[Senate Hearing 115-366]
[From the U.S. Government Publishing Office]
S. Hrg. 115-366
FEDERAL RESERVE'S SECOND MONETARY POLICY REPORT FOR 2018
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
ON
OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU-
ANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978
__________
JULY 17, 2018
__________
Printed for the use of the Committee on Banking, Housing, and Urban Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: http: //www.fdsys.gov /
_______________
U.S. GOVERNMENT PUBLISHING OFFICE
32-517 PDF WASHINGTON : 2018
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
Joe Carapiet, Chief Counsel
Kristine Johnson, Professional Staff Member
Elisha Tuku, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Phil Rudd, Democratic Legislative Assistan
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
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TUESDAY, JULY 17, 2018
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 37
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Prepared statement........................................... 37
WITNESS
Jerome H. Powell, Chair, Board of Governors of the Federal
Reserve System 4
Prepared statement........................................... 39
Responses to written questions of:
Senator Brown............................................ 41
Senator Corker........................................... 58
Senator Cotton........................................... 59
Senator Rounds........................................... 62
Senator Scott............................................ 64
Senator Tillis........................................... 66
Senator Reed............................................. 69
Senator Menendez......................................... 70
Senator Warner........................................... 122
Senator Cortez Masto..................................... 125
Senator Jones............................................ 141
Additional Material Supplied for the Record
Monetary Policy Report to the Congress dated July 13, 2018....... 146
Article submitted by Senator Brown............................... 212
FEDERAL RESERVE'S SECOND MONETARY POLICY REPORT FOR 2018
----------
TUESDAY, JULY 17, 2018
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:01 a.m., in room SH-216, Hart
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will now come to order.
Today we welcome Chairman Powell back to the Committee for
the Federal Reserve's Semiannual Monetary Policy Report to
Congress.
This hearing provides the Committee an opportunity to
explore the current state of the U.S. economy and the Fed's
implementation of monetary policy and supervision and
regulatory activities.
Since our last Humphrey-Hawkins hearing in March, Congress
passed, with significant bipartisan support, and the President
signed into law S. 2155, the Economic Growth, Regulatory
Relief, and Consumer Protection Act.
The primary purpose of this 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.
A key provision of the bill provides immediate relief from
enhanced prudential standards to banks with $100 billion in
total assets or less.
The bill also authorizes the Fed to provide immediate
relief from unnecessary enhanced prudential standards to banks
with between $100 billion and $250 billion in assets. It is my
hope that the Fed promptly provides relief to those within
these thresholds.
By rightsizing regulation, the bill will improve access to
capital for consumers and small businesses that help drive our
economy. And the banking regulators are already considering
this bill in some of their statements and rulemakings.
Earlier this month, the Fed, FDIC, and OCC issued a joint
statement outlining rules and reporting requirements
immediately impacted by the bill, including a separate letter
issued by the Fed that was particularly focused on those
impacting smaller, less complex banks. But there is still much
work to do on the bill's implementation.
As the Fed and other agencies revisit past rules and
develop new rules in conjunction with the bill, it is my
expectation that such rules will be developed consistent with
the purpose of the bill and the intent of the Members of
Congress who voted for the bill.
With respect to monetary policy, the Fed continues to
monitor and respond to market developments and economic
conditions.
In recent comments at a European Central Bank Forum on
Central Banking, Chairman Powell described the state of the
U.S. economy, saying, ``Today most Americans who want jobs can
find them. High demand for workers should support wage growth
and labor force participation . . . Looking ahead, the job
market is likely to strengthen further. Real gross domestic
product in the United States is now reported to have risen 2.75
percent over the past four quarters, well above most estimates
of its long-run trend . . . Many forecasters expect the
unemployment rate to fall into the mid-3s and to remain there
for an extended period.''
According to the FOMC's June meeting minutes, the FOMC
meeting participants agreed that the labor market has continued
to strengthen and economic activity has been rising at a solid
rate. Additionally, job gains have been strong and inflation
has moved closer to the 2-percent target.
The Fed also noted that the recently passed tax reform
legislation has contributed to these favorable economic
factors. I am encouraged by these recent economic developments
and look forward to seeing our bill's meaningful contribution
to the prosperity of consumers and households.
As economic conditions improve, the Fed faces critical
decisions with respect to the level and trajectory of short-
term interest rates and the size of its balance sheet.
I look forward to hearing more from Chairman Powell about
the Fed's monetary policy outlook and the ongoing effort to
review, improve, and tailor regulations consistent with the
Economic Growth, Regulatory Relief, and Consumer Protection
Act.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. Welcome, Mr. Chair.
It is nice to see you again.
This week the President of the United States went overseas
and sided with President of Russia while denigrating critical
American institutions, including the press, the intelligence
community, and the rule of law.
Our colleague Senator McCain expressed clearly what every
patriotic American thought: ``No prior President has ever
abased himself more abjectly before a tyrant. Not only did
President Trump fail to speak the truth about an adversary; but
speaking for America to the world, our President failed to
defend all that makes us who we are--a republic of free people
dedicated to the cause of liberty at home and abroad. American
Presidents must be the champions of that cause if it is to
succeed.'' The words of the 2008 Republican Presidential
nominee.
With our democratic institutions under threat, we cannot
ignore what happened in Helsinki yesterday. But we must not
lose sight of the other special interest policies of this
Administration, including the rollback of the rules put in
place to prevent the next economic crisis.
Just last week, a Federal Reserve official said, ``There
are definitely downside risks, but the strength of the economy
is really pretty important at the moment. The fundamentals for
the U.S. economy are very strong.''
That may be true for Wall Street, but for most of America
workers have not seen a real raise in years, young Americans
are drowning in student loan debt, families are trying to buy
their first home. For most of America, the strength of the
economy is an open question.
Last month former Fed Chair Ben Bernanke was very clear
about the long-term impact of the tax cut and the recent bump
in Federal spending when he said, ``in 2020 Wile E. Coyote is
going to go off the cliff.''
Last week the San Francisco Fed released a study finding
that the rosy forecasts of the tax bill are likely ``overly
optimistic.'' It found that the bill's boost to growth is
likely to be well below projections--or even as small as zero.
It suggested that these policies could make it difficult to
respond to future economic downturns and manage growing Federal
debt.
And it is not just the tax bill. The economic recovery has
not been evenly felt across the country. Not even close. Mr.
Chairman, I would like to enter into the record an article from
the New York Times this weekend which talks about those
families still struggling from the lack of meaningful raises
and other job opportunities.
Chairman Crapo. Without objection.
Senator Brown. Thank you, Mr. Chairman.
While hours have increased a bit over the past year for
workers as a whole, real hourly earnings have not. For
production and nonsupervisory workers, hours are flat; pay has
actually dropped slightly, according to the Bureau of Labor
Statistics.
The number of jobs created in 2017 was smaller than in each
of the previous 4 years. Not what we hear in the mainstream
media, perhaps. Some of the very companies that announced
billions in buybacks and dividends are now announcing layoffs,
shutting down factories, and offshoring more jobs.
Some of the biggest buybacks, as we know in this Committee,
are in the banking industry, assisted in part by the Federal
Reserve's increasingly lax approach to financial oversight.
Earlier this month, as part of the annual stress tests, the
Fed allowed the seven largest banks to redirect $96 billion to
dividends and buybacks. This money might have been used, as the
President and members of the majority party liked to promise
during the tax bill, this money might have been used to pay
workers, to reduce fees for consumers, to protect taxpayers
from bailouts, or be deployed to help American businesses.
Three banks--Goldman, Morgan Stanley, and State Street--all
had capital below the amount required to pass the stress tests,
but the Fed gave them passing grades anyway.
The Fed wants to make the tests easier next year. Vice
Chair Quarles has suggested he wants to give bankers more
leeway to comment on the tests before they are administered. I
guess it is OK in Washington to let students help write the
exam.
The Fed is considering dropping the qualitative portion of
the stress tests altogether--even though banks like Deutsche
Bank and Santander and Citigroup and HSBC and RBS have failed
on qualitative grounds before.
That does not even include the changes the Fed is working
on after Congress passed S. 2155 to weaken Dodd-Frank, making
company-run stress tests for the largest banks ``periodic''
instead of annual and exempting more banks from stress tests
altogether.
And, oh, yeah, Vice Chair Quarles has also made it clear
that massive foreign banks can expect goodies, too.
And on and on and on it goes. The regulators loosen rules
around big bank capital, dismantle the CFPB, ignore the role of
the FSOC, undermine the Volcker Rule, and weaken the Community
Reinvestment Act.
When banks make record profits, we should be preparing the
financial system for the next crisis. We should buildup
capital, we should invest in workers, we should combat asset
bubbles.
And we should be turning our attention to bigger issues
that do not get enough attention, like how the value that we
place on work has declined in this country, how our economy
increasingly measures success only in quarterly earning
reports.
Much of that is up to Congress to address. Over the last 6
months, tragically, I have seen the Fed moving in the direction
of making it easier for financial institutions to cut corners,
and I have only become more worried about our preparedness for
the next crisis.
I look forward to the testimony, Mr. Chairman. And welcome,
Mr. Chairman.
Chairman Crapo. Thank you, Senator Brown. And, again,
Chairman Powell, welcome. We appreciate you testifying today,
and we look forward to your opening statement. You may proceed.
STATEMENT OF JEROME H. POWELL, CHAIR, BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Mr. Powell. Thank you and good morning. Good morning
Chairman Crapo, Ranking Member Brown, and other Members of the
Committee. I am happy to present the Federal Reserve's
semiannual Monetary Policy Report to the Congress today.
Let me start by saying that my colleagues and I strongly
support the goals that Congress has set for monetary policy:
maximum employment and price stability. We also support clear
and open communication about the policies we undertake to
achieve these goals. We owe you, and the public in general,
clear explanations of what we are doing and why we are doing
it. Monetary policy affects everyone and should be a mystery to
no one.
For the past 3 years, we have been gradually returning
interest rates and the Fed's securities holdings to more normal
levels as the economy has strengthened. We believe that this is
the best way we can help set conditions in which Americans who
want a job can find one and in which inflation remains low and
stable.
I will review the current economic situation and outlook,
and then I will turn to monetary policy.
Since I last testified here in February, the job market has
continued to strengthen and inflation has moved up. In the most
recent data, inflation was a little above 2 percent, the level
that the Federal Open Market Committee thinks will best achieve
our price stability and employment objectives over the longer
term. The latest figure was boosted by a significant increase
in gasoline and other energy prices.
An average of 215,000 net new jobs per month were created
each month in the first half of this year. That number is
somewhat higher than the monthly average of 2017. It is also a
good deal higher than the average number of people who enter
the workforce each month on net. The unemployment rate edged
down 0.1 percent over the first half of the year to 4.0 percent
in June, near the lowest level of the past two decades. In
addition, the share of the population that either has a job or
has looked for one in the past month--what we call the ``labor
force participation rate''--has not changed much since late
2013, and this development is another sign of labor market
strength. Part of what has kept the participation rate stable
is that more working-age people have started looking for a job,
which has helped make up for the large number of baby boomers
who are retiring and leaving the labor force.
Another piece of good news is that the robust conditions in
the labor market are being felt by many different groups. For
example, the unemployment rates for African Americans and
Hispanics have fallen sharply over the past few years and are
now near their lowest levels since the Bureau of Labor
Statistics began reporting these data in 1972. Groups with
higher unemployment rates have tended to benefit the most as
the job market has strengthened. But jobless rates for these
groups are still higher than those for whites. And while three-
fourths of whites responded in a recent Fed survey that they
were doing at least OK financially, only two-thirds of African
Americans and Hispanics responded that way.
Incoming data show that, alongside the strong job market,
the U.S. economy has grown at a solid pace so far this year.
The value of goods and services produced in the economy--or
GDP--rose at a moderate annual rate of 2 percent in the first
quarter after adjusting for inflation. However, the latest data
suggest that economic growth in the second quarter has been
considerably stronger than in the first. The solid pace of
growth so far this year is based on several factors. Robust job
gains, rising after-tax income, and optimism among households
have lifted consumer spending in recent months. Investment by
businesses has continued to grow at a healthy rate. Good
economic performance in other countries has supported U.S.
exports and manufacturing. And while housing construction has
not increased this year, it is up noticeably from where it
stood a few years ago.
Turning to inflation, after several years in which
inflation ran below our 2-percent objective, the recent data
are more encouraging. The price index for personal consumption
expenditures, or PCE inflation--an overall measure of prices
paid by consumers--increased 2.3 percent over the 12 months
ending in May. That number is up from 1.5 percent a year ago.
Overall or headline inflation increased partly because of
higher oil prices, which caused a sharp rise in gasoline and
other energy prices paid by consumers. Because energy prices
move up and down a great deal, we also look at core inflation.
Core inflation excludes energy and food prices and generally is
a better indicator of future overall inflation. Core inflation
was 2.0 percent for the 12 months ending in May, compared to
1.5 percent a year ago. We will continue to keep a close eye on
inflation with the goal of keeping it near 2 percent.
Looking ahead, my colleagues on the FOMC and I expect that,
with appropriate monetary policy, the job market will remain
strong and inflation will stay near 2 percent over the next
several years. This judgment reflects several factors. First,
interest rates, and financial conditions more broadly, remain
favorable to growth. Second, our financial system is much
stronger than before the crisis and is in a good position to
meet the credit needs of households and businesses. Third,
Federal tax and spending policies likely will continue to
support the expansion. And, fourth, the outlook for economic
growth abroad remains solid despite greater uncertainties in
several parts of the world. What I have just described is what
we see as the most likely path for the economy. Of course,
economic outcomes that we experience often turn out to be a
good deal stronger or weaker than our best forecast. For
example, it is difficult to predict the ultimate outcome of
current discussions over trade policy as well as the size and
timing of the economic effects of the recent changes in fiscal
policy. Overall, we see the risk of the economy unexpectedly
weakening as roughly balanced with the possibility of the
economy growing faster than we currently anticipate.
Over the first half of 2018, the FOMC has continued to
gradually reduce monetary policy accommodation. In other words,
we have continued to dial back the extra boost that was needed
to help the economy recover from the financial crisis and the
Great Recession. Specifically, we raised the target range for
the Federal funds rate by a quarter percentage point at both
our March and June meetings, bringing the target to its current
range of 1\3/4\ to 2 percent. In addition, last October we
started gradually reducing the Fed's holdings of Treasury and
mortgage-backed securities, and that process has been running
smoothly. Our policies reflect the strong performance of the
economy and are intended to help make sure that this trend
continues. The payment of interest on balances held by banks in
their accounts at the Federal Reserve has played a key role in
carrying out these policies, as the current Monetary Policy
Report explains. Payment of interest on these balances is our
principal tool for keeping the Federal funds rate in the FOMC's
target range. This tool has made it possible for us to
gradually return interest rates to a more normal level without
disrupting financial markets and the economy.
As I mentioned, after many years of running below our
longer-run objective of 2 percent, inflation has recently moved
close to that level. Our challenge will be to keep it there.
Many factors affect inflation--some temporary and others longer
lasting. So inflation will at times be above 2 percent and at
times below. We say that the 2-percent objective is
``symmetric'' because the FOMC would be concerned if inflation
were running persistently above or below our 2-percent
objective.
The unemployment rate is low and expected to fall further.
Americans who want jobs have a good chance of finding them.
Moreover, wages are growing a little faster than they did a few
years ago. That said, they still are not rising as fast as in
the years before the crisis. One explanation could be that
productivity growth has been low in recent years. On a brighter
note, moderate wage growth also tells us that the job market is
not causing high inflation.
With a strong job market, inflation close to our objective,
and the risks to the outlook roughly balanced, the FOMC
believes that--for now--the best way forward is to keep
gradually raising the Federal funds rate. We are aware that, on
the one hand, raising interest rates too slowly may lead to
high inflation or financial market excesses. On the other hand,
if we raise rates too rapidly, the economy could weaken and
inflation could run persistently below our objective. The
Committee will continue to weigh a wide range of relevant
information when deciding what monetary policy will be
appropriate. As always, our actions will depend on the economic
outlook, which may and will change as we receive new data.
For guideposts on appropriate policy, the FOMC routinely
looks at a range of monetary policy rules that recommend a
level for the Federal funds rate based on the current rates of
inflation and unemployment. The July Monetary Policy Report
gives an update on monetary policy rules and their role in our
policy discussions. I continue to find these rules helpful,
although using them requires careful judgment.
Thank you, and I will now be happy to take your questions.
Chairman Crapo. Thank you for your statement, Chairman
Powell.
The first question I have will relate to CCAR. As you know,
the Fed recently released the results of the 2018 Comprehensive
Capital Analysis and Review, the CCAR, stress test. This year
the Fed issued conditional nonobjections to certain banks,
which, as you are aware, some have criticized. What details can
you share about the Fed's decision to issue the conditional
nonobjections while allowing those firms to maintain capital
distributions at recent levels?
Mr. Powell. Thank you, Mr. Chairman. So the CCAR
supervisory test is and will remain an important part of our
supervisory framework, particularly for the largest and most
systemically important firms. And I guess I would start by
saying that this year's test was by a good margin the most
stringent test yet. Hypothetical losses for 2018 were $85
billion higher than during the 2017 stress test, and the
hypothetical decline in the capital ratio was 110 basis points
higher this year than last year; so a very significantly severe
test, and it will result in a material increase in the effect
of aggregate capital requirement of the firms subject to the
test.
So, you know, we carefully evaluated the results. We voted
on them on June 20th, and the next day the firms received a
call from our staff, which informed them of the results and
their options. This is the standard operating procedure that we
follow every year. There is no negotiation, there is no
haggling. The decision has been made the day before by the
Board, and they are just informed of their options, and they
deal with them as they are.
Almost all the firms finished above the required poststress
minimums, which is a sign of how well capitalized the industry
is. Two firms that did not were required to restrict their
distributions to past years' levels. That has always been the
penalty for failing to meet the poststress minimums, and that
will require the firms to build capital this year, these two
firms. The third firm was required to take certain steps
regarding the management and analysis of its counterparty
exposures under stress. So the same exact penalty was paid. We
labeled these as conditional nonobjects rather than objecting
straight out to the plan, and we have done that over a period
of years many times, and we thought that it was appropriate
here.
When we fail a firm, when we actually fail them and send--
what we do is we send the plan back and say that your capital
planning process is deficient, please take this plan back,
please fix it and bring it back to us, and we will look at it
again. So that sends a signal that we believe that the capital
planning processes of the firms are deficient in some serious
way.
As I mentioned, in a number of cases we have gone with sort
of an intermediate sanction, and we felt that that was
appropriate here. One reason for that is the timing of the tax
bill, as we mentioned, and firms plan, of course, well in
advance so that they will have enough capital to pass the test.
This particular bill passed, was signed into law on December
22nd. We used fourth quarter capital levels for the test, so
the TCJA resulted in a significant decrease in the level of
capital these firms have. But, of course, they do not benefit
from what in the longer term will be a lower tax effect on
their earnings. So I think whereas any analyst would look at
that law and say that it is positive for banks and for their
ability to earn money, it was strictly a negative in this test.
So we looked at that, and among other factors we decided to use
the conditional nonobject.
I will stop there, Mr. Chairman.
Chairman Crapo. All right. I appreciate that explanation,
and essentially what I am hearing you say is that the same--in
fact, even a stricter test was applied, and the same standards
of review were used in your analysis and in the consequences
that were applied.
Mr. Powell. That is right, and I just would reiterate our
commitment to this particular supervisory stress test. It is a
very important thing for us, and we will make sure to keep it
stringent.
Chairman Crapo. All right. Thank you.
Chairman Powell, moving to regulation, the recently enacted
Economic Growth, Regulatory Relief, and Consumer Protection Act
received significant bipartisan support, as you know. In
addition to several provisions providing regulatory relief to
community and midsize banks, a key provision of the bill raises
the threshold for the application of the enhanced prudential
standards from $50 billion to $250 billion.
What is the Fed's process for quickly implementing S. 2155,
including its process for ensuring that the financial companies
with total assets between $100 billion and $250 billion
promptly receive similar relief to the relief provided for the
financial institutions with less than $100 billion in total
assets?
Mr. Powell. So our intention and our practice is going to
be to implement the bill as quickly as we possibly can. As you
probably know, I am sure you know, we released a statement the
Friday of July 4th week laying out our plans to move ahead with
some things. And, again, we will do them as quickly as
possible, and we indicated that we will try to move that along
very quickly.
Chairman Crapo. All right. Thank you.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
Mr. Chairman, I have a number of questions. I hope your
answers can be brief. Thank you for our phone call the other
day. I know you know this: In real terms wages have not budged
recently. Last week BLS reported that hours for production and
nonsupervisory workers are flat and pay has actually dropped
over the past year. Of course, we should focus on real wages
rather than nominal wages. By that measure, is the typical
worker really better off this year than he or she was a year
ago?
Mr. Powell. Yes. Yes, I would say that the labor market has
strengthened. The labor report will show that wages went up 2.7
percent. That is significantly higher than trend inflation.
There is a bit of a bump from gas prices going up and consumers
do pay that, but I would say that overall workers are better
off because----
Senator Brown. I would partially contradict that and say
that nonsupervisory workers, four out of five workers have seen
nominal wages go up but real wages have not by those same BLS
statistics.
Let me move to another. You have called stress testing
``the most successful regulatory innovation of the postcrisis
era''--you said that some time ago--but the actions the Fed has
taken during your tenure undercut that effect when the Fed gave
Goldman, Morgan, and State Street passing grades this year even
though they failed to meet capital requirements in CCAR, the
first time that has ever happened in CCAR history. The Fed
proposes to weaken the leverage constraint, and CCAR reportedly
may drop the qualitative portion of the test, wants to give
bankers more leeway to influence the Fed's models, and may soon
adjust Dodd-Frank stress tests to make them less stressful and
less frequent, hence the ``periodic.''
Stress test tests were adopted in 2009 to provide
confidence to the public that the banks could weather economic
shocks. How is the public supposed to trust the stress test
when the Fed proposes all of those ways to weaken them?
Mr. Powell. So we are strongly committed to using stress
tests. We really developed the supervisory stress test at the
Fed, and as you know, we think it is a very important tool. It
was one of the main ways that we used to raise capital,
particularly among the largest firms, and we are committed to
continuing stress testing as one of the three or four most
important innovations, along with higher capital, higher
liquidity, and resolution. It is one of the big four pillars
for us.
The program has to continue to evolve. We want to
strengthen it. We want to make it more transparent. We want to
improve it over time. And all of our actions are designed to do
that, and I think if you look at the state of the banking
system and the fact that this test will require higher capital,
then I think you will see that is consistent with--that our
words are consistent with our actions.
Senator Brown. Well, I think the message coming out
emanating from the business press--and those are not, you know,
Democratic, liberal newspapers; they are the Wall Street
Journal, the Financial Times, the New York Times business
section--speaks to the fact that these stress tests are getting
weaker.
Let me ask another question. Vice Chair Quarles has given
two speeches outlining how the Fed wants to recalibrate the
rules for large foreign banks. You gave an answer, a carefully
worded answer, I thought, to obscure the fact that large
foreign banks may receive less oversight as a result of S.
2155. The public is getting mixed messages from the Fed.
For the record, can foreign banks with more than $50
billion in U.S. assets--Deutsche, Santander, Credit Suisse, the
others--can foreign banks with more than $50 billion in U.S.
assets expect to get regulatory relief during your tenure?
Mr. Powell. You know, I think I can say that S. 2155, it is
not clear to me how it provides regulatory relief to those
firms. I mean, all of the banks that have $50 billion in U.S.
assets have more than $250 billion in global assets. So I do
not think there really will be much effect. I will not say that
we will never do anything to provide regulatory relief to a
group during my tenure, but----
Senator Brown. So your position seems to be that if they
are between--if they are over 50 in the U.S., under 250 as
those are, but much, much, much bigger with all the----
Mr. Powell. Globally.
Senator Brown. Globally, that you do not expect any
regulatory relief for them?
Mr. Powell. Well, the main thing is the $50 billion
threshold for internal holding companies will remain the same.
We are not looking at that. And I think they will not see much
difference.
Senator Brown. Physical commodities. The Fed proposed a
physical commodities rule for 2016. You are moving presumably
to finalize it. The Fed responded to questions for the record
saying that the Board continues to consider this proposal. When
can we expect action on it, Mr. Chairman?
Mr. Powell. I do not have a date for you on that. I know
that we received extensive comments on it, and we are
considering them.
Senator Brown. Do you feel some urgency on it?
Mr. Powell. I will have to go back and look and see where
that is in the line.
Senator Brown. If you would please respond in writing to
that.
And a last question, Mr. Chairman. The Administration and
some in Congress pushed through tax cuts and bank deregulation
under the guise that it would trickle down to American families
in the form of more loans. Loan growth has slowed in the last
quarter. It was less than half the growth rate than during the
last year of the Obama administration. The four largest banks,
as you know, redirected record levels of profits into dividends
and stock buybacks. The four big banks' CEOs got an average
raise of 26 percent.
My question is simple: When, if ever, do you expect to be
able to come before this Committee and demonstrate to us in
this Committee, as Chair of the Fed, demonstrate to us how tax
cuts and deregulation have actually benefited the real economy
in the forms of more lending?
Mr. Powell. I guess I see my role as reporting about the
overall economy rather than the effect of any particular law,
although I will be happy to take questions on that.
Senator Brown. OK. Thank you, Mr. Chairman.
Chairman Crapo. Senator Scott.
Senator Scott. Thank you, Mr. Chairman. And good morning,
Chairman Powell. Thank you for being with us today.
Mr. Powell. Good morning, Senator.
Senator Scott. It certainly is difficult to find negative
news as it relates to our economic reality. The truth of the
matter is that we are in the third largest economic expansion
since 1854--not 1954--1854. An 18-year low in our unemployment
rates. African American unemployment for the first time in
recorded history below 6 percent at 5.9 percent. Hispanic
unemployment at 4.6 percent, lowest recorded as well. Wage
growth 2.7 percent, the highest level since 2009. And the
Atlanta Federal Reserve suggests that we could have a 5-percent
GDP growth in the second quarter. And the good news just keeps
on coming.
Small businesses said they have not been this optimistic in
45 years. That has got to be a record. Beyond a doubt, tax
reform combined with responsible regulations have resulted in
more Americans have more money in their pockets. And another
great example of the economic reality that we face today is
that the core prime-age labor force participation rate has
stabilized since 2013 and is starting to climb in the right
direction.
My question for you, Chair Powell, is: What has been the
overall impact of the economic growth for the long-term
unemployed? And can we read into the prime-age labor force
participation rate's increase really positive news for those
long-term unemployed?
Mr. Powell. Yes, so prime-age labor force participation,
Senator, as you pointed out, has been climbing here in the last
couple of years. That is a very healthy sign because prime-age
labor force participation is really--you know, it has been
weak, and it has been weak in the United States compared to
other countries. So it is very troubling, and the fact that
that is coming back up is a very positive thing. We really hope
it is sustained, and we hope that these gains in participation
can be sustained. We have a long box in our Monetary Policy
Report that talks about that.
The other thing, you mentioned the long-term unemployed.
Senator Scott. Yes.
Mr. Powell. So the number of long-term unemployed has come
down dramatically since, I do not know, maybe 2010. I want to
say the numbers were between 6 and 7 million, and unless I get
this wrong, I think the current number of longer-term
unemployed is around 1.5 million. So the people who are on the
very edges of the labor force like those people, those are the
ones who have benefited the most.
Senator Scott. Thank you. With all that economic heat
coming our way in a positive way, the prices seem to be going
up, so the CPI rose 2.9 percent, the fastest pace since 2012.
Those rising prices could negate some of the wage growth that I
just talked about if left unchecked.
In the past we have discussed, you and I, the Fed role
according to the congressional mandate seeking stable prices
being one of those specific mandates. We have also talked about
the downsides of low interest rates for extended periods of
time. What do you see in the prices for energy, housing, health
care, and transportation? And how is that going to impact your
thinking moving forward?
Mr. Powell. Inflation has been below our 2-percent
objective since I joined the Board of Governors in May of 2012
just until last month. For the first time, we have 12 months of
core inflation being at 2 percent. So that is a very positive
thing. We want to see overall inflation continue to come up so
that it is sort of symmetrically around 2 percent. I would say
we are just shy of achieving that. But we want inflation to
remain right around 2 percent and be as likely to be a little
above as a little below. I would say we are on the--and I think
our monetary policy is really designed to help us continue to
achieve that. So we are gradually moving up rates, and that we
think is the policy that will help us get inflation to 2
percent sustainably.
Senator Scott. Thank you. Just two more areas for you.
South Carolina, my home State's economy is built on trade. You
name it, we make it. We grow it and we ship it. Cars, cotton,
tires, jets, peaches, soybeans, turbines, solar panels, and the
list goes on and on.
What has generally happened in the past to economic growth
when we have raised tariffs?
Mr. Powell. I have to start by saying that, you know, I am
really firmly committed to staying in our lane and, you know,
our lane is the economy. Trade is really the business of
Congress, and Congress has delegated some of that to the
executive branch. But, nonetheless, it has significant effects
on the economy, and I think when there are long-run effects, we
should talk about it and talk in principle. And I would say in
general countries that have remained open to trade, that have
not erected barriers, including tariffs, have grown faster.
They have had higher incomes, high productivity. And countries
that have, you know, gone in a more protectionist direction
have done worse. I think that is the empirical result.
Senator Scott. I only have about 5 seconds left, so let me
use my time wisely. As you know, I have a background in the
insurance industry, and I am seriously a fan of a State-based
system of insurance regulations. I think it is the best in the
world. As the Fed participates in developing the ICS with the
IAIS, I strongly urge you to shape a final product that
protects the U.S. system of insurance regulation, and I would
appreciate you and I having a conversation in the near future.
Mr. Powell. Thank you, Senator.
Senator Scott. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman. Welcome,
Chairman Powell.
The issue of wages has been discussed by several of my
colleagues and yourself. In 2000, the last time we were at this
situation where we were touching 4 percent unemployment, the
share of national income by corporations was about 8.3 percent,
and the share of wages was 66 percent. Today we are once again
reaching that point of about 4 percent unemployment, yet
corporate profits account for about 13.2 percent of national
income. They have gone up significantly. Wages as a share of
national income have gone down from 66 percent to 62 percent.
If those trends continue, we are in a situation where working
men and women are not going to get their fair share of growth.
What are you trying to do at the Fed to ensure that they get
their fair share of growth?
Mr. Powell. The decline in labor share of profits--labor
share of profits was generally, you know, oscillating fairly
constant for a number of decades and right around the turn of
the century began to drop precipitously and continued to do so
for more than a decade. It is very troubling. We want an
economy that works for everyone. And that happened, by the way,
in essentially all advanced economies, and probably a range of
factors are responsible for that.
In the last 5 years or so, labor share of profits has been
sideways. This is very much akin to the flattening out of
median incomes over the last few decades. So it has got to do
with a number of global factors.
The thing that we can do is to take seriously your
congressional order that we seek maximum employment, so in
tight labor markets, workers are more likely going to be paid
well and paid their share. I would say most of the factors that
have driven down labor share of profits are really not under
the control of the Fed. And so those are issues that we do not
have control over.
Senator Reed. But would you say that the tax bill did not
affect those downward trends in wages positively, that, in
fact, it has done nothing to reverse what you have seen as a
decade or more of decreases?
Mr. Powell. I think wages are set in the marketplace
between workers and companies, and they are affected by a range
of factors. I think it would be early to be looking for a bill
that was signed into law less than a year ago to be able to
visibly be affecting much of anything at this point, really.
These things, big changes in fiscal policy, take quite a while
to affect wages.
Senator Reed. So none of this good news we are talking
about today is a result of this tax bill, it is too early?
Mr. Powell. It is very hard to isolate the--I mean, I would
say wages have moved up meaningful over the last 5 years. It
has been quite gradual. And, you know, we certainly think it
would be fine for them to move up more.
Senator Reed. Do you think the European Union is a foe of
the United States?
Mr. Powell. No, I do not.
Senator Reed. Thank you.
As we look ahead to some of the potential obstacles--and
having, both of us, lived through 2008 and 2009, it looked good
and then it looked real bad. In retrospect, we saw some signs
of the danger. What are the signs of danger that you are sort
of focusing on? There are huge deficits, both Government
deficits, private deficits worldwide. You have got a trade
battle brewing. And you have got things like Brexit that could
complicate our life dramatically. So what are the two or three
things that you think could throw us off this track?
Mr. Powell. There is a difference between the longer term
and the short term. So in the near term, things look good. You
know, we look very carefully at a range of financial conditions
and financial stability vulnerabilities, we feel that those are
at sort of normal, moderate levels right now, although there
are some areas that are elevated, some assets prices are high,
and there is an elevated level of debt in the nonfinancial
corporate sector. More broadly, banks are well capitalized.
Households are in much better shape. So financial stability I
do not worry about too much at this point, although we keep our
eye on that very carefully after our recent experience.
You mentioned trade. It is hard to say what the outcome
will be. Really, there is no precedent for this kind of broad
trade discussions. In my adult life, I have not seen where
essentially all of our major trading partners--hard to know how
that comes out. If it results in lower tariffs for everyone,
that would be a good thing for the economy. If it results in,
you know, higher tariffs across a broad range of traded goods
and services that remain that way for a longer period of time,
that will be bad for our economy and for other economies, too.
Senator Reed. Thank you very much, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
Chairman Powell, first of all, I want to thank you for
being here today. Before I get into the questions, I would just
like to take note of the two rules that were announced this
spring: the new stress capital buffer and the proposed changes
to tailor the enhanced supplementary leverage ratio. I do
appreciate the Federal Reserve's efforts, and I hope we can
continue an open dialogue on these changes as you move forward.
I am just curious. You indicated with regard to Senator
Reed's question, based on the tax bill, clearly there is an
improvement in GDP growth over the last couple of years. Was it
anticipation of the tax bill being passed? I would like to
flesh that out just a little bit, because most certainly I
think a lot of truly believe that that tax bill is a key
component in the development of an improvement in our GDP. Your
thoughts?
Mr. Powell. I was really answering about whether you could
see it in wages right now. That is hard to do. So growth
averaged around 2 percent for 8 years, and then in 2017, I
think the current estimate is 2.6 percent. And you saw
significant improvements in household and business confidence
levels. Overall confidence about the economy, you saw that
coming on in 2017. Some of that was probably in anticipation of
the passage of what finally passed. So probably that was
already in the growth rate. I think it is hard to say, but I
suspect that some anticipation of tax cuts and tax reform was
already in the growth in 2017.
Going forward--and we have said this--we expect--there are
a range of estimates on this, but we would expect that the tax
bill and the spending bill would provide meaningful support to
demand for at least the next 2 or 3 years, maybe 3 years, and
also might have, you know, effects on the supply side as well.
To the extent you are encouraging more investment, you are
going to get higher productivity. So it is very--these
estimates are subject to tremendous uncertainty both as to
amount and as to timing. But I think we look at the range of
estimates, and that is certainly where we broadly come out.
Senator Rounds. I just want to be clear. That tax bill had
a positive impact, even if it is the anticipation of the tax
bill. It has a positive impact on our GDP growth, correct?
Mr. Powell. Yes, I think, so this year, maybe last year,
too.
Senator Rounds. OK. Let me ask you this: With regard to
trade, you make notes specifically in your comments on trade
and the fact that there are some things up in the air right
now. There is perhaps some instability or some questions on the
part of not only our businesses but businesses around the
world. Are businesses looking for stability with regard to
trade compacts? Or are they looking for opportunity and
instability?
Mr. Powell. Well, they would clearly be looking for
stability.
Senator Rounds. OK. And then I would look to associate
myself--and I support what Senator Scott indicated earlier with
regard to the insurance issues and the fact that our State-
based regulatory system for insurance I think is critical. I
think it is a positive thing for consumers when it is as close
to that State regulatory process as possible.
When you came here before the Committee earlier this year,
you discussed capital requirements in the options market and
mentioned that the Federal Reserve was working on a rule to
transition from the risk-insensitive Current Exposure Method,
or CEM, to the internationally agreed upon Standardized
Approach for Counterparty Credit Risk, SA-CCR. I am supportive
of these efforts, but I remain concerned about the timeline for
implementation. I noted with concern in a letter to Vice Chair
Quarles last year, in response to my request that the Federal
Reserve used its reservation of authority to grant interim
relief, Vice Chair Quarles asserted that the Fed lacks such
authority in this context. I originally raised this issue when
Vice Chair Quarles was testifying at his confirmation hearing
last July. Unfortunately, it has been a year since that time,
and the Fed has yet to take meaningful action.
I remain concerned about this because the longer we wait
for American regulators to implement SA-CCR, the more market
makers will exit the options market entirely, making our
financial system more vulnerable to economic shocks and less
competitive compared to our international peers.
I noted in the Basel Committee's last progress report from
April of 2018 that 22 of the 27 Basel member countries have
either implemented SA-CCR or made substantially more progress
at implementation compared to the United States. I am a
particularly strong supporter of risk-based capital standards,
particularly in this context in options markets. Can you
provide an update on when the rulemaking from CEM to SA-CCR
will be released?
Mr. Powell. I know that we are working on it now. I know
that we think it is good policy. And I cannot give you an exact
date, but I know we are actively directing a rule. By not being
able to provide interim relief, all we meant was we actually
have to amend the rule. So we will be putting a rule out for
proposal and get comments, and then it will go final. It is in
train, but these things take time. We are working on it.
Senator Rounds. OK. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Menendez.
Senator Menendez. Thank you. Thank you, Chairman Powell,
for being here.
Lately we have heard a near constant refrain from the
Administration, the President himself, corporate media outlets,
and even from you that ``the economy is doing very well'' and
``it has never been better.''
Now, if we take a narrow view of the unemployment rate and
corporate profits, then, sure, it is a real rosy picture. But
take a wider lens to what working families are seeing, and the
view is one of great contrast.
Over the last year, despite falling unemployment, working
families actually saw their real wages fall. By comparison,
after-tax corporate profits increased by 8.7 percent just in
the last quarter.
There is something fundamentally wrong in our economy when
workers are seeing their pay cut while corporations are
benefiting from a $2 trillion tax giveaway. Working families
not only cannot get ahead, but they are actually falling
behind.
I can tell you, families in New Jersey cannot keep up with
the surge in costs, particularly for prescription drugs and
health care. I just heard from a constituent in Glendora, New
Jersey, who told me that even with his Medicare and secondary
insurance, he cannot afford to pay for his insulin and diabetes
equipment, and that is pretty unconscionable.
So my question to you, Mr. Chairman, is: When will the
benefits of this ``booming economy'' reach working families?
Mr. Powell. Thank you, Senator. I think we are aware and I
am aware that while the aggregate numbers are good and
unemployment is low and surveys overall of households are very
positive about the job market, not everybody is experiencing
the recovery. Not every demographic group, not every place are
experiencing this. So we call that out in every FOMC meeting
and in all of our public communications, as I did in my
testimony this morning. And, you know, we understand that we
have to take maximum employment seriously, and we do. We have
been supporting a strong labor market for a long time. Despite
many calls for us to raise interest rates much more quickly, I
am glad that we stayed in longer than that, and I think
gradually raising rates is the way for us to extend this
expansion. Nothing hurts working families and people at the
margin of the labor markets more than a recession.
Senator Menendez. Well, you are probably going to have a
couple more interest rates. What specific steps then are you
taking to foster broad-based wage growth so that the average
worker, not just managers and executives, are reaping the
benefits? I cannot accept that wages are growing when the
Bureau of Labor Statistics points out that production and
nonsupervisory workers saw their wages fall two-tenths of a
percent, and that is despite increasing their average work week
to make up for it. So they are getting squeezed.
Mr. Powell. So the latest Government report was that wages
went up 2.7 percent for production, nonsupervisory workers, and
supervisory workers over the last 12 months. And that is
higher. That is moving up. It also happens that inflation has
moved up and that sort of a bump in energy prices is passing
through the headline inflation number. So I think overall,
though, you see inflation at about a 2-percent trend. You see
wages at 2.7 percent. So I think those trends are healthy, and
I think they are reflected in what are pretty positive surveys
among workers generally.
Senator Menendez. Let me ask you this: These working
families we are talking about are the first to feel the impact
when banks, big banks, and corporations take risky bets with no
accountability. When we passed Dodd-Frank, we included language
to ban incentive-based compensation practices that reward
senior executives for irresponsible risk taking. Regulators
issued a proposal in 2016, but more than 2 years later, nothing
has been finalized. In the meantime, Wall Street bonuses jumped
17 percent last year to an average of more than $184,000--the
most since 2006, and that is bonuses alone.
Now, you have made time to weaken Wall Street oversight by
revisiting capital rules, revisiting leverage rules, proposing
changes to the Volcker Rule, all of which were finalized after
years of deliberation, public comments, and input from other
regulators, and all of which protect our economy from another
financial crisis. How is it, Mr. Chairman, that you have not
made time to finish the incentive-based compensation rulemaking
for the first time? And can you give me a commitment today as
to a timeline for when this will be done?
Mr. Powell. We tried for many years--it is a multiagency
rule, the incentive comp rule. We tried--we were not able to
achieve consensus over a period of many years between the
various regulatory agencies that need to sign off on that. But
that did not stop us from acting, you should know. Particularly
for the large institutions, we do expect that they will have in
place compensation plans that do not provide incentives for
excessive risk taking. And we expect that the Board of
Directors will make sure that that is the case. And so it is
not something that we have not done. We have, in fact, moved
ahead through supervisory practice to make sure that these
things are better than they were, and they are substantially
better than they were. You see much better compensation
practices here focusing mainly on the big firms where the
problem really was.
Senator Menendez. Well, that does not have the power of a
rule. I hope we can get to a rule-based purpose, because at the
end of the day we seem to have revisited everything that was
already completed, but yet we cannot get this one going.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Corker.
Senator Corker. Thank you, Mr. Chairman. And, Mr. Chairman,
thank you for being here. I was remarking to our staff
yesterday, as we talked a little bit about this meeting, that
because of the way that you are handling yourself, which I
think is in a very positive way, following the Fed is getting
really boring these days. But hopefully that will continue. I
know that is your goal. We appreciate some of the transparency
efforts that you have put forth.
I think I heard you earlier talk about inflation, and
obviously we are, you know, at full employment. Hopefully there
will be additional people participating in the workforce that
have not in the past, and I am glad to see those numbers are
rising. But if I understand correctly what you are saying, the
predictive stat for people who are watching the Fed today will
be core inflation. In other words, that will be the
determinative factor as it relates to rate increases in the
future.
Mr. Powell. So we, of course, look at headline inflation,
too, and that is our legal mandate. We look at core inflation
when we are thinking about the path of future inflation,
though, because it is just a better predictor. Many of the
things that affect headline inflation do not actually send much
of a signal about future inflation.
Senator Corker. But for people who are trying to see where
things are going, now that the labor issue is where it is
today, the predictive matter as it relates to future increases
and the amount of those is really going to be inflation.
Mr. Powell. Inflation is going to be really important. You
know, I think we are--for quite a while here, we have been in
the range of achieving our maximum employment goal, and we are
only just getting there with inflation. I would not declare
victory on that yet, either.
Senator Corker. Yeah, it has really been difficult, I
think, for many Western countries to get to a place that they
are comfortable in inflation, which brings me to the wage
issue.
Look, like my colleagues, I am very concerned about wage
stagnation, and I am not in any way trying to offload that
issue to you. We all have responsibilities to put in place
policies that will hopefully cause all Americans' wages to
increase. But what we are seeing here and what we are seeing
actually, let us face it, in Western countries around the world
is people are not--the anticipation that people had relative to
where they were going to be in life is not being achieved,
which is creating some extremes as it relates to the political
environment--actually, in some ways beginning to destabilize,
because people are, rightly so, concerned about the fact that
they are not really increasing the ability to raise their
families as they wish.
Let us talk a little bit about that. What is it from your
perspective that is causing us to be in this place where the
economy is growing, but for the last 30 years, Americans really
have not seen the wage gains that they would like to see? Could
you just lay out--not in any way to take responsibility at the
Fed solely yourself, but what is driving that?
Mr. Powell. You know, the stagnation of middle-class
incomes, the relatively low mobility that we have, the
disappointing level of wages over a long period of time, it is
all of a piece, and it all does go to that. And I think the
causes of these things are really deep. It is not something we
can address really successfully over time with monetary policy,
as you say. So, I mean, I think it is----
Senator Corker. What are those deep causes?
Mr. Powell. So I think, you know, part of it is, in our
case, in the case of the United States, stagnation of
educational achievement, the leveling out of educational
attainment. When U.S. educational attainment was rising,
technology was coming in; it was asking for more skills on the
part of people. They had those skills, and so you had
productivity rising, you had incomes rising, you had inequality
declining over a long period of time.
U.S. educational attainment flattened out in the 1970s, and
everywhere else in the world it has been going up. We really
had a lead. We were the first country to have gender-blind, you
know, secondary education universally. So that is a big thing.
Really the only way for incomes to go up over a long period of
time is through higher productivity. Real incomes go up over a
long period of time because of higher productivity. Higher
productivity is a function of, in part, the educational and
skills and aptitude of the workforce. It is also, you know,
partly the evolution of technology and investment.
I think right now in particular we had a number of years of
very weak investment after the crisis because there was no need
to invest. That weak investment period is casting a shadow over
productivity right now, which is one of the main factors that
is holding down wages. These are deep, hard problems, but
education is really at the bottom of the pile.
Senator Corker. And I am glad you alluded to that, and my
time is up, I know. But we have had--we actually have had
productivity growth without wage growth.
Mr. Powell. Over long periods of time, the only way wages
can go up sustainably is with productivity growth. They do not
necessarily match all the time. I mean, since the crisis ended,
productivity growth has been--output per hour has been very,
very weak. Increases have been very, very weak.
Senator Corker. Thank you, Mr. Chairman.
Chairman Crapo. Senator Tester.
Senator Tester. Thank you, Chairman Crapo and Ranking
Member Brown. And thank you for being here, Chairman Powell. I
want to run over some stuff that has been run over already just
real quick.
You had answered in a previous question that the stress
tests continue. Is that correct? Stress tests continue on the
banks?
Mr. Powell. Absolutely. Every year.
Senator Tester. And you said you were going to try to
improve them, make them more transparent, which, by the way, I
applaud that. Would you also add to that list that you are
trying to weaken the stress tests?
Mr. Powell. No, absolutely not.
Senator Tester. You are still making them do what they need
to do to prove that their soundness is there?
Mr. Powell. The 2018 stress test was by a margin the most
stringent stress test we have done yet.
Senator Tester. OK. Folks also continue to be concerned
that S. 2155 allowed foreign megabanks like Deutsche Bank, UBS,
Barclays to see their enhanced prudential standards weakened.
You have agreed--and you have said it again today--that S. 2155
does not do that. Do you have any plans to weaken standards on
the largest FBOs that I mentioned?
Mr. Powell. No. No, sir.
Senator Tester. OK. In your testimony you said, ``Good
economic performance in other countries has supported U.S.
exports and manufacturing.'' What other countries are you
talking about? Would that include the EU? Would that include
Canada and Mexico, the other countries, I am talking about,
that have good economic performance? Would that include China?
Those other countries----
Mr. Powell. It would include all those countries, yes.
Senator Tester. All those countries? And I know you said
that the tariff situation and the trade situation is something
that Congress deals with that you do not deal with, but it
would appear to me--and I just want to get your opinion on this
because I value it. It would appear to me that all this stuff
about getting out of NAFTA and putting tariffs on folks and not
being at the table when TPP was finally signed is a net
negative on our economy. Would you agree with that long term--
short term and long term?
Mr. Powell. I am going to try to walk that line that I
mentioned earlier and not comment on any particular policy, but
in principle, open trading is good. We do not want countries to
have barriers to trade or, you know, tariffs being a barrier to
trade.
Senator Tester. Both directions.
Mr. Powell. In both directions. We want to have an
international, you know, rules-based system in which countries
can get together and any country that violates that can face
the other countries, and that system has served us very well.
Tariffs have come down steadily over the years. Until recently,
they were at their all-time low level. But the thing is we do
not know how this goes. This process we are in right now, the
Administration says it is going for broadly lower tariffs. If
that happens, that is good for the economy. That would be very
good for the economy--our economy and others' too, by the way.
On the other hand, if we wind up with higher tariffs, then not
so good.
Senator Tester. That is correct. And in the meantime, just
as a sidebar, if it cuts off foreign markets for grains, for
example, there is going to be a lot of people in family farm
agriculture that are put out of business. And that is my
concern. You do not need to comment on that.
I realize that you do not play a central role in our
housing finance system, but you do play a central role in our
economy, and the Fed does have a sizable balance sheet with
billions of dollars' worth of mortgage-backed securities on the
books.
In March it was announced that Fannie Mae and Freddie--no,
not Freddie, but Fannie Mae would need $4 billion from its line
of credit at the Treasury Department. How concerning is this to
you and the Fed given the size of mortgage-backed securities
that are on your books?
Mr. Powell. The mortgage-backed securities that we have are
guaranteed by the Federal Government. There is no credit risk
there. I would say more generally, if this is responsive, I
think that the housing finance system, the GSEs, remains one of
the big unfinished pieces of business postfinancial crisis, and
I think it would be healthy for the economy and for the housing
finance system to see that move forward.
Senator Tester. You answered my second question. So you
think that Congress' inability to address Fannie Mae and
Freddie Mac in the end could harm our economy?
Mr. Powell. I think it is really important for the longer
run that we get the housing finance system off the Federal
Government's balance sheet and using market forces and some of
the things that are already in place and carry forward some
kind of a reform. I think it is very important for the economy
longer term.
Senator Tester. OK. Thank you, Chairman Powell, and I
appreciate your being here. I have got a couple other questions
for the record that I would love to have you answer.
Thank you very much.
Mr. Powell. Thanks.
Chairman Crapo. Senator Toomey.
Senator Toomey. Thanks, Mr. Chairman. Thank you, Chairman
Powell, for joining us.
I just had a quick follow-up on this wage discussion. I
think the most recent numbers we had were the month of June.
Comparison to the previous June, 2.7 percent I think was the
nominal growth in the wage number, so obviously a positive
number. I think we would all like to see a bigger real growth.
I think there is no question we would like to see that. But I
would suggest that there is something peculiar about just the
arithmetic of this sometimes, and maybe you could just briefly
comment on this.
As our economic growth has coincided with a significant
growth in entry-level jobs and people coming into the workforce
at entry-level wages, since those wages are at the low end of
the wage spectrum, isn't it the case that the nature of
arithmetic is that the average wage will reflect to some degree
the fact that new entrants naturally come in at the low end of
the spectrum and it would mask the growth in wages of people
who have been continuously employed?
Mr. Powell. Yes, that is right. There can be compositional
effects, is what we call them, so younger people coming in,
lower wages; older people, higher wages, retirement can be an
effect. I am not sure it is right now, but I can check on that.
Senator Toomey. I think that is likely to be the case as we
have increasing workforce participation. I think that is a
likely consequence.
You made a very important point, I think, earlier that
sustained wage growth absolutely requires sustained
productivity growth. It is not possible to have the former
without the latter. We all know that productivity growth is
driven by several things, but one of the principal contributing
factors is capital expenditure. It is new tools and equipment
and technology in the hands of workers that make them more
productive.
The June FOMC minutes included a disturbing observation,
and I will quote very briefly. It says, ``Some districts
indicated that plans for capital spending had been scaled back
or postponed as a result of uncertainty over trade policy.'' So
the FOMC is saying that there is already adverse consequence in
the form of scaled back investment as a result of uncertainty
in trade policy. If there is more uncertainty--and we have
threats of additional tariffs hanging over the markets right
now--doesn't it follow that this is a threat to wage growth
because the continuum includes a reduction in capital
expenditure, lower productivity growth than we would otherwise
have in a corresponding relative weakness in wage growth?
So, in other words, isn't all this trade uncertainty a
threat to wage growth?
Mr. Powell. It may well be. We do not see it in the numbers
yet, but we have heard a rising chorus of concern which now
begins to speak of actual cap ex plans being put on ice for the
time being.
Senator Toomey. Yeah, which is really disturbing. The
Senator from Tennessee's question about what causes stagnant
wages, well, it corresponded to an extended period of very low
productivity growth, which itself corresponded to very low
capital expenditure growth. We broke that with the incentives
in the tax reform that caused a big surge in cap ex. And it
would be a tremendous pity to jeopardize that because of the
trade policy.
Let me move on to a somewhat technical matter regarding the
Fed's balance sheet. As you know, historically the Fed has
manipulated just overnight rates, the discount rate and Fed
funds rate, and let the markets decided all other interest
rates. That all changed with quantitative easing when the Fed
became the biggest market participant in the purchase of
Treasurys. And it changed in an explicit way when the Fed
decided that it would intentionally manipulate the shape of the
yield curve with Operation Twist, which was very consciously
and willfully designed to change the shape of the curve.
My understanding is now, to the extent that you make
purchases of Treasurys, which you do when payments come back to
the Fed in excess of what you want to run off, you do so
basically as a set proportion of what the Treasury is issuing
without regard to where on the curve they are issuing.
So while this is happening, the yield curve is flattening
and in a pretty dramatic way, right? Twos, tens were like a
hundred basis points a year ago. Today they are, I do not know,
25 basis points. Some people are concerned that a flattening
curve or an inverted curve correlates with economic slowdown
and recession.
Here is my question: Does a dramatic change in the shape of
the yield curve in any way influence the trajectory that you
guys are on with respect to normalizing interest rates and the
balance sheet?
Mr. Powell. Sorry. In other words, are we going to change
our balance sheet policies due to the--is that what you are
asking--due to the changing shape of the curve?
Senator Toomey. Yeah, does the changing shape of the curve
weigh into your considerations at all?
Mr. Powell. You know, I think what really matters is what
the neutral rate of interest is, and I think population look at
the shape of the curve because they think that there is a
message in longer-run rates, which reflects many things, but
that longer-run rates also tell us something, along with other
things, about what the longer-run neutral rate is. That is
really, I think, why the slope of the yield curve matters. So I
look directly at that rather than--in other words, if you raise
short-term rates higher than long-term rates, you know, then
maybe your policy is tighter than you think, or it is tight,
anyway.
So I think the shape of the curve is something we have
talked about quite a lot. Different people think about it
different ways. Some people think about it more than others. I
think about it as really the question being what is that
message from the longer-run rate about neutral rates.
Senator Toomey. Yeah, I think that makes a lot of sense.
I see my time has expired. Thank you, Mr. Chairman.
Chairman Crapo. Let me check.
Senator Warner. I got in under----
Chairman Crapo. Senator Warner.
Senator Warner. Thank you, Mr. Chairman. Chairman Powell,
it is great to see you again. Part of the challenge coming this
late in the hearing is a lot of my questions have been
answered. I want to follow up a comment at least on what
Senator Toomey was addressing. I was going to cite the minutes
of the Fed June meeting as well in terms of you say you have
not seen these effects in the economy yet, but there has been a
slowing of cap ex because of concerns about what I think is the
President's kind of ill-thought-through trade war. I strongly
believe we ought to take into consideration and have a fair and
balanced trading system. I think China is the worst offender,
particularly in the theft of intellectual property and other
items. I was actually applauding the President when he moved
strongly at first for a day or two on ZTE and before he folded
at the first pushback from President Xi. And I would argue that
we would be in a stronger position vis-a-vis citizenship if we
had been about to actually rally other nations around the
world, nations that are our allies. Instead, he is engaged in
trade practices with them. No need to comment on that.
Senator Tester raised an issue I wanted to raise as well,
indicating foreign banks that have relatively small U.S.
subsidiaries but large overall international assets are still
going to be subject to stress tests. As a matter of fact,
wasn't it correct that at least, since there are a variety of
stress tests, the CCAR stress tests still applies to
institutions that have assets at any level or relatively any
level, and that there was recently a foreign bank with $900
billion of total assets but only $86 billion in U.S. assets
that the CCAR stress test still applied to? Is that not
correct?
Mr. Powell. I believe that is correct.
Senator Warner. OK. I think you have addressed that, and
there are some tensions here between--the Chairman is a good
friend of mine and all. I think there may be appropriate
regulatory relief for some regional banks, but I want to make
sure--and I think you have addressed this with Senator Tester--
that for those banks in that 100 to 250 range, you can have a
thorough process and rulemaking process that stress tests are
going to continue on a regular basis, and that these banks that
fall into this category are going to be strictly reviewed
before they might receive some of this regulatory relief to
make sure that they--you know, size alone may not be the only
indicator of significance to the overall market, and there may
be some institutions that fall in that category but still need
the enhanced SIFI diagnosis.
Mr. Powell. Right, so the bill gives us all the authority
we need, frankly, to reach below 250 down to 100 and apply any
prudential standard we want, either on the grounds of financial
stability or just the safety and soundness of banking
companies. We will published--we are thinking about it
carefully now. We are going to publish for public comment the
range of factors that we can consider. And, again, the bill is
very generous in letting us consider all the factors that we
think are relevant.
Senator Warner. But one of the reasons that I was
supportive of the legislation was testimony that you had given
prior to the passage that this was not going to be some blanket
dismissal of these institutions, that you were going to go
through a thorough rulemaking process and make an evaluation
before those regulations were relaxed. Is that still your
position?
Mr. Powell. We will, absolutely. In fact, there is one
institution now that is designated as a SIFI that is less than
250. So we are not shy about finding financial stability risk
when we find it.
Senator Warner. We think, again, the lines are always
arbitrary here, but it is up to you and the Fed to make sure
that institutions, particularly based upon their business
practices that may be overall economically significant, that
they still will have that determination, as you indicated, even
if they fall below 250.
Mr. Powell. Yes, a wide range of factors it will be.
Senator Warner. Let me move to a different topic. I
recently sent you a letter with a number of my Democratic
colleagues on the Community Reinvestment Act, and I think the
renewal of that act is very important. And I am concerned that
the OCC has proposed a policy that will ``only consider
lowering component performance test ratings of a bank if
evidence of discrimination or illegal credit practices directly
relates to the institution's CRA lending activities.''
The way I read that would mean that under the OCC's
proposal, which I think is inappropriate, you could end up with
a bank still getting a good CRA rating, even though they had
discriminatory practices, but simply those discriminatory
practices fell outside of its CRA lending processes. So my hope
would be for those banks that fall under the Fed's review that
we will not see a relaxing of those CRA standards.
Mr. Powell. You have correctly stated what our policy is,
and I have every reason to think that it will continue to be
that. We am not looking to change it.
Senator Warner. I would hope so, and I want to make sure we
will follow up with additional letters and requests on that
subject.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. Mr. Chairman,
welcome. Good to have you here.
A couple questions that relate to the tax bill, because
much has been said about that. Senator Toomey mentioned that it
has resulted in increased investment. What I have seen is a
huge whopping increase in stock buybacks. In fact, as of today,
the number is $600 billion in stock buybacks. Those are
corporations that have decided not to invest the money back
into their workers or their plant or their equipment, but give
it to stockholders, which included, I should say, one-third of
the stock holdings in this country are foreign stockholders. So
it is a great windfall for the accounts of foreign
stockholders.
Much has also been claimed about the economic impact. I am
looking at the most recent projection that the Fed had for
median long-term growth. As of your June 13th report, I see it
is 1.8 percent, is that correct, for the current long-term
growth median projection?
Mr. Powell. Yes, it is.
Senator Van Hollen. Are you aware of what the projection
was a year ago before the tax bill was passed?
Mr. Powell. I am going to say 1.8 percent.
Senator Van Hollen. It was 1.8 percent. I mean, the reality
is, despite all the hype around here, it is not really going to
have an impact on our long-term growth. Surprisingly, a lot of
us did think there was going to be a sugar high. When you dump
$2 trillion into the economy, you would think there would be
some sugar high, and maybe there will be some sugar high. But I
was interested in an analysis that came out of the San
Francisco Fed. I do not know if you saw it. Two economists
there actually said that the 2017 tax law is likely to give
maybe not even a sugar high. Have you had a chance to review
that analysis?
Mr. Powell. I have, and I would just say that, you know,
there is a wide range of estimates of the effects of the recent
fiscal changes, and, you know, they are talking about the
possibility--I think their point was late in the cycle when you
are near full employment, the effects might be less. You know,
they might or they might not be. I think there is a lot of
uncertainty.
One of the great things about the Fed is we get a range of
views, which is a healthy thing.
Senator Van Hollen. But it does stand to reason, right,
that you would have a smaller impact late in a cycle? I mean,
that is why most fiscal policy in this country over the years
has said that we want to provide stimulus during the really
tough times when a lot of people are out of work, but you do
not necessarily want to provide stimulus sugar high when the
economy is clicking on all cylinders. And I think that is the
point these economists made, is we are actually in the ninth
year of growth.
So when you are talking about some increase in real wages,
not nearly what we want--I mean, that is over the 9-year
period. Is that right?
Mr. Powell. I am sorry. Your question?
Senator Van Hollen. When you talk about some small uptick
in real wages, that is over the period of recovery, right?
Mr. Powell. I was really talking about nominal wages, and
what I was talking about was if you look at 2012, 2013, 2014,
all of our main wage things sort of were around 2 percent,
measures around 2 percent. Now they are close to 3 percent. So
it was not an overnight thing, overnight sensation. It was a
gradual increase. But you have seen a meaningful increase.
Senator Van Hollen. Right. And isn't a fact that real wage
increases were higher during the last term of the Obama
administration than during the Trump administration?
Mr. Powell. I would really have to go back and look at
that.
Senator Van Hollen. I have the advantage, Mr. Chairman, of
having your detailed Fed analysis and the Bureau of Labor
Statistics. And what it shows is that, in fact, real wage
increases were higher during the last term of the Obama
administration. The point here really is not play make-believe,
as we sometimes hear around here, that this tax bill somehow
miraculously helped a lot of people out. The reality is, as we
heard, real wages are pretty flat. I understood your testimony
about oil price increases. We do not know how long they will be
with us. But we also know that real wage increases were higher
during the 4 years of the Obama administration than so far in
the Trump administration with the tax cut and everything else.
So I hope that my colleagues will bring more of a
discussion based--a reality-based discussion to this. The one
thing we do know that tax bill did, the one thing we did know
is it is going to add about $2 trillion to our national debt, a
debt that will have to be paid off by everybody in this room
and their kids and grandkids. And at the same time, the Fed
projection shows no change in the long-term growth projections.
So we just blew $2 trillion. A lot of it is already going to
stock buybacks, and I just hope we will sort of end the happy
talk about what this tax cut did.
Thank you.
Chairman Crapo. Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman. And thank you,
Chairman Powell, for once again coming before the Committee and
being willing to answer our questions.
I want to just make a point about wages, and you do not
need to comment on this. Almost 20 percent of the people in our
country who are wage earners earn less than $12.50 an hour. I
do not know how many of you think you can live on $12.50 an
hour, but I think--given that you are working a 40-hour week.
Thirty-two percent earn between $12.50 and $20 an hour. Twenty
dollars an hour is just barely $40,000 a year. And the next 30
percent is $22 to $30, much of it heavily weighted on the light
end. In fact, I have seen one survey that has told us that two-
thirds of all wage earners in this country earn less than $20
an hour, hourly wage earners.
If you do not think that that presents economic challenges
if that does not change, we are wrong. I think that there is
optimism. Optimism is leading to taking on more consumer debt.
I think we are seeing that. The response, and I think
appropriate, that you have on interest rates is going to drive
increased costs. We have targeted or linked the student loan
rate to what you do, thereby exacerbating those people who are
attempting to take that next leap forward. So I just want to
make the point that where your job is to look at macro, we
visit with people every day in our States who are struggling,
struggling to make ends meet.
And I want to transition to the next place for me on North
Dakota struggles, and that is trade. You know, I have been
asking questions about trade for 2 years now. So if you look at
the minutes of the Fed meeting, which I think Senator Toomey
talked about, businesses across the country from steel and
aluminum to farming have been telling Fed officials about plans
to pull back their investments in their business or offshore
their business. We have now pork producers talking about moving
their pork production offshore to basically avoid what has been
happening in the pork industry.
These industries I think have good reason to be concerned.
Economists across the spectrum, including economists in the
private sector, Morgan Stanley and Goldman Sachs, European
Central Bank, the IMF, they are all raising alarms with trade
tensions looming.
So if the President's trade policies continue to result in
escalating tariffs by our trading partners, I think this is
going to have serious damage to the economy and, in particular,
to producers and consumers in my State.
Now, just to give you a number, North Dakota is the ninth
most dependent on imported steel. That surprises people, but
you think about our base industry. What is one of the primary
inputs in drilling and in moving oil? It is steel. What is one
of the primary inputs in large equipment manufacturing? It is
steel. And I have heard from my equipment manufacturers that
what amount they got in tax savings has been gobbled up in the
first 2 or 3 months of this fiscal year.
Then we are not even talking about farmers with the double
whammy of getting hit with steel tariffs--they are large steel
users--and seeing their commodity prices being challenged.
You offered a view last week that the President's trade war
results in other countries actually lowering their trade
barriers. Then that would be a positive outcome. I do not
disagree. However, the historic and economic evidence suggests
the opposite is likely to occur. In fact, if you look at
efforts such as Smoot-Hawley--we can go all the way back
there--we know and I believe history will tell you that it
contributed significantly to the depth of the Great Depression.
I do not say it causes it, but it certainly did not assist in
early recovery.
So would you agree with former Chairman Ben Bernanke when
he said in a 2007 speech on trade that restricting trade by
imposing tariffs, quotas, or other barriers is exactly the
wrong thing to do for the economy?
Mr. Powell. I would, assuming you are talking about them
remaining in place over a sustained period of time. Absolutely.
Senator Heitkamp. Well, you know, I get a little frustrated
by this short-term pain for long-term gain. I think that we are
going to have long-term consequences in agriculture because I
think we are going to have emerging markets in the competitive
space that we have not before. We already see the Chinese are
subsidizing their farmers to grow soybeans. We see that Brazil
and Argentina are amping up their soybeans and, arguably, could
be, in fact, buying American soybeans, marking them up and
enjoying our market with the markup as we struggle.
So in that same speech, then-Chair Bernanke cites studies
which show that the effects of protectionist policies almost
invariably lead to lower productivity in U.S. firms and lower
living standards for U.S. consumers. Is there any reason to
believe that these studies are no longer valid?
Mr. Powell. None that I know of.
Senator Heitkamp. OK. Chair Powell, I make the point on
Bernanke's comments and historic record because we cannot
afford to put our head in the sand and ignore the facts about
the impact of the Administration's trade policies on our
economy. I think it is clear--I have been probably one of the
most outspoken critics of the President's trade policy here,
certainly on this side of the aisle. And if we want to improve
trade, the right way to do it is to expand trade agreements, in
my opinion, not impose reciprocal tariffs.
And so I am deeply concerned--and I know that at this point
you are taking a watchful eye. But I am deeply concerned about
the long-term ramifications of this so-called short-term
policy. And certainly if we see the next tranche, the $200
billion, and then beyond that we see tariffs on automobiles, we
will, in fact, be in a full-on, escalated, damaging trade war.
And I do not know where that ends. And if this is a game of who
blinks first, the best thing to do would be to get to the
negotiating table.
Now--oh, I am over my time.
Chairman Crapo. Yes.
Senator Heitkamp. I am sorry. But I want to make the point
that I am going to stay on this. I am going to stay on the
macro effects of this trade policy, because this is not good
for our economy, and we are going to look back at this time
perhaps in a year and say that is the point at which we turned
the corner and the economy started taking a downturn.
Chairman Crapo. Senator Warren.
Senator Warren. Thank you, Mr. Chairman. And good to see
you again, Chairman Powell.
Before the financial crisis, banks loaded up on risky loans
while regulators just looked the other way. And when those
loans went bad, taxpayers were left holding the bag because big
banks did not have enough capital to stay afloat.
Dodd-Frank included two major reforms to make sure that
this never happens again: first, rules that make big banks meet
higher capital standards so they are better equipped to handle
losses; and, second, rules that make the banks take annual
stress tests to ensure that they are not taking on too much
risk.
But since you have taken over, Chairman Powell, the Fed has
rolled back on both of these reforms, and I just want to
explore what that means for our economy.
In April the Fed proposed an amendment that lowers the
enhanced supplementary leverage ratio. That is the special
capital requirement for the too-big-to-fail banks. The FDIC
claims that this reform will allow the banks to maintain $121
billion less in capital, but the Fed disagrees with the FDIC's
assessment. Why is that?
Mr. Powell. We actually think that the effect of that
proposed change which is under consideration--we are looking at
the comments--would be pretty close to zero as it relates to
the firm itself. And, also, we think--in other words, if you
look at the entire entity, it would be less than $1 billion. I
will not say zero, but I think our estimate was $400 million.
Senator Warren. So you just think the FDIC's $121 billion
estimate is made up?
Mr. Powell. They are talking about the bank; whereas, we
are talking about the whole firm. Within the whole firm, at the
firm level----
Senator Warren. But the banks we have to worry about are
the banks that get bailed out here.
Mr. Powell. Yeah, and the enhanced supplemental leverage
ratio, the problem with this is that we do not want a leverage
ratio to be the binding capital requirement because it actually
calls upon--if you are bound by that, you are actually called
upon to take more risk. So we would rather not have the bank
bound by that.
Senator Warren. So let us take a look at this in terms of
trying to strengthen the banks so that we do not have to be in
a position to bail them out. The second thing you have done is
you have put a lot of stock in stress tests, and last week you
called the stress tests ``the most successful postcrisis
innovation for bank regulation.'' But under your leadership,
the Fed has weakened the stress test regime.
Here is one example. Results of this year's exercise
recently became public and reportedly three banks--Goldman
Sachs, State Street, and Morgan Stanley--had capital levels
that were too low to pass the test. I wrote to you about these
banks a few weeks ago, and I appreciate your response on this.
But just to be clear, after they flunked, did you give those
too-big-to-fail banks a failing grade?
Mr. Powell. We gave them what we call a ``conditional
nonobject,'' which is something we have done----
Senator Warren. OK, but that is not a failing grade, right?
They did not flunk.
Mr. Powell. They suffered the same penalty, which was to
have to limit their distributions to the prior years.
Senator Warren. Well, that is what I want to ask. If you
did not flunk them, did you at least follow the Fed guidelines
and make those banks submit new capital plans that would pass
the test?
Mr. Powell. No. In fact, when we do the conditional
nonobject, we do not require them to resubmit----
Senator Warren. So you do not require them to actually meet
the criteria.
Mr. Powell. In the many times we have used that tool over
the years, we have not required that.
Senator Warren. In other words, the Fed looked the other
way. You let these banks off with what you call a conditional
nonobjection, letting them distribute capital to their
shareholders instead of keeping it on their books. In fact,
because of your action, Morgan Stanley and Goldman Sachs
investors took home about $5 billion more than they otherwise
would have. That is nice gift to the bank, Mr. Chairman.
On top of that, the Fed also proposed a rule in April that
would make the stress tests less severe, effectively reducing
capital requirements at the eight largest banks by a total of
about $54 billion, according to a Goldman Sachs analysis.
So, Chairman Powell, by your own account, the economy is
doing well. We all know that bank profits are gigantic. The
banks just got huge tax breaks. Three Fed Presidents--President
Rosengren, President Mester, and President Evans--have
suggested it is an ideal time to raise capital requirements to
strengthen the banks instead of siphoning off cash to
shareholders. So why is the Fed under your leadership
persistently seeking to reduce capital requirements and weaken
stress tests?
Mr. Powell. With respect, Senator, we are not doing either
of those things. In fact, the stress test in 2018 was
materially more stressful--the amount of the loss and the
amount of required capital to pass the test was the highest by
far of any test.
Senator Warren. Look, I do not know what to say. The FDIC
does not see it that way. Goldman Sachs does not see it that
way. The data do not seem to back you up on this. The Fed's
capital requirements and the stress test are like a belt and
suspenders. You can loosen the belt and rely on the suspenders,
or you can take off the suspenders and rely on the belt. But if
you do both, your pants will fall down. And, Chairman Powell,
we learned in 2008 that when the big banks' pants fall down, it
is the American economy, American taxpayers, American workers
who get stuck pulling them back up. So it looks like to me the
Fed is headed in the wrong direction here.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Schatz.
Senator Schatz. Thank you, Mr. Chairman. Chairman Powell,
thank you for your service, and thank you for being willing to
engage. I understand the need for you to stay in your lane, so
I am going to ask a question, and I want to have as
constructive of an exchange as possible, knowing that some of
this ground has been covered, and I do not want to turn this
into a partisan conversation.
Banks are doing well. They had record-breaking profits in
the years 2016 and 2017, and it looks like 2018 is going to be
another gangbuster year. Across the board, banks increased
their dividends by 17 percent in 2017, 12 percent in 2018.
Community banks' earnings are also up. Household credit is up.
In April, after your speech to the Economic Club of
Chicago, you said, and I quote, ``As you look around the world,
U.S. banks are competing very, very successfully. They are very
profitable. They are earning good returns on capital. Their
stock prices are doing well. So I am looking for the case for
some kind of evidence that regulation is holding them back, and
I am not really seeing that case as made at this point.''
The data backs up your statement. Banks are the most
profitable that they have ever been. So what is the motivation
for weakening Dodd-Frank rules like the Volcker Rule?
Mr. Powell. I think we want regulation to be as efficient
as well as effective as it can possibly be. Regulation is not
free. Regulation, good regulation, has very positive benefits--
avoiding financial crises, avoiding consumer harm, and things
like that. But nobody benefits when regulation is inefficient.
And so we have taken the job, particularly for the smaller
institutions going back and looking at everything we have done
over the last decade, to make sure that we are doing it in the
most efficient way possible. That is what we are doing. We want
the strongest, toughest regulation to apply to the biggest
banks, particularly the eight SIFIs. And then we want to make
sure that we have tailored appropriately as we move down into
regionals and subregionals and then large community banks and
then smaller ones.
Senator Schatz. OK. A fair answer. What would you say to
someone back home who says, ``Why would the Fed focus on this?
Why would the Banking Committee focus on this? Why would the
Federal legislative branch focus on making life easier for the
banks given income inequality, given that these are literally
the most profitable institutions in American history?'' I get
that it is always better to make things more efficient. It just
seems like you have limited resources and we have limited
political capital to spend on priorities for the Fed. What do I
say to someone back home who says, ``Why are you taking care of
these guys who seem to be feeding at the trough pretty
nicely?''
Mr. Powell. I think you have to distinguish between
different kinds of institutions. You know, I do not think that
the smaller community banks are maybe feeling quite as healthy
as you are saying. I think they are healthy. But I think, you
know, we want them to be devoting their efforts to making loans
and investing in their communities, supporting economic
activities in communities, not----
Senator Schatz. But lending is up, right? And profitability
is at least somewhat of a proxy for the efficiency of the
regulations. I will not belabor this. I take your answer in
good faith.
In a recent interview with Marketplace, you were asked what
keeps you up at night. This is one of the things I enjoy about
you, is you are frank in your responses while trying to stay in
your lane. And you said, ``We face some real longer-term
challenges, again, associate with how fast the economy can grow
and also how much the benefits of that growth can be spread
through the population. I look at things like mobility. If you
judge the United States against other similar well-off
countries, we have relatively low mobility. So if you are born
in the lower end of the income spectrum, your chances of making
it to the top or even to the middle are actually lower than
they are in other countries.''
Understanding that the Fed cannot address these issue
squarely, can you talk a little bit about income inequality and
what ought to be done? And then my final question around income
inequality is whether, to the extent that you have expressed
this view, a tax cut that provides about $33,000 for
individuals in the top 1 percent of earners and about 40 bucks
to the poorest of the poor, whether or not that helps or hurts
in terms of income inequality.
Mr. Powell. There are a range of--the question I was
answering in that interview and that you are really asking is
really these are issues that the Fed does not have the tools or
the mandate to fix, but they, nonetheless, involve significant
longer-term economic challenges. So I just would--you know, I
pointed out low mobility, which is the research of Raj Chetty,
who is a professor back at Harvard now, and also just the
stagnation of median incomes for a long time. And if you look
at things like labor force participation among prime-age males,
you have seen a decline over 60 years.
These are unhealthy trends in the U.S. economy that we do
not have the tools to fix. You do. These are things for the
legislature to work on. And, you know, it comes down to things
that are easy to say and hard to do, like improve education,
deal with the opioid crisis, things like that. And I also
think, you know, balanced regulation plays a role in this and
in enabling capital to be allocated freely and people to move
from job to job. All those things go into it. But these are
long-run important issues, particularly--another one is the
potential growth rate of the country, which looks like it has
slowed down because of aging, really, and demographics and
things like that.
So these are big issues. We cannot really affect them with
monetary policy.
Senator Schatz. Thank you.
Chairman Crapo. Senator Cortez Masto.
Senator Cortez Masto. Thank you. Chairman Powell, thank you
for being here, and thank you for also answering our questions.
I appreciated your comments earlier in the introduction, and
noting what you admitted that the aggregate numbers do look
good.
But I also noted in your presentation that there is a quote
that you say, and it is this: ``And while three-fourths of
whites responded in a recent Federal Reserve survey that they
were doing at least OK financially'' in 2017--``at least OK,
only two-thirds of African Americans and Hispanics responded
that way'' when it comes to financially whether they were doing
OK. And I think that is what this comes down to. It comes down
to those individuals who are living out there who are
struggling, how much money is in their pocket, how much it can
pay for.
I notice you talked about the wages are up 0.27 percent,
price index increased 2.3 percent. So in response to Senator
Menendez's question about the steps that you were taking for
broad-based wage growth, you answered several things. But let
me ask you this: Is it your opinion that it is the Fed's
responsibility or role to do something about wage growth,
broad-based wage growth to play a role there?
Mr. Powell. I think, you know, what you have assigned us is
literally maximum employment and stable prices, and also
financial stability, we have an overall responsibility for
that. Maximum employment, the sense of that is it is not just
one measure. It is a broad range of measures, and I think we
have really--you know, we have worked hard to provide support
for the labor markets.
Senator Cortez Masto. And that would include wage growth
then?
Mr. Powell. It would. Wage growth comes into really both of
those things. It comes into maximum employment. It also comes
into inflation.
Senator Cortez Masto. Good. I am glad you said that because
here is the other thing that you said that concerned me, and
you said one way to address and increase wage growth was
incomes need to go up, and they only go up with higher
productivity. And that is what you said needs to occur.
But let me ask you this, because I have looked at some of
the economists and studied some of the reports in the last 30
years or so, and I know that was true probably from 1950 to the
1970s, that they were both going up together. But we also have
studies that show from 1973 to 2016 it was just the opposite.
They are divergent, that productivity went up by 73.7 percent,
but the hourly pay went up 12.5 percent, only 12.5 percent.
That is 5.9 times more, more productivity than pay.
So knowing that, how can you say that we need to focus on
higher productivity because that will also increase wages?
Mr. Powell. So what I said was that over a long period of
time, wages cannot go up sustainably without productivity also
increasing. It is a different thing to say that higher
productivity guarantees higher wages. I did not say that, and I
do not think that is true. I know very well the charts you are
talking about.
Senator Cortez Masto. So then what tools--then what are you
doing to address wage growth to ensure that we are increasing
wages? Because here is what is happening--and you know this. If
you are in your community--and I am hoping you are--and you are
talking to people across America, you know that wages have been
flat since 1973. That means that the people when I go home--and
me and my family and Nevadans in general who are struggling,
they do not have enough money to pay for housing costs, for
health care, for education, for prescription drugs. And what do
I tell them that you are doing to look out for their interests
to help them and improve their lives with the tools that you
have?
Mr. Powell. The tool that we have is monetary policy, and
we can and we have----
Senator Cortez Masto. No, I appreciate that. Let me ask you
this: Can you just put it in terms if you are talking to a
constituent in my State to explain to them what you are doing--
now, remember, Nevada was a place where we had the foreclosure
crisis. People lost their homes, and they lost their jobs. We
had 15 percent unemployment at one point in time, underwater in
their homes. What would you say to those individuals that you
are doing to ensure, one, it does not happen again and, two,
improve the wage growth for them?
Mr. Powell. We are doing everything we can with our tools
to make sure that if you want a job, you can have one, and we
are also----
Senator Cortez Masto. But having a job and having a livable
wage are two different things.
Mr. Powell. Over the long term, we do not have those tools.
You have those tools. Congress has the tools to assure stronger
wage growth over time. We really do not have that with--we can
move interest rates around to support activities, support
hiring. We do not have the tools to support higher
productivity, for example, which tends to lead to higher wages
without guaranteeing them.
Senator Cortez Masto. As an economist, you can work with us
and tell us the tools or the things that can be done, like
increasing the minimum wage, that might improve livable wages
for individuals, correct?
Mr. Powell. I would say principally over long periods of
time investing in education and in skills are the single--that
is the single best thing we can do to have a productive
workforce and share prosperity widely, which is what we all
want.
Senator Cortez Masto. And I know my time is up, and I
appreciate that. But I am concerned. Is that based on your own
individual opinion, or is that research or data or information
that you know that shows that?
Mr. Powell. It is a lot of research.
Senator Cortez Masto. OK. Thank you.
Chairman Crapo. Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman. And thank you,
Mr. Chairman.
Mr. Powell, I am worried about farmers in my State. I
checked about an hour ago. Soybean prices are $8.40 a bushel,
well below the cost of production right now. Corn is $3.48 a
bushel, well below the cost of production. In the last couple
of weeks, I have visited with a number of Hoosier farmers and
groups like the Indiana Corn and Soybean Alliance and the
Indiana Farm Bureau to hear their growing concerns with falling
commodity prices and uncertain trade policies, which are
already harming Hoosier farmers in rural communities.
Let me tell you a conversation I had last Friday. It was
with a businessman who is also a farmer, and he was telling me
about he just bought 140 acres from another farmer. And he
said, ``Joe, I told the farmer, `I do not want to buy this from
you right now because I know you are struggling. And I know you
do not want to sell this. And I do not want to take advantage
of you.' ''
And the farmer who was selling it said, ``If I do not sell
this, I could start losing everything else, and so you are
actually helping me out.'' This is where our rural economy is
going right now.
I have also heard from local businesses dealing with
canceled orders because of the tariffs. The price of soybeans,
as I mentioned, it is a 10-year low--a 10-year low--due largely
to the Chinese tariffs on U.S. exports. This current policy,
what I worry about is that it has already damaged foreign
export markets that took decades and decades to build. And so
what I am asking you is: What would be the long-term impact of
falling commodity prices and reduced agriculture exports on
rural communities, which are struggling in so many ways
already?
Mr. Powell. Well, I think we know it would be very bad, and
we have seen periods in American history where that has
happened, and it can be extremely tough on farmers and rural
communities.
Senator Donnelly. And if they lose the markets that they
have developed--I was over in China talking to some of their
defense leaders a few years ago about North Korea, and I was
walking through the airport, and there was a group just by
coincidence--it was a flight back home, the flight to Chicago
and then go back home to Indiana. It was a group of Indiana
soybean farmers who were traveling the country, developing the
market. What happens to rural communities if China just looks
up and says, you know, ``we found more reliable suppliers''?
Mr. Powell. As we discussed, it can be very tough.
Senator Donnelly. So as Fed Chairman, what would you say to
all those farmers who are really nervous, really concerned
about what their future will be? They look to us for smart
policies, for reasonable policies. Is there anything you can
say about this trade war that is going on right now?
Mr. Powell. I should again start by saying that it is
really not the Fed's role. We do not do trade policy. That is
Congress and the Administration.
But, you know, I think if the current process of
negotiation back and forth results in lower tariffs, that would
be a good thing for the economy. If it results in higher
tariffs, then I think--you know, I hardly need to tell you what
higher tariffs would do for agricultural producers. Agriculture
is an area where we lead the world in productivity and we are
great exporters, and, you know, you would be very hard hit by
these tariffs.
Senator Donnelly. If this goes on for a couple more years,
what would be the impact on our rural communities?
Mr. Powell. I think certainly it would be very tough on the
rural communities and, you know, I think we would feel that at
the national level, too.
Senator Donnelly. Let me also ask you about opioids, which
you have mentioned, and workforce participation. My State has
been deeply impacted by the opioid crisis. Last summer, during
one of her final appearances before Congress, I spoke with
former Chair Janet Yellen about the opioid epidemic and its
connection to not just health outcomes but also economic and
employment outcomes, the impact of opioids on the labor
participation rate, which has declined from 66 to 63 percent
over the last decade. She agreed there was a connection and
noted surveys suggest that many prime-age individuals who are
not actively participating in the labor market are involved in
prescription drug use.
You know, I look at these people we have lost, the next
doctors, the next electricians, the next nurses. What do you
see is the impact of the opioid epidemic on our workforce
participation and, in general, the economy?
Mr. Powell. You know, it is a terrible human tragedy for
many communities, certainly for the individuals and their
families involved. I think from an economic standpoint, some
high percentage of the prime-age people who are not in the
labor force, particularly prime-age males who are not in the
labor force, are taking painkillers of some kind. I think the
number that Alan Krueger, who is a professor, came up with is
44 percent of them. So it is a big number. It is having a
terrible human tool on our communities, and also it matters a
lot for labor force participation and economic activity in our
country.
Senator Donnelly. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator Donnelly.
That concludes the questioning, but Senator Brown wants----
Senator Brown. Thirty seconds, Mr. Chairman. Thank you. A
number of colleagues have talked about productivity and
nonsupervisory pay, that pay has gone up 27 percent and--I am
sorry, 2.7 percent, but it is important--from June to June, I
think, was what one of my colleagues said. But it is important
to recognize that CPI has gone up 3 percent in that period. So
we should really never talk about nominal pay. We should talk
about real dollar pay.
Thank you, Mr. Chairman.
Chairman Crapo. Understood. All right. Thank you. And thank
you, Mr. Chairman, again for being here. We appreciate your
work and also your taking the time to come here and respond to
our questions.
For Senators wishing to submit questions for the record,
those questions are due in 1 week, on Tuesday, July 24th, and,
Chairman Powell, we ask that you respond as promptly as you can
to the questions that may come in.
Again, we thank you for being here. This is very good
timing. We have got a vote underway right now, so we appreciate
you helping to steer this hearing to a good conclusion.
With that, the hearing is adjourned.
Mr. Powell. Thank you.
[Whereupon, at 11:53 a.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
Today, we welcome Chairman Powell back to the Committee for the
Federal Reserve's Semiannual Monetary Policy Report to Congress.
This hearing provides the Committee an opportunity to explore the
current state of the U.S. economy, and the Fed's implementation of
monetary policy and supervision and regulation activities.
Since our last Humphrey-Hawkins hearing in March, Congress passed,
with significant bipartisan support, and the President signed into law,
S. 2155, the Economic Growth, Regulatory Relief, and Consumer
Protection Act.
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.
A key provision of the bill provides immediate relief from enhanced
prudential standards to banks with $100 billion in total assets or
less.
The bill also authorizes the Fed to provide immediate relief from
enhanced prudential standards to banks with between $100 billion and
$250 billion in assets.
It is my hope that the Fed promptly provides relief to those within
those thresholds.
By right-sizing regulation, the bill will improve access to capital
for consumers and small businesses that help drive our economy.
And, the banking regulators are already considering this bill in
some of their statements and rulemakings.
Earlier this month, the Fed, FDIC and OCC issued a joint statement
outlining rules and reporting requirements immediately impacted by the
bill, including a separate letter issued by the Fed that was
particularly focused on those impacting smaller, less complex banks.
But, there is still much work to do on the bill's implementation.
As the Fed and other agencies revisit past rules and develop new
rules in conjunction with the bill, it is my expectation that such
rules be developed consistent with the purpose of the bill and intent
of the members of Congress who voted for the bill.
With respect to monetary policy, the Fed continues to monitor and
respond to market developments and economic conditions.
In recent comments at a European Central Bank Forum on Central
Banking, Chairman Powell described the state of the U.S. economy,
saying, ``Today, most Americans who want jobs can find them. High
demand for workers should support wage growth and labor force
participation . . . Looking ahead, the job market is likely to
strengthen further. Real gross domestic product in the United States is
now reported to have risen 2.75 percent over the past four quarters,
well above most estimates of its long-run trend . . . Many forecasters
expect the unemployment rate to fall into the mid-3s and to remain
there for an extended period.''
According to the FOMC's June meeting minutes, the FOMC meeting
participants agreed that the labor market has continued to strengthen
and economic activity has been rising at a solid rate.
Additionally, job gains have been strong and inflation has moved
closer to the 2 percent target.
The Fed also noted that the recently passed tax reform legislation
has contributed to these favorable economic factors.
I am encouraged by these recent economic developments, and look
forward to seeing our bill's meaningful contribution to the prosperity
of consumers and households.
As economic conditions continue to improve, the Fed faces critical
decisions with respect to the level and trajectory of short-term
interest rates and the size of its balance sheet.
I look forward to hearing more from Chairman Powell about the Fed's
monetary policy outlook and the ongoing effort to review, improve and
tailor regulations consistent with the Economic Growth, Regulatory
Relief and Consumer Protection Act.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you, Mr. Chairman. This week, the President went overseas,
and sided with President Putin while denigrating critical American
institutions, including the press, the intelligence community, and the
rule of law.
Our colleague Senator John McCain expressed clearly what every
patriotic American thought, ``No prior president has ever abased
himself more abjectly before a tyrant. Not only did President Trump
fail to speak the truth about an adversary; but speaking for America to
the world, our president failed to defend all that makes us who we
are--a republic of free people dedicated to the cause of liberty at
home and abroad. American presidents must be the champions of that
cause if it is to succeed.''
With our democratic institutions under threat, we cannot ignore
what happened in Helsinki yesterday. But we must not lose sight of the
other policies of this Administration--including the rollback of the
rules put in place to prevent the next economic crisis.
Mr. Powell, thank you for appearing before the Committee to discuss
these policies.
Just last week, a Federal Reserve official said, ``There are
definitely downside risks, but the strength of the economy is really
pretty important at the moment. The fundamentals for the U.S. economy
are very strong.''
That may be true for Wall Street, but for most of America workers
haven't seen a real raise in years, young Americans drowning in student
loan debt, families trying to buy their first home--the strength of the
economy is an open question at best.
Last month, former Fed Chair Ben Bernanke was very clear about the
long-term impact of the tax cut and the recent bump in Federal spending
when he said, ``in 2020 Wile E. Coyote is going to go off the cliff.''
Last week, the San Francisco Fed released a study finding that the
rosy forecasts of the tax bill are likely ``overly optimistic.'' It
found that the bill's boost to growth is likely to be well below
projections--or as small as zero. It also suggested that these policies
could make it difficult to respond to future economic downturns and
manage growing Federal debt.
And it's not just the tax bill--the economic recovery hasn't been
evenly felt across the country, either. Mr. Chair, I'd like to enter
into the record an article from the New York Times this weekend which
talks about those families still struggling from the lack of meaningful
raises and other job opportunities.
While hours have increased a bit over the past year for workers as
a whole, real hourly earnings have not. \1\ And for production and
nonsupervisory workers, hours are flat and pay has actually dropped
slightly, according to the Bureau of Labor Statistics.
---------------------------------------------------------------------------
\1\ https://www.bls.gov/news.release/realer.nr0.htm
---------------------------------------------------------------------------
The number of jobs created in 2017 was smaller than in each of the
previous 4 years. Some of the very companies that announced billions in
buybacks and dividends are now announcing layoffs, shutting down
factories, and offshoring more jobs.
Some of the biggest buybacks are in the banking industry, assisted
in part by the Federal Reserve's increasingly lax approach to financial
oversight.
Earlier this month, as part of the annual stress tests, the Fed
allowed the seven largest banks to redirect $96 billion to dividends
and buybacks. This money might have been used to pay workers, reduce
fees for consumers, protect taxpayers from bailouts, or be deployed to
help American businesses.
Three banks--Goldman Sachs, Morgan Stanley, and State Street--all
had capital below the amount required to pass the stress tests, but the
Fed gave them passing grades anyway.
The Fed wants to make the tests easier next year. And Vice Chair
Quarles has suggested he wants to give bankers more leeway to comment
on the tests before they're administered--that's like letting the
students help write the exam.
The Fed is considering dropping the qualitative portion of the
stress tests all together--even though banks like Deutsche Bank,
Santander, Citigroup, HSBC, and RBS have failed on qualitative grounds
before.
That doesn't even include the changes the Fed is working on after
Congress passed S. 2155 to weaken Dodd-Frank, making company-run stress
tests for the largest banks ``periodic'' instead of annual, and
exempting more banks from stress tests altogether.
Vice Chair Quarles has also made it clear that massive foreign
banks can expect goodies, too.
And on and on and on it goes. The regulators are loosening rules
around big bank capital, dismantling the CFPB, ignoring the role of the
FSOC, undermining the Volcker Rule, and weakening the Community
Reinvestment Act.
When banks are making record profits, we should be preparing the
financial system for the next crisis, building up capital, investing in
workers, and combating asset bubbles.
And we should be turning our attention to bigger issues that don't
get enough attention, like how the value placed on work has declined in
this country, and how our economy increasingly measures success only in
quarterly earnings reports.
Much of that is up to Congress to address, but over the last 6
months, I have only seen the Fed moving in the direction of making it
easier for financial institutions to cut corners, and I have only
become more worried about our preparedness for the next crisis.
I look forward to your testimony. Thank you.
______
PREPARED STATEMENT OF JEROME H. POWELL
Chair, Board of Governors of the Federal Reserve System
July 17, 2018
Good morning. Chairman Crapo, Ranking Member Brown, and other
Members of the Committee, I am happy to present the Federal Reserve's
semiannual Monetary Policy Report to the Congress.
Let me start by saying that my colleagues and I strongly support
the goals the Congress has set for monetary policy--maximum employment
and price stability. We also support clear and open communication about
the policies we undertake to achieve these goals. We owe you, and the
public in general, clear explanations of what we are doing and why we
are doing it. Monetary policy affects everyone and should be a mystery
to no one. For the past 3 years, we have been gradually returning
interest rates and the Fed's securities holdings to more normal levels
as the economy strengthens. We believe this is the best way we can help
set conditions in which Americans who want a job can find one, and that
inflation remains low and stable.
I will review the current economic situation and outlook and then
turn to monetary policy.
Current Economic Situation and Outlook
Since I last testified here in February, the job market has
continued to strengthen and inflation has moved up. In the most recent
data, inflation was a little above 2 percent, the level that the
Federal Open Market Committee, or FOMC, thinks will best achieve our
price stability and employment objectives over the longer run. The
latest figure was boosted by a significant increase in gasoline and
other energy prices.
An average of 215,000 net new jobs were created each month in the
first half of this year. That number is somewhat higher than the
monthly average for 2017. It is also a good deal higher than the
average number of people who enter the work force each month on net.
The unemployment rate edged down 0.1 percentage point over the first
half of the year to 4.0 percent in June, near the lowest level of the
past two decades. In addition, the share of the population that either
has a job or has looked for one in the past month--the labor force
participation rate--has not changed much since late 2013. This
development is another sign of labor market strength. Part of what has
kept the participation rate stable is that more working-age people have
started looking for a job, which has helped make up for the large
number of baby boomers who are retiring and leaving the labor force.
Another piece of good news is that the robust conditions in the
labor market are being felt by many different groups. For example, the
unemployment rates for African Americans and Hispanics have fallen
sharply over the past few years and are now near their lowest levels
since the Bureau of Labor Statistics began reporting data for these
groups in 1972. Groups with higher unemployment rates have tended to
benefit the most as the job market has strengthened. But jobless rates
for these groups are still higher than those for whites. And while
three-fourths of whites responded in a recent Federal Reserve survey
that they were doing at least okay financially in 2017, only two-thirds
of African Americans and Hispanics responded that way.
Incoming data show that, alongside the strong job market, the U.S.
economy has grown at a solid pace so far this year. The value of goods
and services produced in the economy--or gross domestic product--rose
at a moderate annual rate of 2 percent in the first quarter after
adjusting for inflation. However, the latest data suggest that economic
growth in the second quarter was considerably stronger than in the
first. The solid pace of growth so far this year is based on several
factors. Robust job gains, rising after-tax incomes, and optimism among
households have lifted consumer spending in recent months. Investment
by businesses has continued to grow at a healthy rate. Good economic
performance in other countries has supported U.S. exports and
manufacturing. And while housing construction has not increased this
year, it is up noticeably from where it stood a few years ago.
I will turn now to inflation. After several years in which
inflation ran below our 2 percent objective, the recent data are
encouraging. The price index for personal consumption expenditures,
which is an overall measure of prices paid by consumers, increased 2.3
percent over the 12 months ending in May. That number is up from 1.5
percent a year ago. Overall inflation increased partly because of
higher oil prices, which caused a sharp rise in gasoline and other
energy prices paid by consumers. Because energy prices move up and down
a great deal, we also look at core inflation. Core inflation excludes
energy and food prices and generally is a better indicator of future
overall inflation. Core inflation was 2.0 percent for the 12 months
ending in May, compared with 1.5 percent a year ago. We will continue
to keep a close eye on inflation with the goal of keeping it near 2
percent.
Looking ahead, my colleagues on the FOMC and I expect that, with
appropriate monetary policy, the job market will remain strong and
inflation will stay near 2 percent over the next several years. This
judgment reflects several factors. First, interest rates, and financial
conditions more broadly, remain favorable to growth. Second, our
financial system is much stronger than before the crisis and is in a
good position to meet the credit needs of households and businesses.
Third, Federal tax and spending policies likely will continue to
support the expansion. And, fourth, the outlook for economic growth
abroad remains solid despite greater uncertainties in several parts of
the world. What I have just described is what we see as the most likely
path for the economy. Of course, the economic outcomes we experience
often turn out to be a good deal stronger or weaker than our best
forecast. For example, it is difficult to predict the ultimate outcome
of current discussions over trade policy as well as the size and timing
of the economic effects of the recent changes in fiscal policy.
Overall, we see the risk of the economy unexpectedly weakening as
roughly balanced with the possibility of the economy growing faster
than we currently anticipate.
Monetary Policy
Over the first half of 2018 the FOMC has continued to gradually
reduce monetary policy accommodation. In other words, we have continued
to dial back the extra boost that was needed to help the economy
recover from the financial crisis and recession. Specifically, we
raised the target range for the Federal funds rate by \1/4\ percentage
point at both our March and June meetings, bringing the target to its
current range of 1\3/4\ to 2 percent. In addition, last October we
started gradually reducing the Federal Reserve's holdings of Treasury
and mortgage-backed securities. That process has been running smoothly.
Our policies reflect the strong performance of the economy and are
intended to help make sure that this trend continues. The payment of
interest on balances held by banks in their accounts at the Federal
Reserve has played a key role in carrying out these policies, as the
current Monetary Policy Report explains. Payment of interest on these
balances is our principal tool for keeping the Federal funds rate in
the FOMC's target range. This tool has made it possible for us to
gradually return interest rates to a more normal level without
disrupting financial markets and the economy.
As I mentioned, after many years of running below our longer-run
objective of 2 percent, inflation has recently moved close to that
level. Our challenge will be to keep it there. Many factors affect
inflation--some temporary and others longer lasting. Inflation will at
times be above 2 percent and at other times below. We say that the 2
percent objective is ``symmetric'' because the FOMC would be concerned
if inflation were running persistently above or below our objective.
The unemployment rate is low and expected to fall further.
Americans who want jobs have a good chance of finding them. Moreover,
wages are growing a little faster than they did a few years ago. That
said, they still are not rising as fast as in the years before the
crisis. One explanation could be that productivity growth has been low
in recent years. On a brighter note, moderate wage growth also tells us
that the job market is not causing high inflation.
With a strong job market, inflation close to our objective, and the
risks to the outlook roughly balanced, the FOMC believes that--for
now--the best way forward is to keep gradually raising the Federal
funds rate. We are aware that, on the one hand, raising interest rates
too slowly may lead to high inflation or financial market excesses. On
the other hand, if we raise rates too rapidly, the economy could weaken
and inflation could run persistently below our objective. The Committee
will continue to weigh a wide range of relevant information when
deciding what monetary policy will be appropriate. As always, our
actions will depend on the economic outlook, which may change as we
receive new data.
For guideposts on appropriate policy, the FOMC routinely looks at
monetary policy rules that recommend a level for the Federal funds rate
based on the current rates of inflation and unemployment. The July
Monetary Policy Report gives an update on monetary policy rules and
their role in our policy discussions. I continue to find these rules
helpful, although using them requires careful judgment.
Thank you. I will now be happy to take your questions.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM JEROME H. POWELL
Q.1. In response to questions at your confirmation hearing on
Federal Reserve efforts to increase diversity in the System,
you said, ``I assure you that diversity will remain a high
priority objective for the Federal Reserve. Reserve banks,
working closely with the Board, have also been looking at ways
to further develop a diverse pool of talent in a thoughtful,
strategic fashion, readying them for leadership roles through
the Federal Reserve System.''
Since you have become chair, what specific steps have you
taken to encourage more diversity in the Federal Reserve
System?
A.1. The Federal Reserve System (System) needs people with a
variety of personal and professional backgrounds to be fully
effective in discharging its responsibilities, and we have
observed that better decisions are made when there are many
different perspectives represented around the table. Since
2016, my colleagues and I on the Federal Reserve Board (Board)
have implemented a framework to better understand and discuss a
range of Board and System efforts that address diversity and
inclusion as well as research on economic inclusion and
economic disparities in the economy. Since becoming the
Chairman in February, I have worked with Board staff to refresh
the framework and prioritize our focus on diversity and
economic inclusion initiatives both at the Board and elsewhere
in the System and have ongoing discussions with staff,
including the Board's Office of Minority and Women Inclusion
(OMWI) Director, on ways to support various efforts.
I continue to stress to Federal Reserve leaders and staff
the importance of having a diverse workforce and providing an
inclusive work environment to our people. System leaders have
fostered a range of diversity and inclusion initiatives,
including the development of leadership pipelines and ongoing
engagements with our own staff and with the financial services,
economic, and academic communities more broadly. Of the various
efforts, I would like to highlight the following:
The System launched a leadership development
initiative to provide a structured way to share
information about our talent pool and to find
opportunities throughout the System to more rapidly
grow our talent and prepare them to take on expanded
roles.
Through the Financial Services Pipeline Initiative,
\1\ the Federal Reserve Bank of Chicago is working to
increase the representation of people of color in the
financial services industry in the Chicago region. Over
the last several months, the Reserve Bank of Chicago
has hosted events designed to develop leadership skills
for high-performing people of color.
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\1\ For more information about the Financial Services Pipeline
initiative, go to: https://www.fspchicago.org/.
Researchers throughout the System continue to
produce cutting-edge research on how and why
disparities exist for different demographic groups in
their experiences in employment, education, and health,
and in the housing and credit markets. In addition,
seminars and panels about diversity and inclusion
topics are being fostered by local leadership and
employee resource networks and are shared across the
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System.
Through the Opportunity & Inclusive Growth
Institute, \2\ the Reserve Bank of Minneapolis is
conducting research on structural barriers that limit
full participation in economic opportunity and
advancement in the country. The Institute looks beyond
aggregate economic indicators in order to examine how
national policies impact diverse communities of people
within the U.S. economy.
---------------------------------------------------------------------------
\2\ For more information about the Opportunity & Inclusive Growth
Institute, go to: https://www.minneapolisfed.org/institute.
The Board cosponsored a Gender and Career
Progression \3\ conference with the European Central
Bank and the Bank of England in May of this year. There
were about 140 people in attendance, including
participants from central banks, academia, think tanks,
private industry, as well as a number of local
students. The topics and papers from the conference
focused on gender diversity in economics, finance, and
central banking, including gender-based discrimination,
the benefits of increased diversity, the role of
culture, and the approaches that could be used to
improve gender diversity. We continue to explore ways
to leverage the knowledge gained from this event for
the Board, the System, and the broader economic
community. The Board subsequently held a panel
discussion for its employees sharing key insights from
the conference.
---------------------------------------------------------------------------
\3\ The conference program and discussion materials are available
on the Bank of England's website at: https://www.bankofengland.co.uk/
events/2018/may/gender-and-career-progression.
Throughout the System, we continue to increase our
outreach to local universities, with a particular focus
on outreach to under-represented groups. The Board will
soon be hosting Exploring Careers in Economics, \4\ an
event for high school and college students, in October.
Organized to broaden awareness of careers in economics
and to further develop a diverse pool of talent
interested in the field, Exploring Careers in Economics
will offer students a chance to learn about and discuss
opportunities in economics generally, and learn about
mentoring opportunities, resources, and career
opportunities within the System. The agenda includes a
discussion of why inclusion and diversity matter for
economics. In addition to welcoming students to the
Board in Washington, students from around the country
will participate in this event via webcast.
---------------------------------------------------------------------------
\4\ For more information about the Exploring Careers in Economics
event, go to https://www.federalreserve.gov/newsevents/pressreleases/
other20180823a.htm.
The Board's OMWI Office, in collaboration with the
OMWI Directors from the Office of the Comptroller of
the Currency (OCC), Federal Deposit Insurance
Corporation (FDIC), National Credit Union
Administration (NCUA), and Consumer Financial
Protection Bureau (CFPB) (collectively, the Agencies),
hosted a Diversity and Inclusion Summit (Summit) on
September 13 at the Federal Reserve Bank of New York
for the institutions regulated by each regulatory
agency. The primary purpose of the Summit was for the
Agencies' OMW is to provide feedback on submissions
received from regulated entities responding to the
questionnaire developed through the Policy Standards
for Assessing Diversity Policies and Practices pursuant
to section 342 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act). Additionally,
an important aspect of the Summit was the dialogue and
insights between representatives from the regulated
entities and the OMWI Directors on leading diversity
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practices.
Q.2. In your role as the head of the Reserve Bank Affairs
Committee and now as Chair of the Board of Governors of the
Federal Reserve System, did you ever ask the search committees
in Atlanta, Richmond, or New York for a lists of candidates
under consideration? At any point did you urge the search
committees at any of the Banks to broaden their searches to
include more women or minority candidates?
A.2. As the Chair of the Reserve Bank Affairs Committee, I had
worked closely with the search committees to ensure a strong
and transparent process that identifies a broad and diverse
slate of qualified candidates for president searches. Now as
Chairman of the Board, I continue to work closely with my
colleague Lael Brainard, Chair of the Reserve Bank Affairs
Committee, to exercise the Board's oversight responsibility and
stress the importance of conducting a broad search throughout
the search process. We also recognize that the appointment of a
president is, as a legal matter, a responsibility of the Class
Band Class C directors.
During the recent Reserve Bank president searches, the
search committees proactively sought out candidates from a
variety of sources. The search committees have also carried out
extensive outreach programs intended to solicit input and
candidate recommendations from a range of constituencies across
the districts. These engagement efforts were done with the goal
of having as broad and diverse of candidate pools as possible
for the searches. Throughout the search process, the chair of
the search committee typically provides status updates,
including information about the candidate pools, and discusses
potential candidates with the Chair of the Reserve Bank Affairs
Committee.
Q.3. What is your role, directly and indirectly, in the San
Francisco Federal Reserve Bank's search to select its next
President?
A.3. The San Francisco Fed announced the appointment of Mary
Daly as its new president on September 14. As Chairman of the
Board, I stayed abreast of the search through the Chair of the
Reserve Bank Affairs Committee. When the search committee
settled on the finalist, my colleagues and I at the Board
interviewed Ms. Daly. Upon final approval by all Class B and
Class C directors of the Federal Reserve Bank of San Francisco,
my colleagues and I at the Board voted on the Bank board's
request for approval of the appointment of Ms. Daly as the new
president for the Reserve Bank.
Q.4. Recently proposed legislation would override the
Securities and Exchange Commission's (SEC) 2014 reforms to
money market funds. Specifically, that legislation would permit
sponsors of money market funds that satisfy certain conditions
to utilize a stable net asset value, or NAV. In addition, the
proposal would exempt those funds from the liquidity fee
requirements in the SEC's rules.
As you know, the SEC's 2014 reforms require institutional
money market funds investing in corporate or municipal debt
securities to use a floating NAV and provide nongovernment
money market fund boards with new tools--liquidity fees and
redemption gates--to prevent runs. Those mechanisms are
intended to prevent runs on money market funds and the freezing
of the short-term liquidity market that occurred during the
financial crisis.
Nellie Liang, who served for 11 years in senior roles at
the Federal Reserve in the Division of Financial Stability and
the Division of Research and Statistics, recently wrote an
article titled, ``Why Congress shouldn't roll back the SEC's
money market rules'' (attached).
Ms. Liang's article explains the market dislocation that
occurred during the crisis that led to the SEC's implementation
of the 2014 reforms. Ms. Liang highlights several important
improvements to the structure of money funds, explaining that
during the crisis ``there was no doubt that the structure of
prime MMF's amplified losses and spread problems to many
companies when their investors ran.'' She concludes that the
``post crisis rules aim not only to prevent a repeat of the
last crisis but to reduce the probability and costs of the next
one,'' and that, ``reverting to precrisis rules would risk a
return to high levels of private short-term liabilities and
another destabilizing run on money market funds, and threaten
stability in the financial system and the economy as a whole''.
Do you agree with Ms. Liang's concerns that reverting to
precrisis rules could create vulnerabilities in the stability
of the financial system?
A.4. Susceptibility of money market funds (MMFs) to runs was a
significant vulnerability and flashpoint in the U.S. financial
system during the financial crisis and afterwards. The run on
MMFs in September 2008 destabilized wholesale funding markets
used by banks, dealers, nonfinancial firms, and municipalities
for short-term financing. The Securities and Exchange
Commission's (SEC) reforms were designed to mitigate these
risks. In part due to these regulatory changes, funding markets
have undergone significant shifts; while markets have largely
adjusted to these shifts, considering additional changes at
this moment would likely be unhelpful to the funding markets.
Q.5. In your testimony, you noted that the banking industry is
well-capitalized. Recent research from the Fed system suggests
that large banks may hold less capital than is optimal in terms
of balancing the cost of another financial crisis with any
incremental increase in bank lending rates. \5\
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\5\ Former Fed Chair Yellen cited research noting that ``research
points to benefits from capital requirements in excess of those
adopted.'' See remarks by Chair Janet L. Yellen. ``Financial Stability
a Decade After the Onset of the Crisis''. Speech at the ``Fostering a
Dynamic Global Recovery'' Symposium Sponsored by the Federal Reserve
Bank of Kansas City, Jackson Hole, Wyoming, August 25, 2017. Available
at: https://www.federalreserve.gov/newsevents/speech/
yellen20170825a.htm; Firestone, Simon, Amy Lorenc, and Ben Ranish, ``An
Empirical Economic Assessment of the Costs and Benefits of Bank Capital
in the U.S.'', Board of Governors of the Federal Reserve System, 2017.
Available at: https://www.federalreserve.gov/econres/feds/files/
2017034pap.pdf; Federal Reserve Bank of Minneapolis, ``The Minneapolis
Plan To End Too Big To Fail'', December 2017. Available at: https://
www.minneapolisfed.org/-/media/files/publications/studies/endingtbtf/
the-minneapolis-plan/the-minneapolis-plan-to-end-too-big-to-fail-
final.pdf?la=en.
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What do you think of this research? Do G-SIBs need to hold
additional capital?
A.5. Maintaining the safety and soundness of the largest U.S.
banks is critical to maintaining the stability of the U.S.
financial system and the broader economy. These firms must be
well-capitalized in order to be considered safe and sound.
Accordingly, the U.S. banking agencies have substantially
strengthened regulatory capital requirements for large banking
firms, thereby improving the quality and increasing the amount
of capital in the banking system. From before the crisis to
today, large U.S. banking firms have roughly doubled their
capital positions, making them significantly more resilient, as
well as able to support lending and financial intermediation in
times of financial stress.
Firestone et al., the staff working paper that you cite,
analyzes aggregate capital levels across the U.S. banking
sector and does not address targeted capital requirements that
apply to specific banks. A firm identified as a global
systematically important bank (G-SIB) is currently subject to
more stringent capital requirements than those required of
other, less systemic firms.
Under the Federal Reserve's final G-SIB surcharge rule, a
G-SIB is required to hold an additional amount of risk-based
capital that is calibrated to its overall systemic risk as well
as an additional supplementary leverage ratio buffer of 2
percent above the 3 percent minimum in order to avoid
restrictions on distributions and certain discretionary bonus
payments. G-SIBs, together with certain other large banks, also
are subject to annual examination of capital planning practices
through the Federal Reserve's Comprehensive Capital Analysis
and Review (CCAR) and to a supervisory stress test. Finally, G-
SIBs are required to maintain minimum levels of unsecured,
long-term debt and total loss-absorbing capacity (TLAC), which
is made up of both capital and long-term debt, in order to
further help reduce the systemic impact of the failure of a G-
SIB. The purpose of these more stringent requirements is to
increase a G-SIB's resiliency in light of the greater threat it
poses to U.S. financial stability. This capital regulatory
framework is designed to ensure that G-SIBs, as well as the
banking industry as a whole, maintain strong capital positions.
Q.6. When asked at the July 17 hearing about your plans to
implement S. 2155, you said it is your intention ``implement
the bill as quickly as we possibly can.'' Does that mean you
are going to move to the rulemakings and implementation of S.
2155 before you finish the remaining unfinished rulemakings
required by the Wall Street Reform and Consumer Protection Act
enacted 8 years ago?
A.6. Many of Economic Growth, Regulatory Relief, and Consumer
Protection Act's (EGRRCPA) changes require amendments to
existing rules. The Board is working expeditiously on these
rulemakings and plans to solicit public comment on the proposed
rule changes. EGRRCPA includes a number of statutory deadlines
for implementing certain sections of the law. It is our
intention to prioritize rulemakings with statutory deadlines in
order to ensure that the Board's rules are compliant with the
law in the timeframe mandated by Congress.
The Board has implemented the majority of its assigned
provisions from the Dodd-Frank Act. Sections of EGRRCPA, along
with the remaining unimplemented sections of the Dodd-Frank
Act, which do not have statutory deadlines, may take longer to
complete.
Q.7. Does the Fed view any provisions in S. 2155 as providing a
statutory requirement to revisit or recalibrate the enhanced
prudential standards applicable to bank holding companies with
more than $250 billion in total consolidated assets?
A.7. One of the fundamental lessons from the financial crisis
was that the largest, most interconnected financial firms
needed to maintain substantially more capital, take
substantially less liquidity risk, and face an effective
orderly resolution regime if they fail. Firms with assets of
$250 billion or more can present a range of safety and
soundness and financial stability concerns. Therefore, the
Board has tailored, and will continue to tailor, as
appropriate, our regulations to the risk profiles of the firms
subject to those regulations.
In light of EGRRCPA's amendments, and consistent with the
Board's ongoing refinement and evaluation of its supervisory
program, the Board is evaluating whether any changes to the
enhanced prudential standards applicable to bank holding
companies with more than $250 billion in total consolidated
assets are appropriate. In doing so, the Board will consider
individual firms' capital structure, riskiness, complexity,
financial activities (including the financial activities of
their subsidiaries), size, and any other risk-related factors
that the Board deems appropriate, as provided in EGRRCPA.
Q.8. Either pursuant to S. 2155 or pursuant to other authority
conferred to the Fed, does the Board intend to alter the
threshold at which foreign banking organizations must establish
a U.S. Intermediate Holding Company? Does the Fed intend to
provide any regulatory relief to foreign banking organizations
that have more than $50 billion in domestic assets? If so, what
regulatory relief is the Fed planning to propose?
A.8. Pursuant to the Board's regulations, foreign bank
organizations (FBOs) with global assets of at least $100
billion and U.S. nonbranch assets of at least $50 billion are
required to establish or designate a U.S. intermediate holding
company (IHC). In our supervisory experience, the requirement
to establish an IHC has worked effectively, providing for
appropriate application of capital, liquidity, and other
prudential requirements across the U.S. nonbranch operations of
the FBO, as well as a single nexus for risk management of those
U.S. nonbranch operations. The Board presently sees no reason
to modify this threshold. We continue to review our regulatory
framework to improve the manner in which we deal with the
particular risks of FBOs in light of the distinct
characteristics of such institutions.
Q.9. Does the Fed have any economic evidence suggesting that
the recently enacted tax bill, S. 2155, or any deregulation
finalized by regulators since 2017 has benefited the overall
economy through increased lending?
A.9. Economic conditions remain strong. Gross domestic product
growth thus far this year is estimated to have averaged a
little above 3 percent at an annual rate. Households and
businesses have been able to obtain the financing needed to
support this growth. Financial institutions are well-positioned
to meet the needs of borrowers. However, it is too early to
determine the economic effects of the tax bill or recently
implemented changes in regulation. Generally speaking, it is
difficult to isolate the effects of such changes given the
myriad factors influencing the economy.
Q.10. Does the Fed intend to revisit the calculation of the G-
SIB surcharge? If so, when and in what ways?
A.10. The Board's capital rules have been designed to reduce
significantly the likelihood and severity of future financial
crises by reducing both the probability of failure of a large
banking organization and the consequences of such a failure,
were it to occur. Capital rules and other prudential
requirements for large banking organizations should be set at a
level that protects financial stability and maximizes long-
term, through-the-cycle, credit availability and economic
growth. Consistent with these principles, the Board originally
calibrated the G-SIB surcharge so that--given the circumstances
of the financial system--each G-SIB would hold enough capital
to lower its probability of failure so that the expected impact
of its failure on the financial system would be approximately
equal to that of a large non- G-SIB.
The bulk of the postcrisis regulation is largely complete,
with the exception of the U.S. implementation of the recently
concluded Basel Committee agreement on bank capital standards.
It is therefore a natural and appropriate time to step back and
assess those efforts. The Board is conducting a comprehensive
review of the regulations in the core areas of postcrisis
reform, including capital, stress testing, liquidity, and
resolution. The objective of this review is to consider the
effect of those regulatory frameworks on the resiliency of the
financial system, including improvements in the resolvability
of banking organizations, and on credit availability and
economic growth.
In general, I believe overall capital for our largest
banking organizations is at about the right level. Critical
elements of our capital structure for these organizations
include stress testing, the stress capital buffer, and the
enhanced supplementary leverage ratio. Work is underway to
finalize the calibration of these fundamental building blocks,
all of which form part of the system in which the G-SIB
surcharge has an effect. In this regard, I would note that the
G-SIB surcharge rule does not take full effect until January
2019.
Q.11. When does the Fed intend to finalize a 2016 proposed
rulemaking related to bank holding companies' allowable
activities in physical commodities markets?
A.11. The Board undertook a review of the physical commodities
activities of financial holding companies after a substantial
increase in these activities during the financial crisis. In
January 2014, the Board invited public comment on a range of
issues related to these activities through an advance notice of
proposed rulemaking. In response, the Board received a large
number of comments from a variety of perspectives.
The Board considered those comments in developing the
proposed rulemaking that was issued in September 2016. The
proposed rulemaking would address the potential catastrophic,
legal, and reputational risks of financial holding companies'
(FHC) physical commodities activities by applying additional
risk-based capital requirements to some of these activities;
tightening some of the existing limitations on physical
commodities trading by FHCs; and establishing new reporting
requirements for physical commodities holdings and activities
of FHCs. Under the proposal, FHCs would be permitted to
continue to engage in a number of physical commodities trading
activities with end users subject to new limits on physical
commodities trading activities.
After providing an extended comment period (150 days) to
allow comm enters time to understand and address the important
and complex issues raised by the proposal, the Board again
received a large number of comments from a variety of
perspectives, including Members of Congress, academics, users
and producers of physical commodities, and banking
organizations. The Board continues to consider the proposal in
light of the many comments received.
Q.12. At the July 17 hearing, when asked when the Fed will
finalize the rulemaking required under Dodd-Frank related to
incentive-based compensation at large bank holding companies,
you stated that the interagency regulators have been unable to
reach consensus and that the Fed has accomplished some of the
goals of the rulemaking through the supervisory process.
Please provide specific examples.
A.12. Section 956 of the Dodd-Frank Act \5\ prohibits
incentive-based compensation arrangements that encourage
inappropriate risks. Federal Reserve staff have worked with
firms in the implementation of the 2010 Federal Banking Agency
Guidance on Sound Incentive Compensation Policies, \6\ a core
principle of which is that incentive compensation should
appropriately balance risk and reward. In so doing, Federal
Reserve staff have observed improvement in incentive
compensation practices in the following areas:
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\5\ Public Law 111-203, 124 Stat. 1376 (2010).
\6\ 75 Federal Register 36395.
Risk adjustment: Firms have increasingly begun
adjusting compensation to more appropriately take into
account the risk an employee's activities may pose to
the organization, including through use of deferral and
forfeiture features in compensation arrangements. Firms
also have increasingly focused on nonfinancial risk
(e.g., compliance failures, misconduct, and operational
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challenges) in risk adjustment decisions.
Involvement of risk management and control
personnel: Risk management and control personnel
generally play a greater role in the design and
operation of incentive compensation programs than
before the financial crisis.
Director oversight: Boards of directors are now
increasingly focused on the relationship between
incentive compensation and risk. For example, at the
board level, finance and audit committees generally
work together with compensation committees with the
goal of promoting prudent risk-taking.
Policies and procedures: Firms have increasingly
developed written policies and procedures to guide
managers in making appropriate risk adjustments.
Q.13. What is the your view on the Fed's role as the
consolidated Federal regulator for insurance companies that
have a savings and loan holding company?
A.13. The Federal Reserve is charged with consolidated
supervision of savings and loan holding companies to promote
the safety and soundness of the subsidiary insured depository
institution (IDI) and the holding company. Our principal
supervisory objectives for consolidated supervision of
insurance savings and loan holding companies (ISLHCs) are to
ensure that they operate in a safe-and-sound manner so that the
subsidiary insured depository institution is protected from
risks related to nonbanking activities, including insurance, as
well as intercompany transactions between the parent and IDI,
and to ensure that the IDI is not adversely affected. To avoid
duplication, we rely on the State insurance departments to the
greatest extent possible, including their supervision of the
business of insurance. In applying our consolidated
supervision, we work to ensure that regulations, supervisory
guidance, and expectations are appropriately tailored to
account for the unique complexities and characteristics of
ISLHCs. We remain committed to tailoring our supervision of
ISLHCs to the firms and their insurance operations, as well as
conducting our consolidated supervision of these firms in
coordination with State insurance regulators. Moreover, the
Board continues to welcome feedback from ISLHCs and other
interested parties on the potential impact of our supervision
and proposed rulemakings in the context of ISLHCs' business and
practices.
Q.14. Vice Chair Quarles recently gave a speech suggesting that
the Fed should ``consider scaling back or removing entirely
resolution planning requirements for most of the firms'' in the
$100 billion to $250 billion total consolidated asset range.
Please describe further the Fed's plans in this regard, along
with any cost-benefit analysis suggesting that the economy
would benefit from such a change.
How does the Fed view the directive in S. 2155 that
company-run and certain supervisory stress tests be made
``periodic'' rather than semi-annual or annual? Does the Fed
anticipate changing the frequency of stress tests for banks
with more than $250 billion in total consolidated assets?
A.14. Consistent with the Economic Growth, Regulatory Relief,
and Consumer Protection Act (EGRRCPA), the Board is considering
the application of enhanced prudential standards, including
resolution planning requirements, to firms in the $100 billion
to $250 billion total consolidated assets range. Resolution
planning is especially critical to ensure that the largest,
most complex, and most interconnected banking firms structure
their operations in ways that make it more possible for them to
be resolved upon failure without causing systemic risks for the
broader economy. The Board therefore anticipates focusing
resolution planning requirements on these firms. Firms with
total assets between $100 billion and $250 billion, especially
those that are less complex and less interconnected, do not
pose a high degree of resolvability risk. Therefore, we should
consider no longer imposing the resolution planning requirement
on at least a subset of the firms with total assets between
$100 billion $250 billion. The Board will solicit feedback,
including feedback on costs and benefits, on any proposed
changes to the applicability of resolution planning
requirements through the public notice and comment process.
The provisions of EGRRCPA are generally consistent with the
Board's view that supervision and regulation should be
appropriately tailored to the risks posed by firms to the
financial system. The Board also recognizes that the complexity
of banks can vary significantly from bank to bank, even for
institutions within the $100 billion to $250 billion group.
Those banks, which provide a significant amount of credit to
the economy, range from large regional banks to an institution
that has been designated a systemically important financial
institution given its size and complexity. That suggests we may
need to consider factors beyond size when we consider whether
it is appropriate to reduce the frequency of the stress test.
Pursuant to the provisions of EGRRCPA, the Board will
assess the necessary and appropriate frequency of supervisory
and company-run stress tests to effectively ensure the safety,
soundness, and resiliency of the financial system while
concurrently minimizing regulatory burden. In general, firms
that pose limited risk to financial stability would be expected
to be subject to less frequent supervisory and company-run
stress tests than those with a large systemic footprint. Of
course, we would invite public comment on any proposal to
change the frequency of the stress test.
Q.15. Does the Fed intend to exempt any firms from the
requirement to calculate risk-weighted assets according to
Advanced Approaches?
A.15. The Board is currently focused on ways to simplify the
existing capital rules and to reduce any unwarranted complexity
of the applicable capital requirements overall, rather than on
considering exemptions for particular firms. The Board believes
there is room to simplify the capital framework, while
preserving the stringency of the overall capital requirements.
The Board is also actively reviewing the requirements
applicable to firms with more than $250 billion in total assets
to make sure they are appropriately tailored to the firms to
which they are applied.
Q.16. How does the Fed's planned rulemaking regarding ``reach
back'' application of enhanced prudential standards anticipate
expeditiously capturing quickly growing firms whose risk to the
economy may rapidly escalate? For example, Countrywide grew
from $26 billion in total consolidated assets in 2000 to $211
billion in 2007, and posed systemic threat to the economy.
A.16. EGRRCPA tailors supervisory requirements to the size and
complexity of banking organizations. As is reflected in
EGRRCPA, regulations should be the most stringent for the
largest and most complex institutions. Rulemakings proposed by
the Board to tailor existing requirements would be designed to
maintain a safe, sound, and stable banking system that supports
economic growth without imposing unnecessary costs. Under this
principle, if a bank grows in size and complexity, the Board's
regulatory framework would apply increasingly stringent
requirements to that banking organization commensurate with the
organization's size and complexity.
Q.17. In what ways, if any, does the Fed intend to revamp the
Community Reinvestment Act (CRA)?
A.17. The Federal Reserve supports modernizing the Community
Reinvestment Act (CRA) regulations so that they better reflect
structural and technological changes in the banking industry
and strengthen the rules to help address the credit needs of
low- and moderate-income communities. We think an Advance
Notice of Proposed Rulemaking (ANPR) is a good starting point
to gather input on the impact of the significant advancements
in technology and other changes in the financial services
marketplace since the regulations were last revised. We value
input from all stakeholders on the impact of the significant
advancements in technology and other changes in the financial
services marketplace since the regulations were last revised.
We look forward to reviewing suggestions that result from the
OCC's ANPR on possible refinements to CRA regulations.
While there are many positive aspects of the current
regulations, we believe that there are opportunities to improve
clarity and consistency through modernization efforts, which
would benefit both banks and the communities they serve. The
Board also believes that revised regulations should recognize
that banks vary widely in size and business strategy and serve
communities with different credit needs. An interagency
modernization process is also an opportunity to define ways to
evaluate a bank's CRA performance in light of its size,
business strategy, capacity, and constraints, as well as its
community's demographics, economic conditions, and credit needs
and opportunities. To this end, more metrics could provide
clarity. It is important that the use of metrics is
sufficiently responsive to local credit needs and account for
differences in performance expectations based on a bank's size,
business model, and strategy.
The Board values the interagency process, and we look
forward to working with the OCC and the FDIC on any regulatory
revisions that would promote consistency in the implementation
of CRA across the industry, as well as offer the greatest
impact to benefit reinvestment in local communities, consistent
with the spirit and intent of the law.
Q.18. Assessment Areas under CRA are geographical areas where
bank performance is evaluated on CRA exams. Currently, these
areas include bank branches and deposit-taking ATMs. Many banks
are making loans outside of branch networks, using alternative
delivery channels including the Internet.
Has the Federal Reserve given thought to changing the
definition of Assessment Areas to reflect the changing
landscape of banking?
A.18. Yes. The central focus of the law is on a bank's
affirmative obligation to meet the credit needs of the
communities it serves, including low- and moderate-income
communities, consistent with safe-and-sound lending. The Board
believes it is time to modernize the regulations, including
making changes to the definition of a bank's ``assessment
area,'' in which its CRA performance is evaluated.
The banking environment has changed significantly since
CRA's enactment and since the current CRA regulation was
adopted. The regulation focuses on assessing performance where
banks have branches, but many banks may now serve consumers in
areas far from their physical branches. Therefore, the Board
agrees that it is sensible for the agencies to consider
expanding the assessment area definition to reflect the various
ways a bank can serve local communities, while retaining the
core focus on place.
Q.19. Comptroller Otting, during Committee testimony in June,
suggested reducing CRA performance measurement to a simple
formula system comparing the sum of CRA activities to bank
assets. Making this ratio the totality of a CRA exam would
abandon current examination weights which judge certain
activities as more important than others, based on local needs.
Do you support this single ratio approach?
A.19. We support updating the CRA regulations to make them more
effective in making credit available in low- and moderate-
income areas. In enforcing CRA, we have identified principles
to guide our work. For example, the Board believes that revised
regulations should be tailored recognizing that banks vary
widely in size and business strategy and serve communities with
widely varying needs. We believe this can be done while
retaining the flexibility to evaluate a bank's CRA performance
in light of its size, business strategy, capacity, and
constraints as well as its community's demographics, economic
conditions, and credit needs and opportunities.
We recognize the importance of considering the ways in
which a bank's business strategy, no matter its size,
influences the types of activities it undertakes to meet its
CRA obligations.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
FROM JEROME H. POWELL
Q.1. The Federal Housing Finance Agency (FHFA) has proposed a
new regulatory capital framework for the Federal National
Mortgage Association and the Federal Home Loan Mortgage
Corporation (each, an ``enterprise''). See Proposed Rule,
Enterprise Capital Requirements (83 Federal Register 33,312)
(Jul. 17, 2018). FHFA's proposed rule contemplates that the
credit risk transfers (CRT) of the enterprises would provide
capital relief. Id. at 33,356. According to FHFA, with respect
to capital relief for CRT, ''the proposed approach is analogous
to the Simplified Supervisory Formula Approach (SSFA) under the
banking regulators' capital rules applicable to banks, savings
associations, and their holding companies.'' Id. at 33,358. But
FHFA also acknowledges that ``the proposed approach deviates
from the SSFA in that it: (i) [p]rovides for a more refined
view of risk differentiation across transactions by accounting
for differences in maturities between the CRT and its
underlying whole loans and guarantees, and (ii) docs not
discourage CRT transactions by elevating aggregate post-
transaction risk-based capital requirements above risk-based
capital requirements on the underlying whole loans and
guarantees.'' Id.
What are the material differences between (i) the rules
governing the capital relief afforded a CRT of an enterprise
under FHFA's proposed rule and (ii) the rules governing the
asset credit, liability reduction or other capital relief
afforded a similar transaction of a banking organization under
the rules of the Board of Governors of the Federal Reserve
System (the Board)?
A.1. The Federal Housing Finance Agency's (FHFA) proposal on
``Enterprise Capital Requirements'' recognizes the risk
mitigation effects of credit risk transfers (CRTs). CRTs are
transfers of credit risk from Fannie Mae and Freddie Mac on a
portion of their loan portfolio to private sector investors. If
CRTs meet certain qualifying criteria, Fannie Mae and Freddie
Mac are able to reduce the amount of capital held against those
portfolios.
The treatment for CRTs proposed by the FHFA is tailored for
two types of products: single-family home loans and multifamily
loans. These products have standardized characteristics that
are incorporated in the FHFA's proposed approach for risk
weighting these exposures.
The regulatory capital rule, adopted by the Federal Reserve
Board of Governors, the Office of the Comptroller of the
Currency, and the Federal Deposit Insurance Corporation
(collectively, ``banking agencies''), similarly recognizes
credit risk mitigation effects of credit risk transfers and
allows a banking organization to assign a lower risk weight to
an exposure. However, relative to the approach proposed by the
FHFA, the banking agencies' capital rule recognizes credit risk
mitigation for a much broader variety of exposures.
The banking agencies' approach for recognizing credit risk
transfer through a securitization needs to be flexible enough
to accommodate a wide variety of securitized asset classes
without standardized characteristics. The approach may require
more capital on a transaction-wide basis than would be required
if the underlying assets had not been securitized, in order to
account for the complexity introduced by the securitization
structure. Furthermore, the banking agencies' capital rule
requires banking organizations to meet certain operational
requirements. An inability by a banking organization to meet
these operational requirements may lead to higher risk
weighting, relative to the FHFA's proposed approach.
Q.2. Does the Board expect to consider FHFA's approach to
capital relief for CRT, and also the experience of the
enterprises with CRT, when the Board next reviews its own rules
governing the capital relief afforded to banking organizations
for CRT and similar transactions?
A.2. The FHFA's proposal is specifically designed for Fannie
Mae and Freddie Mac and their specialized lending purposes. The
FHFA has calibrated its proposed capital requirements and
tailored its credit risk mitigation rules to two specific
categories of exposures: single-family home loan and
multifamily loan portfolios.
Banks have a wider variety of exposures than Fannie Mae and
Freddie Mac. Thus, banks require a different calibration of
capital requirements and a more general set of rules governing
the recognition of credit risk mitigation.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
FROM JEROME H. POWELL
Q.1. International Organizations. Background: The Federal
Reserve has membership in several international standard-
setting bodies. Among them are the Bank for International
Settlements (BIS) and the Financial Stability Board (FSB).
These standard-setting bodies provide opportunities to push
U.S. interests and greater regulatory harmonization globally.
The level of participation by the Federal Reserve going forward
is unclear. The question is intended to give Chairman Powell an
opportunity to describe his vision for the Federal Reserve's
participation in these international organizations.
Chairman Powell, the Federal Reserve has traditionally
played an important and active role in international standard-
setting bodies such as the Bank for International Settlements
(BIS) and the Financial Stability Board (FSB). This has been
important for both representing the interests of the United
States and promoting policies that benefit the global financial
system. In the Treasury Department's first report to the
President on financial regulatory reform, it advocated for
robust U.S. engagement in international financial regulatory
standard-setting bodies as a way to ``promote financial
stability, level the playing field for U.S. financial
institutions, prevent unnecessary regulatory standard-setting
that could stifle financial innovation, and assure the
competitiveness of U.S. companies and markets . . . .'' The
Treasury Department recommended in its report that U.S.
regulators advocate for international regulatory standards that
are aligned with U.S. interests.
As Chairman, what will be your top priorities when
representing the United States in international standard-
setting bodies such as BIS and FSB?
A.1. One of our top priorities in international standard
setting bodies is to consolidate the financial reform gains we
have achieved globally. These include a responsible increase in
bank capital standards, introduction of liquidity standards,
recovery and resolution planning for the most globally active
and systematically important banks, and mandates to increase
incentives for financial firms to centrally clear derivatives.
As we get further from the financial crisis, it will become
easier to forget the reasons for which we took actions to
strengthen significantly the prudential framework for banks and
global financial stability. Therefore, it is important that the
United States, with its large number of globally active
financial firms, continue to play a central role in reenforcing
this message at the international level.
At the same time, we believe now is an appropriate time to
evaluate the reforms to ensure that they are working as
efficiently and effectively as they can and do not give rise to
adverse incentives. The evaluation work, already underway, may
lead us to adjust various standards to achieve these objectives
while maintaining the strength and resiliency of the system.
Q.2. Can you describe the work you hope to accomplish or new
initiatives you hope to pursue in BIS, FSB and other relevant
international standard-setting bodies?
A.2. One priority is to finalize the bank capital framework for
trading activities. Strong standards are necessary for these
activities as trading activities facilitated many of the
riskier bank practices that led to the crisis. At the same
time, it is important to ensure that these standards are well-
crafted in order to avoid adverse effects on market liquidity.
The international standard-setters are also working to build up
financial firms' resiliency to operational risks, including
those emanating from cyber-risks. These risks are some of the
most important risks that financial firms face today. These
international efforts are aimed at ensuring that we have common
terminology to discuss these risks and have a common set of
expectations for firms' resiliency in the face of operational
risk incidents.
Q.3. EU. Background: Legislative bodies in Europe are
considering draft revisions to the European Market
Infrastructure Regulation (EMIR) that would bring U.S.-based
and other third-country central counterparties (CCPs) under the
regulation and supervision of the EU for the first time. The
proposed changes would expand the European Securities and
Markets Authority's (ESMA) and the European System of Central
Banks' supervisory authority over third-country CCPs, including
U.S. CCPs, that are recognized to do business in Europe. EMIR's
stated purpose for making these changes is to address the
potential risks that third-country CCPs could pose to the EU's
financial system. These changes could also reopen a 2016
equivalence agreement for derivatives clearinghouse supervision
between the CFTC and the EU authorities. CFTC Chairman
Giancarlo has expressed significant concerns regarding the
potential impact this proposed legislation could have on U.S.
CCPs. In recent testimony before the U.S. Senate Agriculture
Committee, Chairman Giancarlo stated that ``regulatory and
supervisory deference needs to remain the key principle
underpinning cross border supervision of CCPs. Deference
continues to be the right approach to ensure that oversight
over these global markets is effective and robust without
fragmenting markets and trading activity.'' The question is
intended to determine how Chairman Powell's intends to address
this issue and whether his views align with that of other U.S.
regulators.
The European Union is considering legislation that, for the
first time, would permit EU regulators, including the European
Central Banks, to directly supervise systemically important
U.S.-based and other third-country CCPs, including U.S. CCPs in
the securities and derivatives markets. This approach itself
could pose risks and potentially interfere with the Federal
Reserve's ability to ensure its policies are being effectuated
without interference by EU supervisors. The U.S. Congress and
regulators have chosen to not take this approach and instead
adhere to the long-standing principal of regulatory deference.
How do you plan to address this situation as Chair?
The proposed legislation (EMIR 2.2) would subject U.S. CCPs
to overlapping EU regulation and supervision without deferring
to U.S. regulators that oversee these entities; namely, the
Federal Reserve, SEC, and CFTC. Do you share CFTC Chairman
Giancarlo's concerns about this proposal? If so, are you
coordinated in your position and messaging to the EU?
A.3. The U.S. central counterparties (CCPs) that may
potentially fall within the scope of the proposed European
Union (EU) legislation to amend the European Market
Infrastructure Regulation include those designated as
systemically important financial market utilities (DFMUs) by
the Financial Stability Oversight Council under Title VIII of
the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act). The Commodity Futures Trading Commission and
the Securities and Exchange Commission are the supervisory
agencies with primary responsibility for supervising and
regulating these firms. The Federal Reserve Board (Board) plays
a secondary role in the oversight of these CCPs under Title
VIII of the Dodd-Frank Act. The proposed EU legislation has
more direct implications for the primary supervisors of these
firms, and those agencies are actively involved in a dialogue
with EU authorities. To date, Board staff has worked to educate
EU authorities on the legal framework created by Title VIII,
explained the nature of the Board's role in the oversight of
DFMUs, pointed out differences considered in the proposed EU
legislation, and expressed support for cooperation among
authorities.
The Board has a long-standing policy objective to foster
the safety and efficiency of payment, clearing, and settlement
systems and to promote financial stability, more broadly. \1\
In that policy, the Board has set out its views, and related
standards, regarding the management of risks that financial
market infrastructures, including CCPs, present to the
financial system and the Federal Reserve Banks. It has also
described how it will engage cooperatively with authorities
with direct responsibility for particular CCPs located outside
of the United States.
---------------------------------------------------------------------------
\1\ See, Federal Reserve Policy on Payment System Risk: https://
www.federalreserve.gov/paymentsystems/files/psr_policy.pdf.
---------------------------------------------------------------------------
As a central bank, the Federal Reserve has a particular
interest in liquidity issues. As far as liquidity risks are
concerned, it is immaterial whether a CCP is based in the
United States or abroad so long as it clears U.S. dollar
denominated assets and makes and receives U.S. dollar payments.
The current EU legislative proposal outlines that the European
Commission, in consultation with the European Securities and
Markets Authority and the relevant EU member central bank, may
determine a third country CCP to be of such systemic importance
to the EU that the only way to mitigate the risks posed would
be for that CCP to establish its clearing business within the
EU. This aspect of the proposed legislation presents a risk of
splintering central clearing by currency area, which could
fragment liquidity and reduce netting opportunities. Given the
extensive cross-border nature of the firms potentially covered
by the proposed EU legislation, we support the EU and U.S.
authorities' efforts to search for cooperative solutions to
these issues that promote CCP resilience while upholding the
aims of both U.S. and international authorities.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
FROM JEROME H. POWELL
Q.1. Supervising large, globally active banking organizations--
such as those covered by the Federal Reserve's Large
Institution Supervision Coordinating Committee (LISCC)--are
among your agency's most important responsibilities. While
LISCC supervision traditionally relates to areas such as
lending, credit risk, and capital and liquidity risk, many of
the strategic and operational risks that larger banks manage
are in areas unrelated to traditional banking services and
functions.
My concern is that as these areas become a larger potential
source of risk, supervisory teams may not have the technical
expertise to properly oversee these complex financial
institutions and may in fact be tempted to substitute their
judgement rather than apply bright line regulations. In fact,
if regulators without technical expertise begin to substitute
their judgement for that of bank management in these areas,
this could lead to increased systemic risk.
How do you make certain that your field supervisory teams
possess the requisite amount of technical experience in areas
like cybersecurity, technology, incentive compensation
planning, and human resources management to oversee banks in
the LISSC portfolio?
Do you agree that supervisory staff should not substitute
their judgment on such matters of general corporate strategy,
especially when they do not have the requisite technical
expertise?
A.1. As you note, supervising Large Institution Supervision
Coordinating Committee (LISCC) firms is one of the most
important responsibilities of the Federal Reserve. The purpose
of this supervision is to ensure that these firms operate in a
safe-and-sound manner, consistent with U.S. financial
stability. The Federal Reserve conducts supervision of LISCC
firms by assessing the adequacy of firms' capital and liquidity
positions, effectiveness of resolution and recovery planning,
the strength of risk management, governance and controls, and
compliance with laws and regulations, including those related
to consumer protection. All areas of supervision--including
quantitative assessments--require some amount of judgment.
Supervisors undergo extensive training to ensure that this
judgment is exercised in a fair and consistent manner that
furthers the safety and soundness of the supervised firms.
While the Federal Reserve has significant experience in
evaluating lending, credit risk, and capital and liquidity
risk, it also has a depth of experience in evaluating strategic
and operational risks. We assess these risks by considering the
effectiveness of boards of directors, senior management
oversight, reporting quality, independent risk management, and
internal audits, among others. As needed, the Federal Reserve
develops or hires personnel with the necessary expertise.
In all technical areas, the Federal Reserve uses both
quantitative and qualitative analysis to assess the strength of
firms' practices. \1\ We also use cross-firm comparative
analysis, commonly referred to as horizontal analysis, to
ensure that our assessments reflect the range of practices that
constitute safety and soundness standards; furthermore, this
tool allows for a more consistent application of supervisory
standards.
---------------------------------------------------------------------------
\1\ Other technical areas include, for example, trading and
counterparty credit risk management, stress testing, and credit
underwriting, and risk management monitoring models.
---------------------------------------------------------------------------
To ensure the appropriateness of supervisory findings,
material supervisory judgments and assessments of LISCC firms
are subject to a rigorous internal governance process, which
includes oversight by committees of individuals from different
parts of the Federal Reserve System. This process is designed
to bring the collective expertise and perspective of the
Federal Reserve to bear on assessments of LISCC firms.
A key objective of LISCC supervision, and in fact,
supervision for all firms, is to ensure that a firm's
governance, risk management activities, and internal controls
adequately support the firm's current risk taking and strategic
objectives. To this end, the Federal Reserve has well-defined
and controlled processes that are appropriate for technical and
specialized activities.
Q.2. For several years, banking organizations that provide
services such as safekeeping and custody to asset managers,
have engaged with the Federal Reserve on the critical need to
refine exposure measurement calculations for use in capital
rules and credit exposure limits. These discussions have led to
the inclusion of technical changes to these capital rules in
the finalization of the Basel Committee's postcrisis capital
reforms agreed to by the Federal Reserve in December 2017.
One of the most important portions of this agreement
relates to securities lending which provides a critical source
of revenue to pension funds, mutual funds, endowments, and
other institutional investors. Given the importance of
securities lending to these asset managers which include
pension funds, such as the South Dakota Retirement System,
enacting these technical changes to the capital rules for
securities financing transactions is an urgent matter. I hope
the Federal Reserve will consider separating these targeted,
technical changes from the rest of the Basel IV package and
begin domestic implementation.
Is there an opportunity for the Federal Reserve to propose
rules to implement these technical changes, and perhaps others,
separately and ahead of its longer range plan to solicit public
input on the broader and more substantive capital changes later
this year through the Advanced Notice of Proposed Rulemaking
(ANPR) process?
A.2. The Federal Reserve Board (Board) understands the concerns
with respect to the capital rules' treatment of securities
financing transactions, and Board staff participated with their
international colleagues on the technical changes provided by
the Basel Committee in December 2017. These changes would
provide a more risk-sensitive treatment of such products,
including to better account for diversification and
correlation. Board staff, in coordination with the other
Federal banking agencies, are evaluating this new standard as
well as other standards adopted by the Basel Committee at the
end of 2017 to determine whether and how best to incorporate
them into the capital rules.
In addition, the Board has been tailoring its regulations
regarding the treatment of securities lending and, more
generally, securities financing transactions. On June 14, 2018,
the Board finalized the Single-Counterparty Credit Limits rule.
The final rule applies to the largest banking firms, placing
limits on a firm's credit exposures to a single counterparty.
These limits address the risks to the economy that are created
when large firms are highly interconnected.
During the public comment period, commenters argued that
the measurement methodology for exposures resulting from
securities financing transactions would not create proper
incentives for risk reduction and would not accurately measure
the actual exposures associated with securities lending
activities. In order to address this concern, the final rule
allows a firm to use any methodology that it is authorized to
use under the Board's risk-based capital rules to measure
exposure resulting from securities financing transactions. This
approach is consistent with other Board regulations, including
the capital rules.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
FROM JEROME H. POWELL
Q.1. I appreciate your timely response to my written questions
from your March 1, 2018, appearance for this Committee. In your
reply, you wrote that ``the State-based system of insurance
regulation provides an invaluable service in protecting
policyholders.'' I could not agree more--and believe that the
U.S. system of insurance regulation is the best in the world.
That is why I'm concerned that recent International
Association of Insurance Supervisors (IAIS) negotiations on the
International Capital Standard (ICS) in Kula Lumpur (KL)
suggest an embrace of a European-centric approach to insurance
capital standards. For example, in the KL agreement, it was
decided that the reference ICS shall have European-like capital
requirements (Prescribed Capital Requirement) and use a
European accounting method (Market Adjusted Valuation).
In the past, the Federal Reserve has stated that the IAIS
does not have any authority to impose enforceable obligations
on U.S. insurance firms and that there is no way that IAIS
negotiations could result in the application of a capital
standard on U.S. insurance firms that is inconsistent with U.S.
laws and regulations. However, if U.S. negotiators agree to a
standard at the IAIS that does not formally recognize the U.S.
insurance regulatory system or, worse, requires that the U.S.
change its regulatory system to match the agreed upon standard
and we do not change our laws, then the EU or other
jurisdictions could penalize U.S. firms operating in said
jurisdictions.
Please answer the following with specificity: What
positions will you take during upcoming IAIS negotiations on
the ICS to ensure the protection of the U.S. system of
insurance regulation?
A.1. I agree that, in order for an Insurance Capital Standard
(ICS) being developed through the International Association of
Insurance Supervisors (IAIS) to be implementable, it cannot be
unsuited or inappropriate for the United States, which remains
the world's largest insurance market. As such, an overly
European-centric ICS would face challenges to being readily
implementable in the United States. As the Federal Reserve
Board (Board) has suggested in relation to insurance firms
supervised by the Board, such a framework may not adequately
account for U.S. Generally Accepted Accounting Principles
(GAAP), may introduce excessive volatility, and may involve
excessive reliance on supervised firms' internal models. \1\
Indeed, the Board strongly supports the U.S. State-based
insurance supervisory system, which has proven its strength and
resilience for well over a century.
---------------------------------------------------------------------------
\1\ See Advance Notice of Proposed Rulemaking, Capital
Requirements for Supervised Institutions Significantly Engaged in
Insurance Activities, 81 Federal Register 38631, 38637 (June 14 2016).
---------------------------------------------------------------------------
Among other things, this motivates our advocacy of an
aggregation alternative, and the use of the GAAP-plus valuation
method, in the ICS. We continue to advocate, and contribute to
developing, the GAAP-plus valuation method for inclusion in the
ICS. In addition, we support the collection of information
through the monitoring period on an aggregation-based approach.
We also participate along with the other U.S. members,
together with other jurisdictions including Canada, Hong Kong,
and South Africa, in the development of such an approach
through the IAIS. Furthermore, the Federal Reserve continues to
develop the Building Block Approach, an aggregation-based
approach that, together with the Group Capital Calculation of
the National Association of Insurance Commissioners (NAIC), can
be used to advocate the aggregation method. Through field
testing and monitoring, we will advocate that an aggregation
method provides comparable outcomes in supervisory actions and
insurance company results relative to the standard calculation
method for ICS that is emerging from the IAIS.
As a member of the IAIS, the Federal Reserve, in
partnership with the NAIC and Federal Insurance Office, remains
committed to pursuing an engaged dialogue to achieve outcomes
that are appropriate for the United States. As a general
proposition, we believe in the utility of having effective
global standards for regulation and supervision of
internationally active financial firms. When implemented
consistently across global jurisdictions, such standards help
provide a level playing field for global financial
institutions. Further, consistent global regulatory standards
can help limit regulatory arbitrage and jurisdiction shopping,
as well as promote financial stability. While we would refrain
from agreeing to any international standard that is
inappropriate for the United States, it is important to recall
that the IAIS has no ability to impose requirements on any
national jurisdiction, and any standards developed through this
forum are not self-executing or binding upon the United States
unless adopted by the appropriate U.S. lawmakers or regulators
in accordance with applicable domestic laws and rulemaking
procedures.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM JEROME H. POWELL
Q.1. Chairman Powell, I'd like to turn to S. 2155
implementation. Many of us are hoping that you and Vice
Chairman Quarles will be taking a robust role in crafting the
rules to implement the newly enacted law. What role are you
currently playing in the implementation of S. 2155?
A.1. The Federal Reserve Board (Board) is working in an
expeditious manner to implement the recently enacted Economic
Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA). The Board has a well-established governance process
for implementing rulemakings and ensuring that such rulemakings
are compliant with the law, including statutory deadlines set
by Congress. Draft rulemakings are carefully reviewed and
considered by the Board's Committee on Supervision and
Regulation, which is chaired by Vice Chairman Quarles. I meet
with staff on a regular basis to discuss regulatory proposals
and provide direction. The Committee's proposals for amendments
to the Board's regulations are finalized only after a vote by
the full Board of Governors.
Q.2. Many of your staff are the same staff that helped write
the implementing rules for the Dodd-Frank Act. In some sense,
the new law mandates they revise their own prior work. From
experience, I would say that such a mandate will take robust
oversight on your part and on our part--do you agree? Can you
give us some insight into how you and Vice Chair Quarles are
managing these workstreams and orchestrating the workstreams?
A.2. As I mentioned above, the Board is working in an
expeditious manner to implement the recently enacted EGRRCPA.
The highest priority of the Federal Reserve is to implement the
laws that we have been entrusted to administer and to work to
protect and enhance the safety and soundness of financial firms
and the financial stability of the U.S. financial system. The
Board has a well-established governance process for
implementing rulemakings and ensuring that such rulemakings are
compliant with the law. I meet with staff on a regular basis to
discuss regulatory proposals and provide direction. Of course,
Vice Chairman Quarles has a statutory obligation to develop
policy recommendations for the Board regarding supervision and
regulation of depository institution holding companies and
other firms we supervise. He is actively involved in the
development of proposals to implement EGRRCPA from the initial
design through finalization.
I would also note that, in general, Board staff regularly
revisits, revises, and tailors previously approved rulemakings.
Through the rule implementation process, the Board receives
feedback from affected banking organizations and other
interested parties. The Board also learns from the experience
of the on-the-ground Reserve Bank examiners. Because of this
continuous dialogue, the Board may conclude that aspects of a
regulation require amendment or streamlining.
Q.3. One area where I would hope that congressional intent is
followed is with respect to the SIFI threshold in Section 401
of the bill. My view is that all banks under $250 billion in
assets are out of the enhanced prudential standards and that
those above $250B are able to take advantage of the mandated
robust tailoring so that the larger regional banks are not
treated like the money center banks and that we are taking
business model and risk into account when applying enhanced
regulations. Is this your view?
A.3. Section 401 of the EGRRCPA raised the threshold for
automatic application of enhanced prudential standards for bank
holding companies from $50 billion to $250 billion in total
consolidated assets. Under this section, the Board has the
discretion to apply enhanced prudential standards to bank
holding companies with total consolidated assets between $100
billion and $250 billion, based on consideration of various
factors, such as capital structure, riskiness, complexity,
financial activities, size, and any other risk-related factors
that the Board deems appropriate.
The core reforms put in place after the financial crisis--
stronger capital and liquidity requirements, stress testing,
and resolution planning--have made our financial system more
resilient. Firms with assets of $100 billion or more can
present a range of safety and soundness and financial stability
concerns, depending on their risks and systemic profile. These
concerns typically increase for firms with assets of $250
billion or more. Therefore, the Board has tailored, and will
work to continue to appropriately tailor, our regulations to
the risk profiles of the films subject to those regulations.
The Board is carefully considering the statutory criteria
under the EGRRCPA for determining which enhanced prudential
standards should continue to apply to firms with $100 billion
to $250 billion in total consolidated assets. The Board is also
evaluating whether any changes to the enhanced prudential
standards applicable to bank holding companies with more than
$250 billion in total consolidated assets are appropriate.
Board staff have begun working on proposals to amend these
aspects of our rules and we look forward to hearing feedback
through the public notice and comment process in the coming
months.
Q.4. I also expect the agencies to take a look at all of the
regulations where they used $50 billion as the asset threshold
for application, including those outside of DFA Section 165,
and raise the number accordingly. What are your thoughts?
A.4. As part of its implementation of EGRRCPA, the Board is
considering which of its regulations require changes given the
amended applicability thresholds in the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act), including
section 165, as well as section 11 of the Federal Reserve Act.
In addition, in light of EGRRCPA's amendments to section 165
and consistent with the Board's ongoing refinement and
evaluation of its supervisory program, the Board is evaluating
whether any other changes to the prudential standards
applicable to large banking organizations are appropriate.
The Board's capital plan rule utilizes a $50 billion asset
threshold and was not affected by the changes made to section
165. Per the Board's public statement on July 6, 2018, the
Board will not take action to require bank holding companies
with total consolidated assets greater than or equal to $50
billion but less than $100 billion to comply with the capital
plan rule.
Q.5. Chairman Powell, the Federal Reserve and the Office of
Financial Research have studied systemic risk and have
determined that banks under $250BB do not pose a systemic risk
and Congress passed and the President signed S. 2155 to raise
the threshold to $250BB for the application of enhanced
prudential standards. I believe that the FED should
expeditiously follow this directive and should follow the will
of Congress, and not wait 18 months. Will you commit to me that
you will direct Fed staff to effectuate this new threshold and
then move on to tailoring above the $250BB threshold?
A.5. As stated above, the core reforms put in place after the
financial crisis--stronger capital and liquidity requirements,
stress testing, and resolution planning--have made our
financial system more resilient, and I would not want to see
any material weakening of these reforms. The Board has the
discretion under the EGRRCPA to apply enhanced prudential
standards to firms with total consolidated assets between $100
billion and $250 billion. When doing so, the enacted
legislation requires us to consider various factors, such as
capital structure, riskiness, complexity, financial activities,
size, and any other risk-related factors that the Board deems
appropriate.
The Board is carefully considering the statutory criteria
under the EGRRCPA and is evaluating whether any changes to the
enhanced prudential standards applicable to bank holding
companies with more than $250 billion in total consolidated
assets are appropriate.
Board staff have begun working on proposals to amend these
aspects of our rules and we look forward to hearing feedback
through the public notice and comment process in the coming
months.
Q.6. The relief in S. 2155 is not immediate, and without prompt
action, the relief will not come until Nov. 24, 2018, 18 months
after enactment. Do you plan to take action immediately?
A.6. There are a number of provisions in EGRRCPA that provided
relief immediately upon enactment. The Board, along with the
other Federal banking agencies, have taken action to address
the EGRRCPA changes that took effect immediately. As described
in the Board's July 6, 2018, statements, the Board will not
take action to enforce existing regulatory and reporting
requirements in a manner inconsistent with EGRRCPA. For
example, the Board will not take action to require bank holding
companies with less than $100 billion in total consolidated
assets to comply with certain existing regulatory requirements.
These requirements include the enhanced prudential standards in
the Board's Regulation YY, the liquidity coverage ratio
requirements in the Board's Regulation WW, and the capital
planning requirements in the Board's Regulation Y. The Board's
statement and interagency statements also discuss other changes
that took effect upon enactment and the interim positions that
will be taken until the relevant regulations are amended to
conform with EGRRCPA, including the treatment of high
volatility commercial real estate exposures and certain
municipal securities in the context of liquidity regulations.
EGRRCPA also raised the threshold for automatic application
of enhanced prudential standards for bank holding companies
from $50 billion to $250 billion in total consolidated assets.
Under this section, the Board has the discretion within 18
months of enactment to apply enhanced prudential standards to
bank holding companies with total consolidated assets between
$100 billion and $250 billion based on consideration of various
factors. The Board is carefully considering the statutory
criteria under the EGRRCPA for determining which enhanced
prudential standards should continue to apply to firms with
$100 billion to $250 billion in total consolidated assets.
In addition, in light of EGRRCPA's amendments, and
consistent with the Board's ongoing refinement and evaluation
of its supervisory program, the Board is evaluating whether any
changes to the enhanced prudential standards applicable to bank
holding companies with more than $250 billion in total
consolidated assets are appropriate.
Board staff have begun working on proposals to amend these
aspects of our rules and we look forward to hearing feedback
through the public notice and comment process in the coming
months.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM JEROME H. POWELL
Q.1. If changes are made to the Community Reinvestment Act that
lead to financial institutions, including those that have an
online presence, to take deposits from communities but actually
make less of an effort to reinvest in these same communities,
would you consider that to be a good or bad outcome?
A.1. I would view revisions to the regulation that cause
financial institutions to make less of an effort to
reinvestment in these communities as an undesirable outcome. In
addition, a successful update to the Community Reinvestment Act
(CRA) regulations should encourage banks to spread their
community investment activities across the areas they serve and
encourage them to seek opportunities in areas that are
underserved.
Currently, a bank's performance in its major markets is
evaluated most closely and weighs most heavily in its CRA
rating. This emphasis has resulted in what banks and community
organizations refer to as credit ``hot spots'' where there is a
high density of banks relative to investment opportunities.
Meanwhile, other areas have a difficult time attracting capital
because they are not in a bank's major market, if they are
served by a bank at all.
We believe that any new set of regulations should eliminate
such market distortions and avoid creating new ones. No matter
how we define a bank's assessment area in the future, new
regulations need to be designed and implemented in a way that
encourages performance throughout the areas banks serve.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM JEROME H. POWELL
Q.1. In response to my question about the joint agency
rulemaking required by Section 956 of Dodd-Frank, you said,
``We tried--we were not able to achieve consensus over a period
of many years between the various regulatory agencies that need
to sign off on that. But that didn't stop us from acting, you
should know. We--particularly, for the largest institutions, we
do expect that they will have in place compensation plans
that--that do not provide incentives for excessive risk-taking.
And we expect that the board of directors will make sure that
that's the case. And so, it's not something that we haven't
done. We've, in fact, moved ahead through supervisory practice
to--to make sure that these things are better than they were
and they're substantially better than they were. You see much
better compensation practices here, focusing mainly on the big
firms where the problem really was.'' \1\
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\1\ https://plus.cq.com/doc/congressionaltranscripts-5358712?4
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Your response suggests that the relevant agencies have
ceased work on this rulemaking.
Is that correct?
A.1. After the Federal Reserve Board (Board), Office of the
Comptroller of the Currency, Federal Deposit Insurance
Corporation, Securities Exchange Committee, National Credit
Union Association, and the Federal Housing Finance Agency (the
agencies), jointly published and requested comment on the
revised proposed rule in June 2016, the agencies received over
one hundred comments. These comments raised many important and
complicated questions. The agencies continue to consider the
comments.
The Federal Reserve believes that supervision of incentive
compensation programs at financial institutions can play an
important role in helping safeguard financial institutions
against practices that threaten safety and soundness, provide
for excessive compensation, or could lead to material financial
loss. In particular, supervision can help address incentive
compensation practices that encourage inappropriate risk-
taking, which may have effects on not only the institution in
question, but also on other institutions or the broader
economy.
Additionally, The Federal Reserve continues to work with
firms to improve incentive compensation practices and promote
prudent risk-taking at supervised entities.
Q.2. Please provide a detailed explanation of how the Federal
Reserve is either limiting or prohibiting incentive-based
compensation practices that encourage excessive risk-taking
through supervision.
A.2. The Federal Reserve, along with the other Federal banking
agencies, issued Guidance on Sound Incentive Compensation
Policies (Guidance) in June 2010. The interagency guidance is
anchored by three principles:
Balance between risks and results: Incentive
compensation arrangements should balance risk and
financial results in a manner that does not encourage
employees to expose their organizations to imprudent
risks;
Processes and controls that reinforce balance: A
banking organization's risk-management processes and
internal controls should reinforce and support the
development and maintenance of balanced incentive
compensation arrangements; and
Effective corporate governance: Banking
organizations should have strong and effective
corporate governance to help ensure sound incentive
compensation practices, including active and effective
oversight by the board of directors.
The Guidance explains how banking organizations should
develop incentive compensation policies that take into account
the full range of current and potential risks, and are
consistent with safe-and-sound practices. Relevant risks would
vary based on the organization, but could include credit,
market, operational, liquidity, interest rate, legal, conduct,
and related risks. The Guidance also discusses the importance
of considering compliance risks (including consumer compliance)
when evaluating whether incentive compensation arrangements
balance risk and rewards.
Currently, supervisory oversight focuses most intensively
on large and complex banking organizations, which warrant the
most intensive supervisory attention because they are
significant users of incentive compensation arrangements and
because flawed approaches at these organizations are more
likely to have adverse effects on the broader financial system.
Q.3. Please provide any guidance issued to regulated
institutions or materials provided to bank examiners on
incentive-based compensation practices.
A.3. Attached to this response are:
Guidance on Sound Incentive Compensation Policies,
issued by the Federal banking agencies in June 2010;
\2\ and
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\2\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg201000621a.htm
A Report on the Horizontal Review of Practices at
Large Banking Organizations, issued by the Board in
October 2011. \3\
---------------------------------------------------------------------------
\3\ https://www.federalreserve.gov/publications/other-reports/
incentive-compensation-report-201110.htm
Q.4. What metrics, thresholds, and standards is the Federal
Reserve using to evaluate incentive-based compensation
---------------------------------------------------------------------------
practices?
A.4. The Federal Reserve's approach is principles-based, and
recognizes that organizations have unique incentive
compensation practices that vary depending on the firm's
organizational model and operating structure. The supervisory
process focuses on assessing how firms have integrated their
approaches to incentive compensation arrangements with their
risk-management and internal control frameworks to better
monitor and control the risks these arrangements may create for
the organization. Supervision also considers whether
appropriate personnel, including risk-management personnel,
have input into the organization's processes for designing
incentive compensation arrangements and assessing their
effectiveness in restraining imprudent risk-taking.
Q.5. Which institutions are subject to the Federal Reserve's
supervision of incentive-based compensation practices?
A.5. The Guidance, issued by the Federal banking agencies in
June 2010, applies to global consolidated operations of all
U.S.-headquartered banking organizations and to the U.S.
operations of foreign banking organizations with a branch,
agency, or commercial lending company in the United States that
use incentive compensation. Because of the size and complexity
of their operations, Federal Reserve supervision focuses on
large banking organizations, those with the most significant
use of incentive compensation, and those with the most complex
operations.
Q.6. Were those institutions selected for supervision by asset
size or some other factor?
A.6. The principles-based Guidance issued by the Federal
banking agencies in June 2010, applies regardless of size;
however, the Federal Reserve focuses supervisory oversight on
the largest banking organizations, those with the most
significant use of incentive compensation, and those with the
most complex operations.
The banking organizations involved in the horizontal
reviews \4\ were selected based on asset size and complexity of
operations.
---------------------------------------------------------------------------
\4\ For additional information on the Federal Reserve's horizontal
reviews of compensation practices, see: ``Incentive Compensation
Practices: A Report on the Horizontal Review of Practices at Large
Banking Organizations'', October 2011, available at: https://
www.federalreserve.gov/publications/other-reports/incentive-
compensation-report-201110.htm.
Q.7. If there is no rule clearly delineating prohibited
practices, how are you ensuring consistency across regulated
---------------------------------------------------------------------------
institutions?
A.7. Supervision of incentive compensation by the Federal
Reserve is governed by the Guidance, which is integrated into
the Bank Holding Company Supervision Manual. Federal Reserve
understanding of incentive compensation practices was developed
through the information collected during the horizontal
reviews. With that understanding, the Federal Reserve has
integrated incentive compensation in ongoing supervisory
reviews, whether targeted (such as sales incentives or
compliance reviews) or within individual lines of business
(such as mortgage lending operations, or trading). A team at
the Board monitors these reviews to encourage constituency.
To foster implementation of improved incentive compensation
practices, the Federal Reserve initiated multidisciplinary,
horizontal reviews of incentive compensation practices at
larger banking organizations. The primary goal was to
consistently guide firms in implementing the interagency
guidance.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Q.8. Many economists, including President Trump's Chair of the
Council of Economic Advisers, have long advocated for less
restrictive immigration policies to help grow the U.S. labor
force, especially in light of an aging population and low birth
rate. According to the Pew Research Center, without a steady
stream of a total of 18 million immigrants between now and
2035, the share of the U.S. working-age population could
decrease to 166 million. \5\
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\5\ http://www.pewresearch.org/fact-tank/2017/03/08/immigration-
projected-to-drive-growth-in-us-working-age-population-through-at-
least-2035/
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What repercussions would restrictive immigration policies
have on our workforce and economy?
A.8. Immigration is an important contributor to the rise in the
U.S. population, accounting for roughly one-half of population
growth annually. And population growth, in turn, affects the
growth rate of the labor force as well as the growth of the
overall economy. Thus, from an economic growth standpoint,
reduced immigration would result in lower population growth and
thus, all else equal, slower trend economic growth. However,
immigration policy is not the purview of the Federal Reserve
but rather is the responsibility of the Congress and the
Administration.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
FROM JEROME H. POWELL
Q.1. Alternative Reference Rate: Some underappreciated work
that you have guided at the Federal Reserve is that of the
Alternative Reference Rate Committee. Global regulators have
acknowledged that at the end of 2021, banks will no longer be
required to submit to the panel that determines LIBOR, meaning
that the rate could stop publication at that time. LIBOR is
currently critical to the smooth functioning of our financial
system, as it underlies $200 trillion in notional value, or ten
times U.S. GDP, including a significant amount of floating-rate
mortgages. As the FSOC's annual report highlighted, if LIBOR
disappears without a liquid market in the replacement rate, the
effects could be catastrophic. Yet a switch to an alternative
rate, the secured overnight financing rate, requires tremendous
collaboration by the private sector and the official sector and
the creation of financial markets that would facilitate the
arbitrage between LIBOR and the secured rate, and the creation
of new products in the new secured rate.
Do you believe end users will demand products in the new
secured rate sufficient to build a deep and liquid market in
the secured rate before the end of 2021, even though first
movers in this space are likely to pay a premium for the
product before the market is fully developed? Why?
A.1. As you note, the Financial Stability Oversight Council
(FSOC) has highlighted the potential risks to U.S. financial
stability from the London Interbank Offered Rate (LIBOR) since
2014. These concerns led the Federal Reserve to convene the
Alternative Reference Rates Committee (or ARRC) at that time.
The ARRC is a diverse group of private sector firms and
institutions that has widespread support from the U.S. official
sector. In addition to the Federal Reserve Board, the Consumer
Financial Protection Bureau, the Commodity Futures Trading
Commission (CFTC), the Federal Deposit Insurance Commission
(FDIC), the Federal Housing Finance Authority, the Federal
Reserve Bank of New York, the Office of the Comptroller of the
Currency (OCC), the Office of Financial Research, the
Securities and Exchange Commission (SEC), and the U.S. Treasury
Department (U.S. Treasury) all act as ex officio members of the
ARRC. The ARRC's work in identifying the secured overnight
financing rate (SOFR) as a recommended alternative to U.S.
dollar LIBOR and developing a plan to promote use of SOFR on a
voluntary basis has unquestionably been necessary in helping to
make sure that the financial stability risks identified by the
FSOC do not materialize.
I have been greatly encouraged by the response of the
private sector since SOFR began publication in April of this
year. Even in this short period of time, we have already seen
evidence that SOFR can and will be used by a wide range of
market participants. The Chicago Mercantile Exchange is
offering futures contracts on SOFR, and trading activity has
already risen to above 5,000 contracts (or about $15 billion)
per day with a total open interest of $75 billion. SOFR futures
already have far more daily transactions underlying them than
LIBOR. In addition, the London Clearing House group has begun
offering clearing of SOFR swaps. And importantly, we have
already seen two recent issuances of debt tied to SOFR. Both of
these issuances were met with high demand and were
oversubscribed, indicating that there is a robust pmt of the
market that recognizes that SOFR instruments have value to
them.
There are several reasons that I believe we will see
liquidity in SOFR instruments continue to grow. First, as a
fully transactions-based, International Organization of
Securities Commissions compliant benchmark based on the
overnight U.S. Treasury repo market--the largest rates market
in the world--SOFR really does represent a robust alternative
to U.S. dollar LIBOR. Because so many firms are active in the
Treasury repo market, they naturally have incentives to trade
SOFR instruments. Second, many market participants have come to
realize that the risks the FSOC has pointed to in LIBOR are
quite likely to materialize, and I believe they see that it is
in their own interest to move away from LIBOR and toward SOFR.
The ARRC and the official sector will 'need to continue to
educate market participants about the risks to LIBOR, and work
to make sure that this transition is a smooth one.
Q.2. Foreign banks and prudential rules: I noticed that in the
single-counterparty credit limit (SCCL) final rule, the Fed
applied limitations on domestic bank holding companies that
have $250 billion or more in total assets and the intermediate
holding companies of foreign banks with at least $50 billion in
total assets. And in the recent CCAR results, the Fed exempted
three U.S. banks with assets between $50 billion and $100
billion, but continued to apply CCAR to the intermediate
holding company of one foreign bank that has nearly $900
billion in total assets but only $86 billion in the U.S.
Can you describe the philosophy guiding the Fed's decisions
to keep foreign banks' U.S. holding companies covered by these
important prudential rules?
A.2. In 2014, recognizing that the U.S. operations of foreign
banking organizations (FBOs) had become more complex,
interconnected, and concentrated, the Board adopted a final
rule that established enhanced prudential standards for large
U.S. bank holding companies (BHCs) and FBOs to help increase
the resiliency of their operations. These standards include
liquidity, risk management and capital, and require a FBO with
a significant U.S. presence to establish an intermediate
holding company (IHC) over its U.S. subsidiaries to facilitate
consistent supervision and regulation of the U.S. operations of
the foreign bank. The standards applied to the U.S. operations
of FBOs are broadly consistent with the standards applicable to
U.S. bank holding companies. However, the standards can also
take into account the combined footprint of FBOs' U.S.
operations, including their branches and agencies.
Accordingly, the 2018 final rule to implement single-
counterparty credit limits (SCCL) for large U.S. bank holding
companies tailors the application of SCCL to U.S. IHCs such
that U.S. IHCs of similar size to U.S. BHCs covered under the
rule are subject to the same SCCL, but the final rule also
takes into account the IHC's role as one portion of a
significantly larger banking organization.
Similarly, the Board's annual Comprehensive Capital
Analysis and Review (CCAR) applies more stringent standards to
an IHC based on whether it is large and complex, meaning it (1)
has average total consolidated assets over $250 billion or (2)
has average total nonbank assets of $75 billion or more, and
(3) is not a U.S. global systemically important firm.
The Board monitors the impact of its regulations after
implementation to assess whether the regulations continue to
function as intended. In implementing enhanced prudential
standards for FBOs with a large U.S. presence, the Board sought
to ensure that FBOs hold capital and liquidity in the United
States and have a risk management infrastructure commensurate
with the risks in their U.S. operations. In general, FBOs with
$50 billion in U.S. subsidiary assets are among the largest and
most interconnected foreign banks operating in the United
States. As a result of the IHC requirement, these films have
become less fragmented, hold capital and liquidity buffers in
the United States that align with their U.S. footprint, and
operate on more equal regulatory footing with their domestic
counterparts. I believe our current IHC framework with the
current threshold is working well.
Q.3. Volcker Rule: The policy behind the Volcker Rule is to
reduce risky activities in banks, in particular high risk
proprietary trading. I've long been a supporter of the Volcker
Rule, and I think this is a worthy goal, as we never want banks
to go back to that type of risky trading. The rule aims to
achieve this in part by prohibiting banks from investing in
hedge funds and private equity funds. I've heard, however, that
the current definition has captured investments that seem far
removed from the statute's original concern--such as an
incubator for women-run businesses--and prohibits bank
investments in funds where banks are permitted to make the
investment directly. The proposed rulemaking seems focused on
easing compliance burdens that have been associated with the
subjective intent test under the current rule, but it provides
little clarity on the agencies' thinking on the covered fund
side.
Can you describe how the Federal Reserve is thinking about
changes to the covered fund rules?
A.3. The Board, along with the OCC, FDIC, CFTC, and SEC (the
agencies) adopted regulations to implement section 13 of the
BHC Act, the ``Volcker Rule'', in 2013. These regulations
included a definition of ``covered fund'' that, in the
agencies' view, was consistent with the statutory purpose of
the Volcker Rule to limit certain investment activities of
banking entities. Subsequently, and based on experience with
the Volcker Rule regulations, the agencies identified
opportunities for improvement and proposed amendments to the
Volcker Rule regulations in June 2018.
The proposal requests comment on how to tailor the
regulations governing a banking entity's covered fund
activities. For example, the proposal asks whether a different
definition of ``covered fund'' would be appropriate. In
addition, the proposal requests comment on potential exemptions
for particular types of funds, or funds with particular
characteristics.
Since proposing the amendments in June, the agencies have
held meetings with and received comments from interested
patties regarding the treatment of covered funds. The agencies
expect to meet with and receive comments from interested
parties throughout the comment period, and will carefully
consider each comment to determine whether any changes to the
covered fund regulations would be appropriate.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM JEROME H. POWELL
Q.1. Home Mortgage Disclosure Act. I remain concerned about
discrimination in mortgage lending, especially as we no longer
have publicly available data on loan quality for 85 percent of
the banks and credit unions. This means we need to rely on the
staff of regulators to ensure banks comply with the Equal
Credit Opportunity Act and the Fair Housing Act.
How will you make sure that your bank examiners are looking
at credit scores, loan-to-value ratios, interest rates, and
other indicators of loan quality to ensure African Americans,
Latinos, and single women are not getting lower quality
mortgage loans?
A.1. 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
Fair Housing Act, which means we can 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 can 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. Relevant to an evaluation
of loan quality, those procedures include risk factors related
to potential discrimination in pricing, underwriting, and
steering. With respect to potential discrimination in the
pricing or underwriting of 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. This data can be
requested from any Board-supervised institution, including the
institutions that were exempted from reporting additional HMDA
data by the Economic Growth, Regulatory Relief, and Consumer
Protection Act (EGRRCPA). \1\ 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.
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\1\ See ``Economic Growth, Regulatory Relief, and Consumer
Protection Act'', Public Law 115-174, S. 2155 104(a) (May 24, 2018).
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At every examination, the Federal Reserve evaluates whether
a lender might be discriminatorily steering consumers towards
certain loans. An institution that offers a variety of lending
products or product features, either through one channel or
through multiple channels, may benefit consumers by offering
greater choices and meeting the diverse needs of applicants.
Greater product offerings and multiple channels, however, may
also create a fair lending risk that applicants will be
illegally steered to certain choices based on prohibited
characteristics. The distinction between guiding consumers
toward a specific product or feature and illegal steering
centers on whether the institution did so on a prohibited
basis, rather than based on an applicant's needs or other
legitimate factors. If warranted by risk factors, the Federal
Reserve will request additional data, such as consumers' credit
scores and loan-to-value ratios, to determine that consumers
would not have qualified for conventional loans.
Q.2. Is it your expectation that the Fed will have the time and
resources to proactively monitor these banks, without the
required reporting in place?
A.2. Provisions in the recently enacted bill, EGRRCPA, related
to HMDA data collection requirements for certain institutions
will not impact the Federal Reserve's ability to fully evaluate
the risk of mortgage pricing or underwriting discrimination.
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. The Federal Reserve's practice
of requesting data relevant to pricing and underwriting
criteria where warranted by risk factors predates EGRRCPA's
enactment, and the practice will continue.
Q.3. How many additional staff will it take to proactively
monitor the more than 5,000 banks now exempted from reporting
requirements?
A.3. With respect to HMDA, the Federal Reserve supervises
approximately 800 State member banks. Recently enacted EGRRCPA
exempts certain institutions from reporting the additional HMDA
data fields required by the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act). However, institutions
exempted by EGRRCPA that meet HMDA's data reporting threshold
\2\ must continue to report the HMDA data fields that are not
the additional fields required by the Dodd-Frank Act. As noted
above in response subpart (b), the Federal Reserve's practice
of requesting data relevant to pricing and underwriting
criteria, where warranted by risk factors, predates EGRRCPA's
enactment, and the practice will continue. The Federal Reserve
continually evaluates its workload and staffing needs to ensure
that we are fulfilling our supervisory responsibilities.
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\2\ In general, if a financial institution has assets exceeding
$45 million and originated at least 25 closed-end mortgage loans in
each of the two preceding calendar years, or originated at least 500
open-end lines of credit in each of the two preceding calendar years,
it must meet the HMDA reporting requirements for its asset size. See
``A Guide to HMDA Reporting: Getting it Right!'', Federal Financial
Institutions Examination Council (Eff. Jan. 1, 2018), https://
www.ffiec.gov/Hmda/pdf/2018guide.pdf.
Q.4. Volcker--Postpone the Deadline for Comment. Congress
passed the Volcker Rule to prevent taxpayer backed banks from
gambling with insured deposits, destabilizing the financial
system and failing or requiring bailouts. Recently, the SEC,
CFTC, Federal Reserve, the OCC, and the FDIC have issued a new
Volcker Rule proposal. However, I am concerned that regulators
have only allowed for a 60-day comment period to respond to a
689 page rule. That rule includes 342 enumerated questions,
dozens of additional questions on the costs or benefits of
aspects of the proposal, and invitations to comment on numerous
technical concepts and provisions. A limited 2 month comment
period may not allow for outside groups, academics and
researchers the full time needed to analyze the proposal.
Will you extend the comment period by an additional 90
days?
A.4. In early June 2018, the Board of Governors of the Federal
Reserve System, the Office of the Comptroller of the Currency,
the Federal Deposit Insurance Corporation, the Securities and
Exchange Commission, and the Commodity Futures Trading
Commission (together, the ``agencies'') proposed revisions to
the rules implementing section 13 of the Bartle Holding Company
Act (12 U.S.C. 1851), also known as the Volcker Rule. The
proposal's comment period was for 60 days after publication in
the Federal Register on July 17, 2018. On September 4, 2018, in
response to requests from commenters, the agencies announced an
extension of the comment period for an additional 30 days,
until October 17, 2018. The extension will allow interested
persons additional time to analyze the proposal and prepare
their comments. The agencies will carefully consider all
comments in formulating the final rule.
Q.5. Wage Stagnation. For the past 8 years, we have added jobs
every quarter. However, wages are not going up. In fact, worker
pay in the second quarter dropped nearly one percent below its
first-quarter level, according to the PayScale Index, one
measure of worker pay. When accounting for inflation, the drop
is even steeper. Year-over-year, rising prices have eaten up
still-modest pay gains for many workers, with the result that
real wages fell 1.4 percent from the prior year, according to
PayScale. The drop was broad, with 80 percent of industries and
two-thirds of metro areas affected.
Meanwhile, many corporate profits have never been stronger.
Banks are making record profits. Companies spent more than $480
billion buying their own stocks. The increased profits are not
going to workers' salaries. Additionally, productivity has
increased by 73.7 percent from 1973 to 2016.
Please expand on your views about the connection between
wages and productivity.
A.5. Over long periods of time, I believe that the best way to
get faster sustainable wage growth (adjusted for inflation) is
to raise productivity growth. The linkage between real wages
and productivity is well-grounded in economic theory and both
tended to rise together in the several decades following World
War II. However, wage growth and productivity growth do not
necessarily track closely over shorter periods, and even over a
longer period of time, higher productivity growth does not
guarantee a faster rise in real wages, as there are other
factors that influence wages as well. This was evident between
1990 and 2010, when real wage growth for the average worker
lagged despite a pickup in productivity growth. \3\ That said,
in recent years, both productivity growth and wage growth have
been disappointing, and my sense is that efforts to boost
productivity growth will be needed to support a faster
sustained pace of real wage gains.
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\3\ This pattern is evident in many other industrialized countries
as well. Economists have been actively researching this issue, but thus
far have not come to a consensus about the cause. Plausible
explanations include the rapid advances in information and computing
technologies during that period, increased international trade and
outsourcing, and increased product market concentration among firms.
But this is clearly an issue that warrants further study.
Q.6. At the hearing, you said that investment in education and
skills were ``the single best'' way to increase wages for
workers. But many have found that connection to be overstated.
For example, Thomas Picketty, author of Capitalism in the 21st
Century, wrote in a blogpost: \4\
---------------------------------------------------------------------------
\4\ Brinker, Luke. ``Thomas Picketty Slams Jeb Bush on Education
and Inequality: `I Think There's a Lot of Hypocrisy.' '' Salon. March
11, 2015. Available at: https://www.salon.com/2015/03/11/thomas-
piketty-slams-jeb-bush-on-education-and-inequality-i-think-theres-a-
lot-of-hypocrisy/.
``there's a lot of hypocrisy' in the rhetoric of
conservatives who condemn inequality while failing to
support policies like an increased minimum wage and
ramped-up infrastructure spending . . . You're saying
let's tax the top and invest that money into education
---------------------------------------------------------------------------
for all.
[Jeb Bush] is a proponent of school choice, of giving
schools vouchers so they can attend public school or
private school, whatever they want. Is this a good
solution in terms of dealing with what he calls the
opportunity gap?'' Ball asks Piketty.
``From what I can see, he doesn't want to invest more
resources into education. He just wants more
competition . . . there's limited evidence that this is
working. And I think most of all what we need is to put
more public resources in the education system. Again,
if you look at the kind of school, high school,
community college that middle social groups in America
have access to, this has nothing to do with the very
top schools and universities that some other groups
have access to,'' Piketty replies. ``[I]f we want to
have more growth in the future and more equitable
growth in the future, we need to put more resources in
the education available to the bottom 50 percent or 80
percent of America. So it's not enough just say it, as
Jeb Bush seems to be saying, but you need to act on it,
and for this you need to invest resources,'' he says.
Asked about claims by Bush and other conservatives that
a so called ``skills gap'' is responsible for the
growth in inequality, Piketty dings that narrative as
simplistic. ``The minimum wage today is lower than it
was 50 years ago, unions are very weak, so you need to
increase the minimum wage in this country today. The
views that $7 and hour is the most you can pay low-
skilled worker in America today . . . I think is just
wrong--it was more 50 years ago and there was no more
unemployment 50 years ago than there is today. So I
think we could increase the minimum wage,'' Piketty
says, adding that the U.S. should also invest in
``high-productivity jobs that produce more than the
minimum wage.'' Education is important, Piketty
acknowledges, but education alone is not enough to
ameliorate inequality. ``You need wage policy and you
need education policy,'' he says. ``And in order to
have adequate education policy, you also need a proper
tax policy so that you have the proper public resources
to invest in these public services. Also you need
infrastructure. Many of the public infrastructure in
this country are not at the level of what the very
developed should have. You cannot say, like many of the
Republicans are saying, we can keep cutting tax on
these top income groups who have already benefited a
lot from growth and globalization over the past 30
years.'' Data from the Survey of Consumer Finances
indicates that, even when accounting for educational
and racial disparities, black households headed by a
college graduate are still less wealthy than less-
educated white ones. \5\
---------------------------------------------------------------------------
\5\ Reeves, Richard V., and Katherine Guyot. ``Black Women Are
Earning More College Degrees, but That Alone Won't Close Race Gaps''.
Brookings. December 4, 2017. Available at: https://www.brookings.edu/
blog/social-mobility-memos/2017/12/04/black-women-are-earning-more-
college-degrees-but-that-alone-wont-close-race-gaps.
Please provide citations for your argument that education
is the main driver for falling wages.
How do you respond to analysis from other economists that
say other reasons--tax policies, weakening unions, regulations
that benefit the financial sector--are a stronger predictor for
wage stagnation?
Can you further elaborate on the wage inequities between
racial and educational disparities?
A.6. I would like to start by noting two good references
detailing the important link between education and wages are:
The Race Between Education and Technology by Claudia Goldin and
Lawrence F. Katz; \6\ and ``The Polarization of Job
Opportunities in the U.S. Labor Market: Implications for
Employment and Earnings'' by David Autor. \7\ The book by
Goldin and Katz traces the coevolution of educational
attainment and the wage structure in the United States through
the twentieth century. They argue, in particular, that the
demand for educated workers outpaced the supply beginning in
about 1980, and that this supply-demand imbalance resulted in a
rise in the wage premium for college-educated workers. In
addition, both resources note that increases in educational
attainment have not kept pace with rising educational returns,
suggesting that the slowing pace of educational attainment has
contributed to the rising gap between college and high school
earnings. And, although the college wage premium has leveled
off in recent years, it remains large. \8\
---------------------------------------------------------------------------
\6\ Claudia Goldin and Lawrence F. Katz, ``The Race Between
Education and Technology'', Belknap Press, 2010.
\7\ David Autor, ``The Polarization of Job Opportunities in the
U.S. Labor Market: Implications for Employment and Earnings''
Brookings, April 2010, https://www.brookings.edu/wp-content/uploads/
2016/06/04jobs_autor.pdf.
\8\ A recent paper by Robert Valletta estimates that the wage
premium for a college-educated worker (relative to a high school
graduate) rose from about 30 percent in 1980 to 57 percent in 2010 and
has leveled off since then. See Robett Valetta, ``Recent Flattening in
the Higher Education Wage Premium: Polarization, Skill Downgrading, or
Both?'' Working Paper No. 2016-17, Federal Reserve Bank of San
Francisco, August 2016.
---------------------------------------------------------------------------
Of course, education is not the only factor that influences
wage growth. For example, the paper by David Autor points out
that the rise in the relative earnings of college graduates
reflected both rising real earnings for college workers and
falling real earnings for noncollege workers. He attributes
these trends to the polarization of job growth, with job
opportunities concentrated in relatively high-skill, high-wage
jobs and low-skill, low-wage jobs, and cites the automation of
routine work and the increased globalization of labor markets
through trade and outsourcing as the primary influences on this
trend. He acknowledges that changes in labor market
institutions, in particular, weaker labor unions and a falling
real minimum wage, may also play a role but argues that these
factors are less important, in part because these wage trends
are evident in many industrialized countries.
With regard to racial disparities in wages, research by
economists at the Federal Reserve Bank of San Francisco shows
that African American men and women earn persistently lower
wages compared with their white counterparts and that these
gaps cannot be fully explained by differences in age,
education, job type, or location. \9\ I agree with their
conclusion that these disparities are troubling and warrant
greater attention by policymakers.
---------------------------------------------------------------------------
\9\ Mary C. Daly, Bart Hobijn, and Joseph H. Pedtke,
``Disappointing Facts About the Black-White Wage Gap'', FRBSF Economic
Letter No. 2017-26, Federal Reserve Bank of San Francisco.
Q.7. Regulation. Chair Powell, at your nomination hearing, you
told me that you supported strong consumer protections.
Please name at least five issues areas where the Federal
Reserve will continue to lead in consumer protection.
A.7. The Federal Reserve has a strong commitment to promoting a
fair and transparent financial services marketplace. We conduct
consumer-focused supervision and enforcement; conduct research
and policy analysis; develop and maintain relationships with a
broad and diverse set of stakeholders; and work to foster
community development.
Our consumer protection efforts include investigating
consumer complaints, assuring consumers' fair and equal access
to credit and treatment in financial markets, assessing the
trends shaping consumers' financial situations, and offering
consumer help via tools and resources developed by Reserve
Banks and other agencies. Examples of the range of our consumer
protection priorities and efforts are described below.
As part of our supervisory outreach, our Reserve Banks have
various consumer and community advisory councils. Additionally,
the Board meets semiannually with its Community Advisory
Council (CAC) as well as with a wide range of consumer and
community groups throughout the year. The CAC is a diverse
group of experts and representatives of consumer and community
development organizations and interests. This important line of
communication provides the Board with broad perspectives on the
economic circumstances and financial services needs of
consumers and communities, with a particular focus on the
concerns of low- and moderate-income populations.
With regard to our enforcement of fair lending laws and
unfair or deceptive acts or practices (UDAP) laws, our
supervisory program is rigorous and we are clear in our
communications with firms about our expectations when we find
weakness in their compliance management systems or violations
of consumer laws. When we find consumer hmm, we make sure that
consumers are provided any appropriate restitution, and when
the situations warrant, we also impose civil money penalties.
Fair lending violations may cause significant consumer harm
as well as legal, financial, and reputational risk to the
institution. The Federal fair lending laws--the Equal Credit
Opportunity Act (ECOA) and the Fair Housing Act (FHA)--prohibit
discrimination in credit transactions, including transactions
related to residential real estate. The ECOA, which is
implemented by the Board's Regulation B (12 CFR part 202),
prohibits discrimination in any aspect of a credit transaction.
It applies to any extension of credit, including residential
real estate lending and extensions of credit to small
businesses, corporations, partnerships, and trusts. Lending
acts and practices that are specifically prohibited, permitted,
or required are described in the regulation.
Official staff interpretations of the regulation are
contained in Supplement I to the regulation. The FHA, which is
implemented by regulations promulgated by the U.S. Department
of Housing and Urban Development, \10\ prohibits discrimination
in all aspects of residential real estate-related transactions.
---------------------------------------------------------------------------
\10\ See 24 CFR part 100.
---------------------------------------------------------------------------
The Board is committed to ensuring that every bank it
supervises complies fully with Federal financial consumer
protection laws, including the fair lending laws. A specialized
Fair Lending Enforcement Section at the Board works closely
with Reserve Bank staff to provide guidance on fair lending
matters and to ensure that the fair lending laws are enforced
consistently and rigorously throughout the Federal Reserve
System (System). Fair lending risk is evaluated at every
consumer compliance examination. Additionally, examiners may
conduct fair lending reviews outside of the usual supervisory
cycle, if warranted by elevated risk.
Section 5 of the Federal Trade Commission Act (FTC Act)
prohibits UDAP and applies to all persons engaged in commerce,
including banks, and the law extends to bank arrangements with
third parties. The Federal Reserve has the authority to take
appropriate supervisory or enforcement action when unfair or
deceptive acts or practices are discovered at institutions
under the Federal Reserve's jurisdiction, regardless of asset
size. We apply longstanding standards when weighing the need to
take supervisory and enforcement actions and when seeking to
ensure that unfair or deceptive practices do not recur.
Examples of practices the Federal Reserve has found to be
unfair or deceptive include certain practices related to
overdrafts and student financial products and services.
With respect to these and other UDAP issues, the Federal
Reserve's enforcement actions have collectively benefited
hundreds of thousands of consumers and provided millions of
dollars in restitution.
In addition to carrying out enforcement actions, we provide
training, direction and support to Reserve Bank examiners in
assessing institutions' compliance with applicable laws and
regulations.
On the consumer level, the System also has a robust process
for responding to consumer complaints about the banks we
supervise. We investigate every complaint of an institution
under our supervisory jurisdiction and refer them to the
appropriate agency if it involves an institution that we do not
supervise. Reserve Banks must respond in writing in a timely
manner.
For the financial institutions we regulate, we develop and
offer guidance to help reduce risk to consumers that supports
our desire to ensure equitable treatment of all consumers,
including those in underserved and economically vulnerable
populations.
We collect and analyze risk data and trends in the
financial services sector affecting consumers and the financial
institutions that we supervise, and we identify emerging
consumer protection issues and promote compliance by
highlighting these areas in publications, webinars, and other
outreach. Examples include our recently launched Consumer
Compliance Supervision Bulletin, which provides to banks and
others high-level summaries of pertinent supervisory
observations related to consumer protections, as well as our
Consumer Compliance Outlook, a System publication focused on
consumer compliance issues, and its companion webinar series,
Outlook Live, both of which are targeted to the industry to
support banks' compliance efforts.
Another example is our annual Survey of Household Economic
Decisions (SHED). The SHED is designed to enhance our
understanding of how adults in the United States are faring
financially, and the results of the survey are posted on our
public website. Other areas include research particularly
focused on the housing market, small business access to credit,
and rural economic development issues.
Through a number of events and on a variety of matters, we
provide outreach to consumer advocacy and community development
organizations that outlines the risks in consumer financial
product markets. Examples of such programs have focused on auto
lending, FinTech/marketplace lending, and student lending.
Q.8. Monetary Policy. If the Fed usually cuts the Federal funds
rate by 5 percentage points to fight a recession and the
neutral rate is around 2.5 percent, what steps can the Federal
Reserve currently take to offset a recession? \11\ Expand the
balance sheet by buying treasuries?
---------------------------------------------------------------------------
\11\ Bosley, Catherine. ``Summers Warns Next U.S. Recession Could
Outlast Previous One'', Bloomberg. February 28, 2018. Available at:
https://www.bloomberg.com/news/articles/2018-02-28/summers-warns-next-
u-s-recession-could-outlast-the-previous-one.
A.8. The possibility that the Federal funds rate could be
constrained by the effective lower bound in future economic
downturns appears larger than in the past because of an
apparent decline in the neutral rate of interest in the United
States and abroad. Several developments could have contributed
to such a decline, including slower growth in the working-age
populations of many countries, smaller productivity gains in
the advanced economies, a decreased propensity to spend in the
wake of the financial crises around the world since the late
1990s, and perhaps a paucity of attractive capital projects
worldwide.
In any case, the Federal Reserve has a number of tools that
it can use in the event that the Federal funds rate is
constrained by the effective lower bound. One such tool is
explicit forward guidance about the path of future policy. By
announcing that it intends to keep short-term interest rates
lower for longer than might have otherwise been expected, the
Federal Reserve can put significant downward pressure on
longer-term borrowing rates for American families and
businesses. Another tool is large-scale asset purchases, which
can also put downward pressure on longer-term borrowing rates
and ease financial conditions. These tools have been an
important part of the Federal Reserve's efforts to support
economic recovery over the past decade. Studies have found that
these tools eased financial conditions and helped spur growth
in demand for goods and services, lower the unemployment rate,
and prevent inflation from falling further below the Federal
Open Market Committee's (FOMC) 2 percent objective. The Federal
Reserve is prepared to use its full range of tools if future
economic conditions were to warrant a more accommodative
monetary policy than can be achieved solely by reducing the
Federal funds rate.
Q.9. Many Federal Reserve officials--including most recently
outgoing New York Fed President Bill Dudley--have talked about
the need for Congress to beef up fiscal stabilizers that can
react automatically to a downturn.
Do you agree that Congress should be working on this? If
so, which stabilizers do you think are most effective? \12\
---------------------------------------------------------------------------
\12\ ``Officials on Record: Automatic Stabilizers'', Dudley,
William C. ``Speech: Important Choices for the Federal Reserve in the
Years Ahead'', The Federal Reserve in the Years Ahead. April 18, 2018.
Available at: https://www.newyorkfed.org/newsevents/speeches/2018/
dud180418a.
A.9. The current monetary policy tools available to the Federal
Reserve can provide significant accommodation in the event of
an economic downturn, although we recognize that there are
limits stemming importantly from the effective lower bound on
the nominal Federal funds rate. As a matter of prudent
planning, we continue to evaluate potential monetary policy
options in advance of an episode in which our primary policy
tool is constrained by the effective lower bound. Since
monetary policy is not a panacea, countercyclical fiscal policy
actions are a potentially important tool in addressing a future
economic downturn. In particular, automatic fiscal stabilizers
have been and continue to be helpful in providing timely
accommodation and thus tempering the extent of a downturn. A
range of fiscal policy tools and approaches could enhance their
effectiveness in helping to provide cyclical stability to the
economy. However, it is appropriate that the details of fiscal
---------------------------------------------------------------------------
policy changes be left to the Congress and the Administration.
Q.10. At your most recent press conference you said--``we can't
be too attached to these unobservable variables.'' If that's
the case, do you think it is possible that the United States
could sustain a long period of unemployment at 3 percent or
even lower? Japan's unemployment has fallen to 2.7 percent and
Germany is at 3.4 percent.
A.10. Monetary policy necessarily involves making judgments
about aspects of the economy that cannot be measured directly
but instead must be inferred. One of those aspects is the level
of the unemployment rate that can be sustained in the longer
term without generating either upward or downward pressure on
inflation. That level is sometimes referred to as the natural
rate of unemployment. Economic modelers have only a limited
ability to estimate the natural rate of unemployment at any
given moment; moreover, there is every reason to believe that
the natural rate can and does change over time. For both of
these reasons, policymakers must always be vigilant in looking
for evidence that might cause them to revise their existing
estimates of parameters such as the natural rate of
unemployment.
As of today, most estimates of the natural rate of
unemployment in the United States range between 4 percent and 5
percent. Other countries will have different rates of
unemployment that are sustainable in the longer run (sometimes
markedly so), depending on the characteristics of the
workforces in those countries (such as age and education), the
geographic mobility of jobs and workers, and structural labor
market policies, to name a few factors.
Q.11. At the last hearing you described the risks to the
economy as balanced, but it seems like the Fed has much more
room to tighten policy--by raising rates and running down the
balance sheet--than it does to loosen policy. Doesn't that
change the balance of risks? If you hike interest rates too
fast, you have limited tools to address an economic slowdown.
If you hike too slowly, you have ample tools to address the
overheating.
A.11. The FOMC recognizes that the effective lower bound (ELB)
on the Federal funds rate can impose a significant constraint
on the conduct of monetary policy. This is one of the reasons
that the Committee has normalized the stance of monetary policy
at a gradual pace during the current economic expansion. That
said, the Federal Reserve has other tools at its disposal to
provide economic stimulus when the Federal funds rate is
constrained by the ELB, including explicit forward guidance
about the path of Federal funds rate and large-scale asset
purchases. Moreover, with strong labor market conditions,
inflation close to 2 percent, and the level of the Federal
funds rate at a bit below 2 percent, the risk of returning to
the ELB has diminished substantially since earlier in the
recovery. Overall, the FOMC currently sees the risks to its
economic outlook as roughly balanced.
History has shown that moving interest rates either too
quickly or too slowly can lead to bad economic outcomes. If the
FOMC raises interest rates too rapidly, the economy could
weaken and inflation could run persistently below the FOMC's
objective. Conversely, there are risks associated with raising
interest rates too slowly. Waiting too long to remove policy
accommodation could cause inflation expectations to begin
ratcheting up, driving actual inflation higher and making it
harder to control. Moreover, the combination of persistently
low interest rates and strong labor market conditions could
lead to undesirable increases in leverage and other financial
excesses. While the Federal Reserve has tools to address such
developments, these circumstances could require the FOMC to
raise interest rates rapidly, which could risk disrupting
financial markets and push the economy into recession.
Q.12. Fed Governance, Diversity, and the San Francisco Fed
Vacancy. At your confirmation hearing, you expressed your
support for more diversity among the Federal Reserve's
leadership, saying, ``We make better decisions when we have
diverse voices around the table, and that's something we're
very committed to at the Federal Reserve.'' \13\ You also
commented on the role that the Board of Governors plays in
approving new Reserve Bank presidents, and assured the Senate
Banking Committee that there is always a ``diverse pool'' in
searching for candidates to fill those positions. However, the
December selection of Thomas Barkin as the president of the
Richmond Fed gives reason for doubt. \14\ Press reports note
that you were very involved in vetting candidates. \15\
---------------------------------------------------------------------------
\13\ CNBC. ``Jerome Powell: I'm a big supporter of diversity.''
November 28, 2017. Available at: https://www.cnbc.com/video/2017/11/28/
jerome-powell-im-a-big-supporter-of-diversity.html.
\14\ Sebastian, Shawn. ``Fed Up Blasts Process, Outcome of
Richmond Federal Reserve Presidential Appointment'', The Center for
Popular Democracy. Available at: https://populardemocracy.org/news-and-
publications/fed-blasts-process-outcome-richmond-federal-reserve-
presidential-appointment.
\15\ Condon, Christopher. ``Fed Documents Show Powell's Hand in
Richmond President Search'', Bloomberg. July 16, 2018. Available at:
https://www.bloomberg.com/news/articles/2018-07-16/fed-documents-show-
powell-s-hand-in-richmond-president-search.
---------------------------------------------------------------------------
Then, in April, John Williams was announced as the new New
York Fed president. A source close to the process said that the
New York Fed search committee just could not find qualified
candidates who were interested in this position, even though
community groups had given a list of qualified and diverse
candidates to the New York Fed board in January. \16\
---------------------------------------------------------------------------
\16\ Guida, Victoria, and Aubree Eliza Weaver. ``In Defense of the
NY Fed Search Committee'', Politico. March 30, 2018. Available at:
https://www.politico.com/newsletters/morning-money/2018/03/30/in-
defense-of-the-ny-fed-search-committee-154624. Guida, Victoria.
``Warren Leads Crusade for Diversity at Fed'', Politico. April 2, 2018.
Available at: https://www.politico.com/story/2018/04/02/federal-
reserve-diversity-elizabeth-warren-452122.
---------------------------------------------------------------------------
Can you explain why these candidates were not considered?
A.12. It is crucial for us to conduct search processes that are
transparent and open to public input, and that encourage
interest and applications from qualified candidates with as
wide a variety of personal and professional backgrounds as
possible. The Federal Reserve System needs such diversity to be
fully effective in discharging its responsibilities, and we
have observed that better decisions are made when there are
many different perspectives represented around the table. I am
firmly committed to conducting each president search in as open
a manner as possible. However, I also recognize the importance
of maintaining the privacy of candidates and the
confidentiality of the composition of the candidate pool in
order to encourage as many qualified individuals to apply as
possible. Therefore, it is not appropriate for me to comment on
the qualification of individual candidates.
During the recent Reserve Bank president searches, the
search committees proactively sought out candidates from a
variety of sources. More specifically, in addition to engaging
the search firm Spencer Stuart, the Federal Reserve Bank of New
York (FRBNY) search committee engaged Bridge Partners, which
has a specific expertise in the identification of diverse
talent. The FRBNY search committee itself also undertook an
extensive program of outreach intended to solicit input and
views from a range of constituencies across the district:
The search committee sent approximately 400 letters
soliciting feedback on the attributes that would enable
success in the role of FRBNY president, as well as
specific names for consideration.
Members of the search committee met with the
FRBNY's standing advisory committees, including the
Advisory Council on Small Business and Agriculture, the
Community Advisory Group (comprised of nonprofit
organizations), the Economic Advisory Panel (comprised
of academic economists), and the Upstate New York
Regional Advisory Board.
The search committee also held two meetings at the
FRBNY with ad hoc groups of invitees, one focused on
labor and advocacy organizations and the other on
business and industry.
Out of these large candidate pools, the search committees
identified candidates who not only had the desired experiences
and key attributes but also confirmed their interests in the
president positions. The FRBNY search committee, at the
conclusion of its search process, published the process
timeline and the characteristics of the candidate pool. \17\
---------------------------------------------------------------------------
\17\ For more information about the FRBNY's president search
timeline, see https://www.newyorkfed.org/aboutthefed/presidential-
search-timeline.
Q.13. Former Honeywell CEO David Cote served as a banker-
elected member of the New York Fed board and search committee,
but abruptly stepped down in mid-March. We later learned he had
resigned this position to take a job with Goldman Sachs. \18\
According to the New York Fed, the search committee had already
settled on John Williams by the time that Cote resigned from
the board. The outgoing New York Fed president was formerly
Goldman Sachs' chief economist, and there have been many
reported instances of an overly cozy relationship between the
Fed and Goldman Sachs, including tapes that leaked in 2014
showing that the New York Fed was very lenient in supervising
Goldman. \19\
---------------------------------------------------------------------------
\18\ Campbell, Dakin. ``Goldman Sacks Teaming up With Former
Honeywell CEO Cote To Strike an Unusual Acquisition'', Business
Insider. Accessed July 16, 2018. Available at: http://
www.businessinsider.com/goldman-sachs-and-former-honeywell-ceo-cote-
teaming-up-to-buy-an-industrial-company-filing-2018-5.
\19\ Haedtler, Jordan. ``Why Do Former Golden Sachs Bankers Keep
Landing Top Slots at the Federal Reserve?'' The Nation. November 30,
2015. Available at: https://www.thenation.eom/article/why-do-former-
goldman-sachs-bankers-keep-landing-top-slots-at-the-federal-reserve/.
Bernstein, Jake. ``The Carmen Segarra Tapes'', ProPublica. November 17,
2014. Available at: https://www.propublica.org/article/the-carmen-
segarra-tapes.
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Do you think it is appropriate that one of the people
responsible for choosing a top Wall Street regulating position
was negotiating a job with Goldman Sachs at the very moment he
was making the decision about who the next New York Fed
president should be?
Does this event raise concerns that the financial industry
has too much influence on regional Reserve Banks boards?
A.13. The process for selecting a Federal Reserve Bank
president is set forth in the Federal Reserve Act. Subject to
the approval of the Board of Governors, a Reserve Bank
president is appointed by that Bank's Class Band Class C
directors. These are the directors who are not affiliated with
banks or other entities supervised by the Federal Reserve.
Class A directors, who are bankers, are not involved in the
search process.
Since 2014, Mr. Cote served on the board of the FRBNY and
on the search committee as a Class B director, representing the
public. Mr. Cote brought to the board his background in the
manufacturing and represented the industry while serving as a
director. Mr. Cote promptly resigned his position on the FRBNY
board of directors, recognizing that pursuing new business
opportunities in the banking sector would affect his
eligibility to serve as a Class B director. \20\
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\20\ For more information about our policies governing the
directors, see https://www.federalreserve.gov/aboutthefed/directors/
policy-governing-directors.htm.
Q.14. A recent analysis by the Center for Popular Democracy
found that although there has been an increase in the gender
and racial diversity of the Federal Reserve Bank's directors,
the Fed is still falling short of true public
representativeness. \21\ Williams' selection has opened up a
vacancy at the San Francisco Federal Reserve Bank. The twelfth
Federal Reserve district is the largest and most diverse in the
country, including a significant Latino population. Latinos
comprise 30 percent of the district. There has never in the
Fed's history been a Latino Federal Open Markets Committee
participant, either as a governor or as a Reserve Bank
president.
---------------------------------------------------------------------------
\21\ Fed Up. ``New Report Analyzes Diversity at the Federal
Reserve in 2018'', The Center for Popular Democracy. February 14, 2018.
Available at: https://populardemocracy.org/blog/new-report-analyzes-
diversity-federal-reserve-2018.
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Do you think it would be valuable for you and your
colleagues to hear the perspective of a Latino FOMC
participant?
A.14. As I have said, we make better decisions when we have
diverse voices around the table, and that is something we are
very committed to at the Federal Reserve. The Federal Reserve
seeks diversity in personal and professional backgrounds to be
more effective in discharging its responsibilities. We value a
broad representation of perspectives, and are working hard
towards greater diversity at all levels of the Federal Reserve.
Recognizing that the appointment of a Reserve Bank president
is, as a legal matter, the responsibility of the Class B and
Class C directors who are by definition not affiliated with
financial institutions in the district, we at the Board worked
closely with the search committee to ensure a strong and
transparent process that identified a broad and diverse slate
of qualified candidates.
As you know, the Federal Reserve Bank of San Francisco
(FRBSF) recently selected Mary Daly as its next president. The
processes of the FRBSF search committee were fair, transparent,
and inclusive. \22\ The FRBSF search committee included
eligible directors from its board who brought diverse
backgrounds and experiences to the process. Further, the search
committee partnered with Diversified Search, the largest
female-founded and owned firm that specializes in identifying
candidates from diverse backgrounds. The search committee
carried out an extensive outreach program, both in person and
virtually, with a range of constituencies across the district,
to gain their input on the search process, obtain their views
on the most important attributes for the Bank president role,
and solicit their recommendations of potential candidates.
---------------------------------------------------------------------------
\22\ For more information about the San Francisco search, go to:
https://www.frbsf.org/our-district/press/news-releases/2018/mary-c-
daly-named-federal-reserve-bank-of-san-francisco-president-and-chief-
executive-officer/?utm_source=frbsf-home-in-the-news&utm_medium=frbsf&
utm_campaign=in-the-news.
---------------------------------------------------------------------------
At the conclusion of its search process, the FRBSF
published additional information about the outreach conducted,
timeline, and characteristics of the candidate pool. The FRBSF
noted that of 283 prospective candidates 33 percent were from a
minority background and 33 percent were female.
Q.15. Inflation Target. In a paper that was recently presented
to Atlanta Fed President Raphael Bostic, economist Dean Baker
argued that the Fed should consider removing the shelter
component from its core inflation indexes. \23\ The reason is
that higher housing costs, particularly in a handful of
metropolitan areas, are significantly outpacing other measures
of inflation--and that these increases stem from a lack of
supply. Baker further argues that continued interest rate
increases from the Fed might have the perverse effect of
sapping housing construction, thereby exacerbating the very
problem (rising inflation) that the Fed is trying to address.
What do you make of this analysis?
---------------------------------------------------------------------------
\23\ Baker, Dean, ``Measuring the Inflation Rate: Is Housing
Different?'' Center for Economic and Policy Research. June 2018.
Available at: http://cepr.net/publications/reports/measuring-the-
inflation-rate-is-housing-different.
A.15. We interpret the Federal Reserve's price-stability
mandate as applying to a broad measure of the price of goods
and services purchased by consumers. Shelter makes up a large
component of consumers' expenditures, and a price index that
excludes shelter would provide a highly incomplete measure of
the cost of living.
To be sure, because monetary policymakers need to be
forward looking in setting policy, we also pay attention to
less-comprehensive inflation measures to help gauge whether a
particular inflation movement is likely to persist. For
example, we examine price indexes excluding food and energy
items, as food and energy prices often exhibit large transitory
movements. But idiosyncratic price movements are by no means
limited to food and energy, and they could well occur in
shelter prices at times; we need to be attentive to whether
such movements might be providing a misleading signal about
inflation's likely future course. My fellow policymakers and I
will continue to factor such judgments into our analyses, even
as we remember that overall consumer price inflation must be
the ultimate focus of our policy.
Q.16. Immigration. Neel Kashkari, the chief of the Minneapolis
Fed, stated that immigration has a net benefit on economic
growth. He said slowing down immigration may slow down job
growth and the U.S. economy as a whole.
Do you agree with President Kashkari?
A.16. Immigration is an important contributor to the rise in
the U.S. population, accounting for roughly one-half of
population growth annually. And population growth, in turn,
affects the growth rate of the labor force as well as the
growth of the overall economy. Thus, from an economic growth
standpoint, reduced immigration would result in lower
population growth and thus, all else equal, slower trend
economic growth. However, as you know, immigration policy is
for Congress and the Administration to decide.
Q.17. SIFI Designation. As a voting member of FSOC, you and
your fellow members are tasked with the mission of identifying
and responding to risks that threaten the financial stability
of the United States, particularly in the shadowy nonbank
ecosystem that required numerous massive bailouts following the
2008 financial crisis. Despite the large number of bail-outs
conferred, only four nonbanks were designated as systematically
significant by the FSOC.
As you considering whether to reduce monitoring and
oversight of one of those institutions?
What about the financial state or inherent systemic risk of
large nonbank institutions has changed since FSOC made the
considerations that warrants removing any enhanced prudential
oversight?
A.17. The financial crisis showed that the distress of large
and systemic nonbank financial companies could imperil the
financial stability of the United States, ultimately putting
the American economy at risk. The Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act) gave regulators
new tools to address this problem, including authorizing the
Financial Stability Oversight Council (FSOC) to determine that
a nonbank financial company's material financial distress would
threaten the financial stability of the United States. If such
a determination is made, such firms are then subject to
supervision by the Federal Reserve Board (Board). The Dodd-
Frank Act authorizes the Board, in consultation with the FSOC,
to establish enhanced prudential requirements and to supervise
nonbank financial companies that have been designated as
systemically important. Further, the Dodd-Frank Act requires
the FSOC to reevaluate each determination of a nonbank
financial institution as systemically important on at least an
annual basis. The FSOC is also responsible for making the
determination to retain or rescind the designation of a nonbank
financial institution.
Financial vulnerabilities, such as high leverage levels and
maturity mismatches between assets and liabilities, are not at
the elevated levels they were prior to the crisis. Regulators
have developed a deeper understanding of the ways in which
nonbank financial institutions differ from banks, particularly
in terms of their vulnerability to runs and the potential
systemic impact this may have on the U.S. financial system.
Further, several nonbank financial institutions have made
significant changes to the organizational structure of their
firms as well as the markets that they participate in, which
has further reduced their overall risk to the U.S. financial
system.
However, the regulatory community has learned from the
experience of the financial crisis that it is important to
focus on potential regulatory gaps and to deal with
vulnerabilities that may build in nonbank financial
institutions before the risks become material. In this context,
it is important to continue to monitor large nonbank financial
firms to ensure that, should they encounter distress, the
functioning of the broader economy is not threatened. Finally,
the possibility of de-designation provides an incentive for
designated firms to significantly reduce their systemic
footprint.
Q.18. Stock Buybacks. The Fed's 2018 CCAR cycle allowed the 22
largest banks to payout $170 billion in dividends and buybacks,
around a quarter more than 2017. Banks subject to the CCAR
process are likewise paying out close to 102 percent in
buybacks and dividends as a percentage of forecasted earnings.
\24\
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\24\ Larkin, Michael. ``All Banks Clear Stress Test--But This Big
Name's Payout Plan at Risk'', Investor's Business Daily. June 21, 2018.
Available at: https://www.investors.com/news/stress-test-results-
federal-reserve-bank-dividends-buybacks//.
---------------------------------------------------------------------------
In the wake of the Federal Reserve's annual stress testing,
Wells Fargo announced plans to buy back up to $24.5 billion in
stock, and boost its quarterly dividend. Twenty-eight other
firms were also allowed to proceed with additional proposals to
boost stock buybacks and dividends. \25\
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\25\ Bloomberg. ``Wells Fargo Plans $24.5 billion in Stock
Buybacks After Passing Fed Stress Test''. Los Angeles Times. June 28,
2018. Available at: http://www.latimes.com/business/la-fi-wells-fargo-
stock-buyback-20180628-story.html.
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In your testimony before the Committee, you noted that
investments in training and education were ``the single best
thing we can do to have a productive workforce.''
What does research suggest about whether dividends and
buybacks raise wages for American workers?
Does the Fed have any researching suggesting the impact on
economic growth if a larger percentage of bank earnings instead
went to raise wages of nonmanagerial and/or frontline bank
workers?
A.18. Productivity growth is a key determinant of wage growth,
and investments in new capital equipment or innovative
technologies are important factors for improving productivity
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 wage growth. However, comparing the
economic effects of these uses of a company's earnings to the
eventual economic effects of stock buybacks is difficult
because we do not know where the gains from buybacks will
ultimately turn up. In particular, 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. Ultimately, companies themselves are the best judges of
what to do with their profits, whether it is to invest in their
business or increase returns to shareholders through dividends
or share buybacks.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR JONES
FROM JEROME H. POWELL
Q.1. In the Federal Reserve's 2018 Report on the Economic Well-
Being of U.S. Households, the report finds that 40 percent of
Americans do not have the sources to cover an unexpected $400
expense.
While the number of Americans responding in this manner has
shrunk since 2013, as noted in the report, it is still an
alarmingly high number.
The report notes that the most common response among those
who could not cover an expense is to place the purchase on a
credit card.
Are there broader economic implications of such a reliance
on potentially high-priced consumer credit?
A.1. According to the survey, conducted in the fourth quarter
of 2017, 18 percent of U.S. adults report that they would pay a
hypothetical $400 emergency expense with a credit card that
they then pay off over time. \1\ In the initial survey in 2013,
this fraction was 17 percent. The fraction of adults who said
they would not be able to meet a $400 expense by any means
declined to 12 percent in 2017 from 19 percent in 2013.
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\1\ For the survey and report, see the Federal Reserve Board's
Survey of Household Economics and Decision Making at
www.federalreserve.gov/consumerscommunities/shed.htm.
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Broader implications of such responses are difficult to
gauge. The costs of financing such an expense would add
financial burden on these households, relative to paying in
cash. However, for some households, such credit access may act
as a relief valve of sorts, allowing them to meet the emergency
or avoiding even costlier forms of credit such as payday loans.
Q.2. Does the Federal Reserve have further context on this
response--how does the number of Americans unable to cover a
$400 expense compare to previous decades, or to other advanced
economies?
A.2. The Federal Reserve first asked how individuals would
handle a $400 unexpected expense in 2013. While we do not have
an exact comparison in prior decades or in other countries, the
Federal Reserve Board's triennial Survey of Consumer Finances
(SCP) reports that the share of households with easily
accessible savings remains low and has changed little in recent
decades. \2\ Liquid savings, such as cash, checking or saving
accounts, are the least costly and easiest assets to use for
unexpected expenses. The 2016 SCP reports that nearly half of
all families did not have $3,000 in liquid savings, almost the
same fraction since 1989 in inflation-adjusted terms.
---------------------------------------------------------------------------
\2\ For more information, see reports and research on the Federal
Reserve Board's Survey of Consumer Finance at www.federalreserve.gov/
econres/scfindex.htm.
Q.3. Does this inability to cover expenses increase
dramatically across certain groups for example, seniors, young
---------------------------------------------------------------------------
people, or minorities?
A.3. Yes, financial security and the ability to cover expenses,
differs across demographic groups. As one example, in 2017,
one-quarter of white adults without education beyond a high
school degree did not expect to pay their current month's bills
in full. Among African Americans and Hispanics with the same
education level, that fraction was 41 percent and 35 percent
respectively.
Financial security is more common with more education, but
a gap by race and ethnicity remains. As a second example, only
half of young adults (under the age of 30) would use cash or
its equivalent to cover an unexpected $400 expense, versus 57
percent of middle-aged adults (ages 30 to 64) and 71 percent of
seniors (age 65 and older). Even with such differences by age,
race, and education, the economic recovery has improved the
finances across many groups.
Q.4. I am concerned that for Americans that live paycheck to
paycheck, the United States' payment system can, at times, fall
short. In particular, I believe there is great need for faster
payments, including quicker access to consumer funds after
deposit. When consumers do not access to their own funds, they
often resort to and rely on high-cost products that are outside
of the traditional banking system.
The Federal Reserve has acknowledged the need to help
foster a faster payments system with its work and creation of
the Faster Payments Task Force. What are the next steps and
future priorities for the Task Force?
A.4. In July 2017, the Faster Payments Task Force (FPTF)
concluded its work upon release of its final report. The FPTF's
Final Report reflected the task force's perspectives on
challenges and opportunities with implementing faster payments
in the United States, outlined its recommendations for next
steps, and included the proposals and assessments for the 16
participants that opted to be included in the final report. \3\
The FPTF recommendations identified the need for ongoing
industry collaboration to address infrastructure gaps; to
develop models for governance, rules, and standards; and to
consider actions and investments that will contribute to a
healthy and sustainable payments ecosystem. A number of
recommendations called for Federal Reserve support to
facilitate this ongoing collaboration.
---------------------------------------------------------------------------
\3\ Faster Payments Task Force, ``Final Report Part One: The
Faster Payments Task Force Approach'', January 2017, and ``Final Report
Part Two: A Call To Action'', July 2017. Available at https://
fasterpaymentstaskforce.org/.
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Following up on the work of the FPTF and other efforts to
advance the Federal Reserve's desired outcomes (focused on
speed, security, efficiency, international payments, and
collaboration) for the payment system, the Federal Reserve
published, in September 2017, a paper presenting refreshed
strategies and tactics that the Federal Reserve is employing in
collaboration with payment system stakeholders. \4\
---------------------------------------------------------------------------
\4\ The desired outcomes are outlined in the Federal Reserve
System's ``Strategies for Improving the U.S. Payment System'', January
26, 2015. Available at https://fedpaymentsimprovement.org/wp-content/
uploads/strategies-improving-us-payment-system.pdf. The refreshed
strategies and tactics are outlined in the Federal Reserve System's
``Strategies for Improving the U.S. Payment System: Federal Reserve
Next Steps in the Payments Improvement Journey'', September 6, 2017.
Available at https://fedpaymentsimprovement.org/wp-content/uploads/
next-step-payments-journey.pdf.
---------------------------------------------------------------------------
The Federal Reserve kicked off these refreshed strategies
and tactics in the summer of 2017, by facilitating the
industry's work to address the FPTF recommendations related to
governance, directories, rules, standards, and regulations. In
addition, consistent with the FPTF recommendations, the Federal
Reserve has been assessing the needs and gaps to enabling
24x7x365 settlement in support of a future ubiquitous real-time
retail payments environment.
Further, the Federal Reserve has started to explore and
assess the need, if any, for any other operational roles to
support ubiquitous, real-time retail payments. These efforts
are being pursued in alignment with Federal Reserve's
longstanding principles and criteria for the provision of
payment services.
Q.5. As you know, new accounting standards, based on a
``current expected credit loss'' (CECL) model, developed by the
Financial Accounting Standards Board (FASB) will go into effect
in 2020. While the new accounting standards underwent multiple
years of study, the implementation of these standards will
result in one of the larger changes to banking accounting in
recent memory.
The CECL standard is likely to affect bank capital in
uncertain and potentially volatile ways, especially as banks
begin the transition process to this new accounting standard.
Did FASB consult with the Federal Reserve for how these changes
might impact bank capital?
A.5. The Federal Reserve Board (Board) along with the other
U.S. Federal financial institution regulatory agencies have
supported the Financial Accounting Standards Board's (FASB)
efforts to improve the accounting for credit losses and provide
financial statement users with more decision-useful information
about the expected credits losses on loans and certain other
financial instruments.
Throughout the development of the current expected credit
loss (CECL), the FASB conducted extensive outreach with a
diverse group of stakeholders, including the Federal Reserve
System. Stakeholders provided input and feedback through the
public comment letters and participation in public forums. The
FASB did not specifically consult the Board regarding CECL's
impact to bank capital since their mandate is to establish and
improve financial accounting and reporting standards to provide
decision-useful information to investors and other users of
financial reports.
In response to CECL, the Board, with the Office of the
Comptroller of the Currency (OCC) and the Federal Deposit
Insurance Corporation (FDIC) (together, ``the agencies''),
recently issued a joint proposal that would address the
forthcoming changes. In particular, the proposal would provide
firms the option to phase in the day-one regulatory capital
effects of CECL over a 3-year period.
The agencies intend for this transition provision to
address films' challenges in capital planning for CECL
implementation, particularly due to the uncertainty of economic
conditions at the time a film adopts CECL.
The agencies are currently reviewing comments to the
proposal in preparation for finalizing it. In addition, the
agencies will continue to monitor the effects of CECL
implementation on regulatory capital and bank lending practices
to help determine whether any further changes to the capital
rules are warranted.
Q.6. Is the Federal Reserve taking into these rule changes as
it continues to implement capital rules created by the Dodd-
Frank financial reform law?
A.6. The Board is indeed taking into consideration the impact
of CECL in connection with the Board's ongoing regulatory and
supervisory functions. For example, the agencies, earlier this
year issued a joint proposal entitled Implementation and
Transition of the Current Expected Credit Losses Methodology
for Allowances and Related Adjustments to the Regulatory
Capital Rules and Conforming Amendments to Other Regulations.
\5\ In the joint proposal, the agencies proposed to amend the
regulatory capital rules of the agencies to address changes to
U.S. generally accepted accounting principles (GAAP) resulting
from the FASB's issuance of CECL. The proposal would provide
firms subject to the capital rules with the option to phase in,
over a 3-year period, the day-one adverse regulatory capital
effects of CECL that may result from the adoption of the new
accounting standard. This transition period is intended to
address the potential challenges in planning for CECL
implementation, including the uncertainty of economic
conditions at the time that a firm adopts CECL. In addition,
the proposal identifies certain credit loss allowances under
the new accounting standard that would be eligible for
inclusion in regulatory capital.
---------------------------------------------------------------------------
\5\ 83 Federal Register 22312 (May 14, 2018).
---------------------------------------------------------------------------
The agencies are currently reviewing comments received from
the public on the proposal. The Board will continue to monitor
the effects of CECL implementation on firms supervised by the
Board and on the U.S. financial system.
Q.7. As the CECL requirements go into effect in 2020, the first
tests of how they impact bank capital may come during annual
CCAR process.
Will the Federal Reserve be taking into account these rule
changes as it undertakes the 2019 and 2020 CCAR process?
A.7. In May 2018, the Board published a joint notice of
proposed rulemaking with the OCC and FDIC to address changes to
U.S. GAAP associated with CECL, issued by FASB in June 2016.
Under the proposal, the Board would not incorporate CECL into
the supervisory stress tests, and would not require a firm to
incorporate CECL into its stress tests, until the 2020 cycle.
If a banking organization were to adopt CECL for the first time
in 2021, it would not be required to include provisioning for
credit losses under the new standard until the 2021 stress test
cycle.
This proposal avoids ``pulling forward'' the effect of
CECL, by aligning the dates that firms are expected to include
CECL in their comprehensive capital analysis and review
projections with the actual date of implementation for those
firms implementing in 2020 and 2021.
In advance of CECL implementation, the Federal Reserve is
considering feedback received during outreach discussions with
industry representatives, developing approaches for
incorporating provision for credit losses in its supervisory
models, and preparing for parallel testing of those models.
Additional Material Supplied for the Record
MONETARY POLICY REPORT TO THE CONGRESS DATED JULY 13, 2018
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
ARTICLE SUBMITTED BY SENATOR BROWN
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]