[Senate Hearing 115-242] [From the U.S. Government Publishing Office] S. Hrg. 115-242 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS ======================================================================= HEARING BEFORE THE COMMITTEE ON BANKING,HOUSING,AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED FIFTEENTH CONGRESS SECOND SESSION ON EXAMINING THE FEDERAL RESERVE'S SEMIANNUAL REPORT TO CONGRESS ON MONETARY POLICY AND THE STATE OF THE ECONOMY __________ MARCH 1, 2018 __________ Printed for the use of the Committee on Banking, Housing, and Urban Affairs [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] Available at: http: //www.govinfo.gov / __________ U.S. GOVERNMENT PUBLISHING OFFICE 30-197 PDF WASHINGTON : 2019 ----------------------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Publishing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).E-mail, [email protected]. COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS MIKE CRAPO, Idaho, Chairman RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio BOB CORKER, Tennessee JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey DEAN HELLER, Nevada JON TESTER, Montana TIM SCOTT, South Carolina MARK R. WARNER, Virginia BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada JERRY MORAN, Kansas DOUG JONES, Alabama Gregg Richard, Staff Director Mark Powden, Democratic Staff Director Elad Roisman, Chief Counsel Joe Carapiet, Senior Counsel Travis Hill, Senior Counsel Elisha Tuku, Democratic Chief Counsel Corey Frayer, Democratic Professional Staff Member Amanda Fischer, Democratic Professional Staff Member Dawn Ratliff, Chief Clerk Cameron Ricker, Deputy Clerk James Guiliano, Hearing Clerk Shelvin Simmons, IT Director Jim Crowell, Editor (ii) C O N T E N T S ---------- THURSDAY, MARCH 1, 2018 Page Opening statement of Chairman Crapo.............................. 1 Prepared statement........................................... 41 Opening statements, comments, or prepared statements of: Senator Brown................................................ 2 Prepared statement....................................... 41 WITNESS Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System................................................. 4 Prepared statement........................................... 42 Responses to written questions of: Senator Scott............................................ 45 Senator Sasse............................................ 47 Senator Schatz........................................... 49 Senator Cortez Masto..................................... 51 Additional Material Supplied for the Record The February 2018 semiannual Monetary Policy Report.............. 66 American Banker article, ``SIFI Hike Could Kick-Start Bank M&A,'' submitted by Senator Brown..................................... 124 (iii) THE SEMIANNUAL MONETARY POLICY REPORT TO THE CONGRESS ---------- THURSDAY, MARCH 1, 2018 U.S. Senate, Committee on Banking, Housing, and Urban Affairs, Washington, DC. The Committee met at 10:01 a.m. in room SD-538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, presiding. OPENING STATEMENT OF CHAIRMAN MIKE CRAPO Chairman Crapo. The hearing will now come to order. Welcome, Chairman Powell, for your first appearance before this Committee as Chairman of the Federal Reserve Board of Governors. Congratulations on your confirmation. Today's hearing is an important opportunity to examine the current state of monetary and regulatory policy. Over the past few years, the Humphrey-Hawkins hearing has often served as an opportunity for Members of this Committee to review the new regulations imposed in the wake of the financial crisis. While I did not always agree with former Chairman Bernanke and former Chair Yellen, I appreciated their willingness to engage with the Committee and to discuss possible improvements to the regulatory regime. These discussions were helpful in building common ground for our banking bill, Senate bill 2155, particularly for provisions like the threshold for enhanced standards under Section 165 of Dodd-Frank. This bipartisan bill now has 13 Republican and 13 Democratic and Independent co-sponsors. The bill was the result of a thoughtful, deliberative process over several years that included hearings, briefings, meetings, and written submissions from hundreds of commentators and stakeholders. The primary purpose of the bill is to make targeted changes to simplify and improve the regulatory regime for community banks, credit unions, mid-size banks, and regional banks to promote economic growth. Economic growth has been a key priority for this Committee and this Administration and for this Congress. The U.S. economy has failed to grow by more than 3 percent annually for more than a decade, by far the longest stretch since GDP has been officially calculated. But now there are widespread expectations that growth is finally picking up. According to the January FOMC meeting minutes, the Federal Reserve increased its expectations for real GDP growth going forward after fourth quarter growth exceeded expectations. The Fed cited the recently enacted tax reform legislation as among the reasons economic growth is expected to rise. In addition to tax reform, President Trump's recently released Budget and Economic Report both emphasize that regulatory reform is a key component of rising productivity, wages, and economic growth. By right-sizing regulation, the Committee's economic growth bill will improve access to capital for consumers and small businesses that help drive our economy. Now that many are predicting a pickup in growth, a number of commentators have expressed sudden concerns about the economy overheating. While the Federal Reserve should remain vigilant in monitoring inflation risks, we must also continue to pursue common-sense, pro-growth policies that will lead to increased innovation, productivity, and wages. With respect to monetary policy, I am encouraged that the Federal Reserve is continuing on its gradual path to monetary policy normalization. The Fed has begun to reduce its balance sheet by steadily decreasing the amount of principal it reinvests as assets as its portfolio matures. I look forward to hearing more about the Fed's monetary policy outlook as part of Chairman Powell's testimony today. I also look forward to hearing about the Federal Reserve's ongoing efforts to review, improve, and tailor existing regulations. I know that you are working with Vice Chairman for Supervision Randy Quarles on all those issues, Mr. Chairman. Vice Chairman Quarles has done an excellent job so far, and I urge Congress to confirm him for his full term on the Board as soon as possible. With that, Senator Brown. STATEMENT OF SENATOR SHERROD BROWN Senator Brown. Thank you, Mr. Chairman. And welcome to your first one of these, Mr. Chair. Nice to see you. Welcome back to the Committee. You are leading the Federal Reserve at a crucial time in our Nation's history as the Fed normalizes interest rates and shrinks the balance sheet. The country is in its ninth year of economic recovery, though, as we know, 2017 marked the worst year for job creation since 2010. And the recovery has not reached everyone. Wage growth has been slow and labor force participation has barely improved since 2014. Nine years of job growth have still not done much to narrow income inequality or address employment disparities. Nationwide, the unemployment rate for African American workers is double that for whites workers--equal to the gap at the start of the civil rights movement. Looking more broadly, labor force participation is down for all minorities. Statistics show that large pockets of people are waiting to share in the benefits from the recovery. Instead of addressing their problems, Republicans are working hard to make sure that Wall Street banks rake in even bigger profits. Despite the fact that we are 9 years removed from the recession, the Administration has embarked on a substantial fiscal stimulus, permanently slashing the corporate tax rate, and providing the largest benefits to the wealthiest Americans. Over time, 81 percent of the benefits of that tax cut goes to the wealthiest 1 percent. Of course, Wall Street, which is making record profits, will do well. Instead of fighting for workers and making sure labor market opportunities are shared among those who have been struggling, Republicans push for tax cuts for corporations and the wealthy. Those tax cuts are not free. As you know, Mr. Chairman, they will add over $1 trillion dollars to the deficit. The once and future deficit hawks on the other side of the aisle were more like marshmallow Peeps when confronted with tax cuts for the wealthy. The ink was barely dry when we began to hear calls for spending cuts that will hurt families across the country. Eighty-one percent of the benefits going to the wealthiest 1 percent, then, alas, there is a budget deficit we have to address. Let us look at ``entitlement reform'' that everyone should understand means cuts to Medicare, Medicaid, and Social Security. It is the same playbook we have seen for years. The claim was that it would all be worth it because workers would benefit. I am happy for any Ohioan who gets a bonus or a raise, but we have seen how banks and corporations have responded to the tax cuts, and the numbers are staggering. In January, Wells Fargo--they have been in front of this Committee a number of times, and we have spent lots of time talking about their illegal behavior. Wells Fargo in January announced a $22 billion stock buyback--288 times what it will spend on pay raises for workers. A lot of discussion, a lot of news coverage on the benefits to workers on the bonuses or the pay raises, but 288 times that number went to stock buybacks for executives. Companies this year will start disclosing CEO-to-worker pay ratios, as required under the Wall Street Reform Act. Honeywell announced an $8 billion stock buyback in December and just disclosed that its CEO is getting a 61-percent pay raise and makes 333 times the average worker's pay. It is pretty simple: For each pay raise or bonus for workers, companies are spending 100, 150, 200 times as much on stock buybacks and executive compensation. And it gets worse. While the biggest banks lavish pay raises and stock giveaways on their executives, they continue to violate the law and abuse their customers. The Federal Reserve recently imposed an unprecedented--if belated--penalty on Wells Fargo following several scandals, including the opening of millions of fake accounts and improperly charging borrowers--even after that scandal was disclosed, charging borrowers for auto insurance they did not need. The Fed told Wells Fargo it cannot grow until it has demonstrated that it has improved board oversight and risk management. It sounds like the Fed has come to the conclusion many of us on this Committee reached a year and half ago: Wells Fargo, simply put, is ``too big to manage.'' I will be closely watching to make sure the new team at the Fed does not lift these penalties, as the Consumer Bureau did, without the bank making real changes. It is not just Wells Fargo. Last week, Citigroup announced it illegally overcharged 2 million credit card accounts for over 5 years; it will refund $335 million to consumers. Though Wall Street cannot seem to go a month without a new scandal, the Senate is set to take up a bill that would roll back critical financial stability protections and limit watchdogs' ability to police the largest banks. We can expect the banks to spend any savings from less oversight the way they spent their tax cuts: more dividends, share buybacks, and mergers. Many of us in this body are concerned about this deregulation bill that I mentioned a moment ago, especially when it comes to foreign banks, those banks that are huge, but their assets in this country are under $250 billion. They are both troubled and troubling banks in their international operations, yet Secretary Mnuchin sat at that table and said he plans to deregulate some of these banks, like Deutsche Bank and Santander. And we know the fines that they have paid and the problems that they have caused internationally. Chair Powell, Wall Street may be focused on whether there are three or four rate hikes this year. I think your focus needs to be on ensuring the Fed does not once again permit the buildup of risk in the market and hubris at the Fed. The Great Moderation turned out to be not so great. We forget that lesson at our peril. The Fed needs to take the side of consumers, making sure the financial system stays strong and regulations are enforced. I look forward to your testimony. Chairman Crapo. Thank you very much. Chairman Powell, once again we appreciate you being here. We look forward to your opening statement, and you may proceed. STATEMENT OF JEROME H. POWELL, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. Powell. Thank you very much, Chairman Crapo, Ranking Member Brown, Members of the Committee. I am pleased to present the Federal Reserve's semiannual Monetary Policy Report to Congress today. On the occasion of my first appearance before this Committee as Chairman of the Federal Reserve, I want to express my appreciation for my predecessor, Janet Yellen, and her important contributions. During her term as Chair, the economy continued to strengthen, and Federal Reserve policymakers began to normalize both the level of interest rates and the size of the balance sheet. Together, Chair Yellen and I have worked to ensure a smooth leadership transition and provide for continuity in monetary policy. I also want to express my appreciation for my colleagues on the Federal Open Market Committee. And, finally, I want to affirm my continued support for the objectives assigned to us by the Congress--maximum employment and price stability--and for transparency about the Federal Reserve's policies and programs. Transparency is the foundation of our accountability, and I am committed to clearly explaining what we are doing and why we are doing it. Today I will briefly discuss the current economic situation and outlook before turning to monetary policy. The U.S. economy grew at a solid pace over the second half of 2017 and into this year. Monthly job gains averaged 179,000 from July through December, and payrolls rose an additional 200,000 in January. This pace of job growth was sufficient to push the unemployment rate down to 4.1 percent, about three- quarters of a percentage point lower than a year earlier and the lowest level since December of 2000. In addition, the labor force participation rate remained roughly unchanged, on net, as it has for the past several years, and that is a sign of job market strength, given that retiring baby boomers are putting downward pressure on the participation rate. Strong job gains in recent years have led to widespread reductions in unemployment across the income spectrum and for all major demographic groups. For example, the unemployment rate for adults without a high school education has fallen from about 15 percent in 2009 to 5 \1/2\ percent in January of this year, while the jobless rate for those with a college degree has moved down from 5 percent to 2 percent over the same period. In addition, unemployment rates for African Americans and Hispanics are now at or below rates seen before the recession, although they are still significantly above the rate for whites. Wages have continued to grow moderately, with a modest acceleration in some measures, although the extent of the pickup likely has been held back in part by the weak pace of productivity growth in recent years. Turning from the labor market to production, inflation- adjusted GDP rose at an annual rate of 2.8 percent in the second half of 2017, nearly a full percentage point faster than its pace in the first half of the year. Economic growth in the second half was led by solid gains in consumer spending, supported by rising household incomes and wealth and upbeat sentiment. In addition, growth in business investment stepped up sharply last year, which should support higher productivity growth in time. The housing market has continued to improve slowly. Economic activity abroad has also been solid in recent quarters, and the associated strengthening in the demand for U.S. exports has provided considerable support to our manufacturing industry. Against this backdrop of solid growth and a strong labor market, inflation has been low and stable. In fact, inflation has continued to run below the 2 percent rate that the FOMC judges to be most consistent over the longer run with our congressional mandate. Overall consumer prices, as measured by the price index for personal consumption expenditures, or ``PCE,'' as we call it, increased 1.7 percent in the 12 months ending in December, about the same as 2016. The core PCE price index, which excludes the prices of energy and food items and is a better indicator of future inflation, rose 1.5 percent over the same period, somewhat less than in the previous year. And we continue to view that some of the shortfall in inflation last year was likely reflecting transitory influences that we do not expect will repeat. And consistent with this view, the monthly readings were a little bit higher at the end of the year than in earlier months. After easing substantially in 2017, financial conditions in the United States have reversed a bit of that easing, and at this point we do not see these developments as weighing heavily on the outlook for economic activity, the labor markets, and inflation. Indeed, the economic outlook remains strong. The robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales will likely continue to boost business investment. Moreover, fiscal policy has become more stimulative. In this environment, we anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC's 2 percent objective over the medium term. Wages should increase at a faster pace as well. The Committee views the near-term risks to the economic outlook as roughly balanced but will continue to monitor inflation developments closely. I will turn now to monetary policy. The Congress has assigned us the goals of promoting maximum employment and stable prices. Over the second half of 2017, the FOMC continued to gradually reduce monetary policy accommodation. Specifically, we raised the target range for the Federal funds rate by a quarter percentage point at our December meeting, bringing that target rate to a range of 1 \1/4\ percent to 1 \1/2\ percent. In addition, in October we initiated a balance sheet normalization program to gradually reduce our securities holdings. That program has been proceeding smoothly. These interest rate and balance sheet actions reflect the Committee's view that gradually reducing monetary policy accommodation will sustain a strong labor market while fostering a return of inflation to 2 percent. In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to try to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis. While many factors shape the economic outlook, some of the headwinds the U.S. economy faced in previous years have turned into tailwinds. In particular, fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory. Despite the recent volatility, financial conditions remain accommodative. At the same time, inflation remains below our 2 percent longer-run objective. In the FOMC's view, further gradual increases in the Federal funds rate will best promote attainment of both of our objectives. As always, the path of monetary policy will depend on the economic outlook as informed by incoming data. In evaluating the stance of monetary policy, the FOMC routinely consults monetary policy rules that connect prescriptions for the policy rate with variables associated with our mandated objectives. Personally, I find these prescriptions helpful. Careful judgments are required about the measurement of the variables used, as well as about the implications of the many issues these rules do not take into account. And I would note that this Monetary Policy Report provides further discussion of monetary policy rules and their role in our policy process, extending the analysis we introduced in July. Thank you again. I look forward to our discussion. Chairman Crapo. Thank you, Mr. Chairman. I am going to focus my questions on Senate bill 2155, which I referenced in my introductory remarks, but first, Mr. Chairman, you are familiar with that legislation, correct? Mr. Powell. Yes, I am. Chairman Crapo. In past hearings former Chair Yellen, former Federal Reserve Governor Tarullo, and former Comptroller of the Currency, among others, have all expressed support for changing the $50 billion threshold for enhanced prudential standards. Building on that feedback, Senate bill 2155 raises the threshold from $50 billion to $250 billion and requires the Fed to tailor regulations to a bank's business model and risk profile. I would like to ask you some questions about this bill if it does become law, and there are five or six of them, so I would like to have you respond as briefly as you can, but fully answer the questions. Is it accurate that the Federal Reserve would still be required to conduct a supervisory stress test for any bank with total assets between $100 billion and $250 billion to ensure that it has enough capital to weather economic downturns? Mr. Powell. Yes, it is. Chairman Crapo. And is it accurate that the Federal Reserve would still have sufficient authority to apply prudential standard to a bank with between $100 billion and $250 billion in total assets if the Fed determined that was appropriate? Mr. Powell. Yes, that is true. Chairman Crapo. Is it accurate that this provision does not weaken oversight of the largest globally systemic banks? Mr. Powell. That is correct. Chairman Crapo. Is it accurate that the Federal Reserve applies enhanced standards to international banks based on their global total consolidated assets, meaning this provision would not exempt banks such as Deutsche Bank and Santander from Section 165 of Dodd-Frank? Mr. Powell. That is correct. Chairman Crapo. Is it accurate that this provision does not in any way restrict the Fed's supervisory, regulatory, and enforcement authorities to ensure the safety and soundness of financial institutions? Mr. Powell. Yes. Chairman Crapo. And, finally, is it accurate that nothing in this provision would restrict the Fed's ability to ensure that large financial institutions are well capitalized? Mr. Powell. Yes. Chairman Crapo. Thank you. And to go on a little bit, as you know, the Dodd-Frank Act included a provision known as the Volcker rule, which placed restrictions on banks that trade for their own profit, otherwise known as ``proprietary trading,'' and on certain relationships with certain private funds. As you also know, financial companies have incurred significant costs attempting to comply with the rule. Do you support addressing this confusion by exempting community banks with less than $10 billion in total assets and who are engaged in a small amount of trading activity? Mr. Powell. I think that is a sensible thing to do, yes. Chairman Crapo. All right. Thank you. And some have expressed concerns that this exemption would allow a community bank to purchase a hedge fund. Is it accurate that the Federal Reserve could use its existing authority to address any safety and soundness concerns arising from such an action? Mr. Powell. We would still apply all of our safety and soundness supervisory activities to that bank, and we would be looking for things like that and find them. Chairman Crapo. All right. Thank you. Finally--and I am shifting gears away from the legislation right now--I also mentioned in my opening statement that Randy Quarles has been confirmed as Vice Chairman for Supervision of the Federal Reserve but has not been confirmed for his full term as a Governor yet. I believe it is very critical that we do that confirmation and confirm Governor Quarles for his full term. Do you agree? And if you do, why is it critical for the Senate to confirm Vice Chairman Quarles as soon as possible? Mr. Powell. Thank you for raising this, Mr. Chairman. I absolutely agree. It is very important that Vice Chair Quarles get his full term. At this point he is working on an expired underlying Governor term, but he has a 4-year Chair term, and I think to have him fully installed, it is very important that he have this underlying Governor term. Chairman Crapo. All right. Thank you. I appreciate your emphasis on that, and hopefully that will help to encourage the full Senate to move more expeditiously on that nomination. Senator Brown. Senator Brown. Thank you. I appreciate my friend and colleague Chairman Crapo's skillful, narrow, and leading questions about his legislation. I think it is important to point out that the question particularly about foreign banks, Deutsche Bank and Santander and those banks that have been both troubled and troubling, will be mostly deregulated under this bill because they are under 250. That is not really my question. I want to get to questions. But I also want to point out, in spite of this Chair of the Federal Reserve's general satisfaction with this bill, there have been serious, serious, serious questions raised against it, raised about it by former Fed Chair Volcker, by former Fed Governor and Deputy Treasury Secretary Sarah Bloom Raskin, but Bush appointee former FDIC Chair Sheila Bair, by former Counselor to the Treasury Secretary Antonio Weiss, and by the former Deputy Governor of the Bank of England Paul Tucker. And I think it is important to note that it is not all candy and roses here. Let me talk about a couple other things. The unemployment rate has been steady at 4 percent, 4.1 percent; wage growth, as you know, Mr. Chair, has been slow to improve. At your confirmation hearing in November, you mentioned that labor force participation for prime-age workers was also lagging. I would like to see improvement across the board, as I know you would. Two questions related to that. Do you think it is possible to achieve further improvement in wages and employment among workers that have been left behind without causing higher inflation? And will you commit to looking at all the data and considering the workers who have struggled the most so as to avoid raising rates preemptively and cutting off the chances for broader economic gains? Mr. Powell. Thank you, Senator. As you mentioned, there are a couple places where it looks like there may be additional slack in the labor force, and the biggest of those is that participation by prime-age workers is a full percentage point below where it was before the crisis. We do not see any strong evidence yet of a decisive move up in wages. We see wages by a couple of measures trending up a little bit, but most of them continuing to grow at about 2 \1/2\ percent. So nothing in that suggests to me that wage inflation is at a point of acceleration, and so I would expect that some continued strengthening in the labor market can take place without causing inflation. We will, of course, be monitoring that, and I think the risks are much more two-sided than they were 2 or 3 years ago when there was a great deal of slack in the labor market. Senator Brown. I appreciate, as I told you in person, your interest and commitment to both mandates of inflation and employment. One Fed nominee that is still in abeyance, may or may not have the votes on the floor, does not take that position. Your position there is crucial, as Chair Yellen understood, as Chairman Bernanke understood. Second question: Morgan Stanley and other Wall Street analysts have said that only 13 percent of the reduced taxes under the tax bill being paid by companies will go to workers' pay; 18 percent will go to mergers. If that ratio holds up for banks--18 percent will go to mergers, 13 percent for worker pay. If that ratio holds up for banks, whether it is the tax bill or the Chairman's bill he talked about, shouldn't we expect even more bank consolidation? Mr. Powell. First, I would say we do not really know yet how that will shake out, but taking your hypothetical, would it add to more consolidation among the banks? You know, bank consolidation has been going on for 30-plus years. It has got a lot to do with smaller banks and economic activity moving out of the rural areas into the city and interstate banking and things like that. I am not sure this would tend to change the trend. Senator Brown. I appreciate what you just said because I certainly heard the deregulators in this body, those that suffer this collective amnesia about what happened a decade ago, always blaming bank consolidation on Dodd-Frank when, as you point out, it has been going on for years. Mr. Chairman, here is an American Banker article from November that discusses your bill. The title is ``SIFI hike could kick-start bank M&A,'' and I ask to enter that in the record. Chairman Crapo. Without objection. Senator Brown. Thank you. Senator Brown. Last question. Most of the Wall Street--the big Wall Street bank offenders have--most of the Wall Street banks have been repeat offenders since the crisis. The Fed and other regulators have fined them. You were part of this, $243 billion in combined penalties, money laundering, market manipulation, deceiving customers, you name it. The Chairman's bank deregulation bill would mandate that the Fed further tailor rules for the largest banks. Meanwhile, Vice Chair Quarles is talking about the Fed's plans to make living wills less frequent, to reduce leverage rules to weaken the Volcker rule. Why should big banks that have consistently failed to follow the rules benefit from statutory or regulatory rollbacks? Mr. Powell. I would just say that our focus is very much on the smaller and medium-size banks. We want the post-crisis regulatory initiatives like higher capital, higher liquidity, stress testing, resolution, we want those to apply in their strongest form to the largest institutions. We want to make sure we are doing that efficiently. And there are some changes we can make in that regard, but most of what we are doing really applies to banks---- Senator Brown. Well, I hear you, but I sat with Senator Crapo and a number of others that are in this room on the Finance Committee, and I heard Republican after Republican say the tax cut was all about the middle class, yet 81 percent of the benefits went to the wealthiest 1 percent. I heard you and I hear the push for this S. 2155 being all about the community banks, but we know much of it is driven by what happens for the larger banks, the weaker stress tests, the periodic stress tests, what we are doing, instead of annual, what we are doing for the foreign banks. So I hear your talk about your interest primarily is the smaller banks, but I guess the question still stands. Why should anything in this bill--why should we do anything for the largest banks? As this bill does, why should we do anything for banks that have consistently failed to follow the rules? Why should they benefit from statutory and regulatory rules rollback? Mr. Powell. As I see the parts of the bill that I am familiar with, they really apply to banks 250 and under. And when you say ``largest banks,'' I think you are talking about either the eight SIFIs--by the way, one of which is below $250 billion in assets, so we are very capable of reaching below 250 to apply enhanced prudential standards when it is appropriate. But it is really those institutions that I would call the large and complex institutions, and the focus there, again, is on sustaining the four pillars that I mentioned of post-crisis regulation and maybe looking at making them more efficient. They do not need to be--they should not be more burdensome than they need to be, but---- Senator Brown. I agree with that. Mr. Powell.----we are looking to strengthen and hold onto those. Senator Brown. Well, I hope in your conversations with the Chair of Supervision, Mr. Quarles, that you will insist that this is about the banks under 250 and insist on that, that it is not about the banks over 250, as some on this podium have suggested. Thank you. Chairman Crapo. Thank you. Senator Shelby. And I do remind our colleagues that we need to stick to the 5-minute rule. Senator Shelby. That is prospective, isn't it, Mr. Chairman? [Laughter.] Senator Shelby. Chairman Powell, you referred to price stability just a few minutes ago as one of the mandates for the Fed in your job. Let us talk a little about price stability and unemployment being real low. Prices, you mentioned earlier that inflation is, I assume, under control, whatever that is. You have got your eyes and you have got your hands on it, so to speak. But a lot of people believe that you will continue to raise interest rates at incremental levels in the future. Is that because of your concern about the specter of inflation, that being full employment, so to speak, you know, mostly, pressure on wages? Or where is it coming from, in other words? Or is it all of it? Mr. Powell. Senator, where we are now is we have got unemployment, as you know, at 4.1 percent, which is sort of at or near or even below most estimates of the natural rate of unemployment. But we have inflation that is still a little bit below, so by continuing to gradually raise interest rates over time, we are trying to balance those two things and, you know, achieve inflation moving up to target, but also make sure that the economy does not overheat. Now, there is not a lot of evidence that--there is no evidence that the economy is currently overheating, but that is really the path that we have been on, and my expectation is that that will continue to be the appropriate path as long as the economy performs this way. Senator Shelby. Well, I think that is a substantive path, too. I agree with you. Do you believe that there is going to be a push for higher wages? You know, you see a little of it now. The economy is good. People seem to be doing well. The tax cuts come in, which is probably going to help. We see that it is going to help at least confidence and everything in the economy. What do you see there? Mr. Powell. It is interesting. Unemployment has declined from 10 percent at the worst part of the crisis--and, actually, well after the crisis--down to 4.1 percent now, and wages have only really gradually started to track up. The increases are now up at about 2 \1/2\ percent if you blend the various measures we look at, and we look at a bunch of them. And I will be honest. I would have thought that you would see more wage increases by this point, and I do expect that we will see more wage increases. We have got an economy with strong momentum. We have got strong job creation as a result of it. We have got low unemployment. And I do think you will begin to see wages coming up, but we have been feeling that way, and that is kind of what we are waiting to see. I hope we see it soon, expect to see it. Senator Shelby. How important to the economy and to the monetary policy is price stability? Mr. Powell. Price stability is one of our two mandates, at the very heart of what we do. Senator Shelby. It is key, isn't it? One of the keys. Mr. Powell. Absolutely at the very heart of what we do. Senator Shelby. OK. I would like to switch over to your other job, and that is, dealing with regulatory issues. Cost- benefit analysis unit, it is my understanding that the Fed has announced recently its intention to create what they call a ``Policy Effectiveness and Assessment Unit'' to conduct cost-benefit analysis on regulations. If that is so, I applaud that effort. A lot of us on this Committee have pushed that for years, believing that there should be an analysis, a real cost-benefit analysis to every regulation. What is the status of this group's development, Mr. Chairman? And what do you hope will come out of this? Mr. Powell. As you know, Senator, we always try to implement regulations in the way that is least burdensome and also faithful to the intent of Congress. In this particular case, we are trying to raise our game here by having a specific group of, you know, quantitatively oriented people who are focusing just on that. We have lately published cost-benefit analysis on specific regulations like the SIFI surcharge, the long-term debt, and things like that. So, you know, we are trying to raise our game here. By the way, whenever we go out for comment on a reg, we also ask for the public's view on costs and benefits. So it is really important to us, and as I said, as you pointed out, we are trying to raise our game. Senator Shelby. A lot of it, though, is letting the public know what all of this is about and what the costs will be to them as well as to the economy, is it not? Mr. Powell. It is, and that is our obligation, is to be transparent about those things. Senator Shelby. Thank you. Thank you, Mr. Chairman. Chairman Crapo. Thank you. Senator Tester. Senator Tester. Yes, thank you, Mr. Chairman and Ranking Member Brown. I appreciate you having this hearing. And welcome, Governor Powell. It is great to have you here. There has been a perception being floated by some that the largest foreign banking organizations, such as Barclays, UBS-- Deutsche Bank has been talked about today already--will be released from enhanced prudential standards under the economic package brought forward called S. 2155. I fundamentally disagree with that. I think those views are a myth, and certainly not the text that is in S. 2155. But I am a dirt farmer, OK? I just kind of read things as they are and do not read a lot of extra stuff into it. You are the man on the Fed, and so I need to know your opinion. Does S. 2155 require the Federal Reserve to weaken any of the Dodd-Frank enhanced prudential standards for the FBO such as Deutsche Bank, UBS, or Barclays? Mr. Powell. It does not, according to my reading of the text. Senator Tester. Can you elaborate, briefly if possible, on how those standards are applied to the largest FBOs? Mr. Powell. Well, currently what the bill does is it moves up to 250 for these institutions, but it looks at their global consolidated capital. We now have intermediate holding company requirements for these companies, and none of those would be affected by this. And what that means is that they are required to keep capital and liquidity here in the United States that is commensurate with their activities. They are also subject to living wills and things like that. So, it is a range of enhanced prudential standards. The intermediate holding company thing is an extra one that we gave them. Senator Tester. OK. Thank you. I am also frustrated that some are jumping to conclusions about how or what might happen regarding international holding company requirements. So just to clarify, from your perspective, the creation of the IHS was not included in Dodd- Frank, correct? Mr. Powell. That is right. That was something that we added on independent of Dodd-Frank. Senator Tester. And the legislative language in S. 2155, the bill that we have been talking about this morning a lot, does not require any change to the IHC, correct? Mr. Powell. It does not. Senator Tester. OK. Thank you for clearing that up. Now, I asked you this question during your confirmation right around the time that S. 2155 was released, and it has been nearly 3 month, and that bill has made its way through this Committee and has overwhelming bipartisan support and hopefully will see the floor next week. What I asked you at that juncture was: Do you believe S. 2155 puts our financial system at risk? At that moment in time you said no. So now you have had a little more time to get your feet on the ground. Do you continue to believe that? Mr. Powell. I do. Senator Tester. OK. Last--go ahead, go ahead. Mr. Powell. I can elaborate if you want. Senator Tester. Sure. Have at it. Mr. Powell. OK. The essence, probably the most significant piece of it is that you raise the threshold for enhanced prudential standards to 250, but you give us the ability to look below 250. We will publish a framework that addresses--and we will put it out for comment--that addresses how we will think about that. We have not been shy about reaching below 250. One of the eight SIFIs, in fact, is below $250 billion in assets. So I think it gives us the tools that we need to continue to protect financial stability. Senator Tester. Thank you. Last, I think it is important that folks remember that the Federal Reserve and Chairman Powell have a number of tools in their toolbox when it comes to regulating our financial institutions well beyond that we even created in Dodd-Frank. I think it is important to remember that things like advanced approaches, CCAR, and Basel were not created by Dodd-Frank, and if I am not mistaken, advanced approaches and CCAR were put in place during a Republican administration. So I guess my question for you, Chairman Powell, is this: Can you remind folks what your safety and soundness authority means to the Federal Reserve and what authority it gives to you? Mr. Powell. Except in places where Congress has addressed particular areas, we have broad safety and soundness authority to do capital requirements of various kinds, liquidity requirements and things like that, and look after the safety and soundness of all depository institutions. Senator Tester. Thank you. I just want to close by saying that I do not for a second think that Dodd-Frank was the only reason we are seeing consolidation in banking. I think technology plays a big role in that, and population shifting plays a big role in that. On this Committee I can deal with Dodd-Frank. Thank you, Mr. Chairman. Chairman Crapo. Thank you. Senator Corker. Senator Corker. Thank you. Welcome, Mr. Chairman. It is good to have you here, and congratulations on your confirmation. You have talked about the accommodative fiscal policy that is in place right now, and just out of curiosity--I know people predict you all are going to raise rates four times this year. You are definitely going to raise rates some. How much of the tax bill that was put in place, how much of that is affecting your desire or your likelihood of raising rates over this year? Mr. Powell. I would not single it out, Senator. I would say---- Senator Corker. No, no. I am not trying to single it out. But just out of curiosity, it is, in fact, something that is going to be stimulative, so how much of a factor is it in looking at raising rates? Mr. Powell. Fiscal policy is one of many, many factors. As you know, we are looking at stable prices and maximum employment. That is what we are looking at. And everything that happens in the economy and financial conditions and fiscal policy affects that. We cannot really isolate one thing, you know, like fiscal policy. But I think, you know, I would expect that fiscal policy this year is going to add meaningfully to demand, and that is going to put upward pressure on inflation and downward pressure on unemployment. It is hard to quantify, but it would not be the main factor. The economy is strong, and it is even stronger now. Senator Corker. So then as it relates to growth, you said it was going to increase demand. How much of a factor is it in your growth projections, the passage of the tax legislation? Mr. Powell. As I mentioned, I think it will add meaningfully to growth for at least the next couple of years. The real question is: How much will it add to--and the amount of that is subject to very different estimates by different approaches, but I guess the bigger question is: How much will it add to longer-run growth? There are a couple channels through which that might happen. Higher investment should lead to higher productivity, which would raise potential growth. Lower tax rates on individuals should increase labor supply. These are highly, highly uncertain, but we hope the effects are meaningful there as well. Senator Corker. You know, we have been through a decade now, I guess, since the crisis, and many of us were here during that time. It was a pretty heady time trying to resolve those issues. And yet we went through periods of time when we were worried about deflation. Obviously, we had really accommodative monetary policy during that time. And here we are again at 4.1 percent unemployment, down from 10, as you mentioned, the economy is strong, and yet still, let us face it, 2 percent inflation--I know you all are combating anything getting out of control. Elaborate on the factors that in this day and age--in this economy in this world situation, what is it that is keeping inflation at such a low rate? Mr. Powell. It is a global phenomenon, and we do not perfectly understand it, but I would say since the crisis, a big factor that has been weighing down inflation has been just the weakness in the economy. You have had a lot of slack, and the economy has not been tight, and so it makes sense that that would press downward on inflation. We also had, you know, the strong dollar and lower oil prices in 2014 and 2015. That pushed down. So more lately, we would have expected inflation to come up by a few more tenths than it has, and we see identifiable idiosyncratic factors. There are other stories, though. There is the Amazon effect story. There is global slack, the idea that slack around the world is affecting, you know, the tightness of the U.S. labor market. It is really hard to tie those down from an empirical standpoint, but that may be having some sort of an effect on inflation as well. It is a global phenomenon, though, so it is not just tied to domestic factors. Senator Corker. I know that my friends on the other side tend to focus a lot on the tax bill, and there is hope that growth is going to overcome any kind of deficits there. It may or may not occur. But we are, in fact, getting ready to spend $2 trillion more that we do not have by passing the bill we just passed. We have got an omnibus coming up. Over the next 10 years, it is a minimum of $2 trillion in additional spending, almost twice what the President requested, and we have $21 trillion in debt today. How much does the deficit picture for our country come into play relative to the Federal Reserve? And how concerning is it to you that we continue just to party like there is no time ending here in Congress? Mr. Powell. We are not on a sustainable fiscal path. We need to get on one. This is a good time to be doing that when the economy is strong. But that is a longer-run problem. It is not really--it is not a problem for today's monetary policy or economy. It becomes a problem gradually over time as we spend more and more of our expenditures on serving--on interest rate, on debt service, and we have less and less to do the things that we really need to do and as we pass along bills to future generations. But the unsustainability of our fiscal path is not something that has too much of an effect in the near term on our policies. Senator Corker. Thank you. Mr. Chairman, thank you. Chairman Crapo. Senator Menendez. Senator Menendez. Thank you, Mr. Chairman. Welcome, Chairman Powell. Good to see you. I want to follow up on some questions that my colleagues Senators Brown and Shelby asked you about. Inflation is continuing to run below the Fed's 2 percent target, which has prompted a majority of the regional Federal Reserve Bank Presidents to urge a study of the current inflation framework. And while we have seen significant economic gains since the worst days of the recession, most hardworking families are still waiting to see their paychecks rise. Real median wages increased by only 14 percent from 1979 to 2017, and any recent acceleration in wages is accruing to high-paid executives and managers with production and nonsupervisory workers simply not seeing those gains. The Fed is projecting a minimum of three interest rate increases in 2018, and after your testimony on Tuesday, the markets are now anticipating as many as four hikes. Do you agree that the achievement of full employment should be associated with strong and broad-based wage growth for average workers, not just increases for executives and managerial pay? Mr. Powell. I do, Senator. Senator Menendez. And if so, doesn't that argue for consideration of a monetary policy path that would allow wages to continue to grow prior to the Fed's pumping the brakes? Mr. Powell. I agree that it does, and I believe that is, in fact, the path we are on. These are gradual rate increases, and we do expect wages to move up. Senator Menendez. What would the cost to the economy of overshooting inflation in the 2 to 3 percent range versus the cost to the economy of choking off growth if the Fed continues to tighten without a clear indication that inflation is going to exceed its target be? Mr. Powell. The risk, one of the risk we are trying to avoid, I think as I mentioned earlier, the risks are more balanced than they used to be. For many years, it was clear there was a lot of slack in the economy, and, you know, I for one supported accommodative policy. At this point we have 4.1 percent unemployment, and the thing we do not want to avoid-- that we do not want to have happen is to get behind the curve, have inflation move up, and have to raise rates too quickly, cause a recession. And recessions, they hit the most vulnerable groups, you know, the hardest, and so that is where unemployment goes up the fastest and that kind of thing. So to prolong the recovery, the Committee's view is that we should continue on this gradual path of rate increases which balances lower inflation and low wages against the need to make sure that we do not run too far past the natural rate of unemployment. Senator Menendez. Well, I hope you will continue to look at wage growth as part of your calibrations. Let me ask you this: During the confirmation hearing--and I was pleased to vote for you--I asked you about the economic risks of adding an additional $1.5 trillion to the deficit, and I just heard your responses to my colleague from Tennessee that we are not on a sustainable path, we need to get one. Obviously, we were not on a sustainable path before we added $1.5 trillion to the debt in the tax cuts that were generated. And you then said in response, and I quote, ``I think we need to be concerned with fiscal sustainability over the long term.'' And in the same hearing, you agreed with Senator Van Hollen when he asked you--you said adding $1.5 trillion to the deficit would make a bad situation worse. Now, your predecessor previously testified before this Committee when she said, ``I am personally concerned about the U.S. debt situation. Taking what is already a significant problem and making it worse is a concern to me.'' Do you agree with former Chairman Yellen that there is reason to be concerned about mounting deficits and growing national debt? Mr. Powell. I do, and I will follow what my predecessors have done and not get too much into the details of fiscal policy, but I will say a couple things. One is that, as I mentioned, we need to get on a sustainable fiscal path in the longer run. We know that we are not in the longer run. The second thing is when we do fiscal policy, when you do fiscal policy, I think it is important to keep in mind measures that would increase the productive capacity of the United States of the economy, things that would increase productivity, that foster investment in people, in education and training, in R&D, and in plant and equipment as well. Those kinds of policies can help the whole economy grow faster on a sustainable basis. Senator Menendez. I agree with you. I would suggest that stock buybacks do not quite do that. Let me ask you a last question. In January, the New York Federal Reserve Bank president said that tax legislation is likely to generate frictional costs that will mitigate its effects on growth, namely disparate impacts regionally. In particular, president Dudley was pointing out the gutting of the State and local income and property tax deduction, which would raise the cost of ownership and adversely affect prices and construction activity in States like New Jersey. Do you agree with president Dudley's analysis that States like New Jersey will see regional economic disparities as a result of the tax bill? Mr. Powell. Senator, I hope you will allow me to say that I would rather not get into the particular details of any particular fiscal bill as Chairman, and I think that is--I am happy to talk about things at a high level, but getting into commenting on particular sections in a fiscal bill which is not our responsibility for me is probably not a good idea. Senator Menendez. Your president of the New York Reserve made that observation, so I would hope that we would look at the consequences to regional growth as part of your overall growth path. The region that I am from generates nearly 20 to 25 percent of GDP for the entire Nation. If we are going to have policies that ultimately affect the ability to be that engine for part of economic growth of the country, we should be considering that as well. Thank you, Mr. Chairman. Chairman Crapo. Senator Cotton. Senator Cotton. Thank you, Mr. Chairman. And, Mr. Powell, welcome in your first appearance as Chairman, first of many. I am sure you have them all circled on your calendar and look forward to them with eagerness, as a child does to Christmas, right? Mr. Powell. Indeed. Senator Cotton. I want to talk about the labor market, in particular wage growth for America's workers. An article in the Harvard Business Review last October discussed wage trends since the 1970s and found that wage gains have mostly accrued to top earners while wages have declined or been stagnant for the bottom half of the income distribution. The bottom half of the income distribution is comprised of many Americans who do not have a 4-year degree, many who do not even have a high school diploma. Research from the Economic Policy Institute shows that American workers without a high school education have seen their wages decline by 17 percent since 1979 adjusted for inflation, and for workers with a high school education but no college, wages have declined by 2 percent. The chart to my left displays this, shows what I am talking about. You can see the massive wage growth for those with a college degree or an advanced degree and wage declines in real terms for those with a high school degree or less. One of my top priorities is to ensure that hardworking Arkansans can share in the economic prosperity that we see in our country in ways that they have not over the course of my lifetime. Mr. Chairman, you write--or I should say the entire Board writes on page 2 and 3 of the Monetary Policy Report, ``Although there is no way to know with precision, the labor market appears to be near or a little beyond full employment at present.'' What is your personal assessment of this matter? Is the economy at full employment today? Mr. Powell. As we say in our statement of longer-run goals and policy strategy, we look at a number of--there is no place you can directly observe. We look at a range of indicators, and I would say most of those indicators say that we are either at or beyond full employment. There are a couple that suggest maybe we are not. I would point to wages and I would point to labor force participation by prime-age males. This is a long answer. It is hard to give a really clear answer, but we do not actually know precisely where full employment is. Put it all in the blender, it seems to me we are very close to full employment. I would add that is not the case in every region. Senator Cotton. To pick up on your point about labor force participation, while our unemployment rate is a bit of good news at 4.1 percent and jobless claims seem to be continuing to trend downward, it is somewhat surprising, given those economic conditions, that over the last year labor force participation continued to decline from 62.9 percent in January of 2017 to 62.7 percent in January of 2018. Even if you account for demographic change, for the aging of the baby-boom generation, many estimates say that 2 million workers are still missing from our economy. I also would note that job growth continues to outpace population growth, which suggests that there is still slack in the labor market. And a lot of the slack appears to be in part on the lower end of the economic scale of those workers who have a high school degree or less than that. Would you agree with that assessment? Mr. Powell. Generally, yes. Labor force participation has been essentially flat since the back half of 2013, so a little more than 4 years, and the downward trend might be 25 basis points a year. So I look at us as having made up probably the slack that emerged--probably fully made up the slack that emerged as part of the crisis. Senator Cotton. And the wage growth we have seen over the last year, while good, I would suggest is still not good enough, especially as long as we have those missing workers. So I would hate to see--putting aside all the other reasons why you might see rate increases in the coming months ahead, rate increases because of continued increases in wages, especially for working-class Americans. And the labor market, like any other market, is a market that is driven by supply and demand, correct? Mr. Powell. Yes. Senator Cotton. So if the supply of labor exceeds the demand of labor, then you would see downward pressure on wages. That is one reason why I and some other Senators, like Senator Perdue, have been so focused on our immigration system. You know, if you could magically convert a million high school graduates in this country to a million Stanford graduates that could go to work in our high-tech industry, then presumably that would be good for the wages of working-class Americans. Well, that is essentially what we do every single year in reverse as we bring in a million unskilled and low-skilled workers that are competing against the very people who have not shared in prosperity and, for that matter, competing against the previous generation of immigrants. I do not think that is good for American citizens. I do not think that is good for our economy, and I will continue to work hard to make sure that those workers share in the prosperity that all Americans in the upper-income brackets, college educated and more, have shared in the past. Thank you. Chairman Crapo. Senator Schatz. Senator Schatz. Thank you. Chairman, thank you for being here, and thank you for being willing to serve. I want to talk about student loan debt. There is currently $1.4 trillion in outstanding student loan debt, the highest category of consumer debt behind mortgages. It is also the most delinquent, with 11 percent of borrowers seriously delinquent or in default. The Fed estimates that this number is likely closer to 22 percent once you take into account the number of borrowers who are in forbearance. In contrast, at the height of the financial crisis, mortgage delinquency was just under 5 percent, and currently that rate is around 1 percent. According to the Federal Reserve's data, high levels of student debt have contributed to lower rates of home ownership and new business starts. So, in your view, does the high level of student debt create a drag on the economy? Mr. Powell. On student loan debt, I think it is important that people be able to borrow to make what may be the most important investment of their lives, which is in their education. So, overall, I think borrowing to invest in yourself is something we should foster, subject to a couple of important caveats. First, it is very important that people understand the nature of the borrowing and the risk that they are taking and the possible payoffs and that sort of thing so that they make informed decisions. The second thing is I think alone among all kinds of debt, we do not allow student loan debt to be discharged in bankruptcy. Senator Schatz. Right. Mr. Powell. I would be at a loss to explain why that should be the case. So it is something--and this is fiscal policy. This is something for you, not something for the Fed. But we do see and Fed research shows and other research shows you do start to see longer-term negative effects on people who cannot pay off their student loans. It hurts their credit rating. It impacts the entire path of their economic life. Senator Schatz. So that is the public policy argument for us to do something about student loan debt and the way we structure higher education financing. My question for you is: Do you see this as a macroeconomic risk? Mr. Powell. It will over time. It is not something you can pick up in the data right now, but as this goes on and as student loan continues to grow and becomes larger and larger, then it absolutely could hold back growth. Senator Schatz. OK. Thank you. And I want to thank you for your willingness to have an open mind on the question of the economic impacts of climate change. I appreciated your answers in the questions for the record, and so I am glad you are willing to talk about it. Your position is that the Fed is only concerned with, and I will quote, ``short- and medium-term developments that may change materially over quarters in a relatively small number of years rather than decades associated with the pace of climate change.'' Now, there are experts within the Government that would strongly disagree that the problem of climate change is measured in decades. They would say we are seeing the economic impacts now. NOAA reported 16 separate billion-dollar climate events in 2017. Combined, these events cost the United States economy $300 billion, 1.5 percent of GDP. Two-thousand seventeen was a record-breaking year, but according to NOAA's science, it will get worse. The number and cost of these events has more than doubled over the last decade, and it has increased eightfold in the last 30 years. So I understand that your aperture is short- and medium- term. That is sort of a premise of how you operate. What I am not accepting as a premise of how you operate is the assumption that climate change belongs in the long-term category because I think you are--you are analysts. You believe in data. And what I would like for you to do is challenge that assumption that climate only belongs in the long-term category, because the Federal Government scientists are starting to indicate that that is not the case. So the question is: Are you willing to relook at that basic assumption that climate is just outside of your window, to sit down with our office and with Federal Government researchers to at least examine the question of whether or not as you do your planning, it continues to belong in this long-term category which is outside of your aperture? Mr. Powell. Senator, as we discussed in your office, I guess last fall, you know, climate change is something that is entrusted to other agencies. We have particular responsibilities and particular tools: interest rate supervision, looking out for the financial system. It is just not clear that it is really in our ambit as opposed to in the ambit of other parts of the Government. But we are obviously always going to be willing to discuss it with you, but I do not know exactly how it would fit into what we do with our tools. Senator Schatz. I guess the question--I mean, I understand what you are saying, but I am trying to figure out why a 1.5 percent hit to GDP last year and the agency that knows about such things is telling us to expect more and more of it, why that wouldn't be in your ambit? That is the first time I have ever used that word. [Laughter.] Mr. Powell. Well, our ambit involves, you know, moving interest rates up and down and supervising financial institutions, so I do not know--I am not sure how it would enter into that. Senator Schatz. OK. I look forward to continuing the discussion. Thank you. Mr. Powell. As do I. Thanks. Chairman Crapo. Senator Perdue. Senator Perdue. Thank you, Mr. Chairman. I am Googling ``ambit'' over here in the meantime. Sorry. [Laughter.] Senator Perdue. Chairman, thank you for being here again. I have a question. You mentioned in your opening comments that foreign demand for U.S. exports is up, and I happen to believe that if we are going to be north of 3 percent GDP growth, we have got to grow our exports. And I think you have made those comments publicly as well. But the low interest rate environment over the last decade has shown a proliferation of new lending, really a binge of new debt issuance in the Third World, or developing world, let me say that. And just this year--and a lot of that is short term, so this year alone, there is some almost $2 trillion of that developing world debt coming due this year, and about 15 percent of that is denominated in U.S. dollars. Do you see that as we normalize rates here in the United States, with the U.S. dynamics that we are talking about between inflation and unemployment, that the impact that that could have on the developing world could in effect have some systemic risk on not only the global economy but on our own recovery? Mr. Powell. Senator, what we can do is we can be transparent, we can be predictable, and the markets can, therefore, understand what we are doing and be ready for it. And I think if we do that, we use our tools to achieve stable prices and maximum employment here in the United States, and financial stability, and so what we try to do for the world financial markets is be really clear about what we are doing, predictable, transparent. As I look at the state of the emerging market countries and their financial markets and financial regulation, they are in a much better place than they were 10, 15 years ago, even 5 years ago. There is not as much dollar-denominated debt, foreign currency-denominated debt. They have better institutions--not everywhere, but it is a much better picture than it was 20 years ago, let us say. Senator Perdue. So following up on that, you talked earlier about reducing the size of your balance sheet, and that has been an ongoing effort even before you took office, as I understand it. So the question is: The four big central bank-- China, Japan, United States, and the European Union--all have similar sized balance sheets, somewhere between $4 and $5 trillion. As you normalize or as you begin to consider taking our balance sheet down to a more normal level, what actions do you monitor of these other central banks? Or is it totally independent when you make those decisions? Mr. Powell. Well, we monitor all financial conditions and economic conditions in what we do. The normalization plan that we adopted through the summer and then put into place in the fall has been accepted very well by the markets. There is no obvious reaction at all. It is a gradual decline. We have said we are not interested in deviating from that unless, you know, unusual circumstances arise. And I think that should be the path, and I think we get to a more normal balance sheet size within about 4 years, give or take a year, let us say. The other large central banks that are talking about normalizing their balance sheets, they are behind that schedule. Our economy recovered sooner. We are raising rates sooner. So, you know, there is going to be some--it is not going to be a synchronized thing. It is going to be something that is happening more seriatim. But we will be watching that very carefully. We are very mindful of the issue that you raise. Senator Perdue. Good. Thank you. One last question. It is a technical question, but it has to do with the leverage capital ratio that requires banks to hold capital against all assets, regardless of the risk of those individual assets, an operation that has created kind of a risk-blind rule. And I understand the overall rationale behind creating this risk-blind rule. But the question I have is ultimately I have a hard time understanding why assets like Treasury securities and funds on deposit in the Federal Reserve are also in that calculation. Can you defend that and answer the question if you are reviewing that practice? Mr. Powell. Sure. My view is that the binding capital requirement should be the risk-based capital requirement, and that would take into account Treasurys and reserves and how risky they are. The issue is that over time banks have figured out ways to game risk-based capital, so we want a hard backstop, and that hard backstop should be high and hard. It should be the leverage ratio. We do not want the leverage ratio to be the binding constraint most of the time because that, frankly, encourages people to take more risk. If you are bound by the leverage ratio, it is really saying you could probably use some riskier assets. So we like leverage--particularly risk-based capital has been vastly improved since the crisis. So that is how we think about it. Senator Perdue. So how would you view right now, in the few seconds we have got left, just very quickly, what is your view of the general health of the entire banking industry in the United States, the capital formation arm of our economic effort in a free enterprise system? What is your assessment of the health of that industry today? Mr. Powell. I think our banking system is quite healthy. I think we have high capital, high liquidity. We have banks that are much more aware of and capable of managing the risks that they face. They are much more ready to face failure if they do because they have living wills, and I think we are seeing profitability. We are seeing returns on capital. And I think it is a good time in our system. Senator Perdue. Thank you, sir. Thank you, Mr. Chairman. Senator Brown. [Presiding.] Senator Cortez Masto. Senator Cortez Masto. Thank you, Ranking Member and Chair for this Committee. And welcome, Chairman Powell. It is good to see you again. I want to follow up on the conversation that you had with one of my colleagues, Senator Shelby, on the Policy Effectiveness and Asset Unit that you have created. Can you speak to how many people will work in the unit and how the importance of data will inform the decisions you make? Mr. Powell. I think it is five or six people now. I do not know how big it will be, but it is going to be something in that range, maybe a little bigger. But the idea is that we will have, you know, a strong quantitative approach that is tightly focused on cost-benefit analysis. I would stress we already do cost-benefit analysis in everything we do, but we hear outside that there is interest in doing more of that, and we are actively pursuing it. Senator Cortez Masto. And the reason why you are doing this is so that it can inform your enforcement and policy decisions, correct? Mr. Powell. Well, yes. And the calibration of our regulations, you know, we want to be able to implement regulations in the least burdensome way we can, consistent with, you know, safety and soundness. Senator Cortez Masto. And the data is key for your ability to do so, correct? Mr. Powell. Very much so. Senator Cortez Masto. And so I am glad to hear you speak about the importance of data collection. I always support that, and that is critical to the work of the Federal Reserve. As I am sure you are aware, the legislation that we have been talking about that is pending in the Senate, it would exempt 85 percent of depository institutions from full reporting of loan data under the Home Mortgage Disclosure Act. Can you speak to how this might impact the ability of the Federal Reserve to properly conduct its obligations under the Community Reinvestment Act and whether the loss of this data might hinder CRA supervisory exams? Mr. Powell. I will be glad to. As I understand it, the CFPB writes the HMDA rules and regulations, and we use that data in what we do, in supervising the banks we supervise, which is a smaller group. In addition to that, we--sorry. I lost my train of thought. What Dodd-Frank did was that it took the base of historical data collection and it significantly increased that. So my understanding is that what is being looked at in a bill is to create a broader exemption just from the Dodd-Frank additions. And so, you know, I think we traditionally get almost everything we need from the historical data, and I think we can continue to work on that basis. Senator Cortez Masto. Right, and that is my concern. The more data, the better. I mean, you are creating a data unit because data is key to your decisionmaking, and my understanding is that the data that is used in the CRA supervisory exams seems to exclude relevant data points. Loans under $1 million are designated small business loans, even if they were not loans administered to small businesses. There is no analysis made whatsoever of whether lending is occurring in communities of color, despite easing accessible data via the Home Mortgage Disclosure Act. And so my question is: Has the Fed considered broadening that criteria in its CRA supervisory exams? And what factors do you think would be helpful in determining whether small businesses, communities of color, and low-income areas are truly receiving the support that the law intended? Mr. Powell. Are we still talking about HMDA data? Senator Cortez Masto. Correct. Mr. Powell. Again, HMDA data is really an issue for the CFPB. They were given authority under Dodd-Frank to write the HMDA regulations, and we generally defer to them in terms of what their view is on that. Senator Cortez Masto. So you do not think that data is going to be informative in what you do with the Community Reinvestment Act and the oversight of that to ensure that that Act is being enforced under the law to protect communities of color, to make sure there is no discrimination, to make sure that the loans are being sent to small businesses, and ensure that the money gets where it needs to go? That data is not going to be helpful for you? Mr. Powell. I do not say that it would not be helpful. What I would say is that, first of all, that is an issue that the CFPB actually has the lead authority on. In addition, we will still have--my understanding is that we will still have under this bill the information that we have traditionally relied upon for just about everything we do under HMDA. So we may not have the additional data from some institutions, but we think we will be able to function. Senator Cortez Masto. Well, let me just tell you--and my time is running out, so I do not have enough time to ask the additional questions that I want to ask you. But let me just say this: As a former Attorney General in the State of Nevada, my concern was discrimination against certain communities of color, and the reason why we increased that data criteria is to ensure there was no discrimination and ensure that the money was going to where it was supposed to be going under the Act and Federal authorities. And so I do not understand why we are rolling back that data and those data criteria if we need--you have said it yourself--to be better informed. You are creating a data unit for analytical purposes to create and collect data. It informs us in everything we do. And so my concern is just that. How can we say we do not want the data when we know it informs every decision that we are making, particularly to ensure the money is going where it is going and there is no discrimination? Mr. Powell. We have been talking about data. Let me take a step back and say that any kind of discrimination by race or gender or any other unfair basis in lending is completely unacceptable, and we are committed as an institution to finding it and using all of our tools to stop it. Senator Cortez Masto. Thank you. I know my time has run out. Thank you very much. Senator Brown. Senator Kennedy. Senator Kennedy. Thank you, Mr. Chairman. Good morning, Mr. Chairman. Mr. Powell. Good morning. Senator Kennedy. Do stock buybacks contribute to economic growth? Mr. Powell. Well, if I can trace that out, when you buy back your stock, the money goes to the shareholder. They lose their stock. They could take that money, and they do with it what they will. They can spend it. They can reinvest it. It does not disappear. So there should be some effect. I have asked this question. It is essentially impossible to really track that on a micro basis, but I would think intuitively it would go back into the economy and either be spent or reinvested. Senator Kennedy. Well, if a company buys back its stock and the value of the stock goes up, then somebody has extra money, right? Mr. Powell. That is right. There would be a wealth effect as well, as you point out. Senator Kennedy. And they could invest that money? Mr. Powell. They could. They could spend it, invest it, and you are right, there would be a wealth effect from higher stock prices, too. Senator Kennedy. And the stock going up is better than the stock going down in terms of economic growth. Mr. Powell. It is, although I am a little hesitant to--you know, I would want to say that it is not our job, as you know, to stop people from losing money or making money in the stock market. Senator Kennedy. Right. In the last 60 days, the bond market has been going down a little bit. What is that telling you? Mr. Powell. Well, I think longer-term interest rates have been going up, and, you know, there are probably many reasons behind that, and I would just offer a couple in my thinking. It is the expectation of higher growth. It is probably the expectation of inflation moving up a little bit closer to our target. It is probably also a realization that growth around the world is quite strong. So we have strong recovery in continental Europe and in Asia, and so, you know, we are not the only game in town now. If money goes to other kinds of safe assets, that will tend to mean higher rates here. But these are all generally positive signs. Senator Kennedy. Could it be a sign of inflation? Mr. Powell. It could be a sign of slightly higher inflation, and we seek slightly higher inflation. Inflation has been below our target since I joined the Fed almost 6 years ago. Senator Kennedy. You talked about us being at or near full employment. We are not at or near the optimum labor participation rate, though, are we? Mr. Powell. The truth is we are not far from the longer-run trend. We have models that--papers published 8 or 10 years ago, and they pretty much tell you that the labor force participation rate will be right about here. That is not really the answer to your question. Labor force participation by prime-age males, for example, has been declining for 60 years. And there may be some good reasons for that, but there are a significant number of reasons that are not good reasons for that. So we as a country---- Senator Kennedy. What are good reasons for that? Mr. Powell. So we may be on our longer-run trend, but the trend is not a great trend. You know, there are many prime-age males, and women, out of the labor force whose lives would be better if they were in the labor force. And, you know, these are not--we do not have the tools to really address that, but it would be---- Senator Kennedy. In 2008, the labor force participation rate was a tad over 66 percent. Today it is a tad over 62 percent. That is not good for the economy, right? Mr. Powell. It would be great to have labor force participation at a higher level, as most advanced economy countries do. Our labor force participation rate is now, you know, not even at the median of comparably wealthy countries. Senator Kennedy. Right. And why is that? Mr. Powell. It really is this trend of prime-age workers leaving the labor force. A lot of that burden has been borne, as Senator Cotton was pointing out, by people with high school educations and below, the less skilled and lower-wage jobs. And it has been going on a long, long time. It is, as I said, a 60- year decline. Senator Kennedy. But why, in your opinion? Mr. Powell. I think it probably has to do with, you know, the evolution of technology. It certainly has to do with the flattening out in the U.S. educational attainment. U.S. educational attainment went up for many, many years, and then it started flattening out in the 1970s. And right about that time, U.S. wages flattened out, and labor force participation starts to get weak. So we kind of reached a point as a country where we could not increase educational attainment, and really many things started happening right about then, the stagnation of median incomes, for example. Senator Kennedy. If we could jack the rate up to pre-2008 levels, that would be an enormous stimulus to the economy, would it not? Mr. Powell. It would. And, of course, there is an underlying trend, too, of the aging of the population. So even though older people work more than they used to after the crisis, older people still work less than younger people. So as the population ages, that is going--that is why labor force participation goes down 25 basis points each year. Senator Kennedy. Thank you, Mr. Chairman. Thank you, sir. Chairman Crapo. [Presiding.] Senator Warren. Senator Warren. Thank you, Mr. Chairman. And it is good to see you again, Chairman Powell. As you know, a few weeks ago, on Chair Yellen's last day in charge, the Fed issued a consent order against Wells Fargo prohibiting the bank from growing any larger until it made certain improvements. Now, the Fed also effectively forced Wells to remove an additional four board members this year. I have pushed the Fed for real accountability on Wells Fargo and its board for repeatedly cheating its customers, and I was glad to see the Fed take action. But I want to understand how the Fed intends to enforce the consent order now that you are in charge. The Fed requires Wells to submit two plans for approval by early April: one on improving the effectiveness of the board and one on improving the board's risk management practices. This is not clear from the order. Will the Fed Board of Governors vote on whether to accept these plans? Mr. Powell. So we have delegated that approval, I believe, to the head of Supervision, but, of course, that will---- Senator Warren. Your staff? Mr. Powell. But that will take place--I assure you that will take place in serious consultation with the Board. Senator Warren. Consultation, but the Board is not going to vote on this? Mr. Powell. That is not the plan. Senator Warren. Well, you know, I do not understand this. The Fed has issued a major unprecedented consent order against one of the biggest banks in the world, and the Fed Board, the people who are actually appointed by the President and confirmed by the Senate, are not going to vote on whether the order is actually being followed? Mr. Powell. Well, of course, we did vote unanimously on the measures themselves. Senator Warren. No. Whether or not the order is actually being followed, because that is the big question here. In my view, staff is not good enough, Chairman Powell. Fed Board members are supposed to make the big decisions, and Fed Board members are supposed to be accountable for these decisions. Will you consider requiring a vote of the Fed Board before these plans are approved? Mr. Powell. Yes. Senator Warren. Good. Thank you. I appreciate it. The next steps it that an independent third party must review Wells' implementation of these plans by the end of September. Will you commit to making that independent review public, redacting any confidential supervisory information that is necessary? I think the public deserves a chance to understand how Wells is working to fix the mistakes that it has committed. Mr. Powell. I cannot make that commitment to you without discussing it with my colleagues and with staff who are implementing this thing. Senator Warren. Will you---- Mr. Powell. I will look into it, yes. Senator Warren. Will you look into it? Will you urge your colleagues to consider making this public? Mr. Powell. If it can be made public---- Senator Warren. I am fine about redacting confidential supervisory information. But my view here is that the American public, given all that Wells has done, the American public has a right to see it, and all of those Wells customers who were cheated have a right to see whether or not Wells is actually following through on its promises. You can see why some people might lack a little confidence in that? Mr. Powell. Right, so we will--I will look at that, and if there is a way to do it that is faithful to our obligations and our practices, then---- Senator Warren. Thank you. Good. And, last, the consent order says that the growth restriction remains in effect until Wells Fargo ``adopts and implements'' the plans that were approved by the Fed. So I want to be really clear on this. To lift the growth restriction, the Fed needs to see that the plans have been fully implemented, right? It is not enough that Wells has taken some preliminary steps toward implementing the plans. Is that right? Mr. Powell. No. I do not think that is right. I think the thought was that once we have approved the plans and they begin to implement them, we see them on track, the growth restriction could then be addressed. No guarantee there, but we would then be prepared to look at it. Senator Warren. You know, I am actually--then tell me, how much progress along that line is enough to remove the growth restriction? Mr. Powell. Well, I think, again, we will have to be happy with the plan itself. We will have to be assured that the company has made these really significant measures and suffered, you know, a significant period of growth cap. And, you know, we will not lightly lift it, but I think that is our understanding of how we are going to do it. Senator Warren. You know, the growth restriction is your really big stick here, and I hope that you will not consider lifting it just because Wells makes some marginal progress. Wells should fix its problems before it is permitted to grow any bigger. The consent order sent a powerful message to big banks that there could be real consequences, including consequences for senior officials if they break the law. But that message will be lost if the Fed does not enforce the order strictly and show the public and the banking industry that they mean business. Thank you. Thank you, Mr. Chairman. Chairman Crapo. Senator Tillis. Senator Tillis. Thank you, Mr. Chairman. Chairman Powell, welcome. Thank you, and our congratulations on your confirmation. Can you just explain--because I was watching a lot of the hearing in my office before I came up here, and you talked about global slack a couple of times. Can you explain to me what that really means? Mr. Powell. The thought is that it has become over the last 30, 40 years during our adult lifetime possible to make just about anything just about anywhere. Technology has enabled that, and rising living standards and capabilities in emerging market countries has created that opportunity. And the thought is that that capacity outside the United States is in a sense a form of slack so that if you are, for example, a worker bargaining for higher wages, you are held back by this overhang of knowing that, you know, you can lose your job in that kind of thing. The issue is that, you know, globalization, most measures of globalization sort of plateaued out at about the time of the crisis, and yet it does not--that story makes a lot of intuitive sense, but it does not actually link up very well with the path of wages over the past few years. So it is something we have looked at, and it gets written about a lot. Senator Tillis. Actually, I think that is a very important point because there is a lot of latent productivity that could be globally deployed that, as we talk about wages and we want to do a good job of moving wages in the right direction, they reach a certain point to where we could plateau again because that capability to deliver could go outside of our jurisdiction. I think that is a very important point. On productivity, a couple of years ago I met with former Chair Greenspan, and he was talking about--the one thing that he was most concerned with at this time was the kind of static growth in capital investment, and he was saying, you know, a healthy percentage of GDP is somewhere around 8 percent, and we were trending down in the 4 percent range. Do you view that as a key indicator that we have to increase? And what, if any, trends are you seeing that give you some sense that we are getting to a healthy percentage of capital investment as a percentage of GDP? Mr. Powell. We do not know how to predict productivity growth very well, but we do think it links up over time with things like investment, investment in people but also investment in plant and equipment, R&D, and that kind of thing. Unfortunately, what the financial crisis did was it generated very weak demand conditions for a long time, and that created weak investment, and that itself then furthers weak demand. So it is kind of a bad, self-reinforcing cycle that we had there for a while. That is why it is so heartening to see investment, business investment, moving up last year and perhaps continuing a strong performance this year, is our expectation. It is ultimately only productivity that raises living standards, and investment is one of the keys, not just investment in plant and equipment, but certainly in the skills and aptitudes of our people as well. Senator Tillis. Do you get a sense that what we have done with tax reform is a potential positive contributor to seeing that investment move up? Mr. Powell. I do think it is a potential positive contributor in the sense that when you lower the corporate tax rate, you lower the user cost of capital. You know, like you, I have spent a lot of time working with private sector companies, and that is one of the factors they consider. It is not the only factor. But lower user cost of capital is something that should spur more investment over time, and that should add to productivity. Hard to quantify, but I think it is there. Senator Tillis. You and I talked about this once or twice in my office, and in my remaining time, I would like for you to talk a little bit about the job that Mr. Quarles has and post- crisis regulatory right-sizing, I would be interested in your thoughts on Basel IV and regulatory tailoring. I know people asked you--I was watching in my office. On the Committee I think some asked you about the banking regulatory reform bill that passed out of here, which provides some regulatory and I think responsible regulatory relief for a portion of our banking sector. But what more can we expect to see that are within your lanes and within your authorities on right-sizing regulations? The other thing I remember with Mr. Greenspan, he said the most troubling job creation growth that he saw at that time-- this was 2 or 3 years ago, post-crisis, about 300,000 jobs that had been created under the tide of regulatory reform, which in my world that is by definition a nonproductive job. So I am kind of curious to see what kind of--how are we going to get to a more tailored--I think Senator Perdue asked this question. How are we going to get to a more tailored, more reasonable regulatory burden on this industry that still manages the risks that you have to be concerned with? Mr. Powell. I think our concern is to maintain and strengthen but make more efficient the big improvements we think we made after the crisis--that is, higher capital, higher liquidity, stress testing, and resolution planning--and those are going to apply and continue to apply to the largest, most complex institutions in the strongest form. Our effort then is to tailor that at every level as we move down and make sure--and we did a lot of tailoring along the way, but we are now going back through each level to make sure that we have got that tailoring just about right. Not everything that we need the eight systemically important institutions to do needs to be done by every bank, and many of them have much simpler business models that are much more traditional banking, and different regulatory strictures should apply to those companies. So it is something we are working on. Senator Tillis. Mr. Chairman, the only thing I would say, as somebody who worked in a firm that helped prepare CCAR and stress tests results, it still is unimaginable to me how a properly tailored environment could result in 60,000- and 100,000-page submissions. There has got to be a better way to do it, even at the high end of the spectrum, and I just look forward to you all continuing to look at it and manage the risk but right-size it. Chairman Crapo. Senator Jones. Senator Jones. Thank you, Mr. Chairman. Chairman Powell, thank you for being here and welcome. I would like to go back to a couple questions. I think it is pretty obvious that folks on the Committee are concerned about wage growth in addition to unemployment. You said in your testimony that with the economy growing the way it is, you expect to see wage growth continue, but that has been on a fairly modest trend over the last few years. So you see that wage growth increasing over the next couple of years as opposed to the very modest trend that we have seen? Mr. Powell. That is my expectation, Senator. As we have moved from 10 percent unemployment down to 4.1 percent, we have seen some gradual increase in wages, but, frankly, not what I would have seen. I think as you look back over the last 3 or 4 years, you can kind of tell the story about why that was the case. Now we are at 4.1 percent unemployment, labor force participation is higher relative to trend than it was, and I guess I would have expected to see higher wages now. And I do continue to expect them to rise as the labor market continues to tighten. Senator Jones. Well, assuming the economy continues to grow as you expect, are there factors that we need to be on the lookout for that could prevent the wage growth that you would anticipate as opposed to the very kind of--not flat but very, very modest wage growth? Are there factors that we need to be concerned about or looking about in the future? Mr. Powell. I think ultimately sustainable wage growth is a function of productivity. Wages should equal, you know, inflation plus productivity. And so to get wages to go up sustainably over a long period of time, we need higher productivity. That is a function of investment in people, investment in plant and equipment, R&D, all those things that drive us to be more productive. That is really the only way to have sustainable wage growth. Senator Jones. OK. Well, that kind of leads me to another area, and I do not want to misrepresent your testimony of the other day, so if I characterize something wrong, just please tell me. It will not be the first time I have been told I am wrong about things. But I think you said on Tuesday to some extent that limiting immigration could limit our productivity growth in the coming years. Chairman Yellen, your predecessor, also told this Committee in the past that limits on immigration could limit GDP growth. And so without putting you on the spot to try to get you to wade into very specific hot-button issues that we have got here, can you talk a little bit about why immigration may boost productivity and GDP growth? Mr. Powell. So to go back to what I was saying, you can think of growth being a function of growth in the labor force plus productivity. Those are really the only two ways the economy can grow--more hours worked and more output per hour. Now, if you look at our labor force growth, it used to be 2, 2 \1/2\ percent, you know, 25 years ago, 30 years ago. Now it is about 0.5 percent as the population ages, and some part of that 0.5 percent is immigration. So I think those of you who have the decision rights around immigration, this is a factor that you ought to consider. It does not directly affect productivity, but it affects potential growth through the labor force. Senator Jones. All right. And I do not know if this would be an appropriate question, but is our current immigration policy in any way contributing to the lack of wage growth, as you see it today? Mr. Powell. You know, immigration is one of those issues that we do not really have authority over, and, you know, I can speak to it as it relates to things like potential growth, but I am loath to get into current policy and things like that. I think I will follow my predecessors in sticking to our knitting on that. Senator Jones. All right. I kind of thought that would be the answer, but I was going to ask anyway. Going back to wage growth, what can we do, as wage growth continues, to try to decrease the disparities that women have in the labor force, that the minority population, you know, whether they be Hispanic or the African American population, have in the labor force? Mr. Powell. Any kind of discrimination in our society, in our labor force, is, of course, unacceptable and not something that we can tolerate. Having said that, you know, we do not have the tools, broadly speaking, to address those things. The tools we do have, though, the biggest thing we can do is to take seriously our statutory mandate of maximum employment. As you can see, when we go into a recession, it is the most vulnerable populations whose unemployment rates go up the fastest and the highest, and you can see that they come down the most in the recovery. They tend to not get down as low as people with college degrees and things like that. But at the same time, that is really how we can contribute. Senator Jones. All right. Last, there were comments made in your testimony on the House side concerning the appropriations process and potentially having Congress appropriate your budgets for nonsupervisory type activities of the Fed, and I would like your quick opinion on that, and also how a potential Government shutdown might affect that should you have that appropriations--I have been fairly critical of the way that the budgetary process here has been taking place, and so we have had five--you know, we have had a couple of shutdowns in the last couple of weeks. How would that have affected your ability to supervise? Mr. Powell. Legislatures all around the world, governments all around the world have seen fit to give central banks an independent source of funding, and I would say that that is a wise decision. The things that we do may not always be politically popular, and I think it is wise to give us just a little bit of degree of separation. Of course, we are transparent; of course, we are accountable. And that is not just for monetary policy. Here in the United States, all three of the bank regulatory agencies have an independent source of funding. This is a decision for Congress, that Congress has made for the last 40 years. It has not stopped Congress from providing, you know, appropriate oversight of our activities and regulations. So I would just say that I do not see what problem we are solving here. Senator Jones. It seems to be working. If it is not broken, do not fix it. Thank you, Mr. Chairman. I appreciate that. Chairman Crapo. Thank you. And before I turn to Senator Moran, I would note to our Members we have a series of three votes being started in about 5 or 6 minutes, and we have four speakers left here. If you are all very concise and stick to your 5 minutes, I think we can probably wrap this up at the tail end of the first vote and go over. So please pay attention to the clock. We will not be able to go over and come back because of the three votes. Senator Moran. Senator Moran. I am glad I am next, Mr. Chairman. [Laughter.] Chairman Crapo. Five minutes. Senator Moran. Mr. Chairman, thank you very much for joining us today. You are new at your job. I would tell you that, listening to you in previous settings and today, you are reassuring, seemingly competent, perhaps exactly the right thing we need at the Federal Reserve in today's economic and political world. So thank you very much for your service to the country. I hope I do not have to change my comments about you in the future, so we look forward to working with you. Let me go through three things. A Treasury report recently indicated that the current exposure method, CEM, may not appropriately measure the economic exposure of a listed options contract, and that a risk-adjusted approach for valuing options for purpose of capital rules such as weighing the options by their delta might be in order. I think this issue need a quicker fix, and perhaps there is a long-term fix, but are you in a position to make the changes that you at least at times have said it is important to make? Mr. Powell. Yes, we are, Senator. I think we are in the middle of a changeover from CEM to SACCR, which is the other way to do it, and we are also looking at the calibration of the enhanced leverage ratio. Both of those things should help. Senator Moran. What kind of timeframe do you believe you are on? Mr. Powell. I would be loath to give you an exact date. Why don't we come back to your office on that? But this is an active thing, I think fairly soon. Senator Moran. Very good. I would welcome the follow- through. Tomorrow I will meet with Esther George at the Kansas City Fed, and I look forward to that conversation. Part of what I will talk to her about is agriculture and particularly the rural economies of our region. Let me highlight for you something that I think is important for you in your regulatory role to remember. Farmers and ranchers often come to me and ask about the safety net that comes from a farm bill. Farm policy is designed to help farmers and ranchers in difficult times, generally difficult economic times. We are experiencing those times now. The challenge is significant for someone trying to earn a living in agriculture. But there is a safety net that I think is often forgotten, and that is the relationship between the lender in their community, a relationship banker, a financial institution, and that family farmer. And I just want to highlight once again the importance that we do not get to the circumstance in which the examiners, the regulations prohibit bankers from making decisions about lending or access to credit by agriculture based upon some very restrained, restrictive method. Let the issue of character, relationship, history between what is often a family owned bank and a family farm continue. That is one of the most important safety nets in difficult times, the relationship between our lenders and our bankers, and where I see the threat of that diminishing or being eliminated is through the regulatory process in which a bank is written up for making a decision that they feel comfortable with but a regulator may not. Any response to that? Mr. Powell. I will just take that very much to heart, Senator. Senator Moran. Thank you very much. And then, finally, let me ask a question about education. If we are looking for economic growth, it seems that a highly motivated, trained, and educated workforce is a significant component of that. Do you have in your understandings of the circumstance that we face in the employment market where we should be focusing our support for education or where we should be emphasizing for students and adults--those two things are not different--for those who need an education and additional training, where we ought to be focusing our resources to meet the economy's needs for that highly motivated, educated, and trained workforce? Mr. Powell. You know, I am probably not the right person to get down into the details of exactly where to focus. I will just say, though, that my view is that in the long run the only way we can sort of win in the international competition is by having the best educated, most productive workforce in the world. There is really no way to hide from that requirement, and that is education. It is also training. It is not just college education. It is also, you know, apprenticeship programs and that kind of thing, which also can be very successful. Senator Moran. Tax rates are an important component in making business decisions, but meeting workforce requirements is there as well. Is that true? Mr. Powell. Yes. Senator Moran. Thank you. Mr. Chairman, thank you. Chairman Crapo. Thank you. Senator Warner. Senator Warner. Thank you, Mr. Chairman. Let the record show your timeliness in starting meetings meant that me being 6 minutes late really was---- Chairman Crapo. I noted that and felt bad for you. Senator Warner. It was quite a challenge. But I wanted to stay because I wanted to ask the Chairman two very important questions. Let me preface this by saying, you know, in my first year here, one of the most important pieces of legislation I have ever worked on was the Dodd-Frank legislation. I think Dodd-Frank, for all its challenges, has made our system remarkably stronger. But we are 8 years later, and there is a broad, bipartisan group of us who are going to debate on the floor next week legislation that would make some modifications. In this legislation, S. 2155, we have not changed the requirements that the Fed perform annual Dodd-Frank stress tests on banks above $250 billion. I think that is terribly important to maintain. We do give the Fed, after an appropriate period to do a rulemaking, the ability to look at those banks between $100 and $250 billion--and this is very important--to continue to undergo stress tests on a periodic basis. My view is that stress testing is the most important prudential standard and that frequent stress tests are some of the best tools we have to prevent another financial crisis. Can you give us your views on stress testing, including how rigorous they should remain and how frequent they should remain, on banks between $100 and $250 billion in assets if this legislation passed? Mr. Powell. I would be glad to. Let me just echo what you said. We do believe that supervisory stress testing is probably the most successful regulatory innovation of the post-crisis era. We are strong believers in this tool, including for institutions of $100 to $250 billion. So it would be our intent, if this bill is enacted, to continue, that these institutions would continue to have meaningful, strong, regular, periodic stress tests, frequent stress tests. And, again, we see it as a very important tool for these institutions. Senator Warner. I hope, again, folks will be listening to this. We are not touching anything on the largest institutions in terms of the annual stress test on folks above 250, and as the Chairman of the Fed has indicated, even amongst those banks between 100 and 250, we are still going to have frequent, periodic stress tests that are still going to be strong, and the legislation lays out in some detail some of the requirements that we would have in those stress tests. My last question is this: In terms of overall enhanced prudential standards, we do move in this legislation from $50 billion to $100 billion. But we give you then in the group of institutions between $100 and $250 billion an 18-month period to essentially tailor those standards more appropriately. And as you have indicated, we already have an institution below $250 billion that still qualifies as a SIFI. So I would just like to say again for the record, for folks who are watching and who will watch the debate next week, that you will take this responsibility of this 18-month rulemaking and do a thorough examination of the banks that fall in that category, and those that are claiming that somehow all enhanced prudential regulations of banks that fall into that category are going to suddenly magically disappear sure as heck is not the intent of this individual in terms of that legislation and I hope is not the intent of the Fed. Mr. Powell. What I see us doing is creating a framework--we will be looking at all the institutions that are in that area and all the risks that might arise in banks between 250 and 100, and we will create a framework for assessing where systemic risk might be, where there might be regional risks. We will look at everything. And that framework will then be in place in 18 months, and if there are institutions that are currently in that population or that over time become systemically risky or even risky to themselves, the way the legislation gives us a lot of flexibility to do that, then we will have that in place. And as you point out, we have not been shy about finding systemic risk under 250. We are perfectly happy to do that. So we will feel comfortable doing this job, I believe. Senator Warner. Listen, I look forward to a fair and spirited debate next week. A lot of Members have different views. But I think it is very, very important when people go about talking about doing away with stress tests or eliminating any kind of enhanced prudential regulations, that is not our intent. There may be some tailoring that goes on in this new category, but particularly for the larger institutions, status quo is going to remain. Thank you, Mr. Chairman. Chairman Crapo. Thank you. And Senator Heitkamp is next. I will let our Senators know we are 5 minutes on our way to the vote, so we have got to really go. Senator Heitkamp. Senator Heitkamp. Thank you. I just want to follow up a little bit on HMDA and clarify what--I was not able to attend because I had other hearings, but what I understand has been discussed has been a clarification from you that nothing in this bill that will be debated next week undermines the Fed's ability to enforce fair lending laws. Is that correct, Mr. Chairman? Mr. Powell. That is generally right. CFPB really writes these rules, and you should seek comment from them, if you like. Senator Heitkamp. But you would acknowledge that our bill preserves the traditional HMDA data collection on race? Mr. Powell. It does, yes. Senator Heitkamp. So while the bill does not undermine fair lending, it does meaningfully reduce substantial costs imposed on small lenders from HMDA data collection. I think this is the motivation. These costs can reach into the hundreds of thousands of dollars per year. One small institution estimates that the cost of HMDA quality assurance for their bank equals approximately $400,000 per year and involves five associates. So when it comes to regulation, we have to look at the benefits and the costs. One of the things that I think I just want to impress on people is that when you do not respond to these kinds of concerns, legitimate concerns from small lenders, there is a resentment to the overall policy that, you know, we tend to throw the baby out with the bath water because of the level of frustration. Wouldn't you agree that we could, in fact, reduce costs to small lenders and still maintain the protections provided by HMDA? Mr. Powell. Yes, I do agree. Senator Heitkamp. So when we are looking at going forward, I think it is important that we have a very spirited debate about this, but I think it also is very important that we put it in perspective and that we not exaggerate the results here or the purpose of this bill. And so, Chairman Powell, just one question, and I know you have been answering a lot of questions about the economy, writ large, but I wanted to just get your sense of economic growth as we look at--again, no big surprise I am going to ask a question about trade. I know you guys do not always like answering those questions. But it seems to me that we are now looking at a potential of tariffs being imposed on aluminum and steel for which there will be retaliation. We have, in fact, retreated somewhat from the commitments on NAFTA, and we no longer have a pathway into TPP. How concerned are you about the impacts of this trade policy of this Administration on our opportunity for economic growth long term? Mr. Powell. I will not comment directly on the Administration's policies, but I will say about trade that I think the record is clear that over long periods of time for many, many countries, trade is a net positive. It spreads productivity. It forces our companies to compete. It gives businesses and people the ability to buy and sell things in the world market. So, overall, the studies all show and theory would suggest that it is a good thing. But the benefits do not fall equally. There can be communities, there can be individuals who are negatively affected by trade, and we have seen a fair amount of that. I think it is more of that than probably was expected. And I think it is important that we address that as well so that you can sustain public support for trade. I think, you know, as Chairman Bernanke said, the tariff approach is not the best approach there. The best approach is to deal directly with the people who are affected rather than falling back on tariffs, but, again, these are not measures that are consigned to us. They are really for you and for the Administration. Senator Heitkamp. But I think that these are measures that are going to have an effect on the kind of economic analysis that you do that is going to lead to monetary policy. I do not think there is any doubt that trade will have a dramatic impact on economic growth, and I am very, very concerned about making sure that our trade policy is consistent with economic growth and also very concerned about the speed at which systems today can react to trade policy as opposed to maybe 20 or 30 years ago when it was kind of, you know, plodding along. It was OK if the WTO took 10 years. Today I do not think that is true, and I do not think it is true that it is OK that it takes 10 years to get back into TPP. I think things will move a lot quicker, and they are going to have--it is going to have a dramatic effect on our ability to be competitive in this country and to encourage investment and growth. Thank you, Mr. Chairman. Chairman Crapo. Thank you. Senator Reed. Senator Reed. Well, thank you very much, Mr. Chairman. And thank you, Mr. Chairman, for being here today. One of the things that we have noticed over the last many years is the decline in workforce participation of prime-age men. In fact, the Kansas City Fed has done a lot of good analytical work on this. One reason is automation. Those are particularly the types of jobs, it seems, that are easily replaced by some type of technology--machines and computers, et cetera. As we go forward, I would assume that that trend will continue, and it raises the question of how does the Fed plan to forecast these effects of automation with your mandate for full employment? We could find ourselves technically at full employment but with millions of Americans who are out of luck and out of jobs and technically not in the workforce. How are you going to deal with that? Mr. Powell. The long history of this, as I am sure you know, is technology comes in and it can displace people, but ultimately if society--if the people in society have the skills and aptitudes to benefit from technology, then the advent of technology lifts all boats. So for 200 years really, since the Industrial Revolution, we have faced this problem, and over longer periods of time, it has always been the case that technology lifts all boats in a way. Now, I do not think there is any law of nature that says that that has to continue, and the reason--the part of it that we control is skills and aptitude of our labor force. To the extent people have the skills and aptitudes to benefit from technology, to operate technology, then they will benefit from it. And to the extent they do not, it is people with the high school degree and less who have really experienced the worst of this. You know, that is where wages are low, that is where labor force participation is low, all those things. So it is a really easy thing to say and a really hard thing to do, but it comes down to education. Senator Reed. Do you think we are doing enough in terms of education, in terms of Federal, State, local investment? We just saw West Virginia shut down for 2 days because their teachers felt they were not being compensated well enough, and we have a situation I think in Oklahoma where they are only going to school 4 days a week because of budget problems. So I agree with you, education is a key. We just do not seem to get that message. Mr. Powell. There is nothing in the productivity data or any other economic data that suggests we are handling this problem well. All around the world, others are catching up and passing. Senator Reed. And exceeding us. Mr. Powell. Yes. Senator Reed. Yes. One other point, and this is sort of a passionate issue with me, and that is the Military Lending Act. The Federal Reserve has the responsibility among many agencies to enforce it. The Department of Defense promulgated regulations in 2015 which I think are tougher. It essentially says you cannot charge someone in uniform over 36 percent interest. That seems to me a pretty fair rule. And having just come back from Somalia and being with Special Forces people and their families back home, I think this has to be enforced aggressively. Can you tell me what you are doing to make sure that your responsibilities under this rule are vigorous and proactive and relentless? Mr. Powell. Well, we share your view about the importance and value of enforcing this, I assure you, and this is one where--as I think we have discussed, this is a very important regulation, and it will get aggressive enforcement from us. Senator Reed. And you will get the message out to your regulated entities that this is really at the top of your list? Mr. Powell. Yes, we will. Senator Reed. Thank you, sir. Chairman Crapo. Thank you. Senator Van Hollen. Senator Van Hollen. Thank you, Mr. Chairman. And welcome, Mr. Chairman. Good to have you here in the Banking Committee in your official capacity. I know there has been some discussion about stock buybacks. Stock buybacks are primarily a way for corporations to increase the share price. Isn't that right? Mr. Powell. Yes. I mean, it works in that way, yes. It is a way for companies to distribute cash to shareholders as well. Senator Van Hollen. Exactly. So I do think it is worth pointing out that since the tax bill was passed, which was in large part advertised as a way to dramatically increase wages of workers--in fact, the predictions were $4,000-a-year pay increases. We have seen the overwhelming amount of the money that has gone to corporations used for stock buybacks, in fact, $200 billion of stock buybacks just in the first 2 months of this year alone, including a $20 billion stock buyback from Wells Fargo, a major financial institution that we have had a lot of discussion about in this Committee, primarily because of a violation of consumer protection issues. I do think it is also worth pointing out that over 35 percent of the stock owned is actually owned by foreigners and foreign entities, which is why the Prime Minister of Norway, when she visited a short time ago, thanked President Trump for the tax bill because it dramatically boosted the stock value of the Norwegian Government and its holdings. But it means money not going into the economy, generally speaking, direct investment by those corporations. I wanted to ask you about the issue of cybersecurity and the impact of cyber attacks on our overall economy. We have seen big banks that have been victims of cyber attacks like JPMorgan. I believe the Fed in the past has been the victim of some cyber intrusions. And the Council for Economic Advisers just put out a report indicating that malicious cyber activity cost the economy between $57 billion and $109 billion in 2016-- a big number--and the Chairman of the Committee has spent a lot of time focusing on this issue, and we had a hearing specifically on the Equifax breach. This evening, I am going to be teaming up with our Maryland State Attorney General, Brian Frosh, to have a forum on consumer protection. Seven hundred people have already signed up for this, and we expect many of them to have been victims of the Equifax breach. My understanding is there has been reporting, first of all, just this morning, that Equifax found an additional 2.4 million people impacted by the breach, and there was also a February 4th report saying that U.S. consumer protection official puts Equifax probe on ice, and the article says that the CFPB, under the leadership of Mr. Mulvaney, has ``rebuffed bank regulators at the Federal Reserve, the FDIC, and the OCC when they offered to help with onsite exams of credit bureaus in connection with the Equifax investigation.'' Can you confirm whether or not the Consumer Financial Protection Bureau has rebuffed offers by the Fed to help them get to the bottom of the Equifax---- Mr. Powell. No, I cannot. I had not heard that. Senator Van Hollen. If you could get back to us--I mean, this is a publicly reported document. Would you be willing to get back to us and let us know, confirm or say one way or another? Mr. Powell. Sure. Senator Van Hollen. I appreciate that very much. In terms of the impact on banks, you have the direct impact--banks are also impacted when those that have less cyber protections--you know, Target, for example--are hacked, and as a result of that, the banks have to pay the credit card cost directly to consumers. And then they have got to go recoup that money from other entities. And so one of the things I have been focused on and the Committee has talked about is to try to get the SEC to increase its oversight with respect to cyber attacks and especially their responsibilities to disclose to the public in a timely manner. And I would just ask you if you could work with us and the other regulators in trying to come up with disclosure requirements that provide the public with adequate notice of these cyber breaches so they can protect themselves from the cost, not just the public but banks and others as well. I would appreciate that if you could do that. Mr. Powell. We would be glad to. Senator Van Hollen. Thank you. Mr. Powell. Thanks. Chairman Crapo. Thank you. And, Chairman Powell, Senator Brown has said---- Senator Brown. I will be very brief, respecting your time and our getting to the vote. I heard you say a number of times in response to questions that there will be no relaxing of the rules for foreign banks, and I want to just--I just do not agree with that. A Treasury report last year, the Administration made it clear it wanted to lower standards. Secretary Mnuchin testified, sitting where you are right now, in January that he believed the bill would accomplish the goal. Paul Volcker has said it does. Sarah Bloom Raskin said that there will be less regulation of the foreign banks. Antonio Weiss said the same. I had an amendment during the markup on that issue, and it was defeated. Foreign banks lobbied against that amendment. The bill's supporters rejected it. I have three very related questions. I will ask the three consecutively, and you can either answer them now or get them in writing to me, if you would. Promises she will push back against foreign bank lobbyists and Secretary Mnuchin to ensure that no foreign bank with more than $50 billion in U.S. assets will benefit from any deregulation. I would like that promise from you that you will push back against foreign bank lobbyists and Secretary Mnuchin. I would like to know what you plan to do when a foreign bank sues the Fed for not treating it equally to a U.S.-based bank that falls in that 50 to 250 category. And I guess my final question: Wouldn't it better to amend this bill to avoid litigation and make sure it does not benefit large foreign banks? So if you want to respond now, or you can respond in writing. Mr. Powell. Why don't we take those under advisement and give you a clear response in writing quickly. Senator Brown. Fair enough. OK. Thank you, Mr. Chairman. Chairman Crapo. All right. Thank you. And that does conclude the questioning. Again, I want to thank you, Chairman Powell, for being here and for the service you are giving to our country. For Senators who wish to submit questions for the record, those questions are due on Thursday, March 8th, and I encourage you, Chairman Powell, if you receive additional questions, to respond to them promptly. I also apologize that because of the pressure we have on the vote I am going to have to conclude this hearing and then run to the floor, so I will not be able to visit with you privately or more personally after your testimony, but we will have plenty of opportunities to do so. With that, the hearing is adjourned. Mr. Powell. Thank you, Mr. Chairman. [Whereupon, at 12:06 p.m., the hearing was adjourned.] [Prepared statements, responses to written questions, and additional material supplied for the record follow:] PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO Welcome, Chairman Powell, for your first appearance before this Committee as Chairman of the Federal Reserve Board of Governors, and congratulations on your confirmation. Today's hearing is an important opportunity to examine the current state of monetary and regulatory policy. Over the past few years, the Humphrey-Hawkins hearing has often served as an opportunity for Members of this Committee to review the new regulations imposed in the wake of the financial crisis. While I did not always agree with former Chairman Bernanke and former Chair Yellen, I appreciated their willingness to engage with the Committee and discuss possible improvements to the regulatory regime. These discussions were helpful in building common ground for our banking bill, S. 2155, particularly for provisions like the threshold for enhanced standards under Section 165 of Dodd-Frank. This bipartisan bill now has 13 Republican and 13 Democratic and Independent co-sponsors. The bill was the result of a thoughtful, deliberative process over several years that included hearings, briefings, meetings and written submissions from hundreds of commentators and stakeholders. The primary purpose of the bill is to make targeted changes to simplify and improve the regulatory regime for community banks, credit unions, midsize banks and regional banks to promote economic growth. Economic growth has been a key priority for this Committee and this Administration this Congress. The U.S. economy has failed to grow by more than 3 percent annually for more than a decade, by far the longest stretch since GDP has been officially calculated. But now, there are widespread expectations that growth is finally picking up. According to the January FOMC meeting minutes, the Federal Reserve increased its expectations for real GDP growth going forward, after 4th quarter growth exceeded expectations. The Fed cited the recently enacted tax reform legislation as among the reasons economic growth is expected to rise. In addition to tax reform, President Trump's recently released Budget and Economic Report both emphasize that regulatory reform is a key component of rising productivity, wages and economic growth. By right-sizing regulation, the Committee's economic growth bill will improve access to capital for consumers and small businesses that help drive our economy. Now that many are predicting a pickup in growth, a number of commentators have expressed sudden concerns about the economy overheating. While the Federal Reserve should remain vigilant in monitoring inflation risks, we also must continue to pursue commonsense, pro- growth policies that will lead to increased innovation, productivity, and wages. With respect to monetary policy, I am encouraged that the Federal Reserve is continuing on its gradual path to monetary policy normalization. The Fed has begun to reduce its balance sheet by steadily decreasing the amount of principal it reinvests as assets in its portfolio mature. I look forward to hearing more about the Fed's monetary policy outlook as part of Chairman Powell's testimony today. I also look forward to hearing about the Federal Reserve's ongoing efforts to review, improve and tailor existing regulations. I know that you are working with Vice Chairman for Supervision Randy Quarles on those issues. Vice Chairman Quarles has done an excellent job so far, and I urge Congress to confirm him for his full term on the Board as soon as possible. ______ PREPARED STATEMENT OF SENATOR SHERROD BROWN Chairman Crapo, thank you for holding this hearing. Chair Powell, welcome back to the Committee, and for the first time in your new role. You are leading the Federal Reserve at a crucial time, as the Fed normalizes interest rates and shrinks its balance sheet. The country is in its ninth year of economic recovery, though 2017 marked the worst year for job creation since 2010. And the recovery has not reached everyone. Wage growth has been slow and labor force participation has barely improved since 2014. Nine years of job growth have still not done much to narrow income inequality or address employment disparities. Nationwide, the unemployment rate for black workers is double that for whites-equal to the gap at the start of the civil rights movement. Looking more broadly, labor force participation is down for all minorities. Statistics show that large pockets of people are waiting to share in the benefits from the recovery. Instead of addressing their problems, Republicans are working hard to help Wall Street banks that are raking in profits. Despite the fact that we are 9 years removed from the recession, this Administration has embarked on a substantial fiscal stimulus, permanently slashing the corporate tax rate and providing the largest benefits to the wealthiest Americans. Of course, Wall Street, which is making record profits, will do well. Instead of fighting for workers and making sure labor market opportunities are shared among those who have been struggling, Republicans would rather push for tax cuts for corporations and the wealthy. Those tax cuts are not free-they will add over a trillion dollars to the deficit. The once and future deficit hawks on the other side of the aisle were more like marshmallow Peeps when confronted with tax cuts for the wealthy. The ink was barely dry when we began to hear calls for spending cuts that will hurt families across the country-the so-called ``entitlement reform'' that everyone should understand means cuts to Medicare, Medicaid, and Social Security. The claim was that it would all be worth it, because workers would benefit. I'm happy for any Ohioan who gets a raise, but we have seen how banks and corporations have responded to the tax cuts, and the numbers are staggering. In January, Wells Fargo announced a $22.5 billion stock buyback-288 times what it will spend on pay raises for its workers. This year, companies will start disclosing CEO-to-worker pay ratios, as required under the Wall Street Reform Act. Honeywell, which announced an $8 billion stock buyback in December, just disclosed that its CEO is getting a 61 percent pay raise and makes 333 times the average worker's pay. It's pretty simple--for each pay raise or bonus for workers, companies are often spending a hundred or two hundred times as much on stock buybacks and executive compensation. It gets worse. While the biggest banks lavish pay raises and stock giveaways on their executives, they continue to violate the law and abuse their customers. The Fed recently imposed an unprecedented-if belated-penalty on Wells Fargo following several scandals, including the opening of millions of fake accounts and improperly charging borrowers for auto insurance they didn't need. The Fed told Wells Fargo it can't grow until it demonstrates that it has improved board oversight and risk management. It sounds like the Fed has come to the conclusion many of us on this Committee reached a year and half ago-Wells Fargo is ``too big to manage''. I'll be closely watching to make sure the new team at the Fed doesn't lift these penalties, without the bank making real changes. And, it's not just Wells Fargo. Last week, Citigroup announced it illegally overcharged nearly two million credit card accounts for over 5 years, and that it will refund $335 million to customers. Though Wall Street can't seem to go a month without a new scandal, the Senate is set to take up a bill that would roll back critical financial stability protections and limit watchdogs' ability to police the largest banks. We can expect the banks to spend any savings from less oversight the same way they spent their tax cuts-more dividends, share buybacks, and mergers. Chair Powell, Wall Street may be focused on whether there are three or four rate hikes this year, but I think your focus needs to be on ensuring the Fed doesn't once again permit the buildup of risk in the market and hubris at the Fed. The Great Moderation turned out to be not so great, and we forget that lesson at our peril. The Fed needs to take the side of consumers-making sure the financial system stays strong and regulations are enforced. Chair Powell, I look forward to your testimony. Thank you, Mr. Chairman. ______ PREPARED STATEMENT OF JEROME H. POWELL Chairman, Board of Governors of the Federal Reserve System March 1, 2018 Chairman Crapo, Ranking Member Brown, and Members of the Committee, I am pleased to present the Federal Reserve's semiannual Monetary Policy Report to the Congress. On the occasion of my first appearance before this Committee as Chairman of the Federal Reserve, I want to express my appreciation for my predecessor, Chair Janet Yellen, and her important contributions. During her term as Chair, the economy continued to strengthen and Federal Reserve policymakers began to normalize both the level of interest rates and the size of the balance sheet. Together, Chair Yellen and I have worked to ensure a smooth leadership transition and provide for continuity in monetary policy. I also want to express my appreciation for my colleagues on the Federal Open Market Committee (FOMC). Finally, I want to affirm my continued support for the objectives assigned to us by the Congress--maximum employment and price stability--and for transparency about the Federal Reserve's policies and programs. Transparency is the foundation for our accountability, and I am committed to clearly explaining what we are doing and why we are doing it. Today I will briefly discuss the current economic situation and outlook before turning to monetary policy. Current Economic Situation and Outlook The U.S. economy grew at a solid pace over the second half of 2017 and into this year. Monthly job gains averaged 179,000 from July through December, and payrolls rose an additional 200,000 in January. This pace of job growth was sufficient to push the unemployment rate down to 4.1 percent, about \3/4\ percentage point lower than a year earlier and the lowest level since December 2000. In addition, the labor force participation rate remained roughly unchanged, on net, as it has for the past several years--that is a sign of job market strength, given that retiring baby boomers are putting downward pressure on the participation rate. Strong job gains in recent years have led to widespread reductions in unemployment across the income spectrum and for all major demographic groups. For example, the unemployment rate for adults without a high school education has fallen from about 15 percent in 2009 to 5 \1/2\ percent in January of this year, while the jobless rate for those with a college degree has moved down from 5 percent to 2 percent over the same period. In addition, unemployment rates for African Americans and Hispanics are now at or below rates seen before the recession, although they are still significantly above the rate for whites. Wages have continued to grow moderately, with a modest acceleration in some measures, although the extent of the pickup likely has been damped in part by the weak pace of productivity growth in recent years. Turning from the labor market to production, inflation-adjusted gross domestic product rose at an annual rate of about 3 percent in the second half of 2017, 1 percentage point faster than its pace in the first half of the year. Economic growth in the second half was led by solid gains in consumer spending, supported by rising household incomes and wealth, and upbeat sentiment. In addition, growth in business investment stepped up sharply last year, which should support higher productivity growth in time. The housing market has continued to improve slowly. Economic activity abroad also has been solid in recent quarters, and the associated strengthening in the demand for U.S. exports has provided considerable support to our manufacturing industry. Against this backdrop of solid growth and a strong labor market, inflation has been low and stable. In fact, inflation has continued to run below the 2 percent rate that the FOMC judges to be most consistent over the longer run with our congressional mandate. Overall consumer prices, as measured by the price index for personal consumption expenditures (PCE), increased 1.7 percent in the 12 months ending in December, about the same as in 2016. The core PCE price index, which excludes the prices of energy and food items and is a better indicator of future inflation, rose 1.5 percent over the same period, somewhat less than in the previous year. We continue to view some of the shortfall in inflation last year as likely reflecting transitory influences that we do not expect will repeat; consistent with this view, the monthly readings were a little higher toward the end of the year than in earlier months. After easing substantially during 2017, financial conditions in the United States have reversed some of that easing. At this point, we do not see these developments as weighing heavily on the outlook for economic activity, the labor market, and inflation. Indeed, the economic outlook remains strong. The robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment. Moreover, fiscal policy is becoming more stimulative. In this environment, we anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC's 2 percent objective over the medium term. Wages should increase at a faster pace as well. The Committee views the near- term risks to the economic outlook as roughly balanced but will continue to monitor inflation developments closely. Monetary Policy I will now turn to monetary policy. The Congress has assigned us the goals of promoting maximum employment and stable prices. Over the second half of 2017, the FOMC continued to gradually reduce monetary policy accommodation. Specifically, we raised the target range for the Federal funds rate by \1/4\ percentage point at our December meeting, bringing the target to a range of 1 \1/4\ to 1 \1/2\ percent. In addition, in October we initiated a balance sheet normalization program to gradually reduce the Federal Reserve's securities holdings. That program has been proceeding smoothly. These interest rate and balance sheet actions reflect the Committee's view that gradually reducing monetary policy accommodation will sustain a strong labor market while fostering a return of inflation to 2 percent. In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis. While many factors shape the economic outlook, some of the headwinds the U.S. economy faced in previous years have turned into tailwinds: In particular, fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory. Despite the recent volatility, financial conditions remain accommodative. At the same time, inflation remains below our 2 percent longer-run objective. In the FOMC's view, further gradual increases in the Federal funds rate will best promote attainment of both of our objectives. As always, the path of monetary policy will depend on the economic outlook as informed by incoming data. In evaluating the stance of monetary policy, the FOMC routinely consults monetary policy rules that connect prescriptions for the policy rate with variables associated with our mandated objectives. Personally, I find these rule prescriptions helpful. Careful judgments are required about the measurement of the variables used, as well as about the implications of the many issues these rules do not take into account. I would like to note that this Monetary Policy Report provides further discussion of monetary policy rules and their role in the Federal Reserve's policy process, extending the analysis we introduced in July. Thank you. I would be pleased to take your questions. RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM JEROME H. POWELL Q.1. Unemployment is at 4.1 percent. Wages are up 2.9 percent compared to a year ago--that's the biggest hike since June 2009. The economy's growing at a healthy rate--3.2 percent during Q3 and 2.6 percent in Q4. Tax reform is going to boost that number back above 3 percent. Despite all the positive indicators, the market had several down days last month. Most of them were around your swearing in. If look back at the recent past, the Federal Reserve and your predecessors have cited stock market volatility as a reason to not raise interest rates. The Fed backed down so many times that this became learned behavior: stock market volatility means no hike in interest rates. Congress says to seek maximum employment and stable prices . . . no more and no less. Please answer the following with specificity: Q.1.a. Is a rising stock market a pillar of monetary policy? A.1.a. My colleagues on the Federal Open Market Committee (FOMC) and I set monetary policy with the sole purpose of achieving and sustaining our statutory objectives of maximum employment and price stability. Because monetary policy affects the economy and inflation with a lag, we need to be forward looking in setting policy. That is why, each time the FOMC meets, we assess the implications of incoming information, including information about financial conditions broadly defined, for the economic outlook. Our current assessment, based on all available information, is that further gradual increases in our target for the Federal funds rate will prove most appropriate for achieving and sustaining the objectives the Congress has assigned to the FOMC. We do not have a target for asset prices and we recognize that asset price fluctuations do not necessarily alter the economic outlook. Moreover, financial conditions are only one of many factors that can affect the outlook for the economy. Q.1.b. Has recent stock market volatility deterred you from your plan to raise rates later this year? A.1.b. After carefully considering all available information necessary to assess where the economy stood relative to the goals of maximum employment and price stability, and how it was likely to evolve, the FOMC concluded, on March 21, that it would be appropriate to raise the target range for the Federal funds rate by a further 25 basis points. Moreover, FOMC participants generally saw the economic outlook as somewhat stronger than was the case in December, and continued to judge that further gradual increases in the Federal funds rate are likely to be warranted if the economy continues to evolve as expected. Indeed most participants anticipated that, in light of the stronger outlook, the Federal funds rate might rise slightly more, in coming years, than they had anticipated in December. Please bear in mind that we do not have a fixed plan for the path of the Federal funds rate. We will be watching how the economy evolves in the months and years ahead relative to our maximum employment and price stability objectives. If the outlook changes, we will adjust monetary policy appropriately. Q.2. I sold insurance for over 20 years, and I've said it many times: our State-based system of insurance regulation is the best in the world. The President's Executive order on financial regulation and other Administration reports favor a deferential approach by the Fed to working with primary financial regulators. When it comes to the business of insurance that means State-based insurance regulators. Please answer the following with specificity: How will you and the Federal Reserve integrate State-based insurance regulators into your work? A.2. The State-based system of insurance regulation provides an invaluable service in protecting policyholders. The Federal Reserve's principal supervisory objectives for all of the insurance holding companies that we oversee include protecting the safety and soundness of the consolidated firms and protecting any subsidiary depository institution, which encompasses protecting the depositors and taxpayer-backed deposit insurance fund. The Federal Reserve also undertakes supervision, through reporting, examination, and other engagement, of entities in an insurance enterprise that are not subject to financial regulation in order to protect against extant or emerging threats to the consolidated enterprise's safety and soundness. The Federal Reserve's consolidated supervision thus is complementary to, and supplements, existing entity-level supervision by the primary functional regulators, with a perspective that considers the risks across the entire firm. We conduct our consolidated supervision of all insurance firms in coordination with State departments of insurance (DOIs), who continue their established oversight of the insurance subsidiaries. In order to maximize efficiencies and eliminate supervisory duplication or ``layering,'' we rely upon the work and supervisory findings of the State DOIs to the greatest extent possible. We intend to continue to do so. Federal Reserve supervisors regularly meet, share supervisory information, and collaborate with State DOIs. We remain open to input from supervised firms, State DOIs, and other interested parties on how we can further tailor and better coordinate our supervision while achieving our supervisory objectives. Moreover, in the ongoing development of a Federal Reserve capital standard for savings and loan holding companies significantly engaged in insurance activities (described as the Building Block Approach (BBA) in the Federal Reserve's advance notice of proposed rulemaking of June 2016), Federal Reserve staff have engaged, and continues to engage, with State regulators and the National Association of Insurance Commissioners in their development of the group capital calculation, a capital assessment that is structurally similar to the BBA. This ongoing dialogue aims to achieve harmonious frameworks to the greatest extent possible and minimize burden upon insurance firms supervised by both the States and Federal Reserve. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE FROM JEROME H. POWELL Q.1. As you know, the Administration has invoked Section 201 of the Trade Act of 1974 to impose significant tariffs on solar panels and washing machines. Q.1.a. As Federal Reserve Chairman, your job is to stay abreast on the state of our economy. These tariffs will almost certainly impact our economy, I believe for the worse. What economic indicators are you consulting to evaluate the economic impact of these tariffs? Q.1.b. What has been the international response to these tariffs and the initial economic impact of these tariffs? A.1.a.-b.The Federal Reserve is entrusted to achieve its congressionally mandated objectives of price stability and maximum sustainable employment. Matters of trade policy are the responsibility of Congress and the Administration. Although the implemented trade actions do have consequences for specific industries, these trade actions are targeted enough that they are likely to have small effects on aggregate price stability and national employment. Federal Reserve staff closely monitor data on U.S. trade flows as well as domestic price developments, both of which could be affected by tariff rate increases. The international response has been consistent with World Trade Organization (WTO) rules. Canada, China, the European Union, Japan, South Korea, and Taiwan have been holding consultations with the United States under the World Trade Organization rules to protest the measures. China has claimed the right to suspend tariff concessions immediately equal to the amount of trade affected, and did so the week of April 2. The affected countries will likely proceed with the filing of WTO cases against the United States. Q.2. The Administration has announced that it will impose 25 percent tariffs on steel and 10 percent tariffs on aluminum under Section 232 of the Trade Expansion Act of 1962. Q.2.a. Can you identify any historical examples where tariffs have helped the United States economy or otherwise fixed the problem it was intended to address? Q.2.b. Based on the record of the Bush administration's 2002- 2003 steel tariffs and other historical examples, how would you expect this 25 percent tariff on steel and aluminum to impact the U.S. economy? Q.2.c. Would this answer change if countries responded with economic retaliation against the United States, such as through tariffs? For example, I hear constantly from Nebraskan agriculture and manufacturing stakeholders of their concern that other countries will respond to the potential trade barriers by retaliating against agriculture. Q.2.d. Historically, what industries would be most impacted by this economic retaliation? For example, would agriculture be impacted? Q.2.e. In 12 months, what economic data would you consult to evaluate the net economic impact of these tariffs in the United States? A.2.a.-e. International trade, facilitated by low barriers to trade, is likely beneficial to the U.S. economy on net. History has shown that countries that are open to trade often are more productive and grow faster than countries that are relatively closed to trade. The challenge is that the gains from trade are not guaranteed to be distributed as to make everyone better off. It is important to realize that openness to trade can cause dislocation and impose costs on some industries and workers. In part because of these costs, effort should be taken to ensure that trade occurs on a level playing field. Higher tariffs on products such as steel and aluminum would tend to reduce imports of these products, and shift demand toward U.S.-produced steel and aluminum. Although U.S. producers may benefit from increased domestic demand, other U.S. firms likely would have to pay more for these products when used as an intermediate input, increasing their production costs. Currently, most of the major exporters of steel and aluminum to the United States are subject to exemptions from the tariffs, including Canada, the European Union, and Mexico. As such, the effects may be muted. The granted exemptions are more extensive than in past episodes. For example, during the 2002 safeguard tariffs on steel, the European Union, a significant supplier of steel to the United States, was not excluded. Even so, the effects on employment and inflation from the 2002 measures were fairly muted. If countries retaliate by increasing their tariffs on U.S. goods, this will likely hurt exporting industries in the United States by reducing their competitiveness and demand for their products. Retaliation is typically equivalent in size to the affected sales to the United States. China's announcement of retaliatory tariffs on products such as fruit and pork on April 1 were in direct response to the steel and aluminum tariffs, and the total amount subject to tariffs was picked to match the total amount of Chinese exports of these products (about $3 billion). China also has threatened to retaliate against a larger list of products, depending on what measures the United States Government takes in response to its investigation under section 301 of the Trade Act of 1974 into China's policies related to technology transfer, intellectual property, and innovation. In calibrating retaliation, foreign countries often target industries in which the United States has a comparative advantage, such as agriculture. In part, this reflects that the United States tends to export more from sectors in which it is relatively productive. In addition, agriculture can make an appealing target for retaliation as agricultural products tend to be relatively homogenous, allowing the retaliating country to shift purchases away from the United States toward alternative producers with less disruption to local consumers. The Federal Reserve looks at a wide range of data to assess the state of the economy. Data which might be used to evaluate the effects of the tariffs would include import and export data, as well as the prices of imports and exports. In addition, domestic employment and overall retail prices might be informative. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM JEROME H. POWELL Q.1. I would like to follow up on our ongoing conversation on the economic impacts of climate change. I understand that the Federal Reserve's mandate and tools are entirely focused on monetary policy. However, the Federal Reserve's implementation of monetary policy is informed by its assessment of the U.S. economy, including future economic trends and risks. According to your answer to a question I posed during your confirmation, your position is that the Federal Reserve is only concerned with ``short- and medium-term developments that may change materially over quarters and a relative small number of years, rather than the decades associated with the pace of climate change.'' Q.1.a. How did you arrive at the determination that there are no short- or medium-term impacts of climate change? Q.1.b. Have you or your staff considered or reviewed data from our Government's scientific agencies about the rate of climate change? Q.1.c. In 2017, NOAA reported 16 separate billion-dollar climate events. Combined, these events cost the U.S. economy over $300 billion--roughly 1.5 percent of U.S. GDP. Do you think that severe weather events that cost the equivalent of 1.5 percent of GDP qualify as short- and medium-term developments that the Federal Reserve should be concerned about? Q.1.d. Will you commit to having a staff-level conversation about these data sources to consider whether they should be a resource the Federal Reserve uses when assessing the national economic outlook and future economic risks? A.1.a.-d. Each and every severe weather event reported by the National Oceanographic and Atmospheric Administration (NOAA) is consequential for the individuals and communities that are directly affected. The most severe of these events can seriously damage the lives and livelihoods of many individuals and families, devastate local economies, and even temporarily affect national economic statistics such as GDP and employment. In that sense, severe weather events do have important short- term effects on economic conditions. And in assessing current economic conditions, such as our published statistics on industrial production, we take into account information on the severity of weather events. For example, we relied on information from the Federal Emergency Management Agency and the Department of Energy to gauge the disruptions to oil and gas extraction, petroleum refining, and petrochemical and plastic resin production caused by last fall's hurricanes. Likewise, we frequently use daily measures of temperatures and snowfall at weather stations throughout the country from the NOAA to assess the short-run economic impact associated with unusually large snowfall events. However, severe weather events are difficult to predict very far in advance. Moreover, the historical regularity has been that these type of events have not materially affected the business cycle trajectory of the national economy, both because the disruptions to production have tended to be relatively short-lived and because such events tend to affect specific geographic areas rather than the United States as a whole. In contrast, monetary policy has broad-based effects on the U.S. economy and tends to influence macroeconomic conditions with a lag. As a result, monetary policy is not well suited to address the economic disruptions associated with severe weather events. That said, the most severe of these events have imposed a significant drain on public resources. If such events become much more frequent or more severe, the fiscal cost would likely mount, and that would be an important issue for the Congress to consider. My staff is available to discuss these issues further if you would find that helpful. Q.2. There is currently $1.4 trillion in outstanding student loan debt, the highest category of consumer debt behind mortgages. It is also the most delinquent, with 11 percent of borrowers seriously delinquent or in default. The Federal Reserve Board of New York estimates this number is likely twice that rate, once borrowers who are in forbearance are taken into account. At the hearing, you agreed that student loan debt could create a drag on the economy as student loan debt continues to grow. Q.2.a. What indicators should we track to determine when student loan debt is starting to have a real impact on the economy? Q.2.b. What are the ways in which student loan debt could hold back the economy and how much of an effect do you think it could have? A.2.a.-b. Student loan debt can potentially hold back the economy through several mechanisms. First, high levels of student loan debt (and the financial burden associated with repaying such debt) may hold back student loan borrowers' savings and therefore affect decisions such as home purchases, investment, marriage, and starting a family. Second, high levels of student loan debt may increase debt-to-income ratios or reduce credit scores, leaving some borrowers with more limited access to mortgage, auto, and credit card loans. In addition, unlike other types of household debt, student loans are not dischargeable in bankruptcy, which can make these loans more burdensome in times of financial hardship. Third, if student loan debt becomes exceedingly burdensome, students may be discouraged from taking loans to go to college, thereby dampening human capital accumulation in the economy. One important caveat to underscore is that if student loan borrowers earn more over their lifetimes as a result of obtaining more education, student loans would likely help strengthen the economy, instead of holding it back. Accordingly, there are several indicators one could track to gauge the possible impact of student loan debt on the economy. Such indicators include auto purchases, home ownership and household formation rates, as well as savings and investment behavior, especially among young adults with student loan debt. In addition, one could track the credit performance of student loan borrowers, not only on their student debt, but also on other types of debt. Q.3. So far, companies benefiting from the recent tax cuts have announced over $200 billion in stock buybacks. In contrast, companies have announced only $6 billion in worker bonuses and raises. Q.3.a. As far as possible investments go, do you think stock repurchases offer the greatest potential for boosting productivity and economic growth? Q.3.b. How do they compare to investments in capital, innovation, or worker compensation in terms of the potential for increases in productivity and economic growth? Q.3.c. If companies put the vast majority of their gains from the new tax law into stock repurchases, would you expect to see an increase in economic growth and wages from the tax law? A.3.a.-c. Investments in new capital equipment or innovative technologies are important factors for improving productivity and economic growth. Similarly, increased worker compensation can be a factor in encouraging individuals to join or remain in the labor force and to develop new skills, which can further increase productivity and growth. Comparing the economic effects of these investments to the eventual effects of stock buybacks is difficult because we cannot be sure where the gains from buybacks will ultimately turn up. When a company buys back its shares or pays higher dividends, the resources do not disappear. Rather, they are redistributed to other uses in the economy. For instance, shareholders may decide to invest the windfall in another company, which may in turn make productivity-enhancing investments. Or they may decide to spend the windfall on goods and services that are produced by other companies, who may in turn hire new workers. In these ways, stock repurchases would also be likely to boost economic growth. Companies themselves are the best judges of what to do with their after-tax profits, whether it is to invest in their business, raise worker compensation, or increase returns to shareholders through dividends or share buybacks. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM JEROME H. POWELL Q.1. The Federal Reserve has the responsibility for monetary policy. The Congress has the responsibility for fiscal policy. In the past few months, Congress spent more than a trillion dollars. The majority did not spend it on investments to build our outdated bridges, roads or electrical grids. The majority did not spend it on transit to reduce gridlock and reduce pollution and improve our air quality. The trillions of dollars did not provide housing for families struggling to pay rent. Or subsidies to help parents afford the cost of child care. Nor did we invest in pre-K education. Or research and development. Instead, multi-national corporations will see their incomes go up substantially: Warren Buffet's Berkshire Hathaway will make $29 billion more in profit. The seven largest banks will increase their income by 12 percent or more. Meanwhile, some families will see big tax increases because they can't deduct their alimony payments or all of their property and State income taxes. Our national debt is already twice the historic average and higher than it has been at any time in history since World War II. Today, it consumes more than 77 percent of the economy. The President's proposed budget would increase that level to as much as 93 percent of our entire economy by 2028 according to the Committee for a Responsible Federal Budget. If we had chosen to invest $1.5-$2.3 trillion in rebuilding our infrastructure, investing in research and development and in our children and families, what is the Federal Reserve's estimates of the effect on wages, productivity and economic growth? A.1. The Federal Reserve has not prepared an estimate of the economic effects of a large investment of the kind that you describe. Any such estimate would depend critically on the particular assumptions one made about the allocation of the investment among the purposes that you describe, as well as the efficiency with which investments could be targeted to high- rate-of-return projects. The Congressional Budget Office is well situated to provide economic analysis of this kind. Q.2. I appreciated your statements opposing discrimination in mortgage lending during your testimony. However, I remain concerned that if the Economic Growth, Regulatory Relief, and Consumer Protection Act, (S. 2155), becomes law the Federal Reserve will not have adequate information on the quality of mortgage loans made by 85 percent of the banks and credit unions in the United States. At the hearing, you told me the Federal Reserve relies primarily on historical Home Mortgage Disclosure Act data but that data does not include specific information on mortgage loan quality or borrower characteristics. In the run up to the Financial Crisis, the Federal Reserve and other regulators missed rampant discrimination in the mortgage market; African Americans and Latinos were more than twice as likely as a white family to receive a subprime mortgage. Even if Latinos and African Americans had higher incomes and credit scores, they still received worse loans. The Federal Reserve has oversight authority of banks with fewer than $10 billion in assets.LHow will you ensure that those banks are not engaged in redlining or other types of discrimination if you do not have information about the loan characteristics, the borrower's credit score or other information in the expanded HMDA requirements? A.2. With respect to fair lending, the Fair Housing Act (FHA) and Equal Credit Opportunity Act are critical to ensuring consumers are treated fairly when offered financial products and services. Discrimination has no place in a fair and transparent marketplace. Discriminatory practices can close off opportunities and limit consumers' ability to improve their economic circumstances, including through access to home ownership and education. The Federal Reserve's fair lending supervisory program reflects our commitment to promoting financial inclusion and ensuring that the financial institutions under our jurisdiction fully comply with applicable Federal consumer protection laws and regulations. For all State member banks, we enforce the FHA, which means we review all Federal Reserve-regulated institutions for potential discrimination in mortgages, including potential redlining, pricing, and underwriting discrimination. For State member banks of $10 billion dollars or less in assets, we also enforce the Equal Credit Opportunity Act, which means we review these State member banks for potential discrimination in any credit product. Together, these laws prohibit discrimination on the basis of race, color, national origin, sex, religion, marital status, familial status, age, handicap/disability, receipt of public assistance, and the good faith exercise of rights under the Consumer Credit Protection Act (collectively, the ``prohibited basis''). We evaluate fair lending risk at every consumer compliance exam based on the risk factors set forth in the interagency fair lending examination procedures. The procedures include risk factors related to potential discrimination in redlining, pricing, and underwriting. While we find that the vast majority of our institutions comply with the fair lending laws, we are committed to identifying and remedying violations when they have occurred. Pursuant to the Equal Credit Opportunity Act, if we determine that a bank has engaged in a pattern or practice of discrimination, we refer the matter to the U.S. Department of Justice (DOJ). Federal Reserve referrals have resulted in DOJ public actions in critical areas, such as redlining and mortgage pricing discrimination. For example, in our redlining referrals, the Federal Reserve found that the banks treated majority-minority areas less favorably than nonminority areas, such as through Community Reinvestment Act (CRA) assessment- area delineations, branching, lending patterns, and marketing. For our mortgage-pricing discrimination referrals, the Federal Reserve found that the banks charged higher prices to African American or Hispanic borrowers than they charged to similarly situated non-Hispanic white borrowers and that the higher prices could not be explained by legitimate pricing criteria.\1\ --------------------------------------------------------------------------- \1\ See, e.g., DOJ public fair lending settlements with Midwest BankCentre; SunTrust Mortgage Inc.; and Countrywide Financial Corporation. The public actions were based on referrals from the Federal Reserve, and can be found at: https://www.justice.gov/crt/ housing-and-civil-enforcement-section-cases-1#lending. More information about recent referrals to the DOJ can be found in the Federal Reserve's annual report at www.federalreserve.gov/publications/2016-ar-consumer- and-community-affairs.htm#14890. --------------------------------------------------------------------------- We also work proactively to support financial institutions in their efforts to guard against fair lending risks through outreach efforts that actively promote sound compliance management practices and programs. The outreach efforts include Consumer Compliance Outlook, a widely subscribed Federal Reserve System publication focused on consumer compliance issues, and its companion webinar series, Outlook Live.\2\ For example, in 2017, we sponsored an interagency webinar on fair lending supervision with almost 6,000 registrants. Several of the webinars and articles described the key risk factors related to redlining and pricing discrimination, as well as information about what banks should do to mitigate those risks. --------------------------------------------------------------------------- \2\ See https://www.consumercomplianceoutlook.org/ and https:// www.consumercompliance outlook.org/outlooklive/. --------------------------------------------------------------------------- With respect to potential discrimination in the pricing or underwriting mortgages, if warranted by risk factors, the Federal Reserve will request data beyond the public Home Mortgage Disclosure Act (HMDA) data, including any data related to relevant pricing or underwriting criteria, such as applicant interest rates and credit scores. The analysis then incorporates the additional data to determine whether applicants with similar characteristics received different pricing or underwriting outcomes on a prohibited basis (for example, on the basis of race), or whether legitimate pricing or underwriting criteria can explain the differences.\3\ --------------------------------------------------------------------------- \3\ A recent study of publicly available HMDA data conducted by The Center for Investigative Reporting and published by Reveal News concluded that African Americans, Latinos, and other individuals of color were more likely to be denied loans for home purchases and home remodeling than white borrowers. See Aaron Glantz and Emmanuel Martinez, ``Kept Out,'' Reveal News, Feb. 15, 2018, available at: https://www.revealnews.org/article/for-people-of-color-banks-are- shutting-the-door-to-homeownership/. Studies such as these put much- needed focus on racial disparities and Federal Reserve staff carefully review them. However, as noted, HMDA data have limitations. These data do not include important underwriting criteria, such as credit scores and loan-to-value ratios. If concerns arise regarding a Federal Reserve-regulated institution, we will request additional data beyond the publicly available HMDA data to fully evaluate whether applicants with similar characteristics received different underwriting outcomes on a prohibited basis (for example, on the basis of race), or whether legitimate underwriting criteria can explain the differences. --------------------------------------------------------------------------- With respect to potential redlining discrimination, the current data analysis does not rely on an evaluation of the additional data fields, but rather the number of HMDA mortgage applications and originations generated in majority-minority tracts by the bank and similar lenders. More specifically, the analysis reviews whether the bank's record of HMDA mortgage applications and originations in majority-minority tracts \4\ shows statistically significant disparities when compared with the lending record of similar lenders. Thus, although additional fields from the exempted institutions could enhance the data analysis, provisions in the recently enacted bill, S. 2155, related to HMDA data collection requirements would not impact the Federal Reserve's ability to fully evaluate the risk of redlining discrimination. Moreover, as explained further below, the data analysis is only one aspect of the redlining analysis. --------------------------------------------------------------------------- \4\ Majority-minority tracts are defined as census tracts that are more than 50 percent African American and Hispanic. Q.3. Historical HMDA data does not collect information on certain racial and ethnic populations at a finer level of granularity. For instance, expanded HMDA requirements that would be rolled back by S. 2155 require reporting within the Asian community (Asian Indian, Chinese, Filipino, Japanese, Korean, and Vietnamese, among others) and within the Hispanic or Latino communities (Mexican, Puerto Rican, among Cuban, --------------------------------------------------------------------------- among others). Q.3.a. How will you monitor and ensure that banks are not engaged in redlining specifically against some of these subgroups without collecting this data? Q.3.b. With historic HMDA data only, do you have the capacity to discern whether lenders are charging single female borrowers higher interest rates or more expensive points and fees on mortgages compared to single men? A.3.a.-b. Consistent with the interagency fair lending examination procedures, the Federal Reserve's redlining review evaluates whether the bank treated majority-minority census tracts less favorably with respect to the following risk factors: LCRA assessment area, Lbranching strategy, Llending record for HMDA-reportable mortgage applications and originations, Lmarketing and outreach, and Lcomplaints. With respect to the lending record, the data analysis reviews the HMDA-reportable mortgage applications and originations generated in majority-minority census tracts. The definition of majority-minority tract is based on the census data classifications for the race and/or ethnicity of the residents of the census tract, rather than on HMDA data classifications. Thus, although the additional data fields from the exempted institutions could enhance the data analysis, provisions in the recently enacted bill, S. 2155, related to HMDA data collection requirements would not impact the Federal Reserve's ability to fully evaluate the risk of redlining discrimination. Also consistent with the interagency fair lending examination procedures, the Federal Reserve's pricing review evaluates the following key risk factors: Lfinancial incentives to charge higher prices, Lloan originator discretion to determine pricing criteria and set the price, Ldisparities in pricing on a prohibited basis, and Lcomplaints. The analysis of potential pricing disparities includes the review of potential disparities in the annual percentage rate, interest rate, and fees. Although not included in the public HMDA data, if warranted by risk factors, the Federal Reserve will request these data as well as any other data related to relevant pricing criteria, such as the interest rate and credit score. Also, the Federal Reserve analyzes the disparity on a prohibited basis, including potential discrimination for single females. The current HMDA data classifications allow for an analysis of potential discrimination against single females. Thus, provisions in the recently enacted bill, S. 2155, related to HMDA data collection requirements would not impact the Federal Reserve's ability to fully evaluate the risk of mortgage pricing discrimination, including for single females. Please also see the response to question 2. Q.4. In your testimony, you stated that data collected under HMDA's original requirements was adequate for the Federal Reserve when examining financial institutions for compliance with the Community Reinvestment Act. Wall Street Reform's expansion of HMDA requirements included a number of critical requirements that were motivated by the financial crisis, including quality of loan, interest rate and providing the legal entity identifier (LEI) of the lender. Without the expanded requirements under Wall Street Reform, how is the Federal Reserve examining the quality of the loans being given to borrowers, particularly female borrowers and borrowers of color? A.4. To determine the risk of potential pricing or underwriting discrimination in mortgages on a prohibited basis (such as, sex, race, color, or national origin), the Federal Reserve evaluates State member banks for compliance with the FHA (and the Equal Credit Opportunity Act for State member banks with $10 billion or less in assets). Although not included in the public HMDA data, if warranted by risk factors, the Federal Reserve will request any data related to relevant pricing and underwriting criteria, such as the interest rate and credit score. Thus, provisions in the recently enacted bill, S. 2155, related to HMDA data collection requirements for certain institutions would not impact the Federal Reserve's ability to fully evaluate the risk of mortgage pricing or underwriting discrimination, including for female borrowers or borrowers of color. While we find that the vast majority of institutions regulated by the Federal Reserve comply with the fair lending laws, we sometimes find violations of the laws and regulations. If we determine that a bank has engaged in a pattern or practice of discrimination, we refer the matter to the DOJ, pursuant to the Equal Credit Opportunity Act. We also take evidence of discrimination into account when assigning consumer compliance ratings and CRA ratings, consistent with regulations and supervisory guidance. Please also see the response to questions 2 and 3. Q.5. Wall Street Reform also expanded on requirements when reporting ethnicity. For example, for Asian American Pacific Islander, lenders should also provide an ethnic breakdown. Without this specific data of race and ethnicity, will the Federal Reserve be able to identify discrimination against specific ethnic groups, such as Filipino or Hmong? A.5. Reviews of potential pricing or underwriting discrimination based on the race or ethnicity of the borrower may be impacted by HMDA data classifications, but other risk factors can be used to evaluate potential discrimination, such as loan policies and procedures, marketing, and complaints. Please also see the response to question 2. Q.6. A 2014 analysis of OneWest Bank--which was then owned by Treasury Secretary Steve Mnuchin--found that the Bank had a ``low satisfactory'' on its last CRA evaluation; that only 15 percent of the banks' branches were located in low- and moderate-income census tracts; and that the majority of ``small business'' loans made by OneWest were to businesses with more than $1 million in revenue. Q.6.a. What recourse does the Community Reinvestment Act give to the Federal Reserve and other regulators when banks have this kind of record? Q.6.b. How can banks that consistently receive low ratings for their lending to small businesses and communities of color be better incentivized to improve their record? A.6.a.-b. The CRA regulations define the ratings and recognize that a ``low satisfactory'' rating under the CRA lending test and/or service test is indicative of ``adequate'' performance in responding to the credit needs in its assessment areas(s), taking into account the number and amount of home mortgage, small business, small farm, and consumer loans, as well as an adequate geographic distribution of loans in its assessment area(s). The CRA ratings are publicly available, which motivates some institutions to seek to improve their rating. Regulators encourage and support banks in this aim by pointing out ways they can improve their CRA performance, which would meet supervisory expectations and enhance how their record is viewed by the public. Further, an overall CRA rating of less than satisfactory can be an impediment to favorable action on an application or notice submitted to the Federal Reserve. Q.7. I agree with you that sound data is critically important in informing the policy and enforcement decisions you'll be making. However, I am very concerned that such analysis fails to capture the human and economic cost of massive financial system failure. For example, in 2009, when I was Attorney General, Nevada had 165,983 people unemployed. Also that year, in a State of 3 million people, we had 28,223 personal bankruptcies, 366,606 mortgage delinquencies and 421,445 credit card delinquencies.\5\ In addition, 121,000 Nevada children's lives and educations were disrupted by the foreclosure crisis. And, we had more than 219,000 foreclosures between 2007-2016. --------------------------------------------------------------------------- \5\ See Center for American Progress. ``10 Years Later: The Financial Crisis State by State.'' February 22, 2018. Available at: https://www.americanprogress.org/issues/economy/news/2018/02/22/447031/ 10-years-later-financial-crisis-state-state/. Q.7.a. Do you agree the Fed underestimated the human costs of --------------------------------------------------------------------------- the financial crisis prior to 2008? A.7.a. The recent financial crisis took a devastating toll on consumers, families, and businesses, as well as revealing weaknesses in our financial system. The fragilities that arose in the U.S. financial system by the mid-2000s resulted in the worst U.S. recession since the Great Depression and a painfully slow economic recovery. We have worked hard in the aftermath of the crisis to make sure we have a financial system that is safer, sounder, has more capital, higher quality capital, and is less prone to crises. Financial crises are immensely costly to the well-being of households, families, individuals, and businesses. It is important to make sure we do everything we can to reduce the odds of another devastating crisis. Q.7.b. How will your analysts accurately ensure you'll get it right this time? A.7.b. The Federal Reserve has substantially increased its efforts to assess risks to financial stability on an ongoing basis, in conjunction with other U.S. agencies (through, for example, discussions at the Financial Stability Oversight Council). These efforts may provide insight into the buildup of risks and allow the appropriate regulatory agencies to take steps to mitigate risks to financial stability. At the same time, we are aware of the challenges facing anyone trying to predict rare events such as financial crises. In part because of these challenges, the Federal Reserve has focused on increasing the resilience of the financial system, so that when detrimental, unforeseen events occur, the system absorbs, rather than amplifies, them. An important part of increased resilience is a set of higher standards for key institutions. These standards are higher for the largest, most systemic firms and include capital regulation, liquidity regulation, steps to enhance the resolvability of large bank- holding companies, and stress testing of large bank-holding companies. We have implemented these standards as a response to the increased awareness among economists of the risks and costs of financial crises. Research, including research by staff within the Federal Reserve System, has documented the large adverse effects of financial crises and the benefits associated with regulatory standards that raise the resilience of the financial system.\6\ --------------------------------------------------------------------------- \6\ For example, the following research paper discusses these issues and related research: Firestone, Simon, Amy Lorenc, and Ben Ranish (2017). ``An Empirical Economic Assessment of the Costs and Benefits of Bank Capital in the U.S.,'' Finance and Economics Discussion Series 2017-034. Board of Governors of the Federal Reserve System (U.S.). Q.7.c. What concerns do you have that cost-benefit analysis requirements allow financial institutions the ability to sue --------------------------------------------------------------------------- regulators to avoid regulation? A.7.c. The Federal Reserve Board (Board) takes seriously the importance of evaluating the costs and benefits of its rulemaking efforts. Under the Board's current practice, consideration of costs and benefits occurs at each stage of the rule or policymaking process. Before the Board develops a regulatory proposal, the Board often collects information directly from parties that it expects will be affected by the rulemaking through surveys of affected parties and meetings with interested parties and their representatives. In the rulemaking process, the Board also specifically seeks comment from the public on the costs and benefits of the proposed approach as well as on a variety of alternative approaches to the proposal. In adopting the final rule, the Board seeks to adopt a regulatory alternative that faithfully reflects the statutory provisions and the intent of Congress while minimizing regulatory burden. The Board also provides an analysis of the costs to small depository organizations of our rulemaking consistent with the Regulatory Flexibility Act and computes the anticipated cost of paperwork consistent with the Paperwork Reduction Act. Increasingly, the Board has published quantitative analyses in connection with its rulemakings. Recent examples include the global systemically important banks surcharge rule, the single- counterparty credit limit rule, and the long-term debt rule. To further these efforts, the Board recently established an office and hired additional staff to focus on analyzing the costs and benefits associated with its rulemakings. The Administrative Procedure Act (APA), which the Board follows, provides for judicial review of final regulations. Affected firms have the right to challenge the actions of an administrative agency under the APA, including whether the agency has engaged in reasoned decisionmaking. Litigation, of course, imposes certain costs on the litigants including an agency and delays the rulemaking process. Q.8. I am very concerned about forcing more than 800,000 men and women--Dreamers--out of the country. It is a cruel betrayal of the promises we've made to them. In Nevada, we have more than 13,000 Dreamers. If our neighbors, friends, and colleagues are deported, some estimate that Nevada would lose more than $600 million in annual economic growth. Q.8.a. Organizations, on both sides of the spectrum, estimate that detaining and deporting DACA recipients could cost the U.S. economy between $280 and $460 billion a year. The United States Chamber of Commerce called ending DACA ``a nightmare for America's economy.'' Q.8.b. Has the Federal Reserve published any information on how the deportation of the Dreamers will affect our Nation's economy? Q.8.c. What do you think the economic impact of deporting 800,000 Dreamers--90 percent or about 720,000 of whom are employed--would be on labor force participation, economic growth and productivity? A.8.a.-c. Over long periods of time, economic growth generally reflects the trend rate of growth of the population, the trend in labor force participation, and the trend in productivity growth. A large deportation of individuals currently living in the United States would probably reduce the level of economic output, for the simple reason that the population--and hence the workforce--would be smaller. That being said, the Federal Reserve has not published information pertaining to your questions. The manner in which economic output per capita would be affected is a more difficult question; the answer would depend on such factors as how the labor-force participation of the deported individuals compared with that of the remaining population; how the productivity of the deported individuals compared with that of the remaining population; and the question of whether problems of job matching would arise (if, for example, deported individuals were concentrated in particular industries, occupations, or geographic areas, and whether nondeposited individuals were available and willing to fill the resulting vacancies). Q.9. Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis recently wrote an op-ed in the Wall Street Journal on why immigration is the key to economic growth. The Minneapolis Fed estimates that boosting legal immigration by one million people a year would grow the economy by at least 0.5 percent a year, even under the most conservative assumptions. Do you agree with the president of the Federal Reserve of Minneapolis that increasing legal immigration will grow our economy? A.9. Growth in the labor force is all important determinant of the longer-run growth rate of the U.S. economy. Because many legal immigrants actively participate in the workforce, challenges in the pace of immigration can affect economic growth. Having said that, however, the issue of immigration is well outside of the remit of the Federal Reserve System, and it would be more prudent for others to decide how best to address that issue. Q.10. I represent Nevada, which is within the San Francisco Federal Reserve District. We are one of the most diverse districts in the Nation--with many Latino and Asian Pacific American families. We value that diversity because it leads to innovation, economic growth and stronger connections with other nations in our globally connected world. A recent report by Fed Up, Working People Still Need a Voice at the Fed: 2018 Diversity Analysis of Federal Reserve Bank Directors, found that there is inadequate diversity at the Federal Reserve. It specifically cited the San Francisco Federal Reserve as one of system's least diverse regional banks. The report states, ``Despite covering some of the most demographically diverse counties in the United States, 100 percent of the San Francisco Fed's Board of Directors come from the banking and financial sector. The directors are 78 percent white and 78 percent male.'' Q.10.a. How will you work with Director Clark to improve the gender and racial diversity of the Board of Directors at the 12 regional Reserve Banks? And specifically the San Francisco Fed? Q.10.b. How will you work to end the outsized representation and influence of the banking and business sectors among the Regional Bank Boards of Directors? Q.10.c. Have you identified directors with nonprofit, academic, and labor backgrounds that could also serve? A.10.a.-c. Diversity is a critical aspect of all successful organizations, and I am committed to fostering diversity and inclusion throughout the Federal Reserve System. In my experience, we make better decisions when we have a wide range of backgrounds and voices around the table. I assure you that diversity is a high priority objective for the Federal Reserve. The Federal Reserve Board (Board) focuses particular attention on increasing gender, racial, and sector diversity among directors because we believe that the System's boards function most effectively when they are constituted in a manner that encourages a variety of perspectives and viewpoints. Monetary policymaking also benefits from having directors who effectively represent the communities they serve because we rely on directors to provide meaningful grassroots economic intelligence. Because all directors serve in this role, we believe it is important to consider the characteristics of both Reserve Bank and Branch boards. Each year, the Board carefully reviews the demographic characteristics of Reserve Bank and Branch boards. This information is shared with Reserve Bank leadership, including the current Chair and Deputy Chair of each board, and areas for improvement are highlighted. The Board thoroughly vets all candidates for Class C and Board-appointed Branch director vacancies, taking into consideration factors such as professional experience, leadership skills, and community engagement. The Board also evaluates a candidate's ability to contribute meaningful insights into economic conditions of significance to the District and the Nation as a whole. As part of this process, the Board focuses considerable attention on whether a candidate is likely to provide the perspective of historically underrepresented groups, such as consumer/community and labor organizations, minorities, and women. Although there is room for improvement, the System has made significant progress in recent years in recruiting highly qualified women and minorities for director positions. For example, in 2018, approximately 56 percent of all System directors are diverse in terms of gender and/or race (with a racially diverse woman counted only one time), which represents a 16 percentage point increase in the share of directors since 2014. With respect to the San Francisco District, 21 of 37 directors, or approximately 57 percent of all Reserve Bank and Branch directors, are diverse. On the Reserve Bank's head-office board, 4 of 9 directors, or approximately 44 percent of Reserve Bank directors, are diverse. We also have numerous directors who represent consumer/community and labor organizations serving on boards throughout the System. In addition, we gain invaluable insight and perspective from directors who are affiliated with other types of organizations, including major health care providers, universities and colleges, and regional chambers of commerce, among others. Q.11. Chair Yellen was the first chair in Federal Reserve history to share data with this Committee about racial economic disparities during her semi-annual testimony. When she presented that data, she touted significant progress, and indeed, black unemployment fell from 11.8 percent at the beginning of her term to the current historically low figure of 6.8 percent. Q.11.a. What do you attribute this trend to? Q.11.b. Do you think the attention that Chair Yellen paid to this issue and the policies of the Federal Reserve deserve some credit for the progress that has been made? A.11.a.-b. The improvement in the black unemployment rate in recent years reflects the general strengthening in labor-market conditions during that time period; and the credit for the general strengthening, in turn, goes to the millions of individuals who go to work day in and day out and work hard, and to those who run businesses, take risks, and generate creative new ideas and new products. Chair Yellen deserves great credit for shining light on the important differences in economic well-being across different segments of the population; I intend to continue that practice. As a Nation, we have a long way to go before we will have achieved the objective of full economic inclusion of all segments of the population. Q.12. At that same testimony where Janet Yellen presented information about racial economic disparities, she said, quote ``it is troubling that unemployment rates for these minority groups remain higher than for the Nation overall, and that the annual income of the median African American household is still well below the median income of other U.S. households.'' Though African American unemployment is lower today, Chair Yellen's point remains true. Q.12.a. Do you think the recent progress is sufficient? Q.12.b. What more can be done to ensure that unemployment among African Americans is equal to white unemployment? Q.12.c. And, how do you plan to respond to reports that African Americans with a college degree have lower employment and wealth than whites with the less education? African American women and Latinos are graduating from college in record numbers but are still having a harder time finding a job. A.12.a.-c. I do not think that recent progress has been sufficient. As I noted earlier, we have a long way to go before we will have achieved the objective of full economic inclusion of all segments of the population. The steps that will be necessary to attain full economic inclusion span virtually the entire spectrum of economic policy areas. These are important issues for Congress' consideration. Q.13. For years, many of my colleagues have suggested that the Fed is unfairly hurting savers through low interest rates. On the subject of seniors, savers, and depositors, I want to ask about a proposal by a nominee to the Board of Governors, Marvin Goodfriend. For decades, Mr. Goodfriend promoted the Fed to incentivize spending by placing a tax on currency. He does admit that ``the regressivity of the tax'' is a concern. If Mr. Goodfriend's proposal were to be implemented, can you estimate what the impact would be on savers and low-income depositors? A.13. Nominations to serve on the Board of Governors are made by the President and require consent of the Senate. It is up to the President and Senate to evaluate the views and qualifications of potential members of the Board. I do not want to comment on a specific nominee. The Federal Reserve has not considered and is not planning to consider a tax on U.S. currency. Our Nation's currency plays an important role as a means of payment and store of value worldwide and taking any action that could diminish its role in the domestic or global economy would need to be very carefully thought through after a thorough review and analysis of relevant data. Q.14. Chair Powell, at your nomination hearing, you told me that you supported strong consumer protections. Since that time, the Consumer Financial Protection Bureau has endured new leadership that is hostile to its mission. Q.14.a. If the Bureau continues to drop lawsuits against predatory online loan companies, like Golden Valley Lending or drop investigations against companies like World Acceptance Corporation, one of the biggest payday lenders, will the Federal Reserve's consumer protection staff pick up the slack and protect people from fraud and abuse? Q.14.b. If the Consumer Financial Protection Bureau's leadership refuses to ask for adequate funding, will you let us know if predatory and deceptive practices start going unaddressed by a weaker Consumer Financial Protection Bureau? Q.14.c. Has the Federal Reserve weighed in on the impact from the Consumer Bureau's decision to weaken fair lending enforcement, suspend the civil penalties fund and stop investigating the hack of 145 million people's information held by Equifax? Q.14.d. What have you shared with the leadership of the Bureau? A.14.a.-d. While the Board plays a consultative role in CFPB rulemakings and coordinates in the examinations as appropriate, we do not have any oversight of the CFPB organizational or structural design, which is defined in statute, nor of CFPB enforcement priorities. By statute, the organizational structure and prioritization of the CFPB's fair lending work is up to the CFPB's director to decide. For our part, the Federal Reserve continues to carry out our supervisory and enforcement responsibilities for the financial institutions and for the laws and regulations under our authority. We remain committed to ensuring that the financial institutions under our jurisdiction fully comply with all applicable Federal consumer protection laws and regulations. For example, in the last few years, the Federal Reserve has addressed unfair and deceptive practices through public enforcement actions that have collectively benefited hundreds of thousands of consumers and provided millions of dollars in restitution. In addition, our examiners evaluate fair lending risk at every consumer compliance exam. Pursuant to the Equal Credit Opportunity Act, if we determine that a bank has engaged in a pattern or practice of discrimination, we refer the matter to the DOJ. Federal Reserve referrals have resulted in DOJ public actions in critical areas, such as redlining and mortgage-pricing discrimination. With respect to the Equifax data breach, the Federal Reserve's authority is limited. The Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (agencies) have authority to examine and regulate bank service companies under the Bank Service Company Act (BSCA).\1\ Additionally, the BSCA provides the agencies with limited authority to regulate and examine the activities of other films that provide certain services to the institutions we supervise.\2\ The three largest credit reporting agencies in the United States (Equifax, Experian, and TransUnion) are not owned by insured depository institutions and are thus not bank service companies. Accordingly, any authority the agencies have under the BSCA with respect to the activities of these companies would arise under the BSCA in so far as insured depository institutions (or their subsidiaries or affiliates) are outsourcing services authorized under the BSCA. To date, none of the agencies has concluded that the credit reports that credit reporting agencies sell to the institutions we supervise are services within the scope of the BHCA. --------------------------------------------------------------------------- \1\ See 12 U.S.C. 1867(a). A ``bank service company'' is defined as a company that is organized to provide services authorized under the BSCA and that is owned exclusively by one or more insured depository institutions. 12 U.S.C. 1861(b)(2). \2\ Whenever an insured depository institution, or any subsidiary or affiliate of such insured depository institution, causes to be performed for itself services authorized under the BSCA, such performance is subject to regulation and examination to the same extent as if such services were being performed by the insured depository institution itself on its own premises. 12 U.S.C. 1867(c). --------------------------------------------------------------------------- However, the Federal Reserve expects financial institutions to follow vendor management guidance issued by the Board and the Federal Financial Institutions Examination Council, which includes conducting an assessment of the relationships with third parties and their handling and protection of sensitive personal information of individuals. As such, the Federal Reserve holds the institutions we supervise accountable for conducting appropriate due diligence and risk management with respect to their relationships with third-parties, including credit reporting agencies. Our examiners regularly assess banking organizations' programs for due diligence, contract management, ongoing monitoring, and overall risk management of third-party and vendor relationships as part of Federal Reserve examinations. In addition, the Board, along with the other banking agencies and the Federal Trade Commission have jointly issued rules under the Fair Credit Reporting Act that require financial institutions to maintain identity theft prevention programs. These programs must include policies and procedures for detecting, preventing, and mitigating identity theft, and we examine the banks we supervise for compliance with these rules. Finally, under the Gramm-Leach-Bliley Act, the Board and other banking agencies have issued guidelines to institutions containing standards for safeguarding their customers' data. Q.15. In recent years, Federal Reserve policymakers have warned that we should raise interest rates to counter asset bubbles destabilizing the financial system. Board of Governor nominee Marvin Goodfriend has suggested replacing liquidity coverage ratios and a host of other regulations with tighter monetary policy. Q.15.a. Do you believe that the blunt tool of monetary policy can be a substitute for sound financial protections? What is your reading of the historical evidence surrounding the relationship between monetary policy and asset bubbles? A.15.a. As stated above, it is up to the President and Senate to evaluate the views and qualifications of potential members of the Board. I do not want to comment on a specific nominee. Strong regulatory and supervisory standards are critical for financial stability. In the years leading up to 2007-2008, excessive leverage and maturity transformation left the U.S. and global economy vulnerable to a deterioration in the U.S. housing market and an increase in investor concerns regarding the solvency and liquidity of large, interconnected financial institutions. Reforms since that time, enacted by Congress and implemented by the appropriate agencies, have raised loss- absorbing capacity within the financial sector and reduced the susceptibility of the financial system to destabilizing runs. Monetary policy, already tasked with the goals of price stability and full employment, should not be considered a substitute for strong financial and supervisory standards. Moreover, asset-price swings owe to many factors, and monetary policy has not generally been a prime factor in historical episodes involving large movements in asset prices. Q.15.b. Besides monetary policy, what other tools are available to temper asset bubbles? A.15.b. It is difficult to identify whether an asset price has reached an unsustainably high (or low) level. For this reason, it is important to monitor asset price developments and to consider whether, for example, unusually rapid increases in asset prices are leading to vulnerabilities in the U.S. economy that could jeopardize financial stability, price stability, or full employment. If a rapid increase in nonfinancial borrowing, leverage in the financial sector, or maturity transformation accompanied a rapid rise in asset prices, tools aimed directly at mitigating such vulnerabilities could be appropriate. For example, the Countercyclical Capital Buffer is a regulatory tool that requires the largest, most systemic bank-holding companies to build additional loss absorbing capacity when the Board identifies a need for such additional resilience. However, the difficulties associated with the detection of vulnerabilities as they emerge highlight the need for strong regulatory and supervisory standards at all times. The capital and liquidity regulations and supervisory policies adopted by the Federal Reserve, including stress testing, represent such an approach to maintaining resilience at a level that limit excessive risk. Q.15.c. Isn't it true that countries with tighter monetary policy than the United States also experienced housing bubbles in the early 2000s? A.15.c. The housing boom during the early 2000s was global in nature, with house prices rising across most advanced economies. Although the availability of mortgage financing at favorable rates coincided with strong housing markets in some countries, there were particularly rapid house price gains in several economies whose key monetary policy rates never declined below 3 \1/2\ percent, including Australia, New Zealand, Norway, and the United Kingdom. Each of those economies experienced house price declines, to varying degrees of severity, during the global financial crisis that followed. Subsequent studies, including at the International Monetary Fund, have found that the stance of monetary policy is not generally a good leading indicator of future house price bubbles and busts. Q.15.d. Can you speak to the scale of interest rate increases that would be needed to rein in an asset bubble? A.15.d. As noted in the second answer to question 15, it is difficult to detect whether an asset price has reached an unsustainable level. A corollary of this challenge is that it is hard to determine what factors are driving unsustainable asset-price movements. The condition of markets is one of many factors that could influence the underlying economy, but efforts to influence asset prices in a manner that is not consistent with the Federal Reserve's employment and price- stability objectives could compromise the achievement of those objectives. 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