MONETARY POLICY AND THE STATE OF THE ECONOMY HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U S HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTEENTH CONGRESS SECOND SESSION FEBRUARY 11 2020 Printed for the use of the Committee on Financial Services Serial No 116–85 U S GOVERNMENT PUBLISHING OFFICE WASHINGTON 42–819 PDF VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00001 Fmt 5011 2021 Sfmt 5011 K DOCS HBA042 000 TERRI HOUSE COMMITTEE ON FINANCIAL SERVICES MAXINE WATERS California Chairwoman CAROLYN B MALONEY New York ´ ZQUEZ New York NYDIA M VELA BRAD SHERMAN California GREGORY W MEEKS New York WM LACY CLAY Missouri DAVID SCOTT Georgia AL GREEN Texas EMANUEL CLEAVER Missouri ED PERLMUTTER Colorado JIM A HIMES Connecticut BILL FOSTER Illinois JOYCE BEATTY Ohio DENNY HECK Washington JUAN VARGAS California JOSH GOTTHEIMER New Jersey VICENTE GONZALEZ Texas AL LAWSON Florida MICHAEL SAN NICOLAS Guam RASHIDA TLAIB Michigan KATIE PORTER California CINDY AXNE Iowa SEAN CASTEN Illinois AYANNA PRESSLEY Massachusetts BEN MCADAMS Utah ALEXANDRIA OCASIO-CORTEZ New York JENNIFER WEXTON Virginia STEPHEN F LYNCH Massachusetts TULSI GABBARD Hawaii ALMA ADAMS North Carolina MADELEINE DEAN Pennsylvania ´ S ‘‘CHUY’’ GARCIA Illinois JESU SYLVIA GARCIA Texas DEAN PHILLIPS Minnesota PATRICK MCHENRY North Carolina Ranking Member ANN WAGNER Missouri FRANK D LUCAS Oklahoma BILL POSEY Florida BLAINE LUETKEMEYER Missouri BILL HUIZENGA Michigan STEVE STIVERS Ohio ANDY BARR Kentucky SCOTT TIPTON Colorado ROGER WILLIAMS Texas FRENCH HILL Arkansas TOM EMMER Minnesota LEE M ZELDIN New York BARRY LOUDERMILK Georgia ALEXANDER X MOONEY West Virginia WARREN DAVIDSON Ohio TED BUDD North Carolina DAVID KUSTOFF Tennessee TREY HOLLINGSWORTH Indiana ANTHONY GONZALEZ Ohio JOHN ROSE Tennessee BRYAN STEIL Wisconsin LANCE GOODEN Texas DENVER RIGGLEMAN Virginia WILLIAM TIMMONS South Carolina VAN TAYLOR Texas CHARLA OUERTATANI Staff Director II VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K DOCS HBA042 000 TERRI CONTENTS Page Hearing held on February 11 2020 Appendix February 11 2020 1 57 WITNESSES TUESDAY FEBRUARY 11 2020 Powell Hon Jerome H Chairman Board of Governors of the Federal Reserve System 5 APPENDIX Prepared statements Powell Hon Jerome H ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Powell Hon Jerome H Written responses to questions for the record from Chairwoman Waters Written responses to questions for the record from Representative Beatty Written responses to questions for the record from Representative Budd Written responses to questions for the record from Representative Cleaver Written responses to questions for the record from Representative Green Written responses to questions for the record from Representative Heck Written responses to questions for the record from Representative Hill Written responses to questions for the record from Representative Sherman Written responses to questions for the record from Representative Tlaib III VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 58 K DOCS HBA042 000 TERRI 63 81 82 83 95 96 99 104 107 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K DOCS HBA042 000 TERRI MONETARY POLICY AND THE STATE OF THE ECONOMY Tuesday February 11 2020 U S HOUSE OF REPRESENTATIVES COMMITTEE ON FINANCIAL SERVICES Washington D C The committee met pursuant to notice at 10 10 a m in room 2128 Rayburn House Office Building Hon Maxine Waters chairwoman of the committee presiding Members present Representatives Waters Velazquez Sherman Meeks Clay Scott Green Cleaver Perlmutter Himes Foster Beatty Heck Vargas Gottheimer Gonzalez of Texas Lawson Tlaib Porter Axne Casten Pressley McAdams Wexton Lynch Adams Dean Garcia of Illinois Garcia of Texas Phillips McHenry Wagner Lucas Posey Luetkemeyer Huizenga Stivers Barr Tipton Williams Hill Zeldin Loudermilk Mooney Davidson Kustoff Hollingsworth Gonzalez of Ohio Rose Steil Gooden Riggleman Timmons and Taylor Chairwoman WATERS The Financial Services Committee will come to order Without objection the Chair is authorized to declare a recess of the committee at any time Today’s hearing is entitled ‘‘Monetary Policy and the State of the Economy ’’ I now recognize myself for 4 minutes for an opening statement I would like to welcome back Chairman Powell As I discussed earlier at our last hearing with you I remain very concerned about the President’s efforts to interfere with the Federal Reserve’s Fed’s independent monetary policy A recent news story noted that Trump has tweeted over 100 times about the Fed since your nomination Many of those tweets appear to be attempting to exert pressure on the Fed Chairman Powell you and the Federal Reserve Board of Governors must not be swayed by these aggressive tactics In upholding the Fed’s independence you should also be mindful of public perception Of course Trump continues to try to claim credit for economic growth that was put in motion by the policies of President Obama Congressional Democrats and the Federal Reserve His irresponsible trade war and the GOP tax scam have blown up the national debt slowed our economic growth and harmed hardworking American families Trump continues to squander this inherited economy Let me note that I am however disappointed in the Fed’s efforts to deregulate megabanks most recently by proposing to further roll back the Volcker Rule The Dodd-Frank Act made our financial sys 1 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 2 tem safer but it depends on agencies like the Fed to prudentially use the tools available to monitor and mitigate threats to our economy The committee is carefully monitoring the developments in the repo market and the Fed’s response The Fed should not arbitrarily reduce liquidity requirements in response to the repo market disruption as some on Wall Street have asked for Instead the Fed should make appropriate adjustments to promote a well-functioning repo market while ensuring we have strong capital rules that can’t be gamed through window dressing a practice where banks alter their balance sheet to appear less risky and reduce their capital levels In addition the riskiness of various financial assets is increasing as climate change poses a more serious risk to our economy The Fed and other regulators should utilize financial stability tools under the Dodd-Frank Act such as incorporating climate-related losses into supervisory stress tests of big banks to address this growing risk I would also like to discuss recent developments with Community Reinvestment Act CRA We have had a series of hearings on this issue and I am very concerned about OCC Comptroller Otting’s harmful proposal to turn CRA into the Community Disinvestment Act and allow banks to escape their obligation to make responsible investments in the communities where they are chartered I urge the Fed to take a careful deliberate approach to any changes to the implementation of the CRA and to not join Comptroller Otting’s misguided efforts Fed Governor Brainard’s statement that ‘‘It is more important to get the reforms done right than to do them quickly ’’ is absolutely correct The OCC and the FDIC should heed that advice as well and extend the public comment period as community banks State regulators community and civil rights groups and committee Democrats have called for so that all stakeholders have an opportunity to voice their concerns I also encourage the Fed to keep a watchful eye on Facebook’s efforts to launch a cryptocurrency and a digital wallet which as we discussed at our last hearing could have profound implications for monetary policy and compete with our own U S dollar In light of the many risks Facebook plans to create I along with other Democrats have called on Facebook to halt their plans until Congress can examine the issues associated with a big tech company developing these digital products and take action I look forward to your testimony today Chairman Powell and to discussing these matters I now recognize the ranking member of the committee the gentleman from North Carolina Mr McHenry for 4 minutes for an opening statement Mr MCHENRY Thank you Chairman Powell for appearing before us once again Under the Trump Administration we have the best economy that we have had in decades The numbers are irrefutable We added 225 000 new jobs in January and the unemployment rate is essentially at its lowest level in half a century This prosperity is being VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 3 shared by all Americans including African Americans and Hispanics whose unemployment rate reached record lows last year The prime-age labor force participation has reached 2 2 million people who were previously out of the workforce and not surprisingly consumer confidence has increased dramatically since the month before the President’s election Every Member of Congress should celebrate these remarkable outcomes which have resulted from Republican leadership on pro-growth policies like tax reform and regulatory rightsizing But sustaining our economic prosperity also hinges on the Federal Reserve having good policy The central bank is currently undertaking a review of its monetary policy framework to determine the tools it may need in the future Chairman Powell I raise the concern that we have regulatory policy that is impinging upon your capacity to make proper monetary policy and that is why I think it is important that you have a regulatory review of the limitations that those regulations can put on your broader monetary policy decisions That includes systemic risk concerns that I have raised as well as open market operations well especially the open market operations and the repo market I thank you for your prompt response to my questions about the repo market operations but I am not sure there has been a satisfactory answer as to what caused the market spike in the first place and that is troubling I have also voiced my concerns with the transition from the London Inter-Bank Offered Rate LIBOR reference rate Nine months later I am still concerned consumers will be impacted by the transition We still have contracts written to the LIBOR reference rate and given the recent volatility in the repo markets I am concerned about the subsequent volatility in consumer-facing products including mortgages auto loans business loans and other consumer loans as this new reference rate is derived from secured overnight financing At previous hearings I have spoken about the cyber threats posed to our financial institutions and your institution and China in particular Yesterday’s news about the Equifax data breach is deeply troubling and is a wake-up call to every single policymaker that we need to take the threat of China and the Chinese communist regime quite seriously If we are not taking them seriously have no fear they are taking us very seriously And now they have basically all of our data too So the spillover effects of this question of Chinese policy is significant not just for cybersecurity but with what we are seeing with the coronavirus and the destabilizing effects it has on global health I know you are not a global health expert but you can give us some sense of your measurement techniques in response to these economic changes that are being driven out of the coronovirus challenge in China and the spillover effects it has on its neighbors and the supply chain as well that is derived through China The nature of the Chinese regime may not fit neatly into the Fed’s risk assessments The Fed has acknowledged in its Financial Stability Report that cyber risks don’t fit neatly either But the VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 4 risks are real Even though our data is limited coming out of China and the limited data we have we question still we should reflect appropriately upon what we know and how we respond as an American Government and to the Western world in response to these threats both cyber and health risks and the spillover effect it has on our economy Again Chairman Powell thank you for being here Thank you for your openness Thank you for your approach as Chair of the Federal Reserve to be in the language of the people rather than simply the language of the PhDs With that I yield back Chairwoman WATERS I now recognize the Chair of our Subcommittee on National Security International Development and Monetary Policy Mr Cleaver for one minute Mr CLEAVER Thank you Madam Chairwoman Mr Chairman first of all I appreciate very much your willingness to travel around the country to do 14 of those Fed Listens sessions You held one of them in Kansas City at the Fed building and I think it is a rare opportunity for most people to get a chance to sit down in a room and discuss economics with the Fed Chairman So thank you very much When you came to Kansas City people were sitting around the table with you and giving you a picture of their struggles and strifes in trying to make it in the economy and people were also concerned about inflation They believe that it is like toothpaste once it gets out it is hard to get it back in So we are concerned about it but also appreciative of your work and I look forward to getting a little further into this as we proceed with the hearing Thank you Madam Chairwoman Chairwoman WATERS I now recognize the subcommittee ranking member Mr Hill for one minute Mr HILL Thank you Madam Chairwoman Chair Powell thank you for being here today We appreciate your willingness to come and field our questions and provide your insights I want to take just a moment and echo the comments of the ranking member on the Community Reinvestment Act I know this has received a lot of attention I read Governor Brainard’s very comprehensive view on the topic and we had Comptroller Otting here recently to discuss the OCC’s point of view As a former community banker it is my view that we really should have ultimately one approach to CRA among the financial services regulatory agencies I have had 40 years of dealing with inconsistency in delivery of regulatory proposals so I do think ultimately it would be productive for us to have one approach to that regulation and to modernize it for the digital world that we live in today I look forward to your presentation today and Madam Chairwoman I yield back Chairwoman WATERS Thank you I want to welcome to the committee our distinguished witness Jerome Powell Chairman of the Board of Governors of the Federal Reserve System He has served on the Board of Governors since 2012 and as its Chair since 2017 Mr Powell has testified before the committee before and I do not believe he needs any further introduction VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 5 Without objection your written testimony will be made a part of the record Mr Powell you are now recognized to present your oral testimony STATEMENT OF THE HONORABLE JEROME H POWELL CHAIRMAN BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr POWELL Thank you very much Chairwoman Waters Ranking Member McHenry and members of the committee I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report My colleagues and I strongly support the goals of maximum employment and price stability that Congress has set for monetary policy Congress has given us an important degree of independence to pursue these goals based solely on data and objective analysis This independence brings with it an obligation to explain clearly how we pursue our goals Today I will review the current economic situation before turning to monetary policy The economic expansion is well into its 11th year and it is the longest on record Over the second half of last year economic activity increased at a moderate pace and the labor market strengthened further as the economy appeared resilient to the global headwinds that had intensified last summer Inflation has been low and stable but has continued to run below the Federal Open Market Committee’s FOMC’s symmetric 2 percent objective Job gains averaged 200 000 per month in the second half of last year and an additional 225 000 jobs were added in January The pace of job gains has remained above what is needed to provide jobs for new workers who entered the labor force allowing the unemployment rate to move down further over the course of last year The unemployment rate was 3 6 percent last month and has been near half-century lows for more than a year Job openings remain plentiful Employers are increasingly willing to hire workers with fewer skills and train them As a result the benefits of a strong labor market have become more widely shared People who live and work in low- and middle-income communities are finding new opportunities Employment gains have been broad-based across all racial and ethnic groups and levels of education Wages have been rising particularly for lower-paying jobs Gross domestic product GDP rose at a moderate rate over the second half of last year Growth in consumer spending moderated toward the end of the year following earlier strong increases but the fundamentals supporting household spending remain solid Residential investment turned up in the second half but business investment and exports were weak largely reflecting sluggish growth abroad and trade developments Those same factors weighed on activity at the nation’s factories whose output declined over the first half of 2019 and has been little changed on net since then The February Monetary Policy Report discusses the recent weakness in manufacturing Some of the uncertainties around trade have diminished recently but risks to the outlook remain In particular we are closely monitoring the emer- VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 6 gence of the coronavirus which could lead to disruptions in China that spill over to the rest of the global economy Inflation ran below the FOMC’s symmetric 2 percent objective throughout 2019 Over the 12 months through December overall inflation based on the price index for personal consumption expenditures was 1 6 percent Core inflation which excludes volatile food and energy prices was also 1 6 percent Over the next few months we expect inflation to move up closer to 2 percent as unusually low readings from early 2019 drop out of the 12-month calculation The nation faces important longer-run challenges Labor force participation by individuals in their prime working years is at its highest rate in more than a decade However it remains lower than in most other advanced economies and there are troubling labor market disparities across racial and ethnic groups and across regions of the country In addition although it is encouraging that productivity growth the main engine for raising wages and living standards over the longer term has moved up recently productivity gains have been subpar throughout this long economic expansion Finding ways to boost labor force participation and productivity growth would benefit Americans and should remain a national priority I will turn now to monetary policy Over the second half of 2019 the FOMC shifted to a more accommodative stance of monetary policy to cushion the economy from weaker global growth and trade developments and to promote a faster return of inflation to our symmetric 2 percent objective We lowered the Federal funds target range at our July September and October meetings bringing the current target range to 11⁄2 to 13⁄4 percent At our subsequent meetings with some uncertainties surrounding trade having diminished and amid some signs that global growth may be stabilizing the Committee left the policy rate unchanged The FOMC believes that the current stance of monetary policy will support continued economic growth a strong labor market and inflation returning to the Committee’s symmetric 2 percent objective As long as incoming information about the economy remains broadly consistent with this outlook the current stance of monetary policy will likely remain appropriate Of course policy is not on a preset course If developments emerge that cause a material reassessment of our outlook we would respond accordingly Taking a longer view there has been a decline over the past quarter-century in the level of interest rates consistent with stable prices and the economy operating at its full potential This low interest rate environment may limit the ability of central banks to reduce policy interest rates enough to support the economy during a downturn With this concern in mind we have been conducting a review of our monetary policy strategy tools and communication practices Public engagement is at the heart of this effort Through our Fed Listens events we have been hearing from representatives of consumer labor business community and other groups The February Monetary Policy Report shares some of what we have learned The insights we have gained from these events have informed our framework discussions as reported in the minutes of VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 7 our meetings We will share our conclusions when we finish the review likely around the middle of the year The current low-interest-rate environment also means that it would be important for fiscal policy to help support the economy if it weakens Putting the Federal budget on a sustainable path when the economy is strong would help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy during a downturn A more sustainable Federal budget could also support the economy’s growth over the long term Finally I will briefly review our planned technical operations to implement monetary policy The February Monetary Policy Report provides details of our operations to date Last October the FOMC announced a plan to purchase Treasury bills and conduct repo operations These actions have been successful in providing an ample supply of reserves to the banking system and effective control of the Federal funds rate As our bill purchases continue to build reserves toward levels that maintain ample conditions we intend to gradually transition away from the active use of repo operations Also as reserves reach durably ample levels we intend to slow our purchases to a pace that will allow our balance sheet to grow in line with trend demand for our liabilities All of these technical measures support the efficient and effective implementation of monetary policy They are not intended to represent a change in the stance of monetary policy As always we stand ready to adjust the details of our technical operations as conditions warrant Thank you I look forward to the discussion The prepared statement of Chairman Powell can be found on page 58 of the appendix Chairwoman WATERS Thank you I now recognize myself for 5 minutes for questions In December of 2019 when the OCC and the FDIC issued a notice of proposed rulemaking on Comptroller Otting’s proposal the Federal Reserve did not join this proposal FDIC Board Member Martin Gruenberg voted against Comptroller Otting’s proposal describing it as ‘‘a deeply misconceived proposal that would fundamentally undermine and weaken the Community Reinvestment Act ’’ And in remarks last month Federal Reserve Board Governor Brainard said that ‘‘Given that reforms to the CRA regulations are likely to set expectations for a few decades it is more important to get the reforms done right than to do them quickly That requires giving external stakeholders sufficient time and analysis to provide meaningful feedback on a range of options for modernizing the regulations ’’ Chair Powell Governor Brainard also suggested in a speech last month that the Federal Reserve created a database of 6 000 public CRA evaluations looking at how various CRA investments support low- and moderate-income communities Has the Fed used this database to evaluate how bank activities would be assessed under the OCC’s and the FDIC’s proposal for CRA Mr POWELL If I understood your question it was whether we have used our database to evaluate their proposal Chairwoman WATERS That is correct VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 8 Mr POWELL I am not totally sure we have Maybe I can provide a little context if that is appropriate if I may which is just that we do agree that this is a good time to update CRA in light of changing technology and demographics and we agree on the goals We have put a lot of work into this We tried hard to get on the same page and weren’t able to do that We have some different ideas Chairwoman WATERS Does the Fed intend to do this assessment Mr POWELL Excuse me Chairwoman WATERS Do you intend to do the assessment that I referenced regarding the database to evaluate bank activities and how they would be assessed under the OCC’s and FDIC’s proposal for the CRA Mr POWELL The real point of that database was for us to create our own set of metrics We want to be very very sure that what comes out of this is a proposal that from us will leave all major participants in CRA better off And so we think it is important that each metric each change that we make is grounded in data and that was the purpose to help us develop our thinking and our proposals and that is essentially what we have been using it for Chairwoman WATERS Given the magnitude of reform in CRA regulations do you think the comment period should be extended to allow the public to weigh in on such an important undertaking Mr POWELL That is really a decision for the OCC and the FDIC Chairwoman WATERS I know it is their decision Mr Powell but what do you think Mr POWELL I think it is not our role to comment on their proposal We have our own work and our own ideas that we would be happy to share But it is really up to them to make that decision Chairwoman WATERS Are you completing your assessment Are you continuing to look until you come to a final decision Mr POWELL We are Chairwoman WATERS Don’t you think the public should have an opportunity to have more time to do that also Mr POWELL And they will when the time comes I think for the time being what we are doing is we are looking forward to reading the comments on the proposal I think we will all learn quite a lot from those comments and we will be able to incorporate that thinking and whatever changes are made to the proposal There may be substantial changes to the existing proposal coming out of the comments Our view is that we want something that will leave everybody better off and will have broad support and that is what we are going to be working on Chairwoman WATERS As you may be aware all of the Democrats on this committee urge regulators to provide a public comment period of at least 120 days on any major CRA reform instead of the 60 days that the OCC and the FDIC have provided Community banks state regulators and community groups have called on these agencies to extend the comment period And even though you said it is not your place to comment on whether or not this should be extended I wish you would think about this As you have said it is important for the public to be able to comment review what you are thinking and if you change VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 9 your mind let us know about commenting on whether or not we should extend the comment period You don’t have to respond to that Thank you very much The gentleman from North Carolina Ranking Member McHenry is recognized for 5 minutes Mr MCHENRY It always is rich right When somebody else has a negative comment about the Federal Reserve that is bad but when I as a policymaker on the Hill have a negative comment about the Fed it is good right So it is all about the eye of the beholder when it comes to the political debate here in Washington Congress made a decision over 100 years ago to outsource monetary policy to the Federal Reserve You are a construct of law you are given independent operations and you have a set term of office And so the independence of the Fed for monetary policy is appropriate and is longstanding Every President in the last 100 years has had some private criticism and we have found out at some point about that criticism either through press reports at the time or later in some biographer’s work about the President But here on the Hill we can make negative comments about the Fed and attack the President for having negative comments about the Fed Right All of this stuff is just rich politics Let’s get down to the essence of this You are the biggest regulator in town when it comes to the financial world I have concerns that I want to address that are regulatory in nature that I think impinge upon monetary policy the repo market for instance You said these operations are temporary in nature Is that still true Mr POWELL Yes Our expectation is that we will continue our bill purchases at least into the second quarter and continue repo operations at least into April Mr MCHENRY Into April Mr POWELL The sense of that is though that we are building up a level of reserves to a level that will mean that we don’t have to be involved in open market operations on an ongoing basis and that is going to take that period of time And as the underlying level of reserves rises due to our bill purchases the need for repo will decline and sometime around the middle of the year we will reach that level of ample reserves and from that point forward the balance sheet will grow at trend demand for our liabilities and will continue to expand with the economy Mr MCHENRY Are you doing a review on your capital requirements for financial institutions that should be participating in the repo market Mr POWELL I think we have reviewed supervisory and regulatory practices that may be affecting the flow of liquidity Our main focus of course is the Federal funds market and our ability to transmit our policy decisions smoothly into the money markets through the Federal funds rate What happened last September in early September was that there was unusual tightness and volatility and we attribute that to the fact that what appeared to be ample levels of liquidity didn’t flow where they might have And so we are really doing 2 things One we are raising the underlying level of liquidity by raising reserves to a level that is VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 10 higher than we had thought we needed and that process as I mentioned will take until the middle of the year— Mr MCHENRY So part of that is a supervisory assessment as well to make sure that the policy is being driven in terms of the institutions Mr POWELL That is right Mr MCHENRY Okay Mr POWELL We have been doing that since September Mr MCHENRY I raised this in my opening statement about China You have spoken publicly about your assessment your thinking as you see what is happening with China’s response to the coronavirus We wish them well We have high hopes that they are going to be able to tackle this crisis this public health crisis they are facing But walk me through your thinking in assessing the situation in China now in terms of the economics and that potential spillover effect Mr POWELL I will just quickly start by saying again that we find the U S economy to be in a very good place performing well We see signs of global growth bottoming out We see reduced trade policy uncertainty Overall in the background we see strong job creation All of this happens in the context of a good strong U S economy And into that picture comes the coronavirus and so the question is what do we think about that Of course first we observe the human tragedy which is terrible to watch But the question for us really is what will be the effects on the U S economy Will they be persistent Will they be material That is really the question I think we know there will be effects on China through some part of the first half of the year and China’s close neighbors and major trading partners in Europe as well as Asia and we know that there will likely be some effects on the United States I think it is just too early to say We have to resist the temptation to speculate on this And so we will be watching that carefully again and the question we will be asking is will these be persistent effects that could lead to a material reassessment of the outlook Mr MCHENRY So a question of length length of time and whether or not this is a temporary disruption Mr POWELL Yes Mr MCHENRY Thank you Chairwoman WATERS The gentlewoman from New York Ms Velazquez is recognized for 5 minutes Ms VELAZQUEZ Thank you Madam Chairwoman Chairman Powell I would like to follow up on Chairwoman Waters’ question on CRA What aspects of the proposed changes to the CRA do you find most troubling Mr POWELL Again what I would like to do if I may is not so much comment directly on the other proposal but talk about how we are looking at this And I will mention the areas in which we have differences Ms VELAZQUEZ Okay I hear that I hear you and I respect it But I would just like to ask you if the Fed is unable to reach an agreement with the OCC and the FDIC on a joint rule do you expect the Fed to issue its own proposal VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 11 Mr POWELL We haven’t made a decision on that yet Right now our focus has been on trying to get on the same page We haven’t been able to do that Now our focus is going to be on learning from the process and I think we will learn a lot Ms VELAZQUEZ Are you meeting regularly with the OCC and the FDIC on this issue Mr POWELL We did for a long time We are not currently meeting with them on this— Ms VELAZQUEZ Would you agree with Governor Brainard’s comment that it is more important to get the rule right than to do it quickly Mr POWELL Yes I think that has been our approach and will continue to be Ms VELAZQUEZ Thank you Chairman Powell as you know Representative Porter and I have been concerned by banks’ growing reliance on cloud-based service providers for data storage needs Does the Fed have all the access authority it needs or are there any contractual or legal limitations restricting the Fed’s ability to obtain the data held by third parties that it needs to properly understand and manage this growing reliance Mr POWELL I think we do have the legal authority that we need We are able to look into third-party service providers and we are doing that more and more because of as you mentioned the prominence and size of the growing importance of these cloud service providers Ms VELAZQUEZ Thank you I yield back Chairwoman WATERS The gentlewoman from Missouri Mrs Wagner is recognized for 5 minutes Mrs WAGNER I thank the chairwoman and thank you for being here Chairman Powell We are all very interested since it just happened on January 29th despite the repo spike I know the ranking member mentioned it I know you are in the middle of your review and such I have a little more specific question Could this repo market turmoil be symptomatic of deeper difficulties for the financial system Mr POWELL It doesn’t appear to be at all Since we took the measures we took in early September repo markets and money markets have been functioning very smoothly There hasn’t been a return to the volatility They are functioning very normal really including over year-end So we haven’t had any return to that It is pretty clear that the measures that we took directly addressed the problem When the medicine is working you can really see and it seems to be working well here Mrs WAGNER And we had a confluence of things happening just I know at that time with the quarterly Federal taxes due along with the Treasury auction of debt of upwards of over I think $78 billion wasn’t it Mr POWELL Yes Mrs WAGNER Do you think that was a function of perhaps this fluke would you call it Mr POWELL We knew all that though The thing is we knew that And what we had done is we had asked banks to tell us what is your lowest comfortable level of reserves Mrs WAGNER Right VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 12 Mr POWELL We got those numbers and we added them up and we put a buffer on top of it and it still suggested that there was plenty of reserves in the system And this happened and I think that makes us think because we knew about those big— Mrs WAGNER Right Those are definitely on the horizon And when you are doing your review I hope that you will find that there isn’t anything symptomatic of some deeper difficulties and we look forward to that Turning the page Chairman Powell in December of last year I asked Vice Chairman Quarles for an update on the status of updating the global systemically important bank G–SIB surcharge and plans for finalizing the stress capital buffer proposal which I understand will require a reproposal with a comment period In January Vice Chairman Quarles delivered a speech where he spoke about bringing ‘‘reasonable transparency to several aspects of the Federal Reserve’s supervisory and regulatory framework ’’ Last week the Fed released the CCAR stress test scenarios To my knowledge there has been no progress or update on the status of the stress capital buffer apart from continued assertions by you and Vice Chair Quarles that aspects of the proposal will be incorporated in the 2020 CCARs Given the acknowledgement by principals at the Fed of the importance of transparency I guess I am concerned about the lack of transparency in this process When can we expect progress on this proposal that has been in process now I think since April of 2018 Mr POWELL We do continue to expect and intend that the core of the stress capital buffer will be incorporated into the framework in time for the 2020 stress test So we are moving along on that and we are on track to do that Mrs WAGNER You do feel on track to do that then Mr POWELL Yes Mrs WAGNER Okay Committee Republicans have underlined the importance of cyber threats as a potential systemic risk We have recently seen malware attacks undermine government infrastructure and according to research last month by economists at the New York Fed a simulated cyber attack on just one major U S bank could have spillover effects impacting 38 percent of the wholesale payments ne2rk What can the U S do better Chairman Powell in order to prioritize this constant flow of cyber risks and strengthen the resilience of our financial sector Mr POWELL I think we can keep and have to keep doing what we are doing which is to make this really a top if not the top supervisory priority not just for the banks but for the Fed and for institutions across the American landscape We have very high expectations particularly of the largest banks on their ability to fend off cyber attacks We are constantly meeting inside the government to make sure that our system is resilient and redundant and strong against cyber attacks But there is never a feeling that you have gotten to a place of comfort on that We just have to keep working and it is staying in the minute learning what the new attacks are making sure that the banks are doing basic housekeeping and all of that is very VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 13 much ingrained and we will just have to keep at it I think for a long time Mrs WAGNER Thank you My time has expired Thank you so much for being here again Chairman Powell and I yield back Chairwoman WATERS The gentleman from California Mr Sherman who is also the Chair of our Subcommittee on Investor Protection Entrepreneurship and Capital Markets is now recognized for 5 minutes Mr SHERMAN I have a couple of responses to what the ranking member had to say Yes the stock market is way up Wages are up a bit more than 1 percent in real terms after inflation Wages at the bottom have risen chiefly in those States where we raised the minimum wage And when we have a Democratic Majority in both Houses we will raise the minimum wage nationwide and deal effectively with those States that have not seen such an expansion of wages at the bottom I have grown not quite old but I have spent many decades in this room I have seen your predecessors And every time they come in and the Republicans attack them for expansionary monetary policy both traditional and newfangled And now we have a new President and all of a sudden they are pushing on the other side All I will say is that I have consistently from the days of Mr Greenspan been pushing for somewhat lower interest rates and an expansionary policy particularly quantitative easing because you returned $55 billion to the Treasury last year and that is I know not your purpose but think of the kids who will get an education because we could fund aid to local education Think of the medical research and the lives that will be saved because we were able to fund medical research I don’t think the $55 billion should be regarded as an irrelevancy or an embarrassment And finally as to the jobs growth we have seen recently I do need to point out the jobs grew much faster in the last 3 years of the Obama Administration than the first 3 years of the Trump Administration It is as if Trump inherited a plane as he inherited so much else the plane was on automatic pilot and it was going in the right direction and he hasn’t managed to completely screw it up We have an issue that I think ought to be completely bipartisan and that is LIBOR It is going to hit us in a couple of years Chairman Powell should Congress simply give the Fed the right to prescribe backup rates when the debt instruments do not do so or should we adopt the Secured Overnight Financing Rate SOFR or what can we do and hopefully do this year and actually solve the problem 12 months in advance Mr POWELL On LIBOR as you know our process is ongoing and we are really committed to having the banks ready by the end of next year to switch over away from LIBOR in case it is no longer published That date is— Mr SHERMAN They need to know legally what to switch over to and we want to avoid the multi-billion-dollar lawsuits when somebody can say it should be this instead of that They not only have to have the technology to make the switch they have to know legally what they are supposed to do VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 14 Mr POWELL If we need a Federal law change we will let you know Mr SHERMAN You have less than 2 years Have you figured out whether you need a Federal law change or— Mr POWELL I don’t think that we think we need a Federal law change Mr SHERMAN If you could get us an answer because there are people who want to wait around until 2 or 3 months before things blow up and then come to Congress and say ‘‘Now fix it ’’ Two years is actually too short a time because we are empowering the economy today because you and I are talking about this and there is this slight risk out there of litigation and uncertainty with regard to legacy LIBOR and we ought to take that off That is one of the things we can do to help the economy So I hope that you will act within a month to let us know what you propose rather than wait until next year Another area that we have talked about before is the wire transfer system We have seen $150 million lost to scams and those scams arise chiefly because when you wire money you do so to a number but there is no payee identified The British have gone to a confirmation of payee system The International Standards Organization has prescribed changes that would require at least identification of payee We don’t I know you have raised issues of State law I have analyzed it I can’t see what would prevent the Fed from prescribing what the wire transfer system would be And it looks like I will have to ask you to get back promptly for the record on that question Chairwoman WATERS The witness is requested to provide an answer in writing for the record The gentleman from Oklahoma Mr Lucas is recognized for 5 minutes Mr LUCAS Thank you Madam Chairwoman Chairman Powell during your testimony before the Joint Economic Committee last year you were asked about what steps the Federal Reserve is taking to assess the impacts of climate change on our financial system In your testimony you made the distinction between the purely informative stress test for climate risk that the Bank of England does and what the U S stress testing regime under CCAR does which is impact and inform capital requirements for capital distributions My understanding is the Bank of England is conducting research and asking financial institutions to think through their portfolios and how they could be impacted but they are not currently integrating those measures in the capital requirements Would you outline some of what the Fed is doing in terms of research and engagement on global climate risk Mr POWELL Sure I should begin by saying that climate change is a very important issue that Congress has largely assigned to other agencies It does play into our work however as it relates to the public’s very reasonable expectation that we would make sure that the financial sector of the banks and the utilities that we supervise are resilient against the longer-term risks from climate change We are in the very early days of understanding what all that means And there is work going on around the world at central VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 15 banks to try to figure that out You talked about the Bank of England stress tests Those are not intended to inform current capital requirements but more to understand what might be the effects on banks from climate change Mr LUCAS Are you planning on joining the Ne2rk for Greening the Financial System Mr POWELL We haven’t made a decision about that We have always attended their meetings I guess my theory is when you join an organization like that you are not necessarily signing up for everything that everybody there believes You can benefit from the work that is being done there and we are kind of doing that now We have not made a decision about membership Mr LUCAS Vice Chairman Quarles recently outlined changes that would increase supervision transparency and accountability and I was encouraged by those comments and will be following this closely of course One change the Vice Chairman outlined is that the Federal Reserve should restore supervisory observations which will allow notice of a supervisory concern without it rising to the level of a matter requiring attention Can you tell us what the timeline is that you see on those proposals to improve supervision Mr POWELL The timeline is hard to say I would just say that what the Vice Chair did was he pointed to this tension that exists between very fundamental expectations and due process transparency and fairness around everything the government does and should be associated with that but also with supervision which by its nature is private and somewhat discretionary nonpublic and confidential really He pointed out that tension and the need to shed more light on that and to ask whether there are places where supervision needs to incorporate more of that due process I think that is a very healthy thing to think about and it is something we will be working on Mr LUCAS In light of the coronavirus Chairman I can’t help but think about as a young man as a boy I spent a lot of time around my grandparents and my great-aunts and great-uncles They were born just after the previous century so their tales of first-hand experience in the pandemic of 1918 and 1919 were very graphic as it rolled through rural western Oklahoma And the reason I bring this up is their description of that particular virus at that particular time in that particular rural society was literally—it brought everything to a stop for weeks in rural western Oklahoma My mother’s family and my father’s family were very fortunate No one died from what was called the Spanish flu but it brought society to a stop The reason I ask that is with 43 000 cases worldwide and the critical impact in China could you describe for a moment how China and its neighboring countries are responding to the economic impact of coronavirus in general and from the perspective of your fellow central bankers in those countries Mr POWELL I think they are really responding now to the outbreak and containing it and the Chinese government has obviously taken very strong measures on that You see businesses closing down in the affected areas You see that sort of thing VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 16 In terms of the economy as you asked the People’s Bank of China has done a number of things to support economic activity and I think you can expect the Chinese government to do lots of things to support economic activity and they have said that they are open to cushioning the economic effects We are not able yet to estimate the size of the economic effects There are many estimates out there but I think you will see governments acting in Asia particularly in China to offset those Mr LUCAS Thank you Mr Chairman I yield back Madam Chairwoman Chairwoman WATERS The gentleman from New York Mr Meeks who is also the Chair of our Subcommittee on Consumer Protection and Financial Institutions is recognized for 5 minutes Mr MEEKS Thank you Madam Chairwoman Welcome Mr Chairman Let me touch quickly initially on asymmetrical growth It has been discussed at length in my community and others that 40 percent of Americans don’t have adequate savings for a $400 emergency and similarly one in five Americans skips essential health care or fails to pay important monthly bills due to the lack of funds Finally a large share of the population is also underbanked or unbanked and we have talked about that a lot in the subcommittee which I Chair My first question to you is why haven’t circumstances improved for low- and moderate-income Americans more rapidly in the past few years given the so-called state of the economy Mr POWELL The pattern was that at the beginning it was more people who had just left the labor force perhaps made it right back in What we really have seen though in the last 2 or 3 years has been wages moving up the most at the bottom end of the wage scale So we do see during this very long expansion significant effects now in low- and moderate-income communities and it is great to see As I mentioned with our Fed Listens events we have been hearing quite a lot about that So that is very positive More to your point though waiting for the 9th 10th and 11th year of an expansion isn’t really a strategy We do see those things now because the labor market is strong But really we need other programs to address the longer-run needs of those communities other than just the business cycle and monetary policies Mr MEEKS During this period of time would you say that—a number of us have been arguing and finally we are moving toward a $15-an-hour minimum wage for individuals on the bottom Would you think that has something to do with helping them also the fact that many States have adopted a $15 or a higher minimum wage than what had been put in place Mr POWELL I will answer your question directly Let me first say though that we of course don’t take a position on the minimum wage That is a classic tradeoff that legislatures have to— Mr MEEKS I understand Mr POWELL The research on exactly what is driving up wages at the lower end does suggest that there is a role there for the minimum wage increases States that have had minimum wage increases have seen—there is a noticeably higher increase But really it is much broader than that and the bigger factor just is very VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 17 low unemployment and a strong labor market high job creation That is the main driver Mr MEEKS The other concern that I have because it also seems as though as unemployment goes lower et cetera it still when you look at Black unemployment it still remains nearly double that of white unemployment And it seems to stay that way where the cycles are a down cycle or an up cycle Are there any signs of how we close those gaps because there are always these gaps that seem to happen between the African-American community and whites where it is a good economy but the gap stays the same Mr POWELL There are persistent gaps and they are very troubling and they are not in the long run something that monetary policy can address It really is up to other policies by governments State and local governments the Federal Government and frankly businesses to do what they can to close that gap What we have is an interest rate tool and what we can do is support the goals you have given us maximum employment and stable prices We see positive effects from that But over the longer run broader policies of education and other things would help with that issue Mr MEEKS Thank you Let me ask I know Chairwoman Waters asked some questions on CRA There were some questions that came up that maybe you can answer The framework that was put forward by Governor Brainard not too long ago is that the same framework of the Federal Reserve Board There are some saying it is just her opinion and it is not that of the Board Maybe you can clear it up Does the Board see similarly as Governor Brainard Mr POWELL We actually haven’t taken a proposal to the Board yet but no that represents the thinking—she has been working on this I asked her to lead this effort for us She has been the head of that committee for some time I am very comfortable with the thinking that is in that speech and I support that set of ideas and that approach But it is not at a place where we can say this is a proposal from the Fed because we haven’t taken it to the Board yet Mr MEEKS Thank you Chairwoman WATERS The gentleman from Florida Mr Posey is recognized for 5 minutes Mr POSEY Thank you Madam Chairwoman Mr Chairman the world is experiencing dramatic growth in the space economy and many are marveling actually at the expansion of civilian space launches I represent the Kennedy Space Center and obviously we are really excited about all that Several estimates put the current level of global space economy at well over $400 billion a year with a growth rate of 8 percent from 2018 to 2019 In December the Bureau of Economic Analysis announced the creation of a Space Economy Satellite Account a new collaborative effort to measure the relative importance of the space sector on the U S economy with a special emphasis on the growing commercial space segment This effort will use input from industry experts and multiple government agencies obviously I recall over the years that the Atlanta Fed has applied its expertise to report on the economy of the space district VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 18 First question can you work with me to ensure that the Federal Reserve joins this multiagency effort with an eye to avoiding financial bottlenecks and keeping this important space industry on a path to a healthy growth rate Mr POWELL It is the first I am hearing about it but I am happy to assure you that we will take a close look at that and if it is something that would be productive we would take part in it Mr POSEY Great Over the years we have developed a rather expansive policy of Federal Reserve independence and I believe in ensuring the freedom of the Fed to act independently on a day-today basis to manage our economy and the critical payment system I would not expect a Member of Congress or other officer of government to insert himself or herself into a decision by the Federal Reserve Chair the Board the Open Market Committee or the Fed monetary policy entity Congress does not direct day-to-day monetary policy and Congress also does not direct generals on battlefields nor should we However the U S Government Accountability Office GAO routinely conducts policy audits of defense policy and strategy yet the GAO is restricted from conducting policy audits on the Federal Reserve I am challenged to understand how policy audits of critical national defense strategy is okay but policy audits of the Fed are off limits The defense industry is at least as sensitive as monetary policy and I would like your thoughts on that Mr POWELL Sure GAO doesn’t do policy audits on the Fed constantly all over the place at the Fed just with one exception and that is our specific monetary policy function Congress chose long ago to create one step of distance away from the GAO in order to underline our independence I think that was a wise move I think changing that would clearly be seen by the public as a diminution of our independence We do look to this committee and to the equivalent committee on the Senate side for oversight on monetary policy in our system of government Our road to oversight and transparency runs right through this committee and the Senate Banking Committee as well Anyway that is what I would tell you about the GAO Mr POSEY What do you think makes the Fed more immune to review than Defense What is the rationale behind that do you think Mr POWELL Again everything we do on payments and financial regulation every single thing we do is subject to GAO audit These are policy audits It is not like a financial audit The public should understand that we are audited Our business model is actually about as simple as that as a very small not complicated and we are constantly audited What this exemption does is it prevents the GAO from coming in and looking at and assessing individual monetary policy decision which Congress saw fit you saw fit your Congress saw fit to carve out of the law And again I think it was an appropriate thing to do and I think it would be unwise to take a step back from that I don’t see any harm that it is doing Mr POSEY The former Chairpersons of the Fed have indicated they simply did not want to be second-guessed on their decisions VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 19 that the public really doesn’t have a right to know I find that illogical quite frankly and that is why I asked you these questions Mr POWELL We are very transparent We publish minutes We publish transcripts Mr POSEY I know ‘‘We publish everything ’’ Mr POWELL We are not hiding anything Mr POSEY We publish everything ‘‘but’’—I think that the ‘‘but’’ exemption is overdue Chairwoman WATERS The gentleman from Missouri Mr Clay who is also the Chair of our Subcommittee on Housing Community Development and Insurance is recognized for 5 minutes Mr CLAY Thank you Madam Chairwoman and thank you Chairman Powell for being here today For most of the constituents in my Congressional district they are not focused on the dial maintained in the 30 000 level but simply trying to make ends meet In fact the St Louis Fed in an essay as part of this Demographics of Wealth series examined the connection between race or ethnicity and wealth accumulation over the past quarter century It was the result of an analysis of data collected between 1989 and 2013 Through the Federal Reserve Survey of Consumer Finances more than 40 000 heads of households were interviewed over those years Median Hispanic and Black wealth levels are about 90 percent lower than the median white wealth level yet median income levels of Hispanics and Blacks are only 40 percent lower The larger ratio wealth gap could be due to Hispanics and Blacks investing in low-return assets like housing as well as borrowing at higher interest rates Hispanics and Blacks could also feel less of a need to save for the future because society’s progressive old-age safety net programs will replace a relatively larger share of the normal incomes they earn during their working years Could you comment on why many communities continue to lag and how the Fed via its monetary policy might seek to address some of the underlying factors that have led to gross inequality Mr POWELL What we can do and what we have been doing is to take seriously your order to us to seek maximum employment and that is what we are doing And I think we just learned because we have been watching what has been happening that unemployment can be lower than many had expected without raising inflationary or other concerns So that is what we can do and we will continue to do and I think that is showing up in communities everywhere I think other governmental and other tools are necessary to address longer-run problems though Mr CLAY Such as how do we address the pay inequity How do we impress upon corporate America that it does this country no good to have a persistent pay inequity among its workers especially when you look at the disparities in the races and the pay inequity Mr POWELL I will say that I think it is important that those issues be addressed It is really not for the Fed to prescribe the measures to address them We need to stay in our lane We do have this grant of independence including the GAO exemption and I think to keep that we need to stay within what you have VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 20 given us to do which is maximum limits stable prices supervise the banks look after the financial space Mr CLAY On another subject will the Federal Reserve release its own proposal on the Community Reinvestment Act one that takes into account the needs of low- and moderate-income communities Mr POWELL We haven’t made a decision on that yet I think our focus right now is on the ongoing process of the other agencies’ proposal and the comments I think we are going to learn a lot from those comments and I suspect there will be changes to that proposal coming out of the comments So we have not made a decision about our own proposal Mr CLAY Traditional monetary policy works through a single economy-wide variable a single interest rate or perhaps the money supply of growth of credit Credit policy by contrast aims at directing credit in specific forms towards specific groups of borrowers Credit policy consists of a central bank operation targeting specific segments of the private debt and security market What is your view of shifting from traditional monetary theory to one that involves the use of more tools in order to enhance borrowing to segments of society Mr POWELL I think that has historically not been a function of the Fed and of central banks generally We have as you pointed out one tool which is our interest rate policy When you are talking about affecting different sectors of the business community or of the population that really should be another agency or Congress itself in fiscal policy rather than— Chairwoman WATERS The witness is requested to provide an answer in writing for the record Mr CLAY My time is up I yield back Thank you Chairwoman WATERS The gentleman from Missouri Mr Luetkemeyer is recognized for 5 minutes Mr LUETKEMEYER Thank you Madam Chairwoman and welcome Chairman Powell It is always good to see you sir I am sure you saw the speech and probably read or heard the speech by Vice Chairman Quarles on the need to reform banking supervision One area I think needs clarity in the supervision regime is the role of guidance I pushed regulators to clarify the use of guidance and in 2018 they came out with an interagency statement on guidance However Vice Chairman Quarles in his speech urged an additional step doing a rulemaking of the role of guidance This fits with the Trump Administration’s recent actions out of the Office of Management and Budget OMB My question is do you believe we need an official rulemaking out of the Fed on the role of guidance Mr POWELL We have not made a decision on that Like the other agencies we are evaluating the OMB memo As you know guidance is not enforceable and so we do understand that Guidance is not a rule Mr LUETKEMEYER When Mr Quarles was here recently I think he made the comment that he intended to look at all the guidance and separate out what he believed needed to be under rule and the rest of it then be clarified as strictly guidance I think that is a great approach but the question is do you anticipate a rule to be VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 21 able to do that and enforce that in the future Are you looking at trying to do that Mr POWELL That is something we are looking at and we are looking at our guidance and asking if some of it is more like a rule Mr LUETKEMEYER Okay Mr Quarles also discussed how regulations have a framework under the Administrative Procedure Act APA but there is no real framework for supervision and he used the Large Institution Supervision Coordinating Committee LISCC as an example of supervision that was conducted without appropriate oversight and does not have specific guardrails In fact the GAO said this should have been conducted as a rulemaking Do you believe we need to change LISCC and what should we do to the firms that are already under this regime Mr POWELL I would agree that it is appropriate that we draw brighter lines around LISCC membership and as Vice Chair Quarles mentioned in his speech recently that is the path we are on Mr LUETKEMEYER Okay Very good Something that is kind of concerning to me is the fact that we have a lot of banks and nonbanks that are in the home mortgage lending space Nonbanks in general were lending roughly $250 billion in 2016 This next year it is anticipated to triple to $750 billion In 2019 nonbanks originated 85 percent of all loans sold into securitization guaranteed by Ginnie Mae 53 percent of loans sold to Freddie Mac and 60 percent of the loans sold to Fannie Mae And nonbank mortgages make up 87 percent of the Federal Housing Administration’s FHA’s portfolio In the most recent Financial Stability Oversight Council FSOC report nonbank mortgage originators were designated as a potential systemic risk You are a member of FSOC Can you explain that or would you like to talk about that a little bit Mr POWELL Sure Mr LUETKEMEYER And do you have any concerns over that Obviously FSOC did Mr POWELL As you mentioned we have looked at that at FSOC and I believe it was part of the recent annual report the thought being that these are now very very important channels through which mortgages are originated And in the case of a downturn the banks have high capital they have lots of regulation lots of liquidity and that is in a good place But these institutions are sometimes funding themselves with credit lines which might not be available So there is risk there and we are in the process of assessing that and determining what to do about it Mr LUETKEMEYER Do you have a timetable on that Mr POWELL We have highlighted it as a risk and we are doing work on it Mr LUETKEMEYER Do you have a timetable on when you might come out with a statement and say what you will or will not do and if you want to do something what it might be Mr POWELL I can get back to you on that This is something that the Treasury has the lead on Mr LUETKEMEYER Okay Very good One of the things that concerns me a little bit also with regards to home lending is just the stack of forms you have to go through We had a gentleman here VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 22 who represented it was actually a credit union at the time but the stack was literally ‘‘this tall ’’ And I asked him how many pages were in there and he said ‘‘Congressman we don’t measure by the page We measure by the pound ’’ And I said that this is how off the charts we have gotten when you have a stack of papers ‘‘this tall’’ to do a home loan I have talked to the FDIC and the CFPB and hopefully we can engage you in a way to kind of reduce that down to where it is manageable but there are protections in there for the consumer when he or she signs for a loan and there is enough information that allows the bank and the regulators to see it But this has to change This can’t continue to grow This is crazy Do you have an opinion on that Mr POWELL A lot of that stuff is legally mandated by Federal or State law Mr LUETKEMEYER I realize that Mr POWELL To the extent it is not then we do try to make assessments about what is necessary and what is not But it is a big challenge I would agree Mr LUETKEMEYER Thank you I just want to note for the record that I did not ask a question about Current Expected Credit Losses CECL today Thank you very much Mr Powell laughter Chairwoman WATERS The gentleman yields back The gentleman from Georgia Mr Scott is recognized for 5 minutes Mr SCOTT Welcome Chairman Powell It’s good to have you here Chairman Powell concerning LIBOR the Alternative Reference Rates Committee ARRC is pursuing in New York legislation to address legacy contracts in New York State Would the Fed support Federal action in that regard Mr POWELL Mr Scott actually it is some members of the ARRC The Alternative Reference Rates Committee itself is not seeking legislation but some members have approached the New York Legislature In terms of the need for Federal legislation we have not reached a point where we think it is going to be necessary We have no plans to do that If we do believe that Federal legislation is necessary we will come tell you and by the way we understand that that is not something you can do in 24 hours So we know that the time for that is soon Mr SCOTT Very good Let’s move over to Great Britain for a moment The UK regulators have been very direct with their financial institutions and they recently established a goal for their institutions to cease LIBOR-based lending by the third quarter of 2020 Why has the Fed not been so direct and do you have plans to set codes and guidelines for your regulated institutions Mr POWELL Yes We will do that at some point You may have seen that Fannie Mae and Freddie Mac have said that they won’t accept LIBOR-referencing mortgages after some point later this year So that sort of thing will begin to happen now I think well in advance of the deadline which is the end of 2021 Mr SCOTT Okay And Chairman Powell your Fed Board recently finalized its rule on tailoring the hopes of providing more VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 23 clear and well-defined risk indicators to determine the regulatory requirements that are placed on firms based on their size and risk But the Board has never disclosed nor provided clear and quantitative criteria under which firms are placed under its enhanced supervisory regime the Large Institution Supervision Coordinating Committee LISCC And even your Vice Chairman Mr Quarles recently gave a speech where he said this He said that he would like to align that portfolio with the tailoring categories and make the designation criteria transparent And you even recently indicated you agreed on the need for brighter lines Could you outline what changes the Board is considering making in this supervisory framework Mr POWELL We are just in the process of working out the specifics but I would agree that we should provide more clarity around what is a LISCC firm and that is really going to be the Category One firms— Mr SCOTT Thank you Now you are a great man and a good friend I respect you tremendously But Chairman Powell the Fed is the axle of our financial system You are the most powerful regulator And I want you to stand back up to Comptroller Otting on this business of him coming with this rulemaking change to the Community Reinvestment Act Let him know that you not only have a mandate for inflationary monetary policy you have a dual mandate which includes employment jobs And here is the other thing You need to remind Comptroller Otting that this piece of legislation this law the Community Reinvestment Act is precious to the nation but is precious to African Americans more than anybody Because it wasn’t the Civil Rights Act it wasn’t the Voting Rights Act that dealt with the big issue facing African Americans Financial stability The 2 anchors for financial stability are owning a home and having a job And this bill was the bill that outlawed redlining which kept African Americans out He needs to back off of that You need to assume your power in this and let him know we are serious and to back off this rule change Chairwoman WATERS The gentleman from Ohio Mr Stivers is recognized for 5 minutes Mr STIVERS Thank you Madam Chairwoman I appreciate you holding this hearing Good morning Mr Chairman How are you doing today Mr POWELL Great thanks Mr STIVERS Great Thanks for being here I want to do some yes-or-no questions You covered them in your testimony but just to remind everybody the labor participation rate is now 83 1 percent which has increased in the last 3 years Is that correct Mr POWELL I think that is prime age Mr STIVERS Sorry Prime age That is the prime-age adults Sorry Yes Has it increased or decreased in the last 3 years Mr POWELL I believe it has yes Mr STIVERS And wage growth has outpaced inflation for workers in the last 3 years Well at least it is currently outpacing inflation correct Mr POWELL Yes it is VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 24 Mr STIVERS And wage growth has actually gone up by about 3 percent in the last few quarters on an annualized rate Is that correct Mr POWELL Over the last few years if you look at a range of measures then you would see wages moving up at about 3 percent Mr STIVERS And we have record low unemployment rates for African Americans and Hispanics Is that correct Mr POWELL That is correct Mr STIVERS So the fundamentals of the economy are in pretty good shape Would you say that is correct Mr POWELL I would and I did Mr STIVERS And you did Thank you for that testimony Your colleague at the Atlanta Fed stated recently that ‘‘an economic expansion does not die of old age ’’ I think that is a great quote Given that the fundamentals of the economy are strong do you think many businesses and investors are trying to talk themselves into a recession Mr POWELL I don’t think so and I certainly hope not There is no reason why the expansion can’t continue There is nothing about this expansion that is unstable or unsustainable Mr STIVERS Great I think the fundamentals are strong but I think a lot of people are worried and I hope that they don’t talk themselves into a recession I agree with you on that Given that about two-thirds of all lending in capital formation occurs in the capital markets I am curious to hear what the Federal Reserve is doing to actually coordinate with the Securities and Exchange Commission SEC and the Commodity Futures Trading Commission CFTC as prudential regulators for the capital markets to make sure that there is actual coordination on the capital markets Mr POWELL The SEC and the CFTC really have primary regulatory authority for those markets and we have supervisory regulatory authority over the banks Where we overlap really is in financial market utilities where we regulate some and the SEC regulates some and the CFTC regulates some and we collaborate on all that So we collaborate pretty closely on that Mr STIVERS I would urge you to increase that collaboration because the lines between securities banking and capital markets are blurring more than ever before and I would ask you and Vice Chairman Quarles to redouble your efforts for that coordination because I do hear from some of the firms that are regulated that they feel like it is not coordinated If you could redouble those efforts I think that would pay dividends to the American investor and the American economy I have a couple of other quick questions What do you think the most significant risk to the financial system is today Mr POWELL I have to start by saying that I think the financial system is strong and has been materially strengthened since the financial crisis particularly the banks—high capital high liquidity and stress tests keep them on their toes and they have real resolution plans None of that was really in place before So I think the financial system is generally in a good place The thing that we worry about a lot is cyber attacks I think we have a great game plan for traditional issues like bad loans and VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 25 things like that Cyber attacks is really the frontier where you should worry And we work very very hard on that All of the agencies do We all work together The institutions themselves work very hard But that I would say is a major focus Mr STIVERS Thank you and an interesting note Mr Chairman you are in line with the CEOs of the biggest institutions I asked them the same question and the consensus although not complete agreement unanimous agreement was that cyber attacks were the issue I think Congress needs to focus on it and I think our regulators need to focus on it Two quick things because I am running out of time I know you are focused on the transition between LIBOR and SOFR Some people have asked that question I hope you will pay particular attention to the impact on both small businesses and our community banks as we make that transition They are particularly vulnerable And with regard to the repo market I hope you will continue to focus on the origins of the problem that caused it Some are regulatory and some are market-based And I know you are focused on it You and I have had private discussions about it But I would like to see that solved in a way that you don’t have to provide Federal Reserve capital at the end of every quarter at the end of every year so if you can stay focused on those things that would be good I am out of time Thank you Mr Chairman Mr POWELL Thank you Chairwoman WATERS The gentleman from Texas Mr Green who is also the Chair of our Subcommittee on Oversight and Investigations is recognized for 5 minutes Mr GREEN Thank you Madam Chairwoman Thank you for appearing today Mr Powell Mr Powell this is an observation not a criticism You have indicated that the fundamentals are strong However you also indicated at the last FOMC press conference that you were a bit surprised that wages have failed to move up despite being well into an expanding economy sustained levels of historically low unemployment and increased labor force participation The fundamentals are strong yet nearly half 42 4 percent of working Americans in 2019 made less than $15 an hour The fundamentals are strong A good many of the people in my Congressional district Mr Powell are more concerned about the supermarket prices than the stock market When they go to the supermarket they are concerned about the price of Procter Gamble products not the stock market price of Procter Gamble itself The stock market means nothing to them It is what they have to pay for products in the supermarket This brings me to my question Has there been a study to give us some sense of what a $15-an-hour wage will do for the economy Has the Fed done such a study Mr POWELL The Fed has not That is not something we would do Mr GREEN Let me just address that if I may I don’t mean to be rude crude and unrefined but let me just call to your attention a study that I found quite interesting The Carbon Disclosure Project a good project Based on thousands of disclosures you have VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 26 concluded that the 500 largest companies by market capitalization are exposed to a trillion dollars in risk Now someone could argue that that is probably not something that you ought to do although I understand that climate change is something that is important to the Fed because it will have a global impact But I think you can take a closer look at this You are the ultimate authority on price stability on wages Let’s have a study to determine what impact a $15-an-hour minimum wage will have on the economy a wage disclosure project if you will Give me some thoughts Mr Powell Can you help us please Mr POWELL There is a great deal of research that has been done on minimum wages and I don’t know of a particular one but there has to be somewhere research on what a Federal $15 wage increase— Mr GREEN I agree with you I agree I have read a few But they don’t come from the Fed They don’t come from the entity that has the dual mandate of price stability and employment It would mean something to working people if we could get such a study notwithstanding what others have done And these are observations Mr Powell not criticisms I have enjoyed visiting with you Notwithstanding what others have done this would be meaningful to working people By the way I think $15-an-hour is not enough as a minimum wage I think it ought to be at least $20 now but I will still settle for $15 if we can get that So can we work with you discuss with you the possibility of a wage project Mr POWELL Again I will go back and talk to our labor people who know this issue very very well and many of them have published on these issues Mr GREEN I am going to thank you for that I have 46 seconds left and I am going to applaud you for it personal applause Madam Chairwoman with that I will yield back the balance of my time Chairwoman WATERS Thank you very much Is the gentleman requesting to have an answer in writing for the record on this question to the Chairman Mr GREEN Yes Madam Chairwoman Thank you Chairwoman WATERS The witness is requested to provide an answer in writing for the record Thank you The gentleman from Kentucky Mr Barr is recognized for 5 minutes Mr BARR Thank you Madam Chairwoman Chairman Powell welcome back to our committee and I want to first touch on your testimony about the importance of fiscal policy in supporting the economy In general what would you say is the lag time associated with a major change in fiscal policy Mr POWELL It can tend to be long as you know With monetary policy we can go into a room and change interest rates and we do Obviously fiscal policy tends to take a lot of work and some time Mr BARR Let me ask the question this way Fiscal policy has changed profoundly in the past 3 years Tax cuts deregulation a less-restrained energy sector a pullback from the Dodd-Frank Act VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 27 repeal of the individual mandate new trade deals Are any of these policy changes impacting current economic conditions Mr POWELL I am sure they are but of course we don’t try to assess that That is not really what we do when we look at the economy But yes they would affect it Mr BARR As you noted in your testimony the U S economy is presently exceptionally strong Since the 2016 election 7 million new jobs have been created The unemployment rate is at a 50-year low More Americans are employed today than ever before Wage growth is the highest in a decade and the lowest-income workers have been seeing the fastest pay increase growing at 16 percent since the 2016 election And just over the weekend this was the headline of the Wall Street Journal which I am sure you follow And the reporting was that a tight U S labor market is drawing Americans off the sidelines at a record rate Despite this after last week’s State of the Union speech Speaker Pelosi said that it was ‘‘appalling’’ to hear the President ‘‘try to take credit’’ for an economy he inherited Chairman Powell I am not going to ask you to weigh in or arbitrate a domestic political dispute but when the FOMC conducts monetary policy given what you said about the lag time of fiscal policy is it fair to say that this President’s policies are impacting today’s economic conditions Mr POWELL At a high level of course they are Mr BARR Let me follow up on Representative Wagner’s question about the G–SIB surcharge In your response to our letter you maintained that you aim to have the ‘‘key components’’ of the stress capital buffer finalized in time for the 2020 CCAR Can you describe in more detail what the key components are and a more precise timeline given that the Fed announced last week scenarios for the 2020 CCAR Mr POWELL I think the timeline is—we do intend and we will put into effect the core of the stress capital buffer in time for the 2020 CCAR cycle so that is coming right up I prefer to leave the exact details of that to—they are still being worked out But it will happen in a timely way for the 2020 cycle Mr BARR I understand Let me try to get just a little bit more detail Is it still the Fed’s view that the activation of the countercyclical capital buffer is a suitable replacement for the dividend add-on in light of the Board’s Financial Stability Report from November which stated that the vulnerabilities have not significantly changed Mr POWELL We haven’t made a decision on that on using the countercyclical capital buffer versus the other approach We have not made a decision on that Mr BARR Okay Thank you for that We are looking forward to that decision Final question The Business Roundtable as you probably remember announced last summer that it was redefining a corporate purpose to elevate so-called stakeholders ahead of shareholders A large investment firm recently announced its intent to divest of fossil energy effectively limiting investment options for clients to a subset of sectors that check the environmental social governance box VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 28 I am concerned that firms which arbitrarily limit investment offerings based on social and political pressure may choke off capital to perfectly legal productive and profitable sectors of our economy and cause retail investors to miss out on returns that they need to fund their futures As a leading voice on the Financial Stability Oversight Council will you commit to raising this issue with your colleagues at FSOC and urge that body to examine the extent to which a misallocation of resources away from shareholders to serve unrelated political errants might stifle capital formation compromise investor returns and ultimately undermine financial stability Mr POWELL I don’t know that I totally understand your concern but I will be happy to discuss it with you Mr BARR The concern is that if shareholders are not a prime concern of corporate boards of directors if stakeholders who have no ownership interest in the company are the focus of a corporation then I would submit that there is a tremendous risk of misallocation of resources away from maximum shareholder returns And I would like FSOC to take a look at that Mr POWELL I will bring that to the authorities at the FSOC Mr BARR Thank you I yield back Chairwoman WATERS The gentlewoman from Ohio Mrs Beatty who is also the Chair of our Subcommittee on Diversity and Inclusion is recognized for 5 minutes Mrs BEATTY Thank you to the chairwoman and to the ranking member and thank you Chairman Powell for being here today Let me also acknowledge the advocates in their green T-shirts for being here today and thank you for coming to my office yesterday and sharing what I thought was valuable information with my team I appreciate you sitting through the hearing Chairman Powell in the latest edition of the Federal Reserve Survey of Consumer Finances that was published in 2017 it gave the breakout between whites Blacks and Hispanics as it related to their net worth And we have heard the statistics I think my colleague Congressman Meeks talked about it and I am sure some others so I will spare going through all of those details But what is very interesting to me is while that data seems great for those who are researching the issue is there any way your office could break it down by regions or cities Because when we go back home this is one of the number one things that I am hearing People are coming into my office once you get through health care and this couples in with jobs and education they are saying we look at the wealth gap that is getting wider It is not coming in And while we are talking about unemployment rates being better many people have to work 2 and 3 jobs just to try to survive Someone talked about the minimum wage Certainly as we are advocating for a higher number it is not enough In my district you would have to make somewhere between $18 70- and $20an-hour to be able to have a livable wage The first question is can this information be localized to a region or to a city to help us as Members of Congress when we go back home The second thing is I just recently introduced a bill closing the racial wealth gap which requires the Federal Reserve to further VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 29 break down the data And this is something that I didn’t realize until really studying the Federal Reserve listening to some of the individuals like the folks here today They have some really good ideas And my second question is could you tell me if you would entertain having your folks look into wage as a measure Because oftentimes many folks don’t work a full-time job but they have a wage Could we be a little more creative in looking at the data based on some of the things that I am hearing from the group who came in And I am sure they have met with your folks and you know some of their issues I will start with can it be localized Can we entertain looking at some of the things that they think we should look at when we calculate or present all the good news that is not the good news for many of the individuals sitting here or in my district Mr POWELL I think you are probably making some of our data people very happy back at the Board of Governors Mrs BEATTY Okay Mr POWELL They love to cut the data different ways and we do learn Every time we do that we learn things I don’t actually know the precise answer to your question of whether we can do it regionally or in what dimensions we can but we would be happy to look into that for you Mrs BEATTY And what about some of the individual ideas about looking at wages in your calculation Mr POWELL Yes I think we can do that Mrs BEATTY So your folks would be willing to work with them on some of the ideas for a starting point of discussing it Mr POWELL Yes Mrs BEATTY Because now we are marrying the people with the power and what a good win-win that would be for all of us since we are really talking about all of our lives and especially those who have to work a little harder than some of the rest of us The next thing is will your agency work with my office I am so excited about this bill and as I understand it part of the reason for asking for the data is the Federal Reserve actually collects the data that sets the policies that then get married with the allocations that come back to the districts I want to make sure I am on the right path when I go back home and I say ‘‘I have a bill that is asking the Federal Reserve to collect data that can help us in the end ’’ Is that in the ballpark Mr POWELL Yes We should actually get the experts to talk directly to you and your staff and tell you what we do and how we do it and how that might be useful I don’t know that we need legislation at all but we certainly have excellent sources of data and we do cut them different ways Why don’t we just follow up with you on that Mrs BEATTY Thank you Chairwoman WATERS The gentleman from Colorado Mr Tipton is recognized for 5 minutes Mr TIPTON Thank you Madam Chairwoman and Chairman Powell thanks for taking the time to be here this morning I want to follow up a bit on the CRA We have had a fair amount of conversation on that and I just wanted to be able to have the clarity VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 30 that the Fed has been involved with the CRA process with the OCC and the FDIC Is that correct Mr POWELL From the very beginning Mr TIPTON Great And I also wanted to get some clarity Were you comfortable not only with Governor Brainard making the speech but the content of her speech in regards to the CRA Mr POWELL Yes Mr TIPTON Okay What extent has the Fed been—I know you are talking about doing some of the analysis of comments coming in—able to work on CRA modernization Mr POWELL From the very beginning of the process we said yes that sounds like a great idea It is a good time to update CRA Let’s try to make it more transparent more objective Let’s try to make it more effective in serving the intended beneficiaries And so we too went around the country I think we had 29 events around the country where we talked to different groups of people about CRA their experience with CRA And it turned us in a particular direction We had a bunch of ideas and it is unfortunate that we weren’t able to get on the same page We weren’t able to really agree completely with their approach and they weren’t able to completely agree with ours But we continue to push and we continue to learn And I would agree with Mr Hill’s earlier comment that ideally you would have one agreed-upon set of standards Mr TIPTON I would agree with that as well I think that harmonization is something that we certainly ought to strive for I was really encouraged reading your comments in your statement that people who live and work in low- and moderate-income communities are finding new opportunities Wages have been rising particularly for lower-paying jobs That is an area that I have a lot of concern on In my State of Colorado I represent the rural areas and we oftentimes have 2 economies where the metropolitan areas resort areas have been doing well but rural areas have continued to often struggle We are now starting to actually see some of that real movement When we are looking at that CRA reinvestment back talking about the community banks I really would encourage you to look at the OCC and FDIC proposal I believe they do reach farther into rural America And you talked about policy Have you done any assessment in terms of the Opportunity Zones that were included in the Tax Cut and Jobs Act We are certainly seeing some benefits and some investments coming into rural areas in my district Are those some of the policies that we need to be looking at Mr POWELL I am not aware of any research that we have done on Opportunity Zones but we probably have truthfully In the System I would imagine we have done research on that and we will be happy to share it with you Mr TIPTON Great Thank you And Fannie Mae and Freddie Mac just took some steps talking now about SOFR to be accepting SOFR-based mortgages And I have noted that other agencies have been taking this step separately Is there any kind of uniform effort at a high level to coordinate the adoption of SOFR VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 31 Mr POWELL Yes there is very much so and we are doing that We are coordinating with the other agencies and with the market participants as well And you will see more of that You will see more instances in which LIBOR will no longer work will no longer be usable in particular contexts and that is what Fannie and Freddie did this week or announced this week Mr TIPTON And to follow up on Mr Stivers’ question in regards to community banks do you see any pluses or minuses in regards to using SOFR over LIBOR for community banks Mr POWELL Yes I think LIBOR itself is really a problem in the sense that there is no guarantee that the rate will continue to be published after the end of 2021 But there is a question about having a credit-sensitive rate in addition to SOFR SOFR will be the main substitute for LIBOR but we are working with the regional and some of the larger banks too about the idea of also having a credit-sensitive rate and that is something that is ongoing Mr TIPTON Okay We have had a little conversation about the coronavirus China the impacts on the economy The President just signed into law the United States-Mexico-Canada Agreement USMCA Do you see that as creating a runway for further economic expansion in the U S for job opportunities and wage growth Mr POWELL We don’t give advice on trade policy but I would just say this that I think the signing and the enactment and implementation of USMCA will be a positive at least in the sense that it removes uncertainty around trade policy And I think that has been part of the issue of the last year or so not knowing what the rules of the game are going to be And I think getting those rules settled is certainly a positive thing Mr TIPTON Great Thank you My time has expired Chairwoman WATERS Thank you The gentleman from Illinois Mr Foster is recognized for 5 minutes Mr FOSTER Chairman Powell first off I would like to thank you for facilitating our meeting with Governor Brainard the meeting that Representative Hill and I had on digital currency We really enjoyed that as well as the meeting with the staff who were excellent and it is great to see how plugged in they were to this issue In a speech last week Governor Brainard highlighted ‘‘The role of central bank digital currencies is in ensuring that sovereign currencies stay at the center of each nation’s financial system ’’ Do you agree with her characterization And in particular do you think that establishing a digital dollar would help ensure that the U S dollar continues to serve as the core of the U S and the world’s financial system Mr POWELL To take the first part of that I think having a single government currency at the heart of the financial system is something that has served us well It is a very very basic thing that really hasn’t been in question And I think before we move away from that we should really understand what we are doing So I think preserving the centrality of a central widely accepted currency that is accepted and trusted is an enormously important thing I think whether a digital currency moves us along that path or not is an open question As you know every major central bank is VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 32 currently taking a deep look at that we feel like that is our obligation Technology has now made this possible The private sector is innovating They are doing it I think it is very much incumbent on us and other central banks to understand the costs and benefits and tradeoffs associated with a possible digital currency Mr FOSTER How would you characterize your state of progress on this compared to other countries—the Swedish central bank developing an e-krona well the Chinese One of the reasons there was so much concern about the Libra project is they would immediately have scale if they just rolled out the product Another entity in a position to do that is the Chinese government to roll out at scale using their already established payment-by-cell-phone systems They would immediately have the scale comparable to Facebook if they rolled that out How would you characterize our ability to respond to this potentially competitive threat Mr POWELL We are working hard on it We have a lot of projects going on a lot of efforts going on on that right now We haven’t had the problem that many—you mentioned Sweden A lot of the northern European economies have moved away from cash to a remarkable degree and that really has not happened in the U S economy even though it seems like it must have happened with our kids not using cash very much Nonetheless the amount of cash in the U S economy continues to grow at faster than nominal GDP Mr FOSTER But if you look at the curve of adoption of payment by cell phone it starts slowly and then all of a sudden it just happens So it seems like that transition can happen in a period of just a couple of years and so we have to be able to respond If that is the driving factor then we have to be in a position where we can respond by rolling out for example a digital dollar on a coupleof-year timescale Mr POWELL I completely agree with that and I think frankly Libra really lit a fire under that and it was a bit of a wakeup call that this is coming fast and could come in a way that is quite widespread and systemically important fairly quickly if you use one of these big tech ne2rks like Libra did So we are working hard on it We fully appreciate the importance of making quick progress We have not decided to do this though I think there are many questions that need to be answered around a digital currency for the United States including cyber issues and privacy issues Many many operational alternatives present themselves And so we are going to be working through all of that and doing that work early and responsibly Mr FOSTER Do you feel as though you have adequate visibility into what the Chinese are doing on this Do you have sort of working-level contacts that give you some idea of what their rollout is likely to do likely to look like Mr POWELL Yes We certainly have that But they are in a completely different institutional context There are things that—for example the idea of having a ledger where you know everybody’s payments that is not something that would be particularly attractive in the United States context It is not a problem in China But nonetheless we are following— VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 33 Mr FOSTER But from a competitive point of view they are claiming they are going to roll it out on the Belt and Road countries sometime very quickly And so I urge you to keep the fire lit Thank you Mr POWELL Thank you Chairwoman WATERS The gentleman from Texas Mr Williams is recognized for 5 minutes Mr WILLIAMS Thank you Madam Chairwoman and thank you for coming back to our committee Chairman Powell We appreciate it With baseball season slowly approaching I wanted to make sure of one thing before I continue that you still are on ‘‘Team Capitalism ’’ Mr POWELL Oh yes Mr WILLIAMS Thank you I appreciate that Experian recently released their 2019 Consumer Credit Review and I wanted to read a section from the report because I think it accurately depicts the state of our economy As you know I am a Main Street business guy and the economy is really good right now ‘‘Indeed the U S economy exceeded expectations Record job growth caused unemployment rates to drop to historic lows while the stock market flexed throughout the year Consumers in return showed their confidence as they continued to borrow and spend energetically most recently evidenced by the strong 2019 holiday shopping season ’’ The report goes on to say that ‘‘consumer credit scores reached an all-time high in 2019 at an average of 703 This translates to people being able to get better rates to borrow money to buy a house to get a small business loan or whatever they need financing for in order to live out their American dream ’’ Chairman Powell what should we be focusing on in this committee to continue the explosion in new jobs that we have seen over the past few years Mr POWELL Honestly I think the focus for me really ought to be on things that address what are our longer-run issues that can be addressed by legislation And there are really two important things One is labor force participation What are the things that you can do that we really can’t do that will help people stay more attached to the labor market We still have low labor force participation compared to essentially all of our economic competitors And the other one is productivity what is it that drives productivity It is a stable legislative environment It is a legislative and administrative environment that supports growth and innovation and investment and those sorts of things Those would be my main focuses Mr WILLIAMS I know you are aware of the Fed’s work on the international insurance capital standard that is being developed for the world I have had my reservations about entering into an international agreement that does not conform with our current Statebased approach to regulating our domestic insurance companies One particular piece of the international standard that I want to ask you about is the flexibility that our government was given to VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 34 develop an equivalent solvency standard that would better fit our insurance ecosystems My question to you is how does the Fed plan on ensuring the standards being developed in the U S will be deemed equivalent by the international group given this continued resistance you are facing from the Europeans Mr POWELL I can just say that we will not be a part of approving any international standard that doesn’t accommodate our own American insurance regulatory framework Mr WILLIAMS That is great We are leaders not followers Some of my colleagues on the other side of the aisle have called for a financial transactions tax I think this is an extremely shortsighted approach to raising revenue that will greatly impact the amount and the ways that Americans save for the future Additionally the thought that adding an extra layer of taxation to other assets so redundant since capital gains taxes are already in place and they should be lowered that take away money from successful investments If we want to further expand economic growth we need to focus on continuing to lower the personal and corporate tax rate so Americans can keep more of their hard-earned income and businesses can invest that profit back into their operations So Chairman can you explain how implementing a financial transaction tax would impact the U S economy Mr POWELL I think I need to stay in my lane here We don’t do fiscal policy and if I start commenting on particular taxes I am worried about where that might go Mr WILLIAMS I understand that But I will tell you from a Main Street standpoint it will really hurt the economy an extra layer of tax We need to actually cut taxes Looking at financial trends across the world and with being in business for over 50 years like myself one data point that catches my eye are negative interest rates Can you help me understand the economics behind negative interest rates and talk about the potential threats that this phenomenon poses to financial stability Mr POWELL A number of countries around the world as you know face the problem of what do you do when your policy rate gets to zero and some of them actually went below zero The United States chose not to We chose not to at the Fed We used other tools when we got to the lower bound and those were forward guidance and large-scale asset purchases I think going forward our inclination would be to rely on the tools that we did use as opposed to negative rates So that is our instinct is that in the U S context that is not a tool we are looking at The question about intermediation is when you have negative rates does it wind up creating downward pressure on bank profitability which limits credit expansion Mr WILLIAMS Right Mr POWELL And there is some evidence of that In any case we are watching other institutions around the world who have done that and we will be able to see what the results are Mr WILLIAMS Thank you for being here Chairwoman WATERS The gentlewoman from Michigan Ms Tlaib is recognized for 5 minutes VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 35 Ms TLAIB Thank you Madam Chairwoman Chairman Powell I don’t know if you know this but in 2013 Detroit filed for Chapter 9 bankruptcy which was marked as the largest municipal bankruptcy filing in U S history In July when you were here I asked you why if the Federal Reserve is willing to backstop or support big banks and corporations during periods of credit market distress we wouldn’t want to make equally sure that State and local governments had access to credit as well And you mentioned that you didn’t have the authority to lend to local and State governments Madam Chairwoman I would like to submit for the record Section 14 2 b of the Federal Reserve Act asserting that the Federal Government actually does have the authority to buy municipal debt Chairwoman WATERS Without objection it is so ordered Ms TLAIB Chairman Powell given that you actually do have the authority can you explain to me why the Federal Reserve shouldn’t ensure that State and local governments have access to funding during times of distress Mr POWELL We have as you know limited authority I think it is to buy short-term municipal obligations We did do that in the 1970s briefly and have not done it since I think a series of FOMCs and Fed Chairs in all kinds of different political environments have thought of that as something that is not appropriate really for us in the sense that it is government finance That is to be dealt with by fiscal authorities rather than by the monetary authority We focus on the job you have given us which is maximum employment and stable prices and to some extent also with other agencies we work on financial stability and bank supervision as opposed to the solvency of State and local governments Ms TLAIB Yes or no The Federal Reserve reserves the ability to open emergency lending facilities Is that accurate in stabilizing the economy Mr POWELL Well yes to financial institutions we do Ms TLAIB So when the Fed steps in to rescue banks in a crisis is that because you believe their role in the economy is vital Mr POWELL It is really because we had no choice It was to prevent the financial system from collapsing in 2007 and 2008 Ms TLAIB No My City filing bankruptcy was devastating to so many retirees sir For 40 or 50 years they worked for the City of Detroit and saw their pensions completely diminished gone Do you not believe that the governments of Detroit and Puerto Rico also play a vital role that should be preserved even if a financial crisis makes it hard for them to borrow money Mr POWELL What I believe is that is not a job for the Fed which has a particular role and particular authorities And lending to State and local governments and supporting them when they are in bankruptcy is not part of our mandate Ms TLAIB We are going to strongly disagree I believe you do have the authority Now you have mentioned that in the face of another financial crisis you would use the same tools of expanding the balance sheet and purchasing long-term bonds in other words more of the same Correct VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 36 Mr POWELL Yes Ms TLAIB I am afraid that simply is not good enough and I think your predecessors former Chairs Yellen and I believe Bernanke seem to agree based on remarks both gave last month For instance Chairman Bernanke has suggested a money-financed fiscal program might be helpful during the next recession Do you agree that would be helpful Mr POWELL I think that is really an untested and not widelysupported perspective I don’t believe Chairman Bernanke said that a money-supported fiscal policy would be something that we should do I know that there has been a group of people who have pushed that idea but I don’t think it included former Chairman Bernanke You may have seen something that I haven’t seen Ms TLAIB I know and Chairman look the Federal Government is supposed to be about people and I don’t see that we are treating pensioners in a city like the City of Detroit which is frontline communities that have really been hit hard by the financial recession— they keep saying Detroit is coming back If I show you neighborhoods they will tell you ‘‘We don’t know what you are talking about ’’ because poverty has actually increased and access to housing has decreased We need to start reflecting and understanding that I believe the Federal Reserve Act actually gives us authority to help and treat just like we bailed out big banks that we can do the same for our people the residents of the City of Detroit I thank you for that and again I would ask you and push you to look at this from a different lens versus the same old process which I believe hasn’t really worked for working-class people Thank you so much and I yield back Chairwoman WATERS Thank you The gentleman from Arkansas Mr Hill is recognized for 5 minutes Mr HILL Thank you Chairwoman Waters And again Chairman Powell welcome back to the House Financial Services Committee I want to thank you for your discussion that you had with Dr Foster a few minutes ago I too want to thank you for your work with Governor Brainard and our discussion that we had with the Governor and the staff about the concept of a digital dollar and the work being done at the Treasury about that I won’t belabor some of the points that Representative Foster made but there are a couple of comments that I would have for you on that Would you advise our committee or ask the Fed to advise our committee what legal authorities the Federal Reserve might require in order to consider the use of a digital dollar Mr POWELL Yes That is a good question and it is one we are looking at A lot of it would depend on the design of that currency Mr HILL Exactly And one thing we also talked about and we have had a lot of discussions in our Fintech Task Force about is Europe’s approach to this idea of a payment provider license which is now part of their financial services code Part of the open banking movement and the idea that one would have a regulatory license here in the United States for being a payment provider—it might be a bank or it might be a nonbank—is that something that the Fed is looking at as well Mr POWELL I wouldn’t say we are specifically focused on that but more broadly it is we think a good idea to look at the whole VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 37 landscape of oversight of our payment system and that would be a piece of that As you may know Governor Brainard talked about that in another of her speeches last week Mr HILL Right Thank you for that Last month the Chinese regulators bailed out Hengfeng Bank It was a $14 billion loan that they arranged through one of their sovereign wealth funds The Chinese banking assets at $41 trillion now are 47 percent of world GDP Does instability in the Chinese banking industry pose a financial threat to the global financial system Is it a financial virus like they have already contributed a physical virus Mr POWELL Generally as I am sure you are aware China has had very high debt-to-GDP for an economy at its stage of development and that includes the banking system And the government has actually for several years now been taking measures led I think by the central bank to try to control the growth of debt and they have stuck to that through the last couple of years even though those were challenging years economically for them So it is something that they are addressing The other thing to say is that they have plenty of fiscal power If you look at it fiscally they have plenty of power to respond to a downturn I wouldn’t go so far as to say that their debt is a systemic threat to the world economy or anything like that but it is something that they need to address and they are addressing it Mr HILL I think it is something that deserves review Mr Barr talked about their misallocation of resources At 47 percent of global GDP that seems like an over-allocation in the banking sector in China and it could pose a threat to our system In your report on page 24 you talk at length in your financial stability section about the decline in bond yields about how particularly in the high-yield market the ratings have fallen And I was looking at a mutual fund annual report the other day and it says of particular concern is the continuing high rate of issuance of BBB bonds the lowest category of investment-grade-rated bonds If the economy stumbles rating downgrades issues could be a flood of fallen angels And this particular mutual fund said they are staying away from the lower end of the high-yield market Are you concerned about the high-yield market Mr POWELL That is the so-called BBB cliff and the idea is that there are a handful of very large issuers which if they were downgraded would then be non-investment grade and the idea is that some holders are not permitted by the terms of their agreements with their investors to hold non-investment grade and it would trigger sales So that is an issue we have been monitoring for some time now really With leveraged lending more generally yes we are monitoring it very carefully You do see low compensation for risk taken You see high leverage You see a lack of covenants You see all of that I think it is a complicated picture though That paper is now largely held in CLOs and mutual funds and exchange-traded funds rather than on bank balance sheets and those vehicles tend to be stably funded in the sense that their liabilities are actually longer than the expected maturing of the underlying instruments VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 38 Mr HILL But it is still a source of financial concern to the FSOC I would think and therefore I commend you for noting it in the report and I thank you for your continued attention to it I yield back Thank you Chairwoman WATERS The gentleman from Illinois Mr Casten is recognized for 5 minutes Mr CASTEN Thank you Madam Chairwoman and thank you Chairman Powell I appreciate you sticking around all the way to the bottom of the dais here If I get elected 8 more times fingers crossed I will have as much experience in this line of work as I do in the energy sector I still come here primarily as an energy nerd and I have a real concern that we are not dealing with the realities of climate change scientifically We understand this really what it means to have rising sea levels but we haven’t really thought about what it means to have an accelerating rate of change Compound interest confuses people and compound changes in the environment we don’t even really think about it as well as we should Just a couple of data points that I hope all of us can appreciate The first evidence that hominids made fire is a cave a million years old James Watt invented the steam engine 244 years ago and ushered in the Industrial Revolution and 50 percent of all the CO2 we have ever emitted as a special is since Back to the Future came out in 1985 It is this massively accelerating shift and if we went to zero CO2 tomorrow we are looking at 2 feet of sea level rise coming The more realistic trends we are on is at least 6 feet of sea level rise coming and at that level there is estimated about $23 trillion of economic loss to the system $900 billion of U S property at risk before factoring in debt losses and pulling out of insurance And there are some serious systemic risks to the economy if we leave those unaddressed I just want to understand a little bit how you and the Fed are thinking about those risks Number one given that the assets exposed to climate change exceed the entire subprime mortgage market prior to the global financial crisis how if at all is the Fed thinking about climate change as a systemic risk to the economy Mr POWELL Climate change again is a very important issue one that is really the provenance of elected representatives to set the overall direction of society and how we will respond to climate change and its challenges Nonetheless we have a job to do and that is to think about the potential implications for the financial system for the economy and I think we are at the very early stages of filling in what exactly that means In terms of things like particular assets these are longer-term considerations We are essentially mainly concerned with business cycle issues That is what we are focused on is issues for the medium term Climate change is a much longer cycle kind of thing Mr CASTEN If I may part of the concern I have is that the actors in the space do not have planning horizons that match the reality that you do and we do right There are people signing 30year mortgages right now for properties in Miami Beach and they may plan on reselling that mortgage a number of times but somebody is going to be left holding the paper with that sea level rise VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 39 coming The insurance industry typically has a one-year holding period And even if the U S is successful at reducing carbon emissions there still is a massive reallocation of capital Have you looked at the transitional risks in thinking about how that starts moving around and dislocating the economy Mr POWELL Those are the things that we are at the beginning stages of looking into As you obviously know there is a lot going on in the financial markets There is a lot of disclosure happening and expectations around disclosure are changing significantly for publicly held companies and that will have an effect But that is not really what we do We do monetary policy bank supervision To your point our banks have to be taking into account the risk of severe weather events and potentially I suppose of rising sea levels— Mr CASTEN Maybe let me give a specific one that has been bugging me lately If you look at the fossil fuel industry the oil and gas companies the coal companies the debt that they hold relative to their assets given that their assets are so heavily dominated by fossil fuel reserves if they were to extract all of their fossil fuel reserves things are going to be way worse than the $23 trillion I just told you Have you ever considered stress testing to see whether their failure to fully monetize their reserves might effectively make them fiscally insolvent Because that to me sounds like a materially adverse event but I wouldn’t want to bet that the economy is going to commit suicide But if I look at the financial statements of a lot of those companies it is not clear to me that they can monetize those assets That has a meaningful effect on the risk of money that is held today I think there was $700 billion lent to fossil fuel companies in the last couple of years Have you considered that as a systemic risk Mr POWELL For us it is a systemic risk to the financial system and we would be stress-testing banks As you know the Bank of England is doing some of that now and we are going to be watching to see what they learn and maybe that is the path we will follow Mr CASTEN Thank you Mr POWELL We haven’t made that decision Mr CASTEN Thank you I will follow up with you offline I yield back my time Thank you Chairwoman WATERS The gentleman from Georgia Mr Loudermilk is recognized for 5 minutes Mr LOUDERMILK Thank you Madam Chairwoman Chairman Powell thank you again for being here First of all I kind of want to touch back on LISCC I know that some have already touched on this subject and as you know several weeks ago Vice Chairman Quarles gave a speech where he outlined a number of changes that he would like to make to the Fed supervisory and regulatory process He said he intends to bring transparency to the LISCC regulatory regime by developing clear and transparent standards for designating firms He also proposed aligning LISCC designation with the Fed’s tailoring categories and limiting it to only Category 1 firms VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 40 My question is at a press conference after last month’s Federal Open Market Committee meeting you said you generally agree with Vice Chairman Quarles in what he had articulated I appreciate that But can you give us an idea of when you expect LISCC designation to be confirmed with new tailoring rules Mr POWELL I don’t actually have a sense of where that is in terms of the timing of it At any given time we have a bunch of things to do and that is certainly one of them Mr LOUDERMILK Okay Hopefully sooner rather than later Mr POWELL I don’t want to commit to something that—there are a lot of things that we are working on at all times But if the Vice Chair gave a speech about it I am aligned with that and I expect we will be moving forward Mr LOUDERMILK That is very good to hear I would like to quickly touch on the CRA I believe that all 3 banking agencies need to have a unified CRA framework and I know you are hesitant to speak on behalf of the other agencies specifically the OCC and the FDIC and their proposals If you don’t want to comment on that and I understand that what are some of your ideas or the Fed’s ideas for CRA modernization Mr POWELL Let me talk about the process We kind of agree on the overall goals and the quesion of how do you get after that And so our thinking was try to get to a set of improvements really that would lead to a more efficient more effective CRA We are looking at ways to make the assessment the test clearer In our thinking at the retail level there is a separate test for community development and for retail lending And also the other thing we are saying is let’s make sure that it is all very grounded in data We have as the Chair mentioned earlier 6 000 datasets that we look at I think we really know when you make a change in the metrics we kind of know what the effects are going to be and we feel good about that So we tried to develop our proposal around that There were a lot of overlaps but there are a handful of differences that prevented us from getting to full agreement Mr LOUDERMILK In the overall objective do you believe that we can remove some of the ambiguity on what projects do and do not qualify Mr POWELL Absolutely transparency ex ante more transparency ex ante as to what qualifies and where more objectivity All of that should help to encourage banks to do more if they really know what is going to qualify and what is not and I think that is all very constructive It is really about how you implement it It is a very important law a very very important law We want to have a high level of confidence that what we change is going to have the desired effects and that is what we are focused on Mr LOUDERMILK I appreciate that because I would like to see us make changes to where it is not financial institutions just checking boxes to get credit but actually investing in projects that do help revitalize these communities As you know the Fiscal Year 2020 appropriations law directs the Treasury Department in consultation with the banking agencies to study whether any changes in banks’ regulatory capital requirements are needed because of CECL If the study concludes that VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 41 that is the case are you open to modifying regulatory capital requirements accordingly Mr POWELL Well yes I think we have said that with CECL we are going to be monitoring very carefully what the implementation is showing because of some of the concerns that have been raised Mr LOUDERMILK Okay Thank you I probably don’t have time to get into any other questions so with that I yield back the balance of my time Chairwoman WATERS Thank you The gentlewoman from California Ms Porter is recognized for 5 minutes Ms PORTER Thank you Chairman Powell you have frequently spoken about your belief in maintaining the independence of the Federal Reserve Do you still have that belief Mr POWELL I do Ms PORTER Has anything changed in the New Year Mr POWELL No Ms PORTER Okay Because we don’t want the Fed to be making decisions about things like where to set interest rates based on any factors other than the best interests of the country And I know you have had some experience with the President publicly and aggressively attempting to lean on you to lower interest rates and I appreciate your continually affirming the importance of the independence of the Fed But it is not just our President There are a lot of people out there who would love the opportunity to weigh in on Fed decisions Outside of Administration officials what other kinds of people might want to influence you in regard to the Fed’s decision-making Mr POWELL What other people might want to influence us Potentially quite a wide range of people I would think Ms PORTER Major investors Financiers Mr POWELL I don’t know that people are really seeking to—you say ‘‘might want to influence us ’’ I really don’t know the answer to that Ms PORTER Okay Mr POWELL Many people follow what we do and respect what we do I think people often when I meet them really shy away from giving advice They really do They feel like they don’t presume to give us— Ms PORTER So you don’t feel undue pressure from political or special interests Mr POWELL No I really don’t Ms PORTER Would you say that someone like Jeff Bezos the CEO of Amazon one of the richest men in the world could benefit from having influence over the Fed’s decisions Mr POWELL I wouldn’t know actually I don’t know Ms PORTER What about Jared Kushner and Ivanka Trump Mr POWELL I don’t know Ms PORTER They are very wealthy people Do they have savings and make different amounts of money depending on what the Fed does with interest rates Mr POWELL Yes Ms PORTER What about Kellyanne Conway Does she in her role as advisor to the President and the President has expressed VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 42 these public views does she potentially have an interest in amplifying the President’s messages That is after all her job Mr POWELL I suppose I don’t know Ms PORTER Okay Mr Powell I am going to project a picture up here so that the audience can see but I am also going to hold it up for you Is this you Mr Powell Mr POWELL That is Ms PORTER Where are you Mr POWELL That is a party after the Alfalfa Club dinner an after-party that I went to Ms PORTER Where was that party held Mr POWELL At Jeff Bezos’ home Ms PORTER At Jeff Bezos’ home And when was it taken Mr POWELL Excuse me Ms PORTER When was this picture taken Mr POWELL Saturday night after the Alfalfa Club dinner Ms PORTER Give or take you will stipulate end of January 2020 Mr POWELL Yes Ms PORTER Recently Can you imagine how attending a lavish party at Jeff Bezos’ $23 million home along with Jared and Ivanka and the CEO of JPMorgan Chase Jamie Dimon might give off the sense to the public that you are not in fact immune from external pressures Mr POWELL I would certainly hope not Ms PORTER What did you talk about at that party with them Mr POWELL I didn’t I didn’t talk to any of the people you named Ms PORTER You didn’t talk to anybody Mr POWELL I didn’t talk to any of the people you named Ms PORTER Oh Can you tell me who you did talk to Mr POWELL I mainly escorted my son and his brand-new wife and I actually introduced them to General Mattis Ms PORTER Okay Great I would just suggest that attendance at this kind of event with these kinds of people is inconsistent with what I would otherwise commend you on for doing a very good job I think of reaffirming to the public This plants in the public’s mind I think a seed that is counter to what you have been doing Quickly Mr Powell if you can just name a couple of the biggest drivers of economic growth in this country since the recession in the 1970s What has been making our economy grow What factors Mr POWELL What factors have been making it grow Well the hard work of the American people I think what you have seen is tremendous growth in some sectors and less in other sectors Of course the big technology companies weren’t around 40 years ago So I think we have seen lots of growth in some areas and in other areas much less so Ms PORTER Mr Powell would it surprise you if I told you that women in the workforce are actually a bigger driver of economic growth than technology companies and in a span of 4 decades since the 1970s 38 million women joined the workforce and without those women our economy would be 25 percent smaller VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 43 When we talk about the health of our economy and we talk about GDP growth what I don’t hear a lot about and I would like to hear more from you about is about the economic effect of things like child-care availability In those same 4 decades in which women grew the economy 25 percent the cost of child care shot up 2 000 percent Do you know Mr Powell how much child care in America costs today Mr POWELL How much it costs today in America It costs a lot Ms PORTER You are an economic expert Could you put a little firmer number on that Mr POWELL I don’t know My kids are grown up Ms PORTER Thank you I yield back Chairwoman WATERS The gentleman from Ohio Mr Davidson is recognized for 5 minutes Mr DAVIDSON Thank you Madam Chairwoman Chairman Powell thank you so much for your time here today Thanks for the good work you and so many of your colleagues are doing at the Federal Reserve Just to address comments that came from my colleague recently is it unprecedented for the Chairman of the Federal Reserve to attend a party or a reception Mr POWELL No Mr DAVIDSON It is certainly not the first time that a Fed Chair has attended a party I am certain it is not the first time a Member of Congress has attended a reception or a party And so I don’t know that we want to say hey just because you were at an event somehow this is nefarious I mean heck you might have actually talked to a Russian on a subway or something So the way that these things are linked for political motives is embarrassingly partisan and bad and I just thank you for resisting all of those pressures Many of them are public of course but one that I am concerned about right now is the repo market Back home a lot of people don’t know that there is such a thing as repo but it is a big factor for our economy And I think some of the warning signs in it have given rise to the Fed in kind of a blend between regulatory action and monetary policy injecting a lot of cash into that market Vice Chairman Quarles spoke recently about the need for that to continue for some time Can you explain the process about how the Fed is going about reviewing the factors that are contributing to this repo spike and what you have learned from the review Mr POWELL Sure What happened is in as you know early September there was a spike in repo rates and the Federal funds rate moved slightly outside of our band our target range for a day or so And we didn’t see that coming Market participants didn’t either And so we have been asking since why is that One clear reason is that the level of reserves which is cash on deposit at reserve banks needs to be higher than we had thought and so in that stream we have immediately set a plan and executed it and it has worked fine to create that— Mr DAVIDSON Some have called this quantitative easing I know you have objected But essentially we are artificially interjecting cash to produce an outcome that the market isn’t producing of its own accord VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 44 I think it is odd that our action is to inject cash from the Federal Reserve to grow the balance sheet at the Fed instead of looking at the underlying regulatory things What have we talked about What has the Board talked about in terms of regulatory factors that instead of injecting cash to fix a problem treating the root cause of the problem and changing the regulatory framework Mr POWELL We are doing both things The reason we are injecting the cash is to supply the demand for cash for basically banks that need to have a certain amount of cash for liquidity purposes Turning to the second issue though we also said that without undermining safety and soundness we would look at ways in which regulation and supervision might have interfered with the otherwise free flow of cash to where it was needed And I think we have done a lot of work on that And Vice Chair Quarles hit on a broad theme there which I think is important and that is the idea of making the treatment the supervisory treatment really of cash the same as that of Treasuries for this purpose You could achieve a better flow of liquidity through the system without affecting the overall level of liquidity in the system which is just what we are looking for He broached some ideas for how to do that and I think that is a very profitable line of inquiry Mr DAVIDSON Okay Thank you for that One of the changes as LIBOR is going away and market forces are coming is we are talking about replacing the benchmark rate And of course ARC includes 250 entities but there is a concern that as you have done this that the best rate isn’t necessarily being provided Is the Fed taking the best proposed rate offered in these repo deals or are we giving it out at a special rate to maybe the top 10 SOFR banks Mr POWELL I’m sorry I lost track of that Mr DAVIDSON When this liquidity is injected— Mr POWELL I see the repo rate Mr DAVIDSON —into the repo rate going into the repo rate Mr POWELL I’m sorry I missed that The rate we have been offering on the repos they have been settling at a level that is a couple of basis points below the interest rate on excess reserves IOER but that won’t be a persistent issue Mr DAVIDSON But are they settling at a rate that is when it is paid out at the high rate is it paid to the best available offer or is it paid to the best available customer Mr POWELL We don’t distinguish Anybody who is eligible can bid and as long as you are eligible we will sell to the— Mr DAVIDSON Thank you My time has expired Chairwoman WATERS Would the gentleman like to ask the witness to provide a more complete answer in writing for the record Mr DAVIDSON I appreciate the Chair’s suggestion I would love to see a written answer for how that is actually working Chairwoman WATERS The witness is requested to provide an answer in writing for the record Mr DAVIDSON Thank you Chairwoman WATERS The gentlewoman from North Carolina Ms Adams is recognized for 5 minutes VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 45 Ms ADAMS Thank you Chairwoman Waters for convening the hearing today and Chairman Powell thank you for your testimony FDIC Board Member Martin Gruenberg voted against Comptroller Otting’s proposal describing it as ‘‘a deeply misconceived proposal that would fundamentally undermine and weaken the Community Reinvestment Act ’’ Can you comment on the deficiencies of Comptroller Otting’s misguided attempt to gut the CRA an essential piece of civil rights and banking law Mr POWELL I guess I feel like our role is not to be commenting on the other agencies’ proposals The public is doing that now We very much look forward to seeing the comments that they do make I can talk about our own thinking about this but it is not really for us to be publicly commenting on the other agencies’ proposals Ms ADAMS Will the Federal Reserve release its own proposal on the Community Reinvestment Act one that takes into account the needs of low- and moderate-income communities Mr POWELL That of course was why we undertook this work was to do that We actually haven’t made a decision yet about whether or when to make a proposal but nonetheless the whole effort was undertaken with a view to creating a modernization proposal for CRA Ms ADAMS Okay As you know the Federal Reserve has a dual mandate price stability and maximum employment Will the Fed set a goal for wage growth and are you considering this approach as part of the framework review Mr POWELL I don’t see us targeting wage growth as an independent item It is something we monitor very carefully Our goal as assigned by Congress is maximum employment and stable prices Those are our two statutory objectives and those are the things that we target I don’t see us targeting a particular level of wage growth Ms ADAMS Okay Have you considered adopting a floor for wage growth for example once we set a certain percentage increase in pay in wages that the Fed may consider switching to a 2-percent inflation rate Mr POWELL We have said that the sense of this project is we want to make the 2 percent symmetric inflation goal more credible and we have been missing it and central banks around the world have been missing their objectives for a decade now on the low side And we want to resoundingly achieve 2 percent inflation That is really the objective of this review that we have undertaken Ms ADAMS Okay Let me ask a question about the Volcker Rule Why has the Fed decided to support further changes to the Volcker Rule given that banks enjoy certain benefits including access to the Fed discount window and that the Rule was intended to limit banks from engaging in risky investment activities that could contribute to a future financial crisis Mr POWELL We did just put out a proposal on part of the Volcker Rule and of course we think that proposal is entirely consistent with both the letter and the spirit of the law But we are going to be reading the comments It is out for comment now—we just put it out—and we are looking forward to reviewing those comments VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 46 Ms ADAMS Okay I understand that you collect a large number of daily trading metrics from banks subject to the Volcker Rule yet it has never been made clear exactly how these metrics are used to determine whether a bank is complying with the Rule nor have any of the metrics been released to the public Is that true Mr POWELL I think it is true that the—so we published the first Volcker Rule I want to say 6 or 7 years ago and I think very widely regulators and financial institutions found it to be a bit unworkable And so we set out to provide a simpler set of metrics and ways that companies could conduct perfectly legal activity and have more certainty that they were doing so without having to prove for every single trade what was in the mind and the heart of every trader because there is going to be trading activity around legal activities that were not covered by the Volcker Rule I think that is what we are doing We are trying to make that Rule more effective and efficient but we are doing it in a way that is consistent with the letter and the spirit of the law Ms ADAMS Okay Thank you Madam Chairwoman I yield back Chairwoman WATERS The gentleman from North Carolina Mr Budd is recognized for 5 minutes Mr BUDD Thank you Madam Chairwoman And Chairman Powell again welcome I want to start by thanking you and Governor Quarles and your Fed staff in charge of insurance regulation for your collaborative work with the U S State insurance commissioners on solvency regulation I also wanted to thank you for the pushback against the European efforts to try and force their system of insurance regulation onto our unique and sound 50-State insurance regulatory regime Notwithstanding the progress achieved to date many in the industry are telling me that the Europeans are still resistant and they ultimately seek to change our regulations so that they mirror theirs Given that here is my question Will you commit to directly reaching out to your peers in Europe to tell them explicitly that the U S will not be adopting a European-centric or international capital standard ICS and that we have our own rules that work very well Mr POWELL I will just say clearly that we have a State-based insurance regulatory system and the Federal rule is what it is and that is not something we are seeking to change and we are committed to that going forward Mr BUDD Chairman they are seeking to change us and so I fear that if we are passive it will migrate towards them But have you had any conversations with any senior European leaders yet on the ICS international capital standard Mr POWELL No I haven’t Mr BUDD Okay Is there any reason why not or is that something that has been avoided Mr POWELL No I just am not involved directly in the insurance There are senior people who are I am sure Vice Chair Quarles is Mr BUDD I would encourage you again and Governor Quarles to continue to press that We have a great system that continues to work well Also Mr Chairman as part of the Basel III finalization efforts a number of changes to the capital rules will have the effect of rais- VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 47 ing capital requirements on capital market activities Can you discuss your views on the appropriate level of capital markets-related activity such as market making or underwriting Mr POWELL Sure Those are critical activities in the functioning of our financial markets and our economy and they do need to be appropriately capitalized I would say that overall I think that the level of capital in our banking system is about right and I don’t see a need to further raise capital I know we are pushing forward with the fundamental review of the training book and the other Basel III end-game things but I don’t see them as needed to raise overall levels of capital Mr BUDD Chairman can you share how your view on capital requirements and things like market making and underwriting how they could affect the balance between bank-driven and marketdriven finance in the U S system Mr POWELL I think to the extent you raise capital requirements and they become quite binding they encourage activity to move outside of the banking system into less-regulated and supervised entities Mr BUDD Very good Mr Chairman there has been a lot of discussion in recent months about leveraged loans and FSOC and others monitoring the market In fact you have had a couple of questions on this topic today but when people discuss the issue sometimes I think they are referencing different things To help us get on the same page here in your opinion how would you define leveraged loans Mr POWELL You are right There are a lot of different ways to think about it but a reasonable ballpark would be something that is rated below BBB Or you could also say an amount of leverage— typically they will have a leverage of maybe 6 times cash flow EBITDA There are different ways to think about it but I think that the best way to think about it is probably not investment grade Mr BUDD Do you think there is a difference in leveraged loans in the banking sector and in the nonbanking sector Mr POWELL Yes I think there has been a trend over time for leveraged loans to be held by longer-term holders outside the banking system and that has accelerated So far fewer of them are on the books of banks with deposit insurance and the safety net as opposed to collateralized loan obligations or exchange-traded funds or mutual funds or pension funds or hedge funds That is where those loans are going now It is more like it has become a distribution business as opposed to a traditional lending business where banks would make a loan and they would put it on the balance sheet That is not what is really happening You have a bank performing an origination function on behalf of a sophisticated investor that is stably funded we hope and in the case of the CLOs is but that is something we need to keep monitoring Mr BUDD Thank you Chairman Chairwoman WATERS Thank you The gentleman from Illinois Mr Garcia is recognized for 5 minutes VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 48 Mr GARCIA OF ILLINOIS Thank you Madam Chairwoman and thank you for being here Chairman Powell I would like to return to the topic of climate change for a bit Extreme weather events have had a great impact on the Midwest and working-class communities like those in my Chicago district and they are often the hardest-hit during such disruptions Climate change is also a risk to the financial sector Jim Cramer host of Mad Money on CNBC in a discussion last week said major institutional investors want nothing to do with fossil fuels because of concerns about climate change To guard against climate change impacts the Bank of England has decided to stress test the UK’s largest banks and insurance companies against the risks associated with climate change Will the Federal Reserve follow suit and develop climate-related stress tests Mr POWELL We are monitoring what the Bank of England is doing By the way those are stress tests that are not like our stress tests in the sense that they would have direct effects on the bank’s ability to make distributions and things like that They are really trying to make an assessment So we will be watching that carefully We haven’t made a decision to proceed with something like that Mr GARCIA OF ILLINOIS Good I am encouraged Looking ahead incorporating climate change into economic forecasts will become more important Climate disasters such as Hurricane Maria in Puerto Rico or the wildfires that swept through California last year are currently labeled transitory risks by the Federal Reserve But we know extreme weather events will become more frequent and severe with the likely result a corresponding increase in economic losses and physical risks the brunt of which will be felt by communities of color and working-class communities Chairman when the Fed develops its economic forecasts at what point should climate change shift from being considered a transitory factor to a structural factor Mr POWELL Our forecasts both the individual ones that FOMC people like me write down and the staff forecasts are not for the sort of longer term What is important is the next year the next 2 years the next 3 years And climate change just operates on a longer cycle than that Of course as you suggest as severe weather becomes more common and that is connected to climate change you will see those things entering the forecast period and it is certainly entering our supervisory practices as well as our economic forecasting Mr GARCIA OF ILLINOIS Okay In a recent speech at the San Francisco Fed’s Conference on the Economics of Climate Change Fed Governor Lael Brainard said ‘‘By participating more actively in climate-related research and practice the Federal Reserve can be more effective in supporting a strong economy and a stable financial system ’’ Do you agree with Governor Brainard’s statement If yes what more will the Fed do in the future to identify and mitigate the financial risks of climate change Mr POWELL I do think it is incumbent on us to do the research and understand the implications of climate change for our supervisory roles and our roles in looking after financial stability and that is what we are doing I think it is early days for that but the VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 49 public will expect that we do that and that we take the measures that we need to take to make sure that the financial system is resilient Mr GARCIA OF ILLINOIS Do you agree with her statement generally Mr POWELL That statement I do yes Mr GARCIA OF ILLINOIS Okay Thank you Big bank mergers and market concentration—3 months ago the Federal Reserve approved a merger between BB T and SunTrust which created the sixth-largest bank in the U S with more than $450 billion in total assets and the Federal Reserve’s own research suggests that the failure of a single $250 billion bank would be far worse for the economy than the failure of 5 separate $50 billion banks Furthermore the former FDIC Chair Mr Gruenberg has warned that the FDIC would not be able to wind down a bank the size of the combined BB T SunTrust without imposing significant losses on the deposit insurance fund and potentially destabilizing the financial system In this light can the Federal Reserve justify its conclusion that ‘‘this transaction would not appear to result in meaningfully greater or more concentrated risk to the stability of the financial system ’’ Mr POWELL Yes I think we can and I think we did We evaluate these mergers under a very clear statutory framework very transparently We had a number of public hearings on it and looked at all the statutory factors and essentially you have 2 banks coming together to form a regional bank that is akin to or smaller than many of the other regional banks and it doesn’t appear to me to have significant financial stability implications at all Mr GARCIA OF ILLINOIS Thank you Mr Chairman I yield back Madam Chairwoman Chairwoman WATERS The gentleman from Tennessee Mr Kustoff is recognized for 5 minutes Mr KUSTOFF Thank you Madam Chairwoman and thank you Mr Chairman for appearing today I heard your statements in your opening remarks about the coronavirus and certainly in regards to some of the questions that you have had today I noticed this morning in a report that Axios listed they quoted from the Global Port Tracker and it said that traffic at U S ports is expected to decline in February almost 13 percent and in March between 9 and 10 percent year over year Now assuming that those numbers are true and correct what impact if any would that have on the retail sector and what impact if any would that have on the overall economy Mr POWELL I think there is a lot of uncertainty around what the ultimate economic effects will be outside of China and particularly in the United States We do expect consistent with that report that there would be some effects The question really will be what will be the size and scope of them and also will they be persistent or will it be something that just passes through And ultimately the bottom-line question for us is does it represent a material change in the outlook something that we should react to with monetary policy That is really the question for us and it is really VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 50 too early to say We will be monitoring it like everyone else will very carefully and that is where we are Mr KUSTOFF Along those same lines and also from Axios they quoted from a Bank of America security report They said they surveyed 3 000 companies about the global supply chain and that many companies around the world are looking at relocating The called it in the report a ‘‘tectonic shift’’ in global supply looking to other areas of South Asia India and also North America My question to you—first of all I don’t know whether you are familiar with the study this Bank of America securities study or report Are those numbers or those anecdotal statements consistent with anything that the Federal Reserve is seeing Mr POWELL I am not familiar with that report and therefore can’t comment on it I would say there are a number of channels through which this could have an effect the first of which is just tourism really The second is that our ability to export to China is less because there is just less going on there so exports could go down You mentioned supply chains Many U S companies buy intermediate goods as part of creating their final product so supply chain issues we don’t have any real evidence on that yet And I would say the last channel is really financial markets financial markets themselves can be a channel for the transmission of risk off behavior which can affect economic behavior We will be looking at all of that It is way too early to say what it will amount to We are just going to have to wait and see There is no way to be kind of confident of anyone’s assessment and there are a range of assessments Mr KUSTOFF Based on what you just said I think I know your answer but I will ask it anyway The report mentioned a number of reasons One is the tariffs between our country and China and the impact that it has had on China and subsidiary companies but also automation and the increase in automation Does that sound consistent with relocating these supply chains Mr POWELL Yes separate from the questions about the virus there clearly has been on the part of American companies a lot of activity in moving to other jurisdictions Vietnam in particular gets mentioned quite a bit I saw a report last week A number of other countries have had American businesses moving their production activities out of China to other locations and that certainly has happened Mr KUSTOFF Including the United States Mr POWELL Yes Mr KUSTOFF Thank you Or relocating back to the United States I guess along those same lines I represent part of Memphis and west Tennessee In Memphis just outside my district there was an announcement Amazon made 2 or 3 weeks ago that they are locating a new facility there It will bring 1 000 jobs and incidentally we had questions on the minimum wage They are going to start their wages at at least $15-an-hour plus benefits But it talked about these new jobs in combination with automation automation in terms of packing and shipping You have talked about your concerns of automation and the effect that will have on VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 51 employment in the future Can you see the two coexisting for instance like with this Amazon plant Mr POWELL Over the last 21⁄2 centuries we have seen advancing technology and there has been a concern that it would replace human labor and that has happened But what has happened though is it has made human labor over time more productive So there is displacement of current workers but over time advancing technology has led to rising incomes But that doesn’t mean there won’t be disruptions and a lot of pain for people in the short term but nonetheless the process over time has led to rising incomes Chairwoman WATERS The gentleman from Florida Mr Lawson is recognized for 5 minutes Mr LAWSON Thank you Madam Chairwoman Mr Chairman welcome to the committee And I would like for you to explain to me for the past almost 3 hours 2 hours and maybe 45 minutes when you were talking and members on the committee were speaking in terms of how well the economy is doing how we have more opportunity for jobs in the economy when you started speaking the Dow was up 125 points and while you were speaking it went down Can you tell me why when something like this occurs who is listening to your speech this morning in front of the Financial Services Committee that would cause the Dow to go down Is it because of the cuts in the interest rate How do you explain it Mr POWELL I really can’t I am not following the market as I sit here answering your questions Mr LAWSON Okay I know that the President tweeted out something similar that when you started the Dow was up and then the Dow went down Do you react to that or it doesn’t really mean that much to you Mr POWELL I’m sorry Do I— Mr LAWSON Do you react to that The President tweeted also about how the Dow went down and the cutting of interest rates Do you react to that or is it just something that happens Mr POWELL My colleagues and I are completely focused on using our tools to support the American people to support the achievement of our goals and that is really all we are focused on Mr LAWSON Okay Explain to me too from a staff report they stated that starting in July of last year about 3 different times the interest rate was cut by a quarter percent How do you make the decision Did that stimulate the economy when you made those cuts all the way through October a quarter percent cut in the interest rate Mr POWELL We were really looking at a few things when we did that and yes the intention was definitely to support the economy Part of it was to offset the effects of global factors and there I would say just the slowdown in growth in the global economy just went on and on and we felt the need to offset that and also take out some insurance against the effect that might have on the United States Trade policy uncertainty was weighing on the U S economy We tried to offset any potential effects and take out some insurance there And the third reason was that we wanted to do what we VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 52 could to guard against a more prolonged shortfall of inflation from our symmetric 2 percent objective We have supported growth to support inflation moving back up So those were the reasons why we did those 3 things and that is the thinking that we had and that we announced Mr LAWSON Okay Could there be a correlation between the growing student crisis and the slowdown of the housing market which we talked about a great deal in the last couple of months As you know many borrowers of student loans are not able to get homes because of their high debt-to-income ratio Could that be a signal that there is a great need to address first the mounting student debt crisis Mr POWELL I would say that the rising student debt is certainly a concern It has been rising fast and is now large There is increasing evidence that shows that students who can’t pay that and can’t service that debt have difficulty having normal economic lives and buying homes and things like that I haven’t seen any evidence that would suggest that it is an important factor currently today driving the housing industry I would say the housing industry has actually been—activity in housing has been moving up here over the course of the last 7 8 months as the effect of lower rates and just an overall good labor market and things like that are showing up in more house building and also housing sales Mr LAWSON My time is about to expire I have a lot of students in my district in the Fifth Congressional District many of them coming out of school One of the things they are concerned about is the housing issue with going into the job market how can they best share in the American Dream like their parents without getting help from their parents And so with that Madam Chairwoman I yield back Chairwoman WATERS Thank you The Chair wishes to remind Members that we have a hard stop at 1 p m today The gentlewoman from Massachusetts Ms Pressley will be the final Member to ask questions today With that the gentleman from Indiana Mr Hollingsworth is recognized for 5 minutes Mr HOLLINGSWORTH I appreciate the time and I both in private and in public have been extremely complimentary of the work that you and your colleagues have done not only in calibrating conditions to match the current economy but also in the framework by which you make many of your decisions and how you present that in public I really appreciate that And I know a cornerstone of what you have been trying to do at the Fed is bring even more transparency to the Fed in some of the decision-making and the press conferences that you have had have added a lot of transparency to it It is hard for me to understand some of the challenges in CCAR and the stress capital buffers and some of the more vague language or inability to pin down a timeline for changes to that expectation of changes to that especially when 2020 CCAR has already started I know Mrs Wagner also asked about this I had asked Vice Chair Quarles about this in December I think I sent a letter to you and Quarles signed by every member on this side of the aisle on VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 53 Financial Services just trying to get a feel for what are the changes that are going to be made what is the timeline for those that would undertake these stress tests getting those changes They are trying to make decisions with trillion-dollar balance sheets multi-billion-dollar balance sheets trying to make their plans This time is now upon us and I feel like we are still being very vague about what is coming down the pike and when we can expect even whatever that is that is coming down the pike when we could expect that to arrive before us And so I wondered if you might give some more color on that or give some reasons why you and your colleagues have been a little more hesitant to answer that Mr POWELL I can’t give more clarity than exists so I will just say again we do expect that the core of the stress capital buffer will be incorporated into the stress test this year and we will do that in a way that is timely for CCAR Mr HOLLINGSWORTH Okay In our previous conversations I think we had had just kind of a general agreement and don’t let me overstate that if that is incorrect that some of the aspects of this needed to be calibrated We put a lot of this into play postDodd-Frank We felt like we were doing the right thing in doing so but perhaps we either had unintended effects maybe the intended effects were not as great as we thought they would be or perhaps this wasn’t the area we needed to focus on And I think we had agreed that some of this requires significant calibration going forward Do you expect that there will be further review and calibration of these tests to reflect either current conditions or alternatively what we have learned since the crisis about what works and what doesn’t work and what may be adding to significant reserves at many of these institutions Mr POWELL My strong view is that capital the levels of capital particularly in the largest institutions are about right and there is not a need to raise or to lower them and that should reflect that Mr HOLLINGSWORTH Just out of curiosity tell me when you say ‘‘about right ’’ buttress that with data Help me understand kind of what do you look at to say this means ‘‘about right ’’ Mr POWELL Capital levels are much higher and the quality of our capital is much higher Mr HOLLINGSWORTH That is undoubtedly true but I think we all agree that during the crisis or pre-crisis capital levels weren’t adequate So to say that they are higher isn’t definitive in terms of are they too high Are they still too low Are they about right What do you use to indicate this is the ‘‘about right’’ level of capital Mr POWELL The stress test for one You look at the stress test and you throw a scenario that is equivalent or maybe even a little stronger than what happened during the global financial crisis and you see do these institutions have the wherewithal to remain reasonably well-capitalized and really well-capitalized enough to continue to have the confidence of the markets That is really the question They have to be above certain minimums and they do but not by some giant margin It doesn’t suggest that capital is too VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 54 high It suggest that it is just about right And the stress tests are probably a great test for that Mr HOLLINGSWORTH Yes I think you could see how it might be concerning for institutions that feel like they are caught in a bit of a circular logic right We can try these stress tests and then if they chin the bar on the stress test then we believe that is right that is exactly right without going back and changing some of the underlying factors that go into the stress test You can always say that right You can always say as long as they chin the bar that it is about right no matter what the bar is They want to go back and just look underneath the hood and say gosh are these assumptions still correct The way that we have done these stress tests is it the right way to do that Right Maybe in a relative sense yes it is higher the capital is higher than what the stress tests have indicated but in an absolute sense we are not asking the question is this testing the right thing and are we doing this test correctly and does it include all the right variables And I think that is what they are looking for is just further clarification on when we can expect that review comprehensively that the Fed has talked about for so long Mr POWELL I think we have been doing that all along We had a conference on the stress test last summer with experts both internal and external—academics people from the banks We are doing that all the time Everything we do with the stress test is transparent public out for comment things like that Maybe not ex ante but people can look back It is not like we haven’t adjusted the stress test Chairwoman WATERS The gentlewoman from Massachusetts Ms Pressley is recognized for 5 minutes Ms PRESSLEY Thank you Madam Chairwoman and I also want to thank the activists in the room who have been organizing for a more responsive Fed I know having been raised by a tenants’ rights organizer that activism can be a full-time job and so we thank you for taking it on and I thank the Chairman for testifying before the committee today Just as with the Fed now the decisions you make do impact everyday working people Your decisions impact how many jobs we have who has what jobs how much they are being paid and who is most harmed when unemployment is higher In the past you have said ‘‘We want prosperity to be widely shared We need policies to make that happen ’’ However the Fed’s approach has never successfully ensured enough well-paying jobs are available to everyone who wants to work even for a small time In a 1944 address FDR called for a second Bill of Rights which included the right to a useful and financially rewarding job Justice Thurgood Marshall argued that the right to a job is secured by the 14th Amendment And Dr Martin Luther King called on the government to guarantee a job to all people who want to work and are able to work Dr King’s legacy is often reduced to just one speech and the March on Washington often mischaracterized The March on Washington was actually the March on Washington for Jobs and Freedoms It was a march for economic justice And I take special claim to the fact that Dr King and Coretta actually met in Boston I represent Boston and I don’t think that VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 55 she gets enough credit for the role that she played in the movement And after Dr King’s assassination Coretta Scott King picked up the mantle pushing the Fed to adopt a full employment mandate and was actually standing behind President Carter as he signed the Humphrey-Hawkins Act into law and that is the reason that you are here today In the interest of time if you would indulge me and answer as succinctly as possible yes or no Mr Chairman given persistent concerns about inflation do you believe that the Federal Reserve can achieve full employment and by full employment I mean anyone who wants to work and can work will have a job available to them Mr POWELL First thank you for that history I didn’t know that That is our goal That is what we are working to do at all times And I think we are never going to say we have accomplished that goal but we certainly have made some progress Ms PRESSLEY I will take that as a yes Could a Federal jobs guarantee succeed where the Federal Reserve has not Yes or no Mr POWELL That is a hard one to answer I don’t know Ms PRESSLEY Guaranteeing a job that is the history that I was providing that anyone who wants to work and is able to work— Mr POWELL I think the numbers on that— Ms PRESSLEY Okay Chairman Powell by all indications the U S economy has had output well below potential for 8 of the past 10 years and for most of the decade prior Is it true that most of that period has seen unemployment well above target while we almost never have seen inflation above target Mr POWELL That is true Ms PRESSLEY Okay Meanwhile Black unemployment remains double that of white unemployment Now the Fed began raising rates in 2016 even though inflation was still below target and when rates go up unemployment tends to as well Did the Fed consider how raising rates would disproportionately impact those who were already struggling to secure employment like communities of color individuals who were formerly incarcerated and our immigrant neighbors Mr POWELL I would say that unemployment has continued to go down quite significantly since we began to raise rates at the end of 2016 actually the end of 2015 Ms PRESSLEY But again did the Fed consider how raising rates would disproportionately impact those who were already struggling to secure employment Mr POWELL I think our consideration was really that the right thing to do was to get monetary policy back toward a place where it reflected an economy that had recovered quite a bit for the benefit of all people including low- and moderate-income people including minorities Ms PRESSLEY A lot of people are still recovering But in the interest of time given that there have been no signs of the economy overheating since then and you are now cutting rates is it possible you began cutting rates too soon Mr POWELL I think history will judge that We have to make the decisions in real time Though we really have learned some- VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI 56 thing since then which is that unemployment can be lower than most people thought without inflation Ms PRESSLEY Bearing that in mind knowing what you know now would you still have supported raising the interest rates when the Fed did Mr POWELL I did support it then and hindsight is 20–20 I think you have to judge those decisions on what we knew at the time Ms PRESSLEY Would more Americans have jobs today if the Fed had not increased rates over the past 3 years Mr POWELL I don’t know We are at a 50-year low That is a fair question Ms PRESSLEY Thank you Mr POWELL Thank you Chairwoman WATERS I would like to thank Chairman Powell for his testimony today The Chair notes that some Members may have additional questions for this witness which they may wish to submit in writing Without objection the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness and to place his responses in the record Also without objection Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record Thank you all and this hearing is now adjourned Whereas at 1 02 p m the hearing was adjourned VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K DOCS HBA042 000 TERRI APPENDIX February 11 2020 57 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00061 Fmt 6601 Sfmt 6601 K 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Jkt 095071 PO 00000 Frm 00088 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 27 here 42819 027 84 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00089 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 28 here 42819 028 85 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00090 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 29 here 42819 029 86 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00091 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 30 here 42819 030 87 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00092 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 31 here 42819 031 88 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00093 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 32 here 42819 032 89 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00094 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 33 here 42819 033 90 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00095 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 34 here 42819 034 91 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00096 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 35 here 42819 035 92 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00097 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 36 here 42819 036 93 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00098 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 37 here 42819 037 94 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00099 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 38 here 42819 038 95 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00100 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 39 here 42819 039 96 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00101 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 40 here 42819 040 97 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00102 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 41 here 42819 041 98 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00103 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 42 here 42819 042 99 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00104 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 43 here 42819 043 100 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00105 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 44 here 42819 044 101 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00106 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 45 here 42819 045 102 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00107 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 46 here 42819 046 103 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00108 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 47 here 42819 047 104 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00109 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 48 here 42819 048 105 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00110 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 49 here 42819 049 106 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00111 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 50 here 42819 050 107 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00112 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 51 here 42819 051 108 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00113 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 52 here 42819 052 109 VerDate Nov 24 2008 15 51 Jan 16 2021 Jkt 095071 PO 00000 Frm 00114 Fmt 6601 Sfmt 6601 K DOCS HBA042 000 TERRI Insert offset folio 53 here 42819 053 110