Jerome Powell Congressional Testimony Transcript: Fed Chair Testifies on the Economy, Coronavirus

Mr. McHenry: (00:00)
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, from African Americans and Hispanics where their unemployment rate has reached record lows last year. The prime age labor force participation has reached 2.2 million people that 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, this impinging upon your capacity to make proper monetary policy and that is why I think it’s important that you have a regulatory review of the limitations that those regulations can put on your broader monetary policy decisions. That includes systemic risks concerns that I’ve raised as well as the open market operations, well, especially the open market operations in the repo market.

I thank you for your prompt response to my questions about the repo market operations, but I’m not sure there’s been a satisfactory answer to what caused the market spike in the first place, and that’s troubling. I’ve also voiced my concerns with the transition from the LIBOR reference rate. We have nine months later, I’m still concerned consumers will be impacted by the transition.

We still have contracts written to the LIBOR reference rate and I think given the recent volatility in the repo markets, I’m concerned about the subsequent volatility in consumer facing products including mortgages, auto loans, business loans, and other consumer loans, as this new reference rates arrive from secured overnight financing. At previous hearings. I’ve spoken about the cyber threats pose to our financial institutions and your institution, and China in particular.

Yesterday’s news about the Equifax data breach is deeply troubling, and is that a wake up call to every single policy maker that we needed to take the threat of China and the Chinese communist regime quite seriously? If we’re not taking them seriously, have no fear, they are taking us very seriously and now they have basically all of our data too.

The spillover effects of this question of Chinese policy is significant, not just for cybersecurity but what we’re seeing with the Coronavirus and the destabilizing effects it has on global health. I know you’re 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 Coronavirus challenge in China and the spillover effects it has to its neighbors and the supply chain as well that’s derived through China.

The nature of China’s 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 questioned still, we should reflect appropriately upon what we know and how we respond as the 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.

Ms. Waters: (04:27)
I now recognize the Chair of the Subcommittee on National Security, International Development and Monetary Policy, Mr. Cleaver, for one minute.

Mr. Cleaver: (04:37)
Thank you, Madam Chair. Mr. Chairman, first of all, I appreciate very much your willingness to travel around the country to do 14 of those Fed Listens sessions, and one of them you did in Kansas City at the Fed Building. And I think that it’s a rare opportunity for most people to get a chance to sit down in a room and discuss economics with the Chairman, so thank you very much.

Mr. Cleaver: (05:08)
When you came to Kansas City, people were sitting around the table with you and giving you a picture of their struggles and strives in trying to make it in the economy, and people also we’re concerned about inflation. They believe that it’s like toothpaste, once it gets out of it’s probably hard to get back in. 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 clearing. Thank you, Madam Chair.

Ms. Waters: (05:48)
I now recognize the Subcommittee Ranking Member Mr. French Hill, for one minute.

Mr. French Hill: (05:53)
Thank you, Madam Chair. Chair Powell, thank you for being here today. We appreciate your willingness 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 views on the topic and we had Mr. Otting here recently to discuss the OCC’s point of view.

Mr. French Hill: (06:18)
As a former community banker it’s my view that we really should have ultimately one approach to CRA among the financial services regulatory agencies. I’ve had 40 years of dealing with inconsistency in delivery of regulatory proposals and so I do think ultimately it would be productive for us to have one approach to that regulation and modernize it for the digital world that we live in today. I look forward to your presentation today and Madam Chair, I yield back.

Ms. Waters: (06:47)
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 and I believe he does not need any further introduction. Without objection, your written testimony will be made part of the record. Mr. Powell, you are now recognized to present your oral testimony.

Jerome Powell: (07:20)
Thank you very much, Chairwoman Waters, Ranking Member McHenry, and other members of the committee. I’m pleased to present the Federal Reserves 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 FOMC’s symmetric 2% 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 enter the labor force, allowing the unemployment rate to move down further over the course of last year. The unemployment rate was 3.6% last month and it has been near half century lowest 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 in 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.

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 fundamental supporting household spending remained 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 symmetric 2% objective throughout 2019. Over the 12 months through December, overall inflation based on the price index for personal consumption expenditures was 1.6%. Core inflation which excludes volatile food and energy prices was also 1.6%. Over the next few months, we expect inflation to move up closer to 2% 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’ll 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% objective. We lowered the federal funds target range at our July, September, and October meetings, bringing the current target range to one and a half to one and three quarters percent.

In 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% 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’ve been hearing from representatives of consumer, labor, business community, and other groups. The February Monetary Policy Report shares some of what we’ve learned. The insights we’ve 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 this 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 continued 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 reached 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 chance, sorry, 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 our discussion.

Ms. Waters: (15:17)
Thank you. I now recognize myself for five minutes for questions. In December 2019, when the OCC and FDIC issued a notice of proposed rulemaking on comptroller outings proposal, the Federal Reserve did not join this proposal. FDIC Board Member, Martin Gruenberg, voted against comptroller outings proposal describing it as, “A deeply misconceived proposal that would fundamentally undermine and weaken the Community Reinvestment Act.”

Ms. Waters: (15:50)
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 irregulation.”

Ms. Waters: (16:18)
Chairman 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 barriers 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?

If I understood your question, it was whether we’ve used our database to evaluate their proposal?

Ms. Waters: (16:59)
That’s right.

I’m not totally sure we have. Maybe I can provide a little context if that’s 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 over… we 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.

Ms. Waters: (17:28)
Does the Fed intent to do this assessment?

Excuse me?

Ms. Waters: (17:33)
Do you intend to do the assessment that I referenced regarding the database to evaluate bank activities and how they would be a assessed-

So we-

Ms. Waters: (17:45)
… under the OCC’s and FDIC’s proposal for CRA?

Well, 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 from us that we’ll leave all major participants in CRA better off. We think it’s important that each metric, each change that we make is grounded in data. And that was the purpose, was to help us develop our thinking in our proposals and that’s essentially what we’ve been using it for.

Ms. Waters: (18:21)
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?

That’s really a decision for the OCC and FDIC-

Ms. Waters: (18:35)
Well, I know it’s a decision of the OCC. Mr. Powell, what do you think?

I think it’s not our role to comment on their proposal. Well, we have our own work and our own ideas that we’d be happy to share, but it’s really up to them to make that decision.

Ms. Waters: (18:51)
Are you completing your assessment? Are you continuing to look until you come to a final decision?

We are. We are…

Ms. Waters: (18:59)
And don’t you think the public should have an opportunity to have more time to do that also?

And they will when the time comes. I mean, I think for the time being what we’re doing is we are looking forward to reading the comments on the proposal. I think we’ll all learn quite a lot from those comments and we’ll 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. I think our view is that we want something that will leave everybody better off and will have broad support, and that’s what we’re going to be working on.

Ms. Waters: (19:36)
Well, 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 the OCC and FDIC has 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 that should be extended, I wish you would think about this and I wish you would as you are doing the assessment and 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, Mr. McHenry, is recognized for five minutes.

It always is rich, right? When somebody else has a negative comment about the Federal Reserve, that’s bad. But when I as a policymaker on the Hill have a negative comment about the Fed, it’s good, right? It’s all about the eye of the beholder when it comes to the political debate here in Washington. Congress made a decision over a 100 years ago to outsource monetary policy to the Federal Reserve. You’re a construct of law, you’re 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 long-standing.

Every president in the last 100 years has had some private criticism and we’ve found out at some point about that criticism either through press reports at the time, or later, or 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 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. These operations you said are temporary in nature. Is that still true?

Yes. Our expectation is that we will continue our bill purchases at least through… at least into the second quarter and continue to repo operations at least through into April.

Into April.

The sense of that is though that we’re 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’s 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’ll reach that level of ample reserves in it. From that point forward the balance sheet will grow at trend demand for our liabilities. We’ll continue to expand with the economy and then we are-

Are you doing a review on your capital requirements for financial institutions that should be participating in the repo market?

Well, I think we’ve reviewed supervisory and regulatory practices that may be affecting the flow of liquidity. Are our main focus of course is the federal funds market and our ability to transmit our policy decisions smoothly into the money markets through their federal funds rate. What happened in last September, 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. We’re really doing two things. One, we’re raising the underlying level of liquidity by raising reserves to a level that’s higher than we had thought we needed. And that process, as I mentioned, will take till in the middle of the year-

Well, part of that is a supervisory assessment as well to make sure that the policy is being driven in terms of the institutions.

That’s right. We’ve been doing that since September.

I raised this in my opening statement about China. Now, you’ve spoken publicly about your assessment, your thinking as you see what is happening with China’s response to the Coronavirus. We wish them well and we have high hopes that they’re going to be able to tackle this crisis there, this public health crisis they’re facing. But walk me through your thinking in assessing the situation in China now in terms of the economics and that potential spillover effect.

I’ll just quickly start by saying again that we find the US economy 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, continued moderate growth, all of those things. All of this happens in the context of a good strong US economy. And into that picture comes to the Coronavirus and so the question is, how do we think about that?

Of course, first we observe the human tragedy which is terrible to watch. The question for us really is what will be the effects on the US economy? Will they be persistent, will they be material? That’s 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 be some, very likely to be some effects on the United States. I think it’s just too early to say. We have to resist the temptation to speculate on this and so we’ll be watching that carefully again, and the question we’ll be asking is will these be persistent effects that could lead to a material reassessment of the whole thing?

It’s a question of length of time and whether or not this is a temporary disruption.

Yes.

Thank you.

The gentlewoman from New York, Ms. Velazquez is recognized for five minutes.

Ms. Velazquez: (26:07)
Thank you, Chairwoman. Chairman Powell, I would like to follow up on Ms. Waters’ question on CRA. What aspects of the proposed changes to the CRA do you find most troubling?

Again, what I’d 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 again we think, and I will mention the areas in which we have differences.

Okay, I hear that. I hear you and I respect it, but I just would 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?

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’ll learn a lot. I think we’ll all learn-

Are you meeting regularly with the OCC and FDIC on this issue?

We did for a long time. We’re not currently meeting with them on this. Of course we’re not-

Would you agree with Governor Brainard’s comment that it’s more important to get the rule right than to do it quickly?

Yes, I mean, I think that’s been our approach and will continue to be.

Thank you. Chairman Powell, as you know, Representative Porter and I have been concerned by banks growing reliance on cloud-based service providers for the 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?

I think we do have the legal authority that we need. We are able to look into third party service providers and we’re doing that more and more because of, as you mentioned, the prominence and size of this growing importance of these cloud service providers.

Thank you. I yield back.

Ms. Waters: (28:25)
The gentlewoman from Missouri, Ms. Wagner, is recognized for five minutes.

Ms. Wagner: (28:29)
I thank you Chairwoman, and thank you for being here Chairman Powell. We’re all very interested, it just happened on January 29th the spike, the repo spike. I know that Ranking Member mentioned it, I know you’re in the middle of your review and such. But could this… I have a little more specific question, could this repo market turmoil be symptomatic of deeper difficulties for the financial system?

Really it doesn’t appear to be at all. Since we took the measures we took in early September repo markets and money markets had been functioning very smoothly, there hasn’t been a return to the volatility. They’re functioning very normal really without, including over year end so we haven’t had any return to that. It’s pretty clear that the measures that we took directly address the problem. When the medicine is working you can really see and it seems to be working well here.

Ms. Wagner: (29:28)
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 uppers of over I think around 78 billion, wasn’t it?

Yes.

Ms. Wagner: (29:44)
You think that was a function of perhaps this fluke, would you call it?

We knew all that though. The thing is we knew that and what we had done was we’d ask banks to tell us, what’s your lowest comfortable level of reserves? We get those numbers, we added them up, we put a buffer on top of it, and it’s still suggested that there was plenty of reserves in the system. But then we-

… that there was plenty of reserves in the system, but then this happened, and I think that makes us think because we knew about those big payments.

Ms. Wagner: (30:08)
Right. Those are definitely on the horizon. Well, and you’re 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.

Ms. Wagner: (30:17)
Turning the page, Chairman Powell, in December of last year I asked Vice Chairman Quarles for an update on the status of updating the GSIB surcharge and plans for finalizing the stress capital buffer proposal, which I understand will require a re-proposal 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.

Ms. Wagner: (30:57)
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’m concerned about the lack of transparency in this process. When can we expect progress on this proposal that has, gosh, it has been in process now, I think since April of 2018?

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 tests. So we’re moving along on that, and we’re on track to do that.

Ms. Wagner: (31:50)
You do feel on track to do that then?

Yes.

Ms. Wagner: (31:52)
All right. Committee Republicans have underlined the importance of cyber threats as a potential systematic 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% of the wholesale payments network. What can the U.S. do better, Chairman Powell, in order to prioritize these constant flow of cyber risks and strengthen the resilience of our financial sector?

I think we can, 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’re constantly meeting inside the government to make sure that our system is resilient, and redundant, and strong against cyber attacks. But there’s never a feeling that you have gotten to a place of comfort on that, we just have to keep working. And it’s staying in the minute, learning what the new attacks are, making sure that the banks are doing the basic housekeeping. All of that is very much in train, and we’ll just have to keep at it I think for a long time.

Ms. Wagner: (33:33)
Thank you. My time has expired. Thank you so much for being here again, Chairman Powell, and I yield back.

Ms. Waters: (33:38)
The gentleman from California, Mr. Sherman, who is also the Chair for the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, is now recognized for five minutes.

Mr. Sherman: (33:50)
Couple of responses to what the ranking member had to say. Yeah, the stock market’s way up, wages are up a bit more than 1% 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’ve grown, not quite old, but I’ve spent many decades in this room. I’ve seen your predecessor’s predecessor’s predecessor, 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’re pushing on the other side. All I’ll say is that I’ve 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’s, I know, not your purpose, but think of the kids that 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.

Finally, as to the jobs growth we’ve seen recently, I do need to point out the jobs grew much faster in the last three years of the Obama administration than the first three 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’ve got an issue that I think ought to be completely bipartisan, and that is LIBOR. It’s 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 dead instruments do not do so, or should we explicitly adopt SOFR? What can we do, and hopefully do this year and actually solve a problem 12 months in advance?

So on LIBOR, as you know, our process is ongoing and we’re 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 a hard date.

Well, they need to know legally what to switch over to.

Right.

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’re supposed to do.

If we need a federal law change, we will let you know. I think right now we’re not-

Well, you’ve got less than two years. Have you figured out whether you need a federal law change or?

I don’t think we think we do need a federal law change right now.

Well, if you could get us an answer, because there are people who want to wait around until two or three 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’re impairing the economy today because you and I are talking about this, and there’s this slight risk out there of litigation and uncertainty with regard to legacy LIBOR, and we ought to take that off. That’s one of the things we can do to help the economy. So I hope that you would act within a month to let us know what you propose, rather than wait until next year.

Another area we’ve talked about before is the wire transfer system. We’ve seen $150 million lost to scams, and those scams arise chiefly because when you wire money, you do so to a number, but there’s 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’ve 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’ll have to ask you to get back promptly for the record on that question.

Ms. Waters: (39:00)
The witnesses are requested to provide an answer in writing for the record. The gentleman from Oklahoma, Mr. Lucas, is recognized for five minutes.

Mr. Lucas: (39:08)
Thank you, Madam Chair.

I’m encroaching.

Mr. Lucas: (39:10)
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’re not currently integrating those measures into capital requirements. Would you outline some of what The Fed is doing in the terms of research and engagement on global climate risk?

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, the banks and the utilities that we supervise, are resilient against the longer term risks from climate change. We’re in very early days of understanding what all that means, and so there’s 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 inform to understand what might be the effects on banks from climate change.

Mr. Lucas: (40:44)
Are you planning on joining the Network for Greening the Financial System?

We haven’t made a decision about that. We’ve always attended their meetings. I mean, I guess my theory is when you join an organization like that, you’re not necessarily signing up for everything that everybody there believes; you can benefit from the work that’s being done there. And we’re kind of doing that now. We have not made a decision about membership.

Mr. Lucas: (41:09)
Vice Chairman Quarles recently outlined changes that would increase supervision, transparency, and accountability. I was encouraged by those comments, and we’ll be following this closely, of course. One change the Vice Chairman outlined is that The Federal Reserve should restore supervisory observations, which would allow a 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?

Timeline is hard to say. I mean, I would just say what the Vice Chair did was he pointed to this tension that exists between very fundamental expectations of due process, transparency, and fairness around everything that government does, and should, should it be associated with that, but also with supervision, which by its nature is private and somewhat discretionary, nonpublic, and confidential, really. So 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 thinking. I think that’s a very healthy thing to think about, and it’s something we’ll be working on.

Mr. Lucas: (42:20)
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 parents, my grandparents I should say, and my great aunts and uncles. They were born just before, just after the previous century. So their tales of firsthand experience in the pandemic of 1918 and 1919 we’re very graphic as it rolled through rural Western Oklahoma. 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. Now, my mother’s family, my father’s family, were very fortunate, no one died from what was called the Spanish flu. But it brought society to a stop.

Mr. Lucas: (43:07)
The reason I asked 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?

I think they’re 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’ve said that they’re open to cushioning the economic effects. We’re not able yet to estimate the size of the economic effects. There are many estimates out there, but I think you’ll see governments acting in Asia, particularly in China, to offset those.

Mr. Lucas: (44:09)
Thank you, Mr. Chairman. I yield back, Madam Chair.

Ms. Waters: (44:12)
The gentleman from New York, Mr. Meeks, who is also the Chair for the Subcommittee on Consumer Protection and Financial Institutions, is recognized for five minutes.

Mr. Meeks: (44:21)
Thank you, Madam Chair. Welcome, Mr. Chairman. Let me touch quick, initially, on asymmetrical growth. It’s been discussed at length in my community and others that 40% of Americans don’t have adequate savings for a $400 emergency. Similarly, one in five Americans skip essential healthcare or fail to pay important monthly bills due to the lack of funds. So finally, a large share of the population is also underbanked or unbanked, and we’ve talked about that a lot on the committee of which I chair, the subcommittee I chair.

Mr. Meeks: (45:07)
So my first question to you, then, 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?

Well, the pattern was that at the beginning, it was more high edge, people who had just left the labor force perhaps made it right back in. What we really have seen, though, in the last two or three 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’s great to see. As I mentioned, with our Fed Listens events, we’ve been hearing quite a lot about that. So that’s 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, really, other programs to address the longer run needs of those communities other than just the business cycle and monetary policy.

Mr. Meeks: (46:16)
Also during this period of time, would you say that, a number of us has been arguing, and finally we are moving toward a $15 an hour minimum wage for individuals on the bottom, would you think that that has something to do with helping them also, the fact that many states have adopted a $15 or higher minimum wage than what had been put put in place?

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’s a classic-

Mr. Meeks: (46:45)
I understand.

… trade-off that legislatures have to balance.

Mr. Meeks: (46:47)
I understand.

The research on exactly what is driving up wages at the lower end does suggest that there’s a role there for the minimum wage increases. States that have had minimum wage increases have seen, you know, there’s a noticeably higher increase. But really, it’s much broader than that, and the bigger factor really just is very low unemployment and a strong labor market, high job creation. That’s the main driver.

Mr. Meeks: (47:14)
The other concern that I have, because it also seems as though as unemployment goes lower, et cetera, when you look at black unemployment, it still remains nearly double that of white unemployment. And it seems to stay that way whether the cycle is a down cycle or an up cycle. Are there any signs of how we close those gaps? I mean, because there’s always these gaps that seems to happen between the African American community and whites, where even though it’s good economy, that gap stays the same.

There are persistent gaps, and they’re very troubling, and they’re 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 too, 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’ve given us, maximum employment and stable prices. We see positive effects from that. But over the longer run, it really needs broader policies of education and and other things that would help with that issue.

Mr. Meeks: (48:25)
Thank you. Let me ask, and I know Chairwoman Waters asked some questions on CRA, there was 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? Some are saying it’s just her opinion, and it’s not that that of the Board, so maybe you can clear it up. Does the Board see it similarly, as Governor Brainard?

We actually haven’t taken a proposal to the Board yet, but no, that represents the thinking of … She’s been working on this. I asked her to lead this effort for us. She was the head of that committee for some time. I’m very comfortable with the thinking that’s in that speech, and support that set of ideas and that approach. But it’s 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: (49:27)
Thank you.

Ms. Waters: (49:28)
The gentleman from Florida, Mr. Posey, is recognized for five minutes.

Mr. Posey: (49:34)
Thank you, Madam Chair. Mr. Chairman, the world is experiencing a 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’re really excited about all that. Now, several estimates put the current level of global space economy at well over $400 billion a year, with a growth rate of 8% from 2018 to 2019.

Mr. Posey: (50:09)
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.

Mr. Posey: (50:42)
First question, can you work with me to ensure that The Federal Reserve joins this multi-agency effort with an eye to avoiding financial bottlenecks and keeping this important space industry on path to a healthy growth rate?

It’s the first I’m hearing about it, but I will surely, I’m happy to assure you that we’ll take a close look at that, and if it’s something that would be productive, we’d take part.

Mr. Posey: (51:06)
Great. Over the years, we’ve developed a rather expansive policy of Federal Reserve independence, and I believe in assuring 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.

Mr. Posey: (51:45)
However, the GAO routinely conducts policy audits of the defense policy and strategy, yet the GAO is restricted from conducting policy audits on The Federal Reserve. I’m 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 surely at least as sensitive as the monetary policy, and I’d like your thoughts on that.

Sure. So the GAO does 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’s what I would tell you about the GAO.

Mr. Posey: (53:10)
What do you think makes The Fed more immune to review than the defense? What’s the rationale behind that, do you think?

Well, again, everything we do on payments, and financial regulation, every single thing we do is subject to GAO audit. And these are policy audits, it’s 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 community bank. It’s not complicated. And we’re constantly audited. What this exemption does is it prevents the GAO from coming in and looking at and assessing individual monetary policy decisions, which Congress saw fit, you saw fit, your Congress saw fit, to carve out of law. And again, I think it was an inappropriate 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’s doing.

Mr. Posey: (54:05)
Well, 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’s why I asked you these questions.

I mean, we’re very transparent. We publish minutes, we publish transcripts. We’re not hiding anything.

Mr. Posey: (54:29)
I know, ” We publish everything but.” I think that the but exemption is overdue.

Ms. Waters: (54:41)
The gentleman from Missouri, Mr. Clay, who is also the Chair for the Subcommittee on Housing, Community Development, and Insurance, is recognized for five minutes.

Mr. Clay: (54:50)
Thank you, Madam Chair, and thank you Chairman Powell for being here today. For most of the constituents in my congressional district, they are not focused on the DOW maintaining a 30,000 level, but simply trying to make ends meet. In fact, the St. Louis Fed, in an essay, as part of its 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.

Mr. Clay: (55:49)
Median Hispanic and Black wealth levels are about 90% lower than the median White wealth level, yet median income levels of Hispanics and Blacks are only 40% lower. The larger racial wealth gap could be due to Hispanics and Blacks investing in low return assets, like housing, as well as to 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.

Mr. Clay: (56:41)
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?

What we can do, and what we have been doing, is to take seriously your order to us to seek maximum employment. And that’s what we’re doing. I think we’ve learned, we’ve just learned because we’ve been watching what’s been happening, that unemployment can be lower than many had expected without raising inflationary or other concerns. So that’s what we can do, and we will continue to do. I think that’s showing up in communities everywhere. I think other governmental and other tools are necessary to address longer run problems, though.

Mr. Clay: (57:33)
Such as, how do we address the pay inequity? How do we impress upon corporate America that it does its 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?

I will say, I think it’s important that those issues be addressed. It’s 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 with what you’ve given us to do, which is maximum limits, stable prices, supervise the banks, look after financial statements.

Mr. Clay: (58:30)
On another subject, will The Federal Reserve release its own proposal on the community reinvestment, and one that takes into account the needs of low and moderate income communities?

We haven’t made a decision on that yet. I think our focus right now is on the ongoing process of the other agency’s proposal and the comments. I think that we’re going to learn a lot from those comments, and I suspect there’ll be changes to that proposal coming out of the comments. So we have not made a decision about our own proposal.

Mr. Clay: (59:05)
Well, traditional monetary policy works through a single economy-wide variable, a single interest rate, or perhaps the money supply or 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 operations targeting specific segments of the private debt and securities market. What is your view of shifting from traditional monetary theory to one that involves a use of more tools in order to enhance borrowing to segments of society?

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.

Jerome Powell: (01:00:03)
As you pointed out, one tool which is our interest rate policy. When you’re talking about effecting different sectors of the business community or of the population, that really should be another agency or Congress itself in fiscal policy rather than the-

Ms. Waters: (01:00:16)
The witness has requested to continue to provide an answer for the record.

Speaker 1: (01:00:20)
I yield back. I yield back. Thank you.

Ms. Waters: (01:00:22)
The gentleman from Missouri, Mr. Luetkemeyer, is recognized for five minutes.

Mr. Luetkemeyer: (01:00:26)
Thank you, Madam Chair and welcome Chairman Powell. Always good to see you, sir. I’m 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 and came out with an inter-agency 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 Trump’s administration recent actions out of the Office of Management and Budget. My question is, do you believe we need an official rule making out of the Fed on the role of guidance?

We have not made a decision on that. We’re, like the other agencies, were evaluating the OMB memo. As you know, guidance is not enforceable. It’s not. And so we do understand that guidance is not a rule.

Mr. Quarles was here recently and I think he made a 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. And I think that’s a great approach, but I think the question is, do you anticipate a rule to be able to do that and enforce it in a future? And so, you’re looking at trying to do that?

That’s something we’re looking at and we are looking at our guidance and asking if some of it should be, is more like a rule.

Okay. Mr Quarles also discussed how regulations have a framework under the Administrative Procedures Act, but there is no real framework for supervision. And he used LISC 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 rule making. Do you believe we need to change LISC, and what should we do to the firms that are already under this regime?

So I would agree that it’s appropriate that we draw brighter lines around LISC membership and as a Vice Chair Quarles mentioned in a speech recently, that’s the path we are on.

Okay. Very good. Something that is kind of concerning to me is the fact that we have a lot of banks and non-banks that are in the home mortgage lending space. Non-banks in general, were roughly lending about 250 billion in 2016. This next year is anticipated to triple to $750 billion. In 2019, non-banks originated 85% of all loans sold into securitization, guaranteed by Ginnie Mae. 53% of loans sold at Freddie Mac and 60% of loans sold Fannie Mae and non-bank mortgages make up 87% of FHAs portfolio. And our most recent FSOC report, non-bank mortgage originators were designated as a potential systemic risk. You’re a member of FSOC. Can you explain that? Would you like to talk about that a little bit or do you have any concerns with it? Obviously, FSOC did.

As you mentioned, we have looked at that at FSOC, and I believe it was part of the recent annual report, that the thought being, these are now very, very important channels through which mortgages are originated. And in a case of a downturn, the banks have high capital, they’ve got lots of regulation, lots of liquidity and that’s in a good place. But these institutions are operating, sometimes under-funding themselves with credit lines, which might not be available. So there’s risk there, and we’re in the process of assessing that and determining what all to do about it.

Do you have a time table on that?

We’ve highlighted as a risk and we’re doing work on it.

Do you have a timetable on what you might come out with a statement and say you will or will not do and if you want to do something, what it may be?

I can come back to you. This is something that the treasury has the lead on.

Okay. Okay. Very good. One of the things that concerns me a little bit is also with regards to home lending is just the stack of forms you have to go through. I mean, 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 are in there and he said, “Congressman, we don’t know what to measure by the page. We measure by the pound.”

I say this is how off the charts we have gotten when you have a stack of papers this tall to do a home loan. I’ve talked to the FDIC and the CAPB, and hopefully we can engage you in a way to kind of reduce that down to where it’s manageable to where still there is protections in there for the consumer when he signs for a loan, and there’s enough information to allow the bank and the regulators to see it, but this has got to change. This can’t continue to grow this. This is crazy. Do you have an opinion on that?

Well, to the extent it’s not legally mandated. A lot of that stuff is legally mandated by federal or state law. To the extent it’s not, then we do try to make assessments about what is necessary and what’s not, but it is a big challenge. I would agree.

Thank you. I just want to note for the record, I did not ask you a question about Cecil today. Thank you very much, Mr. Powell.

Ms. Waters: (01:05:26)
The gentleman yields back. The gentleman from Georgia, Mr. Scott, is recognized for five minutes.

Mr. Scott: (01:05:31)
Welcome, Chairman Powell. Good to have you. Chairman Powell, concerning LIBOR, the Alternative Reference Rate Committee is pursuing in New York legislation to address legacy contracts in New York state. Would the Fed support federal action in that regard?

Mr. Scott, so actually it’s 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’s going to be necessary. We have plans to do that. If we do believe that that Federal legislation is necessary, we will come tell you. And by the way, we understand that that’s not something that you can do in 24 hours. So we know that the time for that is soon.

Mr. Scott: (01:06:24)
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 seize LIBOR based lending by the third quarter of 2020. So why has the Fed not been so direct? And do you have plans to set clear goals and guidelines for your regulated institutions?

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 a 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: (01:07:21)
Okay. And Chairman Powell, your Fed board recently finalized its rule on tailoring in 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 risks. But the board has never disclosed nor provided clear and quantitative criteria under which firms are place under its enhanced supervisory regime that is called Large Institutions Supervision Coordinate Committee. And even your vice chairman, Mr. Quarles recently gave a speech where he said this, he said that he would like to align their portfolio with the tailoring categories and make the designation criteria transparent. And you even recently indicate that you agreed on the need for brighter lines. So could you outline what changes the board is considering to make in this supervisory framework?

We’re just in the process of working out the specifics. But I would agree that we should provide more clarity around what is a LISC firm and that’s really going to be the category one firms.

Mr. Scott: (01:08:49)
Thank you. Now let’s move to… You are a great man, and good man, 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 Mr. [inaudible 01:09:18] on this business of him coming with this rule, making change to the Community Reinvestment Act. Let him know that you not only have a mandate for inflationary or monetary policy, you have a dual mandate, employment, jobs.

Mr. Scott: (01:09:44)
And here’s the other thing, you need to remind Mr. [inaudible 01:09:48], that this piece of legislation, this law, the Community Reinvestment Act is precious to the nation, but it’s 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 and the two anchors for that is a home, owning a house and having a job, and this bill was the bill that outlined, red lining that kept African Americans out. He needs to back off of that. You need to assert your power in this and let him know we’re serious and to back off this rule change.

Ms. Waters: (01:10:53)
The gentleman from Ohio, Mr. Stivers, is recognized for five minutes.

Mr. Stivers: (01:10:57)
Thank you, Madam Chair. I appreciate you holding this hearing. Good morning, Mr. Chairman. How are you doing today?

Great, thanks.

Mr. Stivers: (01:11:03)
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% which is increased in the last three years. Is that correct?

I think that’s prime age.

Mr. Stivers: (01:11:19)
Sorry, prime age. That’s the prime age adults, sorry. Yeah. Has it increased or decreased in the last three years?

I do believe it has, yes.

Mr. Stivers: (01:11:27)
And wage growth has outpaced inflation for workers in the last three years? Well, at least is currently outpacing inflation, correct?

Yes, it is.

Mr. Stivers: (01:11:38)
And wage growth has actually gone up the last, about by about 3%, the last few quarters in an annualized rate. Is that correct?

Over the last few years, if you look at a range of measures, then you would see wages moving up at about 3%.

Mr. Stivers: (01:11:55)
And we have record low unemployment rates for African Americans and Hispanics. Is that correct?

That is correct.

Mr. Stivers: (01:12:04)
So the fundamentals of the economy are pretty good shape, would you say that’s correct?

I would. And I did.

Mr. Stivers: (01:12:11)
And you did. Thank you for that testimony. So your colleague at the Atlanta Fed stated recently that, “Economic and economic expansion does not die of old age.” I think that’s 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?

I don’t think so and I certainly hope not. There’s no reason why the expansion can continue. There’s nothing about this expansion that is unstable or unsustainable.

Mr. Stivers: (01:12:39)
Great, and 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 and capital formation occurs in the capital markets, I’m curious to hear about what the Federal Reserve is doing to actually coordinate with the Securities and Exchange Commission and the CFTC as prudential regulators for the capital markets to make sure that there is actual coordination on the capital markets.

Well, I mean, the SEC really, and the CFTC really have primary regulatory authority for those markets, and we have supervisor regulatory authority over the banks. Where we overlap really is in financial market utilities, where we regulate some and the SEC regulates some in the CFTC regulates some and we collaborate on all of that, so we collaborate pretty closely on that.

Mr. Stivers: (01:13:35)
Well, 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 it from some of the firms that are regulated that they feel like it’s not coordinated. So if you could read double those efforts, I’d really, really… I think that would pay dividends to the American investor and the American economy. A couple other quick questions here. What do you think the most significant risk to the financial system is today?

I mean, 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, stress tests keep them on their toes and now 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 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. It’s more cyber attacks is it’s really the frontier where you worry. And we work very, very hard on that, all the agencies do. We all work together. The institutions themselves work very hard, but that I would say is a major focus.

Mr. Stivers: (01:15:00)
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 in agreement, unanimous agreement, was that cyber attacks were the issue. I think Congress needs to focus on it. I think our regulators need to focus on it. Two quick things because I’m running out of time. I know you’re focused on the transition between LIBOR and SOFR. Some people have asked that question. I hope you’ll pay particular attention to the impact on both small businesses and our community banks as we make that transition.

Mr. Stivers: (01:15:36)
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, some are market based and I know you’re focused on it. You and I have had private discussions about it, but I’d 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, I’m out of time. Thank you, Mr. Chairman. Thank you.

Ms. Waters: (01:16:07)
The gentleman from Texas, Mr. Green, whose also the chair for the Subcommittee on Oversight and Investigation, is recognized for five minutes.

Mr. Green: (01:16:16)
Thank you Madam Chair. Thank you for appearing today, Mr. Powell. Mr. Powell, this is an observation, not a criticism. You’ve indicated that the fundamentals are strong. However, you also indicated that the last FMOC 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. Fundamentals are strong. Strong, yet nearly half, 42.4% of working Americans in 2019 made less than $ 15 an hour. 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’re concerned about the price of Proctor and Gamble products, not the stock market price of Proctor and Gamble itself.

Mr. Green: (01:17:29)
The stock market means nothing to them. It’s 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, a study for what a $15 an hour wage will do for the economy? Has the Fed done such a study?

The Fed has not. That’s not something we would do, but…

Mr. Green: (01:18:03)
Well, 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. Good project, based on thousands of disclosures, you’ve concluded that the 500 largest companies by market capitalization are exposed to $1 trillion in risk. Now, someone could argue that that’s 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 an impact, global impact, but I think you can take a closer look at this. You’re 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?

There’s a great deal of research that’s been done on minimum wages, and I don’t know of a particular one, but there’s has to be somewhere research on what a federal $15 wage increase would do.

Mr. Green: (01:19:25)
I agree with you. I agree. I’ve read a few, but they don’t come from the Fed. They don’t come from the entity that has the dual mandate, price stability, unemployment or employment. It would mean something to working people if we could get such a study, not withstanding what others have done. And these are observations, Mr. Powell, not criticisms. I’ve enjoyed visiting with you. Not withstanding 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’ll still settle for 15 if we can get that. So can we work with you, discuss with you, the possibility of a wage project?

Again, I’ll go back and talk to our labor people who know this issue very, very well and many of them have published on these issues. So let me come back and…

Mr. Green: (01:20:30)
I’m going to thank you for it. I’ve got 46 seconds and I’m going to applaud you for it, personal applause. Madam Chair, with that, I will yield back the balance of my time.

Ms. Waters: (01:20:42)
Thank you very much. Is the gentleman requesting to have an answer in for the record on this question to the chairman?

Mr. Green: (01:20:51)
Yes, Madam Chair. Thank you.

Ms. Waters: (01:20:52)
The witnesses has requested to provide an answer in writing for the record. Thank you. The gentleman from Kentucky, Mr. Barr, is recognized for five minutes.

Mr. Barr: (01:21:00)
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 and supporting the economy. In general, what would you say is the lag time associated with a major change in fiscal policy?

Well, it can tend to be long, as you know. With monetary policy, we can go into a room and change interest rates, and do. Obviously, fiscal policy tends to take a lot of work and some time.

Mr. Barr: (01:21:29)
Well, let me ask you this. Let me ask the question this way. Fiscal policy has changed profoundly in the past three years, tax cuts, deregulation, a less restrained energy sector, a pullback from Dodd-Frank, repeal of the individual mandate, new trade deals. Are any of these policy changes impacting current economic conditions?

I’m sure they are, but of course we don’t try to assess that. That’s not really what we do when we look at the economy, but yes, they would be affected.

Mr. Barr: (01:21:57)
As you noted in your testimony, the US 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% since the 2016 election. And just over the weekend, this was the headline of the Wall Street Journal, which I’m sure you follow, and the reporting was that a tight US 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 quote, appalling, to hear the president, quote, try to take credit, unquote, for an economy he inherited. Now Chairman Powell, I’m 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?

At a high level, of course, they are.

Mr. Barr: (01:23:10)
Let me follow up on Representative Wagner’s question about the GSIB surcharge. In your response to our letter, you maintain that you aim to have the, quote, key components, unquote, 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?

So I think the timeline is, we do believe, we do intend and will put into effect the core of the stress capital buffer in time for the 2020 CCAR cycle. So that’s coming right up. I prefer to leave the exact details of that to… They’re still being worked out but it will happen in a timely way for the 2020 cycle.

Mr. Barr: (01:23:53)
I understand. Well, let me try to get a 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?

We haven’t made a decision on that on using the countercyclical capital buffer versus the other approach. We’ve not made a decision on that.

Mr. Barr: (01:24:20)
Okay. Thank you for that. We’re 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 checked 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 errands, might stifle capital formation, compromise investor returns and ultimately undermine financial stability.

I don’t know that I totally understand your concern, but I’ll be happy to discuss it with you and…

Mr. Barr: (01:25:40)
Well, the concern is that if shareholders are not a prime concern of corporate boards and 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 to FSOC to take a look at that.

Ms. Waters: (01:26:08)
The gentleman yields back.

I will bring that to the authorities at the FSOC.

Mr. Barr: (01:26:12)
Thank you. I yield back.

Ms. Waters: (01:26:12)
The woman from Ohio, Ms. Beatty, is also the chair for the Subcommittee on Diversity and Inclusion, is recognized for five minutes.

Ms. Beatty: (01:26:21)
Thank you to the chair 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. Appreciate you sitting through the hearing. Chairman Powell, in the latest edition of the Federal Reserve Survey, Consumer Finances that was published in 2017 and it gave the breakout between whites, blacks and Hispanics as it related to their net worth. And we’ve heard the statistics, I think my colleague Congressman Meeks talked about it and I’m sure some others, so I’ll spare going through all of those details. But what’s very interesting to me, 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?

Ms. Beatty: (01:27:27)
Because when we go back home, this is one of the number one things that I’m hearing. People are coming into my office, once you get through health care, and this couples in with jobs and education, they’re saying is, we look at the wealth gap, that it’s getting wider. It’s not coming in. And while we’re talking about unemployment rates being better, many people have to work two and three jobs just to try to survive. Someone talked about the minimum wage. Certainly, as we’re advocating for a higher number, it’s not enough in my district, you’d have to make somewhere between $18.70 and $20 to be able to have a livable wage. So 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?

Ms. Beatty: (01:28:27)
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 so my second question is, could you tell me if you would entertain having your folks look into looking at wage as a measure? Because oftentimes, when you look at, many folks don’t work a full time job but they have a wage. So could we be a little more creative in looking at the data based on some of the things that I’m hearing from the group that came in? And I’m sure they’ve met with your folks and you know some of their issues. So I’ll start with too, 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?

I think you’re probably making some of our data people very happy back at the Board of Governors.

Ms. Beatty: (01:29:50)
Okay.

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’d be happy-

… to your question of whether we can do it regionally or in what dimensions we can, but we’d be happy to look into that for you.

Ms. Beatty: (01:30:08)
What about some of the individuals’ ideas about looking at wages in your calculation?

Yes, I think we can do that. I think we can-

Ms. Beatty: (01:30:19)
So your folks would be willing to work with them on some of the ideas to at least start at a starting point of discussing it?

Yes.

Ms. Beatty: (01:30:26)
Because now we’re marrying the people with the power, and what a good win-win that would be for all of us since we’re really talking about all of our lives, and especially those who have to work a little harder than some of the rest of us.

Ms. Beatty: (01:30:45)
Then the next thing, 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. So I want to make sure I’m on the right path when I go back home and I say I have a bill that’s asking the Federal Reserve to collect data that can help us in the end. Is that in the ballpark?

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 try to follow up with you on that?

Ms. Beatty: (01:31:42)
Thank you.

Ms. Waters: (01:31:43)
Gentleman from Colorado, Mr. Tipton, is recognized for five minutes.

Mr. Tipton: (01:31:48)
Thank you Madam Chair and Chairman Powell. Thanks for taking the time to be able to be here this morning. Did want to follow up a bit on the CRA. We’ve had a fair amount of conversation on that and just wanting 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?

From the very beginning.

Mr. Tipton: (01:32:09)
Great, and 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?

Yes.

Mr. Tipton: (01:32:21)
Okay. What extent has the Fed been doing, I know you’re talking about doing some of the analysis comments coming in, but to be able to work on CRA modernization?

From the very beginning of the process we said, “Yes, that sounds like a great idea. It’s a good time to update CRA. Let’s try and make it more transparent, more objective. Let’s try and make it more effective in serving the intended beneficiaries.” 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’s 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 set of standards.

Mr. Tipton: (01:33:21)
I would agree with that as well. I think that harmonization is something that we certainly want to strive for. 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’s an area that I have a lot of concern on. In my state of Colorado, I represent the rural areas, and we oftentimes have two economies. Where the metropolitan areas/resort areas have been doing well, rural areas have continued to often struggle. We’re now starting to actually see some of that real movement, but when we’re looking at that CRA re-investment back talking about the community banks, I really would encourage you to be able to look at that OCC and FDIC proposals. I believe they do reach further into rural America.

Mr. Tipton: (01:34:14)
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’re certainly seeing some benefits and some investments coming into rural areas of my district. Is those some of the policies that we need to be looking at?

I’m not aware of any research that we’ve done on opportunity zones, but we probably have, truthfully. In the system, I would imagine we have done research on that and we’ll be happy to share it with you.

Mr. Tipton: (01:34:43)
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’ve noted that other agencies have been taking this step separately. Is there any kind of uniform effort at a high level to be able to coordinate the adoption of SOFR?

Yes, there is, very much so, and we’re doing that. We’re coordinating with the other agencies and with the market participants as well. 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 context. That’s what Fannie and Freddie did this week or announced this week.

Mr. Tipton: (01:35:24)
To follow up on Mr. Stivers’ question in regards to community banks, do you see any pluses, minuses, in regards to using SOFR over LIBOR for community banks?

Yes, I think we’re … LIBOR itself is really a problem in the sense that the rate … There’s no guarantee that the rate will continue to be published after the end of 2021, but there’s 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 regional and some of the larger banks, too, about the idea of also having a credit-sensitive rate and that’s something that’s ongoing.

Mr. Tipton: (01:36:06)
Okay. And we’ve had a little conversation about the coronavirus, China, the impacts on the economy. President just signed into law the USMCA. Do you see that as creating a runway for further economic expansion in the US: job opportunities and wage growth?

We don’t give advice on trade policy, but I would just say this, that I think the signing and the enactment of and implementation of USMCA will be a positive, at least in the sense that it removes uncertainty around trade policy. I think that’s been part of the issue of the last year or so has been not knowing what the rules of the game are going to be. I think getting those rules settled is certainly a positive thing.

Mr. Tipton: (01:36:50)
Great. Thank you. My time is expired.

Ms. Waters: (01:36:53)
Thank you. The gentleman from Illinois, Mr. Foster, is recognized for five minutes.

Mr. Foster: (01:37:01)
Chairman Powell, first off I’d like to thank you for facilitating our meeting with Governor Brainard, Representative Hill, and I had on a digital currency. We really enjoyed that, as well as the meeting with the staff who were excellent and it’s great to see how plugged in they were to this issue.

Mr. Foster: (01:37:19)
Now in a speech last week, Governor Brainard highlighted, “The role of central bank digital currencies in ensuring that sovereign currencies stay at the center of each nation’s financial system.” Do agree with her characterization? In a particular, do you think that establishing a digital dollar would help ensure that the US dollar continues to serve as the core of the US and the world’s financial system?

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’s a very, very basic thing that really hasn’t been in question. I think before we move away from that, we should really understand what we’re doing. 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. That we feel like that’s our obligation, technology has now made this possible. Private sector is innovating, they’re doing it. So I think it’s very much incumbent on us and other central banks to understand the costs and benefits and trade-offs associated with a possible digital currency.

Mr. Foster: (01:38:42)
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 LIBOR 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 a scale comparable to Facebook if they rolled that out. How would you characterize our ability to respond to this potentially competitive threat?

We’re working hard on it. We have a lot of projects going on and efforts going on, on that right now. We haven’t had the problem that many of … 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 US 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 US economy continues to grow at faster than nominal GDP [crosstalk 01:39:56].

Mr. Foster: (01:39:57)
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. That seems like that transition can happen in a period of just a couple of years, so we have to be able to respond. If that’s 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.

I completely agree with that and I think frankly Libra really lit a fire under that and it was a bit of a wake up 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 networks like Libra did. We’re 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 issues of cyber issues, privacy issues, many, many operational alternatives present themselves. So we’re going to be working through all of that and doing that work thoroughly and responsibly, but with some-

Mr. Foster: (01:41:13)
Do you feel as though you have adequate visibility into what the Chinese are doing on this? Do you have working-level contacts that give you some idea of what their rollout is likely to do, likely to look like?

Yes. I mean, we certainly have that, but they’re 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’s not something that would be particularly attractive in the United States context. It’s not a problem in China, but nonetheless [crosstalk 00:11:52].

Mr. Foster: (01:41:51)
But from a competitive point of view, they’re claiming they’re going to roll it out on the Belt and Road countries sometime very quickly. And so this, I urge you to keep the fire lit. Thank you.

Will do. Thank you.

Ms. Waters: (01:42:05)
The gentleman from Texas, Mr. Williams, is recognized for five minutes.

Mr. Williams: (01:42:09)
Thank you, Madam Chairman, and thank you for coming back to our committee, Chairman. We appreciate it. With baseball season slowly approaching I wanted to make sure one thing before I continue that you still are on team capitalism.

Oh yes.

Thank you. 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’m a main street business guy and the economy’s really good right now. “Indeed, the US economy exceeded expectations. Record job growth caused unemployment rates to drop to historic lows while the stock market [inaudible 01:42:51] throughout the year. Consumers in return showed their confidence as they continue 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, 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 for jobs explosion and new jobs that we have seen the past few years?

Honestly, I think the focus for me really ought to be on things that address our … What are our longer run issues that can be addressed by legislation? It’s 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. The other one is productivity. What is it that drives productivity? It’s a stable legislative environment. It’s a legislative and administrative environment that supports growth and innovation and investment and those sorts of things. Those would be my main focus.

Okay. I know you’re aware about the Fed’s work on the international insurance capital standard that has being developed for the world. I’ve 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 US will be deemed equivalent by the international group given this continued resistance you’re facing from the Europeans?

I can just say that we will not be part of approving any international standard that doesn’t accommodate our own American insurance regulatory framework.

That’s great. We’re 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 shortsighted approach to raise 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 tax [inaudible 01:45:22] to other assets is 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 rates so Americans can keep more of their hard-earned incomes and businesses can invest that profit back into their operations. Chairman, can you explain how implementing a financial transaction tax would impact the US economy?

I think I need to stay in my lane here. We don’t do fiscal policy. If I start commenting on particular taxes, I’m worried about where that might go, so I’m going to have to …

Well, I understand that. I’ll 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 phenomena poses to financial stability?

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. That’s our instinct is, that in the US context, that’s not a tool we’re 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?

Right.

There’s some evidence of that, so in any case, we are watching other institutions around the world who’ve done that and we’ll be able to see what the results are.

Thank you for being here.

Ms. Waters: (01:47:30)
The gentlewoman from Michigan, Ms. Tlaib, is recognized for five minutes.

Ms. Tlaib: (01:47:34)
Thank you, Madam Chair. I don’t know if you know, but in 2013, Chairman, Detroit filed for Chapter 9 bankruptcy, which was marked as the largest municipal bankruptcy filing in the US 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 that we wouldn’t want to make equally sure that state and local government also had access to credit as well?” And you mentioned that you didn’t have the authority to lend to local and state governments. Madam Chair, I’d like to submit for the record Section 14, 2B, of the Federal Reserve Act asserting that the feds, actually do have the authority to buy municipal debt.

Ms. Waters: (01:48:26)
Without objection such is the order.

Ms. Tlaib: (01:48:28)
Chairman, given that you actually do have the authority, can you explain to me why shouldn’t the Federal Reserve ensure that state and local governments have access to funding during times of distress?

We have, as you know, limited authority. I think it’s to buy short-term municipal obligations. We did do that in the 1970s briefly and then 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’s not appropriate really for us in the sense that it’s government finance. That’s to be dealt with by fiscal authorities rather than by the monetary authority. We focus on the job you’ve given us, which is maximum employment and stable prices and to some extent also we’re with other agencies who work on financial stability and bank supervision, as opposed to the solvency of state and local governments.

Ms. Tlaib: (01:49:27)
Yes or no, the Federal Reserve retains the ability to open emergency lending facilities? Is that accurate in stabilizing the economy?

Well, yes, to financial institutions we do.

Ms. Tlaib: (01:49:42)
Uh-huh (affirmative), so when the Fed step into rescue banks in a crisis, is that because you believe their role in the economy is vital?

It’s really because we had no choice to prevent the financial system from collapsing in 2007 and 8.

Ms. Tlaib: (01:49:54)
Yeah, no, I mean my city filing bankruptcy was devastating to so many retirees, sir. 40-50 years they worked for the city of Detroit, 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 financial crisis makes it hard for them to borrow money?

What I believe is that’s not a job for the Fed. The Fed has a particular role in particular authorities, and lending to state and local governments and supporting them when they’re in bankruptcy is not part of our mandate.

Ms. Tlaib: (01:50:34)
Yeah, you do. We’re going to strongly disagree. I do believe you do have the authority. Now you’ve mentioned that in the face of another financial crisis you would use the same tools of expanding the balance sheet and purchasing longterm bonds. In other words, more of the same, correct?

Yes.

Ms. Tlaib: (01:50:48)
So I’m afraid that’s simply not good enough. I mean, I think your predecessors, Former Chairs Yellen, and I believe it’s Bernanke, seem to agree based on remarks, both that gave last month. For instance, Chairman Bernanke has suggested a money finance fiscal program might be helpful during the next recession. Do you agree with that, would be helpful?

I think that’s 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.

Ms. Tlaib: (01:51:24)
I see.

I know that there’s been a group of people that have pushed that idea, but I don’t think it included Former Chairman Bernanke. You may have seen something I haven’t seen.

Ms. Tlaib: (01:51:33)
I know, and Chairman, look, the Federal government is supposed to be about people and I don’t see that we’re treating pensioners, a city like the city of Detroit, which is frontline communities that have really been hit hard by the financial recession … I mean, we haven’t actually. They keep saying Detroit is coming back. If I show you neighborhoods, they’ll tell you, “We don’t know what you’re talking about,” because poverty is actually increased, access to housing has decreased, I mean, all of those things. That we 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 would actually ask and push you to looking 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. I yield the rest of my time.

Ms. Waters: (01:52:31)
Thank you. The gentleman from Arkansas, Mr. Hill, is recognized for five minutes.

Mr. French Hill: (01:52:36)
Thank you, Chair Waters. Again Chairman, welcome back to the House Financial Services Committee. 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 a couple of comments that I’d 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?

Yes, I mean, that’s a good question and it’s one we’re looking at. A lot of it would depend on the design of that currency.

Exactly. And one thing we also talked about and we’ve had a lot of discussions in our FinTech task force here is about Europe’s approach to this idea of a payment provider license, which is now part of their financial services code, part of their 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 non-bank. Is that something the Fed’s looking at as well?

I wouldn’t say we’re specifically focused on that, but more broadly, we think it’s 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.

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% of world GDP. Is instability in Chinese banking industry pose a financial threat to the global financial system? Is it a financial virus, like they’ve already contributed a physical virus?

Generally, as I’m sure you’re aware, China has had very high debt to GDP for an economy at its stage of development and that includes the banking system. 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. They’ve stuck to that through the last couple of years even though those were challenging years economically for them. It’s something that they’re addressing. The other thing to say is that they have plenty of fiscal space. If you look at … Fiscally, they have plenty of power to respond to 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’s something that they need to address and are.

I think it’s something that I think deserves a review. Mr. Barr talked about their misallocation of resources at 47% of global GDP that seems like an over-allocation in the banking sector in China and could pose a threat to our system. In your report on page 24, you talk at length on your financial stability section about the decline in bond yields, particularly the high-yield market the ratings have fallen, and I was looking at a mutual fund annual report the other day and it says, “A particular concern is the continuing high rate of issuance of Triple-B Bonds, the lowest category of investment grade rated bonds. If the economy stumbles in rating downgrades issue, it could be a flood of fallen angels.” And this particular mutual fund said they’re staying away from the lower end of the high-yield market. Are you concerned about the high-yield market?

That’s the so-called Triple-B 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 that some holders are not permitted by the terms of their agreements with their investors to hold non-investment grade. It might trigger sales. That’s an issue we’ve been monitoring for some time now really. With leverage lending more generally, yes, we’re monitoring it very carefully. You do see low compensation for risk taken, you see high leverage, you see a lack of convenance, you see all of that. I think it’s 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. Those vehicles tend to be stably funded in a sense that their liabilities are actually longer than the expected maturity of the underlying instruments that are held [crosstalk 01:57:34].

It’s still a source, I think, of financial concern to the FSOC, I would think.

It is.

Therefore, I commend you for noting it in the report and thank you for your continued attention to it. [inaudible 00:27:43].

Thank you.

Ms. Waters: (01:57:45)
The gentleman from Illinois, Mr. Casten, is recognized for five minutes.

Mr. Casten: (01:57:50)
Thank you, Madam Chair, and thank you, Chairman Powell. I appreciate you sticking around all the way to the bottom of the dice here. If I get elected eight more times, fingers crossed, I’ll have as much experience in this line of work as I do in the energy sector. So 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 viscerally 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.

Mr. Casten: (01:58:32)
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% of all the CO2 we have ever emitted as a species is since Back to the Future came out in 1985. This is this massively accelerating shift and if we went to zero CO2 tomorrow, we’re looking at two feet of sea level rise coming. The more realistic trends we’re on is at least six feet of sea level rise coming and at that level there’s estimated about $23 trillion of economic loss to the system, $900 billion of US property at risk before factoring in debt losses, and pulling out of insurance. There are some serious systemic risks to the economy if we leave those unaddressed.

Mr. Casten: (01:59:24)
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?

Climate change, again, a very important issue. One that is really the province of elected representatives to set the overall direction of society in 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-

The potential implications for the financial system for the economy. And I think we’re 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’re essentially mainly concerned with business cycle issues. That’s what we’re focused on, is issues for the medium term. Climate change is a much longer cycle kind of a thing.

Mr. Casten: (02:00:29)
If I may, part of the concern I have is that the actors in the space do not have planning horizons that match to the reality that you and we do. Right? There’s 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 US is successful at reducing carbon emissions, there still is a massive re-allocation of capital. Have you looked at the transitional risks, in thinking about how that starts moving around and dislocating the economy?

So those are the things that we’re at the beginning stages of looking into. As you obviously know, there’s a lot going on in the financial markets. There’s a lot of disclosure happening, and expectations around disclosure are changing significantly for publicly held companies. And that will have an effect, but that’s not really what we do. We do monetary policy, bank supervision. Our banks, 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 all the time.

Mr. Casten: (02:01:43)
Well, let me maybe give a specific one that’s 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 as their assets are so heavily dominated by fossil fuel reserves, if they were to extract all 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’s not clear to me that they can monetize those assets. That has a meaningful effect on the risk of money that’s held today. I think there was $700 billion lended to fossil fuel companies in the last couple of years. Have you considered that as a systemic risk?

Well, for us it’s systemic risk to the financial system. And we’d be stress testing banks. As you know the Bank of England is doing some of that now and we’re going to be watching and see what they learn and see if that’s a path we’ll follow. We haven’t made that decision.

Mr. Casten: (02:02:59)
Thank you. I’ll follow up you offline. I yield back my time. Thank you, Chairman.

Ms. Waters: (02:03:02)
Gentleman from Georgia, Mr. Loudermilk, is recognized for five minutes.

Mr. Loudermilk: (02:03:07)
Thank you, Madam Chair. Chairman Powell, thank you again for being here. First of all, I kind of want to touch back on [Lisik 02:03:16]. 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’s supervisory and regulatory process. He said he intends to bring transparency to the lisik regulatory regime by developing clear and transparent standard for designating firms. He also proposed aligning lisik designation with the Fed’s tailoring categories and limiting it to only category one firms. So 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 and what he had articulated. I appreciate that. But can you give us an idea of when you expect lisik designation be confirmed with new tailoring rules?

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 entrained to do, and that’s certainly one of them.

Okay. Hopefully sooner rather than later. I would …

I don’t want to commit to something that … there are a lot of things we’re working on at all times. But the Vice Chair gave a speech about it. I’m aligned with that. And I expect we will be moving forward.

Well, that’s very good to hear. Real quickly, I’d like to touch on the CRA. I believe that all three banking agencies need to have a unified CRA framework, and I know you’re hesitant to speak on behalf of the other agencies, specifically OCC and 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?

Well, so I would say … let me talk about the process. We kind of agree on the overall goals, and the question is how do you get after that? And so our thinking was to try to get to a set of improvements, really, that would lead to more efficient, more effective CRA. So we’re looking at ways to make the assessment, the tests, clearer. In our thinking there’s a separate for, at the retail level, there’s a separate test for community development and for retail lending.

And also other thing we’re saying is, “Let’s make sure that it’s all very grounded in data.” So we’ve got, as the Chair mentioned earlier, 6,000 data sets that we look at. So 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 are a lot of overlaps, but there are a handful of differences that have prevented us to get to full agreement.

And the overall objective, do you believe that we can remove some of the ambiguity on what projects do and do not qualify?

Absolutely. I mean, 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’s going to qualify and what’s not. And I think that’s all very constructive. It’s really about how you implement it. And we want to have a very high … it’s a very important law, 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’s what we’re focused on.

Well, I appreciate that. Because I would like to see us make changes to where it’s not financial institutions just checking boxes to get credit, but actually investing in projects that do help revitalize these communities. So as the fiscal year 2020 Appropriation Law directs treasury department in consultation with the banking agencies to study whether any changes in banks’ regulatory capital requirements are needed because of [Sesil 02:07:26]. If the study concludes that that is the case, are you open to modifying regulatory capital requirements accordingly?

Well, yes. I think we’ve said that with Sesil we’re going to be monitoring very carefully what the implementation is showing, because of some of the concerns that have been raised.

Okay. Thank you. Probably don’t have time to get into any other questions, so with that I yield back, balancing my time.

Ms. Waters: (02:07:53)
Thank you. The gentle woman from California, Ms. Porter, is recognized for five minutes.

Ms. Porter: (02:08:00)
Thank you. Chairman Powell, you’ve frequently spoken about your belief in the importance of maintaining the independence of the Federal Reserve. Do you still have that belief?

I do.

Ms. Porter: (02:08:11)
Anything changed in the new year?

No.

Ms. Porter: (02:08:13)
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 interest of the country. And I know you’ve 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’s not just our president, but 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 and in regard to the Fed’s decision making?

What other people might want to influence us? Potentially quite a wide range of people, I would think.

Ms. Porter: (02:08:59)
Major investors, financiers?

I don’t know that people are really seeking to … I mean, you say might want to influence us, the answer is I really don’t know the answer to that. 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 advice.

Ms. Porter: (02:09:26)
So you don’t feel unduly pressured by political or special interests?

No, I really don’t.

Ms. Porter: (02:09:30)
Great. 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?

I wouldn’t know, actually. I don’t know.

Ms. Porter: (02:09:44)
What about Jared and Ivanka Trump? They very wealthy people. Do they have savings and make different amounts of money depending on what the Fed does with interest rates?

Yes.

Ms. Porter: (02:09:55)
What about Kellyanne Conway? Does she, in her role as advisor to the president, and the president’s expressed these public views, does she potentially have an interest in amplifying the president’s message? That is, after all, her job.

I suppose. Yeah. I don’t know.

Ms. Porter: (02:10:10)
Okay. Mr. Powell, I’m going to project a picture up here so that the audience can see, but I’m also going to hold it up for you. Is this you, Mr. Powell?

That is.

Ms. Porter: (02:10:21)
Where are you?

That’s a party after the Alfalfa Dinner, an after party that I went to.

Ms. Porter: (02:10:26)
Where was that party held?

It was at Jeff Bezos’ home.

Ms. Porter: (02:10:30)
Jeff Bezos’ home. And when was it taken?

Excuse me.

Ms. Porter: (02:10:34)
When was this picture taken?

Saturday night after the Alfalfa Dinner.

Ms. Porter: (02:10:39)
Give or take, you’ll stipulate end of January, 2020?

Yes?.

Ms. Porter: (02:10:42)
Recently. Can you imagine how attending a lavish party at Jeff Bezos’ $23 million home along with Jared and Ivanka and the CEO of JP Morgan Chase Jamie Dimon might give off the sense to the public that you are not, in fact, immune from external pressures?

I would certainly hope not.

Ms. Porter: (02:11:05)
What did you talk about at that party with them?

I didn’t talk to any of the people you named.

Ms. Porter: (02:11:10)
You didn’t talk to anybody?

I didn’t talk to any of the people you named.

Ms. Porter: (02:11:10)
Oh, can you tell me who you did talk to?

I mainly escorted my son and his brand new wife in there. And I actually introduced them to General Mattis.

Ms. Porter: (02:11:21)
Okay, great. I would just suggest that this 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 plant’s 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’s been making our economy grow What factors.

What factors have been making it grow? Well, the hard work of the American people. I think what you’ve seen is tremendous growth in some sectors, in less in other sectors. Of course, the big technology companies are … they weren’t around 40 years ago. So I think we’ve seen lots of growth in some areas. I think other areas, much less so.

Ms. Porter: (02:12:11)
Mr. Powell, would it surprise you if I told you that women are actually, women in the workforce, are actually a bigger driver of economic growth than technology companies? And in a span of four decades since the 1970s, 38 million women joined the workforce, and without those women or economy would be 25% smaller. So 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’d like to hear more from you about, is about the economic effect of things like childcare availability. In those same four decades in which women grew the economy 25%, the cost of childcare shot up 2,000%. Do you know, Mr. Powell, how much childcare in America costs today?

How much it costs today in America? It costs a lot.

Ms. Porter: (02:13:01)
Could you put a little bit firmer … you’re an economic expert. Could you put a little firmer number on that?

I don’t. My kids are grown up all.

Ms. Porter: (02:13:07)
Thank you. I’ll yield back.

Ms. Waters: (02:13:12)
The gentleman from Ohio, Mr. Davidson, is recognized for five minutes.

Mr. Davidson: (02:13:16)
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 the comments that came from my colleague recently, is it unprecedented for the Chairman of the Federal Reserve to attend a party or reception?

No.

I mean, it’s certainly not the first time that a Fed chair’s attended a party. I’m certain it’s not the first time a member of Congress has attended a reception or party. And so I don’t know that we want to say, “Hey, just because you’re at an event somehow this is nefarious.” I mean, heck, you might’ve 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 those pressures. Many of them are public, of course.

But one that I’m 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 to inject a lot of cash into that market. 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’ve learned from the review?

Sure. So what happened is in, as you know, in 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 so we didn’t see that coming, market participants didn’t either. And so we’ve 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 forth a plan and executed it. And it’s worked fine to create that [crosstalk 02:15:35].

So, I mean, some have called this quantitative easing. I know you’ve objected. But essentially we’re artificially interjecting cash to produce an outcome that the market isn’t producing of its own accord. So I think it’s 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?

Oh, we’re doing both things. The reason we’re 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’ve 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. So 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’re looking for. So he broached some ideas for how to do that, and I think that’s a very profitable line of inquiry.

Okay. So thank you for that. One of the changes in … as [LIBOR’S 02:17:14] going away and market forces are coming, we’re talking about replacing the benchmark rate. And of course Arc includes a 250 entities. But there’s a concern that as you’ve done this, that the best rate isn’t necessarily being provided. So 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 or so for our banks?

I’m sorry. I lost track of that. Say it again.

When this liquidity is injected-

I see. The repo rate that we’re on.

The repo rate, going into the repo rate. And I guess-

No, it’s been a couple of … okay. I’m sorry. I missed that. So the rate we’ve been offering on the repos, they’ve been settling at a level that’s a couple of basis points below IOER. But that won’t be a persistent issue. [crosstalk 02:18:10]-

But are they settling at a rate that is … when it’s paid out at the high rate, is it paid to the best available offer or is it paid to the best available customer?

We don’t distinguish. I mean, anybody who’s eligible can bid and we don’t … as long as you’re eligible, we’ll sell to them.

Thank you. My time has expired.

Ms. Waters: (02:18:25)
Would the gentleman like to ask to witness to provide a more answer in writing for the record?

I appreciate the Chair’s suggestion. I would love to see a written answer for how that is actually working.

Ms. Waters: (02:18:38)
The witness is requested to provide an answer in writing for the record.

Thank you, Chairman.

Ms. Waters: (02:18:42)
The gentlewoman from North Carolina, Ms. Adams, is recognized for five minutes.

Ms. Adams: (02:18:46)
Thank you, Chairwoman Waters, for convening the hearing today. And Chairman Powell, thank you for your testimony. The FDIC board member Martin Gruenberg voted against Comptroller Otting’s proposal, and describing it as a deeply misconceived proposal that would fundamentally undermine and weaken the Community Reinvestment Act. So can you comment on the deficiencies of Comptroller Ottings’ misguided attempt to gut the CRA, an essential piece of civil rights in banking law?

So I guess I feel like our role is not to be commenting on the other agencies’ proposal. The public is doing that now. We very much look forward to seeing the comments that they do make. I can talk about how our own thinking about this, but it’s not really for us to be publicly commenting on the other agency’s proposal.

Ms. Adams: (02:19:38)
So 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?

So 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: (02:20:06)
Okay. As you know, the Federal Reserve has a dual mandate, price stability and maximum employment. So will the Fed set a goal for wage growth, and are you considering this approach as part of the framework review?

I don’t see us targeting wage growth as an independent item. It’s 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: (02:20:43)
Okay. So have you considered adopting a floor for wage growth? For example, once we set a certain percentage increase in pay in wages, the Fed may consider switching to 2% inflation rate?

Well, we’ve said that we … the sense of this project is we want to make the 2% symmetric inflation goal more credible, and we’ve 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% inflation. That’s really the objective of this review that we’ve undertaken.

Ms. Adams: (02:21:25)
Okay. Let me ask a question about the Volcker Rule. Why has the Fed decided to support for the 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.

So we did just put out a proposal on part of the Volcker Rule. And of course we think that that proposal is entirely consistent with both the letter and the spirit of the law. But we’re going to be reading the comments. It’s out for comment now. We just put it out, and we’ll be looking forward to reviewing those comments.

Ms. Adams: (02:22:08)
Okay. I understand that you collect a large number of daily trading metrics from banks subject to the Volcker Rule. Yet it’s never been made clear exactly how these metrics are used to determine whether a bank is compliant with the rule, nor have any of the metrics been released to the public. Is that true?

I think it’s true that … so we published the first Volcker Rule, I want to say, six or seven 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 approve every single trade, what was in the mind and the heart of every trader. So because there was going to be trading activity around legal activities that were not covered by the Volcker Rule. So I think that’s what we’re doing. We’re trying to make that rule more effective and efficient, but we’re doing it in a way that’s consistent with the letter and the spirit of the law.

Ms. Adams: (02:23:17)
Okay. Thank you. Madam Chair, I’ll yield back.

Ms. Waters: (02:23:21)
The gentleman from North Carolina, Mr. Budd, is recognized for five minutes.

Mr. Budd: (02:23:26)
Thank you, Madam Chair. And Chairman Powell, again, welcome. I want to start by thanking you and Governor Quarles and your federal staff in charge of insurance regulation for your collaborative work with the US State Insurance Commissioners on solvency regulation. 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. Not withstanding 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. So given that, here’s my question. Will you commit to directly reaching out to your peers in Europe to tell them explicitly that the US will not be adopting a European-centric ICS, or International Capital Standard, and that we have our own rules that work very well?

So I’ll just say clearly that we have a state-based insurance regulatory system. And we have … the federal role is what it is, and that’s not something we’re seeking to change. And we’re committed to that going forward.

Mr. Budd: (02:24:38)
Chairman, they’re seeking to change us and so I fear that if we’re passive that it will migrate towards them. But have you had any conversations with any senior European leaders yet on the ICS, International Capital Standard?

No, I haven’t.

Mr. Budd: (02:24:53)
Okay. Is there any reason why not, or has that been something that’s been avoided?

No. I’m not involved directly in the insurance. There are senior people who are, I’m sure Vice Chair Quarles is.

Mr. Budd: (02:25:05)
I would encourage you, again, Governor Quarles, to continue to press that. We have a great system that continues to work well. So 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. So can you discuss your views on the appropriate level of capital markets-related activities, such as market making or underwriting?

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, and that the level of capital in our banking system is about right. And I don’t see a need to further raise capital. So I know we’re pushing forward with the fundamental review of the trading book and the other Basel III endgame things, but I don’t see them as needed to raise overall levels of capital.

Mr. Budd: (02:26:09)
Chairman, can you share how your views on capital requirements and things like market making and underwriting, how they could affect the balance between bank-driven and market-driven finance and the US system?

Well, I mean, I think if you … to the extent you raise capital requirements and they become quite finding, they encourage activity to move outside of the banking system into less regulated and supervised entities.

Mr. Budd: (02:26:35)
Very good. So, Mr. Chairman, there’s been a lot of discussion in recent months about leveraged loans and FSOC and others monitoring the market. In fact, you’ve had a couple of questions on this topic today, but when people discuss the issue sometimes I think they’re referencing different things. So to help us get on the same page here, in your opinion, how would you define leveraged loans?

Yeah, you’re right. There are a lot of different ways to think about it. But a reasonable ballpark would be something that’s rated below triple B. Or you could also say it could … an amount of leverage. Typically they’ll have leverage of maybe six times cash flow, EBITDA. There are different ways to think about it. But, I mean, I think that the best way to think about it is probably non investment grade.

Mr. Budd: (02:27:27)
Do you think there’s a difference in leverage loans in the banking sector, and in the non-banking sector?

Yes. I mean, I think before the crisis there were … I think there’s been a trend over time for leveraged loans to be held by longer term holders outside the banking system. And that has accelerated. So there are 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’s where those loans are going now. So it’s more like it’s become a distribution business, as opposed to a traditional lending business where banks would make a loan, they put it on the balance sheet. That’s not what’s really happening. You have a bank performing an origination function on behalf of a sophisticated investor that’s stably-funded, we hope. And in the case of the CLOs is, but that’s something we need to keep monitoring.

Mr. Budd: (02:28:31)
Thank you, Chairman.

Ms. Waters: (02:28:34)
Thank you. The gentleman from Illinois, Mr. Garcia, is recognized for five minutes.

Mr. Garcia: (02:28:40)
Thank you, Madam Chair. And thank you for being here, Chairman. I’d 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’re 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 capital banks, largest banks, pardon me, and insurance companies against the risks associated with climate change.” Will the Federal Reserve follow suit and develop climate-related stress tests?

So we’re monitoring what the Bank of England is doing. And those are, by the way, those are stress tests that are not 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’re really trying to make an assessment. And so we’ll be watching that carefully. We haven’t made a decision to proceed with something like that.

Mr. Garcia: (02:29:54)
Good. I’m encouraged. Looking ahead, incorporating climate change into economic forecast will become more important. Climate disasters such as Hurricane Maria in Puerto-

Mr. Garcia: (02:30:03)
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. The likely result, a corresponding increase in economic losses and physical risks, the brunt of which to be felt by communities of color and working class communities. So 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?

Our forecasts, both the individual ones that FLMC people like me write down and the staff forecast are, they’re not for this sort of much longer term. Really, what’s important is the next year or the next two years, the next three years, and climate change is just operates on a longer cycle than that. Of course, as you suggest, as severe weather becomes more common and that’s connected to climate change, you will see those things of entering the forecast period and certainly entering our, our supervisory practices, as well as our economic forecasting.

Mr. Garcia: (02:31:18)
In a recent speech at the San Francisco Fed’s conference and the economics of climate change, a fed a 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?

I do think it’s 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’s what we’re doing. I think it’s 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: (02:32:15)
Do you agree with her statement generally?

That statement, I do, yes.

Mr. Garcia: (02:32:19)
Okay. Thank you. Big bank mergers and market concentration. Three months ago, the Federal Reserve approved a merger between BB&T and SunTrust, which created the sixth largest bank in the US 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 five 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 it’s conclusion that “This transaction would not appear to result in meaningfully greater or more concentrated risks to the stability of the financial system?”

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 two banks coming together to form a regional bank that’s 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: (02:33:52)
Thank you chairman. I yield back Ma’am Chairman.

Ms. Waters: (02:33:55)
Chairman, the gentleman from Tennessee. Mr. Kustoff is recognized for five minutes.

Mr. Kustoff: (02:34:00)
Thank you Madam Chair 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’ve 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 US ports is expected to decline in February almost 13% and in March between 9 and 10% 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?

So I think there’s a lot of uncertainty around what the ultimate economic effects will be outside of China and particularly in the United States. And the question will be, we do expect that 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’s really the question for us. And it’s really too early to say. We’ll be monitoring it, like everyone else will, very carefully. And that’s where we are.

Mr. Kustoff: (02:35:31)
Along those same lines, and then also from Axios, they’d quoted from Bank of America security report. They said they surveyed 3000 companies about the global supply chain and that many companies around the world are looking at relocating… they called it in the report, a “tectonic shift” in global supply, looking to other areas of South Asia, India, 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 or not. Are those numbers or is that those anecdotal statements, is it consistent with anything that the Federal Reserve is seeing?

I’m 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 our ability to export to China is less, because there will be… it’s just less going on there. So exports could go down. You mentioned really supply chain. So many US 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’d say the last channel is really financial markets, which financial markets themselves can be a channel for the transmission of risk off behavior which can affect economic behavior. So we’ll be looking at all of that. It’s way too early to say whether… what it will amount to. We’re just going to have to wait and see. There’s no way to be kind of confident about anyone’s assessment and their range of assessments.

Mr. Kustoff: (02:37:22)
Based on what you just said, I think I know your answer but I’ll ask it anyway. The report, it mentioned a number of reasons. One is the tariffs between our country and China and the impact that it’s had on China and subsidiary companies, but also automation and the increase in automation. Does that sound consistent with relocating the supply chains?

Well, that’s, 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, like 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: (02:38:12)
Including the United States?

Yes.

Mr. Kustoff: (02:38:15)
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 a announcement Amazon made two or three weeks ago that they are locating a new facility there. There’ll be a thousand jobs, and incidentally you had questions on the minimum wage. They’re going to start their wages at least $15 an hour plus benefits, but it talked about these new jobs and in combination with automation, automation in terms of packing and shipping. You’ve talked your concerns of automation and the effect that that will have on unemployment in the future. Can you see the two coexisting businesslike with this Amazon plant?

Well, over the last two and a half centuries we’ve seen advancing technology and there’s 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’s 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.

Ms. Waters: (02:39:36)
The gentleman from Florida, Mr. Lawson is recognized for five minutes.

Mr. Lawson: (02:39:41)
Thank you Madam Chair and 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 are talking and members on the committee was speaking in terms of how well the economy is doing, how we have more opportunity for jobs in the economy. When you start speaking, the Dow was up 125 points and while you were speaking it went down. Can you contribute to tell me why something like this occurs? Who is listening to your speech this morning in front of the Financial Service Committee that would cause the Dow to go down? Is this because of the cuts in interest rate? How do you explain that?

I really can’t. I’m not following the market as I sit here answering your questions.

Mr. Lawson: (02:40:49)
Okay. Well, I know the president tweeted out something similar that when you started off 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?

I’m sorry. Do I-

Mr. Lawson: (02:41:04)
Yeah. Do you react to that… the president tweet about also about how the Dow went down and the cutting of interest rates. Do you react to that or it just something that happens?

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’s really all we’re focused on.

Mr. Lawson: (02:41:30)
All right. Explain to me too, from the staff report, they stated that starting in July of last year, that for about three different time the interest rate was cut by a quarter percent. How do you make decision? Did that stimulate the economy when you made those all the way through October quarter percent cut in the interest rate?

Yeah. 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 US. Trade policy uncertainty was weighing on the US 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% objective. So we’ve supported growth to support inflation moving back up. So those were the reasons why we did those three things and that’s the thinking that we had and that we announced.

Mr. Lawson: (02:42:49)
Okay. Now could there be a … I’d like free to comment, be a correlation between the growing student that crashes and slow in 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 the high debt to income ratio. Could there be a signal that there is a great need to address first the amount of student debt crisis?

I would say that the rising student debt is certainly a concern. It’s been rising fast and is now large. There’s increasing evidence that shows that students who can’t pay that, who 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’s an important factor currently today driving the housing industry. I would say the housing industry is actually been… activity in housing has been moving up here over the course of the last seven, eight months as the effect of lower rates and just overall good labor market and things like that are showing up in more house building and also housing sales.

Mr. Lawson: (02:44:13)
My time is about to expire. I have a lot of students in my district, in the Fifth Congressional District and many of them coming out of school. One of the thing they concern about is the housing issue, with going into the job market, how can they best share in American dream like their parents without getting the help from their parents. And so with that Madam Chair, I yield back.

Ms. Waters: (02:44:40)
Thank you. The chair wishes to remind members that we have a hard stop at 1:00 PM today. The gentle woman from Massachusetts will be the final member to ask questions today. With that, the gentleman from Indiana, Mr. Hollingsworth is recognized for five minutes.

Mr. Hollingsworth: (02:44:55)
Well, 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 can really appreciate and I know a cornerstone of what you’ve been trying to do at the Fed is bring even more transparency to the Fed and some of the decision making and the press conferences that you’ve had have added a lot of transparency to it.

It’s 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 timeline for changes to that, expectation of changes to that, especially when 2020 CCAR has already started. I know Ms. Wagner also asked about this. I had asked 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’s the timeline for those that would undertake these tress tests? Getting those changes, they’re trying to make decisions with trillion dollar balance sheets, multibillion dollar balance sheets, trying to make their plans.

This time is now upon us and I feel like we’re still being very vague about what’s coming down the pike and when we can expect even whatever that may be that’s 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.

I can’t give more clarity than exists, so I’ll just say again, we do expect that the core of the stress capital buffer will be incorporated into this stress test this year and we’ll do that in a way that’s timely for CCAR.

Okay. In our previous conversations, I think we’d had just kind of a general agreement, and don’t let me overstate that if that’s incorrect, that some of the aspects of this need to be calibrated, right? We put a lot of this into place 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 weren’t as great as we thought they would be, or maybe perhaps this wasn’t the area we needed to focus on. And I think we’d agreed that some of this requires significant calibration going forward. And do you expect that there will be further review in calibration of these tests to reflect either current conditions or alternatively what we’ve learned since the crisis about what works and what doesn’t work and what may be adding to significant reserves that many of these institutions?

My strong view is that capital, the levels of capital, particularly in the largest institutions are about right.

No.

And there’s not a need to raise or to lower them-

No. Can you tell us-

… and the stress test should reflect that.

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, right?

Well capital levels are much higher and the quality of our capital is much higher.

Right? Well that’s not undoubtedly true, but I think we all agree that during the crisis or pre-crisis, right, capital levels weren’t adequate to sort of say that their 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?

Well, the stress tests for one. Look at the stress tests and you throw up a scenario that’s 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’s 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’s too high. It suggests that it’s just about right. And the stress tests are probably a great test for that.

Yeah. So I think you could see how it might be concerning for institutions that feel like they’re caught in a bit of a circular logic, right? We contrive these stress tests and then if they chin the bar on the stress test, then we believe that’s right, that’s 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’s 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, is it the right way to do that?” Right? So maybe in a relative sense, yes, it’s higher, the capital is higher than what the stress tests have indicated. But in an absolute sense, we’re 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 that’s what they’re looking for is just further clarification on when we can expect that review comprehensively that the Fed has talked about for so long.

I think we’ve been doing that all along. We had a conference on the stress tests last summer with experts, internal, external, academics, people from the banks. We’re doing that all the time. Everything we do with a stress test is transparent, public, out for comment, things like that. Maybe not ex ante but people can look back. It’s not like we haven’t adjusted the stress test.

Ms. Waters: (02:50:00)
Gentlewoman from Massachusetts, Ms. Pressley is recognized for five minutes.

Ms. Pressley: (02:50:04)
Thank you Madam Chair. And I also want to thank the activists in the room who had 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 think the Chairman for testifying before the committee today.

Just as with 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’re being paid, and who is most harmed when unemployment is high. Now, in the past you’ve 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.

And in 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 Martin Luther King, 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 takes 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 oxygen for the role that she played in the movement. And so 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’s the reason that you are here today.

So in the interest of time, if you would indulge me an answer as succinctly as possible, yes or no, Mr. Chairman, given persistent concerns about inflation, do you believe 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.

First, thank you for that history. I didn’t know that. That’s our goal. That’s what we’re working to do at all times. And I think we’re never going to say we’ve accomplished that goal, but we certainly made some progress.

I’ll take that as a yes. Could a federal jobs guarantee succeed where the Federal Reserve has not? Yes or no?

That’s a hard one to answer. You mean by… I don’t know-

Guaranteeing a job. That’s the history that I was providing, that anyone who wants to work and is able to work-

[crosstalk 02:53:00].

Okay. So Chairman Powell, by all indications, the US 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 seen inflation above target?

That is true.

Okay. So 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 are already struggling to secure employment, like communities of color, individuals who were formally incarcerated, our immigrant neighbors?

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 15.

But again, did the Fed consider how raising rates would disproportionately impact those who were already struggling to secure employment?

I think our consideration was really that the right thing to do is 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 my minorities.

There’s a lot of people still recovering, but in interest of time, given that there have been no signs of the economy overheating since then and you’re now cutting rates, is it possible you began cutting rates too soon?

I think history will judge that. We have to make the decisions in real time. We have though… we really have learned something since then and that is that unemployment can be lower than most people thought without inflation.

So bearing that in mind, knowing what you know, would you still have supported raising the interest rates when the Fed did?

I did support it then. And hindsight’s 20/20. I think you have to judge those decisions on what we knew at the time.

Mr. Lawson: (02:55:03)
Would more Americans have jobs today, if the Fed had not increased rates over the past three years?

I don’t. We’re at a 50 year low. It’s a fair question.

Thank you.

Thank you.

Ms. Waters: (02:55:19)
I would like to thank Chairman Powell for his testimony today. Without objection, all members have five legislative days within which to submit additional written questions for the witnesses to the chair, which will be forwarded to the chairman for his response. I ask you to please respond as promptly as you are able. Without objection all members, will have five legislative days within which to submit extraneous materials to the chair for inclusion in the record. Thank you all. And this hearing is adjourned.

Jerome Powell Congressional Testimony Transcript: Fed Chair Testifies on the Economy, Coronavirus

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