CEOInterviews.AIFed Chair Powell Testifies Before the Senate

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Jerome Powell0:00

The committee slowed the pace of interest rate increases over its past two meetings. We will continue to make our decisions meeting by meeting, taking into account the totality of the incoming data and their implications for the outlook for economic activity and inflation. Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we'd be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time. Our overarching focus is using our tools to bring inflation back down to our 2% goal and to keep longer-term inflation expectations well anchored. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done. To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. At the Federal Reserve, we will do everything we can to achieve our maximum employment and price stability goals. Thank you. I look forward to your questions.

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Sherrod Brown1:41

Thank you, Mr. Chair. There are 23 of us on this committee. Almost everyone will be here today. I ask each of us to stay as close to the five minute mark as we can because we have votes at 11:30. So thank you all for your cooperation. Chair Powell, thank you. Job growth is strong as unemployment remains historically low. You might not know that from the opening statements. Many drivers of inflation, corporate greed, rising inequality, supply chain disruptions, Russia's bestiality, if you will, in Ukraine won't get better because of interest rate increases. Every indication is that this post-pandemic economy is different. Should we be worried, Mr. Chair, that the Fed is treating this economic period as it has in the past instead of reacting differently?

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Jerome Powell2:28

Thank you, Mr. Chairman. We've been aware since the very beginning and have discussed this publicly on many occasions that there are some differences this time. In particular, we have not seen the kind of supply side collapse that we saw at the very beginning of the inflation outbreak, also the outbreak of a war which had significant effects on commodity prices a year ago. So all that is different. There are also though some similarities. There is a mismatch between supply and demand. You can see that in the goods sector still, you saw it in housing prices going up over 40% since before the pandemic, and you see it in the labor market where we have 1.9 job openings for every unemployed person. So we're well aware that this particular situation involves a mix of forces, not all of which our tools can affect, but there is a job here for us to do in better aligning demand with supply.

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Sherrod Brown3:28

Okay. Understanding you have limited tools to address inflation and our conversations in the past show my concern about continued rate increases that may not actually address the root cause of inflation. They hurt workers and I just, many of us contend we can't follow the same old playbook. Next question.

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Senator3:47

Last year, three banking regulators issued proposed updates on the Community Reinvestment Act to account for changes in our banking system. My question is, does the Fed remain committed to work with FDIC and OCC to finalize a CRA rule, and when will that rule likely be finalized?

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Jerome Powell4:03

Yes, we do remain committed, and I believe we are in broad agreement with the other two agencies on the revisions to the rule. So now we're in the process of writing all that down, and that will take some time. After that, of course, it will come to the Board of Governors for a vote, and that will involve briefings and discussions. I can't give you an exact date, but as quickly as possible. Yes, but it will be some months.

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Senator4:29

Okay. Thank you. Banks weathered the shock of the COVID-19 shutdowns mostly because of the fiscal response provided by Congress. We now see a spike in loan delinquencies, an increase in overall risk. Banks are again plowing billions, as many other corporate leaders always defended by people on that side of the aisle, into stock buybacks, which makes me concerned that if there's a downturn in the economy, banks could end up with too little capital. That's why I'm worried about any potential rollbacks of safeguards or regulations. Can you assure me that the Fed will keep capital requirements strong and exercise more long-term, forward-thinking than corporate CEOs that seem to be focused on the short term?

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Jerome Powell5:14

I can assure you as to the first part, that we'll keep capital requirements strong.

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Senator5:20

I didn't expect you to comment on or give me an opinion about your looking more forward than companies that look at the short-term benefits of stock buybacks. Mr. Chair, when you last testified, I asked you about the risk posed by crypto assets, stablecoin, the Fed, and other regulated possibilities. How's the Fed evaluating the risks of crypto-related activities by your supervised institutions?

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Jerome Powell5:46

This is something we've been quite active in. I'll say that we believe that innovation is very important over time to the economy. We don't want to stifle innovation. We don't want regulation to stifle innovation in a way that just favors incumbents and that kind of thing. But like everyone else, we're watching what's been happening in the crypto space. What we see is quite a lot of turmoil, fraud, a lack of transparency, run risk, lots and lots of things like that. So what we've been doing is making sure that the regulated financial institutions that we supervise and regulate are careful, are taking great care in the ways that they engage with the whole crypto space, and that they give us prior notice. We've issued along with the FDIC and the OCC a number of issuances and notices to that effect.

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Sherrod Brown6:42

Thank you. And I will close with this. I've long pushed for the Fed to prioritize workers and for the leaders of the Fed to reflect the diversity of our country. We've made progress, but our work is not done. We have a new opening. Understand it's not your job to appoint the new Fed member. We have a number of upcoming vacancies at the Reserve Banks. I support Senator Reed from Rhode Island, Senator Menendez from New Jersey, and other colleagues who are pushing for more diverse voices at the Fed. Senator Scott.

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Tim Scott7:10

Thank you, Chairman. Obviously, the chairman and I both have strong passions about the challenges that we face as a country. The one thing that I do believe that we agree on is the importance of having a strong capital markets as it relates to making sure that Americans have the ability to continue to grow their businesses and to solve their challenges. And frankly, I hope that we get there. Building on the same comment that Chairman had around capital standards is where I'm going to go with my thoughts today. When I think back on these last few years, it's hard not to recognize the extraordinary efforts our financial institutions of all sizes, frankly, undertook to administer a program like the PPP, all while weathering a shutdown of our global economy. I welcome your thoughts, but from my viewpoint, our banking system was resilient. Our financial institutions stepped up and delivered aid to support families and businesses every single day. That's why Vice Chair Barr's broad comments around holistic review of our capital trouble me so much. We should be laser focused on our economy and addressing the needs of everyday Americans, trying to forge a new future and helping them open the door to opportunity. As you and I both know, capital and its quality must be continually scrutinized. But increased capital does not necessarily provide an increased benefit. And requiring banks to hold capital that is not risk-based and appropriately tailored to a bank's size, scope, and activities can cause more harm than good. At a time of record inflation where everyday needs are more expensive, we should not be pursuing actions that are harmful. Rather, we should be supporting the engine of our economy, small businesses. While I remain greatly concerned by the vice chair's comments, I am hopeful that you will ensure this review is appropriate, keeping the impacts on our banking system front and center. We must promote and further the growth of our economy and thereby our people. Anything less should be unacceptable. To that end, will you commit that any ongoing capital review by the Federal Reserve will follow the law and that any follow-on regulatory proposals will be risk-based and tailored to an institution's activity, size, and complexity and not a one-size-fits-all?

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Jerome Powell9:38

Yes. I can easily commit to that. You know, we're very strongly committed to tailoring. I can say that anything we do will reflect tailoring, which is a long-held principle for us and also now a requirement in the law.

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Senator9:51

Yes, sir. Thank you very much. Two weeks ago, I sent a letter with Chairman McHenry to Chair Gensler regarding the SEC's climate disclosure rule, urging him to rescind his proposal and reminding him that the SEC is a market regulator, not a climate forecaster. Much like Congress designed the SEC to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation and not to advance progressive climate change policies, Congress designed the Federal Reserve to promote price stability and maximum employment, not to play politics. To that end, I find worrying the Fed's announcement of recent actions to consider climate-related scenarios, coupled with remarks by the vice chair of supervision as attempts to incorporate broader ESG policies into the financial services system. Banks have and continue to account for weather-related risks in their risk management. But efforts that attempt to predict climate change far into the future fall outside the scope of their authority. Importantly, the level of speculation required in these models should highlight their arbitrary and capricious nature. At a time when our economy is suffering from historically high inflation, I expect our central bank to focus its time and resources on bringing inflation down, not on policy outside of its mandate. I noted in my opening statement a recent speech that you've given about the state of the Fed and how you should resist the temptation to broaden its scope and to address social issues. Do you agree that the Federal Reserve does not have the authority or statutory direction to use its monetary policy or supervisory tools to weigh into the ESG or other climate policies?

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Jerome Powell11:42

I do. I do. As you know, there is a tightly focused role that we do have that I believe that we have, but I would agree with your statement.

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Senator11:51

Mr. Chairman, I have 20 seconds left, but I'm going to defer because of my earlier question to my opening statement.

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Sherrod Brown11:57

Thank you, Senator Scott. Senator Menendez is close but not here yet. So, Senator Rounds, a nice try.

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Mike Rounds12:09

Thank you, Mr. Chairman. Mr. Chairman, first of all, welcome. It's always good to have you in front of our committee. As you know, both core and headline inflation have remained persistently elevated, and over the past 12 months, real average hourly earnings fell by 1.8%, about 4% since President Biden took office. To make ends meet, as prices increase, more Americans are leaning on credit cards. At the end of 2022, credit card debt hit a record of $930.6 billion, an 18.5% spike from a year earlier, and an average credit card balance rose to $5,850. Over the past year, the Fed has acted aggressively to tame inflation, and yet we are still seeing price increases. We've discussed this several times, but I recognize that it's been an ongoing discussion. I believe that this further proves that we have long been feeling the effects of a policy-induced inflation resulting from decisions by the Biden administration, primarily cutting off the resources necessary to improve and increase domestic energy production. I continue to be concerned that if you attempt to use the tools that are available at this time for the Fed, then I believe that we're going to have a challenge of not being able to address specifically the challenges brought out when you have a policy promoting higher prices with regard to energy, as opposed to what you're trying to do, which is to bring down the total overall cost. I just wanted to ask, and you're going to think this is something that we've heard before, but do you believe that you currently have the monetary policy tools to actually reduce inflation? I put it in this perspective. In January of 2021, the CPI was 1.4%. When the Biden administration began in January of 2022, and this is before the Russian invasion of Ukraine, CPI was at 7.5%. Today, March of 2022, CPI is 8.5%. Wouldn't it be fair to assess that a lot of the policy or the inflation that we've seen here may very well be due to policy decisions by this administration?

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Jerome Powell14:39

Senator, it's not for us to point fingers. Our job is to use our tools. You asked whether we have the tools to get this job done, and we do over time. There are some things that we can affect, but over time we can achieve 2% inflation, and we will.

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Mike Rounds14:55

In other words, you've got a limited number of tools available to you, and the limited number of tools that you have are designed to impact simply the reduction in prices and so forth. And yet, if there are competing interests out there that are pushing prices higher, you don't have the wherewithal to decide one tool versus another based on whether it's policy-induced or whether it is a matter of a shortage in supplies from outside or whether it's war-related.

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Jerome Powell15:25

That's right. Our tools essentially work on demand, moderating demand, so that's what we can do.

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Mike Rounds15:31

So if there were policies in place that actually helped to reduce inflation, in other words, and by that I'm just going to look at energy alone just as a good example. If policies were in place that were actually allowing energy prices to come down in the United States, then you would have less of a need to use the very blunt tools that you do have right now with regard to increasing rate increases. Is that a fair statement, sir?

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Jerome Powell15:59

In a sense it is, but I would just say on energy we...

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Mike Rounds16:02

I'm not trying to get you to a policy discussion with what the president's doing on his energy policy. I just want to make it clear that you have to respond to what's in front of you and it doesn't matter where the inflation is coming from or what's driving it up. You're simply trying to bring it back down to that 2% number with the only tools that you've really got.

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Jerome Powell16:21

Yes. But I will say on energy, energy has tended over time to fluctuate up and down and is not mainly affected by our tools. The things we look at are really things that are tightly linked to demand in the US economy. Those we can affect.

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Mike Rounds16:37

I think just the fact that you've been increasing interest rates and yet inflation continues to ride up would suggest, just as you've just indicated, that when you have high energy prices, it's tough to impact that part of it with the monetary policy that you've got available to you.

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Jerome Powell16:54

We focus on everything, but we also focus on core in particular, which doesn't include energy prices. What's happened is core inflation has come down but nowhere near as fast as we might have hoped, and it has a long way to go.

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Mike Rounds17:08

Thank you. One last question. Last June, Vice Chairman of Supervision Michael Barr testified before this committee that he would defend the use of the aggregation method as an alternative approach to the insurance capital standards, the ICS proposed by the IAIS, as the final compatibility criteria set to come out later this year. Can you confirm that you share Vice Chair Barr's views on this?

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Jerome Powell17:34

I will confirm that, but I'll have to get back to you on the status of that.

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Mike Rounds17:37

Okay. Thank you. Thank you, Mr. Chairman.

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Sherrod Brown17:39

Thanks, Senator Rounds. Senator Menendez of New Jersey is recognized.

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Bob Menendez17:42

Thank you, Mr. Chairman. Mr. Chairman, I want to take this moment to remind my colleagues that there are more than 62 million Latinos that call the United States home. We are the largest minority group in the country. We account for nearly 20% of the United States population. We contribute almost $3 trillion in GDP. Yet, Latinos have no representation in the Federal Reserve's leadership. In the 109-year history of the Federal Reserve, there has never been a single member of the Board of Governors or regional bank president who has the lived experience of being Latino in the United States. And in practice, that means that the voices of nearly one-fifth of our country's people are repeatedly drowned out when the Fed is making critical decisions on economic policy. Decisions that affect whether a Latino family can afford their first home, find a job that pays a living wage, send their children to college, save for a comfortable retirement, or get a loan to expand their business. Right now, the Biden administration has a clear opportunity to make history with its next nomination to the Board of Governors. It has identified a number of highly qualified Latino candidates who are dedicated their careers to the field of economics, who are committed to the Fed's dual mandate, who will preserve the independence of the central bank. The administration has rightly nominated and advocated for a number of diverse candidates with similar qualifications both at the Fed and elsewhere. But despite having five opportunities over the past two years to nominate a qualified Latino economist to serve at the Federal Reserve, this administration has repeatedly chosen not to. Representation or lack thereof does not happen by accident. It is a choice. And I hope the administration makes the right choice with this nomination. Mr. Chairman, would you say that it is a truism that the United States dollar is the reserve of choice in the world?

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Jerome Powell19:54

Yes, I would.

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Bob Menendez19:54

And that brings us enormous benefits, does it not?

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Jerome Powell19:57

Yes, it does.

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Bob Menendez19:57

Now, 12 years ago, a Republican House brought us to the brink of defaulting on the debt for the first time in history of this country, jeopardizing our credit and the world economy. I'm getting a sense of deja vu because once again, Republicans are recklessly demanding draconian spending cuts to programs that hardworking US families rely on in exchange for allowing the Treasury Department to pay for spending that Congress, including most of them, have already voted to authorize. You want to talk about spending cuts. It seems to me that the budget is the time to do that, but not to put the full faith and credit of the United States at risk. Chairman Powell, can you talk about the catastrophic damage a debt default would inflict on the economy?

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Jerome Powell20:46

I will start by saying that these are really matters between the executive branch and Congress. We do not seek to play a role in these policy issues. But at the end of the day, there's only one solution to this problem, and that is Congress. Whatever else may happen will happen. But Congress really needs to raise the debt ceiling. That's the only way out in a timely way that allows us to pay all of our bills when and as due. And if we fail to do so, I think that the consequences are hard to estimate. But they could be extraordinarily adverse and could do long-standing harm.

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Bob Menendez21:25

Well, I think that's a mild statement of what would happen. I understand I didn't ask you to engage in the congressional executive branch roles. I asked you about the abstract question of what happens if you have a debt default. Isn't even this constant fight putting into question the possibility that the United States will not honor its full faith and credit have consequences within the economy?

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Jerome Powell21:52

In principle, it could. I think markets tend and observers tend to watch this and tend to think that it will work out, and it has in the past worked out. So it needs to work out this time too.

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Bob Menendez22:03

Now, seeing your testimony before the committee, is it fair to say that you'll do whatever is necessary to tame inflation?

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Jerome Powell22:12

We serve a dual mandate and we will do everything we can to restore price stability while also serving maximum employment.

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Bob Menendez22:20

And primarily that means additional rate increases, would it not? What other tool do you have?

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Jerome Powell22:27

That's what we have. The shrinkage of the balance sheet will continue to, but it's principally rate hikes.

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Bob Menendez22:31

So the question is, when does that part of doing anything necessary to tame inflation come into conflict with your other mandate of maximum employment?

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Jerome Powell22:43

Not now when we have the lowest unemployment in 54 years and a labor market that is extremely tight. So that time could come, but it really isn't now when we're very far from our price stability mandate and the economy is past most estimates of maximum employment.

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Bob Menendez23:10

Thank you, Mr. Chairman.

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Sherrod Brown23:11

Thanks, Senator Menendez. Senator Kennedy of Louisiana is recognized.

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John Kennedy23:15

Thank you, Mr. Chairman. Chairman Powell, thank you for being here. Thank you to you and your team for helping to save the economy during the pandemic meltdown. For what it's worth, I'm generally supportive of the actions of the Fed right now. And I'm not going to ask you today to blame anybody. When Congress spends money, it stimulates the economy, does it not?

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Jerome Powell23:49

Well, it would depend on whether that's funded by tax increases or not. But if there's spending that's not accompanied by taxes, would have a net at the margin stimulative effect.

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John Kennedy24:01

Well, and when Congress borrows money to spend even more, that stimulates the economy even more, does it not?

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Jerome Powell24:11

At the margin. Yeah.

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John Kennedy24:13

Okay. If Congress reduced the rate of growth in its spending and reduced the rate of growth in its debt accumulation, it would make your job easier in reducing inflation, would it not?

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Jerome Powell24:40

I don't think fiscal policy right now is a big factor driving inflation at this moment. But it's absolutely essential that we do slow the pace of growth particularly for the areas of the...

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John Kennedy24:51

All right, let's try to unpack this then. I'm not trying to trick you. You're raising interest rates to slow the economy, are you not?

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Jerome Powell25:01

Yes, to cool the economy off.

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John Kennedy25:04

And one of the ways you measure your success, other than fluctuation in gross domestic product, is the unemployment rate. Is it not?

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Jerome Powell25:15

Yes, one of the measures.

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John Kennedy25:16

Okay. So, in effect, I'm not being critical. When you're slowing the economy, you're trying to put people out of work. That's your job, is it not?

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Jerome Powell25:25

Not really. We're trying to restore price stability.

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John Kennedy25:28

No, you're trying to raise the unemployment rate. I know you don't like the phrase, so let me strike it. You're trying to raise the unemployment rate, aren't you?

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Jerome Powell25:41

No, we're not trying to raise it. We're trying to realign supply and demand, which could happen through a bunch of channels like, for example, just job openings.

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John Kennedy25:50

Let me put it another way. Okay. The Economist did a wonderful study. They looked at 10 disinflationary periods in America going all the way back to the 1950s. Disinflation is what you're trying to do. It's a slowing in the rate of inflation. Am I right?

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Jerome Powell26:13

Yes.

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John Kennedy26:14

In other words, prices don't go down, they just don't go up as fast. Deflation is when prices actually go down. You're trying to achieve disinflation, are you not?

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Jerome Powell26:25

Yes, we are.

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John Kennedy26:25

Okay. Based on history, in the 10 times that we got inflation down since the 1950s, in order to reduce inflation by 2%, unemployment had to go up 3.6%. Now, that's history, is it not?

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Jerome Powell26:46

I don't have the numbers in front of me, but yes, the standard has been that there have been recessions and downturns when the Fed has tried to reduce inflation. Right now, the current inflation rate is 6.4% and the current unemployment rate is 3.4%.

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John Kennedy27:01

Now, if history is right, unless you get some help, in order to get inflation down from 6.4% to let's say 4.4%, the unemployment rate is going to have to rise to 7% based on history. That's what the record would say. Okay. And to get inflation down to 2.2% based on history, an immutable fact, unemployment would have to go to 10.6%. Would it not?

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Jerome Powell27:39

No, I wouldn't. I wouldn't.

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John Kennedy27:40

That's what the record shows. That's what the history shows.

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Jerome Powell27:42

I don't think that kind of a number is at all in play here.

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John Kennedy27:47

I know you're reluctant to admit it and you don't want to get in the middle of a policy dispute, but I think it's undeniable. It's undeniable that the only way we're going to get this sticky inflation down is to attack it on the monetary side, which you're doing, and on the fiscal side, which means Congress has got to reduce the rate of growth of spending and reduce the rate of growth of debt accumulation. Now, I get that you don't want to get in the middle of that fight, but the more we help on the fiscal side, the fewer people you're going to have to put out of work. Isn't that a fact? Please answer.

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Jerome Powell28:33

Could work out that way.

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John Kennedy28:35

It could work out that way. Yes, sir. Thank you.

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Sherrod Brown28:37

Thank you, Senator Kennedy. Senator Reed of Rhode Island is recognized.

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Jack Reed28:40

Thank you very much, Mr. Chairman. Thank you, Chairman, for being here today. We saw in the wake of COVID, the globalized supply chain disrupted significantly, and we're in the process in some respects of rebuilding a supply chain with emphasis on sourcing in the United States. To what extent did that disruptive supply chain contribute to inflation, and to what extent will the new supply chain that is located in the United States and other friendly countries affect inflation?

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Jerome Powell29:14

The initial outbreak of inflation was all about spending on goods where people couldn't spend on services. So good spending went way up, and the global supply chain for many goods is imported. The global supply chain has collapsed, and that was the source of the original inflation. It has now spread over the last two years to housing and also to the rest of the service sector. So to your question, we are seeing goods prices, goods inflation has been coming down for some time now. It's still too high, but it's coming down. Housing services is in the pipeline. You see the new leases that are being signed. What that tells you is that in the next 6 to 12 months, we will see that come down. But this big service sector that's everything else—financial services, medical services, travel and leisure—all of those things, that's really where the source of the inflation we have now is, which had nothing to do with the supply or not much to do with the supply chains. That's where the challenge is now.

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Jack Reed30:13

And is there anything you can do that would target that service area without affecting the other areas?

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Jerome Powell30:18

There's not really. Our monetary policy tools are famously powerful but blunt.

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Jack Reed30:28

A different topic: as you are probably aware, the Fifth Circuit delivered a ruling in the Community Financial Services Association versus CFPB that the CFPB's funding mechanism is unconstitutional. Just like the Board of Governors, the CFPB is a bureau of the Federal Reserve. Both the Board of Governors and CFPB rely on the same source of funds and draw on those funds in virtually identical ways. If the Board of Governors' funding structure was found unconstitutional, what would the implications be for the country and monetary policy?

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Jerome Powell31:05

Well, it would be very significant, but I have to say we have significant responsibilities. I would be reluctant to comment on a case that's before the Supreme Court. But it is certainly something that people have examined for possible ramifications.

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Jack Reed31:22

Yes. And you know, central banks tend to be self-funding because of the way they work, and that's a key factor of our independence. We've been going back and forth on the impact of rate hikes on workers. You've indicated previously that wages have not been spiraling upwards necessarily and that inflation expectations are currently stable. But the impact of increased interest rates are usually felt more by low to moderate income people. Is there any way you can work yourself out of that dilemma?

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Jerome Powell32:03

Where we are right now is of course very low unemployment. Wages have been moderating, and they've been doing so without softening in the labor market, without a rising unemployment really, and that's a good thing. We really don't know. The current situation is a combination of more typical supply and demand issues but also just things that we haven't seen before, like the war in Ukraine, like the supply chains that you mentioned. We have many unusual factors, and I don't think anybody knows with confidence how this is going to play out.

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Jack Reed32:39

Thank you very much, Mr. Chairman.

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Sherrod Brown32:43

Thanks, Senator Reed. Senator Britt of Alabama is recognized.

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Katie Britt32:45

Thank you, Mr. Chairman. Chairman Powell, it's great to have you here today. Over the past two years, we've seen the highest inflation of my lifetime, driving up costs for American families across the board. According to the US Department of Labor, the annual inflation rate in 2021 was 7%, and in 2022 it was 6.5%. According to the US Department of Agriculture, the cost of food went up 10% in 2022. The real effects of that are moms and dads across this nation that are working to put food on the table for their kids, for their babies, had a harder time doing that. This has devastated hardworking Americans, causing a kitchen table crisis in every corner of our country as the price of food, energy, and housing have all skyrocketed. In response, the Federal Reserve has raised the federal funds rate more than four percentage points. Being far from transient, inflation has remained persistent, high, and well above the Fed's long-run goal of remaining under 2%. In the coming year, what factors and indicators are you paying attention to as you and the Federal Open Market Committee decide on whether to increase rates?

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Jerome Powell34:10

I'd say a couple things to that. First, we're going to be looking at inflation in the three sectors that I mentioned: the goods sector, the housing sector, and then the broader service sector. We need the inflation that's already underway in the goods sector to continue. That's really important. In the housing sector, we just need time to pass so that reported inflation comes down, and it's effectively in the pipeline as long as new leases are being signed at relatively small increases. We'll be watching very, very carefully though at the larger service sector, which is 56% of consumer spending and more than that of current inflation. That's one thing. Also, we raised rates very quickly last year, and we know that monetary policy tightening has delayed effects. It takes a while for the full effects to be seen in economic activity and inflation. We're watching carefully to see those effects come into play. We're aware that we haven't seen the full effect yet, and we're taking that into account as we think about rate hikes.

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Katie Britt35:17

So when you're looking at this, obviously not to get into a policy discussion, but if there were an increase of energy production in this country, do you feel like that would help drive down inflation?

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Jerome Powell35:28

Well, I think over time more energy would mean lower energy prices, but we are very focused on what we call core inflation, because that is what is driven by demand, and our tools are really aimed at demand.

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Katie Britt35:44

Right. Understood. But I feel like the cost of energy is not just what you pay at the pump. It ends up affecting every good across this great nation. Additionally, I'd like to ask you about labor participation. When you look at the unemployment rate, and we've heard my colleagues discuss people having to be displaced in order for us to maybe get to the inflation rate that we would like as a nation. I'd like to focus on the labor participation rate. Right now it's 62.4%. If there were an increase in people coming back into the workforce, would that be a positive factor with regards to driving us down to the 2% rate that you would want to achieve?

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Jerome Powell36:19

I think that it would. I mean, remember those people coming into jobs? That would be great because the economy clearly wants more people than are currently working. Of course, those people would then spend more. So it wouldn't be a zero-sum game, but it would be great for the country and great for them if they were to come into the labor force.

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Katie Britt36:34

Amen. I believe that increasing capital requirements on financial institutions would have a chilling effect on the economy and the availability of financial services. Last week, I joined many of my colleagues in sending you a letter that expressed concerns that if the Federal Reserve decides to conduct a 'holistic review' of capital standards, as we heard Senator Scott talk about earlier. So, is the Federal Reserve concerned that the impact to the economy of increasing capital requirements on financial institutions at a time when inflation remains persistently high would cause an issue?

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Jerome Powell37:12

I think it's always a balance. We know that higher capital makes banks safer and sounder. We also know that you will at the margin provide less credit the more capital you have to have. But I think it's never exactly clear that you're at perfect equilibrium, and it's a fair question to look at that.

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Katie Britt37:32

I know out of respect for the chairman and trying to stay in my time, I will just end by saying I heard what you said obviously. As you have said, the Federal Reserve is not and will not be a climate policymaker. I just want to thank you for your public statement on that. I agree with you that there's a difference between policymakers and financial regulators, and certainly look forward to working with you in the future. Thanks, Senator.

S

Sherrod Brown37:54

Senator Warner from Virginia is recognized.

M

Mark Warner37:57

Thank you, Mr. Chairman. Chairman Powell, it's good to see you again. Let me start by saying, depending on who's asking questions, they're either pounding you for how quickly we're going to drive that inflation back to 2% or pounding you on making sure that we don't push the economy into a recession and drive up unemployment. I got to tell you, these are maybe not the cheap seats, but I actually think you've done a pretty good job in terms of both ratcheting up rates and then starting to tail off a little bit. I think we all were concerned by the January numbers where it popped up a little bit more. I wish, Mr. Chairman, we were actually having this hearing two weeks from now because we're going to have a lot more data later in this week and next week. But I want to net net, we've still got ways to go and the January numbers were concerning, but I do think your tailored approach... we can all second guess, but I think it has been the right approach, and I want to commend you on that. I want to get two questions in. One of the areas that I am very worried about is commercial debt. We've got a Bloomberg story here showing we're going to hit a $6 trillion wall this year on refinancing. Where I'm particularly concerned is the issue around commercial real estate. As we recover from COVID, a lot of things are getting back to normal, but clearly the transformation of where people work is going through a fundamental transition. I hope people do return more to the office, but lots of folks prefer working elsewhere. That's going to fundamentally change the real estate market on the commercial side. I do believe we're going to hit potentially a cliff here of a totally unexpected problem in terms of commercial real estate. How are you looking at that issue? Recognizing there are lots of bumps coming out of COVID, this one seems to be more unique in nature. How are you thinking about that issue?

J

Jerome Powell40:06

On commercial debt, business debt generally, it's kind of been moving sideways as a percent of GDP. So you don't see a big spike going on or anything like that. However, of course, there are pockets of concern, and particularly you pointed to the refinancing spike that has to happen. I've seen those come and go before. Generally, markets can absorb them, maybe at a much higher rate this time, but it's something that we're well aware of and watching carefully. In terms of CRE, I would agree with you. The occupancy of office space in many major cities is just remarkably low, and you wonder how that can be. Over time, some of that's going to be made into condominiums and things like that, since we don't seem to have quite enough housing in some places. But the question is what's the financial stability risk. It's not great. The largest institutions don't tend to have a lot of direct exposure to that. Some smaller banks actually do. Medium and small-size banks do. We carefully monitor it. We agree that that's an area that requires a lot of monitoring, and I'd say we're on the case.

M

Mark Warner41:23

Well, that will morph me into my last question. Something we've talked about, and a lot of my colleagues have talked about, with the large institutions and other... I do think even some of the biggest critics of Dodd-Frank would acknowledge our banking system is a heck of a lot stronger and was able to withstand COVID in a very healthy way. But what we've also seen evolve is a vast amount of financial institutions move beyond the regulatory perimeter. The fact that we now have way over half of the mortgage origination coming from non-financing institutions because a lot of the large entities, hedge funds, other funds that may be doing some of this commercial debt or some of the CRE debt. I'd like you to talk generally in the last 40 seconds or so about how you think about this regulatory perimeter. I'm a big believer, and I know some of my colleagues are, that we ought to look less at charter and look at same risk, same regulation maybe as a guiding principle. Senator Warren's been working on some work, I've been working on some work around crypto around that area, but there's a vast amount of activity that's taking place outside the regulatory perimeter. How should we be thinking about that, and how do we make sure that doesn't create the kind of crisis sneak-up that happened in 2008 on the non-regulated side of the house?

J

Jerome Powell42:50

I think you articulated the principle very well. It's same activity, same regulation, and that covers crypto and all kinds of other activities. People are going to assume when they deal with something that looks like a money market fund that it has the same regulation as a money market fund or a bank deposit. Stablecoins need some attention in that respect. I just think that's the basic principle. And you're right, so much of our intermediation has moved away from the regulated banks really for a long period of time. We got to keep an eye on that.

M

Mark Warner43:22

We can keep looking at it. I hope it's...

S

Sherrod Brown43:24

Thank you, Senator Warner. Senator Hagerty of Tennessee.

B

Bill Hagerty43:28

Thank you, Chairman Brown. And thank you very much, Ranking Member Scott, for holding this hearing. Chairman, it's great to see you again here. I appreciate your presence, and I appreciate the opportunity to talk with you about an item that I'm particularly concerned about, and that's the holistic review that Senator Britt just brought up that Vice Chair Barr is conducting right now. It's generating a sense that higher capital requirements are on the horizon for us. As I think about that in the context of what we've weathered, you think about the situation in 2020—it was an acute, real-life stress test, if you will. I think that our financial system navigated that admirably. In the past, Chairman Powell, you've told this committee that our financial system has proven resilient through 2020 and that the capital levels at that point in time (and I would note that those capitals are at multi-decade highs) are in aggregate adequate. I just wanted to follow up on those prior statements and see if you still feel that way.

J

Jerome Powell44:28

I would say it to you this way. In our system, we have a vice chair for supervision who has statutory responsibilities. When a new vice chair for supervision comes in, generally they're going to want to take a fresh look. That's what the former one, Vice Chair Quarles did, and that's what... Dan Tarullo kind of had the job on an informal basis, and that's what he did. So it's only natural that someone would come in and take a fresh look, and I think that's part of the process. The role of that person is to make recommendations on regulation and supervision to the full board. The role of the board is to consider those when made. This to me comes under that heading.

B

Bill Hagerty45:08

Well, as the review is underway, and I appreciate that context, one aspect of it seems to be an apparent willingness to undo the tailoring requirements that were enacted as part of S.2155. I understand that nothing has been finalized regarding the regulations. It's a concerning prospect if that's the case. The Fed's general counsel just yesterday alluded to undoing S.2155 by 'pushing down the Basel requirements' on banks that were intentionally given relief in that bill. I want to be perfectly clear that the banking regulators themselves can't just simply ignore or selectively enforce the laws. Again, I realize that the details of the study haven't been finalized or made public, but if the proposal put forth by Vice Chair Barr is either unduly aggressive or appears to contradict the spirit of S.2155, will you vote for it?

J

Jerome Powell46:02

I'd have to... I can't answer that in the abstract of course. But I would say that we as an institution are very strongly committed to tailoring, and anything we do is going to reflect tailoring of institutions according to their risk. I mean, that's a principle that we'll stick with.

B

Bill Hagerty46:19

I think it's quite important given the legislative intent here and the concerns that we maintain, um, in the face of what general counsel said just yesterday. I appreciate your perspective in terms of keeping that in place. I'd like to come with my next question, Chairman Powell, with... starting the question by underscoring the importance of the independence of the Fed's monetary policy. Right now, the economic picture is about as uncertain as I can remember. We've had large companies in the private sector who are in the midst of planning layoffs and forecasting serious economic weakness in the quarters to come. Yet, on the other hand, the current economic data seems to be robust. Inflation showed some signs of softening in the past several releases. So I just hope, Chairman Powell, that you could briefly tell us how you synthesize these seemingly contradictory data.

J

Jerome Powell47:08

Quickly, at the end of last year, we saw a couple of very promising moderate readings on inflation in November and December. But earlier this year, some of that improvement was revised away. In addition, we got a very strong reading on inflation in January. Also, a very strong jobs reading, also very strong retail sales. So as I pointed out in my testimony, we are looking at a reversal, really, of what we thought we were seeing to some extent, a partial reversal. It's still the case that we're seeing progress on inflation. We're seeing goods inflation come down significantly. There's improvement in housing inflation in the pipeline. There's not a lot of improvement yet to be seen in the largest sector, which is non-housing services. So, core inflation is running at 4.7% on a 12-month basis. I think nothing about the data suggests to me that we've tightened too much. Indeed, it suggests that we still have work to do.

B

Bill Hagerty48:10

In that context and thinking about where the tightening goes and when it might happen, where do you see the terminal fed funds rate landing in this cycle?

J

Jerome Powell48:20

We last wrote down our individual assessments to that in December, and I think the median range was basically people were clustered between five and five and a half. We're going to write those down again as part of the... we do it four times a year. We'll do it around the March meeting, which is on the 21st and 22nd of March. As I indicated in my testimony, I think the data we've seen so far, and we still have other data to see before the meeting, suggests that the ultimate rate we write down may well be higher than what we wrote down in December.

B

Bill Hagerty48:55

Got it. Thank you, Mr. Chairman.

S

Sherrod Brown48:56

Thank you.

E

Elizabeth Warren49:02

Thank you, Mr. Chairman. So the Fed has raised interest rates eight times over the last year in what has been the most extreme rate hike cycle in 40 years. The Fed's goal is to slow inflation, and your tool—raising interest rates—is designed to slow the economy and throw people out of work. So far, you haven't tipped the economy into a recession, but you haven't brought inflation entirely under control either. And maybe the reason for that is that other things are also keeping prices high—things you can't fix with high interest rates, things like price gouging and supply chain kinks and a war in Ukraine. But you are determined to continue to raise interest rates. So I want to take a look at where you're headed. In December, the Fed released its projections on the state of the economy under your monetary policy plan. According to the Fed's own report, if you continue raising interest rates as you plan, unemployment will be 4.6% by the end of the year. More than a full point higher than it is today. Chair Powell, if you hit your projections, do you know how many people who are currently working, going about their lives, will lose their jobs?

J

Jerome Powell50:20

I don't have that number in front of me. I will say it's not an intended... it's an unintended consequence.

E

Elizabeth Warren50:27

But it is, and it's in your report. That would be about two million people who would lose their jobs. People who are working right now, making their mortgages. So, Chair Powell, if you could speak directly to the two million hardworking people who have decent jobs today who you're planning to get fired over the next year, what would you say to them? How would you explain your view that they need to lose their jobs?

J

Jerome Powell50:52

I would explain to people more broadly that inflation is extremely high and it's hurting the working people of this country badly. All of them. Not just two million of them, but all of them are suffering under high inflation. And we are taking the only measures we have to bring inflation down.

E

Elizabeth Warren51:10

And putting two million people out of work is just part of the cost. And they just have to bear it.

J

Jerome Powell51:15

Will working people be better off if we just walk away from our jobs and inflation remains five, six percent?

E

Elizabeth Warren51:23

Let me ask you about what happens if you do this. Since the end of World War II, there have been 12 times in which the unemployment rate has increased by one percentage point within one year. Exactly what you're aiming to do right now. How many of those times did the US economy avoid falling into a recession?

J

Jerome Powell51:47

It's not as black and white as...

E

Elizabeth Warren51:50

Looking at the numbers, it actually is pretty... Alan Blinder's written a book on this. There have been 12 times that we've seen a one-point increase in the unemployment rate in a year. That's exactly what your Fed report has put out as the projection and the plan based on how you're going to keep raising these interest rates. How many times did the economy fail to fall into a recession after doing that out of 12 times?

J

Jerome Powell52:15

I think the number is zero.

E

Elizabeth Warren52:16

I think the number is zero. That's exactly right. So then the question becomes, we've got two million people out of work. Can you stop it at two million people? History suggests that the Fed has a terrible track record of containing modest increases in the unemployment rate. Once the economy starts shedding jobs, it's kind of like a runaway train. It is really hard to stop. In fact, in 11 out of the 12 times that the unemployment rate increased by a full percentage point within one year, unemployment went on to rise another full percentage point on top of that. If that's what happens this time, we'd be looking at at least three and a half million people who would lose their jobs. So, Chair Powell, if you reach your goal and two million people get laid off by the end of this year, and then just like in 11 out of 12 times that unemployment has risen by a point in a single year it keeps on rising, and then we've got two and a half million people out of work, three million, three and a half million... What's your plan?

J

Jerome Powell53:36

Right now, the unemployment rate is 3.4%, which is the lowest in 54 years. And we actually don't think that we need to see a sharp or enormous increase in unemployment to get inflation under control.

E

Elizabeth Warren53:48

I'm looking at your projections. Do you call laying off two million people this year not a sharp increase in unemployment? Four and a half percent. Explain that to the two million families who are going to be out of work.

J

Jerome Powell53:59

We're not targeting any of that. But I would say even 4.5% unemployment is well better than most of the time for the last 75 years.

E

Elizabeth Warren54:10

In other words, you don't have a plan to stop a runaway train if it occurs. Chair Powell, you are gambling with people's lives. There's a pile of data showing that price gouging and supply chain kinks and the war in Ukraine are driving up prices. You cling to the idea that there's only one solution: lay off millions of workers. We need a Fed that will fight for families. And if you're not going to lead that charge, we need someone at the Fed who will.

S

Sherrod Brown54:38

Senator Vance of Ohio.

J

JD Vance54:40

Thank you, Mr. Chairman. Chairman Powell, thanks so much for being here. I have a question that's slightly far afield, but how often do you get to talk to the Federal Reserve chairman, so I might as well ask it. To give some context here, my family comes from Appalachia, particularly my grandparents grew up in southeastern Kentucky coal country and then moved to southern Ohio, where I now have the honor of representing all of Ohio. One of the things that you hear a lot when you study the regional history of Appalachia is it's often described as possessing a resource curse. There's a lot of coal in central Appalachia that enables a certain amount of consumption, obviously consumption is good, people need food and medicine. But there's also a good argument that it causes malinvestment in the region and consequently you have lower productivity growth, lower innovation, an economy that's much less diversified and much less dynamic. I'm wondering when I think about the history of Appalachia and the resource curse, I'm struck by the idea that you could make a similar argument about the reserve currency status of the United States dollar. Americans have enjoyed one of the greatest privileges of the international economy for the last nearly eight decades: a strong dollar that acts as the world's reserve currency. This has obviously been great for American purchasing power, we enjoy cheaper imports, when Americans travel abroad they benefit from lower costs. But it does come at a cost to American producers. In some ways you can argue that the reserve currency status is a massive subsidy to American consumers but a massive tax on American producers. I know the strong dollar is sort of a sacred cow of the Washington consensus. But when I survey the American economy and I see our mass consumption of mostly useless imports on the one hand and our hollowed-out industrial base on the other hand, I wonder if the reserve currency status also has some downsides. Let me put a final point on this and I'd love to get your thoughts. Chairman Powell, we are of course the main supporter of a massive land war in Europe between the Russians and the Ukrainians. I read recently that the United States is trying to ramp up production from 14,000 artillery shells to 20,000 artillery shells per month, while the Russians are firing 20,000 artillery shells in Ukraine per day. When I look at the American economy, we have a lot of financial engineers and a lot of diversity consultants. We don't have a lot of people making things. I worry that the reserve currency status and the lack of control we have over our currency is perhaps driving that. I'd love to get your feedback on that. What are the upsides and downsides of the reserve currency?

J

Jerome Powell57:36

That's a big question to try to answer.

J

JD Vance57:39

You have two minutes, Chairman Powell. So plenty of time.

J

Jerome Powell57:41

I can't even get started on that. We are the world's reserve currency, of course, and that's because of our democratic institutions. It's because of our control over inflation over many, many, many years. The public, the world, trusts the rule of law in the United States, and those are the things. Once you're the world's reserve currency, it's used all over the world in transactions, and it's the place where people want to be in times of stress—in dollar-denominated assets. Of course, we benefit by being able to pay for our goods all over the world, pay for everything anywhere in the world mostly with dollars. That's an advantage. There is some economic theory around that it also has burdens of various kind, but I can't call it all back to mind.

Stable equilibrium, but it's not a perfect one. It's not a permanent one. Rather, there isn't any obvious candidate to replace the United States right now where you can have free flow of capital in and out of the country, where you can really trust the rule of law and democratic institutions, and keeping price stability, which you can here.

J

JD Vance58:55

Do you think it gives us less control over our own currency, the fact that it's become the world's reserve currency?

J

Jerome Powell59:03

Control over our currency? I'm not sure. Essentially what we try to control is price stability, and no, it doesn't make it harder for us to keep inflation under control. The United States has a smaller external sector than most large economies, only about 15%, so mainly what affects inflation in the United States is domestic supply and demand.

J

JD Vance59:25

Do you think it makes it harder for us to affect or fight back against currency manipulation, to control the export and import flows in a way that stabilizes our own manufacturing sector?

J

Jerome Powell59:36

Well, what's important there is really the level of the dollar. When the dollar is stronger, obviously our wares are more expensive abroad and that kind of thing. But we don't have an opinion on that. Matters of the level of the dollar really matter for the Treasury Department and the elected government, not for the Fed.

J

JD Vance59:54

Thank you, Chairman Powell.

S

Sherrod Brown59:55

Thank you, Senator Vance. Senator Van Hollen of Maryland is recognized.

C

Chris Van Hollen59:59

Thank you, Mr. Chairman. Chairman Powell, thank you for being here and for your service. I know the Fed is experiencing lots of challenges these days. I've got a couple questions that are basic yes or nos and then some longer questions. Would you agree that changes in the size of corporate profits can be one of the factors that affects the inflation rate?

J

Jerome Powell1:00:22

Yes.

C

Chris Van Hollen1:00:23

Right. Now, recently we saw that the employment cost index, which measures the growth of wages and benefit costs, grew at roughly 4% on an annualized basis in the fourth quarter of 2022. Is that right?

J

Jerome Powell1:00:37

That's my recollection. Yes.

C

Chris Van Hollen1:00:40

So if corporate profits were to decline from the extremely high levels we saw recently, would it be possible to sustain the 4% growth rate in the employment cost index for an extended period of time even as we get inflation down to the target of 2%?

J

Jerome Powell1:01:00

Depends on what you mean by extended period of time.

C

Chris Van Hollen1:01:02

So you would not, without a very large increase in productivity which would be great but that we don't expect, you wouldn't be able to sustain 4% wage inflation over the longer term. Over the shorter term though, yes.

J

Jerome Powell1:01:17

So over the shorter term, that would not be a justification in and of itself for raising rates. Is that right? In the short term.

C

Chris Van Hollen1:01:25

Well, I think wages affect prices and prices affect wages. We do think that some softening in labor market conditions will happen as we try to get inflation under control, and will need to happen.

Right. But that's more a prediction about your efforts to fight inflation. Are you saying that simply looking at the current 4% growth rate in the short term is an excuse for jacking up interest rates?

J

Jerome Powell1:01:51

No. What I would say is that all the data we look at in the labor market, including not just that measure of wages but others, also unemployment, participation, job openings and quits, all of that put into the picture, I think you see a labor market that is extremely tight and is probably contributing to inflation. I've never said it was the main cause.

C

Chris Van Hollen1:02:17

Right. I think the larger point here, based on your response to that first question about growth in profits, is that corporations have a decision as to whether they're going to pocket more for profit or provide higher wages to their employees. If you actually lowered your profit margins, you could sustain a higher wage increase without violating the 2% inflation. Isn't that right?

J

Jerome Powell1:02:46

Yes. When I hear profit margins, what we're seeing in the economy is pretty much about shortages and supply chain blockages. When there's not enough of a product and there's a lot of demand, you see prices going up. As the supply chains get fixed and shortages are alleviated, you will see inflation coming down, margins coming down, and that will certainly help with inflation.

C

Chris Van Hollen1:03:12

Right, but profits are the margin. They're going up beyond what they were before. That means that even with the increase of costs because of supply chains, they're making more profits, which they can do. But my point is that as a contributor to inflation, as you indicated in response to the first question, let me ask you about the tight labor market. One of the issues in a tight labor market is parents with kids, including a lot of moms who would like to go back into the market but are not able to do so because of lack of affordable child care. The other issue is immigration. I know that you've gotten some recent data on how some immigration figures have softened the tightness in the labor market. Can you talk broadly about those two factors, affordable child care and immigration, more legal immigration, and how they could affect labor force participation and therefore also reduce inflation pressures?

J

Jerome Powell1:04:13

On the first, we don't make recommendations or evaluate fiscal policy, but I will say there's research that shows it helps keep women in the workforce when there's child care available, which is self-evident. The second was immigration. What I talked about with you is actually part of the January Bureau of Labor Statistics report, the employment report for January which comes out in early February. There is a section about more people. The Census Department has increased its estimate of the workforce by something like 870,000, and a significant part of that has been immigration. That has moved up participation by a little bit, and it may be part of why we're hearing that the really intense labor shortage pressures from 2021 and 2022 may be alleviating. That would contribute to that. Clearly the economy is calling for more people, with essentially two job openings for every unemployed person, and this can be a source of those people. That would reduce the tightness of the labor market and reduce pressures on inflation. It may already be doing so.

C

Chris Van Hollen1:05:35

Thank you.

S

Sherrod Brown1:05:39

Senator Cramer of North Dakota is recognized.

K

Kevin Cramer1:05:42

Thank you, Mr. Chairman. Thank you, Chairman Powell, for being here. I can't resist responding to a few things that my friends on the left have said. For example, in his opening statement, Chairman Brown had a long list of things that raising interest rates won't do. I'm going to fill in the blank with a couple things. How about raising interest rates won't stop Senate Democrats and President Biden from overtaxing, overspending, overborrowing, overregulating? Chairman Brown said we should rebuild our supply chain by curbing offshoring. I agree. He talked a lot about corporate greed contributing to inflation. But how about regulatory greed contributing to corporate greed? How do you expect corporations to reinvest money if you overregulate their ability to invest that money right here in the United States? You want to onshore some things? How about energy policy? Instead of looking to Venezuela or Iran for oil supply, or Russia, or looking to China for electric vehicles and chips and solar panels, how about we have a strategy that onsures those things by reducing regulation, reducing taxes, letting those corporations reinvest their profits rather than stock buybacks or dividends. This idea that somehow the Federal Reserve is supposed to keep inflation in check while half of the government works against it is mindboggling. Now, I know you don't like to comment on policy. You and I have been around and round about this. You were anxious to advise us to spend lots of money during the pandemic. I don't think a lot of people blame you for that. You wouldn't respond to efforts by the Biden administration after we're in a robust recovery from not spending so much money. I can appreciate the change, but now we're in this debate between Republicans and Democrats, between the House Speaker and the president on how to raise the debt ceiling. You've made some pretty strong comments about raising the debt ceiling absent from structural reforms that would actually help us get back to reasonable growth. So I warn you again, if you're going to make political comments, if you're going to advise us on policy, be consistent with it. Now, I want to get back to the greening of the Federal Reserve and these stress tests. I'm concerned that the Federal Reserve is starting down this path, maybe slightly at first, about climate stress testing. I just want to ask you this. If we're going to go down that path, if the Federal Reserve is now going to become part of the Federal Climate Police Force, are we going to consider the ramifications of having entire communities and economies, factories and manufacturers, energy entities, large server farms, leaving them susceptible to a very unreliable, very expensive energy source? Is that part of the stress test?

J

Jerome Powell1:09:02

No. Those are considerations for elected people, not for us. We have a narrow role to play here, but it's a real role. I can talk about that if you'd like.

K

Kevin Cramer1:09:11

Well, I would like you to, because if we're going to start doing stress tests for the six largest financial institutions related to climate, which really is more weather than climate, then are we going to consider the effects of an unreliable energy source at several locations throughout our country?

J

Jerome Powell1:09:30

Our only focus is on the safety and soundness of these institutions and do they understand and can they manage all of the risks that they run in their business model. That's our only goal. We're not looking to be climate policymakers. Climate policy is clearly going to have effects on regions, companies, individuals, countries, disparate effects. That is not for unelected people like us who have a narrow mandate. But I think it does touch climate, and you're right to be concerned that we find ourselves on a slippery slope. Honestly, the climate scenarios are something that the banks are already doing themselves, and the climate guidance is something that they're looking for. They want to know how we're thinking about this, but we will try really hard not to get on a slippery slope and find ourselves becoming climate policymakers. It's just not appropriate for an independent agency.

K

Kevin Cramer1:10:27

I completely agree, and I hope you stick to that. I think you ought to ask the banks to consider what vulnerabilities that might expose. With that, with regard to what Senator Warren was saying on her monologue, one thing about ideologues is they have the luxury of binary choices. You have a really big job and you have a single, in my mind one and a half maybe two missions. I think the first one handles the second one. But it's got to be tough when the White House is working against you, and you don't have to comment. Thank you.

S

Sherrod Brown1:11:03

Thank you, Mr. Chairman.

Senator Tester of Montana is recognized.

J

Jon Tester1:11:09

Chair Powell, thank you for being here today and for serving in this critical role at this critical time. I have talked many times in this committee, and I especially right now cannot overstate the importance of the Fed's independence. I said it in the previous administration, I say it now. We cannot be playing politics with our economy. That is a fact. From a climate standpoint, I will just tell you it's entirely artificial right now anyway, because if you look at the hundreds of billions of dollars this country puts out every year in disasters due to climate instability, we ought to be asking if that is sustainable. Because quite frankly, it has to be done, and I don't think it's sustainable. So we've got to start looking for some solutions on the climate side sooner rather than later. The Fed has a tough job, and I really appreciate how you've done it, working together, making hard decisions for the good of the economy. We have to get this right. So the question is, how much has inflation decreased since its peak?

J

Jerome Powell1:12:24

It depends on the measure, but it's meaningfully at least a couple percentage points.

J

Jon Tester1:12:28

Has unemployment gone down as inflation has gone down?

J

Jerome Powell1:12:34

Unemployment has gone down. Yes, it has, to now a 54-year low.

J

Jon Tester1:12:39

So the question becomes, and I always think back to 1998, I bought some property and the interest on that property was 10% in 1998. I thought I got a hell of a deal, by the way. But the truth is, interest rates have been artificially low for the last 20 years probably. The question becomes, as you look at the economy and as you try to make the determination whether the inflation is caused by demand or supply, where does all that fall into your decision making moving forward?

J

Jerome Powell1:13:23

Well, you mean the level of interest rates. In theory, there's this thing called the neutral level of interest, and we know it only by its works. Neutral is the level that neither pushes the economy up nor pulls it down, and it changes over time. That's the thing about these important variables in economics. What happened until now was that the neutral level of interest went down and down to the point where many countries had zero interest rates and very low inflation. Now we have this shock, a series of shocks associated with the pandemic, and we have rates at 4.5%, our policy rate, and we have the labor market very strong and inflation reacting somewhat. It does raise the question of where the neutral rate is. Honestly, we don't know. I think we look at the current situation and we see that there's not a lot of evidence that it's hard to make a case that we've overtightened. It means we need to continue to tighten. We're very mindful of the lags with which our policy works. We don't think we need a significant increase in unemployment, and we're certainly not aiming for one, but we do think there'll be some softening in labor market conditions to get to 2% inflation.

J

Jon Tester1:14:37

When you're looking at interest rates, I know we talk about energy prices here and the price of gasoline, and then if you go over to Europe, it's much higher. Are we comparable with our interest rates here with say Europe?

J

Jerome Powell1:14:56

We're very close to where Canada is. We're a little bit higher than where Europe is. Europe's traditionally had much lower inflation. They now have very high inflation and they're still increasing rates, but they're a bit lower in terms of rates.

J

Jon Tester1:15:08

So if we do not get the inflation under control, and I think the steps you've taken have been reasonable and measured, if we don't get it under control, what are the impacts of that?

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Jerome Powell1:15:24

The social costs of failure are very high. If inflation were to continue, at some point it will become the psychology. People and businesses will come to expect high inflation, and that will make it more self-perpetuating. That will mean an up-and-down economy. It'll mean something that looks more like what we've seen in periods of high inflation. Capital allocation is difficult in a world like that. It's not a good time for the economy. What we want to do is restore price stability firmly back at 2% so that we can have the kind of strong labor market for a sustained period that we had before.

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Jon Tester1:16:07

Once again, thank you for your work. Thank you for your independence.

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Sherrod Brown1:16:11

Senator Daines, thank you.

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Steve Daines1:16:13

Thank you, Senator Tester. I'll be handing off to Senator Cortez Masto when I'm finished up as well. Mr. Chairman, good to have you here today. When I'm back in Montana, the number one issue I hear across the state is the high cost of gas, the high cost of groceries, and overall how their paychecks are shrinking because of inflation. It's a crushing blow. It has real life impacts. It's a top-of-mind issue for Montanans. It's also important to note the devastating impact it's going to have on our nation's economic future. In October of last year, I sent a letter to Congressional Budget Office Director Swagel regarding the impact that high inflation and elevated interest rates would have on the cost of servicing the federal debt. His response painted a less than rosy picture. Then we got CBO's updated 10-year baseline forecast in February, and it confirmed the truly dire situation that we find ourselves in, driven by interest payments on the debt. The CBO now projects that cumulative deficits during the 10-year window will exceed $20 trillion. The cumulative deficits, not the debt, because it's going to grow the total federal debt to more than $51 trillion by 2033. 2033 used to sound like a long way away. We're 10 years away. 10 years goes by very quickly. Within five years, we're going to spend more on annual interest on the national debt than we spend on national defense. Think about that for a moment. These are coming out of the CBO, absolutely shocking but quite frankly predictable projections. Go back to a debate we vigorously had here in the Banking Committee. Remember when Lawrence Summers, former Secretary of Treasury under President Clinton, economic adviser to President Obama, he warned us. He was practically warning my colleagues across the aisle, saying, 'You can't move forward with this purely partisan $1.9 trillion spending extravaganza. We had a trillion dollars of unspent COVID money in December of 2020.' And that passed on a purely partisan vote. We said it's going to start to ignite the inflation fires. So I certainly hope the president's budget, which we expect to see later this week, will propose pro-growth policies that can get us out of this mess. I would argue it's almost an existential crisis as we look at what's going to come at us over the course of the next 10 years with debt and service on that debt. Unfortunately, as the president said in the State of the Union address, he said he's going to raise taxes. That's a recipe for disaster. It's going to crush productivity, discourage investment, stifle economic growth even further. I want to turn to my questions now. Chairman Powell, you're raising interest rates to combat the inflation we've seen in the economy over the past few years. Is that correct?

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Jerome Powell1:19:44

Yes.

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Steve Daines1:19:46

And although this is the domain of Treasury, a higher Fed funds rate will mean higher borrowing costs. Is that correct?

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Jerome Powell1:19:56

Yes, all else equal.

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Steve Daines1:19:59

So I just want to connect the dots here. Inflation was sparked. One of the big reasons was massive spending here in Washington. And now we're going to be bearing the challenges with higher debt service over the course of the next several years, where we're going to see debt service exceeding defense spending, which we see the threats of China, threats around the world. I think it's very concerning. As a grandfather of four, soon to be five grandchildren, the things you think about more and more as you look forward. I want to change here and talk about American energy. When the war in Ukraine broke out, many feared that Russia would cut off natural gas exports and cause energy inflation to spike. Prices didn't spike as much as anticipated due in large part to the fact that American companies stepped up to the plate. As of late last year, the European Union now receives more liquefied natural gas from the United States producers than it does from Russian producers. That's a good thing for the world to see more US-produced energy. Chairman Powell, do you believe that European and American inflation would have been manageable if not for American energy producers?

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Jerome Powell1:21:13

I certainly think that our natural gas assets have helped Europe make the transition.

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Steve Daines1:21:22

Any sense of how much worse the global energy picture would be if you imagine a world where we're not producing and shipping energy to other countries?

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Jerome Powell1:21:32

It'd be hard to estimate, probably worse.

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Steve Daines1:21:36

I think it's been clearly that Europe has managed better than expected, and a part of that story is US energy exports. Also, the winter wasn't as bad, and the Germans made some good decisions. We made some prayers that we need to pray for a warm winter for Europe, and I think they got one, which has been helpful. I'm out of time here. I'm going to send this back over to Senator Cortez Masto.

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Catherine Cortez Masto1:22:01

Thank you, Chairman Powell. It's great to see you. Thank you so much. I know it's been a long morning. I always appreciate you coming to talk with us here on the committee. I want to first align myself with the remarks from Chairman Menendez supporting a Latino nominee to the open seat on the Federal Reserve. It's been more than 100 years and a Latino has never served on the Federal Reserve Board, and I know there are many strong Latino economists and economic experts who would capably serve. So I want to put that out there. Chairman Powell, I also sit on Senate Finance right across the way, and we are talking about affordable housing. For purposes of so many of us across the country, including in Nevada, when we talk about affordable housing, it's also about workforce housing. It's about making sure families that are working so hard have an opportunity to keep a roof over their head. Right now in Nevada, if you're making minimum wage, you have to work 75 hours a week just to be able to afford housing. So I want to talk to you about this. I was distressed to see in the report that activity in the housing sector has contracted as a result of elevated mortgage rates, and you've been talking about that. I often hear from Nevadans who say, 'I don't know if I'm ever going to own a home,' and many feel resigned to being stuck in a cycle of renting. So, Chairman, how do the Federal Reserve economists and leaders think about the balance between keeping interest rates low to spur affordable home building and home buying while addressing inflation?

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Jerome Powell1:23:36

We have a dual mandate from Congress, as you well know, which is maximum employment and price stability. That's really what we take into account. Interest-sensitive spending is the thing that gets the most support when we cut rates and the thing that is most affected when we raise rates, and that means housing to a significant extent. That's not a choice that we make; that's just the way it works. We only have really one tool, which is monetary policy. So we don't try to use our tools to affect broader housing policy, but really just to achieve our statutory goals.

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Catherine Cortez Masto1:24:14

It happens to unfortunately be in effect as you try to achieve your statutory goal.

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Jerome Powell1:24:21

Yes.

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Catherine Cortez Masto1:24:22

And so I want to have you have the opportunity to address Senator Warren's conversation with you earlier about the tools that you have and the impact it has on causing potentially more people to be unemployed, and this obviously has an impact on their ability to afford homes as well. Couldn't you address that?

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Jerome Powell1:24:42

I'd be glad to. I want to be clear that we do not seek and we don't believe we need to have a very significant downturn in the labor market. It's not just hope. If you look at the situation in the labor market, you've got all these job openings, and in principle you could reduce the job openings without seeing a really significant increase in unemployment. Also, you're starting from such a strong labor market. It seems as though you're a long way away from anything that looks like a recession just looking at the labor market by itself. So honestly, we don't know that there will need to be a really significant downturn. Other business cycles had quite different backstories than this one. We're going to have to find out whether that matters or not. But I do think, and I've said all along, my colleagues and I have too, that we believe there is a path to restoring 2% inflation with less significant effects on the labor market than have typically been seen in downturns.

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Catherine Cortez Masto1:25:49

For purposes of the general public, the people Nevadans that I know that are struggling, we have one of the highest unemployment rates in the country. Our service sector was hit so hard. We're still at over 5%. Just in southern Nevada, we have high gas prices, grocery prices, housing prices that are high. One of the things that you have commented on, and you just did again, but I know it was in your opening remarks, and it's quoted right here: 'Our overarching focus is using our tools to bring inflation back down to our 2% goal and to keep longer-term inflation expectations well anchored.' For the general public, for those working families and people, why 2%? Why is getting it to 2% so important?

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Jerome Powell1:26:36

That has become the globally agreed target. Essentially all major central banks target 2% inflation in one form or another.

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Catherine Cortez Masto1:26:46

How does that help my Nevada families? How does that help people in Nevada?

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Jerome Powell1:26:49

I'll tell you how it does. It's not obvious how that is, but what 2% inflation and to have people believe that inflation is going to go back to 2% really anchors inflation there. The evidence is that people's expectations about inflation actually have a real effect on inflation. If you expect inflation to go up 5%, then it will, because businesses and households will be expecting that and it'll kind of happen because they expect it. So having a 2% inflation goal, which we had for many years de facto, then we formally adopted it in 2012, but for years before that we were effectively targeting 2% inflation. What that meant was that inflation was low and predictable. Having a real target and sticking to it, not changing it at convenient moments, we think it's really important that we do stick to a 2% inflation target and not consider changing it. We're not going to do that. People will be better off if the whole question of high inflation is just not part of their lives. That's kind of the definition of price stability: if people live their lives without having to think about inflation all the time.

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Catherine Cortez Masto1:28:07

Thank you. I notice my time is up. Thank you so much.

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Sherrod Brown1:28:09

Senator Lummis.

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Cynthia Lummis1:28:12

Thank you very much, Madam Chairman, and welcome, Chairman Powell. When you're setting these rates and making these decisions and seeking that 2% magic number, are you considering the cost of borrowing for the United States, knowing that Congress has over-borrowed and that we have overspent and that the national debt is now at least 97% of GDP, and that we're going to face challenges of our own making? This is not about what the Fed has done. This is about what Congress has done that you have to factor into your decisions. Do you think about the costs of borrowing for the United States itself?

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Jerome Powell1:29:15

No, we do not, and we're not going to. That would be fiscal dominance if we were constrained in our monetary policy by the budgetary situation of the United States, and we're not. Clearly, the path we're on is not sustainable, but the level of debt that we have is not unsustainable. It is sustainable, put it that way. So we don't think about interest costs when we make monetary policy. We think about maximum employment and price stability.

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Cynthia Lummis1:29:45

It's your opinion that the level of debt we have is sustainable?

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Jerome Powell1:29:50

Yes. We have the largest economy in the world. We can service this debt. That's not the problem. The problem is that we're on a path where the debt is growing substantially faster than the economy. That's by definition in the long run unsustainable. The way countries have fixed that is with longer-term programs that have bipartisan support and that address the actual problem in the budget. That's really the formula.

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Cynthia Lummis1:30:21

Thank you. I'm going to switch to stablecoins. You're a member of the President's Working Group on Financial Markets. The working group called for bank-like regulation of stablecoins in late 2021. Then on January 3rd of this year, in a joint staff statement, the federal banking agencies stated that even after a bank's capital, BSA, AML, and risk management, a bank issuing a stablecoin on an open public or decentralized network is highly likely to be inconsistent with safe and sound banking practices. I'm going to say that again. Even after a bank's capital, BSA, AML, and risk management, a bank issuing a stablecoin on an open public or decentralized network is highly likely to be inconsistent with safe and sound banking practices. So I'm a little confused about where we're heading on stablecoins. Does the January 3rd statement mean that the Fed has decided that stablecoins on a permissionless distributed ledger have no place in banks?

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Jerome Powell1:31:37

I think there are real concerns about permissionless public blockchains, and the reason is that they've been so susceptible to fraud, money laundering, and all of those things. So I think what you heard from the federal banking agencies in one of their reports was that they would tend to look at those as not consistent with safety and soundness.

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Cynthia Lummis1:31:59

And what about properly regulated stablecoins? Do you think they could have a place in our banking system?

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Jerome Powell1:32:07

I certainly think that in a world of appropriate regulation, where the same activity, where stablecoin activity gets the same regulation as comparable products in different places, then there certainly could be a place for stablecoins in our financial services sector.

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Cynthia Lummis1:32:24

Thank you. The European Union, UK, Australia, Switzerland, Singapore, and others have all moved over the last few years to create a legislative framework for digital assets. The European Union in particular is attempting to be a standard setter again, like it was with its data protection rule. Is the United States in danger of being a rule taker, not a rule maker, when it comes to digital assets?

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Jerome Powell1:32:55

I do think it would be important for us to have a workable legal framework around digital activities. I think that is important, and something Congress in principle needs to do because we can't really do that.

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Cynthia Lummis1:33:09

Thank you, Senator Gillibrand, and I agree with you. One area we've already seen is in the Basel Committee on Bank Supervision. They proposed a prudential treatment for crypto assets framework setting forth banks' capital standards for digital assets. The Basel Committee's framework does not impose a capital charge for digital asset custody, whereas the SEC's Staff Accounting Bulletin 121 imposes a prohibitive capital charge through the back door and places consumers at risk in bankruptcy. Similarly, the Basel Committee framework allows banks to issue or hold digital assets on their balance sheet if the requisite capital is set aside. So back to January 3rd, 2023, the Fed and other bank regulators have said that it is forbidden for a US bank to conduct these activities no matter the capital. So my question is, what does the rest of the world know about digital asset regulation that we do not, that the Fed does not?

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Jerome Powell1:34:20

As we discussed, this is an SEC staff accounting bulletin, and it's not something that the Fed issued. I'd be loath to comment directly on it.

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Cynthia Lummis1:34:33

The issue that concerns me is that the Fed and other federal banking agencies are not following international norms on digital asset regulation. That's just my comment. Thank you, Chairman Powell, for being here. I now recognize Senator Smith.

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Tina Smith1:34:54

Well, thank you. Chair Powell, it looks as if Senator Britt and I are the last people standing at this committee hearing. Thank you for passing on the gavel to Senator Lummis. I want to thank you for your service and for our recent conversation. Before I get into my questions, I would just like to note there's been a good back and forth amongst our committee around some of the big economic challenges and opportunities that we face in this country. I would just like to note that the programs and the spending that the ranking member and some of our colleagues have blamed for inflation provided critical relief that kept working families and small businesses afloat during a global pandemic. In fact, many of these policies were passed on a bipartisan basis and signed into law by both Republican and Democratic presidents. I also just want to add that the laws that the Democrats passed to lower prescription drug costs and health care costs and to lower energy costs for Americans are helping to lower basic costs for families. All of which, by the way, was fully paid for. So I return to what you have said to me privately and to all of us publicly, which is that what we ought to be looking for is striving for bipartisan solutions to find a path forward. In fact, Senator Lummis and I were just talking about this yesterday when it came to housing policy. So I just want to put that out there. When you and I spoke yesterday briefly, we talked about the Community Reinvestment Act, and I appreciated the chair raising this point earlier in the hearing. I want to return to that briefly. I am very glad to see it's been about a year since the Fed, the OCC, and the FDIC issued their proposed rule to modernize implementation of the Community Reinvestment Act. I don't think the proposal was perfect by any means, but it does make really important improvements to how, through the CRA, financial services organizations can serve and meet the needs of communities that are full of assets but lack the resources to make it happen like wealthy communities can. Chair Powell, you indicated that you expect this new CRA rule to be finalized in the coming months. Is that what you indicated?

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Jerome Powell1:37:16

Yes, that's right.

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Tina Smith1:37:17

Can you tell us, with the departure of Dr. Brainard, who will be spearheading the CRA efforts?

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Jerome Powell1:37:24

I've asked Vice Chair Barr to be responsible for moving the project forward. Of course, it has to go to the whole board, and everyone gets a vote on that, but he'll be pushing it forward.

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Tina Smith1:37:38

That's great. Thank you. I was glad to see that disaster preparedness and climate resiliency were added to the definition of community development activities that would be eligible for CRA credit. This is important because low- and moderate-income folks and the communities they live in often face some of the worst impacts of climate change and extreme weather events. This isn't social engineering. This is dealing with the actual costs and challenges that people experience because of climate change. Chair Powell, can you talk to us a little bit about how you see that change and how it fits with the CRA's overarching objectives?

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Jerome Powell1:38:14

I think it fits for the reasons that you said. Honestly, I'm a week or so away from getting a briefing on where the proposal lies. So I'm reluctant to touch on that. I'd rather wait until after I'm fully briefed on where that agreement came out after the FOMC meeting.

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Tina Smith1:38:33

Thank you. That's fine. I'll look forward to continuing this conversation with you and with Mr. Barr. I think you know my view is that climate change and the economy are inextricably linked, and the reality is that climate-related action or inaction has a direct financial impact on people and our economy. I was wondering if you would be willing to update us briefly on some of the next steps that the Fed is going to be looking at as you evaluate the resilience of financial institutions with respect to climate risk. There's this pilot project that started in January of this year, and I'm curious to know how you see next steps there.

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Jerome Powell1:39:19

We're doing really two things. One is we are doing a climate stress scenario, which the large banks, the six that we're working with, are already doing. That's really just to begin the process of understanding the risks associated with this over the longer term. They're already doing it, and there's a lot of learning going on around the world. The other thing we're doing is providing guidance. The banks want clear guidance. They actually want one set of rules globally. The big banks that do business around the world are hoping that they aren't in a world where there are different regulatory regimes everywhere they go. So we're working on that as well.

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Tina Smith1:40:00

Great. Thank you very much, Mr. Chair.

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Sherrod Brown1:40:02

Thank you, Senator Smith. Senator Tillis of North Carolina is recognized.

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Thom Tillis1:40:07

Thank you, Mr. Chairman. Chair Powell, thank you for being here. In your opening statement, I was here for that. I think you touched on some of the interest rate-sensitive components of GDP and non-interest rate-sensitive components of GDP. I think you said that we do have a concern in the latter group, inflation expectations, labor market tightening, etc. Can you tell me a little bit about how you're looking at the interest rate-sensitive and non-interest rate-sensitive readings and whether the Fed, what sort of Fed actions can take place to avoid a hard landing?

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Jerome Powell1:40:51

Sure. The housing sector is interest-sensitive spending. That is the thing that is very directly affected by our policies almost right away, and the poster child for that is housing. You've seen mortgage rates go up back over 6%. You've seen housing starts come down. Activity in housing has declined as people are reluctant to get out of the low-rate mortgages they had before. So housing activity is slowing down. On the other hand, housing prices went up in the aggregate more than 40% since the beginning of the pandemic. So we may be seeing some price correction on that too. Housing inflation, which is a big part of the CPI and a little smaller part of the PCE, the inflation measures we rely on, will be coming down because of the slowdown in the housing market. The service sector is probably less interest-sensitive than that. That's restaurants, travel and leisure, healthcare, financial services, all those services. That's a big part of our economy. This sector is 54% or 56% of consumer spending on non-energy and food. It's very important. It's about having a little bit softer demand and about having some softening in labor market conditions. We think our tools will work on that, but we do expect that will take time.

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Thom Tillis1:42:32

Thank you. I know the chairman in his opening comments mentioned a belief, I don't want to misquote them, but a belief that we have too little capital in the banking sector. That may be true of a couple of banking institutions. But how do you feel about the current capital that our broader banking sector, irrespective of where they are in size? What concerns, if any, do you have about the capital that we see out there already?

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Jerome Powell1:43:04

I supported all of the capital raising that we did. I joined the Fed in 2012, and we were in the middle of implementing all those Dodd-Frank increases, and I supported all of them after careful thought and discussion with my colleagues. The new vice chair is doing what new vice chairs do, which is to take a fresh look and ask the question, even though I think we all agree capital is strong, certainly the vice chair does, the question is whether it is at the right level. That's what happens with a new vice chair for supervision. We don't have any proposals yet, but at some point we will.

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Thom Tillis1:43:39

I'm going to be meeting with the vice chair and we'll drill down on that topic. I do know that several members, well first off, we know that Vice Chair Barr is looking at a holistic review of capital requirements. I think that's a good idea. But I have to ask a question. Does the Fed consider the bipartisan Senate Bill 2155, which is currently the law of the land, to be superior to any of the Basel requirements or any holistic review process? It is the law of the land. How does that weigh into how these reviews go?

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Jerome Powell1:44:20

2155 was about tailoring. Dodd-Frank actually called for tailoring, and what 2155 did was it changed 'may tailor' to 'shall tailor' and also changed the thresholds. Tailoring is an absolutely bedrock aspect of our bank regulatory system, and anything that we do is going to reflect what we think is appropriate tailoring between the different sizes and risks of the financial institutions that we supervise and regulate.

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Thom Tillis1:44:54

What we were trying to accomplish as a part of that, I don't expect you to respond, I know that we're coming to the end of the hearing, is that a holistic review of a financial services institution is going to reveal the fact that many of these financial institutions are very different based on the activities that they're most involved in. Those holistic reviews may actually result in increasing capital requirements for two banks that look like peers but not for another because of the inherent risk associated with their business focus. Does that make sense?

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Jerome Powell1:45:31

To your earlier point, the Dodd-Frank language, as amended, actually requires that we take those things into consideration. So we certainly will.

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Thom Tillis1:45:41

Thank you.

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Sherrod Brown1:45:41

Thanks, Senator. Senator Ossoff of Georgia is recognized.

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Jon Ossoff1:45:46

Thank you so much, Mr. Chairman. Before I begin my questions, I know that this committee will soon consider a new nominee to serve on the Federal Reserve Board of Governors. While it has not historically been the case, it seems to me that the board should reflect the diversity of our nation, that those things are connected, policy and representation are connected. I hope that we will see sitting before this committee a nominee that pushes us closer towards our ideals of e pluribus unum, out of many, one. I support Senator Menendez and others who have called for a diverse nominee, specifically the fact that we've never had a Latino person serve on the Federal Reserve Board. I think it's a huge oversight, and I hope we can move quickly in that direction. That said, my state of Georgia is in a housing crisis like much of the country. The Federal Reserve Bank of Atlanta has designated owning a home in Atlanta as unaffordable to the average home buyer. But this is not just a city problem. Harris County, Georgia, with a population of less than 35,000, sitting on the border of Alabama, is also rated as unaffordable. In the midst of this housing crisis, the Federal Reserve continues to raise interest rates. This makes mortgages a lot more expensive for families, especially young families looking to buy a house. According to the National Association of Realtors, the share of first-time home buyers is at an all-time low, while the average age of a purchaser is at an all-time high. Chair Powell, you have said that there has been an imbalance in the housing market. But if you're a Georgia family, parents in their mid-30s, young children, and all you want is to be able to afford your first home and place and build equity to one day pass that equity on to your kids, how are the Fed's actions helping that family afford a home?

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Jerome Powell1:48:02

Our mandate is to provide maximum employment, use all our tools to foster maximum employment and price stability. We're using those tools now to restore price stability at a time of the highest inflation in 40 years. The same people who are having high mortgage costs if they have a floating rate mortgage are also experiencing high costs for all the basic necessities of life. One of our most fundamental roles at the central bank is to keep price stability. So we have to prioritize that in what we do.

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Jon Ossoff1:48:41

I understand the tools and the mandate, but my concern is that we could have a cure that's worse than the disease. It doesn't do families any good if we stabilize housing prices while mortgage rates continue to skyrocket. It doesn't matter to me why a house is unaffordable. Maybe the house is unaffordable. Maybe the mortgage is unaffordable. Unaffordable is unaffordable. How does the Federal Reserve continue to consider the total price of home ownership, including cost of mortgages, in executing that mandate to keep prices stable?

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Jerome Powell1:49:17

Housing inflation is a very important component of various inflation indexes. The way that's calculated is economists look at rents, and for people who own a home, they impute a rent depending on the value of the home. So it actually does factor in. Measures of new leases being signed and new housing prices show significant declines in inflation, not in price, but in inflation. That will play through so that overall inflation over the course of the next six months or a year will decline.

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Jon Ossoff1:50:00

If we're seeing mortgage rates go up, yes or no, does this discourage folks who may have a low interest mortgage rate from putting their home on the market and then possibly paying double the cost on a mortgage for their new house?

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Jerome Powell1:50:13

It certainly could. People who are in a fixed-rate low-rate mortgage, I would assume many of them are not moving.

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Jon Ossoff1:50:23

Does raising the federal interest rate change the cost of borrowing for a company hoping to develop new housing?

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Jerome Powell1:50:30

Yes.

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Jon Ossoff1:50:31

Does it make it more expensive for suppliers to finance expanding production to meet supply needs?

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Jerome Powell1:50:36

It does.

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Jon Ossoff1:50:37

Does it give businesses less wiggle room to offer higher wages and attract qualified workers?

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Jerome Powell1:50:42

Indeed.

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Jon Ossoff1:50:43

All of these actions have to be taken into account. The Federal Reserve does not control housing supply, but its actions do have a massive effect on housing supply. Some of these supply effects, it seems to me, will be felt for many years, well beyond when interest rate hikes have slowed or rates have even gone down. I know you've got a difficult job and a tough situation, but I hope the Fed will think more about its actions and how they affect housing supply even as it attempts to control housing demand. Thank you.

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Sherrod Brown1:51:21

Thanks, sir. That's the last questioner, I believe. Senator Sinema is remote from Arizona.

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Kyrsten Sinema1:51:29

Thank you, Mr. Chairman, and Chairman Powell. Thank you for being here today. In raising interest rates last month by 25 basis points, the FOMC cited Russia's war against Ukraine as a key contributor to elevated global uncertainty. The war has serious implications for global energy and agricultural markets. As you know, energy inflation in particular can appear in the form of higher prices of other goods and services. This feels like a substantial driver of inflation overall. In my mind, you can't understand the global economy fully without assessing the range of possible outcomes in Ukraine. As we've also seen, the war created new supply chain problems overnight and has caused abrupt price swings in select commodities. How is the FOMC assessing the economic impact of the war and the range of potential outcomes in order to inform how it sets monetary policy?

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Jerome Powell1:52:16

The principal way the war has affected our economy is really through commodity prices, grain and particularly energy prices. Those have both flattened out. Energy prices globally have settled down, and they're at a higher level, and food prices as well to some extent. The second thing I would say is that it represents a significant risk. The war in Ukraine, the outcome is uncertain, developments there are uncertain, and you have to think of it as a source of potential risk to the global economy and to our economy. We look at alternative scenarios and things like that. We don't really do it from a geopolitical standpoint, but we do of course model scenarios where commodity prices are higher and things that would look like what could happen from Ukraine.

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Kyrsten Sinema1:53:20

Thank you. At home, Arizona families are struggling to navigate this economy. Higher prices are making it more difficult to afford groceries, gas, rent, and airfare. But on the other hand, rising interest rates are crowding out investment and making it more difficult for first-time home buyers to buy a home. Inflation has also slowed housing development to a halt in Arizona. As you know, housing is a major economic contributor in my state. It's also clear that more spending comes with trade-offs, and it's why tackling inflation has historically been so difficult. Yet it's more important than ever that we get it under control. There's been much debate about a soft landing, where we get inflation under control without triggering recession, versus a hard landing, where inflation comes down but triggers a painful recession. Some economists are currently saying they see no landing right now, that growth is actually accelerating, and that more aggressive actions will be needed to get inflation under control. If true, that would be problematic. What do you think about that assessment?

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Jerome Powell1:54:15

As I mentioned earlier, if you look at the data that's been coming in since earlier this year, you have seen stronger labor market conditions, higher inflation, stronger consumer spending, and also we saw some of the low inflation readings from the fourth quarter of last year revised away. You take all of those, they may be to some extent related to things like seasonal adjustments or a warm January, but nonetheless they all point in the same direction. They do suggest that the possibility that we ultimately would need to raise rates higher than had been expected. Of course, we have two or three more very important data releases to analyze before the time of the FOMC meeting. Those are going to be very important in the assessment we have of this relatively recent data. We'll be looking carefully at that, and all of that will go into making the decision, which we have not made, about what to do at the March meeting.

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Kyrsten Sinema1:55:20

Thank you. On February 23rd, the Fed, the FDIC, and the OCC released another joint statement on crypto assets and liquidity risks posed to banking organizations. It's clear that regulators see undue risks for banks in the current environment and are taking a more conservative approach. Do you believe these risks are inherent to crypto assets and how they behave, or is some of the risk a product of the current regulatory and policy landscape for crypto assets in the US?

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Jerome Powell1:55:46

We're seeing, really in the last close to a year now, a remarkable set of events in the crypto space. Lots of companies collapsing. We've seen massive fraud. We've seen all kinds of things. We have to be open to the idea that somewhere in there there is technology that can be featured in productive innovation that makes people's lives better. However, in the near term, we see in crypto activity lots of things that suggest that regulated financial institutions should be quite cautious in doing things in the crypto space. That's what we've issued three or four releases to the banks along with the OCC and the FDIC. They essentially say you really need to be careful here. It's early days with crypto. There isn't the appropriate regulation. We're learning lots about the risks, and there are many of the same risks that are run in other parts of the financial system but without appropriate regulation.

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Kyrsten Sinema1:56:52

Thank you, Chairman Powell.

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Sherrod Brown1:56:54

Thank you, Senator Sinema. We conclude the hearing. The Fed must make sure that workers and families are at the center of every decision it makes to strengthen our economy. We've heard a lot today about the role that Wall Street plays in our economy, too. As you've said, Mr. Chair, we know that higher capital requirements make banks safer and stronger. It allows them to make investments in their workers and their communities and our economy. That's what they should be doing instead of spending billions on buybacks. I look forward, Chair Powell, to working with you to strengthen our economy. For senators who wish to submit questions for the hearing record, these questions are due one week from today, Tuesday, March 14th. Chair Powell, please submit your responses to questions for the record 45 days from the day you receive them. I thank my colleagues for the very good attendance today. Only one member on each side was not here, one for health reasons, the other just because he's doing 12 different things. So I appreciate all that, and thanks for your testimony, your public service, Mr. Chairman.

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Jerome Powell1:57:56

Thank you, Mr. Chairman.

Fed Chair Powell Testifies Before the Senate

About Jerome Powell