the Fed
are thinking about those risks. Number one, given that the
assets exposed to climate change exceed the entire subprime
mortgage market prior to the global financial crisis, how, if
at all, is the Fed thinking about climate change as a systemic
risk to the economy?
Mr. Powell. Climate change, again, is a very important
issue, one that is really the provenance of elected
representatives to set the overall direction of society and how
we will respond to climate change and its challenges.
Nonetheless, we have a job to do, and that is to think about
the potential implications for the financial system, for the
economy, and I think we are at the very early stages of filling
in what exactly that means.
In terms of things like particular assets, these are
longer-term considerations. We are essentially mainly concerned
with business cycle issues. That is what we are focused on, is
issues for the medium term. Climate change is a much longer
cycle kind of thing.
Mr. Casten. If I may, part of the concern I have is that
the actors in the space do not have planning horizons that
match the reality that you do, and we do, right? There are
people signing 30-year mortgages right now for properties in
Miami Beach, and they may plan on reselling that mortgage a
number of times, but somebody is going to be left holding the
paper with that sea level rise coming. The insurance industry
typically has a one-year holding period.
And even if the U.S. is successful at reducing carbon
emissions, there still is a massive reallocation of capital.
Have you looked at the transitional risks in thinking about how
that starts moving around and dislocating the economy?
Mr. Powell. Those are the things that we are at the
beginning stages of looking into. As you obviously know, there
is a lot going on in the financial markets. There is a lot of
disclosure happening and expectations around disclosure are
changing significantly for publicly held companies, and that
will have an effect. But that is not really what we do. We do
monetary policy, bank supervision.
To your point, our banks have to be taking into account the
risk of severe weather events, and potentially, I suppose, of
rising sea levels--
Mr. Casten. Maybe, let me give a specific one that has been
bugging me lately. If you look at the fossil fuel industry, the
oil and gas companies, the coal companies, the debt that they
hold relative to their assets, given that their assets are so
heavily dominated by fossil fuel reserves, if they were to
extract all of their fossil fuel reserves, things are going to
be way worse than the $23 trillion I just told you.
Have you ever considered stress testing to see whether
their failure to fully monetize their reserves might
effectively make them fiscally insolvent? Because that, to me,
sounds like a materially adverse event, but I wouldn't want to
bet that the economy is going to commit suicide. But if I look
at the financial statements of a lot of those companies, it is
not clear to me that they can monetize those assets. That has a
meaningful effect on the risk of money that is held today. I
think there was $700 billion lent to fossil fuel companies in
the last couple of years. Have you considered that as a
systemic risk?
Mr. Powell. For us, it is a systemic risk to the financial
system, and we would be stress-testing banks. As you know, the
Bank of England is doing some of that now, and we are going to
be watching to see what they learn, and maybe that is the path
we will follow.
Mr. Casten. Thank you.
Mr. Powell. We haven't made that decision.
Mr. Casten. Thank you. I will follow up with you offline. I
yield back my time. Thank you.
Chairwoman Waters. The gentleman from Georgia, Mr.
Loudermilk, is recognized for 5 minutes.
Mr. Loudermilk. Thank you, Madam Chairwoman. Chairman
Powell, thank you again for being here.
First of all, I kind of want to touch back on LISCC. I know
that some have already touched on this subject, and as you
know, several weeks ago, Vice Chairman Quarles gave a speech
where he outlined a number of changes that he would like to
make to the Fed supervisory and regulatory process. He said he
intends to bring transparency to the LISCC regulatory regime by
developing clear and transparent standards for designating
firms.
He also proposed aligning LISCC designation with the Fed's
tailoring categories and limiting it to only Category 1 firms.
My question is, at a press conference after last month's
Federal Open Market Committee meeting ,you said you generally
agree with Vice Chairman Quarles in what he had articulated. I
appreciate that. But can you give us an idea of when you expect
LISCC designation to be confirmed with new tailoring rules?
Mr. Powell. I don't actually have a sense of where that is
in terms of the timing of it. At any given time, we have a
bunch of things to do, and that is certainly one of them.
Mr. Loudermilk. Okay. Hopefully, sooner rather than later.
Mr. Powell. I don't want to commit to something that--there
are a lot of things that we are working on at all times. But if
the Vice Chair gave a speech about it, I am aligned with that,
and I expect we will be moving forward.
Mr. Loudermilk. That is very good to hear.
I would like to quickly touch on the CRA. I believe that
all 3 banking agencies need to have a unified CRA framework,
and I know you are hesitant to speak on behalf of the other
agencies, specifically the OCC and the FDIC and their
proposals. If you don't want to comment on that, and I
understand that, what are some of your ideas, or the Fed's
ideas for CRA modernization?
Mr. Powell. Let me talk about the process. We kind of agree
on the overall goals and the quesion of, how do you get after
that? And so, our thinking was try to get to a set of
improvements, really, that would lead to a more efficient, more
effective CRA. We are looking at ways to make the assessment,
the test clearer. In our thinking, at the retail level, there
is a separate test for community development and for retail
lending.
And also, the other thing we are saying is, let's make sure
that it is all very grounded in data. We have, as the Chair
mentioned earlier, 6,000 datasets that we look at. I think we
really know when you make a change in the metrics, we kind of
know what the effects are going to be, and we feel good about
that.
So, we tried to develop our proposal around that. There
were a lot of overlaps, but there are a handful of differences
that prevented us from getting to full agreement.
Mr. Loudermilk. In the overall objective, do you believe
that we can remove some of the ambiguity on what projects do
and do not qualify?
Mr. Powell. Absolutely, transparency ex ante, more
transparency ex ante as to what qualifies and where, more
objectivity. All of that should help to encourage banks to do
more, if they really know what is going to qualify and what is
not, and I think that is all very constructive. It is really
about how you implement it. It is a very important law, a very,
very important law. We want to have a high level of confidence
that what we change is going to have the desired effects, and
that is what we are focused on.
Mr. Loudermilk. I appreciate that, because I would like to
see us make changes to where it is not financial institutions
just checking boxes to get credit but actually investing in
projects that do help revitalize these communities.
As you know, the Fiscal Year 2020 appropriations law
directs the Treasury Department, in consultation with the
banking agencies, to study whether any changes in banks'
regulatory capital requirements are needed because of CECL. If
the study concludes that that is the case, are you open to
modifying regulatory capital requirements accordingly?
Mr. Powell. Well, yes. I think we have said that with CECL,
we are going to be monitoring very carefully what the
implementation is showing, because of some of the concerns that
have been raised.
Mr. Loudermilk. Okay. Thank you. I probably don't have time
to get into any other questions, so with that, I yield back the
balance of my time.
Chairwoman Waters. Thank you. The gentlewoman from
California, Ms. Porter, is recognized for 5 minutes.
Ms. Porter. Thank you. Chairman Powell, you have frequently
spoken about your belief in maintaining the independence of the
Federal Reserve. Do you still have that belief?
Mr. Powell. I do.
Ms. Porter. Has anything changed in the New Year?
Mr. Powell. No.
Ms. Porter. Okay. Because we don't want the Fed to be
making decisions about things, like where to set interest
rates, based on any factors other than the best interests of
the country. And I know you have had some experience with the
President publicly and aggressively attempting to lean on you
to lower interest rates, and I appreciate your continually
affirming the importance of the independence of the Fed.
But it is not just our President. There are a lot of people
out there who would love the opportunity to weigh in on Fed
decisions. Outside of Administration officials, what other
kinds of people might want to influence you in regard to the
Fed's decision-making?
Mr. Powell. What other people might want to influence us?
Potentially, quite a wide range of people, I would think.
Ms. Porter. Major investors? Financiers?
Mr. Powell. I don't know that people are really seeking
to--you say, ``might want to influence us.'' I really don't
know the answer to that.
Ms. Porter. Okay.
Mr. Powell. Many people follow what we do and respect what
we do. I think people often, when I meet them, really shy away
from giving advice. They really do. They feel like they don't
presume to give us--
Ms. Porter. So, you don't feel undue pressure from
political or special interests?
Mr. Powell. No, I really don't.
Ms. Porter. Would you say that someone like Jeff Bezos, the
CEO of Amazon, one of the richest men in the world, could
benefit from having influence over the Fed's decisions?
Mr. Powell. I wouldn't know, actually. I don't know.
Ms. Porter. What about Jared Kushner and Ivanka Trump?
Mr. Powell. I don't know.
Ms. Porter. They are very wealthy people. Do they have
savings and make different amounts of money depending on what
the Fed does with interest rates?
Mr. Powell. Yes.
Ms. Porter. What about Kellyanne Conway? Does she, in her
role as advisor to the President, and the President has
expressed these public views, does she potentially have an
interest in amplifying the President's messages? That is, after
all, her job.
Mr. Powell. I suppose. I don't know.
Ms. Porter. Okay. Mr. Powell, I am going to project a
picture up here, so that the audience can see, but I am also
going to hold it up for you. Is this you, Mr. Powell?
Mr. Powell. That is.
Ms. Porter. Where are you?
Mr. Powell. That is a party after the Alfalfa Club dinner,
an after-party that I went to.
Ms. Porter. Where was that party held?
Mr. Powell. At Jeff Bezos' home.
Ms. Porter. At Jeff Bezos' home. And when was it taken?
Mr. Powell. Excuse me?
Ms. Porter. When was this picture taken?
Mr. Powell. Saturday night after the Alfalfa Club dinner.
Ms. Porter. Give or take, you will stipulate end of January
2020?
Mr. Powell. Yes.
Ms. Porter. Recently. Can you imagine how attending a
lavish party at Jeff Bezos' $23 million home, along with Jared
and Ivanka and the CEO of JPMorgan Chase, Jamie Dimon, might
give off the sense to the public that you are not, in fact,
immune from external pressures?
Mr. Powell. I would certainly hope not.
Ms. Porter. What did you talk about at that party with
them?
Mr. Powell. I didn't. I didn't talk to any of the people
you named.
Ms. Porter. You didn't talk to anybody?
Mr. Powell. I didn't talk to any of the people you named.
Ms. Porter. Oh. Can you tell me who you did talk to?
Mr. Powell. I mainly escorted my son and his brand-new
wife, and I actually introduced them to General Mattis.
Ms. Porter. Okay. Great. I would just suggest that
attendance at this kind of event with these kinds of people is
inconsistent with what I would otherwise commend you on for
doing a very good job, I think, of reaffirming to the public.
This plants in the public's mind, I think, a seed that is
counter to what you have been doing.
Quickly, Mr. Powell, if you can just name a couple of the
biggest drivers of economic growth in this country, since the
recession in the 1970s. What has been making our economy grow?
What factors?
Mr. Powell. What factors have been making it grow? Well,
the hard work of the American people. I think what you have
seen is tremendous growth in some sectors and less in other
sectors. Of course, the big technology companies weren't around
40 years ago. So, I think we have seen lots of growth in some
areas, and in other areas, much less so.
Ms. Porter. Mr. Powell, would it surprise you if I told you
that women in the workforce are actually a bigger driver of
economic growth than technology companies, and in a span of 4
decades since the 1970s, 38 million women joined the workforce,
and without those women, our economy would be 25 percent
smaller?
When we talk about the health of our economy and we talk
about GDP growth, what I don't hear a lot about, and I would
like to hear more from you about, is about the economic effect
of things like child-care availability. In those same 4 decades
in which women grew the economy 25 percent, the cost of child
care shot up 2,000 percent. Do you know, Mr. Powell, how much
child care in America costs today?
Mr. Powell. How much it costs today in America? It costs a
lot.
Ms. Porter. You are an economic expert. Could you put a
little firmer number on that?
Mr. Powell. I don't know. My kids are grown up.
Ms. Porter. Thank you. I yield back.
Chairwoman Waters. The gentleman from Ohio, Mr. Davidson,
is recognized for 5 minutes.
Mr. Davidson. Thank you, Madam Chairwoman. Chairman Powell,
thank you so much for your time here today. Thanks for the good
work you and so many of your colleagues are doing at the
Federal Reserve.
Just to address comments that came from my colleague
recently, is it unprecedented for the Chairman of the Federal
Reserve to attend a party or a reception?
Mr. Powell. No.
Mr. Davidson. It is certainly not the first time that a Fed
Chair has attended a party. I am certain it is not the first
time a Member of Congress has attended a reception or a party.
And so, I don't know that we want to say, hey, just because you
were at an event, somehow this is nefarious. I mean, heck, you
might have actually talked to a Russian on a subway or
something. So, the way that these things are linked, for
political motives, is embarrassingly partisan and bad, and I
just thank you for resisting all of those pressures.
Many of them are public, of course, but one that I am
concerned about right now is the repo market. Back home, a lot
of people don't know that there is such a thing as repo, but it
is a big factor for our economy. And I think some of the
warning signs in it have given rise to the Fed, in kind of a
blend between regulatory action and monetary policy, injecting
a lot of cash into that market.
Vice Chairman Quarles spoke recently about the need for
that to continue for some time. Can you explain the process
about how the Fed is going about reviewing the factors that are
contributing to this repo spike, and what you have learned from
the review?
Mr. Powell. Sure. What happened is in, as you know, early
September, there was a spike in repo rates, and the Federal
funds rate moved slightly outside of our band, our target range
for a day or so. And we didn't see that coming. Market
participants didn't either. And so, we have been asking since,
why is that? One clear reason is that the level of reserves,
which is cash on deposit at reserve banks, needs to be higher
than we had thought, and so in that stream we have immediately
set a plan and executed it, and it has worked fine to create
that--
Mr. Davidson. Some have called this quantitative easing. I
know you have objected. But essentially, we are artificially
interjecting cash to produce an outcome that the market isn't
producing of its own accord.
I think it is odd that our action is to inject cash from
the Federal Reserve to grow the balance sheet at the Fed
instead of looking at the underlying regulatory things. What
have we talked about? What has the Board talked about in terms
of regulatory factors that, instead of injecting cash to fix a
problem, treating the root cause of the problem and changing
the regulatory framework?
Mr. Powell. We are doing both things. The reason we are
injecting the cash is to supply the demand for cash for
basically banks that need to have a certain amount of cash for
liquidity purposes. Turning to the second issue, though, we
also said that without undermining safety and soundness, we
would look at ways in which regulation and supervision might
have interfered with the otherwise free flow of cash to where
it was needed. And I think we have done a lot of work on that.
And Vice Chair Quarles hit on a broad theme there, which I
think is important, and that is the idea of making the
treatment, the supervisory treatment really of cash the same as
that of Treasuries for this purpose. You could achieve a better
flow of liquidity through the system without affecting the
overall level of liquidity in the system, which is just what we
are looking for. He broached some ideas for how to do that, and
I think that is a very profitable line of inquiry.
Mr. Davidson. Okay. Thank you for that. One of the changes,
as LIBOR is going away and market forces are coming, is we are
talking about replacing the benchmark rate. And, of course, ARC
includes 250 entities, but there is a concern that as you have
done this, that the best rate isn't necessarily being provided.
Is the Fed taking the best proposed rate offered in these repo
deals, or are we giving it out at a special rate to maybe the
top 10 SOFR banks?
Mr. Powell. I'm sorry. I lost track of that.
Mr. Davidson. When this liquidity is injected--
Mr. Powell. I see, the repo rate.
Mr. Davidson. --into the repo rate, going into the repo
rate.
Mr. Powell. I'm sorry. I missed that. The rate we have been
offering on the repos, they have been settling at a level that
is a couple of basis points below the interest rate on excess
reserves (IOER), but that won't be a persistent issue.
Mr. Davidson. But are they settling at a rate that is when
it is paid out at the high rate, is it paid to the best
available offer or is it paid to the best available customer?
Mr. Powell. We don't distinguish. Anybody who is eligible
can bid, and as long as you are eligible, we will sell to the--
Mr. Davidson. Thank you. My time has expired.
Chairwoman Waters. Would the gentleman like to ask the
witness to provide a more complete answer in writing for the
record?
Mr. Davidson. I appreciate the Chair's suggestion. I would
love to see a written answer for how that is actually working.
Chairwoman Waters. The witness is requested to provide an
answer in writing for the record.
Mr. Davidson. Thank you.
Chairwoman Waters. The gentlewoman from North Carolina, Ms.
Adams, is recognized for 5 minutes.
Ms. Adams. Thank you, Chairwoman Waters, for convening the
hearing today, and Chairman Powell, thank you for your
testimony.
FDIC Board Member Martin Gruenberg voted against
Comptroller Otting's proposal, describing it as, ``a deeply
misconceived proposal that would fundamentally undermine and
weaken the Community Reinvestment Act.'' Can you comment on the
deficiencies of Comptroller Otting's misguided attempt to gut
the CRA, an essential piece of civil rights and banking law?
Mr. Powell. I guess I feel like our role is not to be
commenting on the other agencies' proposals. The public is
doing that now. We very much look forward to seeing the
comments that they do make. I can talk about our own thinking
about this, but it is not really for us to be publicly
commenting on the other agencies' proposals.
Ms. Adams. Will the Federal Reserve release its own
proposal on the Community Reinvestment Act, one that takes into
account the needs of low- and moderate-income communities?
Mr. Powell. That, of course, was why we undertook this
work, was to do that. We actually haven't made a decision yet
about whether or when to make a proposal, but nonetheless, the
whole effort was undertaken with a view to creating a
modernization proposal for CRA.
Ms. Adams. Okay. As you know, the Federal Reserve has a
dual mandate: price stability; and maximum employment. Will the
Fed set a goal for wage growth, and are you considering this
approach as part of the framework review?
Mr. Powell. I don't see us targeting wage growth as an
independent item. It is something we monitor very carefully.
Our goal, as assigned by Congress, is maximum employment and
stable prices. Those are our two statutory objectives, and
those are the things that we target. I don't see us targeting a
particular level of wage growth.
Ms. Adams. Okay. Have you considered adopting a floor for
wage growth, for example, once we set a certain percentage
increase in pay in wages, that the Fed may consider switching
to a 2-percent inflation rate?
Mr. Powell. We have said that the sense of this project is
we want to make the 2 percent symmetric inflation goal more
credible, and we have been missing it, and central banks around
the world have been missing their objectives for a decade now,
on the low side. And we want to resoundingly achieve 2 percent
inflation. That is really the objective of this review that we
have undertaken.
Ms. Adams. Okay. Let me ask a question about the Volcker
Rule. Why has the Fed decided to support further changes to the
Volcker Rule, given that banks enjoy certain benefits,
including access to the Fed discount window, and that the Rule
was intended to limit banks from engaging in risky investment
activities that could contribute to a future financial crisis?
Mr. Powell. We did just put out a proposal on part of the
Volcker Rule, and, of course, we think that proposal is
entirely consistent with both the letter and the spirit of the
law. But we are going to be reading the comments. It is out for
comment now--we just put it out--and we are looking forward to
reviewing those comments.
Ms. Adams. Okay. I understand that you collect a large
number of daily trading metrics from banks subject to the
Volcker Rule, yet it has never been made clear exactly how
these metrics are used to determine whether a bank is complying
with the Rule, nor have any of the metrics been released to the
public. Is that true?
Mr. Powell. I think it is true that the--so we published
the first Volcker Rule, I want to say 6 or 7 years ago, and I
think very widely, regulators and financial institutions found
it to be a bit unworkable. And so, we set out to provide a
simpler set of metrics and ways that companies could conduct
perfectly legal activity and have more certainty that they were
doing so without having to prove, for every single trade, what
was in the mind and the heart of every trader, because there is
going to be trading activity around legal activities that were
not covered by the Volcker Rule.
I think that is what we are doing. We are trying to make
that Rule more effective and efficient, but we are doing it in
a way that is consistent with the letter and the spirit of the
law.
Ms. Adams. Okay. Thank you, Madam Chairwoman. I yield back.
Chairwoman Waters. The gentleman from North Carolina, Mr.
Budd, is recognized for 5 minutes.
Mr. Budd. Thank you, Madam Chairwoman. And Chairman Powell,
again, welcome. I want to start by thanking you and Governor
Quarles and your Fed staff in charge of insurance regulation
for your collaborative work with the U.S. State insurance
commissioners on solvency regulation. I also wanted to thank
you for the pushback against the European efforts to try and
force their system of insurance regulation onto our unique and
sound 50-State insurance regulatory regime. Notwithstanding the
progress achieved to date, many in the industry are telling me
that the Europeans are still resistant and they ultimately seek
to change our regulations so that they mirror theirs.
Given that, here is my question: Will you commit to
directly reaching out to your peers in Europe to tell them
explicitly that the U.S. will not be adopting a European-
centric or international capital standard (ICS), and that we
have our own rules that work very well?
Mr. Powell. I will just say clearly that we have a State-
based insurance regulatory system, and the Federal rule is what
it is, and that is not something we are seeking to change, and
we are committed to that going forward.
Mr. Budd. Chairman, they are seeking to change us, and so I
fear that if we are passive, it will migrate towards them. But
have you had any conversations with any senior European leaders
yet on the ICS, international capital standard?
Mr. Powell. No, I haven't.
Mr. Budd. Okay. Is there any reason why not, or is that
something that has been avoided?
Mr. Powell. No. I just am not involved directly in the
insurance. There are senior people who are. I am sure Vice
Chair Quarles is.
Mr. Budd. I would encourage you, again, and Governor
Quarles, to continue to press that. We have a great system that
continues to work well.
Also, Mr. Chairman, as part of the Basel III finalization
efforts, a number of changes to the capital rules will have the
effect of raising capital requirements on capital market
activities. Can you discuss your views on the appropriate level
of capital markets-related activity, such as market making or
underwriting?
Mr. Powell. Sure. Those are critical activities in the
functioning of our financial markets and our economy, and they
do need to be appropriately capitalized.
I would say that overall, I think that the level of capital
in our banking system is about right, and I don't see a need to
further raise capital. I know we are pushing forward with the
fundamental review of the training book and the other Basel III
end-game things, but I don't see them as needed to raise
overall levels of capital.
Mr. Budd. Chairman, can you share how your view on capital
requirements and things like market making and underwriting,
how they could affect the balance between bank-driven and
market-driven finance in the U.S. system?
Mr. Powell. I think, to the extent you raise capital
requirements and they become quite binding, they encourage
activity to move outside of the banking system into less-
regulated and supervised entities.
Mr. Budd. Very good. Mr. Chairman, there has been a lot of
discussion in recent months about leveraged loans, and FSOC and
others monitoring the market. In fact, you have had a couple of
questions on this topic today, but when people discuss the
issue, sometimes I think they are referencing different things.
To help us get on the same page here, in your opinion, how
would you define leveraged loans?
Mr. Powell. You are right. There are a lot of different
ways to think about it, but a reasonable ballpark would be
something that is rated below BBB. Or you could also say an
amount of leverage--typically, they will have a leverage of
maybe 6 times cash flow EBITDA. There are different ways to
think about it, but I think that the best way to think about it
is probably not investment grade.
Mr. Budd. Do you think there is a difference in leveraged
loans in the banking sector and in the nonbanking sector?
Mr. Powell. Yes. I think there has been a trend over time
for leveraged loans to be held by longer-term holders outside
the banking system, and that has accelerated. So, far fewer of
them are on the books of banks with deposit insurance and the
safety net, as opposed to collateralized loan obligations or
exchange-traded funds or mutual funds or pension funds or hedge
funds. That is where those loans are going now.
It is more like it has become a distribution business as
opposed to a traditional lending business, where banks would
make a loan, and they would put it on the balance sheet. That
is not what is really happening. You have a bank performing an
origination function on behalf of a sophisticated investor that
is stably funded, we hope, and in the case of the CLOs is, but
that is something we need to keep monitoring.
Mr. Budd. Thank you, Chairman.
Chairwoman Waters. Thank you. The gentleman from Illinois,
Mr. Garcia, is recognized for 5 minutes.
Mr. Garcia of Illinois. Thank you, Madam Chairwoman, and
thank you for being here, Chairman Powell. I would like to
return to the topic of climate change for a bit. Extreme
weather events have had a great impact on the Midwest and
working-class communities like those in my Chicago district,
and they are often the hardest-hit during such disruptions.
Climate change is also a risk to the financial sector.
Jim Cramer, host of Mad Money on CNBC, in a discussion last
week, said major institutional investors want nothing to do
with fossil fuels because of concerns about climate change. To
guard against climate change impacts, the Bank of England has
decided to stress test the UK's largest banks and insurance
companies against the risks associated with climate change.
Will the Federal Reserve follow suit and develop climate-
related stress tests?
Mr. Powell. We are monitoring what the Bank of England is
doing. By the way, those are stress tests that are not like our
stress tests, in the sense that they would have direct effects
on the bank's ability to make distributions and things like
that. They are really trying to make an assessment. So, we will
be watching that carefully. We haven't made a decision to
proceed with something like that.
Mr. Garcia of Illinois. Good. I am encouraged. Looking
ahead, incorporating climate change into economic forecasts
will become more important. Climate disasters, such as
Hurricane Maria in Puerto Rico or the wildfires that swept
through California last year, are currently labeled transitory
risks by the Federal Reserve. But we know extreme weather
events will become more frequent and severe, with the likely
result a corresponding increase in economic losses and physical
risks, the brunt of which will be felt by communities of color
and working-class communities.
Chairman, when the Fed develops its economic forecasts, at
what point should climate change shift from being considered a
transitory factor to a structural factor?
Mr. Powell. Our forecasts, both the individual ones that
FOMC people like me write down, and the staff forecasts, are
not for the sort of longer term. What is important is the next
year, the next 2 years, the next 3 years. And climate change
just operates on a longer cycle than that.
Of course, as you suggest, as severe weather becomes more
common, and that is connected to climate change, you will see
those things entering the forecast period, and it is certainly
entering our supervisory practices as well as our economic
forecasting.
Mr. Garcia of Illinois. Okay. In a recent speech at the San
Francisco Fed's Conference on the Economics of Climate Change,
Fed Governor Lael Brainard said, ``By participating more
actively in climate-related research and practice, the Federal
Reserve can be more effective in supporting a strong economy
and a stable financial system.'' Do you agree with Governor
Brainard's statement? If yes, what more will the Fed do in the
future to identify and mitigate the financial risks of climate
change?
Mr. Powell. I do think it is incumbent on us to do the
research and understand the implications of climate change for
our supervisory roles and our roles in looking after financial
stability, and that is what we are doing. I think it is early
days for that, but the public will expect that we do that and
that we take the measures that we need to take to make sure
that the financial system is resilient.
Mr. Garcia of Illinois. Do you agree with her statement,
generally?
Mr. Powell. That statement I do, yes.
Mr. Garcia of Illinois. Okay. Thank you.
Big bank mergers and market concentration--3 months ago,
the Federal Reserve approved a merger between BB&T and
SunTrust, which created the sixth-largest bank in the U.S.,
with more than $450 billion in total assets, and the Federal
Reserve's own research suggests that the failure of a single
$250 billion bank would be far worse for the economy than the
failure of 5 separate $50 billion banks. Furthermore, the
former FDIC Chair, Mr. Gruenberg, has warned that the FDIC
would not be able to wind down a bank the size of the combined
BB&T/SunTrust without imposing significant losses on the
deposit insurance fund, and potentially destabilizing the
financial system.
In this light, can the Federal Reserve justify its
conclusion that, ``this transaction would not appear to result
in meaningfully greater or more concentrated risk to the
stability of the financial system?''
Mr. Powell. Yes, I think we can, and I think we did. We
evaluate these mergers under a very clear statutory framework,
very transparently. We had a number of public hearings on it
and looked at all the statutory factors, and essentially, you
have 2 banks coming together to form a regional bank that is
akin to, or smaller than many of the other regional banks, and
it doesn't appear to me to have significant financial stability
implications at all.
Mr. Garcia of Illinois. Thank you, Mr. Chairman. I yield
back, Madam Chairwoman.
Chairwoman Waters. The gentleman from Tennessee, Mr.
Kustoff, is recognized for 5 minutes.
Mr. Kustoff. Thank you, Madam Chairwoman, and thank you,
Mr. Chairman, for appearing today.
I heard your statements in your opening remarks about the
coronavirus and certainly in regards to some of the questions
that you have had today. I noticed this morning, in a report
that Axios listed, they quoted from the Global Port Tracker,
and it said that traffic at U.S. ports is expected to decline
in February almost 13 percent, and in March, between 9 and 10
percent, year over year.
Now assuming that those numbers are true and correct, what
impact, if any, would that have on the retail sector, and what
impact, if any, would that have on the overall economy?
Mr. Powell. I think there is a lot of uncertainty around
what the ultimate economic effects will be outside of China,
and particularly in the United States. We do expect, consistent
with that report, that there would be some effects. The
question really will be, what will be the size and scope of
them, and also, will they be persistent, or will it be
something that just passes through? And ultimately, the bottom-
line question for us is, does it represent a material change in
the outlook, something that we should react to with monetary
policy? That is really the question for us, and it is really
too early to say. We will be monitoring it like everyone else
will, very carefully, and that is where we are.
Mr. Kustoff. Along those same lines, and also from Axios,
they quoted from a Bank of America security report. They said
they surveyed 3,000 companies about the global supply chain,
and that many companies around the world are looking at
relocating. The called it, in the report, a ``tectonic shift''
in global supply, looking to other areas of South Asia, India,
and also North America.
My question to you--first of all, I don't know whether you
are familiar with the study, this Bank of America securities
study or report? Are those numbers, or those anecdotal
statements, consistent with anything that the Federal Reserve
is seeing?
Mr. Powell. I am not familiar with that report, and
therefore can't comment on it. I would say there are a number
of channels through which this could have an effect, the first
of which is just tourism, really. The second is that our
ability to export to China is less because there is just less
going on there, so exports could go down.
You mentioned supply chains. Many U.S. companies buy
intermediate goods as part of creating their final product, so
supply chain issues, we don't have any real evidence on that
yet. And I would say the last channel is really financial
markets; financial markets themselves can be a channel for the
transmission of risk off behavior, which can affect economic
behavior.
We will be looking at all of that. It is way too early to
say what it will amount to. We are just going to have to wait
and see. There is no way to be kind of confident of anyone's
assessment, and there are a range of assessments.
Mr. Kustoff. Based on what you just said, I think I know
your answer, but I will ask it anyway. The report mentioned a
number of reasons. One is the tariffs between our country and
China and the impact that it has had on China and subsidiary
companies, but also automation and the increase in automation.
Does that sound consistent with relocating these supply chains?
Mr. Powell. Yes, separate from the questions about the
virus, there clearly has been, on the part of American
companies, a lot of activity in moving to other jurisdictions.
Vietnam, in particular, gets mentioned quite a bit. I saw a
report last week. A number of other countries have had American
businesses moving their production activities out of China to
other locations, and that certainly has happened.
Mr. Kustoff. Including the United States.
Mr. Powell. Yes.
Mr. Kustoff. Thank you. Or relocating back to the United
States.
I guess, along those same lines, I represent part of
Memphis and west Tennessee. In Memphis, just outside my
district, there was an announcement Amazon made 2 or 3 weeks
ago that they are locating a new facility there. It will bring
1,000 jobs, and incidentally, we had questions on the minimum
wage. They are going to start their wages at at least $15-an-
hour, plus benefits.
But it talked about these new jobs in combination with
automation, automation in terms of packing and shipping. You
have talked about your concerns of automation and the effect
that will have on employment in the future. Can you see the two
coexisting, for instance, like with this Amazon plant?
Mr. Powell. Over the last 2\1/2\ centuries, we have seen
advancing technology, and there has been a concern that it
would replace human labor, and that has happened. But what has
happened, though, is it has made human labor, over time, more
productive. So, there is displacement of current workers, but
over time, advancing technology has led to rising incomes. But
that doesn't mean there won't be disruptions and a lot of pain
for people in the short term, but nonetheless the process over
time has led to rising incomes.
Chairwoman Waters. The gentleman from Florida, Mr. Lawson,
is recognized for 5 minutes.
Mr. Lawson. Thank you, Madam Chairwoman. Mr. Chairman,
welcome to the committee.
And I would like for you to explain to me, for the past
almost 3 hours, 2 hours and maybe 45 minutes, when you were
talking, and members on the committee were speaking in terms of
how well the economy is doing, how we have more opportunity for
jobs in the economy, when you started speaking, the Dow was up
125 points, and while you were speaking, it went down. Can you
tell me why, when something like this occurs, who is listening
to your speech this morning in front of the Financial Services
Committee that would cause the Dow to go down? Is it because of
the cuts in the interest rate? How do you explain it?
Mr. Powell. I really can't. I am not following the market,
as I sit here answering your questions.
Mr. Lawson. Okay. I know that the President tweeted out
something similar, that when you started, the Dow was up, and
then the Dow went down. Do you react to that, or it doesn't
really mean that much to you?
Mr. Powell. I'm sorry. Do I--
Mr. Lawson. Do you react to that? The President tweeted
also about how the Dow went down and the cutting of interest
rates. Do you react to that, or is it just something that
happens?
Mr. Powell. My colleagues and I are completely focused on
using our tools to support the American people, to support the
achievement of our goals, and that is really all we are focused
on.
Mr. Lawson. Okay. Explain to me, too, from a staff report
they stated that starting in July of last year, about 3
different times, the interest rate was cut by a quarter
percent. How do you make the decision? Did that stimulate the
economy, when you made those cuts, all the way through October,
a quarter percent cut in the interest rate?
Mr. Powell. We were really looking at a few things when we
did that, and yes, the intention was definitely to support the
economy. Part of it was to offset the effects of global
factors, and there I would say just the slowdown in growth in
the global economy just went on and on, and we felt the need to
offset that and also take out some insurance against the effect
that might have on the United States.
Trade policy uncertainty was weighing on the U.S. economy.
We tried to offset any potential effects and take out some
insurance there. And the third reason was that we wanted to do
what we could to guard against a more prolonged shortfall of
inflation from our symmetric 2 percent objective. We have
supported growth to support inflation moving back up.
So, those were the reasons why we did those 3 things, and
that is the thinking that we had and that we announced.
Mr. Lawson. Okay. Could there be a correlation between the
growing student crisis and the slowdown of the housing market,
which we talked about a great deal, in the last couple of
months? As you know, many borrowers of student loans are not
able to get homes because of their high debt-to-income ratio.
Could that be a signal that there is a great need to address,
first, the mounting student debt crisis?
Mr. Powell. I would say that the rising student debt is
certainly a concern. It has been rising fast and is now large.
There is increasing evidence that shows that students who can't
pay that and can't service that debt have difficulty having
normal economic lives and buying homes and things like that.
I haven't seen any evidence that would suggest that it is
an important factor currently today, driving the housing
industry. I would say the housing industry has actually been--
activity in housing has been moving up here over the course of
the last 7, 8 months, as the effect of lower rates and just an
overall good labor market and things like that are showing up
in more house building and also housing sales.
Mr. Lawson. My time is about to expire. I have a lot of
students in my district, in the Fifth Congressional District,
many of them coming out of school. One of the things they are
concerned about is the housing issue, with going into the job
market, how can they best share in the American Dream like
their parents without getting help from their parents?
And so with that, Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you. The Chair wishes to remind
Members that we have a hard stop at 1 p.m. today. The
gentlewoman from Massachusetts, Ms. Pressley, will be the final
Member to ask questions today.
With that, the gentleman from Indiana, Mr. Hollingsworth,
is recognized for 5 minutes.
Mr. Hollingsworth. I appreciate the time, and I, both in
private and in public, have been extremely complimentary of the
work that you and your colleagues have done, not only in
calibrating conditions to match the current economy but also in
the framework by which you make many of your decisions and how
you present that in public. I really appreciate that.
And I know a cornerstone of what you have been trying to do
at the Fed is bring even more transparency to the Fed in some
of the decision-making, and the press conferences that you have
had have added a lot of transparency to it.
It is hard for me to understand some of the challenges in
CCAR and the stress capital buffers and some of the more vague
language or inability to pin down a timeline for changes to
that, expectation of changes to that, especially when 2020 CCAR
has already started.
I know Mrs. Wagner also asked about this. I had asked Vice
Chair Quarles about this in December. I think I sent a letter
to you and Quarles, signed by every member on this side of the
aisle on Financial Services, just trying to get a feel for,
what are the changes that are going to be made, what is the
timeline for those that would undertake these stress tests,
getting those changes. They are trying to make decisions with
trillion-dollar balance sheets, multi-billion-dollar balance
sheets, trying to make their plans.
This time is now upon us and I feel like we are still being
very vague about what is coming down the pike and when we can
expect even, whatever that is that is coming down the pike,
when we could expect that to arrive before us.
And so, I wondered if you might give some more color on
that, or give some reasons why you and your colleagues have
been a little more hesitant to answer that?
Mr. Powell. I can't give more clarity than exists, so I
will just say again, we do expect that the core of the stress
capital buffer will be incorporated into the stress test this
year, and we will do that in a way that is timely for CCAR.
Mr. Hollingsworth. Okay. In our previous conversations, I
think we had had just kind of a general agreement, and don't
let me overstate that if that is incorrect, that some of the
aspects of this needed to be calibrated. We put a lot of this
into play post-Dodd-Frank. We felt like we were doing the right
thing in doing so, but perhaps we either had unintended
effects, maybe the intended effects were not as great as we
thought they would be, or perhaps this wasn't the area we
needed to focus on. And I think we had agreed that some of this
requires significant calibration going forward.
Do you expect that there will be further review and
calibration of these tests to reflect either current
conditions, or, alternatively, what we have learned since the
crisis about what works and what doesn't work, and what may be
adding to significant reserves at many of these institutions?
Mr. Powell. My strong view is that capital, the levels of
capital, particularly in the largest institutions, are about
right, and there is not a need to raise or to lower them, and
that should reflect that.
Mr. Hollingsworth. Just out of curiosity, tell me, when you
say, ``about right,'' buttress that with data. Help me
understand kind of what do you look at to say this means,
``about right?''
Mr. Powell. Capital levels are much higher and the quality
of our capital is much higher.
Mr. Hollingsworth. That is undoubtedly true, but I think we
all agree that during the crisis, or pre-crisis, capital levels
weren't adequate. So to say that they are higher isn't
definitive in terms of, are they too high? Are they still too
low? Are they about right? What do you use to indicate this is
the ``about right'' level of capital?
Mr. Powell. The stress test, for one. You look at the
stress test, and you throw a scenario that is equivalent or
maybe even a little stronger than what happened during the
global financial crisis, and you see, do these institutions
have the wherewithal to remain reasonably well-capitalized and
really well-capitalized enough to continue to have the
confidence of the markets? That is really the question. They
have to be above certain minimums, and they do, but not by some
giant margin. It doesn't suggest that capital is too high. It
suggest that it is just about right. And the stress tests are
probably a great test for that.
Mr. Hollingsworth. Yes. I think you could see how it might
be concerning for institutions that feel like they are caught
in a bit of a circular logic, right? We can try these stress
tests, and then if they chin the bar on the stress test then we
believe that is right, that is exactly right, without going
back and changing some of the underlying factors that go into
the stress test.
You can always say that, right? You can always say as long
as they chin the bar that it is about right, no matter what the
bar is. They want to go back and just look underneath the hood
and say, gosh, are these assumptions still correct? The way
that we have done these stress tests, is it the right way to do
that? Right?
Maybe in a relative sense, yes, it is higher, the capital
is higher than what the stress tests have indicated, but in an
absolute sense, we are not asking the question, is this testing
the right thing and are we doing this test correctly, and does
it include all the right variables? And I think that is what
they are looking for, is just further clarification on when we
can expect that review, comprehensively, that the Fed has
talked about for so long.
Mr. Powell. I think we have been doing that all along. We
had a conference on the stress test last summer with experts
both internal and external--academics, people from the banks.
We are doing that all the time. Everything we do with the
stress test is transparent, public, out for comment, things
like that. Maybe not ex ante, but people can look back. It is
not like we haven't adjusted the stress test.
Chairwoman Waters. The gentlewoman from Massachusetts, Ms.
Pressley, is recognized for 5 minutes.
Ms. Pressley. Thank you, Madam Chairwoman, and I also want
to thank the activists in the room who have been organizing for
a more responsive Fed. I know, having been raised by a tenants'
rights organizer, that activism can be a full-time job, and so
we thank you for taking it on, and I thank the Chairman for
testifying before the committee today.
Just as with the Fed now, the decisions you make do impact
everyday working people. Your decisions impact how many jobs we
have, who has what jobs, how much they are being paid, and who
is most harmed when unemployment is higher.
In the past, you have said, ``We want prosperity to be
widely shared. We need policies to make that happen.'' However,
the Fed's approach has never successfully ensured enough well-
paying jobs are available to everyone who wants to work, even
for a small time.
In a 1944 address, FDR called for a second Bill of Rights,
which included the right to a useful and financially rewarding
job. Justice Thurgood Marshall argued that the right to a job
is secured by the 14th Amendment. And Dr. Martin Luther King
called on the government to guarantee a job to all people who
want to work and are able to work. Dr. King's legacy is often
reduced to just one speech, and the March on Washington often
mischaracterized. The March on Washington was actually the
March on Washington for Jobs and Freedoms. It was a march for
economic justice.
And I take special claim to the fact that Dr. King and
Coretta actually met in Boston. I represent Boston, and I don't
think that she gets enough credit for the role that she played
in the movement. And after Dr. King's assassination, Coretta
Scott King picked up the mantle, pushing the Fed to adopt a
full employment mandate, and was actually standing behind
President Carter as he signed the Humphrey-Hawkins Act into
law, and that is the reason that you are here today.
In the interest of time, if you would indulge me and answer
as succinctly as possible, yes or no, Mr. Chairman, given
persistent concerns about inflation, do you believe that the
Federal Reserve can achieve full employment, and by full
employment, I mean anyone who wants to work and can work will
have a job available to them?
Mr. Powell. First, thank you for that history. I didn't
know that.
That is our goal. That is what we are working to do at all
times. And I think, we are never going to say we have
accomplished that goal, but we certainly have made some
progress.
Ms. Pressley. I will take that as a yes. Could a Federal
jobs guarantee succeed where the Federal Reserve has not? Yes
or no?
Mr. Powell. That is a hard one to answer. I don't know.
Ms. Pressley. Guaranteeing a job, that is the history that
I was providing, that anyone who wants to work and is able to
work--
Mr. Powell. I think the numbers on that--
Ms. Pressley. Okay. Chairman Powell, by all indications,
the U.S. economy has had output well below potential for 8 of
the past 10 years, and for most of the decade prior. Is it true
that most of that period has seen unemployment well above
target, while we almost never have seen inflation above target?
Mr. Powell. That is true.
Ms. Pressley. Okay. Meanwhile, Black unemployment remains
double that of white unemployment. Now, the Fed began raising
rates in 2016, even though inflation was still below target,
and when rates go up, unemployment tends to as well. Did the
Fed consider how raising rates would disproportionately impact
those who were already struggling to secure employment, like
communities of color, individuals who were formerly
incarcerated, and our immigrant neighbors?
Mr. Powell. I would say that unemployment has continued to
go down quite significantly since we began to raise rates at
the end of 2016, actually the end of 2015.
Ms. Pressley. But again, did the Fed consider how raising
rates would disproportionately impact those who were already
struggling to secure employment?
Mr. Powell. I think our consideration was really that the
right thing to do was to get monetary policy back toward a
place where it reflected an economy that had recovered quite a
bit, for the benefit of all people, including low- and
moderate-income people, including minorities.
Ms. Pressley. A lot of people are still recovering. But in
the interest of time, given that there have been no signs of
the economy overheating since then, and you are now cutting
rates, is it possible you began cutting rates too soon?
Mr. Powell. I think history will judge that. We have to
make the decisions in real time. Though we really have learned
something since then, which is that unemployment can be lower
than most people thought, without inflation.
Ms. Pressley. Bearing that in mind, knowing what you know
now, would you still have supported raising the interest rates
when the Fed did?
Mr. Powell. I did support it then, and hindsight is 20-20.
I think you have to judge those decisions on what we knew at
the time.
Ms. Pressley. Would more Americans have jobs today if the
Fed had not increased rates over the past 3 years?
Mr. Powell. I don't know. We are at a 50-year low. That is
a fair question.
Ms. Pressley. Thank you.
Mr. Powell. Thank you.
Chairwoman Waters. I would like to thank Chairman Powell
for his testimony today.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to this witness and to place his responses in the record. Also,
without objection, Members will have 5 legislative days to
submit extraneous materials to the Chair for inclusion in the
record.
Thank you all, and this hearing is now adjourned.
[Whereas, at 1:02 p.m., the hearing was adjourned.]
A P P E N D I X
February 11, 2020
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