CEOInterviews.AIJerome Powell - The Semi-Annual Monetary Policy Report to the Congress - 26th February 2019

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Mike Crapo0:00

But on the other hand served as a member of the NCUA board between 2005 and 2010, including as its vice-chairman. The six remaining nominees were renamed and reintroduced to Congress after their nominations to the same positions expired at the end of last Congress and were returned to the president. Last Congress the Banking Committee held nomination hearings on each of them, these six, and they were subsequently voted favorably out of committee. If confirmed, all of these nominees will play integral roles in helping to promote US trade and facilitate commerce abroad, oversee policy and regulation of the financial system, and support our nation's housing system. I'm confident that they will be valuable assets to their respective agencies and departments. We have several other nominees that were resubmitted to the committee this Congress who were reported favorably out of committee last Congress, and we will move to those expeditiously once their paperwork is complete. Senator Brown?

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Sherrod Brown1:06

This morning the committee will vote on ten nominees who will each have a huge impact on our economy and on American families. Six of them were voted out of committee last Congress. If confirmed, Dr. Mark Calabria would oversee six trillion dollars in financing for mortgages that give households a place to call home. In his nomination hearing, Dr. Calabria showed his command of housing issues, but unfortunately he used that knowledge to duck and dodge questions about his beliefs. He promised three times that he would operate the GSEs' signature affordable housing initiatives within the confines of the statute, but he never gave us his interpretation of that statute. What Dr. Calabria did say was that he stands by all of what he has written. So we are left with Dr. Calabria's writings that say, quote, 'All existing mortgage subsidies including FHA and GSEs should eventually be eliminated.' His words. 'Providing assistance through the Hardest Hit Fund to states like Ohio was simply subsidizing states because their housing markets are getting more affordable.' Again his words. Dr. Calabria's solution to the affordable housing problem would be solved, he said, by letting prices fall. I oppose his nomination. I also have concerns about Mr. Patel and Mr. Falaschetti. Mr. Patel's testimony lacks details on policy. Mr. Falaschetti has opposed the agency he is nominated to run. I'm also concerned that Mr. Kurtz will be unable to withstand the administration's desire to slash funding. I'll support moving the other nominees to the floor. We need full boards of the Export-Import Bank and the NCUA.

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Mike Crapo6:42

Thank you, Senator Brown. We will now move to the votes on the nominees. We will begin with a roll call vote on the nomination of Dr. Calabria. The clerk will call the roll. [Roll call] The nominee is approved 13 to 12. The eyes have it and the nomination is ordered reported favorably to the full Senate. We will now move to a voice vote on the nomination of Mr. Patel. All in favor say aye. Opposed? No. The eyes have it, reported favorably. We will now vote on block on Mr. Harper and Mr. Hood. All in favor say aye. Opposed? No. Reported favorably. We will now vote on the nomination of Ms. Reid. Does anyone call for a roll call? Senator Brown: 'I emphasize that I hope Senator McConnell will do its job and schedule these. They've come out of this committee with Democrats supporting them every single time. It used to be bipartisan until right-wing politics roiled the waters. Let us bring it to a vote on the floor.' Thank you, Senator Brown. Voice vote on Ms. Reid: all in favor say aye. Opposed? No. Reported favorably. We will now vote on block on Mr. Bachus and Ms. Prieto. All in favor say aye. Opposed? No. Reported favorably. We will now move to report favorably on block the nominations of Dr. Falaschetti, Mr. Appleton, and Mr. Kurtz. All in favor say aye. Opposed? No. Reported favorably. That concludes our voting. I want to thank everyone for being here. We are going to move now to the Humphrey-Hawkins hearing. We'll take a brief break while Chairman Powell comes in. The executive session is now concluded.

The hearing will come to order. We welcome you, Chairman Powell, to the committee for the Federal Reserve's semiannual monetary policy report to Congress. This hearing provides the committee an opportunity to examine the current state of the US economy, the Fed's implementation of monetary policy, and its supervisory and regulatory activities. In the wake of the 2008 financial crisis, the Fed entered a period of unconventional monetary policy including drastically cutting interest rates and expanding its balance sheet. I've long been concerned about the Fed's quantitative easing programs and the size of its balance sheet. As economic conditions improved, the Fed began to normalize monetary policy. The Fed's balance sheet grew to approximately $4.5 trillion from around $800 billion between 2007 and 2015, and now stands at around $4 trillion. At the most recent FOMC press conference, Chairman Powell provided additional clarity saying the ultimate size of our balance sheet will be driven principally by financial institutions' demand for reserves plus a buffer. The normalization will be completed sooner and with a larger balance sheet than previous estimates. During this hearing I look forward to understanding more about these factors. The US economy remains strong with robust growth and low unemployment. The economy expanded at an annualized rate of 3.4% in the third quarter of last year. Unemployment is around 4%. Major legislation passed through this committee and enacted last Congress supported economic growth. The Economic Growth, Regulatory Relief, and Consumer Protection Act was enacted to right-size regulation. I appreciate the work the Fed has done to implement that law. The committee will also look for additional opportunities to foster economic growth. Turning to another issue, Senator Brown and I issued a press release inviting feedback on the collection, use, and protection of sensitive information by financial regulators. Americans are rightly concerned about how their data is collected and used. Lastly, I want to recognize Don Ratcliffe, the committee's chief clerk, who is retiring after 27 years. Thank you for your service.

Senator Brown.

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Sherrod Brown22:53

Thank you, Chairman Crapo. I throw out with thank you again for your service to our country, to this committee. Don Ratcliffe has been instrumental in making this committee run smoothly. Congratulations on your retirement. Chairman Powell, welcome back. It's been a great week for Wall Street. The FDIC announced that banks made a record-breaking $237.7 billion in profits in 2018. Corporations bought back a record $1 trillion in stocks. The president's tax bill put $30 billion in the banks' pockets. But the economy looks great from a corner office on Wall Street, not from a house on Main Street. Workers' wages have barely budged. Seven of the ten fastest growing occupations don't pay enough to afford rent on a modest one-bedroom apartment. Household debt continues to rise. At the end of 2018, 7 million Americans with auto loans were at least 90 days past due. Even with low unemployment, borrowers of color have not recovered from the crisis. The Trump shutdown revealed that too many Americans live paycheck to paycheck. We've questioned whether the economic recovery has been felt by all Americans. Your comments at the Fed town hall confirmed this: you said we have work to do to make prosperity widely spread. Chairman Powell, the Fed has spent a decade bending over backwards to help banks. We're late in this economic cycle, and record Wall Street profits won't be trickling down to workers before the next downturn. I hope we don't make the same mistake again. Thank you.

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Mike Crapo27:49

Thank you, Senator Brown. Chairman Powell, we welcome you here again. We appreciate your attention and the report you have provided. You may make your statement about that report, and then we will proceed to some questions.

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Jerome Powell28:07

Thank you, Chairman Crapo, Ranking Member Brown, and other members of the committee. I'm happy to present the Federal Reserve's semiannual monetary policy report to Congress. Let me start by saying that my colleagues and I strongly support the goals Congress has set for monetary policy: maximum employment and price stability. We are committed to transparency and accountability. Today I will review the current economic situation and outlook before turning to monetary policy. The economy grew at a strong pace on balance last year. Employment and inflation are close to our statutory goals. Based on available data, GDP rose a little less than 3% last year. Growth was led by strong gains in consumer spending and business investment. In recent months, some data have softened but still point to spending gains. The job market remains strong: monthly job gains averaged 220,000 in 2018 and 304,000 in January. The unemployment rate stood at 4%. We are seeing signs of stronger wage growth, with the strongest gains for lower-skilled workers. However, disparities persist across groups and regions. Inflation as measured by PCE is estimated at 1.7% in December, held down by energy prices; core PCE is 1.9%. We expect inflation to run close to 2%. Over the past few months, we have seen some crosscurrents and conflicting signals. Financial markets have become more volatile, growth has slowed in some major foreign economies, and uncertainty is elevated around Brexit and trade negotiations. We will carefully monitor these issues. Our nation also faces longer-term challenges: low productivity growth, declining labor force participation, stagnant incomes, and unsustainable federal debt. Over the second half of 2018, the FOMC gradually raised interest rates. At our January meeting, we determined that these developments warranted a patient approach. Going forward, our policy decisions will be data-dependent. We have continued to gradually shrink our balance sheet. At the January meeting, we decided to continue using our current operating procedure with an ample supply of reserves. We are prepared to adjust any details for completing balance sheet normalization. Finally, we have improved transparency: we launched new financial stability and supervision reports, began press conferences after every FOMC meeting, and announced a comprehensive review of our strategies and communications. Thank you, and I will be happy to respond to your questions.

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Mike Crapo38:21

Thank you very much, Chairman Powell. As I mentioned in my opening statement, you said that the balance sheet normalization may end sooner with a larger balance than previously anticipated. The ultimate size will be driven by demand for reserves plus a buffer. Correct?

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Jerome Powell38:41

That is correct. Reserves have increased from $43 billion in early 2008 to about $2.8 trillion in 2014, now falling to about $1.6 trillion. The demand for reserves is substantially higher than before the crisis due to post-crisis liquidity requirements. We don't have a precise notion, but public estimates of around $1 trillion plus a buffer seem a reasonable starting point.

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Mike Crapo40:20

Alright, thank you. As you know, I've been a strong critic of quantitative easing. I appreciate your explanation. You mentioned that labor force participation has started to grow. Do you expect that growth to stabilize and possibly increase as we move forward?

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Jerome Powell41:12

Labor force participation: the US was at the high end for women, but now we are at the bottom for both men and women. A big part is demographics, but even allowing for that, we're lower than we need to be. The gains over the past year are very positive, but we don't know how long they can be sustained. We need a broad policy focus on sustaining labor force participation, including through legislative policy.

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Mike Crapo42:21

I have lots of questions, but just one more in the time I have. This gets to regulatory relief and implementation of S. 2155. The Volcker Rule still has significant issues. Can you commit to using your regulatory discretion to promptly address issues like the covered funds definition and the accounting test?

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Jerome Powell43:19

Yes, we received comments on those issues and thought some were very well taken. We are working hard to address them and I assure you we'll do our best.

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Sherrod Brown43:33

Thank you again for being here. Your predecessor Janet Yellen said she doesn't think President Trump has a grasp of macroeconomic policy. Is she right?

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Jerome Powell43:47

I won't have any comment on that for you, Senator.

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Sherrod Brown43:49

All right, I'm not surprised. It's troubling that the former Fed chair says that. Let me shift to another question. Paul Volcker raised concerns that the culture of banking only focuses on profits and CEO pay. Since 1979, worker productivity has grown 70%, but compensation has grown just 11%. The top 0.1% saw earnings grow 343%. Do you think the Fed's employment mandate is just to ensure people are employed, or does full employment imply that workers earn a salary and benefits that let them fully participate in the economy?

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Jerome Powell45:17

Our mandate is maximum employment, and we try to take that to heart. Our tool is monetary policy. We are at a 50-year low in unemployment. But to achieve some of the things you're talking about, we need other tools. The Fed can't affect every social problem. Wages do go into our assessment of maximum employment. Wages have started to move up in a way more consistent with past history. They are now going up a little better than 3%, with inflation at 2% and productivity around 1%, so about right from that standpoint. We welcome that and don't find it troubling from an inflation standpoint.

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Sherrod Brown46:55

Let me put in a bit of historical perspective. Will Rogers during the Great Depression said that unlike water, money trickles up, not down. It seems like the Fed still thinks the best way to help workers is to shore up big bank profits and hope prosperity trickles down. One more question: Too big to fail is alive and well. SunTrust and BB&T are merging. What message does the Fed send to regional and community banks if you approve this merger?

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Jerome Powell48:33

We have a process for evaluating mergers set forth in law and guidance. We will go through that process carefully, fairly, and thoroughly. We haven't received an application yet. We will do our work professionally and transparently, without prejudging.

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Richard Shelby49:10

Thank you, Chairman Powell. Somebody's doing something right – this is the best economy I've seen in my lifetime. The question is how we keep it going. How do you gauge inflation? How do we keep this economy going?

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Jerome Powell50:00

We want to use our tools to sustain this expansion and keep labor markets strong and inflation near 2%. We see a strong labor market with job creation and wages moving up. Inflation pressures are muted, which gives us the ability to be patient. The committee has decided that with our policy rate in the range of neutral and muted inflation pressures, this is a good time to be patient and watch how the situation evolves.

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Richard Shelby51:01

How does the abundance of hydrocarbons we've found feed into the economy positively?

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Jerome Powell51:15

It's a big industry employing many people in certain areas. On inflation, unlike the 1970s when oil shocks drove inflation up, our large domestic oil industry now acts as a shock absorber – when oil prices rise, domestic producers produce more, offsetting the shock.

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Richard Shelby52:06

How important is the certainty of good trade agreements to our economy and the world economy?

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Jerome Powell52:11

Uncertainty is the enemy of business. Businesses want a set of transparent rules to make longer-term plans. We've been hearing from our contacts about uncertainty holding back some decisions. Overall certainty around trade and other government policies is very important.

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Richard Shelby52:55

As we look at our current account, does the imbalance of trade with most of the world concern you?

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Jerome Powell53:04

The current account is set by the difference between savings and investment. It tends to go up in good times when Americans are buying things, some imported. Over time we'd like to see balance in savings and investment and the trade balance.

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Richard Shelby53:50

We discussed cost-benefit analysis for regulations last year. Can you provide an update on the work of that unit?

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Jerome Powell54:06

That unit is up and running. Cost-benefit analysis is something we've always done, but now we have a dedicated unit focused on it. We're pleased with the progress, and they are involved in rulemakings and assessments.

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Richard Shelby54:42

What's the health of our banking system that you regulate? Are the biggest banks healthy?

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Jerome Powell54:56

Our banking system overall is quite strong. Record profits, no bank failures in 2018, much higher capital and liquidity, better risk management, stress tests have focused banks on understanding risks. We never take it for granted, but overall it's strong.

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Bob Menendez55:35

Welcome. As the number of legitimate cannabis-related businesses grows, most banks are not offering services due to legal risk. Do you agree that financial institutions need clarity on this issue?

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Jerome Powell56:16

I think it would be great to have clarity. Financial institutions and their supervisors are in a difficult position with marijuana illegal under federal law but legal under many state laws. It would be nice to have clarity on that supervisory relationship.

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Bob Menendez56:43

A corollary question: the ability for such businesses to secure insurance products is a necessity for financing. Would it be helpful for Congress to consider the role of insurance companies?

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Jerome Powell56:59

I believe so, yes.

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Bob Menendez57:01

On a different question: BB&T plans to purchase SunTrust. BB&T had a downgraded CRA rating in 2008 due to fair lending violations. Can you assure that the Federal Reserve will treat such violations with seriousness when evaluating the merger?

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Jerome Powell57:58

We haven't changed our policy. We consider consumer compliance, fair lending records, and CRA performance under convenience and needs of communities. We will consider all information when we get an application.

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Bob Menendez58:21

Can you give a sense of what the review of the bank's CRA track record will look like?

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Jerome Powell58:33

We'll look thoroughly at the rating and consider public comments and a full range of information. Banks with an unsatisfactory rating have a hard time. We'll consider everything presented.

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Bob Menendez58:53

I ask because the OCC has proposed changes to CRA implementation without input from the Fed. Governor Brainard said CRA is more important than ever. Can you commit to building consensus among Fed governors before moving forward with proposals to change CRA implementation?

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Jerome Powell59:41

Yes. We are unified in our commitment to the mission of CRA. Any revisions we do will preserve that mission and enable banks to serve it more effectively.

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Pat Toomey1:00:35

Thank you, Mr. Chairman. Chairman Powell, welcome back. I want to compliment you and your colleagues for normalizing monetary policy. Quick regulatory question: the interagency proposal on tailoring capital and liquidity requirements is a high priority. Can you assure us that finalizing these rules is a priority?

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Jerome Powell1:01:30

It is a very high priority. S. 2155 implementation is probably our highest priority. I wouldn't want to put a date on final rules, but we are working on it.

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Pat Toomey1:01:56

Unrelated: the private sector has set up a real-time payment system. Do you believe it's necessary for the Fed to develop a competing system?

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Jerome Powell1:02:21

That's a judgment we haven't made. We are considering it and mindful of the Monetary Control Act's requirement that we not provide services the private sector can adequately provide.

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Pat Toomey1:03:05

On inflation targeting: there's discussion about targeting a price level rather than a change in price level. If inflation ran below target for a while, would it make sense to intentionally exceed the target to hit an average? I'm concerned about intentionally running above target. What are your thoughts?

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Jerome Powell1:04:04

These questions will be the subject of careful consideration this year. The issue is that rates have come down, and in a typical downturn we are more likely to hit the zero lower bound. That could drag inflation expectations down. Inflation expectations are now the most important driver of actual inflation. We're thinking about ways to make the 2% target credible so that inflation averages around 2% over time. No decisions have been made, but we owe it to the public to think through the best way to address that problem.

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Pat Toomey1:05:40

I understand the logic but would urge great caution. For the period when you exceed the target, you don't have price stability. I've got other questions but I'm out of time.

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Jon Tester1:06:15

Thank you, Chairman Powell. I want to talk about the government shutdown – it cost the economy $11 billion. We have a debt ceiling coming up March 1. Can you walk us through the economic impacts of failing to increase the debt ceiling?

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Jerome Powell1:06:56

Failure to increase the debt ceiling creates a lot of uncertainty. When the government runs out of cash and doesn't pay its bills, we've never passed that point. It would be a very big deal. The United States not honoring all its obligations is beyond considering. It would have large, hard-to-predict effects.

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Jon Tester1:08:02

Someone said it would be no big deal. Do you agree?

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Jerome Powell1:08:04

No, I don't. It would be a very big deal not to pay all our bills when they are due.

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Jon Tester1:08:13

I agree. Senator Shelby talked about trade certainty. Can you grade this administration's trade policies? How are they affecting our economy?

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Jerome Powell1:08:33

We don't play a role in trade negotiations, so I cannot comment directly. We hear from businesses about uncertainty, particularly in your state area. That's all I can say.

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Jon Tester1:08:46

I farm. As we prepare for planting, I can't tell you any commodity or livestock that will make money. The Minneapolis Fed said farm bankruptcies are seeing a serious uptick. Are you concerned that it's a direct result of trade?

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Jerome Powell1:09:28

The agricultural economy has been under pressure for five years due to sustained low crop prices. That has driven up bankruptcies and foreclosures. The trade issues haven't helped this year. The report that bankruptcies haven't peaked sounded plausible to me.

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Jon Tester1:10:39

Agriculture got a bailout, but it didn't amount to much. Small businesses say big guys can stay in business because of these trade wars, but they'll be out. Do you believe trade policies impact smaller businesses more?

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Jerome Powell1:11:24

I don't know the answer to that. It's a fair question.

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Mike Rounds1:11:53

Good morning, Chairman Powell. Thank you for coming. I want to underscore the importance of the insurance policy advisory committee required by S. 2155. South Dakotans have a strong interest in preserving our state-based insurance regulatory system. I look forward to working with you. I've got a series of questions I'll put in for the record, but I want to discuss the federal government's spending and its impact on monetary policy. Congress has a tendency to only make changes in a crisis. We have $22 trillion in debt. We don't vote on 70% of spending – Social Security, Medicare, Medicaid, interest on debt. Would you comment on how Congress manages these safety nets and the impact on our economy?

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Jerome Powell1:14:52

We try to stay in our lane. But I will say the US federal government is on an unsustainable fiscal path, with debt as a percentage of GDP growing quickly. That is unsustainable. The timing and ways to stabilize debt-to-GDP are not for the Fed to decide. Over time, we spend more on servicing the debt and less on important investments. In my personal thinking, the single biggest driver of fiscal unsustainability is health care delivery: we spend 17% of GDP on health care with average outcomes, while others spend 10% on average. That's over a trillion dollars more each year. It's not that benefits are too generous, it's that we deliver them inefficiently.

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Mike Rounds1:17:20

So if we managed resources better, we could do a better job.

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Jerome Powell1:17:35

Again, I'm not here to criticize, but I think it's a profitable thing to do.

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Tina Smith1:17:54

Thank you. It's wonderful to see you again. I want to follow up on what Senator Tester asked about rural economic issues. Your monetary policy report highlights disparities in rural areas. In Minnesota, some rural counties have 2% unemployment, others 6-7%. The report notes the impact on rural workers without a college degree. Why is this gap widening?

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Jerome Powell1:19:20

The gap shows up in labor force participation more than unemployment. Lower educational levels are associated with lower participation, but even accounting for that, it doesn't explain much. Rural areas are more associated with manufacturing, which has recovered less than services. Also, people who can leave rural areas for urban areas with better job opportunities may leave, leaving behind a population with lower participation.

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Tina Smith1:20:40

So when people leave, the remaining population is older and less able to find jobs. Would that suggest it would be smart to increase investment in career and technical education to fill manufacturing jobs in rural areas?

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Jerome Powell1:21:27

I do think a national focus on labor force participation would be helpful. That would be one piece of it.

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Jon Tester1:21:36

Tools I can identify it as a problem and it is a serious problem, but I think that's a profitable place to look. Yeah, the other thing I wonder is maybe people are not coming back into the workforce because they can't afford to. In rural Minnesota, you can't afford childcare and it's not readily available. So the work that may be part of the problem is I wonder if the jobs that are there aren't paying. How come wages don't go up if there's a demand for labor? People potentially are there. Why don't wages just go up?

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Jerome Powell1:22:13

As I mentioned earlier, wages have moved up from their very low levels of increase earlier. I wouldn't say that they're going up quickly now, but they're going up at a more healthy rate. There are some things in the federal tax code where people lose their benefits with their first dollar of earnings, which again, it's not our job, but that doesn't sound like you want people to go back to work. You want to be rewarded for going back to work, and it seems like that's something we could look at.

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Jon Tester1:22:48

Thank you very much, Chairman Powell. I know I'm out of time. I want to just note that I appreciated the question that Senator Tester was asking about farm bankruptcies, which is a real concern in Minnesota and across the whole northern swath of states. I'm going to follow up with a written question about how you see those farm bankruptcies potentially affecting the overall economic strength of the country, especially in rural areas. Thank you, Mr. Chair.

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Mike Crapo1:23:15

Thank you, Mr. Chairman. Chairman Powell, good to see you again. I want to continue on the line of discussion that you've been on. In our conversation when we met, we talked about this labor force participation issue. Everywhere I go in Arizona, in the more metropolitan areas, the companies are doing great, the optimism is there, but they are lacking for workers. They are just screaming for workers, and it's really up and down the skill set. It's not just in the trade craft, although that often tends to be those areas. So what we're seeing is the labor force participation rate is going up a little bit, ticking up, but there's clearly still this gap that is maybe holding back even more economic growth because of the mismatch of not having the workers for the jobs that are there. Can you give some additional perspective on that? And within your power and within our power, what do you think we can do to incentivize increasing that number, get more people off the sidelines, get them the skills they need to continue to provide more opportunities for the people we represent?

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Jerome Powell1:24:25

Sure. This strong labor market and strong economy that we have at the aggregate level is, as you mentioned, pulling people back into the labor force or encouraging them to stay in the labor force and not leave. This is very positive for us. Labor force participation has gone back up above 63%. To be in the labor force, by the way, you've either got to have a job or have looked for one in the last four weeks. So if you haven't looked for a job in the last four weeks and you're not employed, you're not considered unemployed. This is very positive, and we hope it's sustained. But even with that, our labor force participation rates are lower than other countries that have anything like our level of wealth, income, and economic activity. It's not easy to say why, but I do think the Fed's ability to address this is really just a function of trying to keep us at maximum employment. There are plenty of people—younger people, particularly younger men, particularly less well-educated younger men, but also people across the gender, income, and age spectrum—we just have low labor force participation. We want the economy to grow and that prosperity to be widely spread. Labor force participation gets both of those things almost better than anything else. So I think it's something that ought to be a high focus for people who have different tools than ours.

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Mike Crapo1:26:11

I agree with you. Not necessarily within your tools, but just based on your perspective, what do you think is holding that back? What else can we do to remove those barriers for people to get back in the labor force, to be working to support their families and meet their full potential?

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Jerome Powell1:26:28

Part of it would probably be education and skills gaps. Part of it would be the opioid crisis. There would be a range of things. As we were discussing a minute ago, there also are some disincentives to go to work that are built into benefit programs. I met with a group of women in West Virginia last year who were in an apprenticeship program for carpentry, electrician, plumbing, steel work, and the hardest thing they had to do was to go to work in this program, which had 100% placement and paid $9 or $10 an hour, because that was less than the very meager benefits they were already getting. So they had to take a pay cut to go back to work, and they did it anyway, which was pretty inspiring. But I think we ought to have policies that reward and support labor force participation. They're not ours, you can get into the prescriptive business, but I think it's really important for the country.

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Mike Crapo1:27:29

Thank you. I do want to follow up on the rural-urban gap. We've got a lot of rural counties. I visited many of them this week in Arizona, and we're seeing the same thing where there is that disconnect in wage growth and labor force participation in those rural areas. Do you take that into account in Fed policy? And again, other perspectives on what else we might be able to do on our side or on your side to not have that gap widening for those in the rural areas.

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Jerome Powell1:27:55

We do in the general sense. We've learned this year that there's more slack in the labor market because people are coming back in. If people weren't coming back in, the unemployment rate would be substantially lower, but they are, or they're staying, and labor force participation is rising in either case. That tells us there is more room to grow, and that certainly has implications for monetary policy. In terms of urban and rural, we look at those disparities. We look at all different kinds of disparities in a general way. They inform our thinking about the state of the economy and particularly maximum employment, which is not a single number you can look at. You have to look at a range of indicators, and that would be one of them.

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Mike Crapo1:28:43

Okay, great. Thank you, Senator Jones.

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Doug Jones1:28:48

Thank you, Chairman Powell, for being here today. I really appreciate it. I want to stay on the rural versus urban divide a little bit. Obviously, we've got senators on this committee who have a lot of urban areas, and it seems like there's one factor that may come into play that's not quite so obvious that we've talked about, and that's health care. In 2017, the Atlanta Fed did a study on the urban-rural divide in the Southeast, and one of the factors they kept noticing was the impact on residents' health on the economic output. To simplify what is obviously a very complex issue, according to that Fed study in Atlanta, while the portion of workers who say they're too sick or disabled to work is roughly 6% nationally, that rises to over 12% and higher in the rural South. So from your perspective, what role do you think health outcomes play in economic growth, particularly in rural America?

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Jerome Powell1:29:51

I think poor health outcomes are very much associated with a lot of social issues, including labor force participation and lots of other economic issues—low lifetime earnings and many different things. Those are obviously more prevalent in rural areas, as you pointed out.

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Doug Jones1:30:14

I would assume you would agree that if healthcare is not accessible in those areas—for instance, in Alabama, we've seen rural hospitals closing left and right, seven or eight in the last seven or eight years—the absence of healthcare may contribute to people leaving those rural areas for urban areas. Would you agree with that?

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Jerome Powell1:30:34

It's hard to say. People have been leaving for some time. Some of these counties, as you obviously know, have lost half their population in the last four or five decades.

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Doug Jones1:30:46

If states individually developed policies that would expand healthcare in these communities, give affordable healthcare access, what would you expect the economic impact to be?

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Jerome Powell1:30:58

I think people who have healthcare would, in principle, be able to remain in the labor market, get back in the labor market, and keep from getting sick and being out of the labor market. So it would be positive for the economy.

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Doug Jones1:31:15

I appreciate that. I promise you we were not going to ask you to testify in front of the Health Committee. Senator Tester made a comment as he was finishing up that despite a lot of good economic news—everybody agrees there's a lot of great economic news out there—I think a lot of folks also see, as Senator Tester said, canaries in the coal mine. Do you see any other than the obvious of the debt that we have? Do you see any canaries in the coal mine that we need to be looking for in this Congress?

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Jerome Powell1:31:45

I would say that the outlook for the US economy is a positive one, a favorable one. There are always risks. Right now, I would say the predominant risks to our economy are slowing global growth, particularly China and Europe. We've seen a significant slowing in growth over the course of the past year, and it seems to be ongoing. That can create a headwind for the United States economy. I talked about Brexit—that's an event risk which could have implications for us here domestically. Again, I think the outlook is generally favorable.

D

Doug Jones1:32:28

Okay, thank you, Mr. Chairman. Senator Shelby asked you about the state of health of our big banks, which he gave a pretty favorable report on. But in December of this year, right as the government was shutting down, the Secretary of the Treasury issued a press release and had a call with all of the big banks to discuss their viability and to make sure things were okay. The next day, I think he had a call with you and some of the other regulators. That sent some alarm bells throughout the country. Can you walk through those two days? What was the purpose? What did you see as the purpose of the Secretary of the Treasury, four days into this shutdown, attempting to reassure folks that the banking system was okay?

J

Jerome Powell1:33:19

I would not comment on the Secretary at all. Our financial system, as I mentioned earlier, is very strong—record profits, no bank failures last year, capital is much higher, liquidity is much higher, risk management is much better. We never take this for granted; we keep watching carefully and looking for problems. But what I was thinking in those days was that we had significant volatility in the markets, and I was asking the question: does that have any broader implications for the economy or for the financial system? The answer I felt was no, but it's part of the job to ask that question.

D

Doug Jones1:34:14

All right, thank you, Mr. Chairman. Appreciate you being here.

J

John Kennedy1:34:17

Thank you, Mr. Chairman. Senator Kennedy. Mr. Chairman, thank you for coming today. A good friend, Senator Brown, lamented the fact that our financial institutions are making profits now. That's a good thing, right? We need a profitable financial system to have a well-capitalized financial system. Is it better if banks are making money or losing money from a macroeconomic standpoint?

J

Jerome Powell1:34:53

I think we want banks to be profitable and strong and well-capitalized, which they have been.

J

John Kennedy1:34:58

Okay. I want to talk about the government shutdown. Tell me if I got this wrong. CBO estimates an $11 billion impact to our economy. We'll recover about $8 billion, so the net loss to our economy is $3 billion. Does that sound about right?

J

Jerome Powell1:35:16

I only know about that from what I've read.

J

John Kennedy1:35:19

Okay, that's what I've read too. Gotta trust somebody—CBO with their word. We've got about a $21 trillion economy, is that right?

J

Jerome Powell1:35:29

Sounds about right.

J

John Kennedy1:35:31

Okay, so as a percentage of our economy, that $3 billion loss is 1.5% of 1%. Is that about right?

J

Jerome Powell1:35:40

You did that math very quickly, Senator. I'm going to trust you on that.

J

John Kennedy1:35:47

Good. Okay, that's an infinitesimal impact, is it not? That's very small. Let's talk about the economy. Some economists said that if we passed the Tax Cuts and Jobs Act, our economy would overheat. Those economists were wrong, were they not? The economy did not overheat and has not overheated. We're having growth without inflation, is that correct?

J

Jerome Powell1:36:13

We have inflation right at our target, right around 2%—1.9%.

J

John Kennedy1:36:20

Okay. And we've had more business investment, is that correct?

J

Jerome Powell1:36:24

We have had solid investment, very solid in the first part of last year and reasonably good in the second half. I think the outlook is for continued reasonable levels of business investment. Wages, as I mentioned, have moved up to 3% or a little better, which is a very good thing to see.

J

John Kennedy1:36:49

I want to get your opinion on—and I'm not trying to ask you to make policy, but I'm asking you as a Fed chair—what could we have done in hindsight to encourage more business investment in plants, machinery, equipment, and software, which would have created more jobs and hopefully increased productivity? Specifically, let me ask you this: there's legislation to prohibit share buybacks. Is that a good thing? I know share buybacks have an economic impact, but if you had legislation that cut business taxes but also said you can't use that money to buy back shares, you have to invest it in your company or pay shareholders dividends, what would you think about legislation like that from an economic standpoint?

J

Jerome Powell1:37:51

Well, first of all, that kind of decision is really not in our hands.

J

John Kennedy1:37:57

I'm not asking you to make it. I'm asking you as an economist.

J

Jerome Powell1:38:01

As an economist, I would say the goal of having prosperity be widely shared is one that we all share. When you talk about companies and what they do with their profits and how they allocate capital, in our system we've always left those decisions to the private sector. I would want to understand the consequences of changing that and look at whether there aren't other ways to achieve the goals we all want, which is to have prosperity be widely shared.

J

John Kennedy1:38:40

Are there other ideas you might have to make sure prosperity is more widely shared?

J

Jerome Powell1:38:46

I think it ties to some of the things we've been talking about here. Labor force participation is a win for the overall economy. The economy will grow faster, and the people who are not taking part tend to be the ones with lower education who are at the edges of the labor force. We are underperforming as a nation on this compared to our peer group. It is a problem that stands out compared to other countries.

J

John Kennedy1:39:11

Is it because we pay people too much not to work, or because people don't have the skills, or because they don't have access to the jobs?

J

Jerome Powell1:39:27

I think there's a range of perspectives on this, and there's some wisdom in a lot of different ideas. The best thing to do would be to get some proposals that would have broad support and work on those. I do think quite a bit of it is skills, education, aptitude, and also not having disincentives in the tax code where people lose their benefits with the first dollar of pay. That seems like a disincentive to work. None of this is in the Fed's hands, but since you asked...

J

John Kennedy1:39:59

You're doing a great job. Thank you.

M

Mike Crapo1:40:02

Thanks, Senator. Senator Warren.

E

Elizabeth Warren1:40:06

Thank you, Mr. Chairman. Thank you, Chairman Powell, for being here. Earlier this month, two giant banks, SunTrust and BB&T, announced that they intended to merge. This new too-big-to-fail institution would have about $450 billion in assets and become the sixth largest bank in the United States. As you know, bank acquisitions and mergers don't go through on their own; they have to be approved first by the Fed. So last spring, I wrote you a letter asking for data on the number of merger and acquisition applications received by the Fed and the number that had been approved over the last ten years. Chairman Powell, when you answered my letter in May of 2018, how many merger and acquisition applications for banks had you received since 2006? Do you remember?

J

Jerome Powell1:40:56

No, I don't have the number.

E

Elizabeth Warren1:40:59

Does 3,819 sound right?

J

Jerome Powell1:41:01

Yes, good. Okay.

E

Elizabeth Warren1:41:04

And do you remember how many of those 3,819 applications you denied?

J

Jerome Powell1:41:09

No, I don't.

E

Elizabeth Warren1:41:11

Would zero sound right?

J

Jerome Powell1:41:15

If you say so.

E

Elizabeth Warren1:41:17

Well, you said so in your letter. Chairman Powell, has the board denied any application since you responded to my letter in May?

J

Jerome Powell1:41:27

I would just offer a little context.

E

Elizabeth Warren1:41:29

Let's get this part out because I'm trying to do this.

J

Jerome Powell1:41:32

I don't believe we have. What happens is that people don't apply or they withdraw their applications.

E

Elizabeth Warren1:41:40

Zero percent of the applications for mergers and acquisitions since 2006 have been denied. Now, that doesn't mean that all potential mergers and acquisitions make it through the process. 13% of applications are withdrawn before they get a decision, according to your letter. Chairman Powell, quote: 'Prospective applicants may discuss a proposed transaction with Federal Reserve System staff prior to filing, and applicants will be discouraged from filing applications where it is apparent that the applications would not meet all of the statutory factors required for approval.' So if you think that a proposed merger won't be approved, you discourage the bank from following through. Is that right?

J

Jerome Powell1:42:30

In some cases, where it's clear that there's a statutory problem.

E

Elizabeth Warren1:42:39

You approve 100% if they go ahead and apply, so I guess they're withdrawn unless they're... That's what I said. So you encourage them to withdraw if they're not going to get an approval, but they can file and then withdraw. The point is they withdraw if they're not going to get it because of a conversation you have. That's a non-public conversation. This is a formal process required by regulation. In order to do an approval, people who object to the merger have an opportunity to file a protest. That's how the process is supposed to work. That would include, for example, communities that are worried that local banks may close following a merger or acquisition, employees who are concerned about losing their jobs, state officials that may be concerned about decreasing competition, and so on. Chairman Powell, you've explained that consultation with a bank can start before the merger is announced publicly. When is it that the public can actually file protests—before or after the merger is announced?

J

Jerome Powell1:43:50

I think the process is that we receive an application for merger, which we have not received yet. I think we expect to receive it sometime next month.

E

Elizabeth Warren1:44:00

And when will the public have a chance?

J

Jerome Powell1:44:03

Certainly then. And that's true in all of these. The public doesn't get a chance to comment until after the application has been filed. But the application is only filed after the banks have had a chance to have this quiet conversation with the Fed.

E

Elizabeth Warren1:44:19

So I just want to get this straight. You and the banks get together in the back room and grease the wheels before the merger is announced. And if you're not going to approve the merger, you tell the bank in advance, and then they go figure out something else. If the public wants a chance to weigh in, they have to wait until you've already made a decision. No wonder you approved 100% of the merger applications. Not a single no. Your approval process itself appears to be a rubber stamp. Everything is happening behind closed doors. So the question I have is about the SunTrust and BB&T merger. Is this one just going to be another rubber stamp? Have you already made the decision behind closed doors before the public gets a chance to weigh in?

J

Jerome Powell1:45:09

No, not at all. We're going to conduct a very fair, open, transparent process. Our obligations under the statute are clear and quite broad. We'll be hearing from groups of all kinds and going through our process carefully and thoroughly.

E

Elizabeth Warren1:45:29

So it's just that in the last 3,819 merger applications, which were all approved without a single one for which you said no, this time you're going to be listening to comments from the public that might cause you to say no? I just have to say, I'll bet that SunTrust and BB&T looked at that 100% merger success rate and saw what everyone else sees: that the Fed works for big, rich banks that want to get bigger and richer, and everyone else pays the price for diminished competition, worse service, higher prices, employee layoffs, and the risk that we have yet another too-big-to-fail bank on our hands. I think it's time that we put down the rubber stamp and really let the public and everyone else weigh in before we create yet another too-big-to-fail bank. Thank you.

T

Tom Cotton1:46:29

Thank you, Chairman Powell, for being here. I want to start talking about stress tests for midsize banks. Reform legislation Congress passed to the Dodd-Frank Act last Congress increased the threshold for stress tests from $10 billion banks to $100 billion banks. Can you tell us why so many of us still hear from banks in that window—larger than $10 billion but smaller than $100 billion—that they are still hearing from their examiners that they need to undergo such stress tests?

J

Jerome Powell1:47:00

The new law is that banks between $10 and $100 billion are exempt from the Dodd-Frank stress tests. That should be crystal clear. I think you're referring to the guidance, which we are in the process of looking at and revising, and I would think addressing that issue.

T

Tom Cotton1:47:20

But to be perfectly clear, banks between $10 billion and $100 billion are not required to undergo Dodd-Frank stress tests, correct?

J

Jerome Powell1:47:29

Correct.

T

Tom Cotton1:47:31

When I was in Afghanistan and Iraq, young soldiers used to complain about the rules of engagement. If you looked at the rules of engagement that the four-star commanders had issued, they're actually pretty flexible, but that had been filtered down in a different way to the front lines. Do you think it's possible that your guidance that you just gave gets filtered down to examiners on the front line in a slightly different way?

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Jerome Powell1:47:55

I think that's something that happens, yes. We are looking at this guidance that's still outstanding. Some of these banks are still going to want to do stress testing, and we're not going to discourage that—it's actually good practice. But we're going to be looking at that guidance to make sure there's no question that banks between $10 and $100 billion in assets are not required by law to do stress tests.

T

Tom Cotton1:48:20

Okay, thank you. These examiners hold a lot of power in their hands when they're on the front lines in one of these smaller community banks. When they say something may be voluntary, that is heard by the banker in a different way than they may intend it. It reminds me of my old basketball coach who had voluntary shootarounds before school and on Sunday afternoons, and it just so happened that the players that reported to those voluntary shootarounds were the ones that got playing time on Tuesday and Friday night.

J

Jerome Powell1:48:49

We try to communicate, and I think our examiners do a good job basically. But we know we need to work hard to make sure the message gets out clearly. We find that our people do listen, so we're alert to that.

T

Tom Cotton1:49:01

Thank you. I want to turn now to a different question. I know there's been some talk here about the unemployment rate, which is pretty low, and the labor force participation rate, which is increasing. We're talking about wages and wage growth. There were some recent data out from the Bureau of Labor Statistics, highlighted in a recent Wall Street Journal article, that said despite the factors, income to employees in the form of pay and benefits continues to decrease. It's down to 52.7% of our gross domestic income. It was as high as 59% in the 1970s and 57% in 2001. By the same token, business income—profits to businesses, whether they're the biggest corporations or small businesses—has gone from 12% up to 20%. Can you give me your thoughts on why we're seeing more income going to the hands of owners in this country and less to the hands of workers?

J

Jerome Powell1:49:57

That's the labor share of income you're talking about. If you look back through history, it zigs and zags, but it generally zigged and zagged at a higher level. Then right around the year 2000, labor share went down sharply for about 10 years, and since then, broadly speaking, it has been about flat. It goes up and down, but it's basically flat. The question is why. It's a really good question, and there are a lot of different answers. Honestly, there's no clear easy answer. As a separate matter, wages are actually growing at a level that makes sense. The problem is the level, not the growth rate. Wages and benefits are growing at around 3% or a little better. That's a healthy growth rate in an economy with 1% productivity increase and 2% inflation. The problem is there were 10 years when that didn't happen, from 2000 until 2010. It can have to do with a lot of things. Globalization is a big answer there—that was right around the time of China joining the WTO. Some researchers connect it to that. In any case, we welcome these wage increases for this reason.

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Tom Cotton1:51:13

Well, I do as well, and I hope that we'll continue to see them and see a little bit more of that growing economic pie going into the hands of our workers. Thanks, Senator.

C

Catherine Cortez Masto1:51:22

Thank you, Chairman Powell, for being here again. I have concerns about discrimination in lending, so I want to ask you a follow-up question to the record that I submitted last time you were here. It involves the Federal Reserve's responsibility to enforce fair lending laws. I asked you how the Fed would improve its oversight of fair lending rules. In your response, you mentioned that Fed examiners evaluate each financial institution for fair lending compliance. So my specific question is: how would examiners evaluate whether a lender might steer consumers to higher-priced loans? In your written response, you mentioned credit scores, loan-to-value ratios, and lending products. But can you expand on what the examiners would consider to ensure against consumers being steered to high-priced loans?

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Jerome Powell1:52:18

I think examiners who examine for that are trained to look for patterns of that nature.

C

Catherine Cortez Masto1:52:26

Specific criteria? Is there anything specific that they look to that you're aware of?

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Jerome Powell1:52:31

I have a general understanding of this, but I should come back to you with more detail.

C

Catherine Cortez Masto1:52:36

Thank you, I appreciate that. I would also like to know, as you come back and answer this question, what examiners consider. Would incentive pay tied to higher-priced loans be a red flag or a pattern? Would the existence of bonuses for bank staff that provided a loan with higher fees and interest rates be a red flag to these examiners? If you could expand on that in writing, that would be fantastic. I appreciate that. The other issue that is important for me because it's an issue in Nevada and across the country is affordable housing. In your response to my submitted questions for the record, I asked you if the rapid rise of housing costs was encouraging your consumer price models to assume a higher threat of inflation than actually existed. Do you think that the Fed's raising interest rates was a factor in rising house costs?

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Jerome Powell1:53:28

I think higher interest rates certainly played into higher mortgage rates, and that will have had an effect.

C

Catherine Cortez Masto1:53:36

What about the cost of building that apartment or house?

J

Jerome Powell1:53:39

I think materials costs and what you hear from builders is labor shortages, particularly skilled labor shortages, and also higher materials costs, some of which are affected by tariffs. That's what you hear—they are under tremendous cost pressure. I think that was flowing through into higher prices, making the affordability calculus a little more challenging for buyers. At the same time, rates were going up. I think that picture slowed down housing construction in the last year or so. Rates are now down a little bit, about 50 basis points, so we're seeing a little bit of a pickup there.

C

Catherine Cortez Masto1:54:23

How would you compare the impact of higher interest rates on construction to that of higher prices for goods that may be caused by tariffs?

J

Jerome Powell1:54:34

From the standpoint of the consumer, what matters is what the house costs. The interest rate is a very important thing from the consumer standpoint, but in setting the price of the house, it's really the cost of materials and labor.

C

Catherine Cortez Masto1:54:55

Could that higher cost of labor also be due to curbing immigration and the lack of labor because of that?

J

Jerome Powell1:55:04

It certainly could in construction, particularly in some regions. I visited Houston not so long ago, and I think a big part of their construction labor force was from immigration. I think they were feeling shortages there for that reason.

C

Catherine Cortez Masto1:55:20

Thank you. Last summer, a Federal Reserve economist noted that high levels of student debt were preventing millennials from buying a home. Other studies have found that millennials faced housing supply constraints, began their careers in a poor labor market, and had high student loan burdens, which have made it difficult for them to buy a home. What was the response to the Federal Reserve's assertion that student debt prevented at least 400,000 millennials from buying a home?

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Jerome Powell1:55:49

It's just research. There's a growing amount of research that shows that student loans have been growing very fast in the last few years.

C

Catherine Cortez Masto1:55:59

Was that the right number, 400,000?

J

Jerome Powell1:56:01

I don't know that number. I will tell you it's a trillion and a half dollars in outstanding student loans. There's research that shows that for students who can't service their loans or discharge them, those loans can weigh on them over a long period of time and have real effects on their economic and personal lives over time.

C

Catherine Cortez Masto1:56:23

And their ability at actual homeownership?

J

Jerome Powell1:56:25

Yes, that's correct.

C

Catherine Cortez Masto1:56:27

Thank you. Thank you, Chairman, for being here.

M

Mike Crapo1:56:29

Thank you, Senator Moran.

J

Jerry Moran1:56:31

Thank you very much, Mr. Chairman. Let me start with what I think is a straightforward question, followed by a much more complicated one. 18 of my Senate colleagues joined me in a letter calling on regulators to provide a more significant reduction in the reporting burden of our smallest banks in the first and third calendar quarters, as required by Section 205 of 21:55. We're looking for a greater difference in those reporting requirements than what has been proposed. According to the current proposal, banks with the smallest assets would save only an average of 71 minutes per quarter. So not a significant change based upon the proposed rules. Can you speak to whether you think our concerns about our smallest banks and their call reports have been addressed?

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Jerome Powell1:57:27

Senator, as you mentioned, we put that rule out for comment. We got a lot of comments and got your letter. We're carefully reviewing those comments. What we're trying to do is find the right balance, and we'll certainly take into account the comments we get.

J

Jerry Moran1:57:46

Well, I appreciate that. I would want you to do that. But if the end result of 21:55 is as modest as this appears to be, we've not achieved our goal. That can't be the congressional intent, at least in this instance on this topic. So let me reiterate that. Then let me talk about what I think is a difficult topic for me to have a conversation with you about, just because of its complexity. A key goal of this legislation was to provide qualifying community banks relief from the complexities and burdens of current risk-based capital rules. But we of course want to ensure that they maintain a high quality of capital consistent with the current rules. The recent interagency proposal for a community bank leverage ratio allows certain banks with less than $10 billion in total assets to elect to use the CBLR instead of the current risk-based capital requirements. If the CBLR ratio is above 9%, the current ratio will be required, being 5%. So under the new proposed framework, a bank would be considered less than well-capitalized if it fell below 9% and hasn't opted out of the CBLR, which would then trigger certain restrictions and requirements. As currently written, the proposal seems to dangle the incentive of reduced regulatory burden but with capital requirements 4% higher for our small banks to qualify. Would it not make sense to leave the existing PCA framework unchanged, allowing small banks to maintain well-capitalized status and begin reporting capital ratios under the current risk-based capital rules when the CBLR falls below 9%?

J

Jerome Powell1:59:38

That's another rule that we have out for comment, obviously. Senator, I would encourage you to submit that as a comment if you haven't. We think these are really important tailoring proposals, and they're obviously mandated by 21:55. We want to get them right. I understand your question, and we'll look carefully at that.

J

Jerry Moran2:00:04

All of the financial institution regulators are working well together in implementation of 21:55, I believe?

J

Jerome Powell2:00:10

Yes, I think we share the goal of putting a very high priority on implementing 21:55 and also on tailoring. For smaller banks, I think all of us feel there's a lot we can do without undermining safety and soundness, and we want to find those things and do them.

J

Jerry Moran2:00:29

I appreciate that approach. I've had many conversations with regulators for as long as I've been on this committee and in the Senate. It is something that is always highlighted when talking to me about its importance, but it's hard to find change that has occurred voluntarily by regulators to make the burdens less on our community banks. That's why 21:55 was so appealing to me—we'd failed generally to get regulators to change their behavior, and 21:55 seems to me to be the only option that I've seen that actually might force change when it's been so reluctant to arrive. So I care a lot about that. In the 15 seconds I have left, I remind you that agriculture, as you and I visited about last time we talked, is facing significant challenges. I want to make certain that our community banks, our relationship bankers, don't lose the ability to consider character and history. I remind you that we have generational bankers along with generational farmers whose grandfather bankers have taken care of grandfather farmers down through the generations. That's continued. Our community bankers know who has character, who has the ability to pay, who has the history to demonstrate that. We can't tie their strings. The agricultural challenges the economy faces today—ag country's problems will be significantly exacerbated if you take away the ability to take into account those factors that are not crossing a T and dotting an I. Thank you.

C

Chris Van Hollen2:02:16

Thank you, Mr. Chairman. Chairman Powell, thank you for your service. I want to focus for a moment on the impact of the tax bill—the big tax bill that passed about a year ago—and especially take a look at the banking industry. I think in no other sector is it as clear what a huge giveaway this tax cut was to big financial interests. I don't know if you saw the Bloomberg analysis that was conducted earlier this month. They looked at the 23 US banks that the Federal Reserve says are most important to our economy and concluded that those 23 banks got a $21 billion tax break windfall. Did you see that analysis?

J

Jerome Powell2:03:02

I don't know that I did.

C

Chris Van Hollen2:03:06

Would you be surprised to learn that they used much of that windfall for major stock buybacks?

J

Jerome Powell2:03:16

I honestly don't know. I know that the tax cut reduced taxes for big companies that weren't very profitable.

C

Chris Van Hollen2:03:25

Well, they did. It was a $21 billion windfall, and a lot of it was used for stock buybacks that helped a lot of the executives. What's interesting is that during that same period of time, we saw a loss of 4,300 jobs among those 23 banks. Does that surprise you? Big tax break and yet a loss of jobs among the big banks?

J

Jerome Powell2:03:48

It must be several million people we're talking about, so it's a...

C

Chris Van Hollen2:03:54

But of course it was sold on the promise that we would see all these new jobs generated. I do want to ask you about the increase in wages. Obviously, it's always good to see an increase in wages. Of course, nominal wages are only half the equation, right? You also have to look at rising costs. When you look at real wages, isn't it the case that during the last term of the Obama administration, real wages rose faster during that period than they have since the beginning of the Trump administration, even with the tax cut? Isn't that the case?

J

Jerome Powell2:04:32

I don't look at it in terms of those time frames. The way I would say it about wages: if you look back to 2012, the four major wage and benefit increases that we track were all around 2%. Now they are 3% or a little better. Part of that is just that the labor market has continued to improve since then.

C

Chris Van Hollen2:04:56

Sure, but as you testified, you've also seen an uptick in inflation and costs, right? So the result for a real American is how much of the increased wages will be in purchasing power. Anyway, if you could take a look at that and get back to confirm whether or not that's true. The figures I've got suggest that you saw a more rapid increase in real wages during the last term of the Obama administration, which just gets to the point about the hype about the tax cuts. Let me ask you about student loans. My colleague just asked you about that. You just testified that we've got $1.5 trillion in student loans. I think the Fed just reported that delinquent US student loans reached a record $166 billion in the fourth quarter of 2018. You indicated this is putting a lot of stress on students who are trying to get out there and buy their apartments or rent their apartments. Would you be in favor of allowing students to discharge their debts in bankruptcy, just like banks can?

J

Jerome Powell2:06:09

I think it's important that students be in a position to borrow to invest in their education. It's important that they get proper disclosure about what the risks are and what the success rates are. It's not a Fed issue. Someone asked me that question a year or so ago, and I did answer it directly, but I would say it's not really for the Fed.

C

Chris Van Hollen2:06:30

Let me ask you this: is the impact of student debt, in your view, impacting the economy in a negative way? The fact that these students are stuck as soon as they graduate trying to pay back loans that they apparently can't repay?

J

Jerome Powell2:06:46

Yes, I think for students who can't repay their loans, there's a growing amount of research that shows those people can have longer-term negative economic effects. Of course, some people invest in their education and borrow money to do it, and it works very well for them. But for those who don't, it can be quite damaging.

C

Chris Van Hollen2:07:05

Well, it's a lot of people who can't right now. You just reported a record delinquency rate in the last quarter. The last thing I would say, Mr. Chairman, is that I'm going to keep after you and your colleagues on this Faster Payments issue. It makes no sense to me that Mexico, South Africa, and soon the entire European Union will have immediate ability to clear payments while we don't. Cash a check on Friday, it won't clear until the middle of next week. Millions of Americans are paying a lot more in terms of late fees and payday loan interest rates—loan shark rates—because of that. So I hope you'll give the same attention to that issue as you're giving to some of the other issues you discussed this morning. Thank you.

D

David Perdue2:07:57

Thank you, Mr. Chair. Thank you, Chairman, for being here and for your perseverance. These are big committees; you've been here a long time. I'll try to be brief. I have two questions for you. One is, I am always amazed at the economic experts in this committee and the revisionist views of history. So let me just throw some facts out and lead to a question for you. This recovery is real. We're going about 100 basis points more than the last administration just after two years. CBO says if you grow four-tenths of 1%, you more than pay for this tax bill. So those are two facts. The second thing is median income is at a historic high—it's the highest ever in the United States. Five million new jobs have been created. Lowest unemployment in 50 years. Lowest African-American unemployment ever measured. Lowest Hispanic unemployment ever measured. My concern, though, is with labor issues, export issues, and interest rate issues. We've had nine Fed fund increases over the last two and a half years. With our debt—and this is the question I'm trying to get to, and you know where I'm going here—I appreciate the time you gave me recently in a private conversation. The federal debt really bothers me. It's overhanging on the economy and our ability to drive the economic wherewithal of every American. The national debt is the greatest threat to national security according to our military experts. Yet today we just turned $22 trillion of national debt. If you include all the debt that we have as a government, as I understand it, about $200 trillion of debt in the world, $60 trillion of that is sovereign. We have about a third of that—5% of the world's population has about a third of all sovereign debt. So the question I have is, in the projection, in the next increase of two and a quarter percent with our size debt, technically that's about $450 billion in new interest that we've loaded in there. Yet of that $60 trillion of sovereign debt in the world, about $11 trillion of that is laid out at negative interest rates, much of that in the eurozone. My question is, are there contingent contagion issues out there that could negatively impact this recovery and the continuation of this recovery, independent of what we do fiscally or monetarily here in the US, due to these negative interest rates around the world?

J

Jerome Powell2:10:17

I think the negative interest rates you're seeing are a reflection of a risk-off mood and slower growth in China and Europe in particular. Europe had a good strong year in 2017 and then really slowed down over the course of 2018, and we're seeing some more of that now. I think that's what you're seeing. Slower global growth for the United States can be a headwind, just as very strong 2017 was a year of synchronized strong growth around the world—a very good year—and we were feeling a tailwind from that. That has now turned into a bit of a headwind for us. Our economy, though, I think the outlook is still a favorable one, still a positive one. But nonetheless, this will be a headwind.

D

David Perdue2:11:10

There's a growing debate in Congress now among some of my colleagues advocating a change in how monetary and fiscal policy work together. These people are advocating a modern monetary theory. They want to spend now, spend later—a policy that would use massive annual deficits to fund tremendously expensive policy proposals such as Medicare for All, free college for all, make every structure in the US energy efficient in ten years, and a universal basic income whether you're working or not. Under this landscape, it's proposed the Fed would keep interest rates artificially low, and fiscal policy would then be driven by Congress to directly manage the business cycle. What obstacles do you anticipate? And how successful has fiscal policy been in terms of managing either inflation or interest rates?

J

Jerome Powell2:12:02

I haven't really seen a carefully worked-out description of what is meant by MMT, what you're mentioning. It may exist, but I haven't seen it. I have heard some pretty extreme claims attributed to that framework, and I don't know whether that's fair or not. But I will say this: the idea that deficits don't matter for countries that can borrow in their own currency, I think it's just wrong. US debt is fairly high as a level of GDP, and much more importantly, it's growing faster than GDP, fairly significantly faster. We're not even close to primary balance, which means the deficit before interest payments. So we're going to have to either spend less or raise more revenue. To the extent people are talking about using the Fed in a role to provide support for particular policies, that's not our role. Central banks everywhere try to achieve maximum employment and stable prices. That's really what it is. Decisions about spending and controlling spending and paying for it are really for you.

B

Brian Schatz2:13:20

Thank you, Mr. Chairman. Chairman Powell, thank you for your service and your stewardship. PG&E, California's largest utility, filed for bankruptcy last month, partly as a result of liability costs from climate-related disasters. The damage from 2017 and 2018 wildfires exceeded $30 billion, more than PG&E's assets and insurance coverage combined. Climate risks threaten many sectors of our economy: real estate, agriculture, fisheries, industries with extensive supply chains—they're all at risk. Take coastal real estate as just one example. The US government currently estimates that storms, floods, erosion, and rising sea level now threaten approximately $1 trillion in national wealth held in coastal real estate. According to Freddie Mac, some of the varied impacts of climate change may not be insurable. More than 300,000 coastal homes are at risk of chronic inundation by 2045, a timeframe that falls well within the timeframe of the 30-year mortgage. These properties are worth about $117 billion and contribute nearly $1.5 billion towards the property tax base. Banks, insurance companies, and other financial institutions are all exposed to these risks. That's why the Bank of England recently announced that it is planning to include the impact of climate change in its banks' stress tests next year. So here's a simple question—it's not a gotcha question: do you agree that climate change creates financial risks for individual financial institutions and for our financial system as a whole?

J

Jerome Powell2:15:07

We don't formally or directly include climate change in our supervision. But we do require financial institutions, particularly those who are more exposed to natural disasters and that kind of thing, to understand and manage that particular operating risk. For example, if you're a bank on the southern coast of Florida and you're subject to hurricanes, we definitely require you to have plans and risk management in place to deal with that sort of thing. So we pick up natural disasters and that kind of thing which are associated with climate change.

B

Brian Schatz2:15:45

Do you think your processes and your staff and your approach to this, which has been built properly over many years and pursuant to the statute, do you think you're moving fast enough to acknowledge the accelerating risks of climate change as it has been over the last two or three years? Do you think there's room for you to do a scrub of whether or not you're fulfilling your statutory mandate? Because I get that you're supposed to pick up any risks related to natural disasters. The question is whether you've really loaded in the latest information from the scientific community to go back to these banks, to go back to REITs, to go back to lenders who have either stranded assets or assets in coastal areas, or whose supply chain is particularly dependent on a certain kind of weather pattern which is not materializing anymore. Do you think you're doing enough in this space? Or let me phrase it another way: are you confident that you're doing enough in this space?

J

Jerome Powell2:16:46

It's a little bit like cyber risk—you should never be confident that you're doing enough in that space. I think we are clear-eyed about the nature of coastal risks and natural disaster risks, but it's a fair question. We'll go back and look at it again.

B

Brian Schatz2:17:04

Could you please respond in writing as it relates to this specific question? The Bank of England and 29 central banks and supervisors from around the world are moving towards incorporating climate risk into their supervision of financial institutions. You know that another part of the Federal Reserve's mandate is to engage with its counterparts abroad to address systemic risks. Do you think the Federal Reserve should be engaging with its international counterparts on this question?

J

Jerome Powell2:17:34

We are in those meetings, we're involved in those bodies. We don't formally take climate change into account in our risks, but I think the consequences are things that we do supervise for.

B

Brian Schatz2:17:50

I think that you've been extraordinary in terms of your ability to withstand political pressure and look at the data and do what's right for the health of the economy. I don't want this to be an exception. I understand that talking about climate change is fraught with partisan peril and will attract the ire of a certain category of people in institutions. But your job is to measure risk, and I would submit that you're not measuring that risk sufficiently. One final question, if you'll indulge me. Chairman Crapo, has anybody either directly or indirectly communicated with you about rates from the White House?

J

Jerome Powell2:18:34

It's a broad question. I don't really talk about it. It's probably not appropriate to discuss my private conversations with other government officials. I would say I'm completely committed to conducting monetary policy in a way that's non-political, in a way that serves all of the American public. I'm very comfortable and confident that that's exactly what the Fed is going to do.

J

Jack Reed2:19:12

Thank you, Mr. Chairman. Thank you for your distinguished service. Senator Brown brought up in his comments your February 6th town hall. You made it clear that we have to work to make prosperity more dispersed throughout society. You also indicated that many of the policies are beyond the purview of the Federal Reserve, but most of them are clearly in the purview of Congress. So if you could just give us one or two of your top three issues that we have to deal with to make equality much more realized in this country.

J

Jerome Powell2:19:53

Senator, I go back again to labor force participation. It's a big win for the overall economy, and it's also the people who are not taking part in the labor force are by and large the less well-educated and less skilled, or people who may be in areas where opioids are prevalent. I think a bipartisan focus on labor force participation would bring in a lot of policies that would help deal with what I see as the problems: relatively stagnant growth in median incomes and relatively little mobility. Education, of course, would be at the top of every list in addressing these issues as well.

J

Jack Reed2:20:40

This would require resources that we would have to commit. I think you're aware we're on the cusp of another debate about sequestration and the share of resources to defense and non-defense. In fact, we're looking at very draconian numbers in terms of the situation of the BCA. But you would argue that we do have an obligation to make a significant investment in domestic programs in order to provide to that equality?

J

Jerome Powell2:21:08

I think it would be great for our country and for our economy if we could address these issues. Easy for me to say—I don't have to find the resources.

J

Jack Reed2:21:20

Thank you. Let me just turn to one on the top of which I'm very much involved with: the Military Lending Act. It puts a 36% cap on interest rates that can be charged to the men and women in uniform of the United States. The Federal Reserve is one of the independent regulators charged with its enforcement. Unfortunately, what we've seen from the CFPB particularly is a retreat. They are no longer supervising this, no longer using this in their supervisory activities. They'll enforce a complaint, but the complaints are seldom—most young soldiers, sailors, Marines don't even realize they have this ability to complain. We're looking at DoD and OMB exempting an insurance product for auto dealers which might result in interest rates far in excess of 36%. Can you commit your continued strong and persistent enforcement to the letter of the Military Lending Act?

J

Jerome Powell2:22:24

Yes, it will be a priority for us. I think we do that.

J

Jack Reed2:22:28

Thank you very much. There's another issue that I think you've touched upon: cybersecurity. It seems to be the ubiquitous complaint of everyone, not just in the financial sector but every sector. It seems to me too that typically those who are going to exploit cyber look for the back door, not the front door. They look for the small institution, not the big Wall Street bank that's spending $200 million a year on cyber protections. How are you dealing with that? How are you and your colleagues dealing with going out and making sure that community banks and other smaller institutions that might be more vulnerable are taking the appropriate steps? Are you looking closely at cybersecurity?

J

Jerome Powell2:23:12

Yes, we are. It's hard because the big banks are attacked too, but they have the resources to deal with it. We deal through the FFIEC, which is the body of regulators, to promote guidance. We supervise for that guidance. With the smaller banks, it's very important. We see that as a real vulnerability, for example for the payment system. But we've also got to be mindful of the burden on smaller banks. It is something we're very focused on.

J

Jack Reed2:23:40

Are you focused to the extent of conducting red-on-blue exercises, seeing what's working out there, seeing where all the connectivity exists or doesn't exist? Are you doing that or getting access to organizations that are doing that?

J

Jerome Powell2:23:58

We do tabletop exercises. These are led by the Treasury Department. This has been a major focus for Treasury, appropriately so, and we take part in them. There is always the feeling with cyber that you're just not doing enough.

J

Jack Reed2:24:14

Well, in fact, that feeling is justified now, probably is, unfortunately. Thank you again for your service, Mr. Chairman. Appreciate it very much.

M

Mike Crapo2:24:25

Thanks, Senator. Thank you. I'm not quite done yet, Mr. Chair. I have a couple more questions. I'd like to go back to the issue of wages, which has been discussed by a number of the senators with you in your testimony. In some of your answers, you indicated that wage growth is at about 3%. There was some comment by one of the senators that the current rate of wage growth may or may not be keeping up with inflation. If I understand the question you were asked correctly, but if I understand your answers, isn't wage growth today growing at a faster rate than inflation?

J

Jerome Powell2:25:10

Yes, real wages are going up. You have to look at the average over a year or so and look at a broad range of indicators. There's no question that wages are going up in real terms by roughly the amount of the productivity increase, which is appropriate.

M

Mike Crapo2:25:27

In your use of the term 'wages,' do you include benefits, or is there a separate calculation on how benefits factor in?

J

Jerome Powell2:25:35

There are countless measures of wages and compensation. One of them that includes wages and benefits is the Employee Compensation Index, which might be our single favorite one. It is one of four major ones we look at. That one does include benefits, and it is showing growth right around 3%, maybe in the low 3s now.

M

Mike Crapo2:25:59

All right, thank you. We've also discussed some aspects of the labor force participation rate. I understand that the retirement of baby boomers is one of the biggest downward pressures on our labor force participation rate. I started to have a discussion with you in my earlier questions about now that we've seen labor force participation rates start to increase, whether that would be stable or not. Could you discuss a little more with me your evaluation of what it looks like for us in terms of labor force participation in general?

J

Jerome Powell2:26:40

It's very gratifying to see US labor force participation actually move up by five-tenths over the course of the last year as the labor market has gotten stronger and stronger. Given the level of job creation we've had, if labor force participation had not gone up, the unemployment rate would now be much lower than it is. The unemployment rate has actually gone up to 4% from 3.7%, but this is only a good thing because it means people are coming back into the labor force. The real thing is, even with these increases, we still lag other countries. You pointed out correctly that the aging of the population is decreasing labor force participation at a trend rate of about 0.2 or 0.25% every year. So for us just to hold participation flat is actually a gain against a longer-run trend. Since the latter part of 2013, labor force participation has been flat to slightly up, which is really good to see. But honestly, that's just a consequence of having a really good labor market. If you're going to have that be sustained through good times and bad and put us on a more competitive footing with other countries, it's going to need more than a good labor market. It's going to need policies that reach out and give people the skills and aptitudes to be sustainably in the labor market.

M

Mike Crapo2:28:26

All right, thank you. I can't remember where I read this, but someone commented recently that today, in the way our labor market is working, if a person wants to work, there is a job for them. Do you tend to agree with that observation generally speaking?

J

Jerome Powell2:28:41

Generally speaking, although if you're in some regions, for example, there are regions of the country which are very poor and don't have job creation. The level of job openings is now at or above the level of unemployed people. So you can say that in a sense, if you're looking for a job, there is at least numerically one job. But there are lots of people who are probably millions of people who are out of the labor force and in a perfect world, in a better world, would be in the labor force. They are in their prime working years and they're not in the labor force because of some kind of problem or issue. I think those are the people we want to get back.

M

Mike Crapo2:29:21

All right, thank you. Just to switch topics for a minute, we've seen a little under 3% growth in our GDP in the last year. I guess on Thursday we're going to get some economic analysis that will give us some statistics on that. One of my colleagues indicated today that with regard to the tax bill that was passed, there was a lot said about how the tax bill would generate a $1.4 trillion deficit. That projection assumed somewhere in the neighborhood of 1.9 or 2% growth in the economy. It was indicated at the time from all the analysis we got that if we just had four-tenths of a percentage rate of growth above that, there would not be any deficit involved with the tax legislation. Of course, we've seen far more than four-tenths of growth so far in terms of the performance of the economy. So that leads to my question. I know you don't have a crystal ball, but you do analyze what it looks like for the economy. Given what we've seen—growth of about almost a percentage point in GDP over the last 12 months or previous growth rates—do you have a projection or anything you can share with us about what you see moving forward as to whether the economy will continue to perform? I know you said it may slow down a little bit this year, but do you have a projection as to what it would likely look like over the next few years in terms of GDP growth?

J

Jerome Powell2:31:11

A good place to start with that question is what makes up growth. It really boils down to more hours worked and more output per hour. More hours worked is really a function of population growth. Population growth has slowed. The trend growth in the labor force, given aging and given immigration and everything, is only about five-tenths right now. Actually, if immigration is going to be even lower, it's going to be below five-tenths. Immigration has made up half of that five-tenths. So that's one piece of it: 0.5% trend labor force growth. The rest is productivity. No one can forecast productivity growth with any confidence. All we can really do is create policies that will encourage investment, encourage innovation, and all those sorts of things that let productivity happen as it will. It's something that just happens. But if you look at longer-term averages, it's been very difficult to predict. You'd have to have sustained high productivity if you're going to have five-tenths labor force growth. You'd have to have very high sustained productivity, higher than we've seen frankly, to get really high levels of growth. That's why I think it's so important to focus on both of those things: labor force participation and also productivity. That's the closest thing we can focus on to raise our potential growth rate.

M

Mike Crapo2:32:43

Well, thank you. In terms of increasing labor force participation, I know there are a lot of factors. One that's been brought up here today already is to perhaps change our policy at the policy level so that a person who takes a job who's not currently employed, a person who is willing to go take one of those jobs and become productive in the labor force, does not actually economically suffer from that decision based on the safety net program support that the government is already providing. I'm not going to ask you to comment on policy, but is it correct that if we were to eliminate or reduce the incentive to stay unemployed because of the disadvantage of relying on wages rather than benefits, would that increase labor force participation?

J

Jerome Powell2:33:47

I think incentives do matter. In my perfect world thinking, easy for me to say, but that's how I would say it.

M

Mike Crapo2:34:00

All right, thank you. Switching gears one more time, and then I'll wrap it up. Housing finance reform. As I'm sure you've seen, there's a very significantly increased emphasis on housing finance reform both on this committee and in Congress in general, as well as at the level of the administration. In 2017, you gave a speech in which you outlined a few principles that you saw for how we should approach housing finance reform. I'm just going to quote what you said: 'Do whatever we can to make the possibility of future housing bailouts as remote as possible, to change the system to attract large amounts of private capital, and that any guarantee should be explicit and transparent and should apply to securities, not to institutions, and to identify and build upon areas of bipartisan agreement.' Do you still agree with those principles?

J

Jerome Powell2:34:55

I sure do.

M

Mike Crapo2:34:56

Well, good. I agree with them too, strongly. We are going to be very aggressively trying to put together a bipartisan solution to this here on this committee and in Congress in general. I would just like to ask you, first of all, if you'll commit to work with this committee in our efforts to build the right solution to this issue. And secondly, any other comments you might want to make about how our nation should approach housing finance reform. I'd ask you also to discuss how getting this fixed could impact our economy and could impact growth.

J

Jerome Powell2:35:37

I do think, and I said this in those remarks, that this is one of the big unfinished pieces of business in the post-crisis reform period. Fannie and Freddie had to be taken over by the government fairly early on in the financial crisis. It was a big part of the financial crisis. I think the proposals that you've had in the past, and I'm sure the one you'll have this year, all have the right elements. It's just a question of getting something done. I think it would be really good for the economy to get this off the federal government's balance sheet and get a lot of private capital between the taxpayer and housing risk. I think it would be a very positive thing for the economy. Of course, we'll be delighted to work with you. We have some very strong, experienced staffers in the housing area, and we'd be happy to provide whatever expert help we can.

M

Mike Crapo2:36:42

All right, thank you. I know I said that was the last one, but this is really the last one. Again, shifting subject. You've testified today that there are some pretty positive things going on in our economy right now, that we are in a relatively good position on a lot of factors. In terms of risks to our economy, could you just tell me what you think are some of the bigger risks we should keep in mind?

J

Jerome Powell2:37:13

I do think the baseline outlook is a good one, a favorable one. There are always risks, though. As I mentioned, I see the foreign risks as particularly relevant right now. Global growth has slowed in China and particularly in the advanced economies, particularly in Europe. When growth is booming around the world, we feel that as a tailwind. When growth is slowing, we feel it as a headwind. I think we're feeling some of that now, and we may feel more of it. So that's a risk. Brexit is an event risk which should not in the end have much of an effect on our economy, but it's something we're monitoring very carefully. Domestically, I think we're in good shape. Unemployment is low. Confidence is still at positive levels. So I feel like we have the makings of a good outlook. As I said, our committee is monitoring the cross currents, which are really the risks. For now, we're going to be patient with our policy and allow things to take time to clarify.

M

Mike Crapo2:38:32

All right, well thank you. I know I speak on behalf of the committee. We appreciate the dedication of you and the other governors at the Federal Reserve. We all want to have this economy stay strong and grow stronger, and we look forward to making sure that we can achieve the right policies and help together to make that happen. My last closing comment would be I echo the concerns—or not the concerns, really the issues—raised by some of my colleagues about the implementation of 21:55. I know you're working very hard. I know what you just said: it was the highest priority maybe at the Fed right now on the oversight level. But I just encourage you to move ahead expeditiously on those issues. I've never been raised already, I'll reiterate our concern that we move as quickly as we can on the implementation of the requirements and the principles of 21:55 with regard to those financial facilities, banks under $100 billion, getting the stress testing levels for them at the right point. If you want to comment on that, you're welcome to. If not, I'll wrap up.

J

Jerome Powell2:39:44

I might add one thing to my last comment. I would want to leave you with the thought that when I say we're going to be patient, what that really means is that we're in no rush to make a judgement about changes in policy. We're going to be patient, allow the situation to evolve, allow the balance of risks and the data to come in. I think we're at a very good place to do that.

M

Mike Crapo2:40:09

All right, thank you. I appreciate that perspective. Once again, thank you for being here with us today. That does conclude the questioning for today's hearing. For senators who wish to submit questions for the record, those questions are due on March 5th, Tuesday. Chairman Powell, we ask that you respond to those questions as promptly as you can. Once again, thank you for being here. This hearing is adjourned.

J

Jerome Powell2:40:33

Thank you, sir.

Jerome Powell - The Semi-Annual Monetary Policy Report to the Congress - 26th February 2019

About Jerome Powell